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, 2001
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 6, 2001:
Common Stock - Par Value $0.01 3,738,250 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 - 19
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 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
June 30, December 31,
2001 2000
-------- ------------
(Dollars in thousands)
ASSETS:
Cash and due from banks $ 29,358 $ 28,853
Federal funds sold 10,980 5,600
Investment securities available for sale (amortized cost of $55,259 and
$47,459 at June 30, 2001 and December 31, 2000, respectively) 58,450 47,296
Mortgage-backed securities available for sale (amortized cost of $128,573
and $117,543 at June 30, 2001 and December 31, 2000, respectively) 129,467 117,431
Stock in Federal Home Loan Bank of Boston 4,915 3,704
Loans receivable:
Residential mortgage loans 304,909 247,923
Commercial loans 218,013 212,818
Consumer and other loans 62,047 58,084
----------------------
Total loans 584,969 518,825
Less allowance for loan losses (7,877) (7,294)
----------------------
Net loans 577,092 511,531
Premises and equipment, net 6,618 6,384
Other real estate owned 22 30
Goodwill, net 11,348 11,930
Accrued interest receivable 6,164 5,630
Prepaid expenses and other assets 1,295 1,031
----------------------
Total assets $835,709 $739,420
======================
LIABILITIES:
Deposits:
Demand deposit accounts $104,085 $106,088
NOW accounts 46,949 36,910
Money market accounts 10,498 12,283
Savings accounts 236,071 210,728
Certificate of deposit accounts 261,017 265,623
----------------------
Total deposits 658,620 631,632
Overnight and short-term borrowings 17,124 13,847
Federal Home Loan Bank of Boston borrowings 98,287 33,292
Other borrowings -- 4,750
Company-obligated mandatorily redeemable capital securities 3,000 --
Other liabilities 2,363 2,607
----------------------
Total liabilities 779,394 686,128
----------------------
SHAREHOLDERS' EQUITY:
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding 3,509,773 shares in 2001 and 3,448,950
shares in 2000 35 34
Non-Voting: Issued and outstanding 228,477 shares in 2001 and 280,000
shares in 2000 2 3
Additional paid--in capital 39,648 39,621
Retained earnings 16,051 13,815
Accumulated other comprehensive income (loss), net 579 (181)
----------------------
Total shareholders' equity 56,315 53,292
----------------------
Total liabilities and shareholders' equity $835,709 $739,420
======================
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,
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands, except per share data)
Interest and dividend income:
Residential mortgage loans $ 5,485 $ 4,449 $ 10,699 $ 8,852
Commercial loans 4,568 4,379 9,281 8,271
Consumer and other loans 1,199 1,068 2,469 2,066
Investment securities 705 777 1,447 1,546
Mortgage--backed securities 1,954 1,315 3,957 2,590
Federal funds sold and other 215 138 356 229
Federal Home Loan Bank of Boston stock dividends 77 69 151 134
--------------------------------------------------
Total interest and dividend income 14,203 12,195 28,360 23,688
--------------------------------------------------
Interest expense:
NOW accounts 58 50 108 94
Money market accounts 60 95 138 205
Savings accounts 1,785 1,427 3,654 2,645
Certificate of deposit accounts 3,566 3,340 7,274 6,376
Overnight and short-term borrowings 116 142 308 272
Federal Home Loan Bank of Boston borrowings 1,373 560 2,323 1,324
Other borrowings 68 70 138 140
Company-obligated mandatorily redeemable capital
securities 79 -- 113 --
--------------------------------------------------
Total interest expense 7,105 5,684 14,056 11,056
--------------------------------------------------
Net interest income 7,098 6,511 14,304 12,632
Provision for loan losses 352 382 840 722
--------------------------------------------------
Net interest income after provision for loan
losses loan losses 6,746 6,129 13,464 11,910
--------------------------------------------------
Noninterest income:
Service charges on deposit accounts 894 662 1,660 1,267
Loan related fees 51 63 100 106
Commissions on loans originated for others 71 13 130 18
Gain on sale of mortgage-backed securities 4 -- 4 --
Other income 286 136 514 259
--------------------------------------------------
Total noninterest income 1,306 874 2,408 1,650
--------------------------------------------------
Noninterest expense:
Salaries and employee benefits 2,665 2,350 5,315 4,521
Occupancy 438 374 868 740
Equipment 208 236 439 445
Data processing 463 324 882 609
Marketing 369 366 557 601
Professional services 185 163 400 423
Loan servicing 242 182 451 386
Other real estate owned expense 21 6 64 9
Amortization of goodwill 291 291 582 582
Deposit tax and assessments 29 26 58 52
Other 737 605 1,421 1,111
--------------------------------------------------
Total noninterest expense 5,648 4,923 11,037 9,479
