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: June 30, 2002
Commission File No. 001-16101
BANCORP RHODE ISLAND, INC.
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(Exact Name of Registrant 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 August 5, 2002:
Common Stock - Par Value $0.01 3,776,150 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 - 20
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 21 - 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 23
Item 3 Default upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23 - 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
Signature Page 25
2
BANCORP RHODE ISLAND, INC.
Consolidated Balance Sheets
June 30, December 31,
2002 2001
-------- ------------
(Dollars in thousands)
ASSETS:
Cash and due from banks $ 22,094 $ 24,261
Overnight investments 9,377 4,913
Investment securities available for sale (amortized cost of $71,249 and
$49,193 at June 30, 2002 and December 31, 2001, respectively) 71,800 49,453
Mortgage-backed securities available for sale (amortized cost of $188,288
and $149,549 at June 30, 2002 and December 31, 2001, respectively) 189,464 150,650
Stock in Federal Home Loan Bank of Boston 7,683 5,668
Loans receivable:
Residential mortgage loans 291,495 310,212
Commercial loans 259,502 239,364
Consumer and other loans 64,581 61,388
----------------------
Total loans 615,578 610,964
Less allowance for loan losses (9,266) (8,524)
----------------------
Net loans 606,312 602,440
Premises and equipment, net 7,717 7,184
Other real estate owned -- 264
Excess of cost over net assets acquired, net 10,184 10,766
Accrued interest receivable 6,059 5,803
Investment in bank-owned life insurance 10,237 --
Prepaid expenses and other assets 3,067 848
----------------------
Total assets $943,994 $862,250
======================
LIABILITIES:
Deposits:
Demand deposit accounts $116,377 $112,925
NOW accounts 64,482 44,445
Money market accounts 9,956 9,914
Savings accounts 268,747 254,861
Certificate of deposit accounts 241,627 248,268
----------------------
Total deposits 701,189 670,413
Overnight and short-term borrowings 18,003 13,033
Federal Home Loan Bank of Boston borrowings 150,802 113,365
Company-obligated mandatorily redeemable capital securities 8,000 3,000
Other liabilities 4,074 3,342
----------------------
Total liabilities 882,068 803,153
----------------------
SHAREHOLDERS' EQUITY:
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding 3,762,850 shares in 2002 and
3,753,550 in 2001 38 37
Additional paid-in capital 39,970 39,826
Retained earnings 20,778 18,336
Accumulated other comprehensive income (loss), net 1,140 898
----------------------
Total shareholders' equity 61,926 59,097
----------------------
Total liabilities and shareholders' equity $943,994 $862,250
======================
See accompanying notes to consolidated financial statements
3
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands, except per share data)
Interest and dividend income:
Residential mortgage loans $ 4,845 $ 5,485 $ 9,772 $ 10,699
Commercial loans 4,443 4,568 8,731 9,281
Consumer and other loans 959 1,199 1,898 2,469
Mortgage-backed securities 2,348 1,954 4,448 3,957
Investment securities 821 705 1,529 1,447
Overnight investments 43 215 116 356
Federal Home Loan Bank of Boston stock dividends 80 77 142 151
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Total interest and dividend income 13,539 14,203 26,636 28,360
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Interest expense:
NOW accounts 86 58 128 108
Money market accounts 31 60 66 138
Savings accounts 1,282 1,785 2,499 3,654
Certificate of deposit accounts 2,101 3,566 4,390 7,274
Overnight and short-term borrowings 53 116 112 308
Federal Home Loan Bank of Boston borrowings 1,888 1,373 3,650 2,323
Other borrowings -- 68 -- 138
Company-obligated mandatorily redeemable capital securities 81 79 157 113
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Total interest expense 5,522 7,105 11,002 14,056
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Net interest income 8,017 7,098 15,634 14,304
Provision for loan losses 450 352 850 840
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Net interest income after provision for loan
losses 7,567 6,746 14,784 13,464
------------------------------------------------
Noninterest income:
Service charges on deposit accounts 912 894 1,767 1,660
Loan related fees 82 51 173 100
Commissions on loans originated for others 58 71 152 130
Commissions on nondeposit investment products 173 73 422 146
Gain on sale of mortgage-backed securities -- 4 23 4
Income from bank-owned life insurance 142 -- 237 --
Other income 151 213 310 368
