-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
O+ETqiGE4LlwJZJxwH3XYJY/FCzc8E6mkfanxKewOE43QDLsu1qgb8IYzcPBxKUg
E7klXEnz9z0yd8n3SwxFEQ==
<SEC-DOCUMENT>0000910647-03-000098.txt : 20030327
<SEC-HEADER>0000910647-03-000098.hdr.sgml : 20030327
<ACCEPTANCE-DATETIME>20030327133814
ACCESSION NUMBER: 0000910647-03-000098
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030327
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: 03620363
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>
<DOCUMENT>
<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, 2002
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. [ ]
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 24, 2003 was $64,516,540.
As of March 24, 2003, there were 3,790,800 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 2002 Annual Report to Shareholders
and Definitive Proxy Statement for the 2003 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
Description Page Number
- ----------- -----------
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 7a -- Qualitative and Quantitative Disclosures
About Market Risk 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
Item 14 -- Controls and Procedures 17
Part IV. Item 14 -- Exhibits, Financial Statement Schedules
and Reports on Form 8-K 18
Signatures 20
<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") to be a bank
holding company and to acquire all of the capital stock of the Bank. The
reorganization of the Bank into the holding company form of ownership was
completed on September 1, 2000. The Company has no significant assets other
than the common stock of the Bank. For 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, 2002, 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
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, 2002, commercial loan outstandings have increased from $85.4
million to $281.0 million, an increase of $195.6 million, or 229.0%.
<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 $6.0 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, 2002, the Bank had $175.2
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, 2002,
owner-occupied commercial real estate loans totaled $59.2 million, or 8.8%
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 $81.2
million, or 12.1% of the total loan portfolio, and multi-family residential
loans totaled $19.0 million, or 2.8% 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, which 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, 2002, commercial and industrial loans (including
leases) totaled $75.0 million, or 11.2% 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 business' principal owners. 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, 2002, small business loans totaled $28.8 million, or 4.3% 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, 2002, outstanding construction loans
totaled $18.1 million, or 2.7% 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 adjustable
rate mortgage ("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, 2002, approximately 4.4% 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 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.
<PAGE> 5
At December 31, 2002 one- to four-family residential mortgage loans
totaled $297.8 million, or 44.4% of the total loan portfolio. The fixed rate
portion of this portfolio totaled $19.3 million and had original maturities
of 15 and 30 years. The adjustable rate portion of this portfolio totaled
$277.3 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, 2002, the consumer
loan portfolio totaled $91.9 million, or 13.7% 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 and 2001, the Bank purchased automobile loans from another New England
institution. At December 31, 2002, purchased automobile loans totaled $3.4
million, or 0.5% of the total loan portfolio. The Bank currently anticipates
that it may continue to purchase automobile loans in the future 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, corporate debt securities, mortgage-backed securities, Federal
Home Loan Bank of Boston ("FHLB") stock and fed funds sold and other
overnight investments, represents 27.9% of total assets, or $282.7 million,
as of December 31, 2002.
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. Late in
2002, the Company retained the services of an outside investment advisory
firm to assist in the management of this portfolio and further diversified
the portfolio through the purchase of corporate debt securities and
collaterized mortgage obligations ("CMOs").
Overall, investments produced total interest and dividend income of
$12.4 million, or 23.2% of total interest and dividend income, in 2002 and
$11.6 million, or 20.7% of total interest and dividend income, during 2001.
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.
As a result of the Bank's continuing emphasis on core deposit growth,
service charges on deposit accounts have also grown and represent the
largest source of noninterest income for the Company. Service charges on
deposit accounts rose
<PAGE> 6
$312,000, or 9.0%, from $3.5 million for 2001, to $3.8 million for 2002,
primarily as a result of growth in checking and savings accounts.
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 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 2000, the Bank terminated this agreement and entered
into a new agreement with Commonwealth Equity Services, Inc., of Waltham,
Massachusetts ("Commonwealth"). The Bank now makes mutual funds, annuities,
stocks, bonds and other fee based products available to its customers
through Commonwealth, and has also assumed direct management responsibility
for the program.
Since year-end 2000, the Bank has made investment management services
available to its high net worth customers through two referral 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, Rhode Island and Marion, Massachusetts.
Other Products and Services
In August 2001, the Bank introduced a new product called CampusMate(tm).
CampusMate is an integrated banking and electronic payment service designed
to meet the needs of colleges and universities, their administrative staffs,
students and parents. The CampusMate product provides an on-line deposit
account, in addition to an on-line vehicle for transferring funds and making
tuition and other payments to the college or university. The Bank has
received a provisional patent for the business practices associated with the
CampusMate product. As of December 31, 2002, the Bank was providing
CampusMate services to a college and a university, both located in Rhode
Island.
Employees
At December 31, 2002, the Company had 193 full-time and 45 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 Fleet, 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
<PAGE> 7
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.
During the past year, banks in general have seen an inflow of money from the
stock markets as a result of the poor performance of equity securities.
Whether this inflow will continue, or for how long, or if these dollars will
return to the equity markets in the future, are questions facing many
financial institutions.
The population in the Bank's market area is growing slowly, at best,
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 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 "Exchange Act") and the recently enacted Sarbanes-Oxley Act of
2002.
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
<PAGE> 8
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," as defined in the BHC Act, of any Rhode Island financial
institution to file an extensive application with the Director. The
application requires detailed information concerning the Bank, the
transaction and the principals involved. The Director may disapprove the
acquisition if the proposed transaction would result in a monopoly, the
financial stability of the institution would be jeopardized, the proposed
management lacks competence, or the acquisition would not promote public
convenience and advantage. The Company is also subject to the Rhode Island
Business Combination Act.
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.
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 the past decade 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 substantial additional 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 (as amended, the "FDI 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 by the FDIC.
<PAGE> 9
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 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, 2002, the
Bank's Tier 1 leverage ratio was 6.06%, its total Risk-Based Capital Ratio
was 10.68% and its Tier 1 Risk-Based Capital Ratio was 9.43%. 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. For example, 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 institution.
Undercapitalized, significantly undercapitalized and critically
undercapitalized institutions also are subject to a number of other
requirements and restrictions.
Safety and Soundness Standards. The FDI Act also 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, 2002, on a consolidated basis, the Company's Tier 1
Leverage Ratio was 6.19%, its total Risk-Based Capital Ratio was 10.88% and
its Tier 1 Risk-Based Capital Ratio was 9.63%. 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 $6.7 million at December 31, 2002 and $5.5 million at
December 31, 2001. 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 facilitated 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.
Gramm-Leach-Bliley Act
In late 1999, Congress enacted the Gramm-Leach-Bliley Act (the "G-L-B
Act"), which repealed provisions of the 1933 Glass-Steagall Act that
required separation of the commercial and investment banking industries. The
G-L-B Act expands
<PAGE> 11
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 also 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 ("SEC") 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 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 this legislation and implementing regulations
are likely ultimately to have a more substantial 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 requires 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.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed
into law the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") which imposed
significant additional requirements and restrictions on publicly-held
companies, such as the Company. These provisions include new requirements
governing the composition and responsibilities of audit committees,
financial disclosures and reporting and restrictions on personal loans to
directors and officers. Sarbanes-Oxley, inter alia, now mandates chief
executive and chief financial officer certifications of periodic financial
reports, additional financial disclosures concerning off-balance sheet
items, and speedier transaction reporting requirements for executive
officers, directors and 10% shareholders. Rules promulgated and to be
promulgated by the SEC pursuant to Sarbanes-Oxley will impose obligations
and restrictions on auditors and audit committees intended to enhance their
independence from
<PAGE> 12
management. In addition, penalties for non-compliance with the Exchange Act
are heightened. The Company does not anticipate any significant difficulties
in complying with this legislation.
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,
sales of non-deposit investment products, 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. Six of these branch office facilities are
owned and seven 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>
Branch offices:
1047 Park Avenue, Cranston, RI . 4,700 1996 Owned N.A.
383 Atwood Avenue, Cranston, RI . 4,700 1996 Owned N.A.
2104 Plainfield Pike, Cranston, RI . 700 2002 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 2/28/08
1440 Hartford Avenue, Johnston, RI . 4,700 1996 Land Leased 12/31/07
One Turks Head Place, Providence, RI . 5,000 1996 Leased 4/30/09
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
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.
Administrative and operational offices:
625 G. Washington Highway, Lincoln, RI 14,600 2003 Leased 12/31/12
One Turks Head Place, Providence, RI 18,400 1999 Leased 6/30/09
</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 2002.
<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 78 of the Company's 2002
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 2002 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
44 of the Company's 2002 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 2002 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, 2002 and
2001 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, 2002,
together with the accompanying notes and the Independent Auditors' Report
contained on pages 46 through 50 of the Company's 2002 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 2002 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.
Name Age Position
---- --- --------
Merrill W. Sherman 54 President and Chief Executive Officer
Albert R. Rietheimer 46 Chief Financial Officer and Treasurer
Donald C. McQueen 46 Vice President and Assistant Secretary
Margaret D. Farrell 53 Secretary
James V. DeRentis 41 Bank Executive Vice President - Retail
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 2003 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 2003 Annual Meeting of Shareholders to be filed with the
SEC.
<PAGE> 16
Equity Compensation Plan Information
The following table sets forth information about the Company's equity
compensation plans as of December 31, 2002:
<TABLE>
<CAPTION>
Number of Securities to Number of Securities
be Issued Upon Exercise of Weighted-Average Exercise Remaining Available for
Outstanding Options, Price of Outstanding Options, Future Issuance Under
Plan Category Warrants and Rights Warrants and Rights Equity Compensation Plans
------------- -------------------------- ----------------------------- -------------------------
<s> <c> <c> <c>
Equity Compensation Plans
Approved by Security Holders 429,250 (1) $13.35 171,000 (2)
Equity Compensation Plans
Not Approved by Security Holders 0 N/A 0
------- -------
Total 429,250 $13.35 171,000
======= ====== =======
<FN>
- --------------------
<F1> Includes 395,750 shares issuable upon exercise of outstanding stock
options granted under the Bancorp Rhode Island, Inc. 2002 Incentive
and Nonqualified Stock Option Plan and predecessor plan (Amended and
Restated Bancorp Rhode Island, Inc. 1996 Incentive and Nonqualified
Stock Option Plan) and 33,500 shares issuable upon exercise of
outstanding stock options granted under the Amended and Restated
Bancorp Rhode Island Non-Employee Directors Stock Plan.
<F2> Includes 148,500 shares available for issuance under the Bancorp
Rhode Island, Inc. 2002 Incentive and Nonqualified Stock Option
Plan and predecessor plan; and 22,500 shares reserved for
issuance under the Amended and Restated Bancorp Rhode Island,
Inc. Non-Employee Directors Stock Plan.