--------------------------------------------------
Income before income taxes 2,404 2,080 4,835 4,081
Income tax expense 832 724 1,703 1,419
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Net income $ 1,572 $ 1,356 $ 3,132 $ 2,662
==================================================
Per share data:
Basic earnings per common share $ 0.42 $ 0.36 $ 0.84 $ 0.71
Diluted earnings per common share $ 0.40 $ 0.36 $ 0.81 $ 0.71
Average common shares outstanding - basic 3,729,879 3,728,550 3,729,415 3,728,550
Average common shares outstanding - diluted 3,888,868 3,734,989 3,874,452 3,728,550
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)
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 gain (loss) on
securities available for sale 757 757
Gain on securities available
for sale included in net income 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
========================================================
2000
----
Balance at December 31, 1999 $37 $39,617 $ 9,763 $(1,742) $47,675
Net income -- -- 2,662 -- 2,662
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on
securities available for sale (368) (368)
-------
Comprehensive income 2,294
Dividends on common stock -- -- (746) -- (746)
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Balance at June 30, 2000 $37 $39,617 $11,679 $(2,110) $49,223
========================================================
See accompanying notes to consolidated financial statements
5
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
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2001 2000
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 3,132 $ 2,662
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 1,511 1,247
Provision for loan losses 840 722
Loss/(gain) on mortgage-backed securities (4) --
Loss/(gain) on other real estate owned, net (14) (7)
Compensation expense from restricted stock grant 11 --
(Increase) decrease in:
Accrued interest receivable (534) (305)
Prepaid expenses and other assets (656) (64)
Increase (decrease) in:
Other liabilities (244) (959)
Other, net 9 21
-------------------------
Net cash provided (used) by operating activities 4,051 3,317
-------------------------
Cash flows from investing activities:
Origination of:
Residential mortgage loans (7,082) (5,457)
Commercial loans (24,813) (30,450)
Consumer loans (9,398) (8,932)
Purchase of:
Investment securities available for sale (34,026) (3,000)
Mortgage-backed securities available for sale (33,000) (18,517)
Residential mortgage loans (105,689) (22,579)
Consumer loans (5,045) --
Federal Home Loan Bank of Boston stock (1,211) --
Principal payments on:
Investment securities available for sale 23,000 7,000
Mortgage-backed securities available for sale 18,017 7,141
Residential mortgage loans 55,454 22,205
Commercial loans 19,407 4,560
Consumer loans 10,342 5,679
Proceeds from sale of mortgage-backed securities 3,885 --
Proceeds from disposition of other real estate owned 84 88
Proceeds from sale of premises and equipment 18 --
Capital expenditures for premises and equipment (739) (946)
-------------------------
Net cash provided (used) by investing activities (90,796) (43,208)
-------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 26,988 65,980
Net increase (decrease) in overnight and short-term
borrowings 3,277 (3,188)
Proceeds from long-term borrowings 71,000 12,000
Repayment of long-term borrowings (7,755) (25,004)
Proceeds from exercise of stock options 16 --
Dividends on common stock (896) (746)
-------------------------
Net cash provided (used) by financing activities 92,630 49,042
-------------------------
Net increase (decrease) in cash and cash equivalents 5,885 9,151
Cash and cash equivalents at beginning of period 34,453 24,486
-------------------------
Cash and cash equivalents at end of period $ 40,338 $ 33,637
=========================
Supplementary Disclosures:
Cash paid for interest $ 13,249 $ 11,013
Cash paid for income taxes 2,690 2,005
Non-cash transactions:
Additions to other real estate owned in settlement of
loans 62 137
Change in other comprehensive income, net of taxes 760 (368)
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 and BRI Statutory
Trust I (an issuer of trust preferred securities), and its indirect
subsidiaries, BRI Investment Corp. (a Rhode Island passive investment
company) and BRI Realty Corp. (a real estate holding company). 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 Generally Accepted Accounting
Principles ("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 ("SFAS") 142, "Goodwill and
Other Intangible Assets." 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 (i.e., recorded goodwill at the date
the financial statement is issued), 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. At June
30, 2001, the Company had $11.3 million of goodwill on its balance sheet
that was being amortized at a rate of $1.2 million annually.
