SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934
For quarter ended: March 31, 2002
Commission File No. 001-16101
BANCORP RHODE ISLAND, INC.
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(Exact Name of Registr ant as Specified in Its Charter)
RHODE ISLAND 05-0509802
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(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
ONE TURKS HEAD PLACE, PROVIDENCE, RI 02903
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(Address of Principal Executive Offices)
(401) 456-5000
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(Issuer's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ( X ) No
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of May 9, 2002:
Common Stock - Par Value $0.01 3,759,850 shares
------------------------------ ----------------
(class) (outstanding)
BANCORP RHODE ISLAND, INC.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in
Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis 9 - 18
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 19 - 20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities 21
Item 3 Default upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
Signature Page 22
2
BANCORP RHODE ISLAND, INC.
Consolidated Balance Sheets
March 31, December 31,
2002 2001
---------- ------------
(In thousands)
ASSETS:
Cash and due from banks $ 26,779 $ 24,261
Overnight investments 19,352 4,913
Investment securities available for sale (amortized cost of $64,166 and
$49,193 at March 31, 2002 and December 31, 2001, respectively) 63,695 49,453
Mortgage-backed securities available for sale (amortized cost of $185,385
and $149,549 at March 31, 2002 and December 31, 2001, respectively) 185,557 150,650
Stock in Federal Home Loan Bank of Boston 7,683 5,668
Loans receivable:
Residential mortgage loans 294,739 310,212
Commercial loans 242,144 239,364
Consumer and other loans 61,798 61,388
-----------------------
Total loans 598,681 610,964
Less allowance for loan losses (8,893) (8,524)
-----------------------
Net loans 589,788 602,440
Premises and equipment, net 7,179 7,184
Other real estate owned -- 264
Excess of cost over net assets acquired, net 10,475 10,766
Accrued interest receivable 6,338 5,803
Investment in bank owned life insurance 10,095 --
Prepaid expenses and other assets 3,546 848
-----------------------
Total assets $930,487 $862,250
=======================
LIABILITIES:
Deposits:
Demand deposit accounts $118,353 $112,925
NOW accounts 50,007 44,445
Money market accounts 9,589 9,914
Savings accounts 276,059 254,861
Certificate of deposit accounts 238,670 248,268
-----------------------
Total deposits 692,678 670,413
Overnight and short-term borrowings 18,278 13,033
Federal Home Loan Bank of Boston borrowings 151,656 113,365
Company-obligated mandatorily redeemable capital securities 3,000 3,000
Other liabilities 5,604 3,342
-----------------------
Total liabilities 871,216 803,153
-----------------------
SHAREHOLDERS' EQUITY:
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding 3,756,550 shares 2002 and 3,753,550
shares in 2001 38 37
Additional paid-in capital 39,877 39,826
Retained earnings 19,553 18,336
Accumulated other comprehensive income (loss), net (197) 898
-----------------------
Total shareholders' equity 59,271 59,097
-----------------------
Total liabilities and shareholders' equity $930,487 $862,250
=======================
See accompanying notes to consolidated financial statements
3
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Operations
Three Months Ended
March 31,
--------------------------
2002 2001
---- ----
(In thousands, except per share data)
Interest and dividend income:
Residential mortgage loans $ 4,927 $ 5,214
Commercial loans 4,288 4,713
Consumer and other loans 939 1,270
Mortgage-backed securities 2,100 2,003
Investment securities 708 742
Overnight investments and other 73 141
Federal Home Loan Bank of Boston stock dividends 62 74
--------------------------
Total interest and dividend income 13,097 14,157
--------------------------
Interest expense:
NOW accounts 42 50
Money market accounts 35 78
Savings accounts 1,217 1,869
Certificate of deposit accounts 2,289 3,708
Overnight and short-term borrowings 59 192
Federal Home Loan Bank of Boston borrowings 1,762 950
Other borrowings -- 70
Company-obligated mandatorily redeemable capital securities 76 34
--------------------------
Total interest expense 5,480 6,951
--------------------------
Net interest income 7,617 7,206
Provision for loan losses 400 488
Net interest income after provision for loan
losses 7,217 6,718
--------------------------
Noninterest income:
Service charges on deposit accounts 855 766
Loan related fees 91 49
Commissions on loans originated for others 94 59
Commissions on nondeposit investment products 249 73
Gain on sale of mortgage-backed securities 23 --
Income from bank owned life insurance 95 --
Other income 159 155
--------------------------
Total noninterest income 1,566 1,102
--------------------------
Noninterest expense:
Salaries and employee benefits 3,047 2,650
Occupancy 467 430
Equipment 249 231
Data processing 440 419
Marketing 271 188
Professional services 407 215
Loan servicing 223 209
Other real estate owned expense (9) 43
Amortization of excess of cost over net assets acquired 291 291
Other expenses 762 713
--------------------------
Total noninterest expense 6,148 5,389
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Income before income taxes 2,635 2,431
Income tax expense 930 871
--------------------------
Net income $ 1,705 $ 1,560
==========================
Per share data:
Basic earnings per common share $ 0.46 $ 0.42
Diluted earnings per common share $ 0.43 $ 0.40
Average common shares outstanding - basic 3,747,171 3,734,828
Average common shares outstanding - diluted 3,977,319 3,865,939
See accompanying notes to consolidated financial statementsBANCORP RHODE
4
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Changes in Shareholders' Equity
Accumulated
Other
Compre-
Additional hensive
Common Paid-in Retained Income
Three months ended March 31, Stock Capital Earnings (Loss), Net Total
---------------------------- ------ ---------- -------- ----------- -----
2002
----
Balance at December 31, 2001 $37 $39,826 $18,336 $ 898 $59,097
Net income -- -- 1,705 -- 1,705
Other comprehensive income, net of tax:
Unrealized gain (loss) on
securities available for sale (1,080) (1,080)
Realized gain (loss) on
securities available for sale
net of taxes of $8 (15) (15)
-------
Comprehensive income 610
Exercise of stock options 1 43 -- -- 44
Common stock issued for incentive
stock award, net -- 8 -- -- 8