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Total noninterest income 1,518 1,306 3,084 2,408
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Noninterest expense:
Salaries and employee benefits 3,207 2,665 6,254 5,315
Occupancy 496 438 963 868
Equipment 246 208 495 439
Data processing 485 463 925 882
Marketing 385 369 681 557
Professional services 416 185 798 400
Loan servicing 236 242 459 451
Other real estate owned expense 16 21 7 64
Amortization of excess of cost over net assets acquired 291 291 582 582
Other 759 766 1,521 1,479
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Total noninterest expense 6,537 5,648 12,685 11,037
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Income before income taxes 2,548 2,404 5,183 4,835
Income tax expense 834 832 1,764 1,703
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Net income $ 1,714 $ 1,572 $ 3,419 $ 3,132
================================================
Per share data:
Basic earnings per common share $ 0.46 $ 0.42 $ 0.91 $ 0.84
Diluted earnings per common share $ 0.43 $ 0.40 $ 0.86 $ 0.81
Average common shares outstanding - basic 3,751,054 3,729,879 3,749,113 3,729,415
Average common shares outstanding - diluted 4,012,159 3,888,868 3,995,352 3,874,452
See accompanying notes to consolidated financial statements
4
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Changes in Shareholders' Equity
Accumulated
Other
Compre-
Additional hensive
Common Paid-in Retained Income
Six months ended June 30, Stock Capital Earnings (Loss), Net Total
------ ---------- -------- ----------- -----
(In thousands)
2002
----
Balance at December 31, 2001 $37 $39,826 $18,336 $ 898 $59,097
Net income -- -- 3,419 -- 3,419
Other comprehensive income, net of tax:
Unrealized holding gains on
securities available for sale,
net of taxes of $132 257 257
Realized gain on securities
available for sale, net
of taxes of $8 (15) (15)
-------
Comprehensive income 3,661
Proceeds from exercise of options 1 128 -- -- 129
Common stock issued for incentive
stock award, net -- 16 -- -- 16
Dividends on common stock -- -- (977) -- (977)
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Balance at June 30, 2002 $38 $39,970 $20,778 $1,140 $61,926
=========================================================
2001
----
Balance at December 31, 2000 $37 $39,621 $13,815 $ (181) $53,292
Net income -- -- 3,132 -- 3,132
Other comprehensive income,
net of tax:
Unrealized holding gains on
securities available for sale,
net of taxes of $1,156 763 763
Realized gain on securities available
for sale, net of taxes of $1 (3) (3)
-------
Comprehensive income 3,892
Proceeds from exercise of options -- 16 -- -- 16
Common stock issued for incentive
stock award, net -- 11 -- -- 11
Dividends on common stock -- -- (896) -- (896)
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Balance at June 30, 2001 $37 $39,648 $16,051 $ 579 $56,315
=========================================================
See accompanying notes to consolidated financial statements
5
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
--------------------
2002 2001
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 3,419 $ 3,132
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 1,792 1,511
Provision for loan losses 850 840
Gain on mortgage-backed securities (23) (4)
Gain on sale of other real estate owned (29) (14)
Income from bank-owned life insurance (237) --
Compensation expense from restricted stock grant 16 11
(Increase) decrease in:
Accrued interest receivable (256) (534)
Prepaid expenses and other assets (2,342) (656)
Increase (decrease) in:
Other liabilities 732 (244)
Other, net 53 9
--------------------
Net cash provided (used) by operating activities 3,975 4,051
--------------------
Cash flows from investing activities:
Origination of:
Residential mortgage loans (4,915) (7,082)
Commercial loans (33,845) (24,813)
Consumer loans (12,313) (9,398)
Purchase of:
Investment securities available for sale (41,074) (34,026)
Mortgage-backed securities available for sale (73,017) (33,000)
Residential mortgage loans (62,318) (105,689)
Consumer loans -- (5,045)
Federal Home Loan Bank of Boston stock (2,015) (1,211)
Principal payments on:
Investment securities available for sale 19,006 23,000
Mortgage-backed securities available for sale 30,359 18,017
Residential mortgage loans 85,614 55,454
Commercial loans 13,619 19,407
Consumer loans 8,949 10,342
Proceeds from sale of mortgage-backed securities 3,766 3,885
Proceeds from sale of other real estate owned 293 84
Proceeds from sale of premises and equipment -- 18
Capital expenditures for premises and equipment (1,122) (739)
Purchase of bank-owned life insurance (10,000) --
--------------------
