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: September 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 Nov. 5, 2001:
Common Stock - Par Value $0.01 3,741,050 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
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 22
Item 3 Default upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
Signature Page 23
2
BANCORP RHODE ISLAND, INC.
Consolidated Balance Sheets
September 30, December 31,
2001 2000
------------- ------------
(Dollars in thousands)
ASSETS:
Cash and due from banks $ 19,249 $ 28,853
Federal funds sold 8,725 5,600
Investment securities available for sale (amortized cost of $52,005 and
$47,459 at September 30, 2001 and December 31, 2000, respectively) 52,806 47,296
Mortgage-backed securities available for sale (amortized cost of $134,711
and $117,543 at September 30, 2001 and December 31, 2000, respectively) 136,513 117,431
Stock in Federal Home Loan Bank of Boston 5,664 3,704
Loans receivable:
Residential mortgage loans 319,572 247,923
Commercial loans 226,536 212,818
Consumer and other loans 60,171 58,084
-------------------------
Total loans 606,279 518,825
Less allowance for loan losses (8,440) (7,294)
-------------------------
Net loans 597,839 511,531
Premises and equipment, net 6,707 6,384
Other real estate owned 22 30
Goodwill, net 11,057 11,930
Accrued interest receivable 6,740 5,630
Prepaid expenses and other assets 630 1,031
-------------------------
Total assets $845,952 $739,420
=========================
LIABILITIES:
Deposits:
Demand deposit accounts $100,566 $106,088
NOW accounts 39,509 36,910
Money market accounts 9,349 12,283
Savings accounts 247,853 210,728
Certificate of deposit accounts 255,107 265,623
-------------------------
Total deposits 652,384 631,632
Overnight and short-term borrowings 16,436 13,847
Federal Home Loan Bank of Boston borrowings 113,285 33,292
Other borrowings -- 4,750
Company-obligated mandatorily redeemable capital securities 3,000 --
Other liabilities 2,394 2,607
-------------------------
Total liabilities 787,499 686,128
-------------------------
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 39,655 39,621
Retained earnings 17,178 13,815
Accumulated other comprehensive income (loss), net 1,583 (181)
-------------------------
Total shareholders' equity 58,453 53,292
-------------------------
Total liabilities and shareholders' equity $845,952 $739,420
=========================
See accompanying notes to consolidated financial statements
3
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands, except per share data)
Interest and dividend income:
Residential mortgage loans $ 5,613 $ 4,522 $16,312 $13,374
Commercial loans 4,470 4,622 13,751 12,893
Consumer and other loans 1,121 1,141 3,590 3,207
Investment securities 856 770 2,303 2,316
Mortgage-backed securities 1,850 1,419 5,807 4,009
Federal funds sold and other 65 346 421 575
Federal Home Loan Bank of Boston stock dividends 72 74 223 208
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Total interest and dividend income 14,047 12,894 42,407 36,582
----------------------------------------------
Interest expense:
NOW accounts 57 55 165 149
Money market accounts 47 92 185 297
Savings accounts 1,568 1,656 5,222 4,301
Certificate of deposit accounts 3,321 3,551 10,595 9,927
Overnight and short-term borrowings 86 157 394 429
Federal Home Loan Bank of Boston borrowings 1,433 546 3,756 1,870
Other borrowings -- 71 138 211
Company-obligated mandatorily redeemable capital
securities 73 -- 186 --
----------------------------------------------
Total interest expense 6,585 6,128 20,641 17,184
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Net interest income 7,462 6,766 21,766 19,398
Provision for loan losses 566 410 1,406 1,132
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Net interest income after provision for loan losses 6,896 6,356 20,360 18,266
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Noninterest income:
Service charges on deposit accounts 869 713 2,529 1,980
Loan related fees 107 100 207 206
Commissions on loans originated for others 55 23 185 41
Gain on sale of mortgage-backed securities -- -- 4 --
