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<SEC-DOCUMENT>0000910647-02-000064.txt : 20020415
<SEC-HEADER>0000910647-02-000064.hdr.sgml : 20020415
ACCESSION NUMBER: 0000910647-02-000064
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020328
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BANCORP RHODE ISLAND INC
CENTRAL INDEX KEY: 0001109525
STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021]
IRS NUMBER: 050509802
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-16101
FILM NUMBER: 02591761
BUSINESS ADDRESS:
STREET 1: ONE TURKS HEAD PLACE
CITY: PROVIDENCE
STATE: RI
ZIP: 02903
BUSINESS PHONE: 4014565015
MAIL ADDRESS:
STREET 1: ONE TURKS HEAD PLACE
CITY: PROVIDENCE
STATE: RI
ZIP: 02903
</SEC-HEADER>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>bri-10k.txt
<DESCRIPTION>BODY OF FORM 10-K
<TEXT>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
(Annual Report Under Section 13 of the Securities Exchange Act of 1934)
For the fiscal year ended December 31, 2001
Commission File No. 001-16101
BANCORP RHODE ISLAND, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Rhode Island 05-0509802
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
ONE TURKS HEAD PLACE, PROVIDENCE, RI 02903
-------------------------------------------
(Address of Principal Executive Offices)
(401) 456-5000
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
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 by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held
by non-affiliates of the Registrant, based on the closing price on The
Nasdaq Stock Market on March 22, 2002 was $65,248,630.
As of March 22, 2002, there were 3,756,550 shares of common stock
(par value $0.01 per share) of the Registrant issued and outstanding.
Documents incorporated by reference:
Portions of Bancorp Rhode Island's 2001 Annual Report to Shareholders
and Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders
are incorporated by reference into Parts II and III of this Form 10-K.
===============================================================================
<PAGE>
Bancorp Rhode Island, Inc.
Annual Report on Form 10-K
Table of Contents
<TABLE>
<CAPTION>
Description Page Number
- ----------- -----------
<s> <c> <c> <c>
Part I. Item 1 -- Business 3
Item 2 -- Properties 14
Item 3 -- Legal Proceedings 14
Item 4 -- Submission of Matters to a Vote of Security Holders 14
Part II. Item 5 -- Market for the Company's Common Stock and Related
Stockholder Matters 15
Item 6 -- Selected Consolidated Financial Data 15
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8 -- Financial Statements and Supplementary Data 15
Item 9 -- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
Part III. Item 10 -- Directors and Executive Officers of the Company 16
Item 11 -- Executive Compensation 16
Item 12 -- Security Ownership of Certain Beneficial Owners
and Management 16
Item 13 -- Certain Relationships and Related Transactions 17
Part IV. Item 14 -- Exhibits, Financial Statement Schedules and
Reports on Form 8-K 17
Signatures 19
</TABLE>
<PAGE> 2
PART I
Cautionary Statement
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").
ITEM 1. BUSINESS
General
Bancorp Rhode Island, Inc. (the "Company"), a Rhode Island
corporation, was organized by Bank Rhode Island (the "Bank") on February
15, 2000, to be a bank holding company and to acquire all of the capital
stock of the Bank. The reorganization of the Bank into the holding company
form of ownership was completed on September 1, 2000. The Company has no
significant operating entities other than the Bank. For this reason,
substantially all of the discussion in this document relates to the
operations of the Bank and its subsidiaries.
The Company's wholly-owned subsidiary, the Bank, is a commercial bank
chartered as a financial institution in the State of Rhode Island. The
Bank was formed in 1996 as a result of the acquisition of certain assets
and liabilities divested in connection with the merger of Fleet Financial
Group, Inc. and Shawmut National Corporation. Headquartered in Providence,
Rhode Island, the Bank conducts business through 13 full service branches,
with nine located in Providence County and four located in Kent County.
The Bank provides a community banking alternative in the greater
Providence market which is dominated by three large regional banking
institutions. Based on total deposits as of June 30, 2001, the Bank is the
fifth largest bank in Rhode Island and the only mid-sized commercially
focused bank in the greater Providence area. The Bank offers a wide
variety of deposit products, commercial, residential and consumer loans,
nondeposit investment products, online banking services and other banking
products and services, designed to meet the needs of individuals and small-
to mid-sized businesses. As a full service community bank, the Bank seeks
to differentiate itself from its competitors through superior personal
service, responsiveness and local decision-making. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to
regulatory limits.
The Bank's principal subsidiary, BRI Investment Corp., a Rhode Island
corporation wholly-owned by the Bank, engages in the maintenance and
management of intangible investments and the collection and distribution of
the income from such investments.
The Company's headquarters and executive management are located at
One Turks Head Place, Providence, Rhode Island 02903 and its telephone
number is (401) 456-5000. The Bank also maintains an internet web site at
http://www.bankri.com.
Lending Activities
General. At its formation, the Bank acquired $85.4 million of
commercial loans and $32.1 million of consumer loans that were in-market
loans largely associated with acquired branches. To provide sufficient
assets to operate profitably, the Bank also purchased $276.4 million of
residential mortgage loans, resulting in an asset mix more characteristic
of a thrift institution than that of a commercial bank. The Bank's
business strategy has been to grow its commercial loan portfolio and to
allow the residential mortgage loan portfolio to decline gradually (as a
percent of total loans) as the Bank is able to replace residential mortgage
loans with higher yielding commercial loans. The Bank has allocated
substantial resources to its commercial lending function to facilitate and
promote such growth. From March 22, 1996, when the Bank commenced
operations, until December 31, 2001, commercial loan outstandings have
increased from $85.4 million to $239.4 million, an increase of $154.0
million, or 180.3%.
<PAGE> 3
The Bank offers a variety of loan facilities to serve both commercial
and consumer borrowers primarily within the State of Rhode Island and
nearby areas of Massachusetts. Commercial and industrial loan products
include revolving lines of credit and term loans offered at fixed and
variable rates. The Bank's real estate lending activities include
originating loans secured by commercial and residential properties and also
purchasing residential mortgage loans. Loans are made on existing
properties as well as on properties under construction. The Bank satisfies
a variety of consumer credit needs by providing home equity term loans,
home equity lines of credit, direct automobile loans, savings secured loans
and personal loans, in addition to residential mortgage loans. Since 2000,
the Bank has also purchased packages of automobile loans.
The Bank has tiered lending authorities. Loan commitments up to $1.0
million per customer relationship may be approved by Department Heads of
the Bank's Business Lending, Commercial Real Estate and Retail Lending
departments. All extensions of credit of more than $1.0 million (up to the
Bank's house lending limit of $5.0 million) per customer relationship
requires the approval of the Credit Committee, which consists of members of
the Bank's senior management and one outside director. Other officers have
limited lending authorities that can be exercised subject to lending policy
guidelines to facilitate volume production and process flow.
The Bank issues loan commitments to prospective borrowers subject to
various conditions. Commitments generally are issued in conjunction with
commercial loans and residential mortgage loans and typically are for
periods up to 90 days. The proportion of the total value of commitments
derived from any particular category of loan varies from time to time and
depends upon market conditions. At December 31, 2001, the Bank had $132.8
million of aggregate loan commitments outstanding to fund a variety of
loans.
Commercial Real Estate and Multi-Family Loans. The Bank originates
loans secured by mortgages on owner-occupied and nonowner-occupied
commercial and multi-family residential properties. At December 31, 2001,
owner-occupied commercial real estate loans totaled $46.7 million, or 7.6%
of the total loan portfolio. Many of these customers have other commercial
borrowing relationships with the Bank, as the Bank finances their other
business needs. Nonowner-occupied commercial real estate loans totaled
$73.4 million, or 12.0% of the total loan portfolio, and multi-family
residential loans totaled $14.9 million, or 2.4% of the total loan
portfolio. The majority of real estate secured commercial loans are
originated on a three-, or five-year adjustable rate basis. Interest rates
typically charged on these loans are higher than those charged on
adjustable rate loans secured by one- to four-family residential units.
Additionally, origination fees may be charged on these loans.
The Bank's underwriting practices for commercial real estate and
multi-family residential loans are intended to ensure that the property
securing these loans will generate a positive cash flow after operating
expenses and debt service payments. The Bank requires appraisals before
making a loan and generally requires the personal guarantee of the
borrower. Permanent loans on commercial real estate and multi-family
properties generally are made at a loan-to-value ratio of no more than 80%.
Loans secured by nonowner-occupied commercial real estate and multi-
family properties involve greater risks than owner-occupied properties
because repayment generally depends on the rental income generated by the
property. In addition, because the payment experience on loans secured by
nonowner-occupied properties is often dependent on successful operation and
management of the property, repayment of the loan is usually more subject
to adverse conditions in the real estate market or the general economy than
is the case with owner-occupied real estate loans. Also, the nonowner-
occupied commercial real estate and multi-family residential business is
cyclical and subject to downturns, over-building and local economic
conditions.
Commercial and Industrial Loans. The Bank originates non-real estate
commercial loans that, in most instances, are secured by equipment,
accounts receivable or inventory, as well as the personal guarantees of the
principal owners of the borrower. Unlike many community banks, the Bank is
able to offer asset-based commercial loan facilities that monitor advances
against receivables and inventories on a formula basis. A number of
commercial and industrial loans are granted in conjunction with the U.S.
Small Business Administration's (''SBA'') loan guaranty programs and
include some form of SBA credit enhancement. Commercial lending activities
are supported by noncredit products and services, such as letters of credit
and cash management services, that are responsive to the needs of the
Bank's commercial customers.
Approximately 75% of Rhode Island businesses are in Providence and
Kent counties. The vast majority of these businesses are small- to mid-
sized and have fewer than 50 employees. The Bank believes the financing
needs of these businesses generally match the Bank's lending profile and
that the Bank's branches are well positioned to generate loans from this
customer base. At December 31, 2001, commercial and industrial loans
(including leases) totaled $66.4 million, or 10.9% of the total loan
portfolio. Generally, commercial and industrial loans are granted at
higher rates than residential mortgage loans, with relatively shorter
maturities, or are at adjustable rates without interest rate caps.
<PAGE> 4
Unlike residential and commercial real estate loans, which generally
are based on the borrower's ability to make repayment from employment and
rental income and which are secured by real property whose value tends to
be relatively easily ascertainable, commercial and industrial loans are
typically made on the basis of the borrower's ability to make repayment
from the cash flow of the business and are generally secured by business
assets, such as accounts receivable, equipment and inventory. As a result,
the availability of funds for the repayment of commercial and industrial
loans may be significantly dependent on the success of the business itself.
Further, the collateral securing the loans may be difficult to value,
fluctuate in value based on the success of the business and deteriorate
over time.
Small Business Loans. The Bank originates loans of $250,000 or less
to small business customers through its branch network and business
development officers. These loans are generally secured by the assets of
the business, as well as the personal guarantees of the principal owners of
the business. A number of these loans are granted in conjunction with the
SBA's Low-Doc and Express programs and include some form of SBA credit
enhancement. At December 31, 2001, small business loans totaled $24.1
million, or 3.9% of the total loan portfolio. Generally, small business
loans are granted at higher rates than commercial and industrial loans.
These loans have relatively short-term maturities or are at adjustable
rates without interest rate caps.
The Bank's underwriting practices for small business loans are
designed to provide quick turn-around and minimize the fees and expenses to
the customer. Accordingly, the Bank utilizes a credit scoring process to
assist in evaluating potential borrowers. In many cases traditional
underwriting practices, similar to those for commercial and industrial
loans, are also employed to provide a more balanced and judgmentally-based
credit decision. The Bank distinguishes itself from larger financial
institutions by providing personalized service through a loan officer
(usually a branch manager) assigned to the customer relationships. Lending
to small businesses may involve additional risks as a result of their more
limited financial resources and more niche-based operations.
Construction Loans. The Bank originates residential construction
loans to individuals and professional builders to construct one- to four-
family residential units, either as primary residences or for resale. The
Bank also makes construction loans for the purpose of constructing multi-
family or commercial properties. At December 31, 2001, outstanding
construction loans totaled $14.0 million, or 2.3% of the total loan
portfolio. Currently, the Bank offers interest-only construction loans
during the construction period.
The Bank's underwriting practices for construction loans are similar
to those for commercial real estate loans, but they also are intended to
ensure completion of the project and take into account the feasibility of
the project, among other things. As a matter of practice, the Bank
generally lends an amount sufficient to pay a percentage of the property's
acquisition costs and a majority of the construction costs but requires
that the borrower have equity in the project. Property appraisals and
generally the personal guarantee of the borrower are required, as is the
case with commercial real estate loans.
The risks associated with construction lending are greater than those
with commercial real estate lending and multi-family lending on existing
properties for a variety of reasons. The Bank seeks to minimize these
risks by, among other things, often using the inspection services of a
consulting engineer for commercial construction loans, advancing money
during stages of completion and generally lending for construction of
properties within its market area to borrowers who are experienced in the
type of construction for which the loan is made, as well as by adhering to
the lending standards described above. In addition, the Bank does not
usually lend to fund the construction of property being built for
speculative purposes.
Residential Mortgage Loans. The Bank's one- to four-family
residential mortgage loan portfolio consists primarily of whole loans
purchased from other financial institutions. Currently, the Bank purchases
new ARM whole loans from other financial institutions both in New England
and elsewhere in the country. The Bank anticipates continuing to purchase
residential mortgage loans until such time as its commercial and consumer
loan originations are sufficient to utilize available cash flows.
Servicing rights related to the whole loan mortgage portfolio are retained
by the mortgage servicing companies. The Bank pays a servicing fee ranging
from .25% to .375% to the mortgage servicing companies for administration
of the loan portfolios. As of December 31, 2001, approximately 8.4% of the
residential mortgage loan portfolio consisted of loans secured by real
estate outside of New England.
Additionally, but to a lesser extent, the Bank originates ARMs for
its own portfolio. The Bank also originates fixed rate mortgage loans and
sells these mortgages to its correspondents at the time of the loan's
closing. While the Bank anticipates that its residential mortgage loan
portfolio will decline long-term as it focuses its resources on commercial
lending, the Bank plans to continue its own origination of one- to four-
family residential mortgage loans, primarily in its market area. Such
<PAGE> 5
activity would decrease the Bank's need to purchase residential mortgage
loans in order to enhance profitability while it increases its commercial
loan portfolio, as well as facilitate overall growth of customer
relationships.
At December 31, 2001, one- to four-family residential mortgage loans
totaled $310.2 million, or 50.8% of the total loan portfolio. The fixed
rate portion of this portfolio totaled $23.3 million and had original
maturities of 15 and 30 years. The adjustable rate portion of this
portfolio totaled $285.6 million and had original maturities of 30 years.
Interest rates on adjustable rate loans are set for an initial period of
either one, three, five, seven or ten years with annual adjustments for the
remainder of the loan. These loans have periodic rate adjustment caps of
primarily 2% and lifetime rate adjustment caps of either 5% or 6%. There
are no prepayment penalties for the one- to four-family residential
mortgage loans.
Although adjustable rate mortgage loans allow the Bank to increase
the sensitivity of its assets to changes in market interest rates, the
terms of such loans include limitations on upward and downward rate
adjustments. These limitations increase the likelihood of prepayments due
to refinancings during periods of falling interest rates, particularly if
rate adjustment caps keep the loan rate above market rates. Additionally,
these limitations could keep the market value of the portfolio below market
during periods of rising interest rates, particularly if rate adjustment
caps keep the loan rate below market rates.
Consumer and Other Loans. The Bank originates a variety of term
loans and line of credit loans for consumers. At December 31, 2001, the
consumer loan portfolio totaled $61.4 million, or 10.0% of the total loan
portfolio, and is comprised primarily of home equity term loans and home
equity lines of credit. These loans and lines of credit are generally
offered for up to 80% of the appraised value of the borrower's home, less
the amount of the remaining balance of the borrower's first mortgage. The
Bank also offers direct automobile loans, savings secured loans and
personal loans. During 2000, the Bank began purchasing automobile loans
from another New England institution. At December 31, 2001, purchased
automobile loans totaled $6.3 million, or 1.0% of the total loan portfolio.
The Bank currently anticipates continued automobile loan purchases to
further diversify its consumer and other loan portfolio.
Investment Activities
Investments, an important component of the Company's diversified
asset structure, are a source of earnings in the form of interest and
dividends, and provide a source of liquidity to meet lending demands and
fluctuations in deposit flows. Overall, the portfolio, comprised primarily
of U.S. agency securities, mortgage-backed securities, Federal Home Loan
Bank of Boston (''FHLB'') stock and fed funds sold and other overnight
investments, represents 24.4% of total assets, or $210.7 million, as of
December 31, 2001.
Loans receivable generally provide a better return than investments,
and accordingly, the Company seeks to emphasize the generation of loans,
rather than increasing its investment portfolio. The investments are
managed by the Chief Financial Officer and Treasurer, subject to the
supervision and review of the Asset/Liability Committee and in compliance
with the Investment Policy established by the Bank's board of directors.
Overall, investments produced total interest and dividend income of
$11.6 million, or 20.7% of total interest and dividend income, in 2001 and
$9.8 million, or 19.7% of total interest and dividend income, during 2000.
Deposits
Deposits are the principal source of funds for use in lending and for
other general business purposes. The Bank attracts deposits from
businesses and the general public by offering a variety of deposit products
ranging in maturity from demand-type accounts to certificates of deposit
with maturities of up to ten years. The Bank relies mainly on quality
customer service and diversified products, as well as competitive pricing
policies and advertising, to attract and retain deposits. The Bank
emphasizes retail deposits obtained locally in contrast to wholesale
deposits obtained from national or regional deposit brokers.
The Bank seeks to develop relationships with its customers in order
to become their primary bank. In order to achieve this, the Bank has
stressed growing its "core" account base, namely its checking and savings
accounts. While the Bank prices certificate of deposit accounts
competitively, and from time to time will run special offers, the Bank does
not ordinarily solicit high cost certificates of deposit.
The Bank generally charges early withdrawal penalties on its
certificates of deposit in an amount equal to three months' interest on
accounts with original maturities of one year or less and six months'
interest on accounts with original maturities
<PAGE> 6
longer than one year. Interest credited to an account during any term may
be withdrawn without penalty at any time during the term. Upon renewal of
a certificate of deposit, only interest credited during the renewal term
may be withdrawn without penalty during the renewal term. The Bank's
withdrawal penalties are intended to offset the potentially adverse effects
of the withdrawal of funds during periods of rising interest rates.
As a general policy, the Bank systematically reviews the deposit
accounts it offers to determine whether the accounts continue to meet
customers' needs and the Bank's asset/liability management goals. This
review is the responsibility of the Pricing Committee, which meets weekly
to determine, implement and monitor pricing policies and practices
consistent with the Bank's overall earnings and growth goals. The Pricing
Committee analyzes the cost of funds and also reviews the pricing of
deposit related fees and charges.
The Bank also derives funds from loan repayments, sales of investment
securities, and FHLB and other borrowings. Loan repayments and deposit
inflows and outflows are significantly influenced by prevailing interest
rates, competition and general economic conditions. Borrowings may be used
on a short-term basis to compensate for reductions in normal sources of
funds, or on a longer term basis to support expanded lending activities.
Nondeposit Investment Products and Services
In October 1997, the Bank introduced a nondeposit investment program
through which it made available to its customers a variety of mutual funds
and fixed and variable annuities. These investment products were offered
through an arrangement with a national wholesaler of mutual funds and
annuities. In December of 2000, the Bank terminated this agreement and
entered into a new agreement with Commonwealth Equity Services, Inc., of
Waltham, MA. The Bank now makes mutual funds, annuities, stocks and bonds
available to its customers through Commonwealth, and has also assumed
direct management responsibility for the program.
In 1998, the Bank began offering trust services through a referral
arrangement with a local trust company. At year-end 2000, the Bank severed
this relationship and now makes investment management services available to
its high net worth customers through two sources. The first is a national
firm, PNC Advisors, a division of PNC Financial Services Group. The other
is Baldwin Brothers, a boutique investment management firm with offices in
Providence, RI and Marion, MA.
Employees
At December 31, 2001, the Company had 184 full-time and 44 part-time
employees. The Company's employees are not represented by any collective
bargaining unit, and the Company believes its employee relations are good.
The Company maintains a benefit program that includes health and dental
insurance, life and long-term disability insurance and a 401(k) plan.
Competition and Marketplace
The Company's primary operating subsidiary, the Bank, is
headquartered in Providence, Rhode Island, and operates in Providence and
Kent counties. The Bank faces significant competition both in making loans
and generating deposits. In the past, the Bank's most significant
competition has come from three large regional banks that have dominated
the Rhode Island market. Currently, these regional banks are FleetBoston,
Citizens and Sovereign. These regional banks have well-established
distribution networks and greater financial resources than the Bank, which
have enabled them to market their products and services extensively, offer
access to a greater number of locations and products, and price
competitively. In addition, the Bank faces competition for loans from
local banks and out-of-state financial institutions that have established
loan production offices as well as from non-bank competitors. Competition
for deposits also comes from local banks, short-term money market funds,
other corporation and government securities funds and other non-bank
financial institutions such as brokerage firms and insurance companies.
Many of the Bank's non-bank competitors are not subject to the same degree
of regulation as that imposed on federally insured state chartered banks.
As a result, such non-bank competitors have advantages over the Bank in
providing certain services.
The population in the Bank's market area is not growing and economic
growth in the Rhode Island area has been slow to moderate over the past
several years, lagging behind other parts of New England and the United
States. Accordingly, the Bank's future growth depends largely upon its
ability to increase its market penetration. Moreover, economic conditions
beyond the Bank's control may have a significant impact on the Bank's
operations. Examples of such conditions include the strength of credit
demand by customers and changes in the general levels of interest rates.
Furthermore, the Bank's commercial and consumer lending activities are
conducted principally in Rhode Island and, to a lesser extent, Southeastern
<PAGE> 7
Massachusetts. Its borrowers' ability to honor their repayment commitments
is generally dependent upon the level of economic activity and general
health of the regional economy, and any economic recession in the Bank's
market area adversely affecting growth could cause significant increases in
nonperforming assets, thereby causing operating losses, impairing liquidity
and eroding capital.
Supervision and Regulation
Overview. The Company and the Bank are subject to extensive
governmental regulation and supervision. Federal and state laws and
regulations govern numerous matters affecting the Bank and/or the Company,
including changes in the ownership or control, maintenance of adequate
capital, financial condition, permissible types, amounts and terms of
extensions of credit and investments, permissible non-banking activities,
the level of reserves against deposits and restrictions on dividend
payments. These regulations are intended primarily for the protection of
depositors and customers, rather than for the benefit of shareholders.
Compliance with such regulation involves significant costs to the Company
and the Bank and may restrict their activities. In addition, the passage
of new or amended federal and state legislation could result in additional
regulation of, and restrictions on, the operations of the Company and/or
the Bank. It cannot be predicted whether any legislation currently under
consideration will be adopted or how such legislation or any other
legislation that might be enacted in the future would affect the business
of either the Company or the Bank. The following descriptions of
applicable statutes and regulations are not intended to be complete
descriptions of these provisions or their effects on the Company and the
Bank, but are brief summaries which are qualified in their entirety by
reference to such statutes and regulations.
The Company and the Bank are subject to extensive periodic reporting
requirements concerning financial and other information. In addition, the
Bank and the Company must file such additional reports as the regulatory
and supervisory authorities may require. The Company also is subject to
the reporting and other dictates of the Securities Exchange Act of 1934, as
amended.
The Company is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding
company, the Company is regulated by the Board of Governors of the Federal
Reserve System (the "FRB"), and also is subject to certain laws of the
State of Rhode Island.
The Bank is a Rhode Island chartered non-member bank of the Federal
Reserve System. The Bank's deposits are insured by the Bank Insurance Fund
(the "BIF") of the FDIC. Accordingly, the Bank is subject to the
supervision and regulation of the FDIC and the Rhode Island Department of
Business Regulation (the "Department of Business Regulation").
Rhode Island Regulation
As a state chartered financial institution, the Bank is subject to
the continued regulation and supervision and periodic examination by the
Department of Business Regulation. Rhode Island law also imposes reporting
requirements on the Bank. Rhode Island statutes and regulations govern
among other things, investment powers, deposit activity, trust powers and
borrowings. The approval of the Department of Business Regulation is
required to establish, close or relocate a branch, merge with other banks,
amend the Bank's Charter or By-laws and undertake certain other enumerated
activities.
If it appears to the Department of Business Regulation that a Rhode
Island bank has violated its charter, or any law or regulation, or is
conducting its business in an unauthorized or unsafe manner, or that the
bank has been notified by its federal insurer of such insurer's intent to
terminate deposit insurance, the Director of the Department of Business
Regulation (the "Director") may, under certain circumstances, restrict the
withdrawal of deposits, order any person to cease violating any Rhode
Island statutes or rules and regulations or cease engaging in any unsafe,
unsound or deceptive banking practice, order that capital be restored, or
suspend or remove directors, committee members, officers or employees who
have violated the Rhode Island banking statutes, or a rule or regulation or
order thereunder, or who are reckless or incompetent in the conduct of the
bank's business.
Rhode Island law also requires any person or persons desiring to
acquire control of any Rhode Island financial institution in any manner to
make an application with the Director. For the purposes of the statute,
"Control" has the meaning set forth in the BHC Act. The application
requires, among other things, information regarding the financial condition
of the bank, personal business history of the persons involved in the
transaction, terms and conditions of the proposed transaction, the source
of funds used in the acquisition and any plans to liquidate the bank after
the acquisition. The Director may disapprove the acquisition if the
proposed transaction would result in a monopoly, the financial condition of
any acquiring person might jeopardize the financial stability of the
institution, the competence of the proposed
<PAGE> 8
management indicates that it would not be in the interest of the
depositors, or the acquisition would not promote public convenience and
advantage.
In addition, whenever the Department of Business Regulation considers
it advisable, an examination of a Rhode Island bank holding company, such
as the Company, may be conducted. Every Rhode Island bank holding company
also must file an annual financial report with the Department of Business
Regulation which may be a copy of the annual report prepared for the FRB.
The Company also is subject to the Rhode Island Business Combination
Act.
Federal Supervision: FDIC
Overview. The FDIC issues rules and regulations, conducts periodic
inspections, requires the filing of certain reports and generally
supervises the operations of its insured state chartered banks, that, like
the Bank, are not members of the Federal Reserve System. The FDIC's powers
have been enhanced in recent years by federal legislation. With the
passage of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989, the Crime Control Act of 1990, and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), federal bank regulatory
agencies, including the FDIC, were granted substantially broader
enforcement powers to restrict the activities of financial institutions and
to impose or seek the imposition of increased civil and/or criminal
penalties upon financial institutions and the individuals who manage or
control such institutions.
The Bank is subject to the FDIC regulatory capital requirements. An
FDIC-insured bank also must conform to certain standards, limitations, and
collateral requirements with respect to certain transactions with
affiliates such as the Company. Further, an FDIC-insured bank is subject
to laws and regulations that limit the amount of, and establish required
approval procedures, reporting requirements and credit standards with
respect to, loans and other extensions of credit to officers, directors and
principal shareholders of the Company, the Bank, and any subsidiary of the
Bank, and to their related interests. FDIC approval also is required prior
to the Bank's redemption of any stock. The prior approval of the FDIC or,
in some circumstances, another regulatory agency, is required for mergers
and consolidations. In addition, notice to the FDIC is required prior to
the closing of any branch office, and the approval of the FDIC is required
in order to establish or relocate a branch facility.