Dividends on common stock -- -- (488) -- (488)
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Balance at March 31, 2002 $38 $39,877 $19,553 (197) $59,271
==========================================================
2001
----
Balance at December 31, 2000 $37 $39,621 $13,815 $ (181) $53,292
Net income -- -- 1,560 -- 1,560
Other comprehensive income, net of tax:
Unrealized gain (loss) on
securities available for sale 927 927
-------
Comprehensive income 2,487
Common stock issued for incentive
stock award, net -- 5 -- -- 5
Dividends on common stock -- -- (448) -- (448)
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Balance at March 31, 2001 $37 $39,626 $14,927 $ 746 $55,336
==========================================================
See accompanying notes to consolidated financial statements
5
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
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2002 2001
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(In thousands)
Cash flows from operating activities:
Net income $ 1,705 $ 1,560
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 928 684
Provision for loan losses 400 488
Gain on sale of mortgage-backed securities (23) --
Gain on sale of other real estate owned (29) --
Income from bank-owned life insurance (95) --
Compensation expense from restricted stock grant 8 5
(Increase) decrease in:
Accrued interest receivable (535) (970)
Prepaid expenses and other assets (2,133) (218)
Increase (decrease) in:
Other liabilities 2,262 961
Other, net 43 20
----------------------
Net cash provided (used) by operating activities 2,531 2,530
----------------------
Cash flows from investing activities:
Origination of:
Residential mortgage loans (1,761) (2,703)
Commercial loans (21,311) (9,331)
Consumer loans (7,122) (4,033)
Purchase of:
Investment securities available for sale (17,984) (4,027)
Mortgage-backed securities available for sale (55,820) (16,066)
Residential mortgage loans (34,462) (74,969)
Consumer loans -- (5,045)
Federal Home Loan Bank of Boston stock (2,015) (1,211)
Principal payments on:
Investment securities available for sale 3,006 13,000
Mortgage-backed securities available for sale 16,154 5,175
Residential mortgage loans 51,486 18,504
Commercial loans 18,514 5,912
Consumer loans 6,612 5,190
Proceeds from sale of mortgage-backed securities 3,766 --
Proceeds from sale of other real estate owned 293 --
Capital expenditures for premises and equipment (287) (206)
Purchase of bank-owned life insurance (10,000) --
----------------------
Net cash provided (used) by investing activities (50,931) (69,810)
----------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 22,265 (84)
Net increase (decrease) in overnight and short-term
borrowings 5,245 3,447
Proceeds from long-term borrowings 40,295 71,000
Repayment of long-term borrowings (2,004) (3,003)
Proceeds from issuance of common stock 44 --
Dividends on common stock (488) (448)
----------------------
Net cash provided (used) by financing activities 65,357 70,912
----------------------
Net increase (decrease) in cash and cash equivalents 16,957 3,632
Cash and cash equivalents at beginning of period 29,174 34,453
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Cash and cash equivalents at end of period $ 46,131 $ 38,085
======================
Supplementary Disclosures:
Cash paid for interest $ 5,595 $ 6,443
Cash paid for income taxes 45 165
Non-cash transactions:
Additions to other real estate owned in settlement of
loans -- 17
Change in other comprehensive income, net of taxes (1,095) 927
See accompanying notes to consolidated financial statements
6
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements
(1) Basis of Presentation
Bancorp Rhode Island, Inc. (the "Company"), a Rhode Island
corporation, was organized by Bank Rhode Island (the "Bank") on February 15,
2000, to be a bank holding company and to acquire all of the capital stock
of the Bank. The reorganization of the Bank into the holding company form
of ownership was completed on September 1, 2000. The Company has no
significant operating entities other than the Bank. For that reason,
substantially all of the discussion in this Quarterly Report on Form 10-Q
relates to the operations of the Bank and its subsidiaries.
The consolidated financial statements include the accounts of the
Company and its wholly-owned direct subsidiaries, the Bank and BRI Statutory
Trust I (an issuer of trust preferred securities), and its indirect
subsidiaries, BRI Investment Corp. (a Rhode Island passive investment
company), BRI Realty Corp. (a real estate holding company) and Acorn
Insurance Agency, Inc. (a licensed insurance agency). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The interim results of consolidated operations are not necessarily
indicative of the results for any future interim period or for the entire
year. These interim consolidated financial statements do not include all
disclosures associated with annual financial statements and, accordingly,
should be read in conjunction with the annual consolidated financial
statements and accompanying notes included in the Company's Annual Report to
Shareholders filed with the Securities and Exchange Commission.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to change
relate to the determination of the allowance for loan losses.
The unaudited interim consolidated financial statements of the Company
have been prepared in accordance with Accounting Principles Generally
Accepted in the United States of America ("GAAP") and prevailing practices
within the banking industry and include all necessary adjustments
(consisting of only normal recurring adjustments), that, in the opinion of
management, are required for a fair presentation of the results and
financial condition of the Company.
(2) Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised and resulted in the issuance of additional
common stock that then shared in the earnings of the entity.
7
(3) Recent Accounting Developments
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets. Under SFAS 142, goodwill and
intangible assets that have indefinite useful lives will no longer be
amortized, but rather will be tested at least annually for impairment. The
Statement applies to existing goodwill, as well as goodwill arising
subsequent to the effective date of the Statement. Intangible assets that
have finite useful lives will continue to be amortized over their useful
lives, but without the constraint of the 40-year maximum life required by
APB Opinion No. 17. The provisions of SFAS 142 must be applied for fiscal
years beginning after December 15, 2001 and may not be adopted earlier.