Other income 325 148 839 407
----------------------------------------------
Total noninterest income 1,356 984 3,764 2,634
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Noninterest expense:
Salaries and employee benefits 2,826 2,540 8,141 7,061
Occupancy 458 390 1,326 1,130
Equipment 213 221 652 666
Data processing 466 339 1,348 948
Marketing 182 238 739 839
Professional services 210 178 610 601
Loan servicing 235 177 686 563
Workout and OREO expense 106 30 170 39
Amortization of goodwill 291 291 873 873
Deposit tax and assessments 29 29 87 81
Other 811 601 2,232 1,712
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Total noninterest expense 5,827 5,034 16,864 14,513
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Income before income taxes 2,425 2,306 7,260 6,387
Income tax expense 849 852 2,552 2,271
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Net income $ 1,576 $ 1,454 $ 4,708 $ 4,116
==============================================
Per share data:
Basic earnings per common share $ 0.42 $ 0.39 $ 1.26 $ 1.10
Diluted earnings per common share $ 0.40 $ 0.38 $ 1.21 $ 1.10
Average common shares outstanding - basic 3,730,550 3,728,701 3,729,793 3,728,600
Average common shares outstanding - diluted 3,922,503 3,793,885 3,892,485 3,748,493
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
Nine months ended September 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 -- -- 4,708 -- 4,708
Other comprehensive income,
net of tax:
Unrealized holding gain (loss) on
securities available for sale 1,761 1,761
Gain on securities available
for sale included in net income 3 3
-------
Comprehensive income 6,472
Proceeds from exercise of options -- 16 -- -- 16
Common stock issued for incentive
stock award, net -- 18 -- -- 18
Dividends on common stock -- -- (1,345) -- (1,345)
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Balance at September 30, 2001 $37 $39,655 $17,178 $ 1,583 $58,453
========================================================
2000
----
Balance at December 31, 1999 $37 $39,617 $ 9,763 $(1,742) $47,675
Net income -- -- 4,116 -- 4,116
Other comprehensive income,
net of tax:
Unrealized holding gain (loss) on
securities available for sale 257 257
-------
Comprehensive income 2,294
Proceeds from exercise of options -- 4 -- -- 4
Dividends on common stock -- -- (1,118) -- (1,118)
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Balance at September 30, 2000 $37 $39,621 $12,761 $(1,485) $50,934
========================================================
See accompanying notes to consolidated financial statements
5
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
---------------------
2001 2000
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 4,708 $ 4,116
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 2,269 1,894
Provision for loan losses 1,406 1,132
Loss/(gain) on mortgage-backed securities (4) --
Loss/(gain) on other real estate owned, net (14) (7)
Compensation expense from restricted stock grant 18 --
(Increase) decrease in:
Accrued interest receivable (1,110) (1,021)
Prepaid expenses and other assets (508) (1,037)
Increase (decrease) in:
Other liabilities (213) (916)
Other, net 13 52
---------------------
Net cash provided (used) by operating activities 6,565 4,213
---------------------
Cash flows from investing activities:
Origination of:
Residential mortgage loans (13,270) (7,812)
Commercial loans (39,475) (55,624)
Consumer loans (14,816) (13,188)
Purchase of:
Investment securities available for sale (38,026) (7,000)
Mortgage-backed securities available for sale (50,851) (32,222)
Residential mortgage loans (146,154) (38,470)
Consumer loans (5,045) --
Federal Home Loan Bank of Boston stock (1,960) --
Principal payments on:
Investment securities available for sale 33,250 10,000
Mortgage-backed securities available for sale 29,681 12,272
Residential mortgage loans 87,329 35,042
Commercial loans 25,567 17,833
Consumer loans 17,559 9,678
Proceeds from sale of mortgage-backed securities 3,885 --
Proceeds from disposition of other real estate owned 84 163
Proceeds from sale of premises and equipment 18 --
Capital expenditures for premises and equipment (1,075) (1,207)
---------------------