Proceedings may be instituted against any FDIC-insured bank, or any
officer or director or employee of such bank and any other institution
affiliated parties who engage in unsafe and unsound practices, breaches of
any fiduciary duty, or violations of applicable laws, regulations,
regulatory orders and agreements. The FDIC has the authority to terminate
insurance of accounts, to issue orders to cease and desist, to remove
officers, directors and other institution affiliated parties, and to impose
substantial civil money penalties.
Deposit Insurance. The Bank's deposits are insured by the BIF of the
FDIC to the legal maximum of $100,000 for each separately insured
depositor. The Federal Deposit Insurance Act provides that the FDIC shall
set deposit insurance assessment rates on a semiannual basis and requires
the FDIC to increase deposit insurance assessments whenever the ratio of
BIF reserves to insured deposits in the BIF is less than 1.25%.
The FDIC has established a risk-based bank assessment system the
rates of which are determined on the basis of a particular institution's
supervisory rating and capital level. The assessment system is based upon
three supervisory categories and three capital categories, resulting in
risk-based premiums which range from the current 0 basis points (subject to
a $2,000 minimum annual fee) for the most highly-rated, well-capitalized
banks to 27 basis points per $100 of domestic deposits for troubled banks
which are undercapitalized (as discussed below). The Bank currently pays
the minimum assessment.
The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines that the institution had
engaged in or is engaging in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations, or has violated any applicable
law, regulation, order or any condition imposed in writing by, or written
agreement with, the FDIC.
Capital Adequacy. FDIC-insured institutions must meet specified
minimal capital requirements and are subject to varying regulatory
restrictions based upon their capital levels. All banks are subject to
restrictions on capital distributions (such as dividends, stock repurchases
and redemptions) and payment of management fees if, after making such
distributions or payment, the institution would be undercapitalized. FDIC-
insured banks that have the highest regulatory rating and are
<PAGE> 9
not anticipating or experiencing significant growth are required to
maintain a leverage capital ratio (calculated using Tier 1 capital, as
defined below, to total assets) of at least 3.0%. All other banks are
required to maintain a minimum leverage capital ratio of 1.0% to 2.0% above
3.0%, with a minimum of 4.0%.
In addition, the FDIC has adopted capital guidelines based upon
ratios of a bank's capital to total assets adjusted for risk, which require
FDIC-insured banks to maintain a total capital-to-risk weighted assets
ratio ("Risk-Based Capital Ratio") of at least 8.0% and a Tier 1 Risk-Based
Capital Ratio of at least 4.0%. The guidelines provide a general framework
for assigning assets and off-balance sheet items (such as standby letters
of credit) to broad risk categories and provide procedures for the
calculation of the Risk-Based Capital Ratio. Tier 1 (sometimes referred to
as "core") capital consists of common shareholders' equity, qualifying,
non-cumulative perpetual preferred stock, and minority interests in the
equity accounts of consolidated subsidiaries. "Supplementary" or Tier 2
capital includes perpetual debt, mandatory convertible debt securities, a
limited amount of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves. Certain intangible assets are deducted in
computing the Capital Ratios.
Prompt Corrective Action Provisions. In order to resolve the
problems of undercapitalized institutions, FDICIA established a system
known as "prompt corrective action." Under prompt corrective action
provisions and implementing regulations, every institution is classified
into one of five categories reflecting the institution's capitalization.
These categories are the following: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. For an institution to be well capitalized, it
must have a total Risk-Based Capital Ratio of at least 10%, a Tier 1 Risk-
Based Capital Ratio of at least 6% and a Tier 1 leverage ratio of at least
5% and not be subject to any specific capital order or directive. In
contrast, an institution will be deemed to be significantly
undercapitalized if it has a total Risk-Based Capital Ratio that is less
than 6%, or a Tier 1 Risk-Based Capital Ratio that is less than 3%, or a
leverage ratio that is less than 3%, and will be deemed to be critically
undercapitalized if the bank has a ratio of tangible equity to total assets
that is equal to or less than 2%. As of December 31, 2001, the Bank's Tier
1 leverage ratio was 5.84%, its total Risk-Based Capital Ratio was 10.97%
and its Tier 1 Risk-Based Capital Ratio was 9.72%. Based upon the above
ratios, the Bank is considered "well capitalized" for regulatory capital
purposes.
The activities in which a depository institution may engage and the
remedies available to federal regulators vary depending upon the category
described above into which an institution's level of capital falls. At
each successive downward capital level, institutions are subject to more
restrictions on their activities. For example, only "well capitalized"
institutions may accept brokered deposits without prior regulatory approval
(brokered deposits are defined to include deposits with an interest rate
which is 75 basis points above prevailing rates paid on similar deposits in
an institution's normal market area).
The FDIC has broad powers to take prompt corrective action to resolve
problems of insured depository institutions, depending upon a particular
institution's level of capital. A bank which does not meet applicable
minimum capital requirements or is deemed to be in a "troubled" condition
may be subject to additional restrictions, including a requirement of
written notice to federal regulatory authorities prior to certain proposed
changes in senior management or directors of the institutions, and a
general prohibition on acceptance, renewal or rollover of brokered
deposits. Also, undercapitalized, significantly undercapitalized and
critically undercapitalized institutions are subject to a number of other
requirements and restrictions. Such institutions also are required to
submit and implement capital restoration plans acceptable to the
appropriate federal banking regulator and are subject to increased
regulatory monitoring. Once an institution becomes significantly
undercapitalized, regulators must take certain actions. A critically
undercapitalized institution must be placed in conservatorship or
receivership unless certain stringent conditions are satisfied. Failure to
meet the minimum regulatory capital requirements could subject a banking
institution to a variety of enforcement remedies, including the termination
of deposit insurance by the FDIC and seizure of the institution.
Safety and Soundness Standards. The Federal Deposit Insurance Act,
as amended, directs each federal banking agency to prescribe standards for
safety and soundness for insured depository institutions and their holding
companies relating to operations, management, asset quality, earnings and
stock valuation.
Examination. FDIC requires that nearly all insured depository
institutions have annual, on-site regulatory examinations and annual audits
by an independent public accountant. Management must prepare an annual
report, attested to by the independent public accountant, confirming
management's responsibility in preparing financial statements, maintaining
internal controls for financial reporting and complying with safety and
soundness standards. The audit process must be overseen by an independent
audit committee composed of outside directors, provided that the federal
banking agencies may permit the committee to include inside directors if
the bank is unable to find competent outside directors, so long as outside
directors comprise a majority of the committee.
<PAGE> 10
Federal Supervision: FRB
The BHC Act mandates that the prior approval of the FRB must be
obtained in order for the Company to engage in certain activities such as
acquiring or establishing additional banks or non-banking subsidiaries or
merging with other institutions.
In addition to the need for obtaining the approval of the FRB for
particular kinds of transactions, a bank holding company is required by the
FRB to adhere to certain capital adequacy standards. It is the position of
the FRB that a bank holding company, such as the Company, should be a
source of financial strength to its subsidiary banks such as the Bank. 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 for holding
companies, like the Company, with consolidated assets in excess of $150
million. If a bank holding company's capital levels fall below the minimum
requirements established by the capital adequacy guidelines, the holding
company will be expected to develop and implement a plan, acceptable to the
FRB, to achieve adequate levels of capital within a reasonable time. Until
such capital levels are achieved, the holding company may be denied
approval by the FRB for certain activities such as those described in the
preceding paragraph. As of December 31, 2001, on a consolidated basis, the
Company's Tier 1 Leverage Ratio was 5.93%, its total Risk-Based Capital
Ratio was 11.10% and its Tier 1 Risk-Based Capital Ratio was 9.86%. Based
upon the above ratios, the Company is considered "well capitalized" for
regulatory capital purposes.
Restrictions on Transactions with Affiliates and Insiders
The Bank is subject to certain federal statutes limiting transactions
with non-banking affiliates and insiders. Section 23A of the Federal
Reserve Act limits loans or other extensions of credit to, asset purchases
with and investments in affiliates of the Bank, such as the Company, to ten
percent (10%) of the Bank's capital and surplus. Further, such loans and
extensions of credit, as well as certain other transactions, are required
to be secured in specified amounts. Section 23B of the Federal Reserve
Act, among other things, requires that certain transactions between the
Bank and its affiliates must be on terms substantially the same, or at
least as favorable to the Bank, as those prevailing at the time for
comparable transactions with or involving other nonaffiliated persons. In
the absence of comparable transactions, any transaction between the Bank
and its affiliates must be on terms and under circumstances, including
credit standards that in good faith would be offered to or would apply to
nonaffiliated persons.
The restrictions on loans to officers, directors, principal
shareholders and their related interests (collectively referred to herein
as "insiders") contained in the Federal Reserve Act and Regulation O apply
to all institutions and their subsidiaries. These restrictions include
limits on loans to one borrower and conditions that must be met before such
loans can be made. Loans made to insiders and their related interests
cannot exceed the institution's total unimpaired capital and surplus.
Insiders are subject to enforcement actions for knowingly accepting loans
in violation of applicable restrictions. All extensions of credit by the
Bank to its insiders are in compliance with these restrictions and
limitations.
Loans outstanding to executive officers and directors of the Bank,
including their immediate families and affiliated companies ("related
parties"), aggregated $5.5 million at December 31, 2001 and $6.4 million at
December 31, 2000. Loans to related parties are made in the ordinary
course of business under normal credit terms, including interest rates and
collateral, prevailing at the time of origination for comparable
transactions with other persons, and do not represent more than normal
credit risk.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 facilitates the interstate expansion and consolidation of banking
organizations by permitting (i) bank holding companies such as the Company,
that are adequately capitalized and managed, to acquire banks located in
states outside their home states regardless of whether such acquisitions
are authorized under the law of the host state, (ii) the interstate merger
of banks after June 1, 1997, subject to the right of individual states to
"opt in" early or "opt out" of this authority prior to such date, (iii)
banks to establish new branches on an interstate basis provided that such
action is specifically authorized by the law of the host state, (iv)
foreign banks to establish, with approval of the appropriate regulators in
the United States, branches outside their home states to the same extent
that national or state banks located in such state would be authorized to
do so and (v) banks to receive deposits, renew time deposits, close loans
and receive payments on loans and other obligations as agent for any bank
or thrift affiliate, whether the affiliate is located in the same or
different state. Rhode Island adopted "opt in" legislation, which permits
full interstate banking acquisition and branching.
<PAGE> 11
Gramm-Leach-Bliley Act
On November 12, 1999 the Gramm-Leach-Bliley Act (the "G-L-B Act")
became law, repealing the 1933 Glass-Steagall Act's separation of the
commercial and investment banking industries. The G-L-B Act could have a
far-reaching impact on the financial services industry. The G-L-B Act
expands the range of non-banking activities that certain bank holding
companies may engage in while preserving existing authority for bank
holding companies to engage in activities that are closely related to
banking. In order to engage in these new non-banking activities, a bank
holding company must qualify and register with the FRB as a "financial
holding company" by demonstrating that each of its banking subsidiaries is
"well capitalized" and "well managed" and has a rating of "Satisfactory" or
better under the Community Reinvestment Act of 1977.
Under the G-L-B Act and its implementing regulations, financial
holding companies may engage in any activity that (i) is financial in
nature or incidental to a financial activity under the G-L-B Act or (ii) is
complementary to a financial activity and does not impose a substantial
risk to the safety and soundness of depository institutions or the
financial system generally. The G-B-L Act and its accompanying regulations
specify certain activities that are financial in nature such as acting as
principal, agent or broker for insurance; underwriting, dealing in or
making a market in securities; and providing financial and investment
advice. The new financial activities authorized by the G-L-B Act may also
be engaged in by a "financial subsidiary" of a national or state bank,
except for insurance or annuity underwriting, insurance company portfolio
investments, real estate investments and development and merchant banking,
which must be conducted in a financial holding company. The FRB and the
Secretary of the Treasury have the authority to decide whether other
activities are also financial in nature or incidental thereto, taking into
account changes in technology, changes in the banking marketplace,
competition for banking services and other pertinent factors. Although the
Company may meet the qualifications to become a financial holding company,
it has no current plans to elect such status.
The G-L-B Act establishes a system of functional regulation, under
which the federal banking agencies will regulate the banking activities of
financial holding companies and banks' financial subsidiaries, the U.S.
Securities and Exchange Commission will regulate their securities
activities and state insurance regulators will regulate their insurance
activities. In addition, the G-L-B Act provides new protections against
the transfer and use by financial institutions of consumers' nonpublic,
personal information. The G-L-B Act also contains a variety of additional
provisions, which, among others, impose additional regulatory requirements
on certain depository institutions and reduce certain other regulatory
burdens, modify the laws governing the Community Reinvestment Act of 1977,
and address a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
At this time, the Company is unable to predict the impact of the G-L-
B Act on its future operations. In granting other types of financial
institutions more flexibility, the G-L-B Act may increase the number and
type of institutions engaging in the same or similar activities as those of
the Company and the Bank, thereby creating a more competitive atmosphere.
However, management believes legislation and implementing regulations are
likely to have a more immediate impact on regional and national holding
companies and banks than on community-based institutions engaged
principally in traditional banking activities.
Other Aspects of Federal and State Laws
Community Reinvestment Act. The Community Reinvestment Act of 1977
("CRA") and the regulations issued thereunder are intended to encourage
banks to help meet the credit needs of their service area, including low
and moderate income neighborhoods, consistent with the safe and sound
operations of the banks. Under CRA, banks are rated on their performance
in meeting these credit needs and the rating of a bank's performance is
public. In connection with the filing of an application to conduct certain
transactions, the CRA performance record of the banks involved are
reviewed. Under the Bank's last CRA examination, the Bank received a
"Satisfactory" rating.
USA Patriot Act. The USA Patriot Act of 2001 (the "Patriot Act"),
designed to deny terrorists and others the ability to obtain anonymous
access to the United States financial system, has significant implications
for depository institutions, brokers, dealers and other businesses involved
in the transfer of money. The Patriot Act mandates or will require
financial institutions to implement additional policies and procedures with
respect to, or additional measures designed to address, any or all of the
following matters, among others: money laundering; suspicious activities
and currency transaction reporting; and currency crimes.
<PAGE> 12
Insurance Sales. Rhode Island legislation enacted in 1996 permits
financial institutions to participate in the sale of insurance products,
subject to certain restrictions and license requirements. The regulatory
approvals required from the Department of Business Regulation and the FDIC
depend upon the form and structure used to engage in such activities.
Miscellaneous. The Company and/or the Bank also are subject to
federal and state statutory and regulatory provisions covering, among other
things, reserve requirements, security procedures, currency and foreign
transactions reporting, insider and affiliated party transactions,
management interlocks, loan interest rate limitations, truth-in-lending,
electronic funds transfers, funds availability, truth-in-savings, home
mortgage disclosure, and equal credit opportunity.
Effect of Governmental Policy
The Company's revenues consist of cash dividends paid to it by the
Bank. Such payments are restricted pursuant to various state and federal
regulatory limitations. Banking is a business that depends heavily on
interest rate differentials. One of the most significant factors affecting
the Bank's earnings is the difference between the interest rates paid by
the Bank on its deposits and its other borrowings, on the one hand, and, on
the other hand, the interest rates received by the Bank on loans extended
to its customers and on securities held in the Bank's portfolio. The value
and yields of its assets and the rates paid on its liabilities are
sensitive to changes in prevailing market rates of interest. Thus, the
earnings and growth of the Bank will be influenced by general economic
conditions, the monetary and fiscal policies of the federal government, and
policies of regulatory agencies, particularly the FRB, which implement
national monetary policy. The nature and impact on the Bank of any future
changes in such policies cannot be predicted.
<PAGE> 13
ITEM 2. PROPERTIES
The Bank presently has a network of 13 branch offices located in
Providence and Kent counties. Five of these office facilities are owned
and eight are leased. Facilities are generally leased for a period of one
to ten years with renewal options. The termination of any short-term lease
would not have a material adverse effect on the operations of the Bank.
The Company's offices are in good physical condition and are considered
adequate to meet the banking needs of the Bank's customers.
The following are the locations of the Bank's offices:
<TABLE>
<CAPTION>
Size Year Opened Owned or Lease
Location (Square feet) or Acquired Leased Expiration Date
- -------- ------------- ----------- -------- ---------------
<s> <c> <c> <c> <c>
1047 Park Avenue, Cranston, RI 4,700 1996 Owned N.A.
383 Atwood Avenue, Cranston, RI 4,700 1996 Owned N.A.
999 South Broadway, East Providence, RI 10,500 1996 Owned N.A.
195 Taunton Avenue, East Providence, RI 3,100 1996 Leased 2/28/03
1440 Hartford Avenue, Johnston, RI 4,700 1996 Land Leased 12/31/02
One Turks Head Place, Providence, RI (branch) 5,000 1996 Leased 4/30/09
One Turks Head Place, Providence, RI (offices) 18,400 1999 Leased 6/30/09
165 Pitman Street, Providence, RI 3,300 1998 Leased 10/18/08
445 Putnam Pike, Smithfield, RI 3,500 1996 Leased 7/31/09
1062 Centerville Road, Warwick, RI 2,600 1996 Owned N.A.
1300 Warwick Avenue, Warwick, RI 4,200 1996 Leased 6/30/04
233 Lambert Lind Highway, Warwick, RI 4,800 1996 Leased tenant at will
2975 West Shore Road, Warwick, RI 3,500 2000 Leased 3/31/10
1175 Cumberland Hill Road, Woonsocket, RI 3,100 1998 Owned N.A.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved only in routine litigation incidental to the
business of banking, none of which the Company's management expects to have
a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the
fourth quarter of 2001.
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by
reference to the Section entitled "Market for the Company's Common Stock
and Related Stockholder Matters" contained on page 80 of the Company's 2001
Annual Report to Shareholders filed as Exhibit 13 to this Annual Report on
Form 10-K.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item is incorporated herein by
reference to the Section entitled "Selected Consolidated Financial Data"
contained on pages 18 through 19 of the Company's 2001 Annual Report to
Shareholders filed as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by
reference to the Section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained on pages 20
through 43 of the Company's 2001 Annual Report to Shareholders filed as
Exhibit 13 to this Annual Report on Form 10-K.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the Section entitled "Asset and Liability Management"
contained on pages 39 through 41 of the Company's 2001 Annual Report to
Shareholders filed as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by
reference to the Consolidated Balance Sheets as of December 31, 2001 and
2000 and the Consolidated Statements of Operations, Consolidated Statements
of Changes in Shareholders' Equity and Consolidated Statements of Cash
Flows for each of the years in the three-year period ended December 31,
2001, together with the accompanying notes and the Independent Auditors'
Report contained on pages 45 through 77 of the Company's 2001 Annual Report
to Shareholders filed as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING OR
FINANCIAL DISCLOSURE
There were no changes in, or disagreements with, accountants on
accounting or financial disclosure as defined by Item 304 of Regulation S-K.
<PAGE> 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The director information required by this item is incorporated herein
by reference to the Sections entitled "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's
Definitive Proxy Statement for the 2001 Annual Meeting of Shareholders to
be filed with the SEC.
The following table sets forth the executive officers of the Company
as of the date hereof.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<s> <c> <c>
Merrill W. Sherman 53 President and Chief Executive Officer
Albert R. Rietheimer 45 Chief Financial Officer and Treasurer
Donald C. McQueen 45 Vice President and Assistant Secretary
Margaret D. Farrell 52 Secretary
James V. DeRentis 40 Bank Executive Vice President - Retail Banking
</TABLE>
Merrill W. Sherman. Ms. Sherman has served as President and Chief
Executive Officer of the Company and Bank since their formation. Ms.
Sherman is also a director of the Providence and Worcester Railroad Company
and The Providence Journal Company, a BELO subsidiary.
Albert R. Rietheimer. Mr. Rietheimer has served as Chief Financial
Officer and Treasurer of the Company since its formation and of the Bank
since September 1996. Mr. Rietheimer is a certified public accountant.
Donald C. McQueen. Mr. McQueen has served as Vice President and
Assistant Secretary of the Company since its formation and as the Bank's
Executive Vice President and Chief Credit and Administrative Officer since
October 2001. From May 1998 through October 2001, Mr. McQueen served as
the Bank's Executive Vice President and Chief Lending Officer and from 1996
through May 1998, Mr. McQueen served as the Bank's Senior Vice President -
Credit Administration.
Margaret D. Farrell. Ms. Farrell has served as Secretary of the
Company and Bank since their formation. Ms. Farrell has been a partner of
the law firm of Hinckley, Allen & Snyder LLP since 1981. Ms. Farrell is
also a director of the Company and the Bank.
James V. DeRentis. Mr. DeRentis has served as the Bank's Executive
Vice President - Retail Banking since October 2001. Immediately prior, Mr.
DeRentis served as the Bank's Senior Vice President - Retail Banking from
December 1998 through October 2001. From 1996 through 1998, Mr. DeRentis
was a Vice President in the Bank's Retail Group.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Section entitled "Executive Compensation" in the Company's
Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to
be filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the Section entitled "Common Stock Ownership of Certain
Beneficial Owners and Management" in the Company's Definitive Proxy
Statement for the 2002 Annual Meeting of Shareholders to be filed with the
SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the Section entitled "Transactions with Management" in the
Company's Definitive Proxy Statement for the 2002 Annual Meeting of
Shareholders to be filed with the SEC.
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements contained within the
Company's 2001 Annual Report to Shareholders are incorporated herein
by reference in Item 8.
1. Independent Auditors' Report
2. Consolidated Balance Sheets as of December 31, 2001 and
2000
3. Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999
4. Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 2001, 2000 and
1999
5. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999
6. Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<c> <s>
3.1 Articles of Incorporation of the Company, as amended (1)
3.2 By-laws of the Company (1)
10.1 Employment Agreement of Merrill W. Sherman dated December 18, 2000 (3) +
10.2 Employment Agreement of Albert R. Rietheimer dated December 18, 2000 (3) +
10.3 Employment Agreement of Donald C. McQueen dated December 18, 2000 (3) +
10.4 Employment Agreement of James V. DeRentis dated December 18, 2000 (3) +
10.5 Amended and Restated 1996 Incentive and Nonqualified Stock Option Plan (3) +
10.6 Amended and Restated Non-Employee Director Stock Plan (2) +
<PAGE> 17
(3) Exhibits (continued)
<CAPTION>
Exhibit No. Description
----------- -----------
<c> <s>
10.7 (a) Bank Rhode Island Supplemental Executive Retirement Plan,
as amended by Amendments No. 1 and No. 2 (1) +
10.7 (b) Amendment No. 3 to Bank Rhode Island Supplemental
Executive Retirement Plan (3) +
10.7 (c) Amendment No. 4 to Bank Rhode Island Supplemental
Executive Retirement Plan +
10.8 Bank Rhode Island Nonqualified Deferred Compensation Plan, as
amended by Amendment No. 1 (1) +
10.9 Warrant for 136,315 shares of Common Stock issued to Fleet
Financial Group, Inc. (1)
10.10 CEO Deferred Compensation Agreement by and between Bank
Rhode Island and Merrill W. Sherman (4) +
10.11 Restricted Stock Agreement by and among Bancorp Rhode
Island, Inc., Bank Rhode Island and Merrill W. Sherman (4) +
11 Computation of earnings per share (5)
13 Annual Report to Shareholders for 2001, portions of which have
been incorporated by reference herein are filed with the Commission. Those
portions which have not been incorporated by reference herein are provided
for information purposes only.
21 List of Subsidiaries
23 Consent of KPMG LLP, as accountants for the Company
<FN>
- --------------------
<F1> Incorporated by reference from the Company's Registration Statement
on Form S-4, SEC File No. 333-33182
<F2> Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2000.
<F3> Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
<F4> Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended March 31, 2001.
<F5> The calculation of earnings per share is set forth as Note 20 to the
Company's audited consolidated financial statements. The Company's
audited consolidated financial statements are filed herewith as part
of Exhibit 13.
+ Management contract or compensatory plan or arrangement.
</FN>
</TABLE>
(b) Reports on Form 8-K
Current Report on Form 8-K dated November 23, 2001, announcing that
due to a recent FASB accounting interpretation, the Company no longer
believed that it would be able to eliminate $1.2 million of annual
goodwill amortization beginning January 1, 2002 as stated in previous
SEC filings and earlier announcements.
<PAGE> 18
BANCORP RHODE ISLAND, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BANCORP RHODE ISLAND, INC.
Date: March 25, 2002 By: /s/ Merrill W. Sherman
--------------------------------
Merrill W. Sherman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Merrill W. Sherman /s/ Albert R. Rietheimer
- ----------------------------------- ------------------------------------
Merrill W. Sherman, Albert R. Rietheimer,
President, Chief Executive Officer Chief Financial Officer and
and Director (Principal Executive Treasurer (Principal Financial
Officer) and Accounting Officer)
Date: March 25, 2002 Date: March 25, 2002
/s/ Karen Adams /s/ Anthony F. Andrade
- ----------------------------------- ------------------------------------
Karen Adams, Director Anthony F. Andrade, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ John R. Berger /s/ Malcolm G. Chace
- ----------------------------------- ------------------------------------
John R. Berger, Director Malcolm G. Chace, Director and
Date: March 25, 2002 Chairman of the Board
Date: March 25, 2002
/s/ Ernest J. Chornyei, Jr. /s/ Karl F. Ericson
- ----------------------------------- ------------------------------------
Ernest J. Chornyei, Jr., Director Karl F. Ericson, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ Margaret D. Farrell /s/ Mark R. Feinstein
- ----------------------------------- ------------------------------------
Margaret D. Farrell, Director Mark R. Feinstein, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ F. James Hodges, Jr. /s/ Edward J. Mack
- ----------------------------------- ------------------------------------
F. James Hodges, Jr., Director Edward J. Mack, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ Donald J. Reaves /s/ Cheryl W. Snead
- ----------------------------------- ------------------------------------
Donald J. Reaves, Director Cheryl W. Snead, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ John A. Yena
- -----------------------------------
John A. Yena, Director
Date: March 25, 2002
<PAGE> 19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>bri-x107.txt
<DESCRIPTION>EXHIBIT 10.7(C)
<TEXT>
EXHIBIT 10.7(c)
BANK RHODE ISLAND
AMENDMENT NO. 4 TO
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, Bank Rhode Island (the "Bank") has adopted a Supplemental
Executive Retirement Plan (the "Plan"); and
WHEREAS, under Section 6.3 of the plan, payments made to any
participant under the Plan resulting from a Change of Control will be
reduced to the extent necessary so that the participant shall not be liable
for federal excise taxes on such payment; and
WHEREAS, on December 18, 2001 the Board of Directors of the Bank has
approved amending Section 6.3 of the Plan in order to provide that the Bank
will pay any federal excise taxes that become due in connection with a
Change in Control and any additional taxes incident thereto;
NOW, THEREFORE, the Plan is amended as follows:
1. Section 6.3 of the Plan be amended in its entirety to read as
set forth below:
"6.3 Excise Tax Equalization Payment. In the event that the
Participant becomes entitled to a payment under this Section 6
("Change of Control Payment") that will be subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Internal Revenue Code
(or any similar tax that may hereafter be imposed), then the Bank
shall pay to Participant in cash an additional amount (the "Gross-Up
Payment") such that the net amount retained by Participant after
deduction of any Excise Tax upon the Change of Control Payment and
any Federal, state and local income tax and excise tax upon the
Gross-Up Payment provided for by this Section 6.3 (including FICA and
FUTA), shall be equal to the Change of Control Payment. Such payment
shall be made by the Bank to the Participant as soon as practical
following any Change of Control, but in no event beyond thirty (30)
days from such date. For the purposed of this Section 6.3 all
defined terms shall be given the meanings provided herein."