Net cash provided (used) by investing activities (79,013) (90,796)
--------------------
Cash flows from financing activities:
Net increase in deposits 30,776 26,988
Net increase in overnight and short-term borrowings 4,970 3,277
Proceeds from long-term borrowings 45,351 71,000
Repayment of long-term borrowings (2,914) (7,755)
Proceeds from exercise of stock options 129 16
Dividends on common stock (977) (896)
--------------------
Net cash provided (used) by financing activities 77,335 92,630
--------------------
Net increase (decrease) in cash and cash equivalents 2,297 5,885
Cash and cash equivalents at beginning of period 29,174 34,453
--------------------
Cash and cash equivalents at end of period $ 31,471 $ 40,338
====================
Supplementary Disclosures:
Cash paid for interest $ 10,901 $ 13,249
Cash paid for income taxes 2,582 2,690
Non-cash transactions:
Additions to other real estate owned in settlement
of loans -- 62
Change in other comprehensive income, net of taxes 242 760
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 assets other than the common stock of 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, BRI Statutory
Trust I and BRI Statutory Trust II (issuers 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 options, warrants 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 Account 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 are no
longer be amortized, but rather are 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 June 30, 2002, the Company had $10.2 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 could 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 on-line 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
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 in
accordance with GAAP and on a cash basis:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings per share $ 0.46 $ 0.42 $ 0.91 $ 0.84
Diluted earnings per share $ 0.43 $ 0.40 $ 0.86 $ 0.81
Basic cash earnings per share $ 0.51 $ 0.47 $ 1.01 $ 0.94
Diluted cash earnings per share $ 0.48 $ 0.45 $ 0.95 $ 0.91
Return on average assets 0.74% 0.77% 0.76% 0.80%
Cash basis return on average assets 0.84% 0.88% 0.85% 0.91%
Return on average equity 11.37% 11.40% 11.43% 11.58%
Cash Basis Return on average equity 12.67% 12.78% 12.71% 12.97%
Efficiency ratio 68.56% 67.21% 67.77% 66.04%
Cash basis efficiency ratio 65.51% 63.74% 64.66% 62.56%
OVERVIEW
--------
Total assets increased $81.7 million, or 9.5%, to $944.0 million at
June 30, 2002 from $862.3 million at December 31, 2001. The increase was
predominantly in overnight investments, US Agency securities, mortgage-
backed securities ("MBSs"), commercial loans and consumer loans. Funding
of this growth was primarily from increases in total deposits and
borrowings from the FHLB, coupled with repayments of residential mortgage
loans. Since the end of 2001, commercial loans increased $20.1 million, or
8.4%, consumer loans increased $3.2 million, or 5.2%, total deposits
increased $30.8 million, or 4.6%, and FHLB borrowings increased $37.4
million, or 33.0%. Shareholders' equity was $61.9 million at June 30,
2002, and represented 6.6% of total assets.
In June 2002, the Company through its subsidiary, BRI Statutory Trust
II, issued $5.0 million of trust preferred securities. These securities
qualify as Tier I capital for regulatory purposes and can be used to
support continued growth of the Company.
FINANCIAL CONDITION
-------------------
-- Investments. Total investments (consisting of overnight
investments, investment securities, MBSs and stock in the FHLB) totaled
$278.3 million, or 29.5% of total assets, at June 30, 2002, compared to
$210.7 million, or 24.4% of total assets, at December 31, 2001. All $261.3
million of investment securities and MBSs at June 30, 2002 were classified
as available for sale and carried a total of $1.7 million in net unrealized
gains. The increase of $67.6 million, or 32.1%, in total investments was
associated with the growth in total deposits and FHLB borrowings.
-- Loans. Total loans were $615.6 million, or 65.2% of total assets,
at June 30, 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 mortgage loan prepayments
during the first quarter of 2002. This led to the residential mortgage
loan portfolio decreasing $18.7 million, or 6.0%, during the first six
months of 2002, as prepayments exceeded new loan purchases.
10
The commercial loan portfolio (consisting of commercial & industrial,
small business, commercial real estate, multi-family real estate and
construction loans) increased $20.1 million, or 8.4%, during the first half
of 2002. Particular emphasis is placed on the 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.