Net cash provided (used) by investing activities (113,299) (70,535)
---------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 20,752 79,124
Net increase (decrease) in overnight and short-term borrowings 2,589 (2,538)
Proceeds from long-term borrowings 86,000 12,116
Repayment of long-term borrowings (7,757) (25,005)
Proceeds from exercise of stock options 16 4
Dividends on common stock (1,345) (1,118)
---------------------
Net cash provided (used) by financing activities 100,255 62,583
---------------------
Net increase (decrease) in cash and cash equivalents (6,479) (3,739)
Cash and cash equivalents at beginning of period 34,453 24,486
---------------------
Cash and cash equivalents at end of period $ 27,974 $ 20,747
=====================
Supplementary Disclosures:
Cash paid for interest $ 20,321 $ 16,971
Cash paid for income taxes 3,445 2,915
Non-cash transactions:
Additions to other real estate owned in settlement of loans 62 137
Change in other comprehensive income, net of taxes 1,764 257
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), BRI Realty Corp. (a real estate holding company) and Acorn
Insurance Agency, Inc. (a seller of annuity products). 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
September 30, 2001, the Company had $11.1 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 primary 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 currently 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS $0.42 $0.39 $1.26 $1.10
Basic Cash EPS $0.47 $0.44 $1.41 $1.25
Diluted EPS $0.40 $0.38 $1.21 $1.10
Diluted Cash EPS $0.45 $0.43 $1.35 $1.25
ROA 0.75% 0.83% 0.78% 0.82%
Cash Basis ROA 0.85% 0.95% 0.89% 0.95%
ROE 11.02% 11.74% 11.39% 11.43%
Cash Basis ROE 12.34% 13.23% 12.75% 12.99%
Efficiency Ratio 66.08% 64.95% 66.06% 65.87%
Cash Basis Efficiency Ratio 62.78% 61.20% 62.64% 61.91%
OVERVIEW
--------
Total assets increased $106.5 million, or 14.4%, to $846.0 million at
September 30, 2001 from $739.4 million at December 31, 2000. The majority of
this increase was in residential mortgage loans 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 has occurred during 2001.
Since the end of last year, total loans have risen to $606.3 million, from
$518.8 million, an increase of $87.5 million, or 16.9%, while FHLB
borrowings have risen to $113.3 million, from $33.3 million, an increase of
$80.0 million, or 240.3%. Shareholders' equity was $58.5 million at
September 30, 2001, representing a $5.2 million, or 9.7%, increase over
shareholders' equity at the end of 2000.
FINANCIAL CONDITION
-------------------
-- Investments. Total investments (consisting of federal funds sold,
investment securities, mortgage-backed securities ("MBSs") and stock in the
FHLB) totaled $203.7 million, or 24.1% of total assets, at September 30,
2001, compared to $174.0 million, or 23.5% of total assets, at December 31,
2000. All $189.3 million of investment securities and MBSs at September 30,
2001 were classified as available for sale and carried a total of $2.6
million in net unrealized gains. The increase of $29.7 million, or 17.1%, in
total investments was primarily centered in investment securities and MBSs
with rate adjustments or final maturities no longer than 5 years.
-- Loans. Total loans were $606.3 million, or 71.7% of total assets,
at September 30, 2001, compared to $518.8 million, or 70.2% of total assets,
at December 31, 2000. During the first nine months of 2001, the residential
mortgage loan portfolio increased $71.6 million, or 28.9%, 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 and
supported by the additional capital created through the issuance of the
trust preferred securities.
The commercial loan portfolio (consisting of commercial & industrial,
small business, commercial real estate, multi-family real estate and
construction loans) increased $13.7 million, or
10
6.4%, during the first three quarters of 2001. 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
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 also a participant in the
U.S. Small Business Administration ("SBA") Preferred Lender Program in Rhode
Island and the 7a Guarantee Loan Program in Massachusetts.