(4) Company-Obligated Mandatorily Redeemable Capital Securities
On January 23, 2001, the Company sponsored the creation of BRI
Statutory Trust I (the "Trust"), a Connecticut statutory trust. The Company
is the owner of all of the common securities of the Trust. On February 22,
2001, the Trust issued $3.0 million of its 10.20% Capital Securities through
a pooled trust preferred securities offering. The proceeds from this
issuance, along with the Company's $93,000 capital contribution for the
Trust's common securities, were used to acquire $3.1 million of the
Company's 10.20% Junior Subordinated notes due February 22, 2031, and
constitute the sole asset of the Trust. The Company has, through the
Declaration of Trust, the Guarantee Agreement, the notes and the related
Indenture, taken together, fully irrevocably and unconditionally guaranteed
all of the Trust's obligations under the Capital Securities, to the extent
the Trust has funds available therefor.
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
------------------------------------------
Contained within this document are various measures of financial
performance that have been calculated excluding the amortization of goodwill
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. This presentation is not in accordance with
Generally Accepted Accounting Principles ("GAAP"), but management believes
it to be beneficial to gaining an understanding of the financial performance
of the Company.
The Bank's formation in 1996 resulted in the generation of $17.5
million of goodwill that is being amortized over a 15 year period. The
amortization of goodwill reduces the Company's pre-tax income $1.2 million
annually. Because of the impact of this amortization, certain information
has been presented on both a GAAP and cash basis. Recently, the Financial
Accounting Standards Board ("FASB") has concluded that goodwill would no
longer be amortized, but will be subject to periodic review for impairment.
For the Company, beginning in 2002, there will no longer be a difference
between GAAP and cash basis presentations. Also see discussion under "Recent
Accounting Developments".
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,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS $0.42 $0.36 $0.84 $0.71
Basic Cash EPS $0.47 $0.41 $0.94 $0.82
Diluted EPS $0.40 $0.36 $0.81 $0.71
Diluted Cash EPS $0.45 $0.41 $0.91 $0.82
ROA 0.77% 0.81% 0.80% 0.81%
Cash Basis ROA 0.88% 0.94% 0.91% 0.94%
ROE 11.40% 11.41% 11.58% 11.26%
Cash Basis ROE 12.78% 13.01% 12.97% 12.87%
Efficiency Ratio 67.21% 66.66% 66.04% 66.37%
Cash Basis Efficiency Ratio 63.74% 62.72% 62.56% 62.30%
OVERVIEW
--------
Total assets increased $96.3 million, or 13.0%, to $835.7 million at
June 30, 2001 from $739.4 million at December 31, 2000. The increase was
predominantly in residential mortgage loans and mortgage-backed securities
("MBSs") and was primarily funded by borrowings from the FHLB. In February
2001, the Company through its subsidiary, BRI Statutory Trust I, issued $3.0
million of trust preferred securities. These securities qualify as Tier I
capital for regulatory purposes and supported the growth in assets that
occurred during the first half of 2001. Since the end of last year, total
loans have risen to $585.0 million, from $518.8 million, an increase of
$66.1 million, or 12.7%, while total deposits have risen to $658.6 million,
from $631.6 million, an increase of $27.0 million, or 4.3%. Shareholders'
equity was $56.3 million at June 30, 2001, representing a $3.0 million, or
5.7%, increase over shareholders' equity at the end of 2000.
FINANCIAL CONDITION
-------------------
-- Investments. Total investments (consisting of federal funds sold,
investment securities, MBSs and stock in the FHLB) totaled $203.8 million,
or 24.4% of total assets, at June 30, 2001, compared to $174.0 million, or
23.5% of total assets, at December 31, 2000. All $187.9 million of
investment securities and MBSs at June 30, 2001 were classified as available
for sale and carried a total of $4.1 million in net unrealized gains. The
increase of $29.8 million, or 17.1%, in total investments was centered in
investment securities and MBSs and was associated with the growth in total
deposits and the additional capital created through the issuance of the
trust preferred securities.
-- Loans. Total loans were $585.0 million, or 70.0% of total assets,
at June 30, 2001, compared to $518.8 million, or 70.2% of total assets, at
December 31, 2000. During the first half of 2001, the residential mortgage
loan portfolio increased $57.0 million, or 23.0%, as the Bank purchased a
number of residential mortgage loans in the secondary market. These
purchases were primarily funded with a series of FHLB borrowings.
The commercial loan portfolio (consisting of commercial & industrial,
small business, commercial real estate, multi-family real estate and
construction loans) increased $5.2 million, or 2.4%, during the first half
of 2001. Particular emphasis is placed on the generation of small- to
10
medium-sized commercial relationships (those relationships with $5.0 million
or less in loan commitments). The Bank is 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.