The consumer loan portfolio increased $3.2 million, or 5.2%, reaching
$64.6 million at June 30, 2002. This increase was predominantly in home
equity lines of credit, which grew $5.1 million, or 18.0%, since December
31, 2001. While the 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:
June 30, December 31,
2002 2001
-------- ------------
(In thousands)
Residential mortgage loans:
One- to four-family adjustable rate $270,450 $285,589
One- to four-family fixed rate 19,879 23,306
----------------------
Subtotal 290,329 308,895
Premium on loans acquired 1,232 1,381
Net deferred loan origination fees (66) (64)
----------------------
Total residential mortgage loans $291,495 $310,212
======================
Commercial loans:
Commercial real estate - nonowner occupied $ 80,024 $ 73,369
Commercial and industrial 57,436 53,677
Commercial real estate - owner occupied 48,722 46,698
Small business 26,466 24,122
Multi-family real estate 16,472 14,927
Construction 15,885 14,027
Leases and other 14,715 12,715
----------------------
Subtotal 259,720 239,535
Net deferred loan origination fees (218) (171)
----------------------
Total commercial loans $259,502 $239,364
======================
Consumer loans:
Home equity - lines of credit $ 33,584 $ 28,460
Home equity - term loans 23,280 22,930
Automobile 4,760 6,335
Installment 1,074 1,240
Savings secured 624 656
Unsecured and other 663 1,153
----------------------
Subtotal 63,985 60,774
Premium on loans acquired 143 192
Net deferred loan origination costs 453 422
----------------------
Total consumer loans $ 64,581 $ 61,388
======================
11
-- Deposits and Borrowings. Total deposits increased by $30.8
million, or 4.6%, during the first half of 2002, from $670.4 million, or
77.8% of total assets, at December 31, 2001, to $701.2 million, or 74.3% of
total assets, at June 30, 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 since the end of 2001. Core deposit accounts (checking and
savings accounts) increased $37.4 million, or 8.9%, while certificates of
deposit decreased $6.6 million, or 2.7%. 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 June 30, 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:
June 30, 2002 December 31, 2001
------------------------------- -------------------------------
Percent Weighted Percent Weighted
of Average of Average
Amount Total Rate Amount Total Rate
------ ------- -------- ------ ------- --------
(Dollars in thousands)
NOW accounts $ 64,482 9.2% 0.98% $ 44,445 6.6% 0.40%
Money market accounts 9,956 1.4% 1.34% 9,914 1.5% 1.40%
Savings accounts 268,747 38.3% 1.87% 254,861 38.0% 1.90%
Certificate of deposit accounts 241,627 34.5% 3.48% 248,268 37.0% 4.15%
------------------ ------------------
Total interest bearing deposits 584,812 83.4% 2.43% 557,488 83.1% 2.77%
Noninterest bearing accounts 116,377 16.6% -- 112,925 16.9% --
------------------ ------------------
Total deposits $701,189 100.0% 2.02% $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 half of 2002, FHLB borrowings increased $37.4 million, or 33.0%, 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 concentrate 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 June 30, 2002, the Company had
nonperforming assets of $902,000, which represented 0.10% of total assets.
This compares to nonperforming assets of $1.0 million, or .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 worsen, management believes it highly likely that the
level of nonperforming assets will increase, as
12
will its level of charged-off loans. Nonperforming assets at June 30,
2002, consisted of nonaccrual commercial loans aggregating $457,000,
nonaccrual residential mortgage loans aggregating $379,000 and nonaccrual
consumer loans aggregating $66,000. Included in nonaccrual loans were
$232,000 of impaired loans at June 30, 2002. There were no impaired loans
at December 31, 2001. The Company maintained reserves of $202,000 against
impaired loans at June 30, 2002. The Company evaluates the underlying
collateral of each nonperforming loan and continues to pursue the
collection of interest and principal.
Delinquencies. At June 30, 2002, loans with an aggregate balance of
$106,000 were 60 to 89 days past due, a decrease of $25,000, or 19.1%, 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.