During the first nine months of 2001, the consumer loan portfolio
increased $2.1 million, or 3.6%, primarily as a result of a $5.0 million
purchase of automobile loans during the first quarter of 2001. 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:
September 30, December 31,
2001 2000
------------- ------------
(In thousands)
Residential mortgage loans:
One- to four-family adjustable rate $289,706 $212,197
One- to four-family fixed rate 28,452 34,609
-------------------------
Subtotal 318,158 246,806
Premium on loans acquired 1,484 1,166
Net deferred loan origination fees (70) (49)
-------------------------
Total residential mortgage loans $319,572 $247,923
=========================
Commercial loans:
Commercial real estate - nonowner occupied $ 70,814 $ 69,315
Commercial and industrial 53,628 51,470
Commercial real estate - owner occupied 43,335 38,272
Small business 22,742 19,170
Multi-family real estate 13,699 15,933
Leases 9,899 11,731
Construction 12,611 7,070
-------------------------
Subtotal 226,728 212,961
Net deferred loan origination fees (192) (143)
-------------------------
Total commercial loans $226,536 $212,818
=========================
Consumer loans:
Home equity - lines of credit $ 27,010 $ 26,215
Home equity - term loans 22,380 23,292
Automobile 7,275 4,643
Installment 1,287 1,348
Savings secured 779 987
Unsecured and other 799 1,044
-------------------------
Subtotal 59,530 57,529
Premium on loans acquired 219 144
Net deferred loan origination costs 422 411
-------------------------
Total consumer loans $ 60,171 $ 58,084
=========================
11
-- Deposits and Borrowings. Total deposits increased by $20.8 million,
or 3.3%, during the first nine months of 2001, from $631.6 million, or 85.4%
of total assets, at December 31, 2000, to $652.4 million, or 77.1% of total
assets, at September 30, 2001. The decrease in the relative percentage of
total assets that has occurred during 2001 resulted from the increased use
of FHLB borrowings. Meanwhile, the composition of total deposits changed as
follows: core deposit accounts (checking and savings accounts) increased
$31.3 million, or 8.5%, while certificates of deposit decreased $10.5
million, or 4.0%. At September 30, 2001, core deposit accounts comprised
60.9% 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:
September 30, 2001 December 31, 2000
------------------------------- -------------------------------
Percent Weighted Percent Weighted
of Average of Average
Amount Total Rate Amount Total Rate
------ ------- -------- ------ ------- --------
(Dollars in thousands)
NOW accounts $ 39,509 6.1% 0.45% $ 36,910 5.8% 0.64%
Money market accounts 9,349 1.4% 1.40% 12,283 1.9% 2.59%
Savings accounts 247,853 38.0% 2.23% 210,728 33.4% 3.52%
Certificate of deposit accounts 255,107 39.1% 4.79% 265,623 42.1% 5.76%
----------------- -----------------
Total interest bearing deposits 551,818 84.6% 3.27% 525,544 83.2% 4.43%
Noninterest bearing accounts 100,566 15.4% -- 106,088 16.8% --
----------------- -----------------
Total deposits $652,384 100.0% 2.77% $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
three quarters of 2001, FHLB borrowings increased $80.0 million, or 240.3%,
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
also considered impaired loans.
-- Nonperforming Assets. At September 30, 2001, the Company had
nonperforming assets of $3.2 million, which represented .37% 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. Nonperforming
assets at September 30, 2001, consisted of nonaccrual commercial loans
aggregating $2.5 million, nonaccrual residential mortgage loans aggregating
$580,000, nonaccrual consumer loans aggregating $36,000 and OREO aggregating
$22,000. Included in nonaccrual loans were $2.4 million of impaired loans at
September 30, 2001. There were no impaired loans at December 31, 2000. The
12
Company maintained reserves of $1.0 million against impaired loans at
September 30, 2001. The Company evaluates the underlying collateral of each
nonperforming loan and continues to pursue the collection of interest and
principal.
Delinquencies. At September 30, 2001, loans with an aggregate balance
of $625,000 were 60 to 89 days past due, an increase of $288,000, or 85.5%,
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.