Also during the first six months of 2001, the consumer loan portfolio
increased $4.0 million, or 6.8%, as the Bank purchased $5.0 million of
automobile loans. While the Bank continues to concentrate its origination
efforts on commercial and consumer loan opportunities, management
anticipates that the Bank will continue to originate residential mortgage
loans on a limited basis for its customers. Until such time as the Bank can
originate 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,
2001 2000
-------- ------------
(In thousands)
Residential mortgage loans:
One- to four-family adjustable rate $273,019 $212,197
One- to four-family fixed rate 30,528 34,609
----------------------
Subtotal 303,547 246,806
Premium on loans acquired 1,428 1,166
Net deferred loan origination fees (66) (49)
----------------------
Total residential mortgage loans $304,909 $247,923
======================
Commercial loans:
Commercial real estate - nonowner occupied $ 67,637 $ 69,315
Commercial and industrial 53,321 51,470
Commercial real estate - owner occupied 40,974 38,272
Small business 21,418 19,170
Multi-family real estate 14,362 15,933
Leases 10,836 11,731
Construction 9,629 7,070
----------------------
Subtotal 218,177 212,961
Net deferred loan origination fees (164) (143)
----------------------
Total commercial loans $218,013 $212,818
======================
Consumer loans:
Home equity - lines of credit $ 27,022 $ 26,215
Home equity - term loans 22,853 23,292
Automobile 8,166 4,643
Installment 1,333 1,348
Savings secured 854 987
Unsecured and other 1,154 1,044
----------------------
Subtotal 61,382 57,529
Premium on loans acquired 246 144
Net deferred loan origination costs 419 411
----------------------
Total consumer loans $ 62,047 $ 58,084
======================
11
-- Deposits and Borrowings. Total deposits increased by $27.0 million,
or 4.3%, during the first half of 2001, from $631.6 million, or 85.4% of
total assets, at December 31, 2000, to $658.6 million, or 78.8% of total
assets, at June 30, 2001. The decrease in the relative percentage of total
assets that occurred during 2001 resulted from the growth in total assets
being primarily funded by FHLB borrowings. Meanwhile, the composition of
total deposits changed as follows: core deposit accounts (checking and
savings accounts) increased $31.6 million, or 8.6%, while certificates of
deposit decreased $4.6 million, or 1.7%. At June 30, 2001, core deposit
accounts comprised 60.4% of total deposits, compared to 57.9% of total
deposits at December 31, 2000. The Bank continues its strategy of
emphasizing core deposit growth over certificate of deposit growth.
The following table sets forth certain information regarding deposits:
June 30, 2001 December 31, 2000
---------------------------------- ---------------------------------
Percent Weighted Percent Weighted
of Average of Average
Amount Total Rate Amount Total Rate
------ ------- -------- ------ ------- --------
(Dollars in thousands)
NOW accounts $ 46,949 7.1% 0.63% $ 36,910 5.8% 0.64%
Money market accounts 10,498 1.6% 2.06% 12,283 1.9% 2.59%
Savings accounts 236,071 35.9% 2.79% 210,728 33.4% 3.52%
Certificate of deposit accounts 261,017 39.6% 5.44% 265,623 42.1% 5.76%
------------------- -------------------
Total interest bearing deposits 554,535 84.2% 3.84% 525,544 83.2% 4.43%
Noninterest bearing accounts 104,085 15.8% -- 106,088 16.8% --
------------------- -------------------
Total deposits $658,620 100.0% 3.24% $631,632 100.0% 3.69%
====================================================================
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 2001, FHLB borrowings increased $65.0 million, or 195.2%, as the
Company sought to take advantage of lower, long-term borrowing rates to fund
its asset growth. 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, 2001, the Company had
nonperforming assets of $3.0 million, which represented .35% of total
assets. This compares to an unusually low level of nonperforming assets at
December 31, 2000, of $538,000, or .07% of total assets. The Bank's
nonperforming assets at June 30, 2001, consisted of nonaccrual commercial
loans aggregating $2.4 million, nonaccrual residential mortgage loans
aggregating $487,000, nonaccrual consumer loans aggregating $33,000 and OREO
aggregating $22,000. Included in nonaccrual loans were $2.4 million of
impaired loans at June 30, 2001. There were no impaired loans at December
31, 2000. The Company maintained reserves of $1.0 million against impaired
loans at June 30, 2001. The
12
Company evaluates the underlying collateral of each nonperforming loan and
continues to pursue the collection of interest and principal.