On October 17, 2001, FASB issued Action Alert No. 01-37. That Action
Alert reported a conclusion reached by FASB at its October 10, 2001 meeting
regarding the application of SFAS 142 and Statement of Financial Accounting
Standards 141, Business Combinations ("SFAS 141") with respect to goodwill
accounting for bank branch acquisitions. The conclusion set forth in the
October 17th Action Alert states that paragraph 5 of Statement of Financial
Standards 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions (SFAS 72), "applies to all acquisitions of financial
institutions (or branches thereof) whether "troubled" or not, in which the
fair value of the liabilities assumed exceeds the fair value of tangible and
intangible assets acquired." SFAS 72 was originally issued in 1983, in the
context of the savings and loan crisis and the acquisition of so-called
"troubled" financial institutions. The branch acquisitions associated with
the formation of the Company's banking subsidiary in March 1996 were such
that the fair value of the liabilities assumed appear to exceed the fair
value of tangible and intangible assets acquired. Thus, the March 1996
transaction gave rise to a type of intangible that, unlike goodwill, will
continue to be amortized under current accounting guidelines.
Based upon the conclusion set forth in the October 17th Action Alert,
the Company is required to continue amortizing its intangible attributable
to its March 1996 bank branch acquisition during the Fleet Financial Group,
Inc. divestiture. Current amortization of this intangible is $1.2 million
annually. Accordingly, the Company anticipates that there will continue to
be a difference between its GAAP and cash basis presentations.
The October 17th Action Alert also states that FASB will reconsider
its new guidance during future deliberations. The conclusion reached by
FASB regarding the need to continue amortization of an unidentifiable
intangible asset, therefore, may be overturned at a later date. The
Company, however, can give no assurance that FASB will vary from its current
position. Regardless of its final outcome, this goodwill accounting issue
will not have any material impact on the Company's financial condition. At
March 31, 2002, the Company had $10.5 million of excess of cost over net
assets acquired remaining on its balance sheet.
8
BANCORP RHODE ISLAND, INC.
Management's Discussion and Analysis
ITEM 2. Management's Discussion and Analysis
Certain statements contained herein are "Forward Looking Statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward Looking Statements may be identified by reference to a future period
or periods or by the use of forward looking terminology such as "may,"
"believes," "intends," "expects," and "anticipates" or similar terms or
variations of these terms. Actual results may differ materially from those
set forth in Forward Looking Statements as a result of certain risks and
uncertainties, including but not limited to, changes in political and
economic conditions, interest rate fluctuations, competitive product and
pricing pressures, equity and bond market fluctuations, credit risk,
inflation, as well as other risks and uncertainties detailed from time to
time in filings with the Securities and Exchange Commission ("SEC").
GENERAL
-------
The Company's principal subsidiary, Bank Rhode Island, is a commercial
bank chartered as a financial institution in the State of Rhode Island. The
Bank pursues a community banking mission and is principally engaged in
providing banking products and services to individuals and businesses in
Providence and Kent counties. The Bank is subject to competition from a
variety of traditional and nontraditional financial service providers both
within and outside of Rhode Island. The Bank offers its customers a wide
range of deposit products, nondeposit investment products, commercial,
residential and consumer loans, and other traditional banking products and
services, designed to meet the needs of individuals and small- to mid-sized
businesses. The Bank also has introduced both commercial and consumer
online banking products and maintains a web site at http://www.bankri.com.
The Company and Bank are subject to regulation by a number of federal and
state agencies and undergo periodic examinations by certain of those
regulatory authorities. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The
Bank is also a member of the Federal Home Loan Bank of Boston ("FHLB").
NON-GAAP MEASURES OF FINANCIAL PERFORMANCE
------------------------------------------
The Bank's formation in 1996 resulted in the generation of $17.5
million of intangibles that are being amortized over a 15-year period. The
amortization of these intangibles reduces the Bank's pre-tax income $1.2
million annually. Because of the impact of this amortization, certain
measures of financial performance have been calculated excluding such
amortization and any related income taxes.
These measures are identified as "cash" or "cash basis" and have been
provided to assist the reader in evaluating the core performance of the
Company. Information presented on a cash basis is not in accordance with
Accounting Principles Generally Accepted in the United States of America
("GAAP"), but management believes it to be beneficial to gaining an
understanding of the financial performance of the Company.
9
The following table sets forth selected financial measures according
to GAAP and on a cash basis:
Three Months Ended
March 31,
-------------------
2002 2001
---- ----
Basic earnings per share $ 0.46 $ 0.42
Diluted earnings per share $ 0.43 $ 0.40
Basic cash earnings per share $ 0.51 $ 0.47
Diluted cash earnings per share $ 0.48 $ 0.45
Return on average assets 0.77% 0.82%
Cash basis return on average assets 0.87% 0.94%
Return on average equity 11.48% 11.75%
Cash basis return on average equity 12.75% 13.16%
Efficiency ratio 66.95% 64.87%
Cash basis efficiency ratio 63.78% 61.36%
OVERVIEW
--------
Total assets increased $68.2 million, or 7.9%, to $930.5 million at
March 31, 2002 from $862.3 million at December 31, 2001. This increase was
predominantly in overnight investments, US Agency securities and mortgage-
backed securities ("MBSs") and was funded by a combination of deposit growth
and borrowings from the FHLB. Since the end of last year, total deposits
increased $22.3 million, or 3.3%, and FHLB borrowings increased $38.3
million, or 33.8%. Shareholders' equity was $59.3 million at March 31,
2002, and represented 6.4% of total assets.