June 30, December 31,
2002 2001
-------- ------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis $ 902 $ 753
Loans past due 90 days or more, but still accruing -- --
Impaired loans (not included in nonaccrual loans) -- --
--------------------
Total nonperforming loans 902 753
Other real estate owned -- 264
--------------------
Total nonperforming assets $ 902 $1,017
====================
Delinquent loans 60-89 days past due $ 106 $ 131
Nonperforming loans as a percent of total loans .15% .12%
Nonperforming assets as a percent of total assets .10% .12%
Delinquent loans 60-89 days past due as a percent
of total loans .02% .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 June 30, 2002, the Company had $8.6 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 June 30, 2002, included
in the $8.6 million of assets that were classified as substandard, were
$7.7 million of performing loans. This compares to $7.9 million of
adversely classified performing assets 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 six months of 2002, the Company made provisions to
the allowance for loan losses totaling $850,000 and had $108,000 of net
charge-offs, bringing the balance in the allowance to $9.3 million at June
30, 2002, compared to $8.5 million at December 31, 2001. The allowance,
expressed as a percentage of total loans, was 1.51% as of June 30, 2002,
compared to 1.40% at the prior year-end and stood at 1027.3% of
nonperforming loans at June 30, 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 June 30, 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 June 30, 2002 and 2001
-----------------------------------------
-- Overview. The Company reported net income for the second quarter
of 2002 of $1.7 million, up $142,000, or 9.0%, from the second quarter of
2001. Diluted earnings per common share were $0.43 for the second quarter
of 2002, compared to $0.40 for the second quarter of 2001. Diluted cash
earnings per common share were $0.48 for the 2002 period, compared to $0.45
for the 2001 period.
The Company reported a return on average assets of 0.74% and a return
on average equity of 11.37% for the 2002 period, as compared to a return on
average assets of 0.77% and a return on average equity of 11.40% for the
2001 period. Cash basis return on average assets and cash basis
14
return on average equity were 0.84% and 12.67% for the 2002 period, and
0.88% and 12.78% for the 2001 period, respectively.
-- Net Interest Income. For the quarter ended June 30, 2002, net
interest income was $8.0 million, compared to $7.1 million for the 2001
period. The net interest margin for the second quarter of 2002 was 3.66%
compared to a net interest margin of 3.64% for the 2001 period. The
increase in net interest income of $919,000, or 12.9%, was primarily
attributable to the continued growth of the Company. Average earnings
assets were $97.3 million, or 12.4%, higher and average interest-bearing
liabilities were $85.7 million, or 12.9%, higher than the comparable period
a year earlier. The slight increase of 2 basis points in the net interest
margin was primarily attributable to a drop in the average rate paid on
certificates of deposit that occurred over the past year.
-- Interest Income. Investments. Total investment income was $3.3
million for the quarter ended June 30, 2002, compared to $3.0 million for
the second quarter of 2001. This increase in total investment income of
$341,000, or 11.6%, was primarily attributable to an increase of $57.9
million, or 44.6%, in the average balance of 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 June 30, 2002, and represented a yield on total
loans of 6.78%. This compares to $11.3 million of interest, and a yield of
7.73%, for the second quarter of 2001. Declining market interest rates,
coupled with residential mortgage loan prepayment activity, resulted in
lower interest from the loan portfolio. Interest from residential mortgage
loans decreased $640,000, or 11.7%, commercial loan income decreased
$125,000, or 2.7%, and consumer and other loan income decreased $240,000,
or 20.0%, between the two quarters. 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 second
quarter of 2001 as follows: commercial loans increased $28.2 million, or
12.8%, and consumer and other loans increased $2.5 million, or 4.0%, while
residential mortgage loans decreased $8.6 million, or 2.9%. As a result of
declining market interest rates, the yields on the various loan portfolio
components changed as follows: commercial loans decreased 115 basis
points, to 7.19%; consumer and other loans decreased 180 basis points, to
5.98%, and residential mortgage loans decreased 66 basis points, to 6.61%.
-- Interest Expense. Interest paid on deposits and borrowings
decreased $1.6 million, or 22.3%, to $5.5 million for the three months
ended June 30, 2002, from $7.1 million paid during the second quarter of
2001. The decrease in total interest expense was primarily attributable to
a decrease in market interest rates, partially offset by an increase in the
average balance of deposits and borrowings. The overall average cost for
interest-bearing liabilities decreased 134 basis points from 4.30% for the
second quarter of 2001 to 2.96% for the second quarter of 2002. Average
costs for the various components of interest-bearing liabilities changed
from the second quarter of 2001 as follows: money market accounts
decreased 89 basis points, to 1.32%, savings accounts decreased 123 basis
points, to 1.87%, certificate of deposit accounts decreased 203 basis
points, to 3.51%, and borrowings decreased 66 basis points to 4.75%, while
NOW accounts increased 8 basis points, to 0.66%. Meanwhile, the average
balance of interest-bearing liabilities increased $85.7 million, from
15
$662.1 million in the second quarter of 2001 to $747.8 million in the
second quarter of 2002, as savings account growth and borrowings were
utilized to fund much of the 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
$450,000 for the quarter ended June 30, 2002, up $98,000, or 27.8%, from
the same quarter last year. Growth in the commercial loan portfolio
increased at an annualized rate of 28.7% during the second quarter of 2002.
