SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934
For quarter ended: March 31, 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 May 8, 2001:
Common Stock - Par Value $0.01 3,736,650 shares
------------------------------ ----------------
(class) (outstanding)
BANCORP RHODE ISLAND, INC.
FORM 10-Q
INDEX
PAGE NUMBER
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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 - 17
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 19
Item 3 Default upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security
Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
Signature Page 21
2
BANCORP RHODE ISLAND, INC.
Consolidated Balance Sheets
March 31, December 31,
2001 2000
--------- ------------
(In thousands)
ASSETS:
Cash and due from banks $ 26,035 $ 28,853
Federal funds sold 12,050 5,600
Investment securities available for sale (amortized cost of $38,474 and
$47,459 at March 31, 2001 and December 31, 2000, respectively) 38,574 47,296
Mortgage-backed securities available for sale (amortized cost of $128,415
and $117,543 at March 31, 2001 and December 31, 2000, respectively) 129,446 117,431
Stock in Federal Home Loan Bank of Boston 4,915 3,704
Loans receivable:
Residential mortgage loans 306,996 247,923
Commercial loans 216,054 212,818
Consumer and other loans 61,912 58,084
-----------------------
Total loans 584,962 518,825
Less allowance for loan losses (7,579) (7,294)
-----------------------
Net loans 577,383 511,531
Premises and equipment, net 6,326 6,384
Other real estate owned 47 30
Goodwill, net 11,639 11,930
Accrued interest receivable 6,600 5,630
Prepaid expenses and other assets 770 1,031
-----------------------
Total assets $813,785 $739,420
=======================
LIABILITIES:
Deposits:
Demand deposit accounts $ 99,587 $106,088
NOW accounts 37,375 36,910
Money market accounts 11,681 12,283
Savings accounts 223,877 210,728
Certificate of deposit accounts 259,028 265,623
-----------------------
Total deposits 631,548 631,632
Overnight and short-term borrowings 17,294 13,847
Federal Home Loan Bank of Boston borrowings 98,289 33,292
Other borrowings 4,750 4,750
Company-obligated mandatorily redeemable capital securities 3,000 --
Other liabilities 3,568 2,607
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Total liabilities 758,449 686,128
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SHAREHOLDERS' EQUITY:
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding 3,508,173 shares 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 39,626 39,621
Retained earnings 14,927 13,815
Accumulated other comprehensive income (loss), net 746 (181)
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Total shareholders' equity 55,336 53,292
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Total liabilities and shareholders' equity $813,785 $739,420
=======================
See accompanying notes to consolidated financial statements
3
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Operations
Three Months Ended
March 31,
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2001 2000
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(In thousands, except per share data)
Interest and dividend income:
Residential mortgage loans $ 5,214 $ 4,403
Commercial loans 4,713 3,892
Consumer and other loans 1,270 998
Investment securities 742 769
Mortgage-backed securities 2,003 1,275
Federal funds sold and other 141 91
Federal Home Loan Bank of Boston stock dividends 74 65
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Total interest and dividend income 14,157 11,493
----------------------
Interest expense:
NOW accounts 50 44
Money market accounts 78 110
Savings accounts 1,869 1,218
Certificate of deposit accounts 3,708 3,036
Overnight and short-term borrowings 192 130
Federal Home Loan Bank of Boston borrowings 950 764
Other borrowings 70 70
Company-obligated mandatorily redeemable capital
securities 34 --
----------------------
Total interest expense 6,951 5,372
----------------------
Net interest income 7,206 6,121
Provision for loan losses 488 340
----------------------
Net interest income after provision for loan losses 6,718 5,781
----------------------
Noninterest income:
Loan related fees 49 43
Service charges on deposit accounts 766 605
Commissions on loans originated for others 59 5
Other income 228 123
----------------------
Total noninterest income 1,102 776
----------------------
Noninterest expense:
Salaries and employee benefits 2,650 2,171
Occupancy 430 366
Equipment 231 209
Data processing 419 285
Marketing 188 235
Professional services 215 260
Loan servicing 209 204
Other real estate owned expense 43 3
Amortization of goodwill 291 291
Deposit tax and assessments 29 26
Other expenses 684 506
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Total noninterest expense 5,389 4,556
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Income before income taxes 2,431 2,001
Income tax expense 871 695
----------------------
Net income $ 1,560 $ 1,306
======================
Per share data:
Basic earnings per common share $ 0.42 $ 0.35
Diluted earnings per common share $ 0.40 $ 0.35
Average common shares outstanding - basic 3,734,828 3,728,550