FINANCIAL CONDITION
-------------------
-- Investments. Total investments (consisting of overnight
investments, investment securities, MBSs, and stock in the FHLB) totaled
$276.3 million, or 29.7% of total assets, at March 31, 2002, compared to
$210.7 million, or 24.4% of total assets, at December 31, 2001. All $249.3
million of investment and mortgage-backed securities at March 31, 2002 were
classified as available for sale and carried a total of $299,000 in net
unrealized losses at the end of the quarter. The increase in total
investments of $65.6 million, or 31.1%, was associated with the growth in
total deposits and FHLB borrowings.
-- Loans. Total loans were $598.7 million, or 64.3% of total assets,
at March 31, 2002, compared to $611.0 million, or 70.9% of total assets, at
December 31, 2001. In response to low market interest rates, the Company
experienced a sharp increase in residential loan and MBS prepayments during
the fourth quarter of 2001 and the first quarter of 2002. This resulted in
the residential mortgage loan portfolio decreasing $15.5 million, or 5.0%,
during the first quarter of 2002, as prepayments exceeded new loan
purchases.
The commercial loan portfolio (consisting of commercial & industrial,
small business, commercial real estate, multi-family real estate, and
construction loans) increased $2.8 million, or 1.2%, during the first
quarter. Particular emphasis is placed on generation of small- to medium-
sized commercial relationships (those relationships with $5.0 million or
less in loan commitments). The Bank is also active in small business
lending (loans of $250,000 or less) in which it utilizes credit scoring, in
conjunction with traditional review standards, and employs streamlined
documentation. The Bank is a participant in the U.S. Small Business
Administration ("SBA") Preferred Lender Program in Rhode Island and the 7a
Guarantee Loan Program in Massachusetts.
10
The consumer loan portfolio remained relatively unchanged during the
first quarter of 2002, beginning the quarter at $61.4 million and ending the
quarter at $61.8 million.
While origination efforts continue to be concentrated on commercial
and consumer loan opportunities, the Bank also originates residential
mortgage loans on a limited basis for its customers. Additionally, until
such time as the Company can generate sufficient commercial and consumer
loans to utilize available cash flow, or to otherwise meet investment
objectives, it also intends to continue purchasing residential mortgage and
automobile loans as opportunities develop.
The following is a breakdown of loans receivable:
March 31, December 31,
2002 2001
--------- ------------
(In thousands)
Residential mortgage loans:
One- to four-family adjustable rate $272,234 $285,589
One- to four-family fixed rate 21,293 23,306
-----------------------
Subtotal 293,527 308,895
Premium on loans acquired 1,284 1,381
Net deferred loan origination fees (72) (64)
-----------------------
Total residential mortgage loans $294,739 $310,212
=======================
Commercial loans:
Commercial real estate - nonowner occupied $ 75,034 $ 73,369
Commercial and industrial 50,086 53,677
Commercial real estate - owner occupied 47,423 46,698
Small business 24,628 24,122
Multi-family real estate 16,391 14,927
Construction 17,797 14,027
Leases and other 10,956 12,715
-----------------------
Subtotal 242,315 239,535
Net deferred loan origination fees (171) (171)
-----------------------
Total commercial loans $242,144 $239,364
=======================
Consumer loans:
Home equity - lines of credit $ 29,847 $ 28,460
Home equity - term loans 23,454 22,930
Automobile 5,506 6,335
Installment 1,157 1,240
Savings secured 615 656
Unsecured and other 613 1,153
-----------------------
Subtotal 61,192 60,774
Premium on loans acquired 167 192
Net deferred loan origination costs 439 422
-----------------------
Total consumer loans $ 61,798 $ 61,388
=======================
11
-- Deposits and Borrowings. Total deposits increased by $22.3
million, or 3.3%, during the first quarter of 2002, from $670.4 million, or
77.8% of total assets, at December 31, 2001, to $692.7 million, or 74.4% of
total assets, at March 31, 2002. The decrease in the relative percentage of
total assets resulted from first quarter total asset growth being primarily
funded by FHLB borrowings. In addition, the composition of total deposits
also changed during the quarter. Core deposit accounts (checking and
savings) increased $31.9 million, or 7.5%, during the quarter, while
certificates of deposit decreased $9.6 million, or 3.9%, during this time
period. The Bank continues its strategy of emphasizing core deposit growth
over certificate of deposit growth. The decline in certificates of deposits
also reflects customer movement away from extended term deposits in response
to the current low interest rate environment. At March 31, 2002, core
deposit accounts comprised 65.5% of total deposits, compared to 63.0% of
total deposits at December 31, 2001.
The following table sets forth certain information regarding deposits:
March 31, 2002 December 31, 2001
------------------------------- ------------------------------
Percent Weighted Percent Weighted
of Average of Average
Amount Total Rate Amount Total Rate
------ ------- -------- ------ ------- --------
(Dollars in thousands)
NOW accounts $ 50,007 7.2% 0.33% $ 44,445 6.6% 0.40%
Money market accounts 9,589 1.4% 1.32% 9,914 1.5% 1.40%
Savings accounts 276,059 39.8% 1.82% 254,861 38.0% 1.90%
Certificate of deposit accounts 238,670 34.5% 3.61% 248,268 37.0% 4.15%
------------------ -----------------
Total interest bearing deposits 574,325 82.9% 2.43% 557,488 83.1% 2.77%
Noninterest bearing accounts 118,353 17.1% -- 112,925 16.9% --
------------------ -----------------
Total deposits $692,678 100.0% 2.01% $670,413 100.0% 2.31%
============================================================
The Company, through the Bank's membership in the FHLB, has access to
a variety of borrowing alternatives, and management will from time to time
take advantage of these opportunities to fund asset growth. During the
first quarter of 2002, FHLB borrowings increased $38.3 million, or 33.8%, as
the Company sought to take advantage of lower, long-term borrowing rates to
fund its asset growth. The proceeds from these new borrowings were
primarily reinvested in hybrid ARM MBSs and allowed the Company to control
the duration match of its balance sheet. However, on a long-term basis, the
Company intends to continue concentrating on increasing its core deposits.