</FN>
</TABLE>
Additional information regarding these equity compensation plans is
contained in Note 14 to the Company's Consolidated Financial Statements
included in the Company's 2002 Annual Report to Shareholders, which is
incorporated herein by this reference.
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 2003 Annual Meeting of
Shareholders to be filed with the SEC.
ITEM 14. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the 90 days
prior to the filing date of this report, the Company carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. This evaluation was carried out under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported with the time
periods specified in Securities and Exchange Commission rules and forms.
There have been no significant changes in the Company's internal
controls or, to the Company's knowledge, in other factors that could
significantly affect such internal controls subsequent to the date of the
Company's evaluation of its internal controls.
<PAGE> 17
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 2002 Annual Report to Shareholders are incorporated herein
by reference in Item 8.
1. Independent Auditors' Report
2. Consolidated Balance Sheets as of December 31, 2002 and
2001
3. Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000
4. Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2002, 2001 and 2000
5. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
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
Exhibit No. Description
- ----------- -----------
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) +
10.6 (a) Amendment to Amended and Restated Non-Employee Director Stock
Plan (4) +
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 (5) +
10.7 (d) Amendment No. 5 to Bank Rhode Island Supplemental Executive
Retirement Plan (6) +
10.8 Bank Rhode Island Nonqualified Deferred Compensation Plan, as
amended by Amendment No. 1 (1) +
10.8 (a) Amendment No. 2 to Bank Rhode Island Nonqualified Deferred
Compensation Plan +
10.9 Warrant for 136,315 shares of Common Stock issued to Fleet
Financial Group, Inc. (1)
<PAGE> 18
10.10 Bank Rhode Island 2002 Supplemental Executive Retirement Plan +
10.11 stricted Stock Agreement by and among Bancorp Rhode Island,
Inc., Bank Rhode Island and Merrill W. Sherman (7) +
10.12 Form of Bank Rhode Island Split Dollar Agreement (6) +
10.13 2002 Incentive and Nonqualified Stock Option Plan (4) +
11 Computation of earnings per share (8)
13 Annual Report to Shareholders for 2002, 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
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002
<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 June 30, 2002.
<F5> Incorporated by reference from the Company's Annual Report on Form 10-
K for the year ended December 31, 2001.
<F6> Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended March 31, 2002.
<F7> Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended March 31, 2001.
<F8> The calculation of earnings per share is set forth as Note 19 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>
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 7, 2002, announcing that as a
result of FASB's issuance of SFAS 147 on October 1, 2002, the Company
would be able to eliminate $1.2 million of annual goodwill
amortization beginning January 1, 2002 and would be required to
restate its net income for the first two quarters of 2002 to reflect
the elimination of goodwill amortization.
<PAGE> 19
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, 2003 By: /s/ Merrill W. Sherman
-------------------------------
Merrill W. Sherman
President and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints
each of Merrill W. Sherman or Albert R. Rietheimer, or either of them, each
acting alone, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for such person and in his or
her name, place and stead, in any and all capacities in connection with the
annual report on Form 10-K of Bancorp Rhode Island, Inc. for the year ended
December 31, 2002, to sign any and all amendments to the Form 10-K, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or their substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
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 and
Officer) Accounting Officer)
Date: March 25, 2003 Date: March 25, 2003
/s/ Karen Adams /s/ Meredith A. Curren
- ----------------------------- ------------------------------
Karen Adams, Director Meredith A. Curren, Director
Date: March 25, 2003 Date: March 25, 2003
/s/ Anthony F. Andrade /s/ Karl F. Ericson
- ----------------------------- ------------------------------
Anthony F. Andrade, Director Karl F. Ericson, Director
Date: March 25, 2003 Date: March 25, 2003
/s/ John R. Berger /s/ Margaret D. Farrell
- ----------------------------- ------------------------------
John R. Berger, Director Margaret D. Farrell, Director
Date: March 25, 2003 Date: March 25, 2003
/s/ Malcolm G. Chace /s/ Mark R. Feinstein
- ----------------------------- ------------------------------
Malcolm G. Chace, Director and Mark R. Feinstein, Director
Chairman of the Board Date: March 25, 2003
Date: March 25, 2003
/s/ Ernest J. Chornyei, Jr. /s/ Edward J. Mack
- ----------------------------- ------------------------------
Ernest J. Chornyei, Jr., Director Edward J. Mack, Director
Date: March 25, 2003 Date: March 25, 2003
/s/ Bogdan Nowak /s/ Cheryl W. Snead
- ----------------------------- ------------------------------
Bogdan Nowak, Director Cheryl W. Snead, Director
Date: March 25, 2003 Date: March 25, 2003
/s/ Pablo Rodriguez /s/ John A. Yena
- ----------------------------- ------------------------------
Pablo Rodriguez, Director John A. Yena, Director
Date: March 25, 2003 Date: March 25, 2003
<PAGE> 20
BANCORP RHODE ISLAND, INC.
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
---------------------------------------------
I, Merrill W. Sherman, certify that:
1. I have reviewed this annual report on Form 10-K of Bancorp Rhode Island,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
/s/ Merrill W. Sherman
- ------------------------------
Merrill W. Sherman
President and Chief Executive Officer
<PAGE> 21
BANCORP RHODE ISLAND, INC.
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
---------------------------------------------
I, Albert R. Rietheimer, certify that:
1. I have reviewed this annual report on Form 10-K of Bancorp Rhode Island,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
/s/ Albert R. Rietheimer
- -----------------------------
Albert R. Rietheimer
Chief Financial Officer and Treasurer
<PAGE> 22
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>bri-108.txt
<DESCRIPTION>EXHIBIT 10.8(A)
<TEXT>
Exhibit 10.8(a)
BANK RHODE ISLAND
NON-QUALIFIED DEFERRED COMPENSATION PLAN
AMENDMENT NO. 2
WHEREAS, Bank Rhode Island (the "Company") desires to amend the
provisions of the Company's Nonqualified Deferred Compensation Plan (the
"Plan") to reflect a change in the income which is credited on a
participant's account balance under the Plan; and
WHEREAS, under Section 7.1 of the Plan, the Board of Directors of the
Company may amend the Plan, provided that such amendment shall not reduce
or eliminate any balance on a Participant's Deferred Compensation Account
accrued through the date of such amendment; and
WHEREAS, the Board of Directors of the Company has approved amending
the income which is credited on a participant's account balance under the
Plan; and
NOW, THEREFORE, the Plan is amended as follows:
1. Section 4.2 of the Plan is amended in its entirety to read as
follows:
"4.2.Investment Credit on Deferral Account. As of each
Valuation Date, the Plan Administrator shall adjust amounts in
a Participant's Deferred Compensation Account to reflect
earnings attributable to the Participant's Deferred
Compensation Account. Earnings on amounts in a Participant's
Deferred Compensation Account shall accrue commencing on the
date the Deferred Compensation Account first has a positive
balance and shall continue to accrue until the entire balance
in the Participant's Deferred Compensation Account has been
distributed. Prior to January 1, 1999 the earnings credited to
a Participant's Deferred Compensation Account for any Plan Year
shall be credited at a rate of interest equal to the yield
quoted by Moody's Investors Service as of the last business day
of the preceding calendar year for the 30 year Baa 1 rated
corporate bond index. Effective January 1, 1999 Participant's
account balances shall be credited with interest at the greater
of (a) the interest rate of 30 year Baa 1 rated corporate bond
index and (b) the Bank's projected rate of return on average
earning assets as reflected in the Bank's budget for such year.
Commencing October 1, 2002 each Participant whose Deferred
Compensation Account exceeds $100,000 may specify, in the
manner prescribed by the Plan Administrator, an alternative
investment index under the Plan for an amount not to exceed
$100,000 or such greater amount as the Plan Administrator may
authorize from time to time. The Participant's selection of an
alternative investment index will have no bearing on the actual
investment or segregation of
<PAGE>
Company assets, but will be used as the basis for making
adjustments to the Participant's account as described in this
Section 4.2. A Participant may change his or her investment
index at such time, and in such manner, as the Plan
Administrator may authorize from time to time."
2. Section 5.1 of the Plan is amended in its entirety to read as
follows:
"5.1. Time and Method of Payment. Payment of the vested portion of
the Participant's Deferred Compensation Account shall be made as soon
as practicable following the Valuation Date coincident with or next
following the Participant's Distribution Date. Payment of the vested
portion of a Participant's Deferred Compensation Account shall be
made in a single, lump sum, cash distribution; provided, however, in
the case of a Participant who has chosen an alternative investment
index under Section 4.2 above, the Company may make such distribution
partly in cash and partly in kind, so long as the in kind
distribution does not exceed the fair value of the portion of the
Account that is directed to the alternative investment index and the
in kind distribution is made solely from assets that are held by the
trustee of a trust established pursuant to Section 6.1 above."
IN WITNESS WHEREOF, the Company has caused this Amendment to the
Nonqualified Deferred Compensation Plan to be executed by its duly
authorized officer as of the 15th day of October, 2002.
BANK RHODE ISLAND
By: / s/Merrill W. Sherman
-------------------------------
Merrill W. Sherman,
President
<PAGE> 2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>bri-1010.txt
<DESCRIPTION>EXHIBIT 10.10
<TEXT>
Exhibit 10.10
BANK RHODE ISLAND
2002 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - Introduction 1
ARTICLE II - Definitions 2
ARTICLE III - Participation and Vesting 4
ARTICLE IV - Source of Benefit Payment 5
ARTICLE V - Retirement Benefits 6
ARTICLE VI - Change of Control 8
ARTICLE VII - Administration 10
ARTICLE VIII - Amendment or Termination of Plan 11
ARTICLE IX - Miscellaneous 12
Schedule A 14
Schedule B 17
Schedule C 19
Schedule D 20
Exhibit A
<PAGE>
ARTICLE I. INTRODUCTION
1.1 Purpose of Plan. The purpose of this Plan is to promote loyalty,
to attract new employees and to encourage employees to make and continue
careers with the Bank and its subsidiaries by supplementing their retirement
benefits, thereby giving them assurance of retirement security and promoting
their continued loyalty to the Bank.
1.2 Status. The Plan is intended to be a plan that is unfunded and
is maintained by the Bank primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated
employees within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of
the Employee Retirement Income Security Act of 1974 (ERISA), and shall be
interpreted and administered accordingly. This Plan provides benefits to
designated employees in addition to the benefits, if any, that employees are
provided under the Bank Rhode Island Supplemental Executive Retirement Plan
that was adopted by the Board of Directors on January 26, 1999, as amended.
1.3 Authorization. This Plan was approved by the Board of Directors
on October 15, 2002.
<PAGE>
ARTICLE II. DEFINITIONS
The following terms have the following meanings:
2.1 "Administrator" means the person designated by the Board to
administer the Plan pursuant to Article VII.
2.2 "Applicable Benefit Amounts", with respect to a Participant, is
defined in Schedule B or C, as the case may be.