Average common shares outstanding - diluted 3,865,939 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
Preferred Common Paid-in Retained Income
Three months ended March 31, Stock Stock Capital Earnings (Loss), Net Total
---------------------------- --------- ------ ---------- -------- ----------- -----
(In thousands)
2001
----
Balance at December 31, 2000 $ -- $ 37 $39,621 $13,815 $ (181) $53,292
Net income -- -- -- 1,560 -- 1,560
Other comprehensive income, net of tax:
Unrealized gain (loss) on
securities available for sale 927 927
-------
Comprehensive income 2,487
Common stock issued for incentive
stock award, net -- -- 5 -- -- 5
Dividends on common stock -- -- -- (448) -- (448)
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Balance at March 31, 2001 $ -- $ 37 $39,626 $14,927 $ 746 $55,336
======================================================================
2000
----
Balance at December 31, 1999 $ -- $ 37 $39,617 $ 9,763 $(1,742) $47,675
Net income -- -- -- 1,306 -- 1,306
Other comprehensive income, net of tax:
Unrealized gain (loss) on
securities available for sale (424) (424)
-------
Comprehensive income 882
Dividends on common stock -- -- -- (373) -- (373)
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Balance at March 31, 2000 $ -- $ 37 $39,617 $10,696 $(2,166) $48,184
======================================================================
See accompanying notes to consolidated financial statements
5
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
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2001 2000
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(In thousands)
Cash flows from operating activities:
Net income $ 1,560 $ 1,306
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 684 600
Provision for loan losses 488 340
Compensation expense from restricted stock grant 5 --
(Increase) decrease in:
Accrued interest receivable (970) (527)
Prepaid expenses and other assets (218) (149)
Increase (decrease) in:
Other liabilities 961 213
Other, net 20 12
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Net cash provided (used) by operating activities 2,530 1,795
----------------------
Cash flows from investing activities:
Origination of:
Residential mortgage loans (2,703) (3,077)
Commercial loans (9,331) (20,996)
Consumer loans (4,033) (2,817)
Purchase of:
Investment securities available for sale (4,027) --
Mortgage-backed securities available for sale (16,066) (9,126)
Residential mortgage loans (74,969) (15,534)
Consumer loans (5,045) --
Federal Home Loan Bank of Boston stock (1,211) --
Principal payments on:
Investment securities available for sale 13,000 4,000
Mortgage-backed securities available for sale 5,175 2,927
Residential mortgage loans 18,504 10,493
Commercial loans 5,912 2,692
Consumer loans 5,190 3,285
Capital expenditures for premises and equipment (206) (656)
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Net cash provided (used) by investing activities (69,810) (28,809)
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Cash flows from financing activities:
Net increase (decrease) in deposits (84) 39,408
Net increase (decrease) in overnight and short-term borrowings 3,447 (3,761)
Proceeds from long-term borrowings 71,000 12,000
Repayment of long-term borrowings (3,003) (21,002)
Dividends on common stock (448) (373)
----------------------
Net cash provided (used) by financing activities 70,912 26,272
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Net increase (decrease) in cash and cash equivalents 3,632 (742)
Cash and cash equivalents at beginning of period 34,453 24,486
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Cash and cash equivalents at end of period $ 38,085 $ 23,744
======================
Supplementary Disclosures:
Cash paid for interest $ 6,443 $ 5,195
Cash paid for income taxes 165 35
Non-cash transactions:
Additions to other real estate owned in settlement of loans 17 90
Change in other comprehensive income, net of taxes 927 (424)
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 securities or other contracts to
issue common stock were exercised and resulted in the issuance of additional
common stock that then shared in the earnings of the entity.
7
(3) Recent Accounting Developments
On December 20, 2000, FASB tentatively concluded that upon the
effective date of its final statement on business combinations and
intangible assets, goodwill recorded on an entity's balance sheets would no
longer be amortized. This would include 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 final statement. Goodwill
will not be amortized but will be reviewed for impairment periodically or
upon the occurrence of certain triggering events. The FASB decided to issue
a revised Exposure Draft during the first quarter of 2001, limited to its
tentative conclusions regarding an impairment-only approach to accounting
for goodwill. The FASB plans to issue a final statement in 2001 that
incorporates its tentative decisions. At March 31, 2001, the Company had
$11.6 million of goodwill on its balance sheet that was being amortized at
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 therefore.