Asset Quality
-------------
The definition of nonperforming assets includes nonperforming loans
and other real estate owned ("OREO"). OREO consists of real estate acquired
through foreclosure proceedings and real estate acquired through acceptance
of a deed in lieu of foreclosure. Nonperforming loans are defined as
nonaccrual loans, loans past due 90 days or more, but still accruing and
impaired loans. Under certain circumstances the Company may restructure the
terms of a loan as a concession to a borrower. These restructured loans are
considered impaired loans.
-- Nonperforming Assets. At March 31, 2002, the Company had
nonperforming assets of $577,000, which represented 0.06% of total assets.
This compares to nonperforming assets of $1.0 million, or 0.12% of total
assets, at December 31, 2001. The level of nonperforming assets remains at
a low level, but as the loan portfolio continues to grow and mature, or if
economic conditions
12
worsen, management believes it highly likely that the level of nonperforming
assets will increase, as will its level of charged-off loans. Nonperforming
assets at March 31, 2002, consisted of nonaccrual residential mortgage loans
aggregating $367,000, nonaccrual commercial loans aggregating $136,000 and
nonaccrual consumer loans aggregating $74,000. There were no impaired loans
as of December 31, 2001 or March 31, 2002. The Company evaluates the
underlying collateral of each nonperforming loan and continues to pursue the
collection of interest and principal.
Delinquencies. At March 31, 2002, loans with an aggregate balance of
$142,000 were 60 to 89 days past due, an increase of $11,000, or 8.4%, from
$131,000 reported at December 31, 2001. The majority of these loans at both
dates were residential mortgage loans and are secured.
The following table sets forth information regarding nonperforming
assets and loans 60-89 days past due as to interest at the dates indicated.
March 31, December 31,
2002 2001
--------- ------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis $ 577 $ 753
Loans past due 90 days or more, but still accruing -- --
Impaired loans (not included in nonaccrual loans) -- --
---------------------
Total nonperforming loans 577 753
---------------------
Other real estate owned -- 264
Total nonperforming assets $ 577 $1,017
=====================
Delinquent loans 60-89 days past due $ 142 $ 131
Nonperforming loans as a percent of total loans 0.10% 0.12%
Nonperforming assets as a percent of total assets 0.06% 0.12%
Delinquent loans 60-89 days past due as a percent of
total loans 0.02% 0.02%
Adversely Classified Assets. The Company's management adversely
classifies certain assets as "substandard," "doubtful" or "loss" based on
criteria established under banking regulations. An asset is considered
substandard if inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if existing deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses
inherent in those classified substandard with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the
basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those
considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not
warranted.
At March 31, 2002, the Company had $8.1 million of assets that were
classified as substandard. This compares to $8.7 million of assets that
were classified as substandard at December 31, 2001. The Company had no
assets that were classified as doubtful or loss at either date. Performing
loans may or may not be adversely classified depending upon management's
judgment with respect to each individual loan. At March 31, 2002, included
in the assets that were classified as substandard, were $7.5 million of
performing loans. This compares to $7.9 million of adversely classified
performing loans as of December 31, 2001. Adversely classified assets are a
reflection of commercial credit quality. An increase in adversely
classified assets may lead to an increase in nonperforming assets and an
increase in the provision for loan losses in future periods.
13
Allowance for Loan Losses
-------------------------
During the first quarter of 2002, the Company made provisions to the
allowance for loan losses totaling $400,000 and had $31,000 of net charge-
offs, bringing the balance in the allowance to $8.9 million, compared to
$8.5 million at December 31, 2001. The allowance, expressed as a percentage
of total loans, increased to 1.49% as of March 31, 2002, compared to 1.40%
at the prior year end and stood at 1541.2% of nonperforming loans at March
31, 2002, compared to 1132.0% of nonperforming loans at December 31, 2001.
Assessing the adequacy of the allowance for loan losses involves
substantial uncertainties and is based upon management's evaluation of the
amounts required to meet estimated charge-offs in the loan portfolio after
weighing various factors. Among these factors are the risk characteristics
of the loan portfolio, the quality of specific loans, the level of
nonaccruing loans, current economic conditions, trends in delinquencies and
charge-offs, and the value of underlying collateral, all of which can change
frequently. Based on this evaluation, management believes that the
allowance for loan losses, as of March 31, 2002, is adequate.
While management evaluates currently available information in
establishing the allowance for loan losses, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review a financial institution's allowance for loan losses and carrying
amounts of other real estate owned. Such agencies may require the financial
institution to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
RESULTS OF OPERATIONS
---------------------
The Company's operating results depend primarily on its "net interest
income," or the difference between its interest income and its cost of
money, and on the quality of its assets. Interest income depends on the
average amount of interest-earning assets outstanding during the period and
the interest rates earned thereon. Cost of money is a function of the
average amount of deposits and borrowed money outstanding during the period
and the interest rates paid thereon. Earnings are further influenced by the
quality of assets, through the amount of interest income lost on nonaccrual
loans, the amount of additions to the allowance for loan losses and the
amount of expenses incurred as a result of resolving troubled assets.