2.3 "Average Compensation" means a Participant's average annual
Eligible Compensation from the Bank during the three consecutive calendar
years as an Employee in which such compensation was greatest. For this
purpose, "Eligible Compensation" shall mean: (i) the Participant's base
salary including any salary reductions made on behalf of the Participant
under any cafeteria, flexible benefits, or 401(k) plan sponsored by the Bank
which are excluded from gross income under Sections 125 or 402(e)(3) of the
Internal Revenue Code, and (ii) any amount deferred by the Participant on an
elective basis under any other non-qualified deferred compensation plan of
the Bank.
2.4 "Board" means the Board of Directors of the Bank.
2.5 "Change of Control" is defined in Schedule A.
2.6 "Bank" means Bank Rhode Island, a Rhode Island financial
institution.
2.7 "401K Plan Benefit" means the annual payment calculated by
converting that portion of the Participant's Bank Rhode Island 401K Plan
Account Balance that is attributable to the Bank's matching and profit-
sharing contributions to an annuity, payable for the life of the Participant
only, using factors set forth in Schedule D
<PAGE> 2
2.8 "Effective Date" means October 15, 2002.
2.9 "Employee" means an individual employed by the Bank or any
subsidiary of the Bank.
2.10 "Normal Retirement Age" means age 65.
2.11 "Normal Retirement Benefit" means the benefit referred to in
Section 5.1 hereof.
2.12 "Normal Retirement Date" means the first day of the month
coinciding with or next following the Participant's sixty-fifth birthday.
2.13 "Participant" means any Employee selected to participate in
the Plan in accordance with Section 3.1.
2.14 "Plan" means this 2002 Supplemental Executive Retirement Plan
as set forth herein and in all subsequent amendments hereto.
2.15 "Primary Social Security Benefit" means the annual amount of
old age insurance benefits payable to a Participant at his or her Normal
Retirement Date computed under the Social Security Act in effect on the date
as of which such computation is made.
<PAGE> 3
ARTICLE III. PARTICIPATION AND VESTING
3.1 Selection of Participants. The Board will select from time to
time those Employees who will be Participants in the Plan and the Applicable
Benefit Amount. The Employees set forth in the attached Schedules B and C
will become Participants on the Effective Date. If and when the Board names
additional Participants, they will be added to the appropriate Schedule and
will become Participants at that time.
3.2 Vesting.
(a) Except as provided in paragraph (b) and in Section 6 and in
Section 9.3, a Participant will be vested and entitled to receive benefits
under this Plan as set forth in the attached Schedule B and C. A Participant
who ceases to be an Employee without becoming vested will forfeit all rights
under the Plan.
(b) A Participant who ceases to be an Employee because of death
before satisfying the requirements of paragraph (a) shall become vested
immediately and entitled to receive benefits subject to the other provisions
of the Plan.
<PAGE> 4
ARTICLE IV. SOURCE OF BENEFIT PAYMENTS
4.1 Obligations of the Bank. The Bank will establish on its books
liabilities for obligations to pay benefits under the Plan. With respect to
all benefits payable under the Plan, each Participant (or other person
entitled to receive benefits with respect to a Participant) will be an
unsecured general creditor of the Bank.
4.2 No Funding Required. Except as otherwise provided in Article VI,
the Bank may, but shall not be required to, establish a trust of which it is
treated as the owner under Subpart E of Subchapter J, Chapter 1 of the
Internal Revenue Code of 1986, as amended (a "rabbi trust"). The Bank may
from time to time deposit funds with the trustee to provide a sound long-
term funding program.
4.3 No Claim to Specific Assets. Nothing in the Plan will be
construed to give any individual rights to any specific assets of the Bank,
person or entity.
<PAGE> 5
ARTICLE V. RETIREMENT BENEFITS
5.1 Normal Retirement Benefit.
(a) Subject to Section 5.2, the Normal Retirement Benefit payable
under the Plan to a Participant will be a monthly benefit equal to one-
twelfth of the Applicable Benefit Amount. For this purpose, the Applicable
Benefit Amount for a Participant is listed on Schedule B or Schedule C as
the case may be.
(b) The Participant's Normal Retirement Benefit will commence at his
or her Normal Retirement Date (or such later date on which the Participant
actually retires) and continue for his or her lifetime.
(c) The benefit with respect to a Participant who ceases to be an
Employee for any reason other than retirement at Normal Retirement Date may
not commence prior to his or her Normal Retirement Date and the Applicable
Benefit Amount shall be adjusted for such early termination pursuant to the
provisions of Schedule B and C.
5.2 Death Benefits. Except as otherwise provided in this paragraph,
no death benefits will be payable to anyone following the death of the
Participant.
(a) Post Retirement. If a Participant for whom retirement benefits
have commenced under this Plan dies, there shall be a death benefit payable
under this Plan equal to the unpaid portion of the Participant's Applicable
Benefit Amount set forth in Schedule B or Schedule C, as the case may be,
that can be provided by the amount the Bank has accrued on its books as a
liability for the Participant's benefit under this Plan as of the date of
the Participant's death, minus the amount of the death benefit, if any,
<PAGE> 6
that is payable under any death benefit or insurance arrangement that
specifically references this Plan (but not less than zero).
(b) Pre-Retirement. If a Participant with a vested benefit for whom
retirement benefits have not commenced dies, there shall be a death benefit
payable under this Plan equal to the portion of the Participant's Applicable
Benefit Amount set forth in Schedule B or Schedule C, as the case may be,
that can be provided by the amount the Bank has accrued on its books as a
liability for the Participant's benefit under this Plan as of the date of
the Participant's death, minus the amount of the death benefit, if any, that
is payable under any death benefit or insurance arrangement that
specifically references this Plan (but not less than zero).
(c) Beneficiary. Any death benefit that is payable under this Plan
shall be paid to the beneficiary or beneficiaries designated in writing from
time to time in a manner acceptable to the Administrator. If no designation
has been made or if all designated beneficiaries are dead, payment shall be
made to the following persons in the following priority: to the
Participant's surviving spouse, if any; but if none to the Participant's
surviving children in equal shares, if any; but if none payment shall be
made to the estate of the Participant.
<PAGE> 7
ARTICLE VI. CHANGE OF CONTROL
6.1 Vesting of Benefits. In the event of a "Change of Control", a
Participant shall, notwithstanding any other provision of the Plan,
immediately become fully vested in his or her retirement benefits as
described in Section 5.1.
6.2 Funding of Benefit. In the event of a Change of Control, the
Bank shall immediately establish a rabbi trust with a third party financial
institution with a net worth of at least $100 million (unless Plan
Participants entitled to receive and beneficiaries receiving a majority of
benefits under the Plan (based upon the dollar amount of benefits accrued)
consent in writing to the appointment of another trustee), substantially in
the form attached hereto as Exhibit A, and shall deposit funds with the
trustee of the trust equal to the difference between the then present value
of all accrued benefits provided under the Plan (computed on the basis of
the actuarial assumptions stated in Schedule D hereto and taking into
account the benefits that become vested or payable in the event of a Change
of Control) and the then fair market value of the assets of the trust (if
any) and shall thereafter make annual additional deposits with the trustee
to reflect increases in the accrued benefits. If the principal of the trust,
and any earnings thereon, are not sufficient to make payment of the benefits
provided for under this Plan, the Bank shall make the balance of each such
payment as it falls due.
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
<PAGE> 8
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.
<PAGE> 9
ARTICLE VII. ADMINISTRATION
7.1 Appointment of Administrator. The Plan will be administered by
the person designated by the Board to administer the Plan (the
"Administrator"), but the Board will have full discretionary authority to
interpret the provisions of the Plan and decide all questions and settle all
disputes that may arise in connection with the Plan. The Board may establish
its own operative and administrative rules and procedures in connection with
the Plan, provided such procedures are consistent with the requirements of
Section 503 of ERISA and the regulations thereunder. All interpretations,
decisions and determinations made by the Board will be binding on all
persons concerned.
7.2 Delegation. The Board in its sole discretion may delegate
certain of its duties and responsibilities to the Administrator or to an
appropriate Employee or Employees. For purposes of the Plan, any action
taken by the Administrator or a delegee Employee pursuant to such delegation
will be considered to have been taken by the Board. The Bank agrees to
indemnify and to defend to the fullest possible extent permitted by law any
delegee of the Board (including any person who formerly served as a delegee)
against all liabilities, damages, costs and expenses (including attorneys'
fees and amounts paid in settlement of any claims approved by the Bank)
occasioned by any act or omission to act in connection with the Plan, if
such act or omission is in good faith.
7.3 Expenses. All expenses incurred in the creation or
administration of this Plan shall be paid by the Bank.
<PAGE> 10
ARTICLE VIII. AMENDMENT OR TERMINATION OF PLAN
The Bank hopes and expects to continue the Plan in effect, but the
Board necessarily reserves the right to amend the Plan at any time, and from
time to time, or to terminate the Plan, provided that such amendment or
termination shall not reduce the vested benefit of any Participant or amend
Article VI without the consent of all Participants who have vested benefits
under the Plan. Any amendment or termination shall be stated in an
instrument in writing and signed by a duly authorized representative of the
Board.
<PAGE> 11
ARTICLE IX. MISCELLANEOUS
9.1 No Assignment or Alienation. None of the benefits, payments,
proceeds or claims of any person under this Plan shall be subject to any
claim of any creditor or to attachment or garnishment or other legal process
by any such creditor; nor shall any person have any right to alienate,
anticipate, commute, pledge, encumber or assign any of the benefits,
payments or proceeds which he or she may expect to receive, contingently or
otherwise, under the Plan.
9.2 Limitation of Rights. Neither the establishment of the Plan, nor
any amendment thereof, nor the payment of any benefits will be construed as
giving any individual any legal or equitable right against the Bank, except
for those rights explicitly provided for in the Plan.
9.3 Forfeiture of Benefits. A Participant shall forfeit all rights
or benefits remaining to him or her under the Plan if such Participant's
employment is terminated on account of, or such Participant is convicted of,
or confesses to, or permits a plea of nolo contendere to be entered with
respect to, a criminal act of fraud, misappropriation, embezzlement, or the
like, which is a felony and involves property of the Bank.
9.4 Governing Law. The Plan will be construed, administered, and
governed under the laws of the State of Rhode Island, to the extent not
preempted by federal law.
9.5 Severability. If any provision of this Plan is held by a court
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions shall continue to be fully effective.
<PAGE> 12
IN WITNESS WHEREOF, the Bank has caused this Plan to be executed by
its duly authorized officer as of this 15th day of October, 2002.