2. All other provisions of the Plan shall remain in full force
and effect and are hereby ratified, approved and confirmed.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 4 to
the Supplemental Executive Retirement Plan to be executed by its duly
authorized officer as of the 18th day of December, 2001.
BANK RHODE ISLAND
By: s/Malcolm G. Chace
---------------------------
Malcolm G. Chace,
Chairman
Attest:
s/Margaret D. Farrell
- -----------------------------
Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>bri-x13.txt
<DESCRIPTION>EXHIBIT 13 ANNUAL REPORT
<TEXT>
Exhibit 13
2001
ANNUAL
REPORT
BancorpRI
<PAGE>
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the Company's
Form 10-K for the year ended December 31, 2001. The Company has no
significant operating entities other than Bank Rhode Island, therefore
substantially all of the discussion in this document relates to the
operations of the Bank.
<PAGE>
BANCORP RHODE ISLAND, INC. -- 2001: THE GROWTH CONTINUES
[PHOTO] Bank Rhode Island launched its first image campaign in
2001. The Bank's core message, "We treat your business
like big business," reached hundreds of thousands of
Rhode Islanders through local television, radio, print
ads and billboards.
In June, the Company's President & CEO Merrill W. [PHOTO]
Sherman joined the likes of Ben Cohen and Jerry
Greenfield of Ben & Jerry's, Jim Koch of the
Boston Beer Company and Leon Gorman of L.L. Bean,
Inc. when she was named one of Ernst & Young's
New England Entrepreneurs of the Year.
[CHART]
1997 $114.7 Bank Rhode Island continued its strong commercial loan
1998 $134.0 growth in 2001. Total commercial loan outstandings
1999 $174.5 reached $239 million, a better than 12 percent increase
2000 $212.8 over 2000 in what was widely acknowledged to be a very
2001 $239.4 challenging business environment.
(In millions)
Bank Rhode Island unveiled a new concept in branch [PHOTO]
design with its new Xcel branch in Cranston. The
branch combines the best in convenience, service
and technology and will serve as a cornerstone of
the Bank's retail distribution strategy.
<PAGE> 1
To Our Shareholders:
In 2001 we continued the strategy, vision and focus which has helped make
Bank Rhode Island the success that it is today.
We continued to build a sophisticated product mix not often found at a bank
our size. We continued our commitment to providing our customers with an
unparalleled level of service. And we continued to post strong financial
results, as we remained focused on our ultimate goal, creating shareholder
value.
In 1996 we set out to fill a void in the marketplace. Consolidation had
polarized the banking landscape in the greater Providence area, with very
large institutions on one side and very small ones on the other. We
believed that a mid-sized, commercially oriented bank could thrive,
providing a product range not available at one end of the banking spectrum,
and a high level of personal service not found at the other.
Bank Rhode Island's results have proven that founding philosophy sound.
Since we opened our doors nearly six years ago, our total assets have
climbed more than 85 percent and total deposits are up almost 60 percent.
We've posted 10 straight quarters of record earnings and our net income is
80 percent higher than it was in our first full year of operations.
[SIDEBAR]
TV Advertising Bank Rhode Island stepped up its advertising efforts in
2001, launching its first-ever image campaign. The campaign included the
use of billboards, newspaper advertising, radio spots and the Bank's first
television commercial. The campaign was designed to position Bank Rhode
Island as one of the top banks in the State. The ads placed the Bank in the
company of the two largest banking competitors in the marketplace, and then
differentiated Bank Rhode Island from its competitors with the slogan, "We
treat your business like big business." The campaign successfully raised
the Bank's profile among both personal and business customers.
<PAGE> 2
We've built a solid reputation in the marketplace and have taken a
disparate mix of retail outlets and turned them into a competitive force in
the Rhode Island banking arena.
[PHOTO] [CHART]
1997 $464.9
1998 $500.7
1999 $513.4
2000 $631.6
2001 $670.4
(In millions)
Total Deposits
[CHART]
1997 $533.0
1998 $596.0
1999 $632.0
2000 $739.4
2001 $862.3
(In millions)
Total Assets
<PAGE> 3
[CHART]
1997 $ .75
1998 $ .85
1999 $1.14
2000 $1.49
2001 $1.62
EPS
[CHART]
1997 $1.03
1998 $1.07
1999 $1.34
2000 $1.69
2001 $1.81
EPS (Cash)
Our accomplishments are a testament to the hard work of everyone at Bank
Rhode Island. The dedication, skill and commitment of our employees are
what enable us to distinguish ourselves from our competitors. Their efforts
are why we were able to continue our success in 2001.
For the third straight year we posted double-digit earnings growth as net
income climbed 12 percent to $6.3 million. We also saw a 9 percent increase
in our diluted earnings per share, which reached $1.62. On a cash basis,
diluted EPS topped $1.81.
Driving EPS growth has always been a primary goal. The earnings per share
we achieved this year represents a 116 percent increase over our 1997
results. The increase in EPS reflects the overall profitable growth of the
Bank, which allowed us to begin paying dividends in 1999. We are pleased
that we were able to increase the quarterly dividend to $0.13 per share
following the fourth quarter of 2001.
In 2001 we also added more than $122 million in assets, pushing total
assets to more than $862 million. Half that increase came from the overall
growth of the Bank. We also were able to take advantage of our new holding
company structure to participate in a trust preferred
<PAGE> 4
[CHART]
1997 $3.5 Net income
1998 $3.8 reached a
1999 $4.4 record
2000 $5.6 $6.3 million
2001 $6.3 in 2001, a
(In millions) 12.4 percent
Net Income increase over
2000.
pool early in the year, which gave us the capital necessary to expand our
assets by another $60 million.
Strong deposit and commercial loan growth once again highlighted our 2001
financial performance. Our deposits climbed more than $38 million in 2001
and commercial loan outstandings increased more than $26 million.
We continue to attract both personal and business customers alike, which
has been and continues to be the basis for profitable growth. Attracting
checking and savings deposits gives us a lower cost source of funds.
Attracting commercial loans provides us with higher yielding assets, and
growing the number of customers who use our products and services helps
drive noninterest income.
The impact of all these factors on earnings and profitability is why we
have spent so much time and energy over the last six years strengthening
our product mix, improving our franchise and building our reputation.
All of that work has given us an excellent foundation on which to further
grow Bank Rhode Island. We are now at a point where we can look to other
parts of the State for opportunities.
Earlier this year we announced plans to expand beyond our original
footprint. We will bring our sophisticated products and service-oriented
approach to Pawtucket and South County. We believe that the market demand
exists throughout the State for a commercially oriented, mid-sized bank
like ours, and that we can grow to be a $1.5 billion institution over the
coming years.
We believe these plans will allow us to continue our history of strong
across-the-board growth, adding to our deposit base, our commercial loan
portfolio and ultimately our profitability.
<PAGE> 5
[PHOTO]
[SIDEBAR]
Cash Management In 2001 Bank Rhode Island continued its commitment to
providing its business customers with an array of sophisticated products
and services. Through an expanded cash management program, the Bank now
offers its commercial customers all the tools they need to manage their
companies' finances quickly and efficiently.
Commercial services including overnight investment sweeps, account
reconciliation, ACH transfers, lock box, electronic data interchange, wire
transfers and zero balance accounting can be customized to meet the needs
of any business customer.
The Bank's ability to service these products out of its local operations
center gives it a competitive edge.
Add to those elements leasing, payroll and international trade services
provided through partnerships with some of the best companies in the
business, and Bank Rhode Island rivals the service offerings of its largest
competitors.
Commercial Lending
Nowhere has the depth of our product offering and the breadth of our
expertise proven to be more advantageous than in commercial lending.
Bank Rhode Island is a full service commercial bank. We can structure
financing for any business need, and can offer the financial management
tools needed to make a business run smoothly. We offer financing for
equipment needs and physical plant improvements, and have developed an
expertise in asset-based lending.
We've built a product mix atypical of an institution our size. Over the
years, we've added leasing services and international trade services
through third party providers. Last year, we introduced online banking,
which is now being used by 17 percent of our business checking customers.
And this year, we filled out our product offerings by expanding our cash
management services.
<PAGE> 6
[PHOTO]
We've put together a lending team that averages more than 15 years
experience, much of it at large financial institutions. We've structured
the department so that senior lenders are aligned with dedicated portfolio
managers and administrative staff. Customers not only have a senior officer
to meet their needs, but they also have a direct line of communication with
analytical and administrative staff who are familiar with their daily
operations. This level of service enhances our responsiveness and reflects
our high-touch relationship management culture.
[SIDEBAR]
Commercial Lending Commercial lending has always been a cornerstone of the
Bank's success and 2001 was no exception. Despite a slowing national and
regional economy, the Bank's commercial loan outstandings grew a solid 12
percent during the year, reaching more than $239 million.
The Bank continues to attract new business customers. Bank Rhode Island's
strong reputation in the marketplace, reinforced by the Bank's new
advertising campaign, helped bring 37 new large business lending
relationships to the Bank. Commercial Real Estate Lending had its second
best year ever as outstandings topped $100 million. And Small Business
Lending closed nearly 200 loans, pushing outstandings up more than 25
percent over year-end 2000.
All of that activity resulted in more than $350,000 in fees and has brought
commercial loan outstandings to almost three times the level they were when
the Bank opened in 1996.
<PAGE> 7
[SIDEBAR]
SUM(sm) Program In March of 2001, Bank Rhode Island joined the NYCE
Network's SUM program, giving its customers surcharge free access to over
2,800 ATMs throughout New England. The SUM program helps minimize ATM fees
for banking consumers by substantially increasing access across the region.
Participating financial institutions, nearly 500 in all, agree to provide
surcharge free ATM access to customers of other participating institutions.
Bank Rhode Island customers can now visit any ATM displaying the SUM logo
from Maine to Connecticut without incurring a surcharge fee.
[PHOTO]
Our commitment to building our commercial lending capacity has produced
tangible results. The Bank's commercial loan outstandings have nearly
tripled since we opened. In 2001 alone, total outstandings grew $26
million, a more than 12 percent increase. We've been able to grow all
aspects of our commercial base, adding significantly to our commercial and
industrial, commercial real estate and small business portfolio segments.
The success of our commercial lending area has allowed us to significantly
shift our asset mix, helping improve profitability. Commercial loans now
make up 39 percent of total loans, compared to 22 percent at inception.
[CHART]
Sweep 1998 $ 4.0
balances 1999 $14.6
topped $27 2000 $21.4
million at the 2001 $27.5
end of 2001, (In millions)
up 31 percent Sweep Balances
over 2000.
<PAGE> 8
Business Lending extended more than $43 million in commercial and
industrial loan commitments in 2001 and brought in 37 large lending
relationships to the Bank. And we remained the No. 3 U.S. Small Business
Administration (SBA) lender in the State, not only in the number of loans
but in dollar volume as well.
Commercial Real Estate had its second best year ever, booking $32 million
in loans and pushing outstandings past the $100-million mark. The group
funded real estate projects of a variety of sizes and types in 2001.
Projects included a $200,000 warehouse in Johnston, a $675,000 medical
office building in Cranston, a $3 million retail development in Coventry,
residential and office space construction in downtown Providence and multi-
family residential projects in Woonsocket and Central Falls.
[PHOTO]
[SIDEBAR]
BARI Investment Services The Bank took a major step forward in its non-
deposit investment program with the launching of BARI Investment Services
early in 2001.
The Bank brought the management of the program in house, retained a well-
respected third party provider to furnish the technical back office
support, and hired top-notch investment representatives to work throughout
the Bank's branch network.
The result has been a program that is fully integrated with the overall
sales and service philosophy of the Bank. Customers are getting
professional investment advice when it comes to stocks, bonds, annuities
and mutual funds, and are receiving the personal attention they've come to
expect from Bank Rhode Island. The revamped program helped push sales to
three times the level achieved in the year 2000.
<PAGE> 9
The group also funded more than $8 million in single-family construction
loans through its line of credit program for contractors. The program, in
its third year, has filled a financial need among residential builders in
Rhode Island and has allowed Bank Rhode Island to build relationships with
some of the premier residential construction firms in the State.
Our Small Business Lending group continued to meet the borrowing needs in
the under $250,000 market, making 192 loans for $11 million. Small Business
Lending has grown to over 10 percent of our commercial loan portfolio,
reaching $24 million at year-end.
[PHOTO]
[SIDEBAR]
Xcel Branch In the Fall, Bank Rhode Island unveiled a new branch concept
designed to attract customers through a unique combination of service,
technology and style.
The new Xcel branch combines the "best of breed" sales models from around
the country and incorporates popular service concepts implemented by Bank
Rhode Island in other parts of the State. The result is a customer-focused
retail environment that is unlike any other banking location in Rhode
Island.
The Xcel branch features overhead television monitors playing cable news, a
curved teller line that extends into the center of the branch, modern
furniture and innovative signage and marketing displays.
The design compliments a host of customer conveniences, including extended
hours, a 24-hour Automated Banking Center, Internet Kiosks and dedicated
areas for business banking and investment services.
<PAGE> 10
The Small Business Lending area has not only been a source of a growing
number of small loans, but it has become a pipeline for larger loans. A
number of small businesses eventually outgrow our small business lending
area. But their relationship with us, and the service they receive, prompt
them to rely on the Bank for their lending needs as they grow.
Retail Banking
In 2001 we launched a major effort to increase our market visibility in the
State. While we've had great success over the years attracting customers
with our service-oriented approach, our goal was to make Bank Rhode Island
top of mind among more Rhode Island consumers.
We launched a multi-faceted image campaign, including our first ever
television commercial. We sponsored high-profile events like the telecast
of the Bristol 4th of July
[MAP]
[SIDEBAR]
Expansion Bank Rhode Island plans to add three new branches in 2002 as it
looks to continue to grow its presence in the State.
The Bank will add a branch in Western Cranston over the Summer, giving it
three service locations in the third largest city in Rhode Island. It will
also look to new markets with branches targeted for Pawtucket and North
Kingstown by the end of the year.
The expansion will bring Bank Rhode Island's sophisticated, service-
oriented approach to a host of new personal and business customers and is a
key to continuing the Bank's history of strong deposit and commercial loan
growth.
<PAGE> 11
[SIDEBAR]
Technology
In 2001, Bank Rhode Island continued its commitment to bring the best in
service and convenience to its customers through technology.
Customers can now get instant approval on home equity loans and lines of
credit through the Bank's Fast Equity Online. That product, along with the
overall success of the Bank's online banking products, has pushed the
number of visits to the Bank's website up 36 percent in the last year
alone. The online product, which offers one of the best online cash
management systems in the area, has become a staple among the Bank's
business customers and has been integral to attracting new customers to the
Bank.
Ironically, Bank Rhode Island's relative youth and size sometimes
constitutes an advantage when it comes to technology. The Bank doesn't have
the patchwork of legacy systems that a number of its larger competitors
have. This can allow the Bank to be more nimble when it comes to employing
new technological solutions to meet customers' needs.
The Bank also made a major service commitment in the Fall with the
introduction of Image Checking Statements. The new system allows the Bank
to create a complete electronic history of every customer's checking
account. Customers now get electronic images of their checks, making
account balancing easier, accessing records more convenient and eliminating
the need to store bulky loose checks. Imaging also allows the Bank's
customer service representatives to retrieve customer information more
quickly and easily.
[PHOTO]
Parade, the oldest Independence Day parade in the country. And we developed
a comprehensive print campaign that consistently put the Bank Rhode Island
name in front of both personal and business customers.
Those efforts could not have been more successful. We elevated the public
perception of the Bank and were able to build upon our history of
impressive deposit growth.
Total deposits reached $670 million at the end of 2001. Our total deposits
have climbed 30 percent in the last two years, with most of that growth
coming in checking and savings deposits. Those deposits climbed $56 million
during the year, a 15 percent increase, and are up more than 48 percent
since the start of 2000.
We place a high value on growing these balances because they represent the
strongest relationships with our customers. Customers consider the bank
where they maintain their checking and savings deposits to be their primary
bank. These customers generally use more of your products and services and
are more likely to remain customers.
<PAGE> 12
Our checking and savings deposits have nearly doubled since we opened our
doors, reaching $422 million at year-end. These deposits now make up more
than 63 percent of total deposits, up from 51 percent at inception.
The checking and savings growth has fueled the increase in deposits
throughout our branch network. We now have an average branch size of more
than $50 million. Six branches have topped the $60-million mark and one,
Smithfield, crossed the $70-million hurdle in 2001.
[PHOTO]
[SIDEBAR]
CampusMate(TM) Always in search of ways to leverage its expertise, Bank
Rhode Island launched an innovative product in 2001 that makes financial
management easier for college students, their parents and college
administrators. The patent-pending product called CampusMate(TM) gives Bank
Rhode Island a unique opportunity to tap the college market by combining an
online student bank account with a back office financial administration
function for colleges and universities.
The result is a product that meets the personal banking needs of students,
streamlines the administration of student activity accounts and gives
parents the ability to fund all of a student's financial needs
electronically.
The program was introduced to students at the Rhode Island School of Design
through an innovative CD, which went on to win one of the most prestigious
interactive award competitions in New England. The CD won the Vertical
Award in Financial Services from the Massachusetts Interactive Media
Council, beating out some national financial giants, including Scudder
Retirement Services and Merrill Lynch.
<PAGE> 13
And our online banking product has been a tremendous success since we
launched it in 2000. We've achieved a 9 percent penetration rate among
checking customers, which outpaces both the Northeast and national
averages.
More than 1,600 business and personal checking customers are now online.
The growth in online use shows that the Internet is gaining acceptance as a
delivery channel for banking products. It also pushed the activity on our
website up 36 percent for the year. We now receive more than 20,000 visits
per month at www.bankri.com.
We also saw tremendous growth in Retail Lending in 2001. A favorable
interest rate environment spurred the residential mortgage market. The Bank
closed more than twice the number of residential mortgage loans it did the
previous year, totaling more than $40 million.
All of that growth would not be possible if we did not consistently provide
our customers with superior products and services. We are constantly
looking for ways to improve the banking experience for our customers and
2001 was no exception.
[SIDEBAR]
Community Involvement Bank Rhode Island has always prided itself on being
an active member of the community. The Bank supported more than 150
organizations throughout the year, helping spur economic development,
providing access to the arts and helping those less fortunate meet the
basic needs of food and shelter.
But it's not just financial support that connects the Bank to the
community. Employees have spent countless hours participating in walkathons
and volunteering at local festivals and have given up their time to serve
on boards and committees in support of causes that mean the most to them.
Whether it's large organizations like the Rhode Island Philharmonic or the
Rhode Island Community Food Bank, or a local theatre group or softball
team, Rhode Islanders have come to rely on the support of Bank Rhode
Island. And we couldn't be more pleased that we can play a meaningful role.
[PHOTO]
<PAGE> 14
[PHOTO]
We joined the NYCE Network's SUMSM Program last year, giving our customers
surcharge free access to more than 2,800 ATMs throughout New England. We
upgraded to image checking statements, which streamlines the statements our
customers receive and enables us to quickly find historic information on
their accounts. And we added instant approvals of home equity loans and
lines of credit through our website.
We upgraded our ATM network and continued to make physical improvements to
our branches. We also launched the ultimate in service and convenience when
we opened our Xcel branch in Cranston. The branch features the latest
technology, extended hours and dedicated business lending and investment
personnel.
The Xcel branch, and our smaller Xpress branch design, will figure
prominently in the Bank's expansion plans, which we announced early in
2002.
We have shown the ability to execute a growth strategy that builds value
for our shareholders as well as our customers. And we've created a mid-
sized commercial bank that is unlike any other in our marketplace.
There remains a tremendous opportunity for us in the State of Rhode Island.
We are confident that our strategy, vision and focus will allow us to
continue to thrive as the service-oriented alternative to the large
regional players in the area.
Thank you for your continued support.
/s/ Malcolm G. Chace
Malcolm G. Chace
Chairman of the Board
/s/ Merrill W. Sherman
Merrill W. Sherman
President & CEO
<PAGE> 15
Bancorp Rhode Island, Inc.
and Bank Rhode Island
Boards of Directors
Malcolm G. Chace
Chairman
Bancorp Rhode Island, Inc.
Chairman
Bank Rhode Island
Providence, RI
Chairman
Mossberg Industries
Cumberland, RI
Chairman
SENESCO
North Kingstown, RI
Karen Adams
News Anchor
WPRI-TV CBS 12
East Providence, RI
Anthony F. Andrade
President
A & H Printing
East Providence, RI
John R. Berger
Consultant
West Hartford, CT
Ernest J. Chornyei, Jr.
Consultant
Watch Hill, RI
Karl F. Ericson
Consultant
Providence, RI
Margaret D. Farrell, Esq.
Hinckley, Allen & Snyder LLP
Providence, RI
Mark R. Feinstein
President
Northeast Management, Inc.
Lincoln, RI
F. James Hodges
Chairman
Hodges Badge Company
Portsmouth, RI
Edward J. Mack
President
Tri-Mack Plastics Manufacturing Co.
Bristol, RI
Donald J. Reaves
Executive Vice President/Finance
and Administration and
Chief Financial Officer
Brown University
Providence, RI
Merrill W. Sherman
President and CEO
Bancorp Rhode Island, Inc.
President and CEO
Bank Rhode Island
Providence, RI
Cheryl W. Snead
President and CEO
Banneker Industries, Inc.
Lincoln, RI
John A. Yena
President
Johnson & Wales University
Providence, RI
[Photos]
<PAGE> 16
CONTENTS
- ---------------------------------------------------------------------------
Selected Consolidated Financial Data 18-19
Management's Discussion and Analysis of
Finanical Condition and Results of Operations (MD&A) 20-43
Management's Report 44
Independent Auditor's Report 45
Consolidated Financial Statements 46-49
Notes to Consolidated Financial Statements 50-77
Officers List 78-79
Locations & Stock Information 80
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table represents selected consolidated financial data
as of and for the years ended December 31, 2001, 2000, 1999, 1998 and 1997.
The selected consolidated financial data is derived from the Company's
Consolidated Financial Statements that have been audited by KPMG LLP. The
selected consolidated financial data set forth below does not purport to be
complete and should be read in conjunction with, and are qualified in their
entirety by, the more detailed information, including the Consolidated
Financial Statements and related Notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing
elsewhere herein.
<TABLE>
<CAPTION>
As of and for the
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands, except Per Share Data)
<s> <c> <c> <c> <c> <c>
Statement of Operations Data:
Interest income $ 55,903 $ 50,035 $ 41,651 $ 40,034 $ 37,269
Interest expense 26,537 23,678 19,600 19,845 17,478
---------------------------------------------------------
Net interest income 29,366 26,357 22,051 20,189 19,791
Provision for loan losses 1,669 1,542 1,000 1,017 1,000
Noninterest income 5,231 3,578 3,222 2,727 1,916
Noninterest expense 23,196 19,662 17,354 16,043 15,273
---------------------------------------------------------
Income before taxes and change in accounting principle 9,732 8,731 6,919 5,856 5,434
Income taxes 3,417 3,113 2,448 2,022 1,924
---------------------------------------------------------
Income before change in accounting principle 6,315 5,618 4,471 3,834 3,510
Cumulative effect of change in accounting principle, net of taxes -- -- 109 -- --
---------------------------------------------------------
Net income 6,315 5,618 4,362 3,834 3,510
Dividends on preferred stock -- -- 88 793 1,413
---------------------------------------------------------
Net income available to common shareholders $ 6,315 $ 5,618 $ 4,274 $ 3,041 $ 2,097
=========================================================
Per Share Data:
Basic earnings per common share:
Income before change in accounting principle $ 1.69 $ 1.51 $ 1.18 $ 0.87 $ 0.75
Cumulative effect of change in accounting principle -- -- (0.03) -- --
---------------------------------------------------------
Net income $ 1.69 $ 1.51 $ 1.15 $ 0.87 $ 0.75
=========================================================
Basic cash earnings per common share (b) $ 1.90 $ 1.71 $ 1.35 $ 1.10 $ 1.03
Diluted earnings per common share:
Income before change in accounting principle $ 1.62 $ 1.49 $ 1.17 $ 0.85 $ 0.75
Cumulative effect of change in accounting principle -- -- (0.03) -- --
---------------------------------------------------------
Net income $ 1.62 $ 1.49 $ 1.14 $ 0.85 $ 0.75
=========================================================
Diluted cash earnings per common share (b) $ 1.81 $ 1.69 $ 1.34 $ 1.07 $ 1.03
Dividends per common share $ 0.48 $ 0.42 $ 0.10 -- --
Dividend pay-out ratio 29.6% 28.2% 8.8% NA NA
Book value per common share $ 15.74 $ 14.29 $ 12.79 $ 12.31 $ 10.77
Tangible book value per common share $ 12.88 $ 11.09 $ 9.27 $ 8.44 $ 5.18
Average common shares outstanding - Basic 3,730,910 3,728,688 3,727,010 3,506,573 2,800,061
Average common shares outstanding - Diluted 3,900,028 3,768,589 3,741,778 3,584,820 2,805,688
<PAGE> 18
<CAPTION>
As of and for the
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Balance Sheet Data:
Total assets $ 862,250 $ 739,420 $ 631,977 $ 595,964 $ 533,025
Investment securities 49,453 47,296 50,503 39,703 48,319
Mortgage-backed securities 150,650 117,431 74,793 79,924 43,078
Total loans receivable 610,964 518,825 458,958 431,402 405,819
Allowance for loan losses 8,524 7,294 5,681 5,018 4,340
Excess of costs over net assets acquired 10,766 11,930 13,094 14,424 15,658
Deposits 670,413 631,632 513,416 500,713 464,907
Borrowings 129,398 51,889 67,911 45,512 19,754
Common shareholders' equity 59,097 53,292 47,675 45,835 30,165
Total shareholders' equity 59,097 53,292 47,675 47,687 44,707
Average Balance Sheet Data:
Total assets $ 818,905 $ 679,085 $ 616,426 $ 565,759 $ 499,382
Investment securities 49,881 47,034 47,348 44,040 47,242
Mortgage-backed securities 130,342 86,114 79,463 57,627 15,689
Total loans receivable 584,400 491,327 439,099 421,554 395,684
Allowance for loan losses 8,056 6,472 5,358 4,799 4,210
Excess of costs over net assets acquired 11,373 12,540 13,720 15,077 16,318
Deposits 644,795 572,924 516,610 476,227 442,604
Borrowings 115,677 54,471 50,496 39,944 10,823
Common shareholders' equity 56,101 48,530 46,169 40,568 27,981
Total shareholders' equity 56,101 48,530 46,631 46,041 43,196
Operating Ratios:
Interest rate spread 3.12% 3.44% 3.25% 3.20% 3.68%
Net interest margin 3.75% 4.10% 3.80% 3.78% 4.22%
Efficiency ratio (a) 67.05% 65.68% 68.67% 70.01% 70.36%
Cash basis efficiency ratio (a) (b) 63.68% 61.79% 64.06% 64.62% 64.67%
Return on average assets (c) 0.77% 0.83% 0.73% 0.68% 0.70%
Cash basis return on average assets (b) (c) 0.88% 0.96% 0.87% 0.84% 0.89%
Return on average equity (c) 11.26% 11.58% 9.59% 8.33% 8.13%
Cash basis return on average equity (b) (c) 12.60% 13.12% 11.20% 10.08% 9.97%
Asset Quality Ratios:
Nonperforming loans to total loans 0.12% 0.10% 0.24% 0.36% 0.41%
Nonperforming assets to total assets 0.12% 0.07% 0.18% 0.33% 0.38%
Allowance for loan losses to nonperforming loans 1132.01% 1435.83% 510.88% 321.05% 258.49%
Allowance for loan losses to total loans 1.40% 1.41% 1.24% 1.16% 1.07%
Net loans charged-off to average loans outstanding 0.08% (0.01%) 0.08% 0.08% 0.17%
Capital Ratios:
Average shareholders' equity to average total assets 6.85% 7.15% 7.54% 8.14% 8.64%
Tier I leverage ratio 5.93% 5.91% 5.88% 5.72% 5.62%
Tier I risk-based capital ratio 9.86% 9.50% 9.70% 9.60% 9.41%
Total risk-based capital ratio 11.10% 10.76% 10.96% 10.85% 10.66%
<FN>
(a) Calculated by dividing total noninterest expenses by net interest
income plus noninterest income.