Three Months Ended March 31, 2002 and 2001
------------------------------------------
-- Overview. The Company reported net income for the first
quarter of 2002 of $1.7 million, up $145,000, or 9.3%, from the first
quarter of 2001. Diluted earnings per common share were $0.43 for the first
quarter of 2002, compared to $0.40 for the first quarter of 2001. Diluted
cash earnings per common share were $0.48 for the 2002 period, compared to
$0.45 for the 2001 period.
14
The Company reported a return on average assets of 0.77% and a return
on average equity of 11.48% for the 2002 period, as compared to a return on
average assets of 0.82% and a return on average equity of 11.75% for the
2001 period. Cash basis return on average assets and cash basis return on
average equity were 0.87% and 12.75% for the 2002 period, and 0.94% and
13.16% for the 2001 period, respectively.
-- Net Interest Income. For the quarter ended March 31, 2002, net
interest income was $7.6 million, compared to $7.2 million for the 2001
period. The net interest margin for the first quarter of 2002 was 3.63%
compared to a net interest margin of 3.99% for the 2001 period. The
increase in net interest income of $411,000, or 5.7%, was primarily
attributable to the continued growth of the Company. Average earning assets
were $119.1 million, or 16.3%, higher, and average interest-bearing
liabilities were $102.6 million, or 16.6%, higher, than the comparable
period a year earlier. The decrease of 36 basis points in the net interest
margin resulted from a 400 basis point drop in short-term market interest
rates, coupled with tighter spreads on wholesale asset purchases completed
in February 2001 and in the first quarter of 2002.
-- Interest Income. Investments. Total investment income was $2.9
million for the quarter ended March 31, 2002, compared to $3.0 million for
the 2001 quarter. The decrease in total investment income was only $17,000,
or 0.6%, and was attributable to a decrease in market interest rates, which
was almost entirely offset by an increase in average balance. The average
yield on investments decreased 179 basis points, and the average balance of
investments increased $67.6 million, from the first quarter of 2001 to the
first quarter of 2002. The increase in average balance was primarily in
MBSs. The Company's investments are primarily comprised of US Agency
securities or MBSs with remaining maturities or repricing periods of less
than five years. In addition to assisting in overall tax planning,
management believes that this composition, along with a structured maturity
ladder, provides more stable earnings and predictable cash flows from the
portfolio.
-- Interest Income. Loans. Interest from loans was $10.2 million for
the three months ended March 31, 2002, and represented a yield on total
loans of 6.80%. This compares to $11.2 million of interest, and a yield of
8.20%, for the first quarter of 2001. Declining market interest rates,
coupled with increased residential mortgage loan prepayment activity,
resulted in lower interest from the loan portfolio. Interest from
commercial loans decreased $425,000, or 9.0%, between the two quarters and
income from consumer and other loans decreased $331,000, or 26.1%.
Residential mortgage loan interest decreased $287,000, or 5.5%, during the
same period. Since its inception, the Bank has concentrated its origination
efforts on commercial and consumer loan opportunities, while purchasing
residential mortgage loans, and more recently automobile loans, as cash
flows dictated. The average balance of the various components of the loan
portfolio changed from the first quarter of 2001 as follows: commercial
loans increased $25.8 million, or 12.0%, residential mortgage loans
increased $23.5 million, or 8.6%, and consumer and other loans increased
$2.2 million, or 3.6%, respectively. In response to declining market
interest rates, the yields on the various loan portfolio components changed
as follows: commercial loans decreased 166 basis points, to 7.21%; consumer
and other loans decreased 247 basis points, to 6.16%, and residential
mortgage loans decreased 98 basis points, to 6.60%.
-- Interest Expense. Interest paid on deposits and borrowings
decreased $1.5 million, or 21.2%, to $5.5 million for the three months ended
March 31, 2002, from $7.0 million for the same period during 2001. The
decrease in total interest expense was primarily attributable to a decrease
in
15
market interest rates. The overall average cost for interest-bearing
liabilities decreased 148 basis points from 4.56% for the first quarter of
2001 to 3.08% for the first quarter of 2002. Average costs for the various
components of interest-bearing liabilities changed from the first quarter of
2001 as follows: NOW accounts decreased 17 basis points, to 0.39%; money
market accounts decreased 119 basis points, to 1.37%; savings deposits
decreased 164 basis points, to 1.87%; certificate of deposit accounts
decreased 191 basis points, to 3.81%; and borrowings decreased 74 basis
points to 4.78%. Meanwhile, the average balance of interest-bearing
liabilities increased $95.4 million, from $522.8 million in the first
quarter of 2001 to $618.2 million in the first quarter of 2002, as
borrowings were utilized to fund asset growth. Liability costs are
dependent on a number of factors including general economic conditions,
national and local interest rates, competition in the local deposit
marketplace, interest rate tiers offered and the Company's cash flow needs.
-- Provision for Loan Losses. The provision for loan losses was
$400,000 for the quarter ended March 31, 2002, down $88,000, or 18.0%, from
the same quarter last year as both nonperforming and delinquent loans
decreased from March 31, 2001 levels. As the loan portfolio continues to
grow and mature, or if economic conditions worsen, management believes it
highly likely that the level of nonperforming assets will increase, which in
turn may lead to increases in the provision for loan losses in future
periods. Management evaluates several factors including new loan
originations, actual and estimated charge-offs, and the risk characteristics
of the loan portfolio and general economic conditions when determining the
provision for each quarter. Also see discussion under "Allowance for Loan
Losses."