Delinquencies. At June 30, 2001, loans with an aggregate balance of
$481,000 were 60 to 89 days past due, an increase of $144,000, or 42.7%,
from $337,000 reported at December 31, 2000. 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,
2001 2000
-------- ------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis $2,928 $508
Loans past due 90 days or more, but still accruing -- --
-------------------
Total nonperforming loans 2,928 508
Other real estate owned 22 30
-------------------
Total nonperforming assets $2,950 $538
===================
Delinquent loans 60-89 days past due $ 481 $337
Nonperforming loans as a percent of total loans .50% .10%
Nonperforming assets as a percent of total assets .35% .07%
Delinquent loans 60-89 days past due as a percent of
total loans .08% .07%
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, 2001, the Company had $11.1 million of assets that were
classified as substandard. This compares to $5.8 million of assets that were
classified as substandard at December 31, 2000. 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, 2001, included in the
$11.1 million of assets that were classified as substandard, were $8.2
million of performing loans. This compares to $5.3 million of adversely
classified performing assets as of December 31, 2000. This increase in
adversely classified assets is reflective of a softening in commercial
credit quality, which in turn may lead to an increase in nonperforming
assets in future periods.
Allowance for Loan Losses
-------------------------
During the first six months of 2001, the Company made provisions to
the allowance for loan losses totaling $840,000 and had $257,000 of net
charge-offs, bringing the balance in the allowance to $7.9 million at June
30, 2001, compared to $7.3 million at December 31, 2000. The allowance,
13
expressed as a percentage of total loans, was 1.35% as of June 30, 2001,
compared to 1.41% at the prior year-end and stood at 269.0% of nonperforming
loans at June 30, 2001, compared to 1,435.8% of nonperforming loans at
December 31, 2000.
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, 2001, 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. The quality of assets further
influences the amount of interest income lost on nonaccrual loans and the
amount of additions to the allowance for loan losses.
Three Months Ended June 30, 2001 and 2000
-----------------------------------------
-- Overview. The Company reported net income for the second
quarter of 2001 of $1.6 million, up $216,000, or 15.9%, from the second
quarter of 2000. Diluted earnings per common share were $0.40 for the second
quarter of 2001, compared to $0.36 for the second quarter of 2000. Diluted
cash earnings per common share were $0.45 for the 2001 period, compared to
$0.41 for the 2000 period.
The Company reported a return on average assets of 0.77% and a return
on average equity of 11.40% for the 2001 period, as compared to a return on
average assets of 0.81% and a return on average equity of 11.41% for the
2000 period. Cash basis return on average assets and cash basis return on
average equity were 0.88% and 12.78% for the 2001 period, and 0.94% and
13.01% for the 2000 period, respectively.
-- Net Interest Income. For the quarter ended June 30, 2001, net
interest income was $7.1 million, compared to $6.5 million for the 2000
period. The net interest margin for the second quarter of 2001 was 3.64%
compared to a net interest margin of 4.16% for the 2000 period. The increase
in net interest income of $587,000, or 9.0%, was primarily attributable to
the continued growth of the
14
Company. Average earnings assets were $152.4 million, or 24.2%, higher and
average interest-bearing liabilities were $127.1 million, or 23.8%, higher
than the comparable period a year earlier. The decrease of 52 basis points
in the net interest margin was partially the result of the wholesale
transaction (purchase of residential mortgage loans funded with FHLB
borrowings) consummated in the first quarter of 2001 and partially the
result of the 250 basis point decrease in market interest rates experienced
in the first half of 2001.
-- Interest Income. Investments. Total investment income was $3.0
million for the quarter ended June 30, 2001, compared to $2.3 million for
the second quarter of 2000. This increase in total investment income of
$652,000, or 28.4%, was primarily attributable to an increase of $47.6
million, or 57.9%, in the average balance of MBSs. The Company's investments
at June 30, 2001 were primarily comprised of Agency securities and 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 $11.3 million for
the three months ended June 30, 2001, and represented a yield on total loans
of 7.73%. This compares to $9.9 million of interest, and a yield of 8.12%,
for the second quarter of 2000. Interest from residential mortgage loans
increased $1.0 million, or 23.3%, between the two quarters and was primarily
attributable to the continued purchase of loans. Income from commercial
loans increased $189,000, or 4.3%, and consumer and other loan income
increased $132,000, or 12.3%. 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 2000 as follows:
residential mortgage loans increased $58.2 million, or 23.9%, commercial
loans increased $23.0 million, or 11.7%, and consumer and other loans
increased $13.2 million, or 27.2%. In response to declining market interest
rates, the yields on the various loan portfolio components changed as
follows: commercial loans decreased 61 basis points, to 8.35%; consumer and
other loans decreased 106 basis points, to 7.78%, and residential mortgage
loans decreased 4 basis points, to 7.27%.