(b) Excludes amortization of intangibles and any related income taxes.
(c) Excludes cumulative effect of change in accounting principle, net of
taxes.
</FN>
</TABLE>
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cautionary Statement
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
Bancorp Rhode Island, Inc. (the "Company"), a Rhode Island
corporation, was organized by Bank Rhode Island (the "Bank") on February
15, 2000, to be a bank holding company and to acquire all of the capital
stock of the Bank. The reorganization of the Bank into the holding company
form of ownership was completed on September 1, 2000. The Company has no
significant operating entities other than the Bank. For this reason,
substantially all of the discussion in this document relates to the
operations of the Bank and its subsidiaries.
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,
non-deposit investment products, commercial, residential and consumer
loans, and other traditional banking products and services, designed to
meet the needs of individuals and small- to mid-sized businesses. The Bank
also has introduced both commercial and consumer online banking products
and maintains a web site at http://www.bankri.com. The Company and Bank
are subject to regulation by a number of federal and state agencies and
undergo periodic examinations by certain of those regulatory authorities.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"), subject to regulatory limits. The Bank is also a
member of the Federal Home Loan Bank of Boston ("FHLB").
Non-GAAP Measures of Financial Performance
The Bank's formation in 1996 resulted in the generation of $17.5
million of intangibles that are being amortized over a 15-year period. The
amortization of these intangibles reduces the Bank's pre-tax income by $1.2
million annually. Because of the impact of this amortization, certain
measures of financial performance have been calculated excluding such
amortization and any related income taxes. These measures are identified
as "cash" or "cash basis" and have been provided to assist the reader in
evaluating the core performance of the Company. Information presented on a
cash basis is not in accordance with Generally Accepted Accounting
Principles ("GAAP"), but management believes it to be beneficial to gaining
an understanding of the financial performance of the Company.
<PAGE> 20
Results of Operations
Net Interest Income
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
amount of interest-earning assets outstanding during the year and the
interest rates earned thereon. The Company's cost of money is a function
of the average amount of deposits and borrowed money outstanding during the
year and the interest rates paid thereon. Earnings are further influenced
by the quality of assets through the amount of interest income lost on
nonaccrual loans, the amount of additions made to the allowance for loan
losses, and the amount of expenses incurred as a result of resolving
troubled assets.
Net interest income for 2001 was $29.4 million, compared to $26.4
million for 2000 and $22.1 million for 1999. This increase of $3.0
million, or 11.4%, during 2001 was primarily attributable to the continued
growth of the Company. The Company's net interest margin decreased in 2001
and was 3.75%, compared to 4.10% in 2000 and 3.80% for 1999. Average
earning assets were $140.5 million, or 21.9%, higher and average interest-
bearing liabilities were $115.5 million, or 21.2%, higher during 2001 than
during the previous year.
Average Balances, Yields and Costs
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the years indicated. Such yields and
costs are derived by dividing income or expense by the average balance of
assets or liabilities. Average balances are derived from daily balances
and include nonperforming loans.
<PAGE> 21
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
2001 2000 1999
------------------------- ------------------------- -------------------------
Interest Interest Interest
Average Earned/ Average Average Earned/ Average Average Earned/ Average
Balance Paid Yield Balance Paid Yield Balance Paid Yield
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Assets:
Earning assets:
Fed funds sold & overnight investments $ 13,642 $ 510 3.74% $ 14,571 $ 930 6.38% $ 10,051 $ 482 4.80%
Investment securities 49,881 3,044 6.10% 47,034 3,056 6.50% 47,348 2,814 5.94%
Mortgage-backed securities 130,342 7,720 5.92% 86,114 5,576 6.48% 79,463 4,835 6.08%
Stock in the FHLB 4,973 288 5.79% 3,704 282 7.61% 3,622 237 6.54%
Loans receivable:
Residential mortgage loans 301,729 21,694 7.19% 243,706 17,982 7.38% 244,698 16,997 6.95%
Commercial loans 221,966 18,078 8.14% 197,200 17,737 8.99% 151,725 12,795 8.43%
Consumer and other loans 60,705 4,569 7.53% 50,421 4,472 8.87% 42,676 3,491 8.18%
---------------- ---------------- ----------------
Total earning assets 783,238 55,903 7.14% 642,750 50,035 7.78% 579,583 41,651 7.19%
------- ------- -------
Cash and due from banks 19,889 17,998 18,268
Allowance for loan losses (8,056) (6,472) (5,358)
Premises and equipment 6,641 6,306 5,283
Other real estate owned 169 80 226
Excess of cost over net assets acquired, net 11,373 12,540 13,720
Accrued interest receivable 4,767 4,126 3,704
Prepaid expenses and other assets 884 1,757 1,000
-------- -------- --------
Total assets $818,905 $679,085 $616,426
======== ======== ========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts $ 39,642 209 0.53% $ 31,555 205 0.65% $ 27,082 175 0.65%
Money market accounts 10,799 221 2.05% 14,113 375 2.66% 17,284 473 2.74%
Savings accounts 236,608 6,507 2.75% 192,217 6,137 3.19% 172,073 4,742 2.76%
Certificate of deposit accounts 257,646 13,458 5.22% 252,521 13,685 5.42% 230,901 11,396 4.94%
Overnight and short-term borrowings 15,386 461 3.00% 11,474 636 5.54% 7,329 335 4.57%
FHLB and other borrowings 97,718 5,418 5.54% 42,997 2,640 6.14% 43,167 2,479 5.74%
Capital trust securities 2,573 263 10.22% -- -- --% -- -- --%
---------------- ---------------- ----------------
Total interest-bearing liabilities 660,372 26,537 4.02% 544,876 23,678 4.34% 497,836 19,600 3.94%
------- ------- -------
Noninterest-bearing deposits 100,100 82,518 69,270
Other liabilities 2,332 3,161 2,689
-------- -------- --------
Total liabilities 762,804 630,555 569,795
Shareholders' equity 56,101 48,530 46,631
-------- -------- --------
Total liabilities and shareholders' equity $818,905 $679,085 $616,426
======== ======== ========
Net interest income $29,366 $26,357 $22,051
======= ======= =======
Net interest rate spread 3.12% 3.44% 3.25%
Net interest rate margin 3.75% 4.10% 3.80%
</TABLE>
<PAGE> 22
Rate/Volume Analysis
The following table sets forth certain information regarding changes
in the Company's interest income and interest expense for the periods
indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in rate (changes in rate multiplied by old average balance) and
(ii) changes in volume (changes in average balances multiplied by old
rate). The net change attributable to the combined impact of rate and
volume was allocated to the individual rate and volume changes.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
Increase/(Decrease) Due To Increase/(Decrease) Due To
--------------------------------- ----------------------------
Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ -----
(In thousands)
<s> <c> <c> <c> <c> <c> <c>
Interest income:
Fed funds sold & overnight investments $ (364) $ (56) $ (420) $ 190 $ 258 $ 448
Investment securities (2,232) 2,220 (12) 261 (19) 242
Mortgage-backed securities (427) 2,571 2,144 321 420 741
Stock in the FHLB (17) 23 6 40 5 45
Residential mortgage loans (447) 4,159 3,712 1,054 (69) 985
Commercial loans (1,039) 1,380 341 898 4,044 4,942
Consumer and other loans (279) 376 97 311 670 981
------------------------------------------------------------------
Total interest income (4,805) 10,673 5,868 3,075 5,309 8,384
------------------------------------------------------------------
Interest Expense:
NOW accounts (11) 15 4 1 29 30
Money market accounts (76) (78) (154) (14) (84) (98)
Savings accounts (556) 926 370 803 592 1,395
Certificate of deposit accounts (518) 291 (227) 1,171 1,118 2,289
Overnight & short-term borrowings (681) 506 (175) 82 219 301
FHLB and other borrowings (229) 3,007 2,778 171 (10) 161
Capital trust securities -- 263 263 -- -- --
------------------------------------------------------------------
Total interest expense (2,071) 4,930 2,859 2,214 1,864 4,078
------------------------------------------------------------------
Net interest income $(2,734) $ 5,743 $3,009 $ 861 $3,445 $4,306
==================================================================
</TABLE>
<PAGE> 23
Comparison of Years Ended December 31, 2001 and December 31, 2000
- -----------------------------------------------------------------
General
Net income for 2001, increased $697,000, or 12.4%, to $6.3 million,
or $1.62 per diluted common share, from $5.6 million, or $1.49 per diluted
common share, for 2000. Diluted cash earnings per common share were $1.81
for 2001, compared to $1.69 for 2000. This performance represented a
return on average assets of 0.77% and a return on average equity of 11.26%
for 2001, as compared to a return on average assets of 0.83% and a return
on average equity of 11.58% for 2000. Cash basis return on average assets
and cash basis return on average equity were 0.88% and 12.60% for 2001, and
0.96% and 13.12% for 2000, respectively.
Net interest income was $29.4 million for 2001, compared to $26.4
million for 2000. The net interest margin for 2001 was 3.75%, compared to
a net interest margin of 4.10% for 2000. The increase in net interest
income of $3.0 million, or 11.4%, was primarily attributable to the overall
growth of the Company. Average earning assets increased $140.5 million, or
21.9%, and average interest-bearing liabilities increased $115.5 million,
or 21.2%, over the prior year. The decrease of 35 basis points in the net
interest margin was caused by the 475 basis point drop in short-term market
interest rates, along with tighter spreads on wholesale asset purchases
completed in the first quarter of 2001.
Interest Income - Investments
Total investment income (consisting of interest or dividends on
federal funds sold, investment securities, mortgage-backed securities, and
FHLB stock) was $11.6 million for 2001, compared to $9.8 million for 2000.
This increase in total investment income of $1.7 million, or 17.5%, was
primarily attributable to a $44.2 million, or 51.4%, increase in the
average balance of mortgage-backed securities ("MBSs"). Meanwhile, the
overall yield on investments decreased 69 basis points due to dramatically
lower market interest rates. The Company's investments at December 31,
2001 were primarily comprised of Agency securities or MBSs with either
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. As a result of the
low interest rate environment present at the end of 2001, prepayments on MBSs
accelerated. These higher prepayment levels had a negative impact on the
yield of MBSs purchased at a premium.
Interest Income - Loans
Interest from loans was $44.3 million for 2001, and represented a
yield on total loans of 7.59%. This compares to $40.2 million of interest,
and a yield of 8.18%, for 2000. This increase of $4.2 million, or 10.3%,
in interest on loans was due primarily to an increase in the average
balance of loans outstanding, partially offset by lower interest rates.
The average balance of the various components of the loan portfolio changed
as follows: residential mortgage loans increased $58.0 million, or 23.8%,
commercial loans increased $24.8 million, or 12.6%, and consumer and other
loans increased $10.3 million, or 20.4%. The Company has concentrated its
origination efforts on commercial and consumer loan opportunities, while
purchasing residential mortgage loans, and more recently automobile loans,
as cash flows have dictated. Meanwhile, in response to declining market
interest rates, the yields on the various components of the loan portfolio
changed as follows: residential mortgage loans increased 19 basis points,
to 7.19%; commercial loans decreased 85 basis points, to 8.14%; and
consumer and other loans decreased 134 basis points, to 7.53%. In recent
months prepayments speeds have increased on residential mortgage loans. If
these prepayment speeds remain high, residential mortgage loan yields will
be negatively impacted as increased cash flows will be reinvested at lower
rates and premiums paid on purchased loans will be amortized more quickly.
<PAGE> 24
Interest Expense - Deposits and Borrowings
Interest paid on deposits and borrowings increased $2.9 million, or
12.1%, to $26.5 million for 2001, compared to $23.7 million for 2000. The
increase in total interest expense was primarily attributable to growth in
savings accounts, along with the use of borrowings, to fund the overall
growth of the Company. The average balance of interest-bearing liabilities
increased $115.5 million, from $544.9 million in 2000, to $660.4 million in
2001. The Company continued to experience strong average balance growth in
core deposit accounts, specifically noninterest bearing demand deposit
accounts (up $17.6 million, or 21.3%) and savings accounts (up $44.4
million, or 23.1%). In addition, the Company increased its utilization of
borrowed funds (average balances up $61.2 million, or 112.4%). In response
to declining market interest rates, the overall average cost for interest-
bearing liabilities decreased 33 basis points from 4.35% for 2000, to 4.02%
for 2001. 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 $1.7 million for 2001, compared to
$1.5 million for 2000. Increases to the Provision for Loan Losses were
primarily in response to a softening economy, some deterioration in
commercial credit quality and growth in loans outstanding. As the loan
portfolio continues to grow and mature, or if economic conditions worsen,
management believes it highly likely that the level of nonperforming assets
will increase, which in turn may lead to increases to the provision for
loan losses in future periods. Management evaluates several factors
including new loan originations, actual and estimated charge-offs, the risk
characteristics of the loan portfolio and general economic conditions when
determining the provision for each quarter. Also see discussion under
"Asset Quality" and "Allowance for Loan Losses."
Noninterest Income
Total noninterest income increased $1.7 million, or 46.2%, from $3.6
million for 2000, to $5.2 million for 2001. Service charges on deposit
accounts, which continue to represent the largest source of noninterest
income, rose $729,000, or 26.8%, from $2.7 million for 2000, to $3.5
million for 2001, primarily as a result of growth in checking and savings
accounts. Commissions on Loans Originated for Others increased $214,000,
or 289.2%, in response to significantly higher fixed-rate mortgage loan
activity resulting from the drop in market interest rates. Additionally,
Other Income increased $679,000, or 129.6%, primarily from increased
commissions on sales of non-deposit investment products.
The following table sets forth the components of noninterest income:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Loan related fees $ 285 $ 258
Service charges on deposit accounts 3,451 2,722
Gain on sale of MBSs 4 --
Commissions on loans originated for others 288 74
Other income 1,203 524
-----------------
Total noninterest income $5,231 $3,578
=================
</TABLE>
<PAGE> 25
Noninterest Expense
Noninterest expenses for 2001 increased a total of $3.5 million, or
18.0%, to $23.2 million, from $19.7 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 $1.7 million,
or 18.2%), Occupancy and Equipment (up $193,000, or 7.9%), Data Processing
(up $439,000, or 32.8%), Loan Servicing (up $184,000, or 24.2%), Workout
and OREO Expense (up $322,000, or 1038.7%) and Other Expenses (up $751,000,
or 32.4%). During 2000 and early 2001, the Company experienced substantial
growth in both loans and core deposits that resulted in the increased
operating costs evidenced in 2001. In addition, the softening of both the
national and local economies in 2001 has lead to increases in workout and
fraudulent activity charges. Partially offsetting these increases was a
decrease in Marketing (down $90,000, or 8.4%). The Company's efficiency
ratio increased 137 basis points, to 67.05%, and its cash basis efficiency
ratio increased 189 basis points, to 63.68%, for 2001. As a result of the
Company's announced expansion plans for 2002, management anticipates
continued upward pressure on noninterest expenses.
The following table sets forth the components of noninterest expense:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Salaries and employee benefits $11,287 $ 9,552
Occupancy and equipment 2,622 2,429
Data processing 1,779 1,340
Marketing 979 1,069
Professional services 883 891
Loan servicing 945 761
Other real estate owned 353 31
Amortization of excess of cost over net assets acquired 1,164 1,164
Deposit tax and assessments 117 109
Other expenses 3,067 2,316
-------------------
Total noninterest expense $23,196 $19,662
===================
</TABLE>
Income Tax Expense
The Company recorded income tax expense of $3.4 million for 2001,
compared to $3.1 million for 2000. This represented total effective tax
rates of 35.1% and 35.7%, 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.
Comparison of Years Ended December 31, 2000 and December 31, 1999
- -----------------------------------------------------------------
General
Net income for 2000 increased $1.3 million, or 28.8%, to $5.6
million, or $1.49 per diluted common share, from $4.4 million, or $1.14 per
diluted common share, for 1999. Net income for 1999 was reduced by a one-
time charge of $109,000 resulting from a change in accounting principle
that required remaining unamortized organizational costs to be charged
against earnings. Operating income, which excludes this one-time charge,
was $5.6 million for 2000, compared to $4.5 million for 1999, an increase
of $1.1 million, or 25.7%. Diluted cash earnings per common share were
$1.69 in 2000, compared to $1.37 in 1999.
<PAGE> 26
This performance represented a return on average assets of 0.83% and
a return on average equity of 11.58% for 2000, as compared to a return on
average assets of 0.73% and a return on average equity of 9.59% for 1999.
Cash basis return on average assets and cash basis return on average equity
were 0.96% and 13.12% for 2000, and 0.87% and 11.20% for 1999,
respectively.
Interest Income - Investments
Total investment income was $9.8 million for 2000, compared to $8.4
million for 1999. This increase in total investment income of $1.5
million, or 17.6%, was attributable to an increase of $10.9 million, or
7.8%, in the average balance of investments (resulting from growth in
deposits), along with an increase in the overall yield of investments of 54
basis points (resulting from increases in market interest rates). The
Company's investments at December 31, 2000 were primarily comprised of
Treasury and Agency securities with remaining maturities of less than five
years, along with MBSs with repricing periods of less than five years.
Management believes that this composition, along with a structured maturity
ladder, provides more stable earnings and predictable cash flows from the
portfolio. As a result of the rising interest rate environment present
during 2000, prepayments on MBSs slowed during the year. These lower
prepayment levels had a positive impact on the yield of MBSs purchased at a
premium.
Interest Income - Loans
Interest from loans was $40.2 million for 2000, and represented a
yield on total loans of 8.18%. This compares to $33.3 million of interest,
and a yield of 7.58%, for 1999. Interest from commercial loans increased
$4.9 million, or 38.6%, between the two years and represented the fastest
growing segment of the total loan portfolio. Income from consumer and
other loans increased $981,000, or 28.1%, and residential mortgage loan
income increased $985,000, or 5.8%. Since 1996, origination efforts have
been concentrated on commercial and, to a lesser extent, consumer loan
opportunities, with residential mortgage loans purchased as cash flows
dictated. The Bank also originates residential mortgage loans on a limited
basis. The average balance of the various components of the loan portfolio
changed from 1999 as follows: commercial loans increased $45.5 million, or
30.0%, consumer and other loans increased $7.7 million, or 18.1%, and
residential mortgage loans decreased $992,000, or 0.4%. In response to
rising market interest rates, the yields on the various loan portfolio
components changed as follows: commercial loans increased 56 basis points,
to 8.99%; consumer and other loans increased 69 basis points, to 8.87%, and
residential mortgage loans increased 43 basis points, to 7.38%. As with
MBSs, the rising interest rate and slower prepayment environment present
during 2000 positively impacted the yield on the loan portfolio.
Interest Expense - Deposits and Borrowings
Interest paid on deposits and borrowings increased $4.1 million, or
20.8%, to $23.7 million for 2000, from $19.6 million paid during 1999. The
overall average cost of interest-bearing liabilities increased 41 basis
points, from 3.94% for 1999 to 4.34% for 2000, and resulted in $2.2 million
of additional interest expense. 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 cash flow needs. In general, deposit costs during the
second half of 2000 showed signs of reacting (on a delayed basis) to the
increases in market rates that occurred during the first half of the year.
Average costs for the various components of interest-bearing liabilities
changed from 1999 as follows: NOW accounts remained the same at 0.65%,
money market accounts decreased 8 basis points, to 2.66%, savings accounts
increased 44 basis points, to 3.19%, certificate of deposit accounts
increased 48 basis points, to 5.42%, and borrowings increased 44 basis
points to 6.01%. Meanwhile, the average balance of interest-bearing
liabilities increased $47.0 million, from $497.8 million in 1999 to $544.9
million in 2000, as the Bank actively sought checking and savings deposits
("core deposits") to fund asset growth and benefited from the unusual
market conditions created by the Fleet Financial/BankBoston divestitures.
<PAGE> 27
Provision for Loan Losses
The provision for loan losses was $1.5 million for 2000, up $542,000,
or 54.2%, from the prior year. The commercial loan portfolio grew at a
rate of 21.9% during 2000, while the Bank experienced net recoveries of
$71,000 for the year. When determining the provision for loan losses,
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 "Financial Condition -- Allowance for
Loan Losses."
Noninterest Income
Total noninterest income increased $356,000, or 11.0%, to $3.6
million for 2000, from $3.2 million for 1999. Service Charges on Deposit
Accounts, which represent the largest source of noninterest income, rose
$507,000, or 22.9%, from $2.2 million for 1999, to $2.7 million for 2000,
primarily as a result of growth in core deposit accounts. Loan Related
Fees decreased $48,000, or 15.7%, as prepayment penalties were less in 2000
than in the prior year and Other Income decreased $94,000, or 15.2%, as
income from investment product sales decreased $110,000. The Bank
announced a number of initiatives to revitalize this program at the end of
2000.
The following table sets forth the components of noninterest income:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2000 1999
---- ----
(In thousands)
<s> <c> <c>
Loan related fees $ 258 $ 306
Service charges on deposit accounts 2,722 2,215
Commissions on loans originated for others 74 83
Other income 524 618
-----------------
Total noninterest income $3,578 $3,222
=================
</TABLE>
Noninterest Expense
Total noninterest expense for 2000 increased $2.3 million, or 13.3%,
to $19.7 million from $17.4 million in 1999. This increase occurred
primarily in the following areas: Salaries and Benefits (up $1.5 million,
or 18.4%), Occupancy and Equipment (up $383,000, or 18.7%), Marketing (up
$186,000, or 21.1%) and Other Expenses (up $329,000, or 16.6%) and
primarily represent increased costs associated with the overall growth of
the institution. The increase in Occupancy and Equipment was partially
attributable to the Bank opening a de novo branch in the Buttonwoods
section of Warwick and the Bank's ongoing replacement and upgrading of
fixed assets throughout its branch network. The increase in Marketing
expense was attributable to the Bank seeking to take advantage of unusual
market conditions created by the Fleet Financial/BankBoston divestitures.
Partially offsetting these increases were decreases in: Loan Servicing
(down $64,000, or 7.8%) due to decreases in mortgage loans serviced by
others and OREO expense (down $77,000, or 71.3%) due to decreased levels of
foreclosures. The Company's efficiency ratio decreased 299 basis points,
to 65.68%, in 2000 and its cash basis efficiency ratio decreased 227 basis
points to 61.79%.
<PAGE> 28
The following table sets forth the components of noninterest expense:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2000 1999
---- ----
(In thousands)
<s> <c> <c>
Salaries and employee benefits $ 9,552 $ 8,065
Occupancy and equipment 2,429 2,046
Data processing 1,340 1,348
Marketing 1,069 883
Professional services 891 870
Loan servicing 761 825
Other real estate owned 31 108
Amortization of excess of cost over net assets acquired 1,164 1,164
Deposit tax and assessments 109 58
Other expenses 2,316 1,987
-------------------
Total noninterest expense $19,662 $17,354
===================
</TABLE>
Income Tax Expense
Income tax expense of $3.1 million was recorded for 2000, compared to
$2.4 million for 1999. This represented total effective tax rates of 35.7%
and 35.4%, 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.
Financial Condition
Loans Receivable
Total loans were $611.0 million, or 70.9% of total assets, at
December 31, 2001, compared to $518.8 million, or 70.2% of total assets, at
December 31, 2000, an increase of $92.1 million, or 17.8%. Total loans as
of December 31, 2001, may be segmented in three broad categories:
residential mortgages that aggregate $310.2 million, or 50.8% of the
portfolio; commercial loans that aggregate $239.4 million, or 39.2% of the
portfolio; and consumer and other loans that aggregate $61.4 million, or
10.0% of the portfolio.
During the second quarter of 1998, the Bank completed a comprehensive
project begun in late 1997, to refine the classification of its individual
commercial loans. This project defined the classification of a loan based
on its primary purpose and collateral. As a result of this project, the
Bank reclassified a number of loans from the commercial & industrial
category to the commercial real estate or multi-family real estate
categories. The amounts shown for December 31, 1997 have not been restated
to reflect this reclassification. Included in the following table as
commercial real estate loans at December 31, 2001, 2000, 1999 and 1998, are
$46.7 million, $38.3 million, $34.0 million and $36.9 million of "owner
occupied" loans, many of which were originated in conjunction with a
commercial & industrial loan to the same borrower and previously classified
as commercial & industrial loans. This classification project did not
affect the total outstanding for commercial loans, only the breakdown by
individual category within the total portfolio.
The Bank utilizes the term "small business loans" to describe its
portfolio comprised of loans to businesses of up to $250,000 in the
aggregate.