September 30, December 31,
2001 2000
------------- ------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis $3,141 $508
Loans past due 90 days or more, but still accruing -- --
----------------------
Total nonperforming loans 3,141 508
Other real estate owned 22 30
----------------------
Total nonperforming assets $3,163 $538
======================
Delinquent loans 60-89 days past due $ 625 $337
Nonperforming loans as a percent of total loans .52% .10%
Nonperforming assets as a percent of total assets .37% .07%
Delinquent loans 60-89 days past due as a percent of total loans .10% .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 September 30, 2001, the Company had $13.6 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 September 30, 2001,
included in the $13.6 million of assets that were classified as substandard,
were $10.4 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. This softening may lead to an increase in
nonperforming assets and an increase to the provision for loan losses in
future periods. While the Bank has not seen any direct impact on credit
quality as a result of the September 11th events, it believes that there is
still uncertainty as to the ultimate impact those events will have.
13
Allowance for Loan Losses
-------------------------
During the first nine months of 2001, the Company made provisions to
the allowance for loan losses totaling $1.4 million and had $260,000 of net
charge-offs, bringing the balance in the allowance to $8.4 million at
September 30, 2001, compared to $7.3 million at December 31, 2000. The
allowance, expressed as a percentage of total loans, was 1.39% as of
September 30, 2001, compared to 1.41% at the prior year-end and stood at
268.7% of nonperforming loans at September 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 September 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 September 30, 2001 and 2000
----------------------------------------------
-- Overview. The Company reported net income for the third quarter of
2001 of $1.6 million, up $122,000, or 8.4%, from the third quarter of 2000.
Diluted earnings per common share were $0.40 for the third quarter of 2001,
compared to $0.38 for the third quarter of 2000. Diluted cash earnings per
common share were $0.45 for the 2001 period, compared to $0.43 for the 2000
period.
The Company reported a return on average assets of 0.75% and a return
on average equity of 11.02% for the 2001 period, as compared to a return on
average assets of 0.83% and a return on average equity of 11.74% for the
2000 period. Cash basis return on average assets and cash basis return on
average equity were 0.85% and 12.34% for the 2001 period, and 0.95% and
13.23% for the 2000 period, respectively.
14
-- Net Interest Income. For the quarter ended September 30, 2001, net
interest income was $7.5 million, compared to $6.8 million for the 2000
period. The net interest margin for the third quarter of 2001 was 3.72%
compared to a net interest margin of 4.11% for the 2000 period. The increase
in net interest income of $696,000, or 10.3%, was primarily attributable to
the continued growth of the Company. Average earnings assets were $140.1
million, or 21.4%, higher and average interest-bearing liabilities were
$118.5 million, or 21.5%, higher than the comparable period a year earlier.
The decrease of 39 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 400 basis point decrease in short-term market
interest rates experienced so far in 2001. Assuming further decreases in
market interest rates, the Bank believes it likely that it will experience
continued pressure on its net interest margin.
-- Interest Income. Investments. Total investment income was $2.8
million for the quarter ended September 30, 2001, compared to $2.6 million
for the third quarter of 2000. This increase in total investment income of
$234,000, or 9.0%, was primarily attributable to an increase of $43.4
million, or 50.4%, in the average balance of MBSs. The Company's investments
at September 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 $11.2 million for
the three months ended September 30, 2001, and represented a yield on total
loans of 7.49%. This compares to $10.3 million of interest, and a yield of
8.26%, for the third quarter of 2000. Interest from residential mortgage
loans increased $1.1 million, or 24.1%, between the two quarters and was
primarily attributable to the continued purchase of mortgage loans. Income
from commercial loans decreased $152,000, or 3.3%, and consumer and other
loan income decreased $20,000, or 1.8%. Both of these decreases were
primarily in response to declining market interest rates. 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 third quarter of 2000 as follows: residential mortgage loans increased
$69.4 million, or 28.5%, commercial loans increased $20.0 million, or 9.9%,
and consumer and other loans increased $10.2 million, or 20.3%. In response
to declining market interest rates, the yields on the various loan portfolio
components changed as follows: consumer and other loans decreased 167 basis
points, to 7.33%; commercial loans decreased 111 basis points, to 7.96%, and
residential mortgage loans decreased 25 basis points, to 7.18%.