-- Interest Expense. Interest paid on deposits and borrowings
increased $1.4 million, or 25.0%, to $7.1 million for the three months ended
June 30, 2001, from $5.7 million paid during the second quarter of 2000. The
increase in total interest expense was primarily the result of an increase
in the average balance of interest-bearing liabilities outstanding. The
average balance of interest-bearing liabilities increased $127.1 million,
from $535.0 million in the second quarter of 2000 to $662.1 million in the
second quarter of 2001, as borrowings were utilized to fund much of the
asset growth. Meanwhile, the overall average cost for interest-bearing
liabilities increased 3 basis points from 4.27% for the second quarter of
2000 to 4.30% for the second quarter of 2001. 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. Average costs for the
various components of interest-bearing liabilities changed from the second
quarter of 2000 as follows: NOW accounts decreased 7 basis points, to 0.58%,
money market accounts decreased 44 basis points, to 2.21%, savings accounts
increased 3 basis points, to 3.10%, certificate of deposit accounts
increased 19 basis points, to 5.53%, and borrowings decreased 65 basis
points to 5.41%.
15
-- Provision for Loan Losses. The provision for loan losses was
$352,000 for the quarter ended June 30, 2001, down $30,000, or 7.9%, from
the same quarter last year. Growth in the commercial loan portfolio slowed
to an annualized rate of 3.6% during the second quarter of 2001, compared to
an annualized growth rate of 15.8% during the second quarter of 2000. When
determining the provision for the quarter, management evaluates several
factors including new loan originations, actual and estimated charge-offs,
and the risk characteristics of the loan portfolio. Also see discussion
under "Allowance for Loan Losses."
-- Noninterest Income. Total noninterest income increased $432,000, or
49.4%, to $1.3 million for the second quarter of 2001, from $874,000 for the
2000 quarter. Service Charges on Deposit Accounts, which represent the
largest source of noninterest income for the Company, rose $232,000, or
35.0%, from $662,000 for the quarter ended June 30, 2000, to $894,000 for
the same period in 2001, as core deposit accounts continued to grow.
Commissions on Loans Originated for Others increased $58,000, or 446.2%,
from the comparable period, as fixed rate mortgage loan activity increased
substantially in response to the falling interest rate environment. Other
Income increased $150,000, or 110.3%, primarily from revitalization of the
Company's non-deposit investment sales program, which increased commissions
$70,000 over the second quarter of last year.
-- Noninterest Expense. Total noninterest expense for the second
quarter of 2001 increased $725,000, or 14.7%, to $5.6 million from $4.9
million in 2000. This increase occurred primarily in the following areas:
Salaries and Benefits (up $315,000, or 13.4%), Occupancy (up $64,000, or
17.1%), Data Processing (up $139,000, or 42.9%), Loan Servicing (up $60,000,
or 33.0%) and Other Expenses (up $132,000, or 21.8%). During 2000 and early
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 2001. In addition, during the third quarter of 2000,
following a review of its salary structure, the Company increased base
salaries for several positions in order to bring their compensation to
industry comparable levels. The Company's cash basis efficiency ratio for
the second quarter of 2001 was 63.74%, compared to 62.72% for the second
quarter of 2000, an increase of 102 basis points.
-- Income Tax Expense. Income tax expense of $832,000 was recorded for
the quarter ended June 30, 2001, compared to $724,000 for the 2000 period.
This represented total effective tax rates of 34.6% and 34.8%, 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
Company's effective tax rate from the 39.9% combined statutory federal and
state tax rates.
Six Months Ended June 30, 2001 and 2000
---------------------------------------
-- Overview. Net income for the first half of 2001, increased
$470,000, or 17.7%, to $3.1 million, or $0.81 per diluted common share, from
$2.7 million, or $0.71 per diluted common share, for the first half of 2000.
Diluted cash earnings per common share were $0.91 for the 2001 period,
compared to $0.82 for the 2000 period.
This performance represented a return on average assets of 0.80% and a
return on average equity of 11.58% for the 2001 period, as compared to a
return on average assets of 0.81% and a return on average equity of 11.26%
for the 2000 period. Cash basis return on average assets and cash basis
return on average equity were 0.91% and 12.97% for the 2001 period, and
0.94% and 12.87% for the 2000 period, respectively.