-- Noninterest Income. Total noninterest income increased $464,000,
or 42.1%, to $1.6 million for the first quarter of 2002, from $1.1 million
for the first quarter of 2001. Service Charges on Deposit Accounts, which
continues to represent the largest source of noninterest income for the
Company, rose $89,000, or 11.6%, from $766,000 for the three months ended
March 31, 2001, to $855,000 for the same period in 2002 in response to
continued growth in checking and savings accounts. Commissions on Loans
Originated for Others increased $35,000, or 59.3%, as fixed-rate mortgage
loan activity increased in response to falling market interest rates.
Commissions on nondeposit investment products increased $176,000, or 241.1%,
as a result of efforts to revitalize, and bring the program in-house, which
were begun in the first quarter of last year. Lastly, the Bank purchased
$10.0 million of bank-owned life insurance during the first quarter of 2002,
which resulted in $95,000 of noninterest income in the 2002 quarter.
-- Noninterest Expense. Noninterest expenses for the first quarter of
2002 increased a total of $759,000, or 14.1%, to $6.1 million from $5.4
million in 2001. This increase occurred primarily in the following areas:
Salaries and Benefits (up $397,000, or 15.0%), Occupancy and Equipment (up
$55,000, or 8.3%), Marketing (up $83,000, or 44.1%) and Professional
Services (up $192,000, or 89.3%). During 2001, the Bank experienced
substantial growth in both loans and core deposits that resulted in the
increased operating costs evidenced in the first quarter of 2002. In
addition, the Bank is currently reviewing its alternatives for data
processing and has retained professional assistance for this project.
Partially offsetting these increases was a decrease in OREO Expense (down
$52,000, or 120.9%) as the Bank disposed of all properties held in OREO.
The Company's efficiency ratio increased slightly, to 66.95%, in 2002 and
its cash basis efficiency ratio increased slightly to 63.78%.
16
-- Income Tax Expense. Income tax expense of $930,000 was recorded
for the three months ended March 31, 2002, compared to $871,000 for the same
period during 2001. This represented total effective tax rates of 35.3% and
35.8%, respectively. Tax-favored income from U.S. Treasury and Agency
securities along with the utilization of a Rhode Island passive investment
company has reduced the effective tax rate from the 39.9% combined statutory
federal and state tax rates.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
-- Liquidity. Liquidity is defined as the ability to meet current and
future financial obligations of a short-term nature. The Company further
defines liquidity as the ability to respond to the needs of depositors and
borrowers, as well as to earnings enhancement opportunities, in a changing
marketplace.
The primary source of funds for the payment of dividends and expenses
by the Company is dividends paid to it by the Bank. Bank regulatory
authorities generally restrict the amounts available for payment of
dividends if the effect thereof would cause the capital of the Bank to be
reduced below applicable capital requirements. These restrictions
indirectly affect the Company's ability to pay dividends. The primary
sources of liquidity for the Bank consist of deposit inflows, loan
repayments, borrowed funds, maturity of investment securities and sales of
securities from the available for sale portfolio. Management believes that
these sources are sufficient to fund the Bank's lending and investment
activities.
Management is responsible for establishing and monitoring liquidity
targets as well as strategies and tactics to meet these targets. In
general, the Company seeks to maintain a high degree of flexibility. At
March 31, 2002, overnight investments, investment securities and MBSs
available for sale amounted to $268.6 million, or 28.9% of total assets.
This compares to $205.0 million, or 23.8% of total assets at December 31,
2001. The Bank is a member of the FHLB and, as such, has access to both
short- and long-term borrowings. In addition, the Bank maintains a line of
credit at the FHLB as well as a line of credit with a correspondent bank.
There have been no adverse trends in the Company's liquidity or capital
reserves. Management believes that the Company has adequate liquidity to
meet its commitments.
-- Capital Resources. Total shareholders' equity of the Company at
March 31, 2002 was $59.3 million, as compared to $59.1 million at December
31, 2001. This increase of $174,000 was the result of net income for the
quarter of $1.7 million, less dividends of $488,000 and changes in other
comprehensive income of $1.1 million.
All FDIC-insured institutions must meet specified minimal capital
requirements. These regulations require banks to maintain a minimum
leverage capital ratio. In addition, the FDIC has adopted capital
guidelines based upon ratios of a bank's capital to total assets adjusted
for risk. The risk-based capital guidelines include both a definition of
capital and a framework for calculating risk-weighted assets by assigning
balance sheet assets and off-balance sheet items to broad risk categories.
These regulations require banks to maintain minimum capital levels for
capital adequacy purposes and higher capital levels to be considered "well
capitalized."
Capital guidelines have also been issued by the Federal Reserve Board
("FRB") for bank holding companies. These guidelines require the Company to
maintain minimum capital levels for capital
17
adequacy purposes. In general, the FRB has adopted substantially identical
capital adequacy guidelines as the FDIC. Such standards are applicable to
bank holding companies and their bank subsidiaries on a consolidated basis.
As of March 31, 2002, the Company and the Bank met all applicable
minimum capital requirements and were considered "well capitalized" by both
the FRB and the FDIC. The Company's and the Bank's actual and required
capital amounts and ratios are as follows:
Minimum Required Minimum Required
For Capital To Be Considered
Actual Adequacy Purposes "Well Capitalized"
----------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
At March 31, 2002:
Bancorp Rhode Island, Inc.
Tier I capital (to average assets) $ 51,993 5.87% $ 26,591 3.00% $ 44,319 5.00%
Tier I capital (to risk weighted assets) 51,993 9.65% 21,559 4.00% 32,338 6.00%
Total capital (to risk weighted assets) 58,755 10.90% 43,117 8.00% 53,897 10.00%
Bank Rhode Island
Tier I capital (to average assets) $ 51,146 5.78% $ 26,548 3.00% $ 44,246 5.00%
Tier I capital (to risk weighted assets) 51,146 9.49% 21,554 4.00% 32,332 6.00%
Total capital (to risk weighted assets) 57,908 10.75% 43,109 8.00% 53,886 10.00%
At December 31, 2001:
Bancorp Rhode Island, Inc.