8
BANCORP RHODE ISLAND, INC.
Management's Discussion and Analysis
ITEM 2. Management's Discussion and Analysis
Certain statements contained herein are "Forward Looking Statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward Looking Statements may be identified by reference to a future period
or periods or by the use of forward looking terminology such as "may,"
"believes," "intends," "expects," and "anticipates" or similar terms or
variations of these terms. Actual results may differ materially from those
set forth in Forward Looking Statements as a result of certain risks and
uncertainties, including but not limited to, changes in political and
economic conditions, interest rate fluctuations, competitive product and
pricing pressures, equity and bond market fluctuations, credit risk,
inflation, as well as other risks and uncertainties detailed from time to
time in filings with the Securities and Exchange Commission ("SEC").
GENERAL
-------
The Company's principal subsidiary, Bank Rhode Island, is a commercial
bank chartered as a financial institution in the State of Rhode Island. The
Bank pursues a community banking mission and is principally engaged in
providing banking products and services to individuals and businesses in
Providence and Kent counties. The Bank is subject to competition from a
variety of traditional and nontraditional financial service providers both
within and outside of Rhode Island. The Bank offers its customers a wide
range of deposit products, nondeposit investment products, commercial,
residential and consumer loans, and other traditional banking products and
services, designed to meet the needs of individuals and small- to mid-sized
businesses. The Bank also has introduced both commercial and consumer 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 review for impairment. Upon the
effective date of the final FASB statement, there will no longer be
9
a difference between GAAP and cash basis presentation. Also see discussion
under "Recent Accounting Developments".
The following table sets forth selected financial measures according
to GAAP and on a cash basis:
Three Months Ended
March 31,
---------
2001 2000
---- ----
Basic earnings per share $0.42 $0.35
Basic cash earnings per share $0.47 $0.40
Diluted earnings per share $0.40 $0.35
Diluted cash earnings per share $0.45 $0.40
Return on average assets 0.82% 0.81%
Cash basis return on average assets 0.94% 0.95%
Return on average equity 11.75% 11.11%
Cash basis return on average equity 13.16% 12.72%
Efficiency ratio 64.87% 66.06%
Cash basis efficiency ratio 61.36% 61.84%
OVERVIEW
--------
Total assets increased $74.4 million, or 10.1%, to $813.8 million at
March 31, 2001 from $739.4 million at December 31, 2000. The increase was
predominantly in residential mortgage loans and mortgage-backed securities
("MBSs") and was 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 quarter. Since the end of last year, total loans rose to $585.0
million, from $518.8 million, an increase of $66.1 million, or 12.7%, while
total deposits remained stable, at $631.5 million. Shareholders' equity was
$55.3 million at March 31, 2001, representing a $2.0 million, or 3.8%,
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 $185.0 million,
or 22.7% of total assets, at March 31, 2001, compared to $174.0 million, or
23.5% of total assets, at December 31, 2000. All $168.0 million of
investment and mortgage-backed securities at March 31, 2001 were classified
as available for sale and carried a total of $1.1 million in net unrealized
gains at the end of the quarter. The increase in total investments of $11.0
million, or 6.3%, was centered in MBSs and was associated with the
additional capital created through the issuance of the trust preferred
securities.
-- Loans. Total loans were $585.0 million, or 71.9% of total assets,
at March 31, 2001, compared to $518.8 million, or 70.2% of total assets, at
December 31, 2000. During the first quarter of 2001, the residential
mortgage loan portfolio increased $59.1 million, or 23.8%, as the Bank
purchased a number of residential mortgage loans in the secondary market.
These purchases were funded by a series of FHLB borrowings and resulted in
(at the time of settlement) an interest rate spread of approximately 175
basis points.