-- Interest Expense. Interest paid on deposits and borrowings
increased $457,000, or 7.5%, to $6.6 million for the three months ended
September 30, 2001, from $6.1 million paid during the third quarter of 2000.
The increase in total interest expense was the result of an increase in the
average balance of interest-bearing liabilities outstanding, partially
offset by lower market interest rates. The average balance of interest-
bearing liabilities increased $118.5 million, from $552.2 million in the
third quarter of 2000 to $670.7 million in the third quarter of 2001, as
borrowings were utilized to fund much of the asset growth. Meanwhile, the
overall average cost for interest-bearing liabilities
15
decreased 52 basis points from 4.41% for the third quarter of 2000 to 3.89%
for the third 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 third quarter of
2000 as follows: NOW accounts decreased 10 basis points, to 0.56%, money
market accounts decreased 71 basis points, to 1.92%, savings accounts
decreased 76 basis points, to 2.56%, certificate of deposit accounts
decreased 39 basis points, to 5.12%, and borrowings decreased 88 basis
points to 5.27%. All of these decreases in average costs are the result of
the unprecedented decline in interest rates since the end of last year.
-- Provision for Loan Losses. The provision for loan losses was
$566,000 for the quarter ended September 30, 2001, up $156,000, or 38.0%,
from the same quarter last year. This increase in the provision was
primarily in response to a softening in commercial credit quality. When
determining the provision for the quarter, management evaluates several
factors including new loan originations, actual and estimated charge-offs,
the risk characteristics of the loan portfolio and general economic
conditions. Also see discussion under "Asset Quality" and "Allowance for
Loan Losses."
-- Noninterest Income. Total noninterest income increased $372,000, or
37.8%, to $1.4 million for the third quarter of 2001, from $984,000 for the
2000 quarter. Service Charges on Deposit Accounts, which represent the
largest source of noninterest income for the Company, rose $156,000, or
21.9%, from $713,000 for the quarter ended September 30, 2000, to $869,000
for the same period in 2001, as core deposit accounts grew. Commissions on
Loans Originated for Others increased $32,000, or 139.1%, from the
comparable period, as fixed rate mortgage loan activity increased in
response to the falling interest rate environment. Other Income increased
$177,000, or 119.6%, primarily from revitalization of the Company's non-
deposit investment sales program, which increased commissions $149,000 over
the third quarter of last year.
-- Noninterest Expense. Total noninterest expense for the third
quarter of 2001 increased $793,000, or 15.8%, to $5.8 million from $5.0
million in 2000. This increase occurred in the following areas: Salaries and
Benefits (up $286,000, or 11.3%), Occupancy (up $68,000, or 17.4%), Data
Processing (up $127,000, or 37.5%), Professional Services (up $32,000, or
18.0%), Loan Servicing (up $58,000, or 32.8%), Workout and OREO Expenses (up
$76,000, or 253.3%), and Other Expenses (up $210,000, or 34.9%). 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 third quarter of 2001. In addition, the softening of both the national
and local economies in 2001 has lead to increases in workout and fraudulent
activity charges. The Company's cash basis efficiency ratio for the third
quarter of 2001 was 62.78%, compared to 61.20% for the third quarter of
2000, an increase of 158 basis points.
-- Income Tax Expense. Income tax expense of $849,000 was recorded for
the quarter ended September 30, 2001, compared to $852,000 for the 2000
period. This represented total effective tax rates of 35.0% and 37.0%,
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 last year to this year and
from the 39.9% combined statutory federal and state tax rates.
16
Nine Months Ended September 30, 2001 and 2000
---------------------------------------------
-- Overview. Net income for the first nine months of 2001, increased
$592,000, or 14.4%, to $4.7 million, or $1.21 per diluted common share, from
$4.1 million, or $1.10 per diluted common share, for the first nine months
of 2000. Diluted cash earnings per common share were $1.35 for the 2001
period, compared to $1.25 for the 2000 period.