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, 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 $212,000,
or 16.2%, to $1.5 million for the second quarter of 2002, from $1.3 million
for the 2001 quarter. The Bank's purchase of $10.0 million of bank-owned
life insurance during the first quarter of 2002 resulted in $142,000 of
noninterest income during the second quarter. This income was not present
during the second quarter of 2001. In addition, Commissions on Nondeposit
Investment Products increased $100,000, or 137.0%, compared to the second
quarter of 2001 as a result of efforts begun in 2001 to revitalize the
program. Partially offsetting these increases was a decrease of $62,000,
or 29.1%, in Other Income that resulted primarily from a decrease in card
services income following the termination of a student travel card program
with FirstDebit Corporation. Service Charges on Deposit Accounts, which
represent the largest source of noninterest income for the Company,
remained steady, rising $18,000, or 2.0%, from $894,000 for the quarter
ended June 30, 2001, to $912,000 for the same period in 2002, as core
deposit accounts continued to grow.
-- Noninterest Expense. Total noninterest expense for the second
quarter of 2002 increased $889,000, or 15.7%, to $6.5 million from $5.6
million in 2001. This increase occurred primarily in the following areas:
Salaries and Benefits (up $542,000, or 20.3%), Occupancy and Equipment (up
$96,000, or 14.9%) and Professional Services (up $231,000, or 124.9%).
During 2001 the Bank experienced substantial growth in both loans and core
deposits that resulted in the increased operating costs evidenced in the
second quarter of 2002. In addition, the Bank has retained professional
assistance to evaluate its data processing alternatives and to develop and
test software being deployed in conjunction with its CampusMate(TM)
product. As a result, the Company's cash basis efficiency ratio increased
177 basis points, from 63.74% for the second quarter of 2001 to 65.51% for
the second quarter of 2002.
-- Income Tax Expense. Income tax expense of $834,000 was recorded
for the quarter ended June 30, 2002, compared to $832,000 for the 2001
period. This represented total effective tax rates of 33.0% and 34.6%,
respectively. Tax-favored income from U.S. Agency securities, along with
the utilization of a Rhode Island passive investment company, has reduced
the Company's effective tax rate from the 39.9% combined statutory federal
and state tax rates. The 2002 period also benefited from the tax-favored
status of the Company's investment in bank-owned life insurance.
16
Six Months Ended June 30, 2002 and 2001
---------------------------------------
-- Overview. Net income for the first half of 2002, increased
$287,000, or 9.2%, to $3.4 million, or $0.86 per diluted common share, from
$3.1 million, or $0.81 per diluted common share, for the first half of
2001. Diluted cash earnings per common share were $0.95 for the 2002
period, compared to $0.91 for the 2001 period.
This performance represented a return on average assets of 0.76% and
a return on average equity of 11.43% for the 2002 period, as compared to a
return on average assets of 0.80% and a return on average equity of 11.58%
for the 2001 period. Cash basis return on average assets and cash basis
return on average equity were 0.85% and 12.71% for the 2002 period, and
0.91% and 12.97% for the 2001 period, respectively.
-- Net Interest Income. For the six months ended June 30, 2002, net
interest income was $15.6 million, compared to $14.3 million for the first
half of 2001. The net interest margin for the first six months of 2002 was
3.64% compared to a net interest margin of 3.81% for the 2001 period. The
increase in net interest income of $1.3 million, or 9.3%, was primarily
attributable to the overall growth of the Company. Average earning assets
increased $108.3 million, or 14.3%, and average interest-bearing
liabilities increased $94.1 million, or 14.7%, over the comparable period a
year earlier. The decrease of 17 basis points in the net interest margin
was primarily caused by the dramatic drop in market interest rates
occurring in 2001, coupled with the asset-sensitive nature of the Company's
balance sheet.
-- Interest Income. Investments. Total investment income was $6.2
million for the six months ended June 30, 2002, compared to $5.9 million
for the first half of 2001. This increase in total investment income of
$324,000, or 5.5%, was primarily attributable to a $53.1 million, or 42.3%,
increase in the average balance of MBSs. Meanwhile, the overall yield on
investments decreased 146 basis points, from 6.26% in 2001, to 4.80% in
2002, in response to dramatically lower market interest rates.