10
The commercial loan portfolio (consisting of commercial & industrial,
small business, commercial real estate, multi-family real estate, and
construction loans) increased $3.2 million, or 1.5%, during the first
quarter of 2001. Particular emphasis is placed on generation of small- to
medium-sized commercial relationships (those relationships with $5.0 million
or less in loan commitments). The Bank is 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 quarter of 2001, the consumer loan portfolio
increased $3.8 million, or 6.6%, as the Bank purchased $5.0 million in
automobile loan receivables. 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:
March 31, December 31,
2001 2000
--------- ------------
(In thousands)
Residential mortgage loans:
One- to four-family adjustable rate $272,528 $212,197
One- to four-family fixed rate 33,000 34,609
----------------------
Subtotal 305,528 246,806
Premium on loans acquired 1,524 1,166
Net deferred loan origination fees (56) (49)
----------------------
Total residential mortgage loans $306,996 $247,923
======================
Commercial loans:
Commercial real estate - nonowner occupied $ 71,335 $ 69,315
Commercial and industrial 52,228 51,470
Commercial real estate - owner occupied 38,003 38,272
Small business 20,646 19,170
Multi-family real estate 14,685 15,933
Leases 10,989 11,731
Construction 8,360 7,070
----------------------
Subtotal 216,246 212,961
Net deferred loan origination fees (192) (143)
----------------------
Total commercial loans $216,054 $212,818
======================
Consumer loans:
Home equity - lines of credit $ 26,141 $ 26,215
Home equity - term loans 22,687 23,292
Automobile 9,013 4,643
Installment 1,317 1,348
Savings secured 967 987
Unsecured and other 1,099 1,044
----------------------
Subtotal 61,224 57,529
Premium on loans acquired 272 144
Net deferred loan origination costs 416 411
----------------------
Total consumer loans $ 61,912 $ 58,084
======================
11
-- Deposits and Borrowings. Total deposits remained relatively
unchanged during the first three months of 2001, beginning at $631.6
million, or 85.4% of total assets, at December 31, 2000, and ending at
$631.5 million, or 77.6% of total assets, at March 31, 2001. The decrease
in the relative percentage of total assets that occurred during the quarter
resulted from the growth in total assets being primarily funded by FHLB
borrowings. Meanwhile, the composition of total deposits did change during
the quarter. Core accounts (checking and savings) increased $6.5 million,
or 1.8%, during the quarter, while certificates of deposit decreased $6.6
million, or 2.5%, during this time period. The Bank continues its strategy
of emphasizing core deposit growth over certificate of deposit growth.
The following table sets forth certain information regarding deposits:
March 31, 2001 December 31, 2000
--------------------------------- ---------------------------------
Percent Weighted Percent Weighted
of Average of Average
Amount Total Rate Amount Total Rate
------ ------- -------- ------ ------- --------
(Dollars in thousands)
NOW accounts $ 37,375 5.9% 0.55% $ 36,910 5.8% 0.64%
Money market accounts 11,681 1.8% 2.46% 12,283 1.9% 2.59%
Savings accounts 223,877 35.5% 3.51% 210,728 33.4% 3.52%
Certificate of deposit accounts 259,028 41.0% 5.65% 265,623 42.1% 5.76%
------------------- -------------------
Total interest bearing deposits 531,961 84.2% 4.32% 525,544 83.2% 4.43%
Noninterest bearing accounts 99,587 15.8% -- 106,088 16.8% --
------------------- -------------------
Total deposits $631,548 100.0% 3.64% $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 quarter of 2001, FHLB borrowings increased $65.0 million, or 195.2%,
as the Company sought to take advantage of lower, long-term borrowing rates
and 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 Bank may restructure the
terms of a loan as a concession to a borrower. These restructured loans are
considered impaired loans.
Nonperforming Assets. At March 31, 2001, the Company had
nonperforming assets of $1.1 million, which represented 0.13% of total
assets. This compares to nonperforming assets of $538,000, or 0.07% of
total assets, at December 31, 2000. While the level of nonperforming assets
increased $525,000, or 97.6%, during the first quarter of 2001, they still
remain at a low level. Nonperforming assets at March 31, 2001, consisted of
nonaccrual residential mortgage loans aggregating $481,000, nonaccrual
commercial loans aggregating $502,000, nonaccrual consumer loans aggregating
$33,000 and OREO aggregating $47,000. Included in nonaccrual loans were
12
$365,000 of impaired loans at March 31, 2001. There were no impaired loans
as of December 31, 2000. No reserves were necessary against impaired loans
as of March 31, 2001. The Company evaluates the underlying collateral of
each nonperforming loan and continues to pursue the collection of interest
and principal.