This performance represented a return on average assets of 0.78% and a
return on average equity of 11.39% for the 2001 period, as compared to a
return on average assets of 0.82% and a return on average equity of 11.43%
for the 2000 period. Cash basis return on average assets and cash basis
return on average equity were 0.89% and 12.75% for the 2001 period, and
0.95% and 12.99% for the 2000 period, respectively.
-- Net Interest Income. For the nine months ended September 30, 2001,
net interest income was $21.8 million, compared to $19.4 million for the
2000 period. The net interest margin for the first nine months of 2001 was
3.78% compared to a net interest margin of 4.10% for the 2000 period. The
increase in net interest income of $2.4 million, or 12.2%, was primarily
attributable to the overall growth of the Company. Average earning assets
increased $138.5 million, or 21.9%, and average interest-bearing liabilities
increased $113.8 million, or 21.2%, over the comparable period a year
earlier. The decrease of 32 basis points in the net interest margin was
equally caused by two different factors: 1) the tighter spreads associated
with the first quarter wholesale transaction, and 2) the dramatic 400 basis
point drop in short-term market interest rates since the beginning of 2001.
-- Interest Income. Investments. Total investment income was $8.8
million for the nine months ended September 30, 2001, compared to $7.1
million for the 2000 period. This increase in total investment income of
$1.6 million, or 23.2%, was primarily attributable to a $43.9 million, or
53.0%, increase in the average balance of MBSs. Meanwhile, the overall yield
on investments decreased 45 basis points in response to dramatically lower
market interest rates.
-- Interest Income. Loans. Interest from loans was $33.7 million for
the nine months ended September 30, 2001, and represented a yield on total
loans of 7.79%. This compares to $29.5 million of interest, and a yield of
8.11%, for the first nine months of 2000. This increase of $4.2 million, or
14.2%, 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 $53.1 million, or 21.8%, commercial loans increased $26.3 million,
or 13.6%, and consumer and other loans increased $12.0 million, or 24.7%.
Meanwhile, the yields on the various components of the loan portfolio
changed as follows: residential mortgage loans increased 1 basis point, to
7.33%; commercial loans decreased 54 basis points, to 8.39%; and consumer
and other loans decreased 89 basis points, to 7.90%. 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 $3.5 million, or 20.1%, to $20.6 million for the nine months ended
September 30, 2001, compared to $17.2 million for the same period during
2000. The increase in total interest expense 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 $113.8 million, from $536.7 million
in 2000, to $650.6 million in 2001. The Company continued to experience
strong average balance growth in core deposit accounts, specifically
noninterest bearing demand
17
deposit accounts (up $17.6 million, or 22.1%) and savings accounts (up $43.7
million, or 23.4%). In addition, the Company increased its utilization of
borrowed funds (up $55.3 million, or 99.2%). The overall average cost for
interest-bearing liabilities decreased 3 basis points from 4.27% for the
first nine months of 2000, to 4.24% for the 2001 period. Deposit and
borrowing 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 $1.4
million for the nine months ended September 30, 2001, compared to $1.1
million for the same period last year. Increases to the Provision for Loan
Losses were primarily in response to a softening economy and some
deterioration in commercial credit quality. 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 "Asset Quality" and "Allowance for Loan Losses."
-- Noninterest Income. Total noninterest income increased $1.1
million, or 42.9%, from $2.6 million for the first nine months of 2000, to
$3.8 million for the first nine months of 2001. Service charges on deposit
accounts, which continues to represent the largest source of noninterest
income, rose $549,000, or 27.7%, from $2.0 million for the 2000 period, to
$2.5 million for the 2001 period, primarily as a result of growth in core
deposit accounts. Commissions on Loans Originated for Others increased
$144,000, or 351.2%, in response to significantly higher fixed rate mortgage
loan activity resulting from the dramatic drop in market interest rates.