BANK RHODE ISLAND
By: /s/Malcolm G. Chace
-------------------------------
Malcolm G. Chace, Chairman
<PAGE> 13
SCHEDULE A
----------
TO
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(A) Change in Control. For purposes of this Plan, a "Change in
Control" shall be deemed to have occurred if and when:
(1) A Takeover Transaction is effectuated; or (2) Bancorp Rhode
Island, Inc. (the "Company") commences substantive negotiations with a third
party with respect to a Takeover Transaction if within twelve (12) months of
the commencement of such negotiations, enters into a definitive agreement
with respect to a Takeover Transaction with any party with which
negotiations were originally commenced; or (3) any election of directors of
the Company occurs (whether by the directors then in office or by the
shareholders at a meeting or by written consent) where a majority of the
directors in office following such election are individuals who were not
nominated by a vote of two-thirds of the members of the board of directors
immediately preceding such election; or (4) either of the Company or the
Bank effectuates a complete liquidation.
(B) Takeover Transaction. A "Takeover Transaction" shall mean:
(1) The acquisition of voting securities of the Company by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than by the Company or its subsidiaries or any employee
benefit plan (or related trust) of the Company or its subsidiaries, which
theretofore did not beneficially own (within the meaning of Rule 13d-3
promulgated under the Exchange Act) securities representing 30% or more of
the voting power of all outstanding shares of voting securities of the
Company, if such
<PAGE> 14
acquisition results in such individual, entity or group owning securities
representing more than 30% of the voting power of all outstanding voting
securities of the Company; provided, that any acquisition by a corporation
with respect to which, following such acquisition, more than 50% of the then
outstanding shares of voting securities of such corporation, is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners of the voting
securities of the Company outstanding immediately prior to such acquisition
in substantially the same proportion as their ownership, immediately prior
to such acquisition, of the outstanding voting securities of the Company,
shall not constitute a Change in Control; or
(2) The issuance of additional shares of common stock of the Company
or the Bank, as applicable, in a single transaction or a series of related
transactions if the individuals and entities who were the beneficial owners
of the outstanding voting securities of the Company or the Bank, as
applicable, immediately prior to such issuance do not, following such
issuance, beneficially own, directly or indirectly, securities representing
more than 50% of the voting power of all then outstanding voting securities
of the Company or the Bank, as applicable; or
(3) Consummation by the Company or the Bank of (a) a reorganization,
merger or consolidation, in each case, with respect to which all or
substantially all of the individuals and entities who were the beneficial
owners of the voting securities of such entity immediately prior to such
reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, securities representing more than 50% of the voting power of
then outstanding voting securities of the corporation resulting from such a
reorganization, merger or
<PAGE> 15
consolidation, or (b) the sale, exchange or other disposition (in one
transaction or a series of related transactions) of all or substantially all
of the assets of the Company (on a consolidated basis) or the Bank to a
party which is not controlled by or under common control with such entity,
or (c) the sale by the Company in one transaction or in a series of related
transactions of voting securities of the Bank such that following such
transaction or transactions the Company no longer beneficially owns,
directly or indirectly, securities representing more than 50% of the voting
power of the then outstanding voting securities of the Bank.
For purposes of this Section (B), "voting power" means ordinary voting
power for the election of directors.
<PAGE> 16
SCHEDULE B
----------
Participants: Applicable Benefit Amount and Vesting
- ------------ -------------------------------------
Merrill W. Sherman (A) 70% of the Participant's Average Compensation,
minus: (i) $250,000, (ii) fifty percent (50%) of the
Participant's Primary Social Security Amount and
(iii) the 401K Plan Benefit or (B) in the event of a
"Change of Control" the amount the Bank has accrued
on its books as a liability for the Participant's
benefit as of the date of the determination, if such
amount is greater than (A). Except as provided under
Sections 3.2 (b) and 6.1, the Benefit Amount shall
be vested as follows: 20% on November 1, 2005, 40%
on November 1, 2006, 60% on November 1, 2007, 80% on
November 1, 2008 and 100% on November 1, 2008
Albert R. Rietheimer (A) 70% of the Participant's Average
Donald C. McQueen Compensation, minus: (i) $50,000, (ii) fifty percent
(50%) of the Participant's Primary Social Security
Amount and (iii) the 401K Plan Benefit or (B) in the
event of a "Change of Control" the amount the Bank
has accrued on its books as a liability for the
Participant's benefit as of the date of the
determination, if such amount is greater than (A).
Except as provided under Sections 3.2 (b) and 6.1,
the Benefit Amount shall be vested as follows: 20%
on November 1, 2008, 40% on November 1, 2009, 60% on
November 1, 2010, 80% on November 1, 2011 and 100%
on November 1, 2012
<PAGE> 17
James V. DeRentis (A) 70% of the Participant's Average Compensation,
minus: (I) $35,000, (ii) fifty percent (50%) of the
Participant's Primary Social Security Amount and
(iii) the 401K Plan Benefit or (B) in the event of a
"Change of Control" the amount the Bank has accrued
on its books as a liability for the Participant's
benefit as of the date of the determination if such
amount is greater than (A). Except as provided under
Sections 3.2 (b) and 6.1, the Benefit Amount shall
be vested as follows: 20% on November 1, 2008, 40%
on November 1, 2009, 60% on November 1, 2010, 80% on
November 1, 2011 and 100% on November 1, 2012
Adjustment for Early Termination under Section 5.1(c): The Applicable
Benefit Amount with respect to a Participant who ceases to be an Employee
for any reason prior to the Normal Retirement Date shall be that portion of
the Participant's Applicable Benefit Amount set forth above that can be
provided by the amount the Bank has accrued on its books as a liability for
the Participant's benefit as of the date of the Participant's early
termination multiplied by the vested percentage as of such date of
termination.
<PAGE> 18
SCHEDULE C
----------
Participants: Applicable Benefit Amount
------------ -------------------------
Elizabeth Carroll $25,000
Stephen Gibbons $25,000
Kevin Kelly $25,000
Kathleen C. Orovitz $25,000
Kenneth Senus $25,000
Peter Walsh $25,000
Vesting: For all Participants in Schedule C, except as provided under
Sections 3.2 (b) and 6.1, the Applicable Benefit Amount shall be vested as
follows: 20% on November 1, 2008, 40% on November 1, 2009, 60% on November
1, 2010, 80% on November 1, 2011 and 100% on November 1, 2012
Adjustment for Early Termination under Section 5.1(c): The Applicable
Benefit Amount with respect to a Participant who ceases to be an Employee
for any reason prior to the Normal Retirement Date shall be that portion of
the Participant's Applicable Benefit Amount set forth above that can be
provided by the amount the Bank has accrued on its books as a liability for
the Participant's benefit as of the date of the Participant's early
termination multiplied by the vested percentage as of such date of
termination.
<PAGE> 19
SCHEDULE D
----------
Actuarial Assumptions:
Mortality: Blended GAM-1983
Interest: 6 3/4 % per annum
<PAGE> 20
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>5
<FILENAME>bri-x13.txt
<DESCRIPTION>EXHIBIT 13
<TEXT>
Exhibit 13
2002
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, 2002. 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>
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.
[CHART] [CHART]
1997 $ 533 1997 $0.75
1998 $ 596 1998 $0.85
1999 $ 632 1999 $1.14
2000 $ 739 2000 $1.49
2001 $ 862 2001 $1.62
2002 $1,013 2002 $1.92
(In millions) Earnings Per Share
Total Assets
[PHOTO]
<PAGE> 1
LETTER TO SHAREHOLDERS
To Our Shareholders:
2002 was a significant year for Bancorp Rhode Island, Inc. We crossed the
billion-dollar mark in total assets, a major milestone. We posted our
seventh straight year of record profits. We continued our expansion on both
the retail and commercial fronts. And we gained heightened visibility
throughout Rhode Island as a result of our advertising campaigns and
continued proactive community involvement.
We also commenced a number of strategic initiatives related to the Bank's
infrastructure that will provide a strong foundation for years to come.
These actions reflect our commitment to provide the support that a high-
touch, service-oriented institution requires to grow and to enhance its
performance.
Financial Performance Summary
Net income for the year rose 21% to $7.7 million. We also saw a 19%
increase in our diluted earnings per share (EPS) which reached $1.92 for
2002. In reporting our income, we were the beneficiary of a change in
accounting principle. It required us to cease amortizing the goodwill
arising at the time of Bank Rhode Island's formation in 1996. However, even
without the change in accounting principle, we achieved a 9% increase in
net income and a 7% increase in EPS.
Our strong performance enabled the Board to increase the dividend.
Effective November 26, 2002, the quarterly dividend rose to $0.14 per
share.
Profitable, sustainable growth and increased earnings have always been
clear objectives of our management group. The strategies we employ to
achieve them are straightforward.
[PHOTO]
<PAGE> 2
First, we look to grow our loan portfolio, particularly, our commercial
loan portfolio. Second, we look to grow our retail banking franchise, with
strong emphasis on increasing our checking and savings account deposit
base. Third, we look to increase our fee income.
A review of our 2002 accomplishments, as well as some of our plans for
2003, illustrates how these objectives drive our business.
Lending
Commercial Lending-
Relationship-based and Experienced
Bank Rhode Island divides commercial lending among three groups. The
Business Lending group manages commercial and industrial account
relationships in excess of $250,000; the Commercial Real Estate Lending
group focuses on construction lending and investment real estate
transactions; and the Small Business Lending group handles business
relationships of $250,000 or less. Each group had an outstanding year.
[SIDEBAR]
[CHART]
1997 $3.5
1998 $3.8
1999 $4.4
2000 $5.6
2001 $6.3
2002 $7.7
(In millions)
Net Income
[SIDEBAR]
[CHART]
1997 $115
1998 $134
1999 $175
2000 $213
2001 $239
2002 $281
(In millions)
Commercial Loans
[SIDEBAR]
[CHART]
1997 $33
1998 $39
1999 $47
2000 $58
2001 $61
2002 $92
(In millions)
Consumer Loans
[PHOTO]
<PAGE> 3
[SIDEBAR]
"Overall, our commercial portfolio grew by 17%, reaching $281 million at
year-end. We are pleased to say we now have one of the largest and most
experienced commercial lending groups that focuses on servicing the Rhode
Island marketplace."
Overall, our commercial portfolio grew by 17%, reaching $281 million at
year-end. We are pleased to say we now have one of the largest and most
experienced commercial lending groups that focuses on servicing the Rhode
Island marketplace.
Our approach to commercial lending has been consistent since inception.
First, we are relationship-based lenders. When you bank successful
businesses and business people - and those are the kind we want to bank -
they always have additional financing needs. For that reason, it is
important that our customers speak to someone who is knowledgeable about
their business each time they call to discuss their financing needs.
At Bank Rhode Island, we connect business owners with a lender who stays
both with us and with them over time. Our lenders are seasoned senior
officers whose expert advice can add a valuable dimension to our customers'
businesses. Moreover, the lenders' familiarity with the customers' business
plans helps expedite approval of credit requests.