Delinquencies. At March 31, 2001, loans with an aggregate balance of
$266,000 were 60 to 89 days past due, a decrease of $71,000, or 21.1%, 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.
March 31, December 31,
2001 2000
--------- ------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis $1,016 $508
Loans past due 90 days or more, but still accruing -- --
Impaired loans (not included in nonaccrual loans) -- --
-------------------
Total nonperforming loans 1,016 508
Other real estate owned 47 30
-------------------
Total nonperforming assets $1,063 $538
===================
Delinquent loans 60-89 days past due $ 266 $337
Nonperforming loans as a percent of total loans 0.17% 0.10%
Nonperforming assets as a percent of total assets 0.13% 0.07%
Delinquent loans 60-89 days past due as a percent of
total loans 0.05% 0.07%
Management believes that the December 31, 2000 level of nonperforming
assets and the charge-off experience for 2000 were unusually low. As the
loan portfolio continues to grow and mature, or if economic conditions
worsen, management believes it likely that the level of nonperforming assets
will increase, as will its level of delinquencies and charge-offs.
Allowance for Loan Losses
-------------------------
During the first quarter of 2001, the Company made provisions to the
allowance for loan losses totaling $488,000 and had $203,000 of net charge-
offs, bringing the balance in the allowance to $7,579,000, compared to
$7,294,000 at December 31, 2000. The allowance, expressed as a percentage
of total loans, was 1.30% as of March 31, 2001, compared to 1.41% at the
prior year end and stood at 746.0% of nonperforming loans at March 31, 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 March 31, 2001, is adequate.
13
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 March 31, 2001 and 2000
------------------------------------------
-- Overview. The Company reported net income for the first
quarter of 2001 of $1.6 million, up $254,000, or 19.4%, from the first
quarter of 2000. Diluted earnings per common share were $0.40 for the first
quarter of 2001, compared to $0.35 for the first quarter of 2000. Diluted
cash earnings per common share were $0.45 for the 2001 period, compared to
$0.40 for the 2000 period.
The Company reported a return on average assets of 0.82% and a return
on average equity of 11.75% for the 2001 period, as compared to a return on
average assets of 0.81% and a return on average equity of 11.11% for the
2000 period. Cash basis return on average assets and cash basis return on
average equity were 0.94% and 13.16% for the 2001 period, and 0.95% and
12.72% for the 2000 period, respectively.
-- Net Interest Income. For the quarter ended March 31, 2001, net
interest income was $7.2 million, compared to $6.1 million for the first
quarter of 2000. The net interest margin for the first quarter of 2001 was
3.99% compared to a net interest margin of 4.04% for the 2000 period. The
increase in net interest income of $1.1 million, or 17.7%, was primarily
attributable to the continued growth of the Company. Average earning assets
were $123.0 million, or 20.2%, higher, and average interest-bearing
liabilities were $95.4 million, or 18.3%, higher, than the comparable period
a year earlier. The decrease of 5 basis points in the net interest margin
resulted primarily from the lower spreads associated with the recent
wholesale transaction (purchase of residential mortgage loans funded with
FHLB borrowings) compared to the spreads associated with traditional
commercial lending funded by core deposits.
-- Interest Income. Investments. Total investment income was $3.0
million for the quarter ended March 31, 2001, compared to $2.2 million for
the first quarter of 2000. This increase in total investment income of
$760,000, or 34.5%, was primarily attributable to an increase of $40.7
million, or 50.7%, in the average balance of MBSs. The Company's
investments at the end of the first quarter of 2001 were primarily comprised
of Agency securities or MBSs with remaining maturities
14
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 March 31, 2001, and represented a yield on total
loans of 8.20%. This compares to $9.3 million of interest, and a yield of
7.92%, for the first quarter of 2000. Interest from commercial loans
increased $821,000, or 21.1%, between the two quarters and represented the
fastest growing segment of the total loan portfolio. Income from
residential mortgage loans increased $811,000, or 18.4%, and consumer and
other loan income increased $272,000, or 27.3%. 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 first quarter
of 2000 as follows: commercial loans increased $35.8 million, or 19.9%,
consumer and other loans increased $12.6 million, or 26.9%, and residential
mortgage loans increased $31.2 million, or 12.8%, respectively. In response
to rising market interest rates, the yields on the various loan portfolio
components changed as follows: commercial loans increased 16 basis points,
to 8.88%; consumer and other loans increased 10 basis points, to 8.63%, and
residential mortgage loans increased 36 basis points, to 7.58%.