<PAGE> 29
The following is a summary of loans receivable:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c> <c>
Residential mortgage loans:
One- to four-family adjustable rate $285,589 $212,197 $196,863 $211,076 $205,020
One- to four-family fixed rate 23,306 34,609 39,037 45,671 50,704
------------------------------------------------------------
Subtotal 308,895 246,806 235,900 256,747 255,724
Premium on loans acquired 1,381 1,166 1,446 2,110 2,045
Net deferred loan origination fees (64) (49) (26) -- --
------------------------------------------------------------
Total $310,212 $247,923 $237,320 $258,857 $257,769
============================================================
Commercial loans:
Commercial real estate $120,067 $107,587 $ 90,149 $ 76,562 $ 49,412
Commercial & industrial 53,677 51,470 40,109 30,655 47,440
Small business 24,122 19,170 13,322 6,804 3,775
Multi-family 14,927 15,933 16,270 13,221 6,874
Construction 14,027 7,070 6,379 3,482 4,683
Leases and other 12,715 11,731 8,499 3,370 2,600
------------------------------------------------------------
Subtotal 239,535 212,961 174,728 134,094 114,784
Net deferred loan origination fees (171) (143) (180) (61) (112)
------------------------------------------------------------
Total $239,364 $212,818 $174,548 $134,033 $114,672
============================================================
Consumer and other loans:
Home equity - lines of credit $ 28,460 $ 26,215 $ 24,166 $ 18,400 $ 11,515
Home equity - term loans 22,930 23,292 19,710 16,996 18,758
Automobile 6,335 4,643 -- -- --
Installment 1,240 1,348 1,279 1,010 888
Savings secured 656 987 1,005 935 1,261
Unsecured and other 1,153 1,044 590 972 956
------------------------------------------------------------
Subtotal 60,774 57,529 46,750 38,313 33,378
Premium on loans acquired 192 144 -- -- --
Net deferred loan origination costs 422 411 340 199 --
------------------------------------------------------------
Total $ 61,388 $ 58,084 $ 47,090 $ 38,512 $ 33,378
============================================================
</TABLE>
During 2001, residential mortgage loans increased $62.3 million, or
25.1%, as purchases of $186.0 million and originations of $18.0 million
were partially offset by $141.7 million in repayments. As part of a
wholesale leverage transaction completed during the first quarter of 2001,
the Bank purchased $50.2 million of residential mortgage loans. These
purchases were funded with a series of FHLB borrowings and supported by the
additional capital created through the issuance of trust preferred
securities. Since inception, the Bank has concentrated its portfolio
lending efforts on commercial and, to a lesser extent, consumer lending
opportunities. During late 1997, the Bank began to originate mortgage
loans for its own portfolio as well as for sale to others and anticipates
continuing to originate mortgage loans on a limited basis for its
customers. The Bank does not employ any mortgage originators and typically
only holds in its portfolio loans whose rate will adjust in less than 10
years. Until such time as the Bank can originate sufficient commercial and
consumer loans to utilize available cash flow, it intends to continue
purchasing residential mortgage loans as opportunities develop.
The commercial loan portfolio (consisting of commercial real estate,
commercial & industrial, multi-family real estate, construction and small
business loans) increased $26.5 million, or 12.5%, during 2001. The
Company believes it is well positioned for continued commercial loan
growth. Particular emphasis is placed on generation of small- to medium-
sized commercial relationships (those relationships with $5.0 million or
less in loan commitments). The Bank is also active in small business
lending in which it utilizes credit scoring, in conjunction with
traditional review standards, and employs streamlined documentation. The
small business portfolio increased $5.0 million, or 25.8%, during 2001.
The Bank is a participant in the U.S. Small Business Administration ("SBA")
Preferred Lender Program ("PLP") in Rhode Island and the 7a Guarantee Loan
Program in Massachusetts.
<PAGE> 30
The consumer loan portfolio is comprised primarily of home equity
term loans and home equity lines of credit. During 2001, consumer loan
outstandings increased $3.3 million, or 5.7%, to $61.4 million at December
31, 2001, from $58.1 million at December 31, 2000. During 2001, the Bank
purchased a $4.9 million package of automobile loans from another New
England institution. These purchased automobile loans represented a
significant portion of the total growth that occurred in the consumer and
other loan portfolio. The remainder of the growth was in home equity term
loans and lines of credit.
The table below shows loan originations, purchases, sales and
repayment activities.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c> <c>
Originations and Principal Additions:
Loans purchased:
Residential mortgage loans $ 186,013 $ 48,491 $ 53,747 $ 107,559 $ 58,271
Consumer and other loans 4,902 4,891 -- -- --
---------------------------------------------------------------
Total loans purchased 190,915 53,382 53,747 107,559 58,271
---------------------------------------------------------------
Loans originated:
Residential mortgage loans 18,037 9,985 17,659 13,093 200
Commercial loans 59,186 65,465 62,430 41,872 40,065
Consumer and other loans 22,332 17,950 18,704 16,837 12,526
---------------------------------------------------------------
Total loans originated 99,555 93,400 98,793 71,802 52,791
---------------------------------------------------------------
Principal Reductions:
Charge-offs/transfers to OREO:
Residential mortgage loans (304) (148) (412) (950) (1,116)
Commercial loans (981) (93) (176) (15) (145)
Consumer and other loans (61) (20) (80) (163) (178)
---------------------------------------------------------------
Total charge-offs/transfers to OREO (1,346) (261) (668) (1,128) (1,439)
---------------------------------------------------------------
Principal payments:
Residential mortgage loans (141,657) (47,422) (91,841) (118,679) (58,419)
Commercial loans (31,631) (27,139) (21,620) (22,547) (17,817)
Consumer and other loans (23,928) (12,042) (10,187) (11,739) (9,985)
---------------------------------------------------------------
Total principal payments (197,216) (86,603) (123,648) (152,965) (86,221)
---------------------------------------------------------------
Change in loans receivable (before
net items) $ 91,908 $ 59,918 $ 28,224 $ 25,268 $ 23,402
===============================================================
</TABLE>
The following table sets forth certain information at December 31,
2001, regarding the aggregate dollar amount of certain loans maturing in
the loan portfolio based on scheduled payments to maturity. Actual loan
principal payments may vary from this schedule due to refinancings,
modifications and other changes in loan terms. Demand loans and loans
having no stated schedule of repayments and no stated maturity are reported
as due in one year or less.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due
---------------------------------------------
After One, But
One Year or Within Five After Five
Less Years Years
----------- -------------- ----------
(In thousands)
<s> <c> <c> <c>
Construction loans $14,027 $ -- $ --
Commercial & industrial loans (including leases) 41,451 17,957 6,984
Small business loans 12,741 10,772 609
-----------------------------------------
Total $68,219 $28,729 $7,593
=========================================
</TABLE>
<PAGE> 31
The following table sets forth as of December 31, 2001, the dollar
amount of certain loans due after one year that have fixed interest rates
or floating or adjustable interest rates.
<TABLE>
<CAPTION>
Loans Due After One Year
------------------------
Floating or
Fixed Adjustable
Rates Rates
----- -----------
(In thousands)
<s> <c> <c>
Construction loans $ -- $ --
Commercial & industrial loans (including leases) 10,957 13,984
Small business loans 7,914 3,467
-------------------
Total $18,871 $17,451
===================
</TABLE>
Asset Quality
The definition of nonperforming assets includes nonperforming loans
and 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. Included in nonaccrual loans at December 31, 1999, were $329,000 of
impaired loans. At December 31, 2001 and 2000, the Company did not have
any impaired loans.
Nonperforming Assets. At December 31, 2001, the Company had
nonperforming assets of $1.0 million, or 0.12% of total assets. This
compares to nonperforming assets of $538,000, or 0.07% of total assets, at
December 31, 2000, and nonperforming assets of $1.2 million, or 0.18% of
total assets, at December 31, 1999. Nonperforming assets at December 31,
2001, consisted of residential mortgage loans aggregating $656,000,
commercial loans aggregating $42,000, consumer loans aggregating $55,000
and OREO aggregating $264,000. Nonperforming assets at December 31, 2000
and 1999, were also primarily comprised of nonaccrual residential mortgage
loans. The Company evaluates the underlying collateral of each
nonperforming loan and continues to pursue the collection of interest and
principal. Management believes that the December 31, 2001 level of
nonperforming assets is low. As the loan portfolio continues to grow and
mature, or if economic conditions worsen, management believes it highly
likely that the level of nonperforming assets will increase, as will its
level of charged-off loans.
The following table sets forth information regarding nonperforming
assets.
<TABLE>
<CAPTION>
December 31,
---------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c>
Nonaccrual loans $ 753 $ 508 $1,112
Loans past due 90 days or more, but still accruing -- -- --
Impaired loans (not included in nonaccrual loans) -- -- --
---------------------------
Total nonperforming loans 753 508 1,112
Other real estate owned 264 30 49
---------------------------
Total nonperforming assets $1,017 $ 538 $1,161
===========================
Nonperforming loans as a percent of total loans 0.12% 0.10% 0.24%
Nonperforming assets as a percent of total assets 0.12% 0.07% 0.18%
</TABLE>
<PAGE> 32
Nonaccrual Loans. Accrual of interest income on all loans is
discontinued when concern exists as to the collectibility of principal or
interest, or when a loan becomes over 90 days delinquent. Additionally,
when a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period income. Loans are
removed from nonaccrual when they become less than 90 days past due and in
the case of commercial and consumer loans, when concern no longer exists as
to the collectibility of principal or interest. Interest collected on
nonaccruing loans is either applied against principal or reported as income
according to management's judgment as to the collectibility of principal.
At December 31, 2001, nonaccrual loans totaled $753,000. Interest on
nonaccrual loans that would have been recorded as additional income for the
year ended December 31, 2001, had the loans been current in accordance with
their original terms, totaled $31,000. This compares with $35,000 and
$66,000 of foregone interest income on nonaccrual loans for the years ended
December 31, 2000 and 1999, respectively.
The following table sets forth certain information regarding
nonaccrual loans.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Percent Percent Percent
Principal of Total Principal of Total Principal of Total
Balance Loans Balance Loans Balance Loans
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Nonaccrual loans:
Residential mortgage loans $656 0.11% $398 0.08% $ 602 0.13%
Commercial loans 42 0.00% 109 0.02% 510 0.11%
Consumer and other loans 55 0.01% 1 0.00% -- --
------------------------------------------------------------------
Total nonaccrual loans $753 0.12% $508 0.10% $1,112 0.24%
==================================================================
</TABLE>
Delinquencies. At December 31, 2001, $3.7 million of loans were 30 to
89 days past due. This compares to $1.1 million and $811,000 of loans 30
to 89 days past due as of December 31, 2000 and 1999, respectively. The
majority of these loans at December 31, 2001 were commercial loans, while
at December 31, 2000 and 1999 they were residential mortgage loans.
Management reviews delinquent loans frequently to assess problem
situations and to quickly address these problems. In the case of consumer
and commercial loans, the Bank contacts the borrower when a loan becomes
delinquent. When a payment is not made, generally within 10-15 days of the
due date, a late charge is assessed. After 30 days of delinquency, a
notice is sent to the borrower advising that failure to cure the default
may result in formal demand for payment in full. In the event of further
delinquency, the matter is generally referred to legal counsel to commence
civil proceedings to collect all amounts owed. In the case of residential
mortgage loans, delinquency and collection proceedings are conducted by
either the Bank or its mortgage servicers in accordance with standard
servicing guidelines. In any circumstance where the Bank is secured by
real property or other collateral, the Bank enforces its rights to the
collateral in accordance with applicable law.
<PAGE> 33
The following table sets forth information as to loans delinquent for
30 to 89 days.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Percent Percent Percent
Principal of Total Principal of Total Principal of Total
Balance Loans Balance Loans Balance Loans
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Loans delinquent for 30 to 59 days:
Residential mortgage loans $ 526 0.09% $ 584 0.11% $378 0.08%
Commercial loans 2,878 0.47% 168 0.03% 334 0.08%
Consumer and other loans 143 0.02% 39 0.01% 6 0.00%
-------------------------------------------------------------------
Total loans delinquent 30 to 59 days 3,547 0.58% 791 0.15% 718 0.16%
-------------------------------------------------------------------
Loans delinquent for 60 to 89 days:
Residential mortgage loans 131 0.02% 278 0.05% 92 0.02%
Commercial loans -- -- 39 0.01% -- --
Consumer and other loans -- -- 20 0.01% 1 0.00%
-------------------------------------------------------------------
Total loans delinquent 60 to 89 days 131 0.02% 337 0.07% 93 0.02%
-------------------------------------------------------------------
Total loans delinquent 30 to 89 days $3,678 0.60% $1,128 0.22% $811 0.18%
===================================================================
</TABLE>
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 December 31, 2001, the Company had $8.7 million of assets that
were classified as substandard. This compares to $5.8 million and $1.2
million of assets that were classified as substandard at December 31, 2000
and 1999, respectively. The Company had no assets that were classified as
loss or doubtful at any of these dates. Performing loans may or may not be
adversely classified depending upon management's judgment with respect to
each individual loan. At December 31, 2001, included in the $8.7 million
of assets that were classified as substandard, were $7.9 million of
performing loans. This compares to $5.3 million and $127,000 of adversely
classified performing assets as of December 31, 2000 and 1999,
respectively. These amounts constitute assets that, in the opinion of
management, could potentially migrate to nonperforming or doubtful status.
The increase in adversely classified assets is reflective of a softening
economy and some deterioration in commercial credit quality. This may lead
to an increase in nonaccrual loans and an increase to the provision for
loan losses in future periods.
Allowance for Loan Losses
The allowance for loan losses is established for credit losses
inherent in the loan portfolio through a charge to earnings. Loans deemed
uncollectible are charged against the allowance, while recoveries of
amounts previously charged-off are added to the allowance. Amounts are
charged-off once the probability of loss has been established, with
consideration given to such factors as the customer's financial condition,
underlying collateral and guarantees, and general and industry economic
conditions.
<PAGE> 34
When an insured institution classifies problem loans as either
substandard or doubtful, it is required to establish allowances for loan
losses in an amount deemed prudent by management. Additionally, general
allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities, and have
not been allocated to particular problem loans.
The following table represents the allocation of the allowance for
loan losses as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Residential mortgage loans $1,835 50.8% $1,460 47.8% $1,395 51.7% $1,558 60.0% $1,534 63.5%
Commercial loans 4,191 39.2% 3,210 41.0% 2,007 38.0% 1,277 31.1% 1,040 28.3%
Consumer and other loans 787 10.0% 731 11.2% 566 10.3% 456 8.9% 393 8.2%
Unallocated 1,711 -- 1,893 -- 1,713 -- 1,727 -- 1,373 --
-----------------------------------------------------------------------------------------------
Total $8,524 100.0% $7,294 100.0% $5,681 100.0% $5,018 100.0% $4,340 100.0%
===============================================================================================
</TABLE>
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. Management's methodology to estimate loss
exposure includes an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on payment status or loss
experience and an unallocated allowance that is maintained based on
management's assessment of many factors including the growth, composition
and quality of the loan portfolio, historical loss experiences, general
economic conditions and other pertinent factors. Based on this evaluation,
management believes that the year-end allowance for loan losses 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.
During 2001, 2000 and 1999, the Bank made additions to the allowance
of $1.7 million, $1.5 million and $1.0 million and experienced net charge-
offs (recoveries) of $439,000, ($71,000) and $337,000, respectively. At
December 31, 2001, the allowance for loan losses stood at $8.5 million and
represented 1132.01% of nonperforming loans and 1.40% of total loans
outstanding. This compares to an allowance for loan losses of $7.3
million, representing 1435.83% of nonperforming loans and 1.41% of total
loans outstanding at December 31, 2000.
<PAGE> 35
An analysis of the activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c> <c>
Balance at beginning of year $7,294 $5,681 $5,018 $4,340 $4,024
Loans charged-off:
Residential mortgage loans -- (11) (128) (174) (505)
Commercial loans (406) (94) (176) (15) (71)
Consumer and other loans (61) (20) (80) (163) (135)
--------------------------------------------------
Total loans charged-off (467) (125) (384) (352) (711)
--------------------------------------------------
Recoveries of loans previously charged-off:
Residential mortgage loans -- -- 29 -- 8
Commercial loans -- 191 1 3 3
Consumer and other loans 28 5 17 10 16
--------------------------------------------------
Total recoveries of loans previously charged-off 28 196 47 13 27
--------------------------------------------------
Net (charge-offs) recoveries (439) 71 (337) (339) (684)
Provision for loan losses charged against income 1,669 1,542 1,000 1,017 1,000
--------------------------------------------------
Balance at end of year $8,524 $7,294 $5,681 $5,018 $4,340
==================================================
Net charge-offs (recoveries) to average loans
outstanding 0.08% (0.01%) 0.08% 0.08% 0.17%
==================================================
</TABLE>
Investments
Total investments (consisting of fed funds sold and overnight
investments, investment securities, MBSs, and FHLB stock) totaled $210.7
million, or 24.4% of total assets, at December 31, 2001. This compares to
total investments of $174.0 million, or 23.5% of total assets, as of
December 31, 2000. The increase of $36.7 million, or 21.1%, was primarily
in MBSs that were purchased to reinvest the funds generated from unusually
high prepayment levels of residential mortgage loans and continued deposit
growth. Some of these purchases were of SBA securities that, in addition
to a governmental guarantee, have a floating interest rate indexed to a
specified prime rate.
The investment portfolio provides a source of short-term liquidity
and acts as a counterbalance to loan and deposit flows. Investment
securities and MBSs are primarily comprised of U.S. Agency securities. All
investment securities and MBSs at December 31, 2001 and 2000, were
classified as securities available for sale. At December 31, 2001, these
securities carried a total of $1.4 million in net unrealized gains,
compared to $275,000 in net unrealized losses at December 31, 2000.
<PAGE> 36
A summary of investment and mortgage-backed securities available for
sale follows:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------- Market
Cost Gains Losses Value
--------- ----- ------ ------
(In thousands)
<s> <c> <c> <c> <c>
At December 31, 2001:
U.S. Agency obligations $ 46,004 $ 514 $ (74) $ 46,444
Trust preferred securities 3,189 -- (180) 3,009
U.S. Agency mortgage-backed securities 140,316 1,260 (325) 141,251
Collateralized mortgage obligations 9,233 166 -- 9,399
----------------------------------------------
Total $198,742 $1,940 $ (579) $200,103
==============================================
At December 31, 2000:
U.S. Treasury obligations $ 1,016 $ -- $ (11) $ 1,005
U.S. Agency obligations 44,256 167 (119) 44,304
Trust preferred securities 2,187 -- (200) 1,987
U.S. Agency mortgage-backed securities 104,863 457 (468) 104,852
Collateralized mortgage obligations 12,680 -- (101) 12,579
----------------------------------------------
Total $165,002 $ 624 $ (899) $164,727
==============================================
At December 31, 1999:
U.S. Treasury obligations $ 10,023 $ 21 $ (36) $ 10,008
U.S. Agency obligations 39,256 5 (875) 38,386
Trust preferred securities 2,198 -- (89) 2,109
U.S. Agency mortgage-backed securities 62,101 -- (1,125) 60,976
Collateralized mortgage obligations 14,357 -- (540) 13,817
----------------------------------------------
Total $127,935 $ 26 $(2,665) $125,296
==============================================
</TABLE>
The following table sets forth the maturities of investment and
mortgage-backed securities available for sale and the weighted average
yields of such securities:
<TABLE>
<CAPTION>
After One, But After Five, But
Within One Year Within Five Years Within Ten Years After Ten Years
------------------ ------------------ ----------------- -------------------
Weighted Weighted Weighted Weighted
Market Average Market Average Market Average Market Average
Value Yield Value Yield Value Yield Value Yield
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c>
At December 31, 2001:
U.S. Agency obligations $ 3,046 5.91% $43,398 4.94% $ -- -- $ -- --
Trust preferred securities -- -- -- -- -- -- 3,009 8.59%
U.S. Agency mortgage-backed securities -- -- -- -- 1,664 3.47% 139,587 5.37%
Collateralized mortgage obligations -- -- -- -- -- -- 9,399 6.47%
------- ------- ------ --------
Total $ 3,046 5.91% $43,398 4.94% $1,664 3.47% $151,995 5.51%
=============== =============== =============== =================
At December 31, 2000:
U.S. Treasury obligations $ 1,005 4.16% $ -- -- $ -- -- $ -- --
U.S. Agency obligations 5,243 5.70% 39,061 6.40% -- -- -- --
Trust preferred securities -- -- -- -- -- -- 1,987 8.16%
U.S. Agency mortgage-backed securities -- -- -- -- -- -- 104,852 6.69%
Collateralized mortgage obligations -- -- -- -- -- -- 12,579 6.47%
------- ------- ------ --------
Total $ 6,248 5.46% $39,061 6.40% $ -- -- $119,418 6.71%
=============== =============== =============== =================
At December 31, 1999:
U.S. Treasury obligations $ 9,007 6.39% $ 1,002 4.15% $ -- -- $ -- --
U.S. Agency obligations 3,991 5.80% 24,557 5.74% 9,838 7.10% -- --
Trust preferred securities -- -- -- -- -- -- 2,108 8.16%
U.S. Agency mortgage-backed securities -- -- -- -- -- -- 60,976 5.98%
Collateralized mortgage obligations -- -- -- -- -- -- 13,817 6.48%
------- ------- ------ --------
Total $12,998 6.21% $25,559 5.68% $9,838 7.10% $ 76,901 6.13%
=============== =============== =============== =================
</TABLE>
<PAGE> 37
Deposits and Borrowings
The Company has devoted considerable time and resources to its
deposit gathering network. The Company experienced a net increase in total
deposits during 2001, to $670.4 million, or 77.8% of total assets, at
December 31, 2001, from $631.6 million, or 85.4% of total assets, at
December 31, 2000. This increase of $38.8 million, or 6.1%, in total
deposits was centered in core accounts and broken down as follows: Demand
deposit and NOW accounts up $14.4 million, or 10.1%; savings accounts up
$44.1 million, or 20.9%; while certificates of deposit accounts were down
$17.4 million, or 6.5%. By comparison, the increase in total deposits
during 2000 (which was an unusual year) was $118.2 million, or 23.0%.
The following table sets forth certain information regarding
deposits:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
Percent Weighted Percent Weighted Percent Weighted
of Average of Average of Average
Amount Total Rate Amount Total Rate Amount Total Rate
------ ------- -------- ------ ------- -------- ------ ------- --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
NOW accounts $ 44,445 6.6% 0.40% $ 36,910 5.8% 0.64% $ 27,456 5.4% 0.64%
Money market accounts 9,914 1.5% 1.40% 12,283 1.9% 2.59% 16,073 3.1% 2.70%
Savings accounts 254,861 38.0% 1.90% 210,728 33.4% 3.52% 173,692 33.8% 2.78%
Certificate of deposit accounts 248,268 37.0% 4.15% 265,623 42.1% 5.76% 228,351 44.5% 4.95%
---------------- ---------------- ----------------
Total interest bearing deposits 557,488 83.1% 2.77% 525,544 83.2% 4.43% 445,572 86.8% 3.76%
Noninterest bearing accounts 112,925 16.9% -- 106,088 16.8% -- 67,844 13.2% --
---------------- ---------------- ----------------
Total deposits $670,413 100.0% 2.31% $631,632 100.0% 3.69% $513,416 100.0% 3.26%
========================================================================================
</TABLE>
At December 31, 2001, certificate of deposit accounts with balances
greater than $100,000 aggregated $35.4 million, compared to $32.1 million
and $25.3 million at December 31, 2000 and 1999, respectively.
Total borrowings (consisting of overnight and short-term borrowings,
FHLB and other borrowings) increased $74.5 million during 2001, to $126.4
million, from $51.9 million at December 31, 2000. The Company had $67.9
million of borrowings outstanding at the end of 1999. The increase during
2001 was the result of the Company seeking to take advantage of lower,
long-term borrowing rates to partially fund its asset growth, along with
funding a number of residential mortgage loan purchases during the first
quarter of 2001. During 2000, the decrease in total borrowings was
primarily attributable to the strong deposit growth the Company
experienced, permitting the repayment of maturing FHLB borrowings. The
Bank, through its 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. However, on a long-
term basis, the Bank intends to concentrate on increasing its core
deposits.
<PAGE> 38
Company-Obligated Mandatorily Redeemable Capital Securities
On February 22, 2001, the Company, through its statutory trust
subsidiary, issued $3.0 million of trust preferred securities. These
securities have a 10.20% interest rate and mature in 30 years. The
regulatory capital generated from issuing these securities supported the
purchase of $50.5 million of residential mortgage loans and $10.1 million
of MBSs during the first quarter of 2001. This issuance also confirmed the
Company's ability to access the capital markets through use of trust
preferred securities.
Asset and Liability Management
The principal objective of the Company's asset and liability
management process is to maximize profit potential while minimizing the
vulnerability of its operations to changes in interest rates by means of
managing the ratio of interest rate sensitive assets to interest rate
sensitive liabilities within specified maturity or repricing periods. The
Company's actions in this regard are taken under the guidance of the Bank's
Asset/Liability Committee ("ALCO") that is comprised of members of senior
management. The ALCO generally meets monthly and is actively involved in
formulating the economic assumptions that the Company uses in its financial
planning and budgeting process and establishes policies which control and
monitor the sources, uses and pricing of funds. The Company has not
engaged in any hedging activities.
The ALCO manages the Company's interest rate risk position using both
income simulation and interest rate sensitivity "gap" analysis. The ALCO
has established internal parameters for monitoring the income simulation
and gap analysis. These guidelines serve as benchmarks for evaluating
actions to balance the current position against overall strategic goals.
The ALCO monitors current exposures and reports these to the Board of
Directors.
Simulation is used as the primary tool for measuring the interest
rate risk inherent in the Company's balance sheet at a given point in time
by showing the effect on net interest income, over a 24-month period, of
interest rate ramps of up to 200 basis points. These simulations take into
account repricing, maturity and prepayment characteristics of individual
products. The ALCO reviews simulation results to determine whether the
downside exposure resulting from changes in market interest rates remains
within established tolerance levels over both a 12-month and 24-month
horizon, and develops appropriate strategies to manage this exposure. The
Company's limits on interest rate risk specify that if interest rates were
to shift up or down 200 basis points over a 12-month period, estimated net
interest income for those 12 months and the subsequent 12 months, should
decline by no more than 5.0% or 10.0%, respectively. As of December 31,
2001, net interest income simulation indicated that the Company's exposure
to changing interest rates was outside of the 10% tolerance level
established for the second year of a 200 basis point decline. This
exposure primarily results from the unusually low current rates paid on
deposit accounts and the extremely high prepayment speeds anticipated for
mortgage-related assets if market rates declined 200 basis points. The
current rates on many deposit accounts are so low, that they cannot decline
200 basis points without becoming negative. This results in a floor of
zero percent for these deposit accounts, and this floor causes compression
of the net interest margin for modeling purposes. The ALCO reviews the
methodology utilized for calculating interest rate risk exposure and may,
from time to time, adopt modifications to this methodology. While the ALCO
reviews simulation assumptions and methodology to ensure that they reflect
historical experience, it should be noted that income simulation may not
always prove to be an accurate indicator of interest rate risk because the
actual repricing, maturity and prepayment characteristics of individual
products may differ from the estimates used in the simulations.