Tier I capital (to average assets) $ 50,433 5.93% $ 25,508 3.00% $ 42,513 5.00%
Tier I capital (to risk weighted assets) 50,433 9.86% 20,462 4.00% 30,694 6.00%
Total capital (to risk weighted assets) 56,803 11.10% 40,925 8.00% 51,156 10.00%
Bank Rhode Island
Tier I capital (to average assets) $ 49,702 5.84% $ 25,526 3.00% $ 42,544 5.00%
Tier I capital (to risk weighted assets) 49,702 9.72% 20,458 4.00% 30,687 6.00%
Total capital (to risk weighted assets) 56,121 10.97% 40,916 8.00% 51,145 10.00%
18
BANCORP RHODE ISLAND, INC.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
------------------
The principal market risk facing the Company is interest rate risk.
The Company's objective regarding interest rate risk is to manage its assets
and funding sources to produce results which are consistent with its
liquidity, capital adequacy, growth and profitability goals, while
minimizing the vulnerability of its operations to changes in market interest
rates. The Bank's Asset/Liability Committee ("ALCO") manages the
Company's interest rate risk position using both income simulation and
interest rate sensitivity "gap" analysis. The ALCO has established internal
parameters for monitoring the income simulation and gap analysis. These
guidelines serve as benchmarks for evaluating actions to balance the current
position against overall strategic goals. The ALCO monitors current
exposures and reports these to the Board of Directors.
Simulation is used as the primary tool for measuring the interest rate
risk inherent in the Company's balance sheet at a given point in time by
showing the effect on net interest income, over a 24-month period, of
interest rate ramps of up to 200 basis points. These simulations take into
account repricing, maturity and prepayment characteristics of individual
products. The ALCO reviews simulation results to determine whether the
downside exposure resulting from changes in market interest rates remains
within established tolerance levels over both a 12-month and 24-month
horizon, and develops appropriate strategies to manage this exposure. The
Company's limits on interest rate risk specify that if interest rates were
to shift up or down 200 basis points over a 12-month period, estimated net
interest income for those 12 months and the subsequent 12 months, should
decline by no more than 5.0% or 10.0%, respectively. As of March 31, 2002,
net interest income simulation indicated that the Company's exposure to
changing interest rates was outside of the 10% tolerance level established
for the second year of a 200 basis point decline. This exposure primarily
results from the unusually low current rates paid on deposit accounts and
the extremely high prepayment speeds anticipated for mortgage-related assets
if market rates declined 200 basis points. The current rates on many
deposit accounts are so low, that they cannot decline 200 basis points
without becoming negative. This results in a floor of zero percent for
these deposit accounts, and this floor causes compression of the net
interest margin for modeling purposes. The ALCO reviews the methodology
utilized for calculating interest rate risk exposure and may, from time to
time, adopt modifications to this methodology. While the ALCO reviews
simulation assumptions and methodology to ensure that they reflect
historical experience, it should be noted that income simulation may not
always prove to be an accurate indicator of interest rate risk because the
actual repricing, maturity and prepayment characteristics of individual
products may differ from the estimates used in the simulations.
19
The following table presents the estimated impact of interest rate
ramps on the Company's estimated net interest income over a twenty-four
month period beginning April 1, 2002:
Estimated Exposure
to Net Interest Income
----------------------
Dollar Percent
Change Change
------ ------
(Dollars in thousands)
Initial Twelve Month Period:
Up 200 basis points $ 707 2.24%
Up 100 basis points 443 1.40%
Down 100 basis points (486) (1.54%)
Down 200 basis points (1,009) (3.20%)
Subsequent Twelve Month Period:
Up 200 basis points $ 647 2.07%
Up 100 basis points 842 2.69%
Down 100 basis points (1,516) (4.84%)
Down 200 basis points (3,600) (11.50%)
The Company also uses interest rate sensitivity gap analysis to
provide a more general overview of its interest rate risk profile. The
interest rate sensitivity gap is defined as the difference between interest-
earning assets and interest-bearing liabilities maturing or repricing within
a given time period. At March 31, 2002, the Company's one year cumulative
gap was a positive $101.1 million, or 10.87% of total assets.
For additional discussion on interest rate risk see the section titled
"Asset and Liability Management" on pages 39 to 41 of the Company's 2001
Annual Report to Shareholders.
BANCORP RHODE ISLAND, INC.
Other Information
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries are a party, or to which any of their
property is subject, other than ordinary routine litigation
incidental to the business of banking.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
No information to report.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
No defaults upon senior securities have taken place.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No information to report.
ITEM 5. OTHER INFORMATION
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.7(d) Amendment No. 5 to Supplemental Executive
Retirement Plan dated as of January 22, 2002.
10.10(a) Termination Agreement between Bank Rhode Island
and Merrill W. Sherman dated as of January 22,
2002, regarding termination of CEO Deferred
Compensation Agreement dated as of January 1,
2001.
10.12 Form of Bank Rhode Island Split Dollar Agreement
dated as of January 22, 2002 and schedule of
terms.
(b) Reports on Form 8-K
No information to report.
20
BANCORP RHODE ISLAND, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Bancorp Rhode Island, Inc.
May 9, 2002 /s/ Merrill W. Sherman
----------- ------------------------------------
(Date) Merrill W. Sherman
President and
Chief Executive Officer
May 9, 2002 /s/ Albert R. Rietheimer
----------- ------------------------------------
(Date) Albert R. Rietheimer
Chief Financial Officer
and Treasurer
21