-- Interest Income. Loans. Interest from loans was $20.4 million for
the six months ended June 30, 2002, and represented a yield on total loans
of 6.79%. This compares to $22.4 million of interest, and a yield of
7.96%, for the first half of 2001. This decrease of $2.0 million, or 9.1%,
in interest on loans was due primarily to a decrease in the average yield
on loans resulting from the dramatic drop in market interest rates over the
past year. The average yield on the various components of the loan
portfolio changed as follows: residential mortgage loans decreased 81
basis points, to 6.61%; commercial loans decreased 140 basis points, to
7.20%; and consumer and other loans decreased 213 basis points, to 6.07%.
The effect of the decreases in average yield was partially offset by
increase in the average balance of loans. The average balance of the
various components of the loan portfolio changed as follows: residential
mortgage loans increased $7.4 million, or 2.5%, commercial loans increased
$27.0 million, or 12.4%, and consumer and other loans increased $2.3
million, or 3.8%. The Company has continued to concentrate its origination
efforts on commercial and consumer loan opportunities, but also originates
residential mortgage loans for its portfolio on a limited basis.
-- Interest Expense. Interest paid on deposits and borrowings
decreased $3.1 million, or 21.7%, to $11.0 million for the six months ended
June 30, 2002, compared to $14.1 million for the same period during 2001.
The decrease in total interest was also primarily attributable to the
dramatic drop in market interest rates over the past year and was partially
offset by growth in checking and
17
savings deposits, along with the use of borrowings to fund the overall
growth of the Company. The overall average cost for interest-bearing
liabilities decreased 141 basis points from 4.43% for the first half of
2001, to 3.02% for the first half of 2002. Deposit costs are dependent on
a number of factors including general economic conditions, national and
local interest rates, competition in the local marketplace, interest rate
tiers offered, and the Company's cash flow needs. Partially offsetting the
effect of the decline in market interest rates, the average balance of
interest-bearing liabilities increased $94.1 million, from $640.3 million
in 2001, to $734.4 million in 2002. The Company continued to experience
strong average balance growth in core deposit accounts, specifically
noninterest bearing demand deposit accounts (up $16.2 million, or 16.8%)
and savings accounts (up $46.1 million, or 20.6%). In addition, the
Company increased its utilization of FHLB borrowings (up $58.5 million, or
66.9%).
-- Provision for Loan Losses. The provision for loan losses was
$850,000 for the six months ended June 30, 2002, compared to $840,000 for
the same period last year. The allowance, expressed as a percentage of
total loans, was 1.51% as of June 30, 2002, compared to 1.40% at the prior
year-end and stood at 1027.3% of nonperforming loans at June 30, 2002,
compared to 1132.0% of nonperforming loans at December 31, 2001.
Management evaluates several factors including new loan originations,
actual and estimated charge-offs, and the risk characteristics of the loan
portfolio when determining the provision for the quarter. Also see
discussion under "Allowance for Loan Losses."
-- Noninterest Income. Total noninterest income increased $676,000,
or 28.1%, from the first half of 2001, to $3.1 million for the first six
months of 2002. Service charges on deposit accounts, which represents the
largest source of noninterest income, rose $107,000, or 6.4%, from $1.7
million for the six months ended June 30, 2001, to $1.8 million for the
same period in 2002, primarily as a result of continued growth in core
deposit accounts. Commissions on Nondeposit Investment Products increased
$276,000, or 189.0%, in response to rejuvenation efforts begun in 2001.
Additionally, the Bank's purchase of $10.0 million of bank-owned life
insurance during the first quarter of 2002, resulted in $237,000 of
noninterest income for the six month period.
-- Noninterest Expense. Noninterest expenses for the first half of
2002 increased a total of $1.6 million, or 14.9%, to $12.7 million. This
increase occurred primarily as a result of the overall growth of the
Company, along with development of new products, and was centered in the
following areas: Salaries and Benefits (up $939,000, or 17.7%), Occupancy
and Equipment (up $151,000, or 11.6%), Marketing (up $124,000, or 22.3%)
and Professional Services (up $398,000, or 99.5%). Partially offsetting
these increases was a decrease in: Other Real Estate Owned Expense (down
$57,000, or 89.1%). The Company's cash basis efficiency ratio increased to
64.66% for the 2002 period, from 62.56% for the 2001 period.