<PAGE> 39
The following table presents the estimated impact of interest rate
ramps on estimated net interest income over a 24-month period beginning
January 1, 2002:
<TABLE>
<CAPTION>
Estimated Impact on
Net Interest Income
-------------------
Dollar Percent
Change Change
------ -------
(Dollars in thousands)
<s> <c> <c>
Initial 12-Month Period:
Up 200 basis point ramp $ 983 3.19%
Up 100 basis point ramp 478 1.55%
Down 100 basis point ramp (560) (1.81%)
Down 200 basis point ramp (1,225) (3.97%)
Subsequent 12-Month Period:
Up 200 basis point ramp $ 1,601 5.23%
Up 100 basis point ramp 1,028 3.36%
Down 100 basis point ramp (1,503) (4.91%)
Down 200 basis point ramp (3,721) (12.16%)
</TABLE>
The Company also uses interest rate sensitivity "gap" analysis to
provide a more general overview of its interest rate risk profile. The
effect of interest rate changes on the assets and liabilities of a
financial institution such as the Bank may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive"
and by monitoring an institution's interest rate sensitivity gap. An asset
or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. 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. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds interest rate sensitive assets.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to
result in an increase in net income. Conversely, during a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest
income adversely.
The Company has sought to maintain a relatively narrow gap position
and has, in some instances, foregone investment in higher yielding assets
when such investment, in management's opinion, exposed it to undue interest
rate risk. However, the Company does not attempt to perfectly match
interest rate sensitive assets and liabilities and will selectively
mismatch its assets and liabilities to a controlled degree when it
considers it both appropriate and prudent to do so. There are a number of
relevant time periods in which to measure the gap position, such as at the
30, 60, 90, or 180 day points in the maturity schedule. Management
monitors the gap position at each of these maturity points, while also
focusing closely on the gap at the one-year point in making its principal
funding decisions, such as with respect to its commercial and residential
mortgage loan portfolios. At December 31, 2001, the Company's cumulative
one-year gap was a positive $97.4 million, or 11.3% of total assets,
compared to negative $2.4 million, or 0.3% of total assets, at the end of
2000. The Company's cumulative one-year gap at December 31, 2001 was
higher than in past years, but is projected to decrease to less than 10.0%
of total assets during 2002.
<PAGE> 40
The following table presents the repricing schedule for interest-
earning assets and interest-bearing liabilities at December 31, 2001. To
the extent applicable, amounts of assets and liabilities that mature or
reprice within a particular period were determined in accordance with their
contractual terms. Investment securities are allocated based upon expected
call dates. Loans and MBSs have been allocated based upon expected
amortization and prepayment rates based on historical performance.
Savings, NOW and money market deposit accounts, which have no contractual
term and are subject to immediate repricing, are anticipated to behave more
like core accounts and therefore are presented as spread evenly over the
first three years. Nonetheless, this presentation does not reflect lags
that may occur in the actual repricing of these deposits.
<TABLE>
<CAPTION>
Within Over Three Over Six Over One
Three to Six to Twelve Year to Over Five
Months Months Months Five Years Years Total
------ ---------- --------- ---------- --------- -----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Interest-earning assets:
Federal funds sold and overnight investments $ 4,913 $ -- $ -- $ -- $ -- $ 4,913
Investment securities 3,000 16,003 5,000 22,001 3,449 49,453
Mortgage-backed securities 42,745 15,421 19,981 68,941 3,562 150,650
FHLB Stock 5,668 -- -- -- -- 5,668
Residential mortgage loans 43,204 34,940 60,279 152,354 19,435 310,212
Commercial loans 93,708 17,871 22,240 101,284 4,261 239,364
Consumer and other loans 31,629 5,406 4,772 13,879 5,702 61,388
-----------------------------------------------------------------------------
Total interest-earning assets 224,867 89,641 112,272 358,459 36,409 821,648
-----------------------------------------------------------------------------
Interest-bearing liabilities:
NOW accounts 3,705 3,705 7,408 29,627 -- 44,445
Money market accounts 825 825 1,652 6,612 -- 9,914
Savings accounts 21,237 21,237 42,476 169,911 -- 254,861
Certificate of deposit accounts 73,710 39,710 89,845 43,970 1,033 248,268
Overnight & short-term borrowings 13,033 -- -- -- -- 13,033
FHLB borrowings 5,003 3 5,008 93,166 10,185 113,365
Capital trust securities -- -- -- -- 3,000 3,000
-----------------------------------------------------------------------------
Total interest-bearing liabilities 117,513 65,480 146,389 343,286 14,218 686,886
-----------------------------------------------------------------------------
Net interest sensitivity gap during
the period $107,354 $ 24,161 $(34,117) $ 15,173 $ 22,191 $134,762
=============================================================================
Cumulative gap -- 12/31/01 $107,354 $131,515 $ 97,398 $112,571 $134,762
=============================================================================
Cumulative gap -- 12/31/00 $ 73,872 $ 56,910 $ (2,440) $ 69,021 $115,423
=============================================================================
Interest-sensitive assets as a percent of
interest-sensitive liabilities (cumulative) 191.35% 171.87% 129.57% 116.74% 119.62%
Cumulative gap as a percent of total assets 12.45% 15.25% 11.30% 13.06% 15.63%
</TABLE>
The preceding table does not necessarily indicate the impact of
general interest rate movements on the Company's net interest income
because the repricing of various assets and liabilities is discretionary
and is subject to competitive and other factors. As a result, assets and
liabilities indicated as repricing within the same period may, in fact,
reprice at different times and at different rate levels.
<PAGE> 41
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 December 31, 2001,
federal funds sold and overnight investments, investment securities and
mortgage-backed securities available for sale amounted to $205.0 million,
or 23.8% of total assets. This compares to $170.3 million, or 23.0% of
total assets, at December 31, 2000. The Bank is a member 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 December 31, 2001 was
$59.1 million, as compared to $53.3 million at December 31, 2000. Major
activity in shareholders' equity during 2001 can be summarized as follows:
net income for the year was $6.3 million, dividends paid on Common Stock
totaled $1.8 million and changes in unrealized gains and losses on
securities equaled $1.1 million.
All FDIC-insured institutions must meet specified minimal capital
requirements. These regulations require banks to maintain a minimum
leverage capital ratio. At December 31, 2001, the Bank's Tier I leverage
ratio stood at 5.84%. 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." According to these standards, the Bank had a Tier I risk-
weighted capital ratio of 9.72% and a Total risk-weighted capital ratio of
10.97% at December 31, 2001.
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. At December
31, 2001, the Company's Tier I leverage ratio was 5.93%, its Tier I Risk-
based capital ratio was 9.86% and its Total Risk-based capital ratio was
11.10%.
<PAGE> 42
As of December 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.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes thereto,
included elsewhere herein, have been prepared in accordance with GAAP,
which require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. Unlike many
industrial companies, substantially all of the assets and liabilities of
the Bank are monetary in nature. As a result, interest rates have a more
significant impact on the Bank's performance than the general level of
inflation. Over short periods of time, interest rates may not necessarily
move in the same direction or in the same magnitude as inflation.
Recent Accounting Developments
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 142 addresses financial accounting
and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. Under SFAS 142, goodwill
and intangible assets that have indefinite useful lives will no longer be
amortized, but rather will be tested at least annually for impairment. The
Statement applies to existing goodwill (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.
On October 17, 2001, FASB issued Action Alert No. 01-37. That Action
Alert reported a conclusion reached by FASB at its October 10, 2001 meeting
regarding the application of SFAS 142 and Statement of Financial Accounting
Standards 141, Business Combinations ("SFAS 141") with respect to goodwill
accounting for bank branch acquisitions. The conclusion set forth in the
October 17th Action Alert states that paragraph 5 of Statement of Financial
Standards 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions (SFAS 72), "applies to all acquisitions of financial
institutions (or branches thereof) whether "troubled" or not, in which the
fair value of the liabilities assumed exceeds the fair value of tangible and
intangible assets acquired." SFAS 72 was originally issued in 1983, in the
context of the savings and loan crisis and the acquisition of so-called
"troubled" financial institutions. The branch acquisitions associated with
the formation of the Company's banking subsidiary in March 1996 were such
that the fair value of the liabilities assumed appear to exceed the fair
value of tangible and intangible assets acquired. Thus, the March 1996
transaction gave rise to a type of intangible that, unlike goodwill, will
continue to be amortized under current accounting guidelines.
Based upon the conclusion set forth in the October 17th Action Alert,
the Company is required to continue amortizing its intangible attributable
to its March 1996 bank branch acquisition during the Fleet Financial Group,
Inc. divestiture. Current amortization of this intangible is $1.2 million
annually. Accordingly, the Company anticipates that there will continue to
be a difference between its GAAP and cash basis presentations.
The October 17th Action Alert also states that FASB will reconsider
its new guidance during future deliberations. The conclusion reached by
FASB regarding the need to continue amortization of an unidentifiable
intangible asset, therefore, may be overturned at a later date. The
Company, however, can give no assurance that FASB will vary from its
current position. Regardless of its final outcome, this goodwill
accounting issue will not have any material impact on the Company's
financial condition. At December 31, 2001, the Company had $10.8 million
of excess of cost over net assets acquired remaining on its balance sheet.
<PAGE> 43
BANCORP RHODE ISLAND, INC.
Management's Report
The management of Bancorp Rhode Island, Inc. is responsible for the
preparation, integrity and fair presentation of the financial statements
and other financial information in this annual report. Management believes
that the financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis in
all material respects. In preparing the financial statements and other
financial information, management makes certain judgments and estimates
where appropriate.
The accounting systems, which record, summarize and report financial
data, are supported by a system of internal control. The Company's system
of internal control is designed to provide reasonable assurance that assets
are safeguarded, that transactions are executed in accordance with
management's authorizations and that transactions are properly recorded in
the financial statements. This system is augmented by written policies and
procedures, along with internal audits. Management recognizes that
estimates and judgments are required to assess and balance the relative
costs and expected benefits of the controls and that errors or
irregularities may nevertheless occur. However, management believes that
the Company's internal control system provides reasonable assurance that
errors or irregularities that could be material to the financial statements
are prevented or would be detected on a timely basis and corrected in the
normal course of business.
The Board of Directors oversees the financial statements through an
Audit Committee comprised solely of outside directors who are not employees
of the Company. The Audit Committee reviews the activities of the internal
audit function and meets regularly with representatives of KPMG LLP, the
Company's independent auditors. KPMG LLP has been appointed by the Board
of Directors to conduct an independent audit and to express an opinion as
to the fairness of the presentation of the consolidated financial
statements of Bancorp Rhode Island, Inc.
Merrill W. Sherman Albert R. Rietheimer
President and Chief Financial Officer and
Chief Executive Officer Treasurer
<PAGE> 44
BANCORP RHODE ISLAND, INC.
Independent Auditors' Report
The Board of Directors and Shareholders
Bancorp Rhode Island, Inc.:
We have audited the accompanying consolidated balance sheets of
Bancorp Rhode Island, Inc. and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Bancorp Rhode Island, Inc. and subsidiaries as of December 31, 2001 and
2000, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of
America.
KPMG LLP
Providence, Rhode Island
January 16, 2002
<PAGE> 45
BANCORP RHODE ISLAND, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Assets:
Cash and due from banks (Note 2) $ 24,261 $ 28,853
Federal funds sold and overnight investments 4,913 5,600
Investment securities available for sale (amortized cost of $49,193 and
$47,459, respectively) (Notes 3, 10, 11 and 12) 49,453 47,296
Mortgage-backed securities available for sale (amortized cost of $149,549 and
$117,543, respectively) (Notes 4 and 11) 150,650 117,431
Stock in the Federal Home Loan Bank of Boston (Note 11) 5,668 3,704
Loans receivable (Notes 5 and 11):
Residential mortgage loans 310,212 247,923
Commercial loans 239,364 212,818
Consumer and other loans 61,388 58,084
---------------------
Total loans receivable 610,964 518,825
Allowance for loan losses (Note 6) (8,524) (7,294)
---------------------
Net loans receivable 602,440 511,531
Premises and equipment, net (Note 7) 7,184 6,384
Other real estate owned (Note 8) 264 30
Excess of cost over net assets acquired, net (Note 2) 10,766 11,930
Accrued interest receivable 5,803 5,630
Prepaid expenses and other assets 848 1,031
---------------------
Total assets $862,250 $739,420
=====================
Liabilities:
Deposits (Note 9):
Demand deposit accounts $112,925 $106,088
NOW accounts 44,445 36,910
Money market accounts 9,914 12,283
Savings accounts 254,861 210,728
Certificate of deposit accounts 248,268 265,623
---------------------
Total deposits 670,413 631,632
Overnight and short-term borrowings (Note 10) 13,033 13,847
Federal Home Loan Bank of Boston borrowings (Note 11) 113,365 33,292
Other borrowings (Note 12) -- 4,750
Company-obligated mandatorily redeemable capital securities (Note 13) 3,000 --
Other liabilities 3,342 2,607
---------------------
Total liabilities 803,153 686,128
---------------------
Commitments and contingencies (Notes 7, 17 and 21)
Shareholders' equity (Notes 1 and 19):
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding: 3,753,550 shares in 2001 and 3,448,950
shares in 2000 37 34
Non-Voting: Issued and outstanding: 280,000 shares in 2000 -- 3
Additional paid-in capital 39,826 39,621
Retained earnings 18,336 13,815
Accumulated other comprehensive income (loss), net (Notes 3 and 4) 898 (181)
---------------------
Total shareholders' equity 59,097 53,292
---------------------
Total liabilities and shareholders' equity $862,250 $739,420
=====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 46
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
(In thousands, except per share data)
<s> <c> <c> <c>
Interest and dividend income:
Residential mortgage loans $ 21,694 $ 17,982 $ 16,997
Commercial loans 18,078 17,737 12,795
Consumer and other loans 4,569 4,472 3,491
Mortgage-backed securities 7,720 5,576 4,835
Investment securities 3,044 3,056 2,814
Federal funds sold and overnight investments 510 930 482
Federal Home Loan Bank of Boston stock dividends 288 282 237
----------------------------------------
Total interest and dividend income 55,903 50,035 41,651
----------------------------------------
Interest expense:
NOW accounts 209 205 175
Money market accounts 221 375 473
Savings accounts 6,507 6,137 4,742
Certificate of deposit accounts 13,458 13,685 11,396
Overnight and short-term borrowings 461 636 335
Federal Home Loan Bank of Boston borrowings 5,280 2,359 2,198
Other borrowings 138 281 281
Company-obligated mandatorily redeemable capital securities 263 -- --
----------------------------------------
Total interest expense 26,537 23,678 19,600
----------------------------------------
Net interest income 29,366 26,357 22,051
Provision for loan losses (Note 6) 1,669 1,542 1,000
----------------------------------------
Net interest income after provision for loan losses 27,697 24,815 21,051
----------------------------------------
Noninterest income:
Loan related fees 285 258 306
Service charges on deposit accounts 3,451 2,722 2,215
Gain on sales of mortgage-backed securities 4 -- --
Commissions on loans originated for others 288 74 83
Other income 1,203 524 618
----------------------------------------
Total noninterest income 5,231 3,578 3,222
----------------------------------------
Noninterest expense:
Salaries and employee benefits (Note 15) 11,287 9,552 8,065
Occupancy (Note 7) 1,744 1,530 1,302
Equipment 878 899 744
Data processing 1,779 1,340 1,348
Marketing 979 1,069 883
Professional services 883 891 870
Loan servicing 945 761 825
Other real estate owned (Note 8) 353 31 108
Amortization of excess of cost over net assets acquired 1,164 1,164 1,164
Deposit tax and assessments 117 109 58
Other expenses (Note 16) 3,067 2,316 1,987
----------------------------------------
Total noninterest expense 23,196 19,662 17,354
----------------------------------------
Income before income taxes and change in accounting principle 9,732 8,731 6,919
Income tax expense (Note 14) 3,417 3,113 2,448
----------------------------------------
Net income before change in accounting principle 6,315 5,618 4,471
Cumulative effect of change in accounting principle -- -- 109
----------------------------------------
Net income 6,315 5,618 4,362
Dividends on preferred stock -- -- 88
----------------------------------------
Net income available to common shareholders $ 6,315 $ 5,618 $ 4,274
========================================
Basic earnings per common share (Notes 2 and 20):
Income per common share before change in accounting principle $ 1.69 $ 1.51 $ 1.18
Cumulative effect of change in accounting principle, net of tax -- -- (0.03)
----------------------------------------
Net income per common share $ 1.69 $ 1.51 $ 1.15
========================================
Diluted earnings per common share (Notes 2 and 20):
Income per common share before change in accounting principle $ 1.62 $ 1.49 $ 1.17
Cumulative effect of change in accounting principle, net of tax -- -- (0.03)
----------------------------------------
Net income per common share $ 1.62 $ 1.49 $ 1.14
========================================
Average common shares outstanding - basic 3,730,910 3,728,688 3,727,010
Average common shares outstanding - diluted 3,900,028 3,768,589 3,741,778
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 47
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Changes in Shareholders' Equity
For Years Ended December 31, 2001, 2000 and 1999
<TABLE>
<CAPTION>
Accumulated
Other
Compre-
Additional hensive
Preferred Common Paid-in Retained Income/
Stock Stock Capital Earnings (Loss) Total
--------- ------ ---------- -------- ----------- -----
(In thousands)
<s> <c> <c> <c> <c> <c> <c>
Balance at December 31, 1998 $ 804 $37 $40,774 $ 5,862 $ 210 $47,687
Net income -- -- -- 4,362 -- 4,362
Other comprehensive income, net
of tax:
Unrealized holding losses arising
during the period, net of taxes of $1,002 (1,952) (1,952)
-------
Comprehensive income 2,410
Exercise of stock options -- -- 49 -- -- 49
Redemption of preferred stock (804) -- (1,206) -- -- (2,010)
Dividends on preferred stock -- -- -- (88) -- (88)
Dividends on common stock -- -- -- (373) -- (373)
---------------------------------------------------------------------
Balance at December 31, 1999 -- 37 39,617 9,763 (1,742) 47,675
Net income -- -- -- 5,618 -- 5,618
Other comprehensive income, net
of tax:
Unrealized holding gains arising
during the period, net of taxes of $(804) 1,561 1,561
-------
Comprehensive income 7,179
Exercise of stock options -- -- 4 -- -- 4
Dividends on common stock -- -- -- (1,566) -- (1,566)
---------------------------------------------------------------------
Balance at December 31, 2000 -- 37 39,621 13,815 (181) 53,292
Net income -- -- -- 6,315 -- 6,315
Other comprehensive income, net
of tax:
Unrealized holding gains arising
during the period, net of taxes of $(556) 1,082 1,082
Gain on securities available for
sale included in net income, net of
taxes of $1 (3) (3)
-------
Comprehensive income 7,394
Exercise of stock options -- -- 175 -- -- 175
Common stock issued for incentive stock
award, net -- -- 30 -- -- 30
Dividends on common stock -- -- -- (1,794) -- (1,794)
---------------------------------------------------------------------
Balance at December 31, 2001 $ -- $37 $39,826 $18,336 $ 898 $59,097
=====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 48
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Cash flows from operating activities:
Net income $ 6,315 $ 5,618 $ 4,362
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,168 2,558 3,030
Provision for loan losses 1,669 1,542 1,000
Gain on sales of mortgage-backed securities (4) -- --
Loss (gain) on other real estate owned (25) (7) 12
Compensation expense from restricted stock grant 30 -- --
(Increase) decrease in accrued interest receivable (173) (960) 59
(Increase) decrease in prepaid expenses and other assets (374) (290) (225)
Increase (decrease) in other liabilities 735 (368) 923
Increase (decrease) in other, net 17 204 213
-----------------------------------
Net cash provided by operating activities 11,358 8,297 9,374
-----------------------------------
Cash flows from investing activities:
Origination of:
Residential mortgage loans (17,997) (9,960) (17,630)
Commercial loans (59,067) (65,421) (62,281)
Consumer loans (22,515) (18,111) (18,909)
Purchase of:
Investment securities available for sale (54,026) (9,000) (35,168)
Mortgage-backed securities available for sale (77,620) (58,999) (17,947)
Residential mortgage loans (186,869) (48,503) (53,883)
Consumer and other loans (5,045) (5,043) --
Federal Home Loan Bank of Boston stock (1,964) -- (359)
Principal payments on:
Investment securities available for sale 52,263 13,000 23,000
Mortgage-backed securities available for sale 41,617 17,785 21,256
Residential mortgage loans 141,657 47,422 91,841
Commercial loans 31,631 27,139 21,620
Consumer loans 23,928 12,042 10,187
Proceeds from sale of mortgage-backed securities 3,832 -- --
Proceeds from disposition of other real estate owned 670 163 617
Proceeds from sale of premises and equipment 18 -- --
Capital expenditures for premises and equipment (1,821) (1,476) (1,923)
-----------------------------------
Net cash used in investing activities (131,308) (98,962) (39,579)
-----------------------------------
Cash flows from financing activities:
Net increase in deposits 38,781 118,216 12,703
Net increase in overnight and short-term borrowings (814) (1,131) 10,716
Proceeds from FHLB and other borrowings 83,082 15,116 70,300
Repayment of FHLB and other borrowings (7,759) (30,007) (58,617)
Proceeds from capital trust securities 3,000 -- --
Redemption of preferred stock -- -- (2,010)
Dividends on preferred stock -- -- (88)
Proceeds from issuance of common stock 175 4 49
Dividends on common stock (1,794) (1,566) (373)
-----------------------------------
Net cash provided by financing activities 114,671 100,632 32,680
-----------------------------------
Net increase (decrease) in cash and cash equivalents (5,279) 9,967 2,475
Cash and cash equivalents at beginning of year 34,453 24,486 22,011
-----------------------------------
Cash and cash equivalents at end of year $ 29,174 $ 34,453 $ 24,486
===================================
Supplementary disclosures:
Cash paid for interest $ 26,122 $ 23,471 $ 19,604
Cash paid for income taxes 4,095 3,975 3,230
Non-cash transactions:
Additions to other real estate owned in settlement of loans 879 137 284
Change in other comprehensive income, net of taxes 1,079 1,561 (1,952)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 49
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements
(1) Organization
Bancorp Rhode Island, Inc., a Rhode Island corporation (the
"Company"), was organized by Bank Rhode Island (the "Bank") on February 15,
2000, to be a bank holding company and to acquire all of the capital stock
of the Bank. The reorganization of the Bank into the holding company form
of ownership was completed on September 1, 2000. The Company has no
significant operating entities other than the Bank. For this reason,
substantially all of the discussion in these Consolidated Financial
Statements and accompanying Notes relates to the operations of the Bank and
its subsidiaries.
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 broad range of basic deposit
services, including checking, savings and certificate of deposit accounts,
along with access to their accounts through automated teller machines
("ATMs"), debit cards and the internet. The Bank also offers a broad range
of commercial, commercial real estate and consumer loans. Additionally,
the Bank provides IRA and Keogh accounts, along with non-deposit investment
products. The Company and Bank are subject to the regulations of certain
state and federal agencies and undergo periodic examinations by those
regulatory authorities. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"), subject to regulatory limits.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America
and to prevailing practices within the banking industry. The Company has
one reportable operating segment. The following is a summary of the
significant accounting and reporting policies used by management in
preparing and presenting the consolidated financial statements.
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.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Bancorp Rhode Island, Inc., and its wholly-owned subsidiaries,
Bank Rhode Island and BRI Statutory Trust I (an issuer of trust preferred
securities), along with the Bank's wholly-owned subsidiaries, BRI
Investment Corp. (a Rhode Island passive investment company), BRI Realty
Corp. (a Rhode Island real estate holding company) and Acorn Insurance
Agency, Inc. (a licensed insurance agency). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the prior year's financial statements may have
been reclassified to conform with the current year's presentation.
<PAGE> 50
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Statement of Cash Flows
For purposes of reporting cash flows, the Company considers cash, due
from banks, federal funds sold and overnight investments to be cash
equivalents. Cash flows relating to deposits are presented net in the
statement of cash flows.
Comprehensive Income
Comprehensive income is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a
component of comprehensive income, with all other components referred to in
the aggregate as 'other comprehensive income.'
Cash and Due From Banks
The Bank is required to maintain average reserve balances in a
noninterest bearing account with the Federal Reserve Bank based upon a
percentage of certain deposits. As of December 31, 2001 and 2000, the
average daily amount required to be held was $531,000 and $500,000,
respectively. Additionally, in connection with a line of credit from a
correspondent bank, the Bank is required to maintain a compensating balance
in a noninterest bearing account. As of both December 31, 2001 and 2000,
the required compensating balance was $100,000.
Investment and Mortgage-Backed Securities
Debt securities are classified as held to maturity, available for
sale, or trading. As of December 31, 2001 and 2000, all of the Company's
securities were classified as available for sale. Securities are
classified as held to maturity and carried at amortized cost only if the
Company has a positive intent and the ability to hold these securities to
maturity. Securities are classified as trading and carried at fair value,
with unrealized gains and losses included in earnings, if they are bought
and held principally for the purpose of selling in the near term.
Securities not classified as either held to maturity or trading are
classified as available for sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of estimated income taxes.
Premiums and discounts on securities are amortized or accreted into
income by the level-yield method. If a decline in fair value below the
amortized cost basis of a security is judged to be other than temporary,
the cost basis of the security is written down to fair value. The amount
of the writedown is included as a charge against earnings. Gains and
losses on the sale of securities are recognized at the time of sale on a
specific identification basis.
Loans
Loans held in portfolio are stated at the principal amount
outstanding, net of unamortized premiums, discounts, or deferred loan
origination fees and costs. Interest income is accrued on a level-yield
basis based on the principal amount outstanding. Premiums, discounts, and
deferred loan origination fees and costs are amortized as an adjustment to
yield over the life of the related loans. When a loan is paid-off, the
unamortized portion of premiums, discounts or net fees is recognized into
income.
<PAGE> 51
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Loans on which the accrual of interest has been discontinued are
designated nonaccrual loans. Accrual of interest income is discontinued
when concern exists as to the collectibility of principal or interest, or
when a loan becomes over 90 days delinquent. Additionally, when a loan is
placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period income. Loans are removed
from nonaccrual when they become less than 90 days past due and when
concern no longer exists as to the collectibility of principal or interest.
Interest collected on nonaccruing loans is either applied against principal
or reported as income according to management's judgment as to the
collectibility of principal.
Impaired loans are loans for which it is probable that the Bank will
not be able to collect all amounts due according to the contractual terms
of the loan agreements. Impairment is measured on a discounted cash flow
method, or at the loan's observable market price, or at the fair value of
the collateral if the loan is collateral dependent. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
In addition, the Bank classifies a loan as an in-substance foreclosure only
when the Bank is in possession of the collateral.
Allowance for Loan Losses
The allowance for loan losses is established for credit losses
inherent in the loan portfolio through a charge to earnings. When
management believes that the collectibility of a loan's principal balance,
or portions thereof, is unlikely, the principal amount is charged against
the allowance. Recoveries on loans which have been previously charged off
are credited to the allowance as received.
Management's methodology to estimate loss exposure inherent in the
portfolio includes an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on payment status or loss
experience and an unallocated allowance that is maintained based on
management's assessment of many factors including the growth, composition
and quality of the loan portfolio, historical loss experience, general
economic conditions, and other pertinent factors. While management
evaluates currently available information in establishing the allowance for
loan losses, future adjustments to the allowance may be necessary if
economic 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. 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.
Other Real Estate Owned
OREO consists of property acquired through foreclosure, real estate
acquired through acceptance of a deed in lieu of foreclosure and loans
determined to be substantively repossessed. Real estate loans that are
substantively repossessed include only those loans for which the Company
has taken possession of the collateral, but has not completed legal
foreclosure proceedings.