16
-- Net Interest Income. For the six months ended June 30, 2001, net
interest income was $14.3 million, compared to $12.6 million for the first
half of 2000. The net interest margin for the first six months of 2001 was
3.81% compared to a net interest margin of 4.10% for the 2000 period. The
increase in net interest income of $1.7 million, or 13.2%, was primarily
attributable to the overall growth of the Company. Average earning assets
increased $137.7 million, or 22.2%, and average interest-bearing liabilities
increased $111.4 million, or 21.1%, over the comparable period a year
earlier. The decrease of 29 basis points in the net interest margin was
primarily caused by two factors: 1) the tighter spreads associated with the
first quarter wholesale transaction resulted in an approximately 16 basis
point decrease in the margin, and 2) the dramatic drop in market interest
rates since the beginning of 2001 resulted in an approximately 13 basis
point decrease in the margin.
-- Interest Income. Investments. Total investment income was $5.9
million for the six months ended June 30, 2001, compared to $4.5 million for
the first half of 2000. This increase in total investment income of $1.4
million, or 31.4%, was primarily attributable to a $44.2 million, or 54.4%,
increase in the average balance of MBSs. Meanwhile, the overall yield on
investments decreased 22 basis points in response to dramatically lower
market interest rates.
-- Interest Income. Loans. Interest from loans was $22.4 million for
the six months ended June 30, 2001, and represented a yield on total loans
of 7.96%. This compares to $19.2 million of interest, and a yield of 8.03%,
for the first half of 2000. This increase of $3.3 million, or 17.0%, in
interest on loans was due primarily to an increase in the average balance of
loans outstanding. The average balance of the various components of the loan
portfolio changed as follows: residential mortgage loans increased $44.8
million, or 18.4%, commercial loans increased $29.4 million, or 15.6%, and
consumer and other loans increased $12.9 million, or 27.1%. In addition, the
yields on the various components of the loan portfolio changed as follows:
residential mortgage loans increased 15 basis points, to 7.42%; commercial
loans decreased 24 basis points, to 8.61%; and consumer and other loans
decreased 49 basis points, to 8.19%. The Company has continued to
concentrate its origination efforts on commercial and consumer loan
opportunities, but will also originate residential mortgage loans for its
portfolio on a limited basis.
-- Interest Expense. Interest paid on deposits and borrowings
increased $3.0 million, or 27.1%, to $14.1 million for the six months ended
June 30, 2001, compared to $11.1 million for the same period during 2000.
The increase in total interest was primarily attributable to growth in
savings and certificate of deposit accounts, along with the use of
borrowings to fund the overall growth of the Company. The average balance of
interest-bearing liabilities increased $111.4 million, from $528.9 million
in 2000, to $640.3 million in 2001. The Company continued to experience
strong average balance growth in core deposit accounts, specifically
noninterest bearing demand deposit accounts (up $19.6 million, or 25.7%) and
savings accounts (up $43.3 million, or 24.0%). In addition, the Company
increased its utilization of borrowed funds (up $47.5 million, or 81.4%).
The overall average cost for interest-bearing liabilities increased 23 basis
points from 4.20% for the first half of 2000, to 4.43% for the first half of
2001. 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.
-- Provision for Loan Losses. The provision for loan losses was
$840,000 for the six months ended June 30, 2001, compared to $722,000 for
the same period last year. 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."
17
-- Noninterest Income. Total noninterest income increased $758,000, or
45.9%, from the first half of 2000, to $2.4 million for the first six months
of 2001. Service charges on deposit accounts, which represents the largest
source of noninterest income, rose $393,000, or 31.0%, from $1.3 million for
the six months ended June 30, 2000, to $1.7 million for the same period in
2001, primarily as a result of growth in core deposit accounts. Commissions
on Loans Originated for Others increased $112,000, or 622.2%, in response to
increased fixed rate mortgage loan activity resulting from the drop in
market interest rates. Additionally, Other Income increased $255,000, or
98.5%, primarily from increased commissions on sales of non-deposit
investment products (up $141,000).
-- Noninterest Expense. Noninterest expenses for the first half of
2001 increased a total of $1.6 million, or 16.4%, to $11.0 million, from
$9.5 million in 2000. This increase occurred primarily as a result of the
overall growth of the Company and was centered in the following areas:
Salaries and Benefits (up $794,000, or 17.6%), Occupancy (up $128,000, or
17.3%), Data Processing (up $273,000, or 44.8%), Loan Servicing (up $65,000,
or 16.8%), OREO Expense (up $55,000, or 611.1%) and Other Expenses (up
$310,000, or 27.9%). Partially offsetting these increases were decreases in:
Marketing (down $44,000, or 7.3%), and Professional Services (down $23,000,
or 5.4%). The Company's cash basis efficiency ratio remained stable at
approximately 62.5% for both periods.