In addition, our customers have the security of knowing that they have
access to a team of people who are knowledgeable about their accounts. As
our customers' inquiries often require an immediate response, each
[PHOTO]
<PAGE> 4
of our senior lenders works with two or three other specifically dedicated
administrative personnel. They are as familiar with the accounts as the
senior lender. This team approach provides our customers with a responsive
service not readily found at large financial institutions.
Business Lending-
The Bank of Choice for Mid-Sized Businesses
We could not have been more pleased with the results the Business Lending
group posted in 2002. The outstanding balance of the group's portfolio grew
25% to $140 million by year-end and more than 40 new account relationships
were added. Those kinds of numbers are not typical of what other
institutions in the Northeast are experiencing. Clearly, we are becoming
the bank of choice for mid-sized businesses in the State of Rhode Island.
We are especially proud of the fact that a number of high-profile
organizations within the state, which have historically relied on super-
regional lenders for their commercial banking needs, became Bank Rhode
Island customers in 2002.
We have made inroads in the fast growing demographic area of South County,
as well. In 2002 we added a new senior lender who has a dedicated market
emphasis in South County. Almost immediately, we became a major lender in
this developing marketplace. Coupled with the completion of a branch
expansion in North Kingstown, we are well poised to grow business
throughout Bank Rhode Island's footprint during 2003. To that end, we
announced at the close of 2002, a team reorganization that will further
elevate our business generation and service capacities.
Commercial Real Estate-
Solid Performance with Growth Potential
Our Commercial Real Estate group posted yet another solid year. Its
portfolio grew 9% to $113 million and 30 new customers were added. In
addition to experiencing a brisk market for refinancing, the group was
particularly active in construction lending. We financed a number of
single-family house builders who produce a solid product to meet demand in
the Rhode Island marketplace.
For an institution our size, we are having an important impact on the
commercial real estate markets in both the urban and suburban areas of
Rhode Island. In 2002, Bank Rhode Island was the sole financing source for
a successful 125-unit single-family development in Smithfield. Currently,
we are participating in a number of key real
[PHOTO]
<PAGE> 5
estate projects in the Providence downcity area. They include a hotel
development and the rehabilitation of several historic buildings. These and
other projects should enhance the prospects for the region in years to
come.
Small Business Lending-
Solid SBA Lending Results
The third leg of our Commercial Lending area is our small business loan
portfolio. We are proud to have grown this portfolio from $6 million as of
year-end 1998 to $29 million by year-end 2002. While we attempt to expedite
processing of these credits and streamline documentation, we remain
relationship-oriented in this area as well. All of these customers are
welcomed at our branches and forge multiple relationships there.
Our small business lending strength contributed to our maintaining a solid
number three position in the Rhode Island market SBA lending results. We
finished behind a large regional bank and managed to run almost neck-and-
neck with a large multinational institution.
In 2003 we will put increased emphasis on this line of business. We will
add personnel to the new business development staff and will streamline our
underwriting processes for even better customer response time.
Retail Lending
One of the areas in which we made major strides was Retail Lending.
Historically, we emphasized commercial lending and saw relatively modest
growth in our retail loan portfolio. 2002 was different. We ran a highly
successful home equity term loan campaign. As a result, we were able to
increase the outstanding balance of our consumer loan portfolio from $61
million to $92 million. Our ability to generate these loans is a testament
to our increased market visibility and presence.
The Retail Lending area also handles our residential first mortgage loan
production. In the low rate environment, the outstanding balances of
adjustable rate mortgage loans that we originate for retention in our
portfolio, experienced a decline. However, fixed rate residential mortgage
loans, which we sell to others, remained relatively high in 2002, and made
a strong contribution to fee income.
[PHOTO]
<PAGE> 6
As a result of the retail successes, we have looked to reorganize and
expand our retail lending function. We have enhanced our residential
mortgage production process by assigning mortgage specialists to handle all
in-house originations. This will free our branch staff to focus on customer
service, cross-selling and deposit growth initiatives.
Credit
We have achieved the increases in our commercial and other loan portfolios
without adverse credit quality results. Our nonperforming assets stood
under $800,000 as of year-end 2002, and our net charge-offs for the year
were a mere 3 basis points of average assets.
As credit conscious as we remain, the 2002 record, unfortunately, may be
impossible to duplicate going forward. In a pre-emptive move, in 2002 we
created a risk management unit to oversee all credit quality issues across
the Bank. The unit already has made valuable contributions to our overall
credit administration.
Retail Banking
While we seek to drive the asset side of the balance sheet primarily
through quality commercial loan growth, our emphasis on the retail side
always has been to increase checking and savings deposits. 2002 was no
exception. Our checking and savings account balances grew a whopping 28%.
We have to assume that some of this was due to people moving assets out of
the volatile equity markets. However, as our core account growth has
averaged greater than 15% during the last several years, we also believe
that a good portion of the growth was due to our hard work and reputation
for excellent service and products. In fact, in 2002 we introduced our new
Asset Manager account and positioned it as an alternative to money market
accounts offered by the brokerage houses. We will continue to refine our
core product mix and plan to introduce a streamlined checking account
offering in 2003.
2002 saw continued enhancement of our franchise footprint with the
elimination of an older mall branch and the opening of our first "Xpress
Branch" on Plainfield Pike in Cranston. The new branch - small, well-
located and highly visible - has received a very positive reception. It
represents the expansion of the retail delivery models we
[PHOTO]
<PAGE> 7
introduced as part of our long-range plan to extend our footprint over a
broader area. We are excited that we will be opening a new, full-size Xcel
branch in North Kingstown in the latter part of 2003. In the interim, we
have leased temporary space and will open a business development office
there in the first quarter of 2003.
The deposit growth has a number of positive consequences. First, we have
experienced a healthy increase in our average branch size, which is now in
excess of $60 million. As of year-end 2002, we had 6 branches with more
than $70 million in deposits and only two of our newer branches are below
$40 million. Over time, this will lead to greater operating efficiency.
Second, because of the emphasis on transaction accounts, we have seen an
increase in fee income. Third, the larger deposit base has provided a key
referral source for the lending groups as well as one of our other growing
areas - our nondeposit investment program.
One of the real success stories in our retail area is the nondeposit
investment program. We sell mutual funds and annuities through licensed
representatives in our branches. Sales of those products have climbed from
$5 million just two years ago to more than $23 million in 2002. Again, we
believe the growth reflects a combination of our efforts and the public's
response to high quality service and products, as our approach to retail
banking is every bit as relationship-oriented as it is in commercial
banking.
Other Products and Services;
Balance Sheet Items
Sales of mortgages and nondeposit investment products are two ways we have
broadened the range of fee producing lines of business. There are other
changes we made last year and programs we put in place to continue our fee
income growth.
The Bank started purchasing bank-owned life insurance. This represents a
diversification in our investment strategy and is reflected on our income
statement as fee income. Our cash management services area is also growing.
Several years ago we expanded cash management to enable us to fully service
our commercial customers. These services include repurchase agreements
(repos) and overnight money market funds. The demand for these services
continues to increase and we saw repo and sweep balances rise to $48
million as of year-end. The recent addition of a prominent quasi-public
agency to our growing list of customers reflects the strong reputation this
area has gained.
[PHOTO]
<PAGE> 8
Our CampusMate(tm) program also continues to develop. Programming for the
product was completed in 2002 and we have been awarded a provisional
patent. Two colleges are fully live on the product, which meets with rave
reviews. We are marketing to other colleges and universities both within
and outside Rhode Island.
Finally, we signed a strategic alliance agreement with an experienced
national syndicator of historic tax credits, who will create a state
historic tax credit fund in Rhode Island. Recent historic tax credit
legislation should facilitate a market for this product beginning in 2003.
However, we remain a margin-driven institution. Our income is primarily
reflective of the difference between the yield on our assets and the price
we pay for deposits and other borrowings. The low rate environment has
placed pressure on our net interest margin.
You will notice some investments in corporate bonds on our balance sheet as
of year-end. We have contracted with an outside firm to advise us with
respect to both investments and asset/liability strategies. We will be
looking to improve our margin through enhancing asset yield without
incurring undue risk.
[SIDEBAR]
[CHART]
1997 $231
1998 $266
1999 $285
2000 $366
2001 $422
2002 $540
(In millions)
Checking & Savings Deposits
[SIDEBAR]
"As of year-end 2002, we had 6 branches with more than $70 million in
deposits and only two of our newer branches are below $40 million."
[SIDEBAR]
[CHART]
1997 $1.,916
1998 $2,727
1999 $3,222
2000 $3,578
2001 $5,231
2002 $7,083
(In millions)
Noninterest Income
[PHOTO]
<PAGE> 9
Marketing
Our commercial successes and our deposit growth are in part fueled by our
marketing efforts. We continued utilizing television advertising, running a
series of ads directed at the size, sophistication and capacity of our
Commercial Lending group. Additionally, we implemented a number of print
and other media campaigns. In 2001 we introduced our first television-based
image campaign and further refined it in 2002 with the "We treat your
business like big business" tagline. The message in the campaign reinforces
the Bank's position as the smart alternative to the mega banks for
businesses and consumers in the Greater Providence market. The message
demonstrated to the market that Bank Rhode Island has all the products and
services of the big banks delivered by seasoned professionals who can
tailor those offerings to fit the customer's needs.
Future initiatives will continue to utilize a combination of television,
radio, print and direct mail to reinforce the Bank's image as a
relationship-focused commercial bank complemented by an exceptional retail
network.
In 2002 we created a new position in commercial marketing to develop
strategies for growth and to enhance the visibility and reputation of Bank
Rhode Island. We launched BusinessRI, a Rhode Island-focused publication
that promotes successful companies and executives in our marketplace. We
also held a number of customer functions to solidify our relationships. In
2003 we will continue to find ways to maintain and further strengthen
customer contact.
Our appearance constitutes a form of marketing as well, and we continue to
upgrade and enhance the physical appearance of our traditional branch
network. The Smithfield and Governor Francis (Warwick) branches were
remodeled to reinforce our customer-focused delivery strategy. Experience
indicates that updating a branch helps drive growth at that location.
Administration and Operations
All of these front-line successes would not be possible without the support
of our operations and MIS groups. They are as customer-focused as our front
line officers. In order to enable them to be as responsive and efficient as
possible and to provide a solid foundation for future growth, we have
undertaken two major operations initiatives. The first was relocating our
back office to a new
[PHOTO]
<PAGE> 10
operations center in Lincoln. That move was announced in May 2002 and was
completed in January 2003. We also analyzed our data processing needs. We
concluded that a new system and change of vendors were warranted. As a
result, we will be undergoing a data processing conversion in the second
quarter of 2003. Over time, the new systems should enhance our analytical
capacity for marketing and financial management. The conversion should be
largely transparent to our customers. However, the new systems will enable
us to continue to deliver the kind of personal, responsive service our
customers have come to expect.