-- Interest Expense. Interest paid on deposits and borrowings
increased $1.6 million, or 29.4%, to $7.0 million for the three months ended
March 31, 2001, from $5.4 million for the same period during 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 $95.4 million,
from $522.8 million in the first quarter of 2000 to $618.2 million in the
first quarter of 2001, as borrowings were utilized to fund asset growth.
Meanwhile, the overall average cost for interest-bearing liabilities
increased 43 basis points from 4.13% for the first quarter of 2000 to 4.56%
for the first 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 first quarter of
2000 as follows: NOW accounts decreased 8 basis points, to 0.56%; money
market accounts decreased 16 basis points, to 2.56%; savings deposits
increased 69 basis points, to 3.51%; certificate of deposit accounts
increased 62 basis points, to 5.72%; and borrowings decreased 37 basis
points to 5.60%.
-- Provision for Loan Losses. The provision for loan losses was
$488,000 for the quarter ended March 31, 2001, up $148,000, or 43.5%, from
the same quarter last year as the total loan portfolio grew $66.1 million,
or 12.7%, during the quarter and charge-offs increased $205,000 from the
first quarter of last year. 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 $326,000,
or 42.0%, to $1.1 million for the first quarter of 2001, from $776,000 for
the first quarter of 2000. Service Charges on Deposit Accounts, which
continues to represent the largest source of noninterest income for the
Company, rose $161,000, or 26.6%, from $605,000 for the three months ended
March 31, 2000, to $766,000 for the same period in 2001. Commissions on
Loans Originated for Others increased $54,000, or
15
1080.0%, from the comparable period, as fixed rate mortgage loan activity
increased substantially in response to the falling interest rate environment.
Other Income increased $105,000, or 85.4%, primarily from revitalization of
the Company's non-deposit investment sales program, which increased
commissions $71,000 over the first quarter of last year.
-- Noninterest Expense. Noninterest expenses for the first quarter of
2001 increased a total of $833,000, or 18.3%, to $5.4 million from $4.6
million in 2000. This increase occurred primarily in the following areas:
Salaries and Benefits (up $479,000, or 22.1%), Occupancy and Equipment (up
$86,000, or 15.0%), Data Processing (up $134,000, or 47.0%), OREO Expenses
(up $40,000, or 1,333.3%) and Other Expenses (up $178,000, or 35.2%).
During 2000, the Bank experienced substantial growth in both the commercial
loan and core deposit areas that has resulted in the increased costs
associated with the first quarter of 2001. In addition, during the third
quarter of 2000, the Bank reviewed its salary structure and subsequently
made adjustments to certain positions in order to bring their compensation
to industry comparable levels. Partially offsetting these increases were
decreases in: Marketing (down $47,000, or 20.0%) and Professional Services
(down $45,000, or 17.3%). The Company's cash basis efficiency ratio for the
first quarter of 2001 was 61.36%, compared to 61.84% for the first quarter
of 2000, an improvement of 48 basis points.
-- Income Tax Expense. Income tax expense of $871,000 was recorded
for the three months ended March 31, 2001, compared to $695,000 for the same
period during 2000. This represented total effective tax rates of 35.8% and
34.7%, respectively. Tax-favored income from U.S. Treasury and Agency
securities along with the utilization of a Rhode Island passive investment
company has reduced the effective tax rate from the 39.9% combined statutory
federal and state tax rates.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
-- Liquidity. Liquidity is defined as the ability to meet current and
future financial obligations of a short-term nature. The Company further
defines liquidity as the ability to respond to the needs of depositors and
borrowers, as well as to earnings enhancement opportunities, in a changing
marketplace.
The primary source of funds for the payment of dividends and expenses
by the Company is dividends paid to it by the Bank. Bank regulatory
authorities generally restrict the amounts available for payment of
dividends if the effect thereof would cause the capital of the Bank to be
reduced below applicable capital requirements. These restrictions
indirectly affect the Company's ability to pay dividends. The primary
sources of liquidity for the Bank consist of deposit inflows, loan
repayments, borrowed funds, maturity of investment securities and sales of
securities from the available for sale portfolio. Management believes that
these sources are sufficient to fund the Bank's lending and investment
activities.