-- Income Tax Expense. The Company recorded income tax expense of
$1.8 million for the first half of 2002, compared to $1.7 million for the
same period during 2001. This represented total effective tax rates of
34.0% and 35.2%, respectively. Tax-favored income from U.S. Agency
securities and bank-owned life insurance, along with its utilization of a
Rhode Island passive investment company, has reduced the Company's
effective tax rate from the 39.9% combined statutory federal and state tax
rates.
18
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 maintains a high degree of flexibility. At June 30,
2002, overnight investments, investment securities and MBSs available for
sale amounted to $270.6 million, or 28.7% 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
June 30, 2002 was $61.9 million, as compared to $59.1 million at December
31, 2001. This increase of $2.8 million was the result of net income for
the period of $3.4 million, less dividends of $977,000 and changes in
unrealized gains on investment securities of $257,000.
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 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.
19
As of June 30, 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 June 30, 2002:
Bancorp Rhode Island, Inc.
--------------------------
Tier I capital (to average assets) $58,602 6.39% $27,505 3.00% $45,841 5.00%
Tier I capital (to risk weighted assets) 58,602 10.39% 22,554 4.00% 33,830 6.00%
Total capital (to risk weighted assets) 65,672 11.65% 45,107 8.00% 56,384 10.00%
Bank Rhode Island
-----------------
Tier I capital (to average assets) $52,614 5.75% $27,456 3.00% $45,760 5.00%
Tier I capital (to risk weighted assets) 52,614 9.34% 22,537 4.00% 33,806 6.00%
Total capital (to risk weighted assets) 59,684 10.59% 45,074 8.00% 56,343 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%
20
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 June 30, 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.
21
The following table presents the estimated impact of interest rate
ramps on the Company's estimated net interest income over a 24-month period
beginning July 1, 2002:
Estimated Exposure
to Net Interest Income
----------------------
Dollar Percent
Change Change
------ -------
(Dollars in thousands)
Initial 12-Month Period:
Up 200 basis points $ 577 1.85%
Up 100 basis points 370 1.19%
Down 100 basis points (451) (1.44%)
Down 200 basis points (969) (3.11%)
Subsequent 12-Month Period:
Up 200 basis points $ 817 2.73%
Up 100 basis points 747 2.50%
Down 100 basis points (1,468) (4.91%)
Down 200 basis points (3,764) (12.59%)
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 June 30, 2002, the Company's one
year cumulative gap was a positive $90.9 million, or 9.63% of total assets.
For additional discussion on interest rate risk see the section
titled "Asset and Liability Management" contained on pages 39 to 41 of the
Company's 2001 Annual Report to Shareholders.
22
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
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
At the Annual Meeting of Shareholders, held May 15, 2002, holders
of Common Stock elected the Board's nominees to the Board of
Directors, approved the 2002 Incentive and Nonqualified Stock
Option Plan, amended the Non-Employee Director Stock Option Plan
and ratified the appointment of independent public accountants.
The vote for Class III director nominees with terms expiring in
2005 was:
FOR WITHHELD
Anthony F. Andrade 3,508,110 27,780
Malcolm G. Chace 3,509,110 26,780
Ernest J. Chornyei, Jr. 3,507,960 27,930
Edward J. Mack, II 3,507,510 28,380
Merrill W. Sherman 3,507,570 28,320
The vote for Class I director nominee with a term expiring in
2003 was:
FOR WITHHELD
Karen Adams 3,504,820 31,070
The vote for approving the 2002 Incentive and Nonqualified Stock
Option Plan was:
FOR AGAINST ABSTAIN
2,724,208 122,703 26,240
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
(continued)
The vote for amending the Non-Employee Director Stock Plan was:
FOR AGAINST ABSTAIN
2,782,023 62,289 28,840
The vote for ratifying the appointment of KPMG LLP as independent
public accountants for the Company was:
FOR AGAINST ABSTAIN
3,524,830 8,200 2,860
ITEM 5. OTHER INFORMATION
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.6(a) Amendment to Amended and Restated Non-Employee
Director Stock Plan.
10.13 2002 Incentive and Nonqualified Stock Option
Plan.
99.1 Certification Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No information to report.
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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.
August 7, 2002 By: /s/ Merrill W. Sherman
-------------- -------------------------------
(Date) Merrill W. Sherman
President and
Chief Executive Officer
August 7, 2002 By: /s/ Albert R. Rietheimer
-------------- -------------------------------
(Date) Albert R. Rietheimer
Chief Financial Officer
and Treasurer
25