OREO, including real estate substantively repossessed, is stated at
the lower of cost or fair value, minus estimated costs to sell, at the date
of acquisition or classification to OREO status. Fair value of such assets
is determined based on independent appraisals and other relevant factors.
Any write-down to fair value at the time of foreclosure is charged to the
allowance for loan losses. A valuation allowance is maintained for known
specific and potential market declines and for estimated selling expenses.
Increases to the valuation allowance, expenses associated with ownership of
these properties, and gains and losses from their sale, are reflected in
operations as incurred. Realized gains upon disposal are recognized as
income.
<PAGE> 52
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Management believes that the net carrying value of OREO reflects the
lower of its cost basis or net fair value. Factors similar to those
considered in the evaluation of the allowance for loan losses, including
regulatory agency requirements, are considered in the evaluation of the net
fair value of OREO.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
primarily by the straight-line method over the estimated useful lives of
the assets, or the terms of the leases if shorter.
Intangible Assets
On March 22, 1996, the Bank acquired certain assets and assumed
certain liabilities from Fleet National Bank of Connecticut, formerly known
as Shawmut Bank Connecticut, N.A. and other related entities. This
acquisition was accounted for utilizing the purchase method of accounting
and generated $17.5 million of an unidentifiable intangible asset in
accordance with Statement of Financial Accounting Standards ("SFAS") 72.
This intangible is being amortized to expense using the straight-line
method over 15 years and results in a annual pre-tax charge to earnings of
$1.2 million. On an ongoing basis, management reviews the valuation and
amortization of this intangible, taking into consideration any events and
circumstances which might have diminished its value.
In April 1998, the FASB issued Statement of Position ("SOP") 98-5,
"Accounting for Costs of a Start-Up Entity." SOP 98-5 requires
organizational costs, which were being amortized, to be expensed as of the
effective date of this statement, January 1, 1999, and accounted for as a
cumulative effect of a change in accounting principle. On January 1, 1999,
the Bank expensed $166,000 of unamortized organizational costs resulting in
a charge to earnings, net of taxes, of $109,000.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to
repurchase. These agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as a liability in
the consolidated balance sheets. Securities pledged as collateral under
agreements to repurchase are reflected as assets in the accompanying
consolidated balance sheets.
Employee Benefits
The Bank maintains a Section 401(k) savings plan for employees of the
Bank and its subsidiaries. Under the plan, the Bank makes a matching
contribution of the amount contributed by each participating employee, up
to 4% of the employee's yearly salary. The Bank's contributions are
charged against current operations in the year made.
The Company has adopted SFAS 123, "Accounting for Stock-Based
Compensation." This Statement establishes a fair value based method of
accounting for stock-based compensation plans under which compensation cost
is measured at the grant date based on the value of the award and is
recognized over the service period. However, the Statement allows a
company to continue to measure compensation cost for such plans under
Accounting Principles Board Opinion ("APB") 25, "Accounting for Stock
Issued to Employees." Under APB 25, no compensation cost is recorded if,
at the grant date, the exercise price of the options is equal to the fair
market value of the Company's common stock. The Company has elected to
continue to follow the accounting in APB 25. SFAS 123 requires companies
that elect to continue to follow the accounting in APB 25 to disclose in
the notes to their financial statements pro forma net income and earnings
per share as if the fair value based method of accounting had been applied.
<PAGE> 53
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Income Taxes
The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income during the period that includes the
enactment date.
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 for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then share in the earnings of
the entity.
(3) Investment Securities Available for Sale
A summary of investment securities available for sale follows:
<TABLE>
<CAPTION>
Unrealized
Amortized ---------------- Market
Cost Gains Losses Value
--------- ----- ------ ------
(In thousands)
<s> <c> <c> <c> <c>
At December 31, 2001:
U.S. Agency obligations $46,004 $514 $ (74) $46,444
Trust Preferred securities 3,189 -- (180) 3,009
-----------------------------------------
Total $49,193 $515 $(254) $49,453
=========================================
At December 31, 2000:
U.S. Treasury obligations $ 1,016 $ -- $ (11) $ 1,005
U.S. Agency obligations 44,256 167 (119) 44,304
Trust Preferred securities 2,187 -- (200) 1,987
-----------------------------------------
Total $47,459 $167 $(330) $47,296
=========================================
</TABLE>
<PAGE> 54
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The following table sets forth the maturities of investment
securities available for sale and the weighted average yields of such
securities:
<TABLE>
<CAPTION>
After One, But
Within One Year Within Five Years
--------------------------------- ----------------------------------
Weighted Weighted
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
--------- ------ -------- --------- ------ --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
At December 31, 2001:
U.S. Agency obligations $3,000 $3,046 5.91% $43,004 $43,398 4.94%
Trust Preferred securities -- -- --% -- -- --%
------------------- --------------------
Total $3,000 $3,046 5.91% 43,004 $43,398 4.94%
============================= ==============================
At December 31, 2000:
U.S. Treasury obligations $1,016 $1,005 4.16% $ -- $ -- --%
U.S. Agency obligations 5,256 5,243 5.70% 39,000 39,061 6.40%
Trust Preferred securities -- -- --% -- -- --%
------------------- --------------------
Total $6,272 $6,248 5.46% $39,000 $39,061 6.40%
============================= ==============================
<CAPTION>
After Five, But
Within Ten Years After Ten Years
--------------------------------- ----------------------------------
Weighted Weighted
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
--------- ------ -------- --------- ------ --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
At December 31, 2001:
U.S. Agency obligations $ -- $ -- --% $ -- $ -- --%
Trust Preferred securities -- -- --% 3,189 3,009 8.59%
------------------- --------------------
Total $ -- $ -- --% $ 3,189 $ 3,009 8.59%
============================= ==============================
At December 31, 2000:
U.S. Treasury obligations $ -- $ -- --% $ -- $ -- --%
U.S. Agency obligations -- -- --% -- -- --%
Trust Preferred securities -- -- --% 2,187 1,987 8.16%
------------------- --------------------
Total $ -- $ -- --% $ 2,187 $ 1,987 8.16%
============================= ==============================
</TABLE>
The weighted average remaining life of investment securities
available for sale at December 31, 2001 and 2000 was 4.6 years and 3.8
years, respectively. Included in the weighted average remaining life
calculation at December 31, 2001 and 2000, were $37.5 million and $31.2
million, respectively, of securities that are callable at the discretion of
the issuer. These call dates were not utilized in computing the weighted
average remaining life. There were no sales of investment securities
during 2001, 2000 or 1999.
(4) Mortgage-Backed Securities Available for Sale
A summary of mortgage-backed securities available for sale by issuer
follows:
<TABLE>
<CAPTION>
Unrealized
Amortized ----------------- Market
Cost Gains Losses Value
--------- ----- ------ ------
(In thousands)
<s> <c> <c> <c> <c>
At December 31, 2001:
U.S. Small Business Administration $ 30,147 $ 42 $ (34) $ 30,155
Federal National Mortgage Association 58,766 764 (143) 59,387
Federal Home Loan Mortgage Corporation 51,403 454 (148) 51,709
Collateralized Mortgage Obligations 9,233 166 -- 9,399
---------------------------------------------
Total $149,549 $1,426 $(325) $150,650
=============================================
At December 31, 2000:
U.S. Small Business Administration $ 21,785 $ -- $ (20) $ 21,765
Federal National Mortgage Association 66,623 381 (445) 66,559
Federal Home Loan Mortgage Corporation 16,455 76 (3) 16,528
Collateralized Mortgage Obligations 12,680 -- (101) 12,579
---------------------------------------------
Total $117,543 $ 457 $(569) $117,431
=============================================
</TABLE>
<PAGE> 55
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The following table sets forth the maturities of mortgage-backed
securities available for sale and the weighted average yields of such
securities:
<TABLE>
<CAPTION>
After Five, But Within Ten Years After Ten Years
--------------------------------- -----------------------------------
Weighted Weighted
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
--------------------------------- -----------------------------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
At December 31, 2001:
U.S. Small Business Administration $1,672 $1,664 3.47% $ 28,475 $ 28,491 3.57%
Federal National Mortgage Association -- -- --% 58,766 59,387 6.00%
Federal Home Loan Mortgage Corporation -- -- --% 51,403 51,709 5.65%
Collateralized Mortgage Obligations -- -- --% 9,233 9,399 6.47%
------------------- ----------------------
Total $1,672 $1,664 3.47% $147,877 $148,986 5.44%
============================= ================================
At December 31, 2000:
U.S. Small Business Administration $ -- $ -- --% $ 21,785 $ 21,765 7.27%
Federal National Mortgage Association -- -- --% 66,623 66,559 6.50%
Federal Home Loan Mortgage Corporation -- -- --% 16,455 16,528 6.74%
Collateralized Mortgage Obligations -- -- --% 12,680 12,579 6.47%
------------------- ----------------------
Total $ -- $ -- --% $117,543 $117,431 6.67%
============================= ================================
</TABLE>
Maturities on mortgage-backed securities are based on contractual
maturities and do not take into consideration scheduled amortization or
prepayments. Actual maturities will differ from contractual maturities due
to scheduled amortization and prepayments. The weighted average remaining
contractual term of mortgage-backed securities available for sale at
December 31, 2001 and 2000 was 25.7 years and 25.0 years, respectively.
The following table presents the sale of mortgage-backed securities
available for sale and the resulting gains from such sales:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
2001 2000 1999
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Amortized cost of mortgage-backed securities sold $3,828 $ -- $ --
Gains realized on sales of mortgage-backed securities 4 -- --
-----------------------------
Net proceeds from sales of mortgage-backed securities $3,832 $ -- $ --
=============================
</TABLE>
<PAGE> 56
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(5) Loans Receivable
The following is a summary of loans receivable:
<TABLE>
<CAPTION>
December 31,
---------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Residential mortgage loans:
One- to four-family adjustable rate $285,589 $212,197
One- to four-family fixed rate 23,306 34,609
---------------------
Subtotal 308,895 246,806
Premium on loans acquired 1,381 1,166
Net deferred loan origination fees (64) (49)
---------------------
Total $310,212 $247,923
=====================
Commercial loans:
Commercial real estate - nonowner occupied $ 73,369 $ 69,315
Commercial and industrial 53,677 51,470
Commercial real estate - owner occupied 46,698 38,272
Small business 24,122 19,170
Multi-family 14,927 15,933
Construction 14,027 7,070
Leases and other 12,715 11,731
---------------------
Subtotal 239,535 212,961
Net deferred loan origination fees (171) (143)
---------------------
Total $239,364 $212,818
=====================
Consumer and other loans:
Home equity - lines of credit $ 28,460 $ 26,215
Home equity - term loans 22,930 23,292
Automobile 6,335 4,643
Installment 1,240 1,348
Savings secured 656 987
Unsecured and other 1,153 1,044
---------------------
Subtotal 60,774 57,529
Premium on loans acquired 192 144
Net deferred loan origination costs 422 411
---------------------
Total $ 61,388 $ 58,084
=====================
</TABLE>
The Bank's commercial and consumer lending activities are conducted
principally in the State of Rhode Island and, to a lesser extent, in nearby
areas of Massachusetts. The Bank originates commercial real estate loans,
commercial and industrial loans, multi-family residential loans and
consumer loans (principally home equity loans and lines of credit) for its
portfolio. The Bank purchases one- to four-family residential mortgage
loans and automobile loans from third party originators. These loans may
have been originated from areas outside of New England. Most loans made by
the Bank are secured by borrowers' personal or business assets. The Bank
considers a concentration of credit to a particular industry to exist when
the aggregate credit exposure to a borrower or group of borrowers in that
industry exceeds 25% of the Bank's capital plus reserves. At December 31,
2001, no concentrations of credit to a particular industry existed as
defined by these parameters. The ability of the Bank's residential and
consumer borrowers to honor their repayment commitments is generally
dependent on the level of overall economic activity within the area they
reside in. Commercial borrowers' ability to repay is generally dependent
upon the general health of the economy and in cases of real estate loans,
the real estate sector in particular. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio is
susceptible to changing conditions in the Rhode Island economy in
particular, and the New England and national economies, in general.
<PAGE> 57
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The Bank's lending limit to any single borrowing relationship is
limited by law to approximately $10.5 million. At December 31, 2001, the
Bank had no outstanding commitments to any single borrowing relationship
that were in excess of $4.2 million.
At December 31, 2001, the risk elements contained within the loan
portfolio were centered in $753,000 of nonaccrual loans and $131,000 of
loans past due 60 to 89 days. This compares to $508,000 of nonaccrual
loans and $337,000 of loans past due 60 to 89 days as of December 31, 2000,
and $1.1 million of nonaccrual loans and $93,000 of loans past due 60 to 89
days as of December 31, 1999. As of December 31, 2001 and 2000, the Bank
did not have any loans that were considered impaired. Included in
nonaccrual loans as of December 31, 1999, were $329,000 of impaired loans.
No specific reserves were necessary in conjunction with these impaired
loans. The average balance of impaired loans was $1.0 million during 2001,
$648,000 during 2000 and $304,000 during 1999.
The reduction in interest income associated with nonaccrual loans was
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Income in accordance with original terms $ 68 $ 48 $130
Income recognized (37) (13) (64)
------------------------
Foregone interest income $ 31 $ 35 $ 66
========================
</TABLE>
Loans outstanding to executive officers and directors of the Company,
including their immediate families and affiliated companies ("related
parties"), are made in the ordinary course of business under normal credit
terms, including interest rates and collateral, prevailing at the time of
origination for comparable transactions with other persons, and do not
represent more than normal credit risk. An analysis of the activity of
these loans is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Balance at beginning of year $ 6,385 $ 3,767
Additions 1,329 4,251
Repayments (2,193) (1,633)
-------------------
Balance at end of year $ 5,521 $ 6,385
===================
</TABLE>
<PAGE> 58
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(6) Allowance for Loan Losses
An analysis of the activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Balance at beginning of year $7,294 $5,681 $5,018
Provision for loan losses charged against income 1,669 1,542 1,000
Loans charged-off (467) (125) (384)
Recoveries of loans previously charged-off 28 196 47
----------------------------
Balance at end of year $8,524 $7,294 $5,681
============================
</TABLE>
The following table represents the allocation of the allowance for
loan losses as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Loan category:
Residential mortgage loans $1,835 $1,460
Commercial loans 4,191 3,210
Consumer and other loans 787 731
Unallocated 1,711 1,893
-----------------
Total $8,524 $7,294
=================
</TABLE>
(7) Premises and Equipment
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Land $ 793 $ 785
Office buildings and improvements 2,346 1,837
Leasehold improvements 2,700 2,233
Data processing equipment and software 3,619 3,297
Furniture, fixtures and other equipment 3,054 2,610
-------------------
Subtotal 12,512 10,762
Less accumulated depreciation and amortization (5,328) (4,378)
-------------------
Total premises and equipment $ 7,184 $ 6,384
===================
</TABLE>
The Company utilizes a useful life of 40 years for buildings and 15
years for building improvements. Leasehold improvements are amortized over
their respective lease terms. Data processing equipment and software's
useful life is three years and furniture, fixtures and other equipment's
useful life varies but is primarily five years. Depreciation expense
totaled $1.0 million, $941,000 and $841,000 for the years ended December
31, 2001, 2000 and 1999, respectively.
<PAGE> 59
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Rent expense for the years ended December 31, 2001, 2000 and 1999 was
$815,000, $686,000 and $531,000, respectively. In connection with the
acquisition of branches from Fleet National Bank of Connecticut, the Bank
assumed the liability for lease payments on seven banking offices
previously occupied by Shawmut Bank Connecticut, N.A. The Bank has
renegotiated some of these leases and has also entered into agreements to
lease additional space. Under the terms of these noncancellable operating
leases, the Bank is currently obligated to minimum annual rents as follows:
<TABLE>
<CAPTION>
Minimum
Lease Payments
--------------
(In thousands)
<s> <c>
2002 $ 713
2003 638
2004 630
2005 618
2006 560
Thereafter 1,388
------
$4,547
======
</TABLE>
(8) Other Real Estate Owned
The following table provides a summary of OREO:
<TABLE>
<CAPTION>
December 31,
--------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
One- to four-family residential property $287 $ 61
-------------
Subtotal 287 61
Allowance for losses (23) (31)
-------------
Total $264 $ 30
=============
</TABLE>
A summary of the activity in the allowance for losses on OREO
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Balance at beginning of year $31 $35
Provisions -- --
Net charge-offs (8) (4)
------------
Balance at end of year $23 $31
============
</TABLE>
<PAGE> 60
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The following summarizes the operating results from OREO:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Collection and repossession expenses $367 $42 $ 73
Net expenses of holding properties 11 (4) 23
Provision for losses -- -- 12
Net gains from dispositions (25) (7) --
----------------------
Total $353 $31 $108
======================
</TABLE>
(9) Deposits
Certificate of deposit accounts had the following schedule of
maturities:
<TABLE>
<CAPTION>
December 31,
---------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
1 year or less remaining $204,248 $224,690
More than 1 year to 2 years remaining 27,774 36,403
More than 2 years to 4 years remaining 15,737 2,938
More than 4 years remaining 505 1,592
---------------------
Total $248,264 $265,623
=====================
</TABLE>
At December 31, 2001, 2000 and 1999, certificate of deposit accounts
with balances $100,000 or more aggregated $35.4 million, $32.1 million and
$25.3 million, respectively.
(10) Overnight and Short-Term Borrowings
Overnight and short-term borrowings are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Treasury tax and loan notes $ 691 $ 819
Retail reverse repurchase agreements 12,342 13,028
-------------------
Total $13,033 $13,847
===================
</TABLE>
<PAGE> 61
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The Bank utilizes the Note Option for remitting Treasury Tax and Loan
payments to the Federal Reserve Bank. Under this option the U.S. Treasury
invests in obligations of the Bank, as evidenced by open-ended interest-
bearing notes. These notes are collateralized by U.S. Agency securities
owned by the Bank. Information concerning these treasury tax and loan
notes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000
---- ----
(Dollars in thousands)
<s> <c> <c>
Outstanding at end of year $ 691 $ 819
Outstanding collateralized by securities with:
Amortized cost 3,997 3,999
Market value 4,007 3,987
Average outstanding for the year 1,038 921
Maximum outstanding at any month end 3,000 3,000
Weighted average rate at end of year 1.40% 5.72%
Weighted average rate paid for the year 1.50% 6.25%
</TABLE>
The Bank utilizes retail reverse repurchase agreements in connection
with a cash management product that the Bank offers its commercial
customers. Sales of retail reverse repurchase agreements are treated as
financings. The obligations to repurchase the identical securities that
were sold are reflected as liabilities and the securities remain in the
asset accounts. All of these agreements are collateralized by U.S. Agency
securities owned by the Bank. The securities underlying the agreements
were held by the Bank in a special custody account and remained under the
Bank's control. Information concerning these retail repurchase agreements
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000
---- ----
(Dollars in thousands)
<s> <c> <c>
Outstanding at end of year $12,342 $13,028
Maturity date 1/2/02 1/2/01
Outstanding collateralized by securities with:
Amortized cost 14,303 14,904
Market value 14,397 14,903
Average outstanding for the year 14,041 10,553
Maximum outstanding at any month end 18,216 14,485
Weighted average rate at end of year 1.70% 2.74%
Weighted average rate paid for the year 3.04% 5.48%
</TABLE>
Additionally, at December 31, 2001, the Bank had a $2.0 million line
of credit with a correspondent bank to facilitate the issuance of letters
of credit by the Bank and the conducting of foreign exchange transactions
for the Bank's customers. Since inception, there have been no outstanding
balances under this line of credit. The Bank is required to maintain a
compensating balance of $100,000 in conjunction with this line of credit.
<PAGE> 62
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(11) Federal Home Loan Bank of Boston Borrowings
FHLB borrowings are comprised of the following:
<TABLE>
<CAPTION>
December 31, 2001 December 31, 2000
----------------------------------- -----------------------------------
Scheduled First Weighted Scheduled First Weighted
Final Call Average Final Call Average
Maturity Date (1) Rate (2) Maturity Date (1) Rate (2)
--------- -------- -------- --------- -------- --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Within 1 year $ 7,000 $ 20,000 3.59% $ 3,000 $13,000 3.57%
Over 1 year to 2 years 20,100 32,100 4.92% -- -- --%
Over 2 years to 3 years 28,000 30,000 6.08% 10,100 10,100 5.87%
Over 3 years to 5 years 11,000 21,000 5.53% 20,000 10,000 6.37%
Over 5 years 47,265 10,265 5.14% 192 192 6.29%
---------------------- -------------------
Total $113,365 $113,365 5.27% $33,292 $33,292 6.23%
================================ ===============================
<FN>
<F1> Callable FHLB advances are shown in the respective periods assuming
that the callable debt is redeemed at the first call date while all
other advances are shown in the periods corresponding to their
scheduled maturity date.
<F2> Weighted average rate based on scheduled maturity dates.
</FN>
</TABLE>
All borrowings from the FHLB are secured by the Bank's stock in the
FHLB and a blanket lien on "qualified collateral" defined principally as
90% of the market value of U.S. Government and Agency obligations and 75%
of the carrying value of certain residential mortgage loans. Unused term
borrowing capacity with the FHLB at December 31, 2001, 2000 and 1999 was
$191.6 million, $269.7 million and $221.0 million, respectively. In
addition, the Bank has a short-term line of credit with the FHLB. Unused
borrowing capacity under this line was $11.2 million for each of the years
in the three-year period. As one requirement of its borrowings, the Bank
is required to invest in the common stock of the FHLB in an amount at least
equal to five percent of its outstanding borrowings from the FHLB. As and
when such stock is redeemed, the Bank would receive from the FHLB an amount
equal to the par value of the stock. As of December 31, 2001, the Bank's
FHLB stock holdings, recorded at cost, were $5.7 million.
(12) Other Borrowings
From time to time, the Bank utilizes term reverse repurchase
agreements as an alternative source of long-term funds. These agreements
are treated as financings. The obligation to repurchase the identical
securities that were sold is reflected as a liability and the securities
remain as assets. The securities underlying this agreement are U.S. Agency
securities and are held by a third party custodian in a special custody
account. Information concerning this term repurchase agreement is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000
---- ----
(Dollars in thousands)
<s> <c> <c>
Outstanding at end of year $ -- $ 4,750
Maturity date NA 6/29/01
Outstanding collateralized by securities with:
Amortized cost -- 5,000
Market value -- 4,973
Average outstanding for the year 2,329 4,750
Maximum outstanding at any month end 4,750 4,750
Weighted average rate at end of year NA 5.83%
Weighted average rate paid for the year 5.91% 5.83%
</TABLE>
<PAGE> 63
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(13) 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.
(14) Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
2001 2000 1999
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Current expense:
Federal $3,897 $ 4,133 $3,011
State 39 95 96
-----------------------------
Total current expense 3,936 4,228 3,107
-----------------------------
Deferred benefit:
Federal (519) (1,115) (659)
State -- -- --
-----------------------------
Total deferred benefit (519) (1,115) (659)
-----------------------------
Total income tax expense $3,417 $ 3,113 $2,448
=============================
</TABLE>
The difference between the statutory federal income tax rate and the
effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
2001 2000 1999
---- ---- ----
<s> <c> <c> <c>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase resulting from:
State income tax, net of federal tax benefit 0.2 0.7 0.9
Other, net 0.9 1.0 0.5
------------------------
Effective combined federal and state income tax rate 35.1% 35.7% 35.4%
========================
</TABLE>
<PAGE> 64
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The components of gross deferred tax assets and gross deferred tax
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Gross deferred tax assets:
Allowance for loan losses $ 2,898 $ 2,488
Organizational costs 18 9
Unrealized loss on securities available for sale -- 93
Other 295 294
-------------------
Total gross deferred tax assets 3,211 2,884
-------------------
Gross deferred tax liabilities:
Purchase accounting adjustments (944) (1,043)
Unrealized gain on securities available for sale (463) --
-------------------
Total gross deferred tax liabilities (1,407) (1,043)
-------------------
Net deferred tax asset $ 1,804 $ 1,841
===================
</TABLE>
It is management's belief, that it is more likely than not, that the
reversal of deferred tax liabilities and results of future operations will
generate sufficient taxable income to realize the deferred tax assets. In
addition, the Company's net deferred tax asset is supported by recoverable
income taxes. Therefore, no valuation allowance was necessary at December
31, 2001, 2000 or 1999 for the deferred tax assets. It should be noted,
however, that factors beyond management's control, such as the general
state of the economy and real estate values, can affect future levels of
taxable income and that no assurance can be given that sufficient taxable
income will be generated to fully absorb gross deductible temporary
differences.
(15) Employee Benefits
Employee 401(k) Plan
The Bank maintains a 401(k) Plan (the "Plan") which qualifies as a
tax exempt plan and trust under Sections 401 and 501 of the Internal
Revenue Code. Generally, Bank employees who are at least twenty-one (21)
years of age and have completed one year of service with the Bank, are
eligible to participate in the Plan. Expenses associated with the Plan
were $240,000, $191,000 and $164,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
Nonqualified Deferred Compensation Plan
The Bank also maintains a Nonqualified Deferred Compensation Plan
(the "Nonqualified Plan") under which certain participants may contribute
the amounts they are precluded from contributing to the Bank's 401(k) Plan
because of the qualified plan limitations, and additional compensation
deferrals that may be advantageous for personal income tax or other
planning reasons. Expenses associated with the Nonqualified Plan were
$34,000, $24,000 and $20,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
<PAGE> 65
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Supplemental Executive Retirement Plan
During 1999, the Bank established a Supplemental Executive Retirement
Plan (the "SERP") for certain of its senior executives under which
participants designated by the Board of Directors are entitled to an annual
retirement benefit. Expenses associated with the SERP were $103,000,
$58,000 and $40,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Restricted Stock Agreement
During 2001, the Company entered into a Restricted Stock Agreement
with its CEO, pursuant to which she was awarded 7,700 shares of restricted
stock, subject to achievement of certain performance goals, which vests 50%
on January 1, 2005 and 50% on January 1, 2006. The restricted stock is
subject to forfeiture if cumulative net income for the three-year period
ending December 31, 2002 does not equal or exceed cumulative net income
forecasted in the Company's budgets for such period. The restricted shares
are also subject to forfeiture in the event of termination of the CEO's
employment prior to the applicable vesting dates for cause by the Company
or without good reason by the executive. Expenses associated with the
Restricted Stock Agreement were $49,000 for the year ended December 31,
2001.
Employee Stock Option Plan
The Company maintains an Incentive and Nonqualified Stock Option Plan
(the "Employee Stock Option Plan") under which it may grant options on its
common stock to officers and key employees. The total number of shares
available for issuance under the Employee Stock Option Plan is 385,000.
Options are granted at an exercise price equal to the market value of the
stock on the date of the grant and vest over a three to five year period.
Unless exercised, options granted under the Employee Stock Option Plan
expire ten years from the grant date.