Management is responsible for establishing and monitoring liquidity
targets as well as strategies and tactics to meet these targets. In
general, the Company maintains a high degree of flexibility with a liquidity
target of 10% to 25% of total assets. At March 31, 2001, federal funds
sold, investment securities and MBSs available for sale amounted to $180.1
million, or 22.1% 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
16
have been no adverse trends in the Company's liquidity or capital reserves.
Management believes that the Company has adequate liquidity to meet its
commitments.
-- Capital Resources. Total shareholders' equity of the Company at
March 31, 2001 was $55.3 million, as compared to $53.3 million at December
31, 2000. This increase of $2.0 million was the result of net income for
the quarter of $1.6 million, less dividends of $448,000 and changes in
unrealized gains on investment securities of $927,000.
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 March 31, 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 March 31, 2001:
Bancorp Rhode Island, Inc.
Tier I capital (to average assets) $ 45,951 6.07% $ 22,271 3.00% $ 37,869 5.00%
Tier I capital (to risk weighted assets) 45,951 9.68% 18,998 4.00% 28,497 6.00%
Total capital (to risk weighted assets) 51,907 10.93% 37,995 8.00% 47,494 10.00%
Bank Rhode Island
Tier I capital (to average assets) $ 45,592 6.02% $ 22,720 3.00% $ 37,867 5.00%
Tier I capital (to risk weighted assets) 45,592 9.60% 18,993 4.00% 28,490 6.00%
Total capital (to risk weighted assets) 51,548 10.86% 37,986 8.00% 47,483 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%
17
BANCORP RHODE ISLAND, INC.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
------------------
The principal market risk facing the Company is interest rate risk.
The Company's objective regarding interest rate risk is to manage its assets
and funding sources to produce results which are consistent with its
liquidity, capital adequacy, growth and profitability goals, while
minimizing the vulnerability of its operations to changes in market interest
rates. 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 April 1, 2001:
Estimated Exposure
to Net Interest Income
-----------------------
Dollar Percent
Change Change
------ -------
(Dollars in thousands)
Initial Twelve Month Period:
Up 200 basis points $ 631 2.17%
Up 100 basis points 336 1.16%
Down 100 basis points (347) (1.19%)
Down 200 basis points (752) (2.59%)
Subsequent Twelve Month Period:
Up 200 basis points $ 1,454 5.04%
Up 100 basis points 879 3.05%
Down 100 basis points (1,159) (4.01%)
Down 200 basis points (2,876) (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 March 31, 2001, the Company's one year cumulative
gap was a positive $41.3 million, or 5.08% of total assets.
For additional discussion on interest rate risk see the section titled
"Asset and Liability Management" on pages 34 to 36 of the Company's 2000
Annual Report to Shareholders.
18
BANCORP RHODE ISLAND, INC.
Other Information
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries are a party, or to which any of their
property is subject, other than ordinary routine litigation
incidental to the business of banking.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
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, conducted in compliance with Regulation S and
Rule 144A promulgated under the Securities Act of 1933, as
amended. First Tennessee Capital Markets and Keefe Bruyette &
Woods, Inc. served as co-placement agents and received a placement
fee equal to 3% of the offering proceeds. 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 aggregate principal amount of the Company's 10.20% Junior
Subordinated Notes due February 22, 2031, which constitute the
sole asset of the Trust. The Company has, through the Declaration
of Trust establishing the 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 therefore.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
No defaults upon senior securities have taken place.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No information to report.
ITEM 5. OTHER INFORMATION
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.10-CEO Deferred Compensation Agreement by and
between Bank Rhode Island and Merrill W. Sherman
Exhibit 10.11-Restricted Stock Agreement by and among Bancorp
Rhode Island, Inc. Bank Rhode Island and Merrill
W. Sherman
(b) Reports on Form 8-K
No information to report.
19
BANCORP RHODE ISLAND, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Bancorp Rhode Island, Inc.
May 10, 2001 /s/ Merrill W. Sherman
------------ ------------------------------
(Date) Merrill W. Sherman
President and
Chief Executive Officer
May 10, 2001 /s/ Albert R. Rietheimer
------------------------------
(Date) Albert R. Rietheimer
Chief Financial Officer
and Treasurer
20