Community Involvement
As our reputation continues to grow, so does our community involvement.
Last year, Bank Rhode Island contributed financial support to a wide array
of community events, projects and organizations that are aimed at improving
the quality of life throughout Rhode Island. In addition, our employees
continue to serve the community with the gift of their time through myriad
volunteer efforts. More than 60 nonprofit organizations benefited from Bank
Rhode Island employee participation as volunteers or advisors or as members
of boards of trustees.
[SIDEBAR]
"ore than 60 nonprofit organizations benefited from Bank Rhode Island
employee participation as volunteers or advisors or as members of boards of
trustees."
[PHOTO]
<PAGE> 11
[SIDEBAR]
"We are striving to build a first-class organization in every respect. From
our people, to our systems, to our products and services, and ultimately to
our performance, we want to be the best in everything we do."
A few highlights of our community participation during 2002 include working
with the Federal Home Loan Bank of Boston on a grant to the Woonsocket
Neighborhood Housing Corporation to provide affordable, single-family
housing to low income individuals; financial and volunteer support for all
Chambers of Commerce located in the Providence and Kent County marketplace;
and sponsorship of the popular Dominican Festival in Providence.
In 2002, the Arts and Business Council of Rhode Island announced that it
would honor Bank Rhode Island with the prestigious Encore Award. This award
was given in recognition of the Bank's contribution to the arts and to
local arts organizations.
We believe that our support of efforts that provide the basic necessities
of food and shelter for those less fortunate, spur economic development and
increase opportunities for cultural enrichment can strengthen the fabric of
our communities. This is good for our neighbors in the community and makes
good business sense for us.
Finally, our efforts on all fronts-commercial and retail lending;
marketing; administration and operations; and community involvement-have
been successful due to the talent and commitment of our employees. We are
[PHOTO]
<PAGE> 12
appreciative of their dedication to making Bancorp
Rhode Island, Inc. a unique financial institution
for our marketplace, and one that continues to build [PHOTO]
value for our shareholders and our customers.
We are striving to build a first-class organization
in every respect. From our people, to our systems, to
our products and services, and ultimately to our
performance, we want to be the best in everything we
do. We are committed to producing a meaningful return
for you, our shareholders.
Thank you for your support.
/s/ Malcolm G. Chace
Malcolm G. Chace
Chairman of the Board
/s/ Merrill W. Sherman
Merrill W. Sherman
President & CEO
[PHOTO]
<PAGE> 13
Bancorp Rhode Island, Inc.
and Bank Rhode Island
Boards of Directors
Malcolm G. Chace, Chairman
Karen Adams
Anthony F. Andrade
John R. Berger
Ernest J. Chornyei, Jr.
Meredith A. Curren
Karl F. Ericson
Margaret D. Farrell, Esq.
Mark R. Feinstein
Edward J. Mack
Bogdan (Bob) Nowak
Pablo Rodriguez, MD
Merrill W. Sherman
Cheryl W. Snead
John A. Yena
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
Donald C. McQueen
Executive Vice President,
Chief Credit & Administrative Officer
Albert R. Rietheimer, CPA
Chief Financial Officer and Treasurer
James V. DeRentis
Executive Vice President,
Retail Banking & Marketing
Officers
Accounting and Finance
John E. Westwood
Senior Vice President, Controller
Joan E. Rivelli
Assistant Vice President,
Accounting Manager
Administration
Elizabeth M. Carroll
Senior Vice President,
Administrative Services
Gisele M. Golembeski
Vice President,
Administrative Services
Daniel A. Patenaude
Vice President,
Facilities Manager
& Security Officer
Bernice M. DeMello
Assistant Vice President,
Administrative Services
Debra S. Regan
Vice President,
Human Resources Manager
Susan J. DiCicco
Human Resources Officer
Audit
Steven E. D'Alfonso
Chief Auditor,
Internal Audit
Melissa A. Ogg
Assistant Vice President,
Internal Audit
[PHOTO]
<PAGE> 14
Retail Banking & Marketing
Kathleen C. Orovitz
Senior 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
Lorie L. Bruyere
Assistant Vice President,
Branch Manager
Timothy J. Davis
Assistant Vice President,
Marketing
Todd M. George
Assistant Vice President,
Investment Sales
Glen J. Gibbons
Assistant Vice President,
Investment Sales
Diane Y. Goyette
Assistant Vice President,
Branch Manager
Jonathan E. Mitchell
Assistant Vice President,
Investment Sales
Kathleen M. Morgan
Assistant Vice President,
Branch Manager
Dana A. Sherman
Assistant Vice President,
Investment Compliance Officer
Doreen M. Sousa
Assistant Vice President,
Retail Training Manager
Thomas W. Quinlan, Jr.
Assistant Vice President,
Branch Manager
Madeleine G. Dickie
Retail Banking Officer,
Branch Manager
Tanya S. Fandino Leung
Retail Banking Officer,
Internet Banking Manager
Renay M. Houle
Retail Banking Officer,
Call Center Manager
Leah M. Prata
Retail Banking Officer,
Branch Manager
Maria T. Travassos
Retail Banking Officer,
Branch Manager
Jacqueline N. Binette
Marketing Officer
Lori A. Oliveria
Retail Banking Officer
Penelope P. Boucher
Retail Banking Officer,
Assistant Branch Manager
Pamela J. Mitchell
Retail Banking Officer,
Assistant Branch Manager
Business Lending
Kevin R. Kelly
Senior Vice President,
Head of Business Lending
Emanuel E. Barrows
Senior Vice President,
Business Lending
[PHOTO]
<PAGE> 15
Daniel J. Hagerty
Senior Vice President,
Business Lending
Michael J. Kerr
Senior Vice President,
Business Lending
James P. Tiernan
Senior Vice President,
Business Lending
James C. Kelshaw
Vice President,
Business Lending
Philip M. Regnier
Vice President,
Cash Management Sales Manager
Albert M. Jaffarian
Assistant Vice President,
Portfolio Manager
George T. Menas
Commercial Banking Officer,
Portfolio Manager
Commercial Real Estate Lending
Stephen J. Gibbons
Senior Vice President,
Head of Commercial
Real Estate
Laurel L. Bowerman
Senior Vice President,
Commercial Real Estate
David R. Cunningham
Vice President,
Commercial Real Estate
Rosa C. Medeiros
Vice President,
Commercial Real
Estate Administration
Thomas F. Croteau
Assistant Vice President,
Portfolio Manager
Small Business Lending
Donald L. DiBlasi
Vice President,
Business Development
Team Leader
Joseph P. Hindle
Vice President,
Business Development
Andrew J. Deluski
Assistant Vice President,
Business Development
Joseph F. Sheehan
Assistant Vice President,
Business Development
Consumer & Small Business Lending
Peter Walsh
Senior Vice President,
Retail, Small Business Lending, &
CRA Officer
David L. Goolgasian
Vice President,
Small Business Underwriting
Suzanne D. Joyal
Assistant Vice President,
Retail Lending Manager
Patricia O. Saracino
Assistant Vice President,
Community Relations
Joseph M. D'Amico
Retail Lending Officer
Abigail T. Moore
Small Business Officer,
Portfolio Manager
Eileen F. Tweedie
Morgage Officer
Credit Administration
Paul G. Wielgus
Senior Vice President,
Senior Credit &
Compliance Officer
Gregory E. Kwiatkowski
Vice President,
Loan Review Officer
Maureen F. Snell
Vice President,
Loan Servicing Manager
Operations/MIS
Kenneth L. Senus
Senior Vice President,
Information Technology
& Operations
Donald G. Morash
Vice President, MIS Manager
Tonia R. Ryan
Vice President, Systems Planning
& Project Management
Karen J. Talbot
Vice President,
Operations Manager
Elizabeth A. Limerick
Assistant Vice President,
EFT Operations
CampusMate(tm) Division
Patricia Hanratty
Senior Vice President,
CampusMate President
Alan L. Lehmann
Senior Vice President,
Sales & Marketing 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 Bancorp Rhode Island, Inc.
2002 annual meeting will be held
on Wednesday, May 21, 2003 at
10:00 a.m. at the Courtyard by Marriott, Providence, RI.
Requests for information, including copies of Bancorp Rhode Island, Inc.'s
annual report, may be obtained at no charge by writing to:
Investor Relations Department
Bancorp Rhode Island, Inc.