The following table summarizes changes in options outstanding under
the Employee Stock Option Plan during 1999, 2000 and 2001 and options
exercisable at December 31, 2001:
<TABLE>
<CAPTION>
Number of Weighted
Unexercised Average
Options Option Price
----------- ------------
<s> <c> <c>
Options outstanding at December 31, 1998 185,950 $10.68
Granted 85,000 10.63
Exercised (4,950) 10.00
Forfeited/Canceled (26,050) 10.60
-------
Options outstanding at December 31, 1999 239,950 10.69
-------
Granted 62,300 10.06
Exercised (400) 10.00
Forfeited/Canceled (1,600) 10.50
-------
Options outstanding at December 31, 2000 300,250 10.56
-------
Granted 58,650 15.17
Exercised (15,900) 10.36
Forfeited/Canceled (3,850) 14.21
-------
Options outstanding at December 31, 2001 339,150 $11.32
=======================
Options exercisable at December 31, 2001 229,015 $10.56
=======================
</TABLE>
<PAGE> 66
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Director Stock Plan
The Company established a Non-Employee Director Stock Plan (the
"Director Stock Plan") under which it may grant up to 40,000 options on its
common stock to non-employee directors. Each non-employee director elected
at the 1998 shareholders meeting received an option for 1,500 shares and
each new non-employee director elected subsequently will receive an option
for 1,000 shares. Non-employee directors will also receive an annual
option grant for 500 shares as of the date of each annual meeting of
shareholders. Options are granted at an exercise price equal to the market
value of the stock on the date of the grant and vest six months after the
grant date. Unless exercised, options granted under the Director Stock
Plan expire ten years from the date granted.
The following table summarizes changes in options outstanding under
the Director Stock Plan during 1999, 2000 and 2001 and options exercisable
at December 31, 2001:
<TABLE>
<CAPTION>
Number of Weighted
Unexercised Average
Options Option Price
----------- ------------
<s> <c> <c>
Options at December 31, 1998 16,500 $17.19
Granted 5,500 10.88
Exercised -- --
Forfeited/Canceled -- --
------
Options at December 31, 1999 22,000 15.61
------
Granted 5,500 10.13
Exercised -- --
Forfeited/Canceled -- --
------
Options at December 31, 2000 27,500 14.52
------
Granted 5,500 16.00
Exercised (1,000) 10.50
Forfeited/Canceled -- --
------
Options at December 31, 2001 32,000 $14.89
=======================
Options exercisable at December 31, 2001 32,000 $14.89
=======================
</TABLE>
<PAGE> 67
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
APB 25 and related interpretations have been applied to account for
these plans. Accordingly, no compensation cost has been charged against
income. Had compensation cost been determined consistent with SFAS 123,
the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
<s> <c> <c> <c>
Net income (in thousands):
As reported $6,315 $5,618 $4,362
Pro forma 6,181 5,492 4,228
Earnings per common share:
Basic:
As reported $ 1.69 $ 1.51 $ 1.15
Pro forma 1.66 1.47 1.11
Diluted:
As reported $ 1.62 $ 1.49 $ 1.14
Pro forma 1.58 1.46 1.11
</TABLE>
The fair value of each option granted was estimated as of the date of
the grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: expected life of 7 years; expected
volatility of 20% in 2001 and 25% in 2000 and 1999; average risk-free
interest rates of 4.90% in 2001, 6.65% in 2000 and 4.84% in 1999; and a
dividend rate of 2.92% in 2001, 4.26% in 2000 and 3.78% in 1999.
(16) Other Operating Expenses
Major components of other operating expenses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Telephone $ 541 $ 470 $ 424
Forms and supplies 512 371 287
Postage 305 251 207
Correspondent bank fees 209 128 99
Insurance 178 128 132
Director fees 158 120 90
Recruiting 125 117 97
Other 1,039 731 651
----------------------------
Total $3,067 $2,316 $1,987
============================
</TABLE>
<PAGE> 68
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(17) Financial Instruments with Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to originate
loans and letters of credit. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and
letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Financial instruments with off-balance sheet risk are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Commitments to originate loans $ 13,965 $ 5,440
Unused lines of credit 118,820 86,935
Letters of credit 2,466 2,324
</TABLE>
Commitments to originate loans and unused lines of credit are
agreements to lend to a customer provided there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since certain commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
<PAGE> 69
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(18) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS 107,
"Disclosures About Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by using available quoted market
information or other appropriate valuation methodologies. The aggregate
fair value amounts presented are in accordance with SFAS 107 guidelines but
do not represent the underlying value of the Bank taken as a whole.
The fair value estimates provided are made at a specific point in
time, based on relevant market information and the characteristics of the
financial instrument. The estimates do not provide for any premiums or
discounts that could result from concentrations of ownership of a financial
instrument. Because no active market exists for some of the Bank's
financial instruments, certain fair value estimates are based on subjective
judgments regarding current economic conditions, risk characteristics of
the financial instruments, future expected loss experience, prepayment
assumptions and other factors. The resulting estimates involve
uncertainties and therefore cannot be determined with precision. Changes
made to any of the underlying assumptions could significantly affect the
estimates.
The book values and estimated fair values for the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31, 2001 December 31, 2000
----------------------- -----------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(In thousands)
<s> <c> <c> <c> <c>
Assets:
Cash and due from banks $ 24,261 $ 24,261 $ 28,853 $ 28,853
Fed funds sold and overnight investments 4,913 4,913 5,600 5,600
Investment securities 49,453 49,453 47,296 47,296
Mortgage-backed securities 150,650 150,650 117,431 117,431
Stock in the FHLB 5,668 5,668 3,704 3,704
Loans receivable, net of allowance for loan losses:
Residential mortgage loans 307,916 313,175 245,951 251,748
Commercial loans 234,121 242,612 208,483 216,035
Consumer and other loans 60,403 61,494 57,097 58,382
Accrued interest receivable 5,803 5,803 5,630 5,630
Liabilities:
Deposits:
Demand deposit accounts 112,925 112,925 106,088 106,088
NOW accounts 44,445 44,445 36,910 36,910
Money market accounts 9,914 9,914 12,283 12,283
Savings accounts 254,861 254,861 210,728 210,728
Certificate of deposit accounts 248,268 250,758 265,623 267,786
Overnight and short-term borrowings 13,033 13,033 13,847 13,847
FHLB borrowings 113,365 115,639 33,292 34,027
Other borrowings -- -- 4,750 4,754
Company-obligated mandatorily redeemable
capital securities 3,000 3,000 -- --
Accrued interest payable 1,839 1,839 1,424 1,424
</TABLE>
Cash and due from banks
The carrying values reported in the balance sheet for cash and due
from banks approximates the fair value because of the short maturity of
these instruments.
<PAGE> 70
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Fed funds sold and overnight investments
The carrying values reported in the balance sheet for federal funds
sold and overnight investments approximates the fair value because of the
short maturity of these instruments.
Investment and mortgage-backed securities
The fair values presented for investment and mortgage-backed
securities are based on quoted bid prices received from securities dealers.
Stock in the Federal Home Loan Bank of Boston
The fair value of stock in the FHLB equals the carrying value
reported in the balance sheet. This stock is redeemable at full par value
only by the FHLB.
Loans receivable
Fair value estimates are based on loans with similar financial
characteristics. Loans have been segregated by homogenous groups into
residential mortgage, commercial, and consumer and other loans. Fair
values are estimated by discounting contractual cash flows, adjusted for
prepayment estimates, using discount rates approximately equal to current
market rates on loans with similar characteristics and maturities. The
incremental credit risk for nonperforming loans has been considered in the
determination of the fair value of loans.
Deposits
The fair values reported for demand deposit, NOW, money market, and
savings accounts are equal to their respective book values reported on the
balance sheet. The fair values disclosed are, by definition, equal to the
amount payable on demand at the reporting date. The fair values reported
for certificate of deposit accounts are based on the discounted value of
contractual cash flows. The discount rates used are representative of
approximate rates currently offered on certificate of deposit accounts with
similar remaining maturities.
Overnight and short-term borrowings
The carrying values reported in the balance sheet for overnight and
short-term borrowings approximates the fair value because of the short
maturity of these instruments.
Federal Home Loan Bank of Boston borrowings
The fair values reported for FHLB borrowings are based on the
discounted value of contractual cash flows. The discount rates used are
representative of approximate rates currently offered on borrowings with
similar remaining maturities.
Other borrowings
The fair values reported for other borrowings are based on the
discounted value of contractual cash flows. The discount rates used are
representative of approximate rates currently offered on borrowings with
similar remaining maturities.
<PAGE> 71
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Company-obligated mandatorily redeemable capital securities
The fair values reported for Company-obligated mandatorily redeemable
capital securities are based on the discounted value of contractual cash
flows. The discount rates used are representative of approximate rates
currently offered on instruments with similar terms and remaining
maturities.
Accrued interest receivable and payable
The carrying values for accrued interest receivable and payable
approximates fair value because of the short-term nature of these financial
instruments.
Financial instruments with off-balance sheet risk
Since the Bank's commitments to originate or purchase loans, and for
unused lines and outstanding letters of credit, are primarily at market
interest rates, there is no significant fair value adjustment.
(19) Shareholders' Equity
Capital guidelines issued by the Federal Reserve Board require the
Company to maintain minimum capital levels for capital adequacy purposes.
Tier I capital is defined as common equity and retained earnings, less
certain intangibles. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets
by assigning assets and off-balance-sheet items to one of four risk
categories, each with an appropriate weight. The risk-based capital rules
are designed to make regulatory capital more sensitive to differences in
risk profiles among banks and bank holding companies, to account for off-
balance sheet exposure and to minimize disincentives for holding liquid
assets. The Bank is also subject to FDIC regulations regarding capital
requirements. These regulations require banks to maintain minimum capital
levels for capital adequacy purposes and higher capital levels to be
considered "well capitalized."
As of December 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. There have been no events or conditions since the
end of the year that management believes would cause a change in either the
Company's or the Bank's categorization.
<PAGE> 72
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The Company's and the Bank's actual and required capital amounts and
ratios are as follows:
<TABLE>
<CAPTION>
For Capital To Be Considered
Actual Adequacy Purposes "Well Capitalized"
------------------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
At December 31, 2001:
Bancorp Rhode Island, Inc.
- --------------------------
Tier I capital (to average assets) $50,433 5.93% $25,508 3.00% $42,513 5.00%
Tier I capital (to risk-weighted assets) 50,433 9.86% 20,462 4.00% 30,694 6.00%
Total capital (to risk-weighted assets) 56,803 11.10% 40,925 8.00% 51,156 10.00%
Bank Rhode Island
- -----------------
Tier I capital (to average assets) $49,702 5.84% $25,526 3.00% $42,544 5.00%
Tier I capital (to risk-weighted assets) 49,702 9.72% 20,458 4.00% 30,687 6.00%
Total capital (to risk-weighted assets) 56,121 10.97% 40,916 8.00% 51,145 10.00%
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%
</TABLE>
Warrants. In connection with its acquisition of certain assets and
assumption of certain liabilities from Fleet National Bank of Connecticut
in 1996, the Bank issued to Fleet Financial Group, Inc. a warrant to
acquire 136,315 shares of Common Stock of the Bank. Upon conversion into a
holding company structure, the warrant became exercisable for 136,315
shares of the Company's Common Stock. The per share exercise price of the
warrant is $10.00. The warrant expires on March 22, 2006, and may be
exercised, in whole or in part, at any time prior to its expiration. Upon
the occurrence of a change of control event the holders of the warrant may
sell the warrant to the Company for an amount that is equal to the product
of the number of shares represented by the warrant being sold and the
difference between the exercise price of the warrant and the fair market
value of the consideration per share received in the change of control
transaction.
<PAGE> 73
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(20) Earnings Per Share
The following table is a reconciliation of basic EPS and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
<s> <c> <c> <c>
Basic EPS Computation:
Numerator (in thousands):
Net income $ 6,315 $ 5,618 $ 4,362
Preferred dividends -- -- (88)
----------------------------------------
Net income available to common shareholders $ 6,315 $ 5,618 $ 4,274
========================================
Denominator:
Common shares outstanding 3,730,910 3,728,688 3,727,010
Stock options -- -- --
Warrants -- -- --
----------------------------------------
Total shares 3,730,910 3,728,688 3,727,010
========================================
Basic EPS $ 1.69 $ 1.51 $ 1.15
========================================
Diluted EPS Computation:
Numerator (in thousands):
Net income $ 6,315 $ 5,618 $ 4,362
Preferred dividends -- -- (88)
----------------------------------------
Net income available to common shareholders $ 6,315 $ 5,618 $ 4,274
========================================
Denominator:
Common shares outstanding 3,730,910 3,728,688 3,727,010
Stock options 115,572 24,534 7,233
Warrants 53,546 15,367 7,535
----------------------------------------
Total shares 3,900,028 3,768,589 3,741,778
========================================
Diluted EPS $ 1.62 1.49 $ 1.14
========================================
</TABLE>
(21) Regulation and Litigation
The Company and the Bank are subject to extensive regulation and
examination by the Federal Reserve Board, the Rhode Island Division of
Banking and the FDIC, which insures the Bank's deposits to the maximum
extent permitted by law. The federal and state laws and regulations which
are applicable to banks regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of
the availability of deposited funds and the nature and amount of and
collateral for certain loans. The laws and regulations governing the Bank
generally have been promulgated to protect depositors and not for the
purpose of protecting shareholders. Among other things, bank regulatory
authorities have the right to restrict the payment of dividends by banks
and bank holding companies to shareholders.
<PAGE> 74
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final
disposition of these lawsuits will not have a material adverse effect on
the consolidated financial condition or results of operations of the
Company.
(22) Parent Company Statements
The following are condensed financial statements for Bancorp Rhode
Island, Inc. (the "Parent Company"):
Balance Sheet
<TABLE>
<CAPTION>
December 31,
-------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Assets:
Cash and due from banks $ 20 $ 16
Overnight investments 736 352
Investment in subsidiaries 61,465 52,878
Prepaid and other assets 108 --
-------------------
Total assets $62,329 $53,246
===================
Liabilities:
Income taxes payable $ (47) $ (46)
Notes payable to subsidiaries 3,093 --
Other liabilities 186 --
-------------------
Total liabilities 3,232 (46)
-------------------
Shareholders' equity:
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding: 3,753,550 shares in 2001 and
3,448,950 shares in 2000 37 34
Non-Voting: Issued and outstanding: 280,000 shares in 2000 -- 3
Additional paid-in capital 39,826 39,621
Retained earnings 18,336 13,815
Accumulated other comprehensive income (loss), net 898 (181)
-------------------
Total shareholders' equity 59,097 53,292
-------------------
Total liabilities and shareholders' equity $62,329 $53,246
===================
</TABLE>
<PAGE> 75
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Statements of Operation
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
2001 2000
---- ----
(In thousands, except per share data)
<s> <c> <c>
Income:
Dividends received from subsidiaries $ 2,250 $ 950
Interest on overnight investments 16 8
-------------------------
Total income 2,266 958
-------------------------
Expenses:
Interest on notes payable 271 --
Compensation expense 49 --
Directors' fees 63 15
Professional services 159 126
Other expenses -- 2
-------------------------
Total expenses 542 143
-------------------------
Income before income taxes 1,724 815
Income tax expense (benefit) (176) (46)
-------------------------
Income before equity in undistributed earnings of subsidiaries 1,900 861
Equity in undistributed earnings of subsidiaries 4,415 4,757
-------------------------
Net income $ 6,315 $ 5,618
=========================
Basic earnings per common share: $ 1.69 $ 1.51
Diluted earnings per common share: $ 1.62 $ 1.49
Average common shares outstanding - basic 3,730,910 3,728,688
Average common shares outstanding - diluted 3,900,028 3,768,589
</TABLE>
Statement of Cash Flow
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2001 2000
---- ----
(In thousands)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 6,315 $ 5,618
Adjustment to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (4,415) (4,757)
Compensation expense from restricted stock grant 30 --
(Increase) decrease in other assets (108) --
Increase (decrease) in other liabilities 185 (46)
-------------------
Net cash provided by operating activities 2,007 815
-------------------
Cash flows from financing activities:
Proceeds from notes payable 3,093 --
Investment in subsidiaries (3,093) --
Proceeds from issuance of common stock 175 --
Dividends on common stock (1,794) (447)
-------------------
Net cash used by financing activities (1,619) (447)
-------------------
Net increase (decrease) in cash and due from banks 388 368
Cash and cash equivalents at beginning of year 368 --
-------------------
Cash and cash equivalents at end of year $ 756 $ 368
===================
Supplementary disclosures:
Cash paid for income taxes $ (175) $ --
Non-cash transactions:
Change in other comprehensive income, net of taxes 1,079 (181)
</TABLE>
The Parent Company's Statement of Changes in Shareholders' Equity is
identical to the Consolidated Statement of Changes in Shareholders' Equity
and therefore is not presented here.
<PAGE> 76
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(23) Quarterly Results of Operations (unaudited)
<TABLE>
<CAPTION>
2001 Quarter Ended
----------------------------------------------
March June September December
31 30 30 31
----- ---- --------- --------
(In thousands, except per share data)
<s> <c> <c> <c> <c>
Interest income $14,157 $14,203 $14,047 $13,496
Interest expense 6,951 7,105 6,585 5,896
---------------------------------------------
Net interest income 7,206 7,098 7,462 7,600
Provision for loan losses 488 352 566 263
---------------------------------------------
Net interest income after provision for loan losses 6,718 6,746 6,896 7,337
Noninterest income 1,102 1,306 1,356 1,467
Noninterest expense 5,389 5,648 5,827 6,332
---------------------------------------------
Income before taxes 2,431 2,404 2,425 2,472
Income taxes 871 832 849 865
---------------------------------------------
Net income $ 1,560 $ 1,572 $ 1,576 $ 1,607
=============================================
Basic EPS $ 0.42 $ 0.42 $ 0.42 $ 0.43
Diluted EPS $ 0.40 $ 0.40 $ 0.40 $ 0.41
<CAPTION>
2000 Quarter Ended
----------------------------------------------
March June September December
31 30 30 31
----- ---- --------- --------
(In thousands, except per share data)
<s> <c> <c> <c> <c>
Interest income $11,493 $12,195 $12,894 $13,453
Interest expense 5,372 5,684 6,128 6,494
---------------------------------------------
Net interest income 6,121 6,511 6,766 6,959
Provision for loan losses 340 382 410 410
---------------------------------------------
Net interest income after provision for loan losses 5,781 6,129 6,356 6,549
Noninterest income 776 874 984 944
Noninterest expense 4,556 4,923 5,034 5,149
---------------------------------------------
Income before taxes 2,001 2,080 2,306 2,344
Income taxes 695 724 852 842
---------------------------------------------
Net income $ 1,306 $ 1,356 $ 1,454 $ 1,502
=============================================
Basic EPS $ 0.35 $ 0.36 $ 0.39 $ 0.40
Diluted EPS $ 0.35 $ 0.36 $ 0.38 $ 0.39
</TABLE>
<PAGE> 77
Bancorp Rhode Island, Inc.
Executive Officers
Merrill W. Sherman
President and CEO
Albert R. Rietheimer, CPA
Chief Financial Officer and Treasurer
Donald C. McQueen
Vice President and Assistant Secretary
Bank Rhode Island
Executive Officers
Merrill W. Sherman
President and CEO
Albert R. Rietheimer, CPA
Chief Financial Officer and Treasurer
Donald C. McQueen
Executive Vice President,
Chief Credit & Administration Officer
James V. DeRentis
Executive Vice President,
Retail Banking & Marketing
Officers
Accounting and Finance
John E. Westwood
Senior Vice President,
Controller
Joan E. Rivelli
Accounting Officer,
Accounting Manager
Administration
Elizabeth M. Carroll
Senior Vice President,
Administrative Services
Gisele M. Golembeski
Assistant Vice President,
Administrative Services
Daniel A. Patenaude
Assistant Vice President,
Facilities Manager & Security Officer
Bernice M. DeMello
Assistant Vice President,
Administrative Services
Stephen M. Turgeon
Vice President,
Corporate Communications
Debra S. Regan
Vice President,
Human Resources Director
Audit
Melissa A. Ogg
Assistant Vice President,
Internal Auditor
Retail Banking
Kathleen C. Orovitz
Vice President,
Branch Sales Manager
Linda A. Geremia
Vice President,
Regional Manager
Kathryn E. Taylor
Vice President,
Regional Manager
Elizabeth A. Hart
Vice President,
Marketing Manager
Michael J. Roy
Vice President,
Retail Banking
Melissa L. Mulhearn
Vice President,
Investment Manager
P. Michael Regnier
Vice President,
Cash Management Officer
Donald L. DiBlasi
Vice President,
Business Development Officer
Andrew J. Deluski
Assistant Vice President,
Branch Manager
Todd M. George
Assistant Vice President,
Investment Sales
Steven J. Grasso
Assistant Vice President,
Business Development Officer
Diane Y. Goyette
Assistant Vice President,
Branch Manager
Suzanne D. Joyal
Assistant Vice President,
Branch Manager
Doreen M. Sousa
Assistant Vice President,
Retail Training Officer
Lorie L. Bruyere
Retail Banking Officer
Branch Manager
Paula Burbank
Retail Banking Officer,
Branch Manager
Madeleine G. Dickie
Retail Banking Officer,
Branch Manager
Tanya S. Fandino
Retail Banking Officer,
Internet Banking Manager
Kathleen M. Morgan
Retail Banking Officer,
Branch Manager
Leah M. Prata
Retail Banking Officer,
Branch Manager
Maria T. Travassos
Retail Banking Officer,
Branch Manager
Eileen F. Tweedie
Retail Banking Officer,
Branch Manager
<PAGE> 78
Renay Houle
Retail Banking Officer,
Call Center Manager
Doris Bragger
Collections Officer
Jacqueline N. Binette
Marketing Officer
Lori A. Oliveira
Marketing Officer
Commercial Lending
Kevin R. Kelly
Senior Vice President,
Head of Business Lending
Emanuel E. Barrows
Senior Vice President,
Business Lending
Daniel J. Hagerty
Senior Vice President,
Business Lending
Michael J. Kerr
Senior Vice President,
Business Lending
James P. Tiernan
Senior Vice President,
Business Lending
Lori J. Webber
Senior Vice President,
Senior Risk Manager
James C. Kelshaw
Vice President,
Business Lending
Albert M. Jaffarian
Business Lending Officer,
Portfolio Manager
Real Estate Lending
Kyle A. Macdonald
Senior Vice President,
Head of Real Estate Lending
Stephen J. Gibbons
Senior Vice President,
Real Estate Lending
Rosa C. Medeiros
Assistant Vice President
Real Estate Lending
Consumer & Small Business Lending
Peter Walsh
Senior Vice President,
Retail, Small Business Lending, &
CRA Officer
David L. Goolgasian
Vice President,
Consumer Loan Manager
Joseph P. Hindle
Vice President,
Small Business Manager
Patricia O. Saracino
Assistant Vice President,
Community Relations
Joseph M. D'Amico
Retail Lending Officer
Abigail T. Moore
Small Business Officer,
Portfolio Manager
Credit Administration
Paul G. Wielgus
Senior Vice President,
Senior Credit & Compliance Officer
Gregory E. Kwiatkowski
Assistant Vice President,
Loan Review Officer
Maureen F. Snell
Assistant Vice President,
Loan Servicing
Operations/MIS
Kenneth L. Senus
Senior Vice President,
Information Technology & Operations
Tonia R. Ryan
Vice President,
Systems Planning & Project Management
Donald G. Morash
Assistant Vice President,
MIS Manager
Karen J. Talbot
Assistant Vice President,
Operations Manager
Elizabeth A. Limerick
Operations Officer
CampusMate
Patricia Hanratty
Senior Vice President,
CampusMate Director
Raymond K. Antonio
Vice President,
Systems & Operations Director
Stock Transfer
Agent
Registrar and Transfer Company
10 Commerce Way
Cranford, NJ 07016
Auditors
KPMG LLP
Providence, RI
Counsel
Hinckley, Allen & Snyder LLP
Providence, RI
Investor Information
The Bank Rhode Island 2001 annual meeting will be held on Wednesday, May
15, 2002 at 10:00 a.m. at the Courtyard by Marriott, Providence, RI.
Requests for information, including copies of the Bank's annual report, may
be obtained at no charge by writing to:
Investor Relations Department
Bank Rhode Island
One Turks Head Place
Providence, RI 02903
<PAGE> 79
Mission Statement
Bank Rhode Island will be the premier bank in the communities we serve. We
will provide excellent service and a broad range of competitive financial
products to our customers through a team of well-trained professional
employees. We will be a civic leader through direct involvement in local
organizations and activities.
All of these endeavors will result in a strong performance for our
shareholders, a rewarding work environment for our employees, and a
valuable resource for our customers and community.
Locations
1047 Park Avenue
Cranston, RI 02910
383 Atwood Avenue
Cranston, RI 02910
195 Taunton Avenue
East Providence, RI 02914
999 South Broadway
East Providence, RI 02914
1440 Hartford Avenue
Johnston, RI 02919
One Turks Head Place
Providence, RI 02903
137 Pitman Street
Providence, RI 02906
445 Putnam Pike
Smithfield, RI 02917
1300 Warwick Avenue
Warwick, RI 02888
1062 Centerville Road
Warwick, RI 02886
233 Lambert Lind Highway
Warwick, RI 02886
2975 West Shore Road
Warwick, RI 02886
1175 Cumberland Hill Road
Woonsocket, RI 02895
(Full Service Drive-up ATM)
17 Coventry Shoppers Park
Coventry, RI 02816
Market for the Company's Common Stock and Related Stockholder Matters
Bancorp Rhode Island, Inc.'s common stock is traded on the Nasdaq Stock
Market(R) under the symbol "BARI". The following table sets forth certain
information regarding the Common Stock for the periods indicated.
<TABLE>
<CAPTION>
Stock Price
----------------- Dividend
High Low Paid
---- --- --------
<s> <c> <c> <c>
2000:
First Quarter $10.25 $ 9.13 $0.10
Second Quarter 11.50 9.00 0.10
Third Quarter 14.50 10.50 0.10
Fourth Quarter 14.13 12.50 0.12
2001:
First Quarter $17.00 $12.63 $0.12
Second Quarter 17.45 15.38 0.12
Third Quarter 19.58 16.35 0.12
Fourth Quarter 17.95 17.13 0.12
</TABLE>
As of March 11, 2002, there were approximately 1,300 holders of record of
the Common Stock.
<PAGE> 80
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>bri-x21.txt
<DESCRIPTION>EXHIBIT 21 LIST OF SUBSIDIARIES
<TEXT>
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
Name Jurisdiction of Organization
---- ----------------------------
Bank Rhode Island Rhode Island
BRI Statutory Trust I Connecticut
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>bri-x23.txt
<DESCRIPTION>EXHIBIT 23 CONSENT OF KPMG
<TEXT>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
Bancorp Rhode Island, Inc.
We consent to incorporation by reference in the registration statement on
Form S-8, File No. 333-46438, of Bancorp Rhode Island, Inc. of our report
dated January 16, 2002, relating to the consolidated balance sheets of
Bancorp Rhode Island, Inc. and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001, which report appears in the Annual Report
on Form 10-K.
/s/ KPMG LLP
Providence, Rhode Island
March 25, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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