-- Income Tax Expense. The Company recorded income tax expense of $1.7
million for the first half of 2001, compared to $1.4 million for the same
period during 2000. This represented total effective tax rates of 35.2% and
34.8%, respectively. Tax-favored income from U.S. Treasury and Agency
securities and 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.
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 with a liquidity target
of 10% to 25% of total assets. At June 30, 2001, federal funds sold,
investment securities and MBSs available for sale amounted to $198.9
million, or 23.8% of total assets. This compares to $170.3 million, or 23.0%
of total assets at December 31, 2000. The Bank is a member
18
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, 2001 was $56.3 million, as compared to $53.3 million at December
31, 2000. This increase of $3.0 million was the result of net income for the
period of $3.1 million, less dividends of $896,000 and changes in unrealized
gains on investment securities of $760,000.
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.
As of June 30, 2001, 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, 2001:
Bancorp Rhode Island, Inc.
Tier I capital (to average assets) $47,389 5.86% $24,240 3.00% $40,400 5.00%
Tier I capital (to risk weighted assets) 47,389 9.71% 19,523 4.00% 29,285 6.00%
Total capital (to risk weighted assets) 53,511 10.96% 39,046 8.00% 48,808 10.00%
Bank Rhode Island
Tier I capital (to average assets) $46,961 5.81% $24,237 3.00% $40,395 5.00%
Tier I capital (to risk weighted assets) 46,961 9.62% 19,519 4.00% 29,278 6.00%
Total capital (to risk weighted assets) 53,083 10.88% 39,038 8.00% 48,797 10.00%
At December 31, 2000:
Bancorp Rhode Island, Inc.
Tier I capital (to average assets) $41,543 5.91% $21,086 3.00% $35,144 5.00%
Tier I capital (to risk weighted assets) 41,543 9.50% 17,484 4.00% 26,226 6.00%
Total capital (to risk weighted assets) 47,029 10.76% 34,968 8.00% 43,710 10.00%
Bank Rhode Island
Tier I capital (to average assets) $41,129 5.85% $21,086 3.00% $35,144 5.00%
Tier I capital (to risk weighted assets) 41,129 9.41% 17,484 4.00% 26,226 6.00%
Total capital (to risk weighted assets) 46,615 10.66% 34,968 8.00% 43,710 10.00%
19
BANCORP RHODE ISLAND, INC.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE RISK
------------------
A 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 that are consistent with its liquidity,
capital adequacy, growth and profitability goals, while minimizing the
vulnerability of its operations to changes in market interest rates.
Simulation modeling is the primary tool used by the Company to measure the
interest rate risk inherent in its balance sheet at a given point of time by
showing the effect on net interest income, over a twenty-four month period,
of interest rate ramps of up to 200 basis points.
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 July 1, 2001:
Estimated Exposure
to Net Interest Income
-----------------------
Dollar Percent
Change Change
------ -------
(Dollars in thousands)
Initial Twelve Month Period:
Up 200 basis points $ 713 2.32%
Up 100 basis points 376 1.22%
Down 100 basis points (450) (1.46%)
Down 200 basis points (970) (3.15%)
Subsequent Twelve Month Period:
Up 200 basis points $ 974 3.13%
Up 100 basis points 695 2.23%
Down 100 basis points (1,395) (4.48%)
Down 200 basis points (3,201) (10.29%)
While the Company 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.
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, 2001, the Company's one year cumulative gap
was a positive $44.8 million, or 5.36% of total assets.
For additional discussion on interest rate risk see the section titled
"Asset and Liability Management" contained on pages 34 to 36 of the
Company's 2000 Annual Report to Shareholders.
20
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 16, 2001, holders
of Common Stock elected the Board's Class II nominees to the Board
of Directors and ratified the appointment of independent public
accountants.
The vote for Class II director nominees with terms expiring in
2003 was:
FOR WITHHELD
John R. Berger 2,520,901 5,700
Karl F. Ericson 2,520,901 5,700
Margaret D. Farrell 2,520,901 5,700
Mark R. Feinstein 2,520,901 5,700
The vote for ratifying the appointment of KPMG LLP as independent
public accountants for the Company was:
FOR AGAINST ABSTAIN
2,520,441 2,500 3,600
ITEM 5. OTHER INFORMATION
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No information to report.
21
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 8, 2001 By: /s/ Merrill W. Sherman
-------------- -------------------------------
(Date) Merrill W. Sherman
President and
Chief Executive Officer
August 8, 2001 By: /s/ Albert R. Rietheimer
-------------- -------------------------------
(Date) Albert R. Rietheimer
Chief Financial Officer
and Treasurer
22