One Turks Head Place
Providence, RI 02903
<PAGE> 16
CONTENTS
- ---------------------------------------------------------------------------
Selected Consolidated Financial Data 18-19
Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) 20-44
Management's Report 45
Independent Auditor's Report 46
Consolidated Financial Statements 47-50
Notes to Consolidated Financial Statements 51-77
Stock Information and Locations 78
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table represents selected consolidated financial data as of
and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. The
selected consolidated financial data is derived from the Company's
Consolidated Financial Statements which 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,
----------------------------------------------------------
2002(a) 2001 2000 1999 1998
------- ---- ---- ---- ----
(Dollars in thousands, except Per Share Data)
<s> <c> <c> <c> <c> <c>
Statement of Operations Data:
Interest income $ 53,507 $ 55,903 $ 50,035 $ 41,651 $ 40,034
Interest expense 22,180 26,537 23,678 19,600 19,845
----------------------------------------------------------
Net interest income 31,327 29,366 26,357 22,051 20,189
Provision for loan losses 1,875 1,669 1,542 1,000 1,017
Noninterest income 7,083 5,231 3,578 3,222 2,727
Noninterest expense 25,024 23,196 19,662 17,354 16,043
----------------------------------------------------------
Income before taxes and change in accounting principle 11,511 9,732 8,731 6,919 5,856
Income taxes 3,849 3,417 3,113 2,448 2,022
----------------------------------------------------------
Income before change in accounting principle 7,662 6,315 5,618 4,471 3,834
Cumulative effect of change in accounting principle, net of taxes(b) - - - 109 -
----------------------------------------------------------
Net income 7,662 6,315 5,618 4,362 3,834
Dividends on preferred stock - - - 88 793
----------------------------------------------------------
Net income available to common shareholders $ 7,662 $ 6,315 $ 5,618 $ 4,274 $ 3,041
==========================================================
Per Share Data:
Basic earnings per common share:
Income before change in accounting principle $ 2.04 $ 1.69 $ 1.51 $ 1.18 $ 0.87
Cumulative effect of change in accounting principle - - - (0.03) -
----------------------------------------------------------
Net income $ 2.04 $ 1.69 $ 1.51 $ 1.15 $ 0.87
==========================================================
Diluted earnings per common share:
Income before change in accounting principle $ 1.92 $ 1.62 $ 1.49 $ 1.17 $ 0.85
Cumulative effect of change in accounting principle - - - (0.03) -
----------------------------------------------------------
Net income $ 1.92 $ 1.62 $ 1.49 $ 1.14 $ 0.85
==========================================================
Dividends per common share $ 0.53 $ 0.48 $ 0.42 $ 0.10 -
Dividend pay-out ratio 27.6% 29.6% 28.2% 8.8% NA
Book value per common share $ 17.59 $ 15.74 $ 14.29 $ 12.79 $ 12.31
Tangible book value per common share $ 14.73 $ 12.88 $ 11.09 $ 9.27 $ 8.44
Average common shares outstanding - Basic 3,758,214 3,730,910 3,728,688 3,727,010 3,506,573
Average common shares outstanding - Diluted 3,996,670 3,900,028 3,768,589 3,741,778 3,584,820
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
----------------------------------------------------------
2002(a) 2001 2000 1999 1998
------- ---- ---- ---- ----
(Dollars in thousands, except Per Share Data)
<s> <c> <c> <c> <c> <c>
Balance Sheet Data:
Total assets $1,012,877 $ 862,250 $ 739,420 $ 631,977 $ 595,964
Investment securities 101,329 49,453 47,296 50,503 39,703
Mortgage-backed securities 156,114 150,650 117,431 74,793 79,924
Total loans receivable 670,658 610,964 518,825 458,958 431,402
Allowance for loan losses 10,096 8,524 7,294 5,681 5,018
Goodwill, net 10,766 10,766 11,930 13,094 14,424
Deposits 761,911 670,413 631,632 513,416 500,713
Borrowings 179,305 129,398 51,889 67,911 45,512
Common shareholders' equity 66,427 59,097 53,292 47,675 45,835
Total shareholders' equity 66,427 59,097 53,292 47,675 47,687
Average Balance Sheet Data:
Total assets $ 947,205 $ 818,905 $ 679,085 $ 616,426 $ 565,759
Investment securities 71,481 49,881 47,034 47,348 44,040
Mortgage-backed securities 177,753 130,342 86,114 79,463 57,627
Total loans receivable 622,545 584,400 491,327 439,099 421,554
Allowance for loan losses 9,375 8,056 6,472 5,358 4,799
Goodwill, net 10,766 11,373 12,540 13,720 15,077
Deposits 706,338 644,795 572,924 516,610 476,227
Borrowings 174,668 115,677 54,471 50,496 39,944
Common shareholders' equity 61,922 56,101 48,530 46,169 40,568
Total shareholders' equity 61,922 56,101 48,530 46,631 46,041
Operating Ratios:
Interest rate spread 3.04% 3.12% 3.44% 3.25% 3.20%
Net interest margin 3.48% 3.75% 4.10% 3.80% 3.78%
Efficiency ratio (c) 65.15% 67.05% 65.68% 68.67% 70.01%
Return on average assets (d) 0.81% 0.77% 0.83% 0.73% 0.68%
Return on average equity (d) 12.37% 11.26% 11.58% 9.59% 8.33%
Asset Quality Ratios:
Nonperforming loans to total loans 0.11% 0.12% 0.10% 0.24% 0.36%
Nonperforming assets to total assets 0.08% 0.12% 0.07% 0.18% 0.33%
Allowance for loan losses to nonperforming loans 1371.74% 1132.01% 1435.83% 510.88% 321.05%
Allowance for loan losses to total loans 1.51% 1.40% 1.41% 1.24% 1.16%
Net loans charged-off to average loans outstanding 0.05% 0.08% (0.01%) 0.08% 0.08%
Capital Ratios:
Average shareholders' equity to average total assets 6.54% 6.85% 7.15% 7.54% 8.14%
Tier I leverage ratio 6.19% 5.93% 5.91% 5.88% 5.72%
Tier I risk-based capital ratio 9.63% 9.86% 9.50% 9.70% 9.60%
Total risk-based capital ratio 10.88% 11.10% 10.76% 10.96% 10.85%
<FN>
(a) Earnings for 2002 were positively impacted by the Company's adoption
of Statement of Financial Accounting Standards ("SFAS") 142,
"Goodwill and Other Intangible Assets" and SFAS 147, "Acquisitions of
Certain Financial Institutions." These Statements required the
Company to cease amortizing its goodwilll and begin reviewing it at
least annually for impairment. In prior years, the amount of this
amortization was $1.2 million annually. Also see discussion under
"Recent Accounting Developments."
(b) In January 1999, the Bank expensed any remaining unamortized
organizational costs in accordance with Statement of Position 98-5,
"Accounting for Costs of a Start -Up Entity."
(c) Calculated by dividing total noninterest expenses by net interest
income plus noninterest income.
(d) 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") to be a bank holding company
and to acquire all of the capital stock of the Bank. The reorganization of
the Bank into the holding company form of ownership was completed on
September 1, 2000. The Company has no significant assets other than the
common stock of the Bank. For 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, nondeposit
investment products, commercial, residential and consumer loans, and other
traditional banking products and services designed to meet the needs of
individuals and small- to mid-sized businesses. The Bank also offers both
commercial and consumer on-line banking products and maintains a web site
at http://www.bankri.com. The Company and Bank are subject to regulation by
a number of federal and state agencies and undergo periodic examinations by
certain of those regulatory authorities. The Bank's deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory
limits. The Bank is also a member of the Federal Home Loan Bank of Boston
("FHLB").
Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying
value of certain assets or net income, are considered critical accounting
policies. The Company considers the following to be its critical accounting
policies: allowance for loan losses and review of goodwill for impairment.
There have been no significant changes in the methods or assumptions used
in accounting policies that require material estimates or assumptions.
Allowance for loan losses
Arriving at an appropriate level of allowance for loan losses necessarily
involves a high degree of judgment. The ongoing evaluation process includes
a formal analysis of the allowance each quarter, which considers, among
other factors, the character and size of the loan portfolio, business and
economic conditions, loan growth, delinquency trends, nonperforming loans
trends, charge-off experience and other asset quality factors.
<PAGE> 20
The Company evaluates specific commercial, commercial real estate and small
business loans deemed to be "impaired" and in excess of a specified dollar
amount. The estimated reserves for each of these credits is determined by
reviewing the fair value of the collateral, the present value of expected
future cash flows, and where available, the observable market price of the
loans. Provisions for losses on the remaining commercial, commercial real
estate, small business, residential mortgage and consumer loans are based
on pools of similar loans using a combination of payment status, historical
loss experience, industry loss experience, market economic factors,
delinquency rates and qualitative adjustments. Management uses available
information to establish the allowance for loan losses at the level it
believes is appropriate. However, future additions to the allowance may be
necessary based on changes in estimates resulting from changes in economic
conditions and other factors. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Company's allowance for loan losses. Such agencies may require the Company
to recognize adjustments to the allowance based on their judgments about
information available to them at the time of their examination.
Review of goodwill for impairment
In March 1996, the Bank acquired certain assets and assumed certain
liabilities from Fleet National Bank of Connecticut and related entities.
This acquisition was accounted for utilizing the purchase method of
accounting and generated $17.5 million of goodwill. This goodwill was
amortized in the years prior to 2002, resulting in a net balance of $10.8
million on the Company's balance sheet as of December 31, 2001. Effective
January 1, 2002, in accordance with Statement of Financial Accounting
Standards ("SFAS") 142 "Goodwill and Other Intangible Assets" and SFAS 147
"Acquisitions of Certain Financial Institutions", the Company was required
to cease amortizing this goodwill and to review it at least annually for
impairment. Goodwill is evaluated for impairment using market value
comparisons for similar institutions, such as price to earnings multiples,
price to deposits multiples and price to equity multiples. Based upon this
review, management believes that the goodwill was not impaired as of
December 31, 2002. This valuation technique contains estimates as to the
comparability of the selected market information to the specifics of the
Company.
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 to the allowance for loan losses
and the amount of losses and other expenses incurred as a result of
resolving troubled assets.
Net interest income for 2002 was $31.3 million, compared to $29.4 million
for 2001 and $26.4 million for 2000. This increase of $2.0 million, or
6.7%, during 2002 was primarily attributable to the continued growth of the
Company. The Company's net interest margin decreased in 2002 to 3.48%,
compared to 3.75% in 2001 and 4.10% for 2000. Average earning assets
increased $115.9 million, or 14.8%, and average interest-bearing
liabilities increased $101.0 million, or 15.3%, during 2002.
<PAGE> 21
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.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- --------------------------
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 $ 19,840 $ 313 1.58% $ 13,642 $ 510 3.74% $ 14,571 $ 930 6.38%
Investment securities 71,481 3,375 4.72% 49,881 3,044 6.10% 47,034 3,056 6.50%
Mortgage-backed securities 177,753 8,428 4.74% 130,342 7,720 5.92% 86,114 5,576 6.48%
Stock in the FHLB 7,528 277 3.68% 4,973 288 5.79% 3,704 282 7.61%
Loans receivable:
Residential mortgage loans 293,117 18,646 6.36% 301,729 21,694 7.19% 243,706 17,982 7.38%
Commercial loans 259,673 18,396 7.08% 221,966 18,078 8.14% 197,200 17,737 8.99%
Consumer and other loans 69,755 4,072 5.84% 60,705 4,569 7.53% 50,421 4,472 8.87%
-------- ------- -------- ------- -------- -------
Total earning assets 899,147 53,507 5.95% 783,238 55,903 7.14% 642,750 50,035 7.78%
------- ------- -------
Cash and due from banks 20,434 19,889 17,998
Allowance for loan losses (9,375) (8,056) (6,472)
Premises and equipment 7,878 6,641 6,306
Other real estate owned 59 169 80
Goodwill, net 10,766 11,373 12,540
Accrued interest receivable 4,599 4,767 4,126
Bank-owned life insurance 10,340 - -
Prepaid expenses and other assets 3,357 884 1,757
-------- -------- --------
Total assets $947,205 $818,905 $679,085
======== ======== ========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Deposits:
NOW accounts $ 65,466 705 1.08% $ 39,642 209 0.53% $ 31,555 205 0.65%
Money market accounts 10,114 130 1.29% 10,799 221 2.05% 14,113 375 2.66%
Savings accounts 275,263 5,083 1.85% 236,608 6,507 2.75% 192,217 6,137 3.19%
Certificate of deposit accounts 235,822 8,118 3.44% 257,646 13,458 5.22% 252,521 13,685 5.42%
Overnight and short-term borrowings 23,118 322 1.39% 15,386 461 3.00% 11,474 636 5.54%
FHLB and other borrowings 145,961 7,377 5.05% 97,718 5,418 5.54% 42,997 2,640 6.14%
Capital trust securities 5,589 445 7.96% 2,573 263 10.22% - - -%
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 761,333 22,180 2.91% 660,372 26,537 4.02% 544,876 23,678 4.34%
------- ------- -------
Noninterest-bearing deposits 119,673 100,100 82,518
Other liabilities 4,277 2,332 3,161
-------- -------- --------
Total liabilities 885,283 762,804 630,555
Shareholders' equity 61,922 56,101 48,530
-------- -------- --------
Total liabilities and shareholders' equity $947,205 $818,905 $679,085
======== ======== ========
Net interest income $31,327 $29,366 $26,357
======= ======= =======
Net interest rate spread 3.04% 3.12% 3.44%
Net interest rate margin 3.48% 3.75% 4.10%
</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 proportionally to the individual rate and volume changes.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
2002 vs 2001 2001 vs 2000
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 investment $ (370) $ 173 $ (197) $ (364) $ (56) $ (420)
Investment securities (791) 1,122 331 (2,232) 2,220 (12)
Mortgage-backed securities (1,738) 2,446 708 (427) 2,571 2,144
Stock in the FHLB (127) 116 (11) (17) 23 6
Residential mortgage loans (2,443) (605) (3,048) (447) 4,159 3,712
Commercial loans (2,527) 2,845 318 (1,039) 1,380 341
Consumer and other loans (1,117) 620 (497) (279) 376 97
---------------------------------------------------------------------
Total interest income (9,113) 6,717 (2,396) (4,805) 10,673 5,868
---------------------------------------------------------------------
Interest expense:
NOW accounts 305 191 496 (11) 15 4
Money market accounts (78) (13) (91) (76) (78) (154)
Savings accounts (2,371) 947 (1,424) (556) 926 370
Certificate of deposit accounts (4,277) (1,063) (5,340) (518) 291 (227)
Overnight & short-term borrowings (311) 172 (139) (681) 506 (175)
FHLB and other borrowings (515) 2,474 1,959 (229) 3,007 2,778
Capital trust securities (69) 251 182 - 263 263
---------------------------------------------------------------------
Total interest expense (7,316) 2,959 (4,357) (2,071) 4,930 2,859
---------------------------------------------------------------------
Net interest income $(1,797) $ 3,758 $ 1,961 $(2,734) $ 5,743 $3,009
=====================================================================
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
General
Net income for 2002 increased $1.3 million, or 21.3%, to $7.7 million, or
$1.92 per diluted common share, from $6.3 million, or $1.62 per diluted
common share, for 2001. The Company's performance represented a return on
average assets of 0.81% and a return on average equity of 12.37% for the
2002 period, as compared to a return on average assets of 0.77% and a
return on average equity of 11.26% for the 2001 period. Earnings for 2002
were positively impacted by the Company's adoption of SFAS 142 "Goodwill
and Other Intangible Assets" and SFAS 147 "Acquisitions of Certain
Financial Institutions." In accordance with SFAS 142, the Company ceased
amortizing its goodwill effective January 1, 2002. Also see discussion
under "Recent Accounting Developments."