Additionally, Other Income increased $432,000, or 106.1%, primarily from
increased commissions on sales of non-deposit investment products (up
$290,000).
-- Noninterest Expense. Noninterest expenses for the first nine months
of 2001 increased a total of $2.4 million, or 16.2%, to $16.9 million, from
$14.5 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 $1.1 million, or 15.3%), Occupancy (up $196,000,
or 17.3%), Data Processing (up $400,000, or 42.2%), Loan Servicing (up
$123,000, or 21.8%), Workout and OREO Expense (up $131,000, or 335.9%) and
Other Expenses (up $520,000, or 30.4%). Partially offsetting these increases
was a decrease in Marketing (down $100,000, or 11.9%). The Company's cash
basis efficiency ratio increased 73 basis points, to 62.64% for the 2001
period.
-- Income Tax Expense. The Company recorded income tax expense of $2.6
million for the first nine months of 2001, compared to $2.3 million for the
same period during 2000. This represented total effective tax rates of 35.2%
and 35.6%, 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.
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 with a liquidity target
of 10% to 25% of total assets. At September 30, 2001, federal funds sold,
investment securities and MBSs available for sale amounted to $198.0
million, or 23.4% of total assets. This compares to $170.3 million, or 23.0%
of total assets at December 31, 2000. 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
September 30, 2001 was $58.5 million, as compared to $53.3 million at
December 31, 2000. This increase of $5.2 million was the result of net
income for the period of $4.7 million, less dividends of $1.3 million and
changes in unrealized gains on investment securities of $1.8 million.
All FDIC-insured institutions must meet specified minimal capital
requirements. These regulations require banks to maintain a minimum leverage
capital ratio. In addition, the FDIC has adopted capital guidelines based
upon ratios of a bank's capital to total assets adjusted for risk. The risk-
based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet
assets and off-balance sheet items to broad risk categories. These
regulations require banks to maintain minimum capital levels for capital
adequacy purposes and higher capital levels to be considered "well
capitalized."
Capital guidelines have also been issued by the Federal Reserve Board
("FRB") for bank holding companies. These guidelines require the Company to
maintain minimum capital levels for capital 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 September 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 September 30, 2001:
Bancorp Rhode Island, Inc.
--------------------------
Tier I capital (to average assets) $48,813 5.94% $24,965 3.00% $41,609 5.00%
Tier I capital (to risk weighted assets) 48,813 9.75% 20,028 4.00% 30,041 6.00%
Total capital (to risk weighted assets) 55,097 11.00% 40,055 8.00% 50,069 10.00%
Bank Rhode Island
-----------------
Tier I capital (to average assets) $48,312 5.90% $24,578 3.00% $40,963 5.00%
Tier I capital (to risk weighted assets) 48,312 9.65% 20,023 4.00% 30,035 6.00%
Total capital (to risk weighted assets) 54,596 10.91% 40,046 8.00% 50,058 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%
20
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 October 1, 2001:
Estimated Exposure
to Net Interest Income
----------------------
Dollar Percent
Change Change
------ -------
(Dollars in thousands)
Initial Twelve Month Period:
Up 200 basis points $ 994 3.21%
Up 100 basis points 556 1.80%
Down 100 basis points (608) (1.96%)
Down 200 basis points (1,269) (4.10%)
Subsequent Twelve Month Period:
Up 200 basis points $ 1,273 4.17%
Up 100 basis points 960 3.15%
Down 100 basis points (1,353) (4.44%)
Down 200 basis points (3,039) (9.96%)
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 September 30, 2001, the Company's one year
cumulative gap was a positive $105.3 million, or 12.45% 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.
21
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
No information to report.
ITEM 5. OTHER INFORMATION
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No information to report.
22
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.
November 8, 2001 By: /s/ Merrill W. Sherman
---------------- ------------------------
(Date) Merrill W. Sherman
President and
Chief Executive Officer
November 8, 2001 By: /s/ Albert R. Rietheimer
---------------- ------------------------
(Date) Albert R. Rietheimer
Chief Financial Officer
and Treasurer