Net interest income was $31.3 million for 2002, compared to $29.4 million
for 2001. The net interest margin for 2002 was 3.48%, compared to a net
interest margin of 3.75% for 2001. The increase in net interest income of
$2.0
<PAGE> 23
million or 6.7%, was primarily attributable to the overall growth of the
Company. Average earning assets increased $115.9 million, or 14.8%, and
average interest-bearing liabilities increased $101.0 million, or 15.3%,
over the prior year. The decrease of 27 basis points in the net interest
margin was primarily caused by the dramatic drop in market interest rates
occurring in 2002, coupled with the asset-sensitive nature of the Company's
balance sheet. Also see discussion under "Asset and Liability Management."
Interest Income - Investments
Total investment income (consisting of interest or dividends on federal
funds sold and overnight investments, investment securities, mortgage-
backed securities, and FHLB stock) was $12.4 million for 2002, compared to
$11.6 million for 2001. This increase in total investment income of
$831,000, or 7.2%, was primarily attributable to a $21.6 million, or 43.3%,
increase in the average balance of investment securities and a $47.4
million, or 36.4%, increase in the average balance of mortgage-backed
securities ("MBSs"). Meanwhile, the overall yield on investments decreased
133 basis points, from 5.81% in 2001, to 4.48% in 2002, in response to
dramatically lower market interest rates and accelerated prepayments on
MBSs. The Company's investments at December 31, 2002, were primarily
comprised of Agency securities, Corporate debt securities and 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, prepayments on MBSs accelerated
during the second half of 2002. If these prepayment speeds remain high, MBS
yields will continue to be negatively impacted as increased cash flows will
be reinvested at lower rates and premiums paid on MBSs will be amortized
more quickly.
Interest Income - Loans
Interest from loans was $41.1 million for 2002, and represented a yield on
total loans of 6.60%, as compared to $44.3 million of interest, and a yield
of 7.59%, for 2001. Declining market interest rates, coupled with higher
residential mortgage loan prepayment activity, resulted in lower interest
income from the loan portfolio. Interest from residential mortgage loans
decreased $3.0 million, or 14.0%, and interest from consumer and other
loans decreased $497,000, or 10.9%, from the prior year. Partially
offsetting these decreases in interest income, interest from commercial
loans increased $318,000, or 1.8%, as a result of strong growth in
commercial outstandings. The Company continues to concentrate its
origination efforts on commercial and consumer loan opportunities, but also
originates residential mortgage loans for its portfolio on a limited basis.
In addition, the Company purchases residential mortgage loans, and to a
lesser degree, leases and automobile loans, as cash flows dictate. The
average balance of the various components of the loan portfolio changed as
follows: residential mortgage loans decreased $8.6 million, or 2.9%,
commercial loans increased $37.7 million, or 17.0%, and consumer and other
loans increased $9.1 million, or 14.9%. Meanwhile, due to declining market
interest rates, coupled with increased prepayment activity, the yields on
the various components of the loan portfolio changed as follows:
residential mortgage loans decreased 83 basis points, to 6.36%; commercial
loans decreased 106 basis points, to 7.08%; and consumer and other loans
decreased 169 basis points, to 5.84%. In recent months prepayment speeds
have increased on residential mortgage loans. If these prepayment speeds
remain high, residential mortgage loan yields will continue to be
negatively impacted as increased cash flows will be reinvested at lower
rates and premiums paid on purchased loans will be amortized more quickly.
Interest Expense - Deposits and Borrowings
Interest paid on deposits and borrowings decreased $4.4 million, or 16.4%,
to $22.2 million for 2002, compared to $26.5 million for 2001. The decrease
in total interest expense was primarily attributable to the dramatic drop
in market interest rates, partially offset by growth in checking and
savings deposits, along with the use of borrowings to fund the overall
growth of the Company. The overall average cost for interest-bearing
liabilities decreased 111 basis points from 4.02% for 2001, to 2.91% for
2002. 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. Partially
<PAGE> 24
offsetting the effect of the decline in market interest rates, the average
balance of interest-bearing liabilities increased $100.9 million, from
$660.4 million in 2001, to $761.3 million in 2002. The Company continued to
experience strong average balance growth in core deposit accounts,
specifically noninterest bearing demand deposit accounts (up $19.6 million,
or 19.6%), savings accounts (up $38.7 million, or 16.3%) and NOW accounts
(up $25.8 million, or 65.1%). In addition, the Company increased its
utilization of FHLB borrowings (average balances up $48.2 million, or
49.4%).
Provision for Loan Losses
The provision for loan losses was $1.9 million for 2002, compared to $1.7
million for 2001. 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. The allowance, expressed as a
percentage of total loans, was 1.51% at December 31, 2002, compared to
1.40% at the prior year-end and stood at 1371.7% of nonperforming loans at
the end of 2002. Management evaluates several factors including new loan
originations, delinquency rates, 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." 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.
Noninterest Income
Total noninterest income increased $1.9 million, or 35.4%, from $5.2
million for 2001, to $7.1 million for 2002. Service charges on deposit
accounts, which continue to represent the largest source of noninterest
income, rose $312,000, or 9.0%, from $3.5 million for 2001, to $3.8 million
for 2002, primarily as a result of growth in checking and savings accounts.
Commissions on nondeposit investment products increased $443,000, or 82.8%,
from strong growth in mutual fund and annuity sales. Additionally, the
Bank's purchase of $14.2 million of bank-owned life insurance during 2002
resulted in $568,000 of noninterest income not present in the previous
period. Lastly, loan related fees increased $403,000, or 141.4%, primarily
as a result of prepayment penalties received from a handful of commercial
loan customers who chose to payoff their loans with the Bank.
The following table sets forth the components of noninterest income:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Service charges on deposit accounts $3,763 $3,451
Commissions on nondeposit investment products 978 535
Income from bank-owned life insurance 568 -
Loan related fees 688 285
Commissions on loans originated for others 325 288
Gain on sale of MBSs 23 4
Other income 738 668
-----------------
Total noninterest income $7,083 $5,231
=================
</TABLE>
<PAGE> 25
Noninterest Expense
Noninterest expenses for 2002 increased a total of $1.8 million, or 7.9%,
to $25.0 million, from $23.2 million in 2001. After removing the effects of
SFAS 142 and 147, total operating noninterest expense increased $3.0
million, or 13.6%, as the 2002 period does not contain any goodwill
amortization, while the 2001 period included $1.2 million of goodwill
amortization. The increase in operating noninterest expenses occurred
primarily as a result of the overall growth of the Company, along with
development of new products and reparation for an upcoming data processing
conversion, and was centered in the following areas: Salaries and employee
benefits (up $1.9 million, or 16.8%), Occupancy and Equipment (up $384,000,
or 14.6%), Data processing (up $208,000, or 11.7%), Marketing (up $255,000,
or 26.0%) and Professional services (up $497,000, or 56.3%). During 2002
and 2001, the Company continued to experience substantial growth in both
commercial loans and core deposits which resulted in the increased
operating costs evidenced in 2002. In particular, during 2002, the Bank
added 16 full-time equivalent employees ("FTEs") to support its overall
growth. Partially offsetting these increases was a decrease in other real
estate owned ("OREO") expense (down $327,000, or 92.6%). The Company's
efficiency ratio decreased 190 basis points, to 65.15%, during 2002. As a
result of the Company's announced expansion plans for a new operations
center (opened January 2003), a new retail branch in North Kingstown
(opening summer 2003) and a planned data processing conversion (2nd quarter
2003), management anticipates continued upward pressure on noninterest
expenses during 2003.
The following table sets forth the components of noninterest expense:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Salaries and employee benefits $13,185 $11,287
Occupancy and equipment 3,006 2,622
Data processing 1,987 1,779
Marketing 1,234 979
Professional services 1,380 883
Loan servicing 927 945
Other real estate owned 26 353
Amortization of goodwill - 1,164
Deposit tax and assessments 117 117
Other expenses 3,162 3,067
-------------------
Total noninterest expense $25,024 $23,196
===================
</TABLE>
Income Tax Expense
The Company recorded income tax expense of $3.8 million for 2002, compared
to $3.4 million for 2001. This represented total effective tax rates of
33.4% and 35.1%, respectively. Tax-favored income from U.S. Agency
securities and bank-owned life insurance, along with the utilization of a
Rhode Island passive investment company, reduced the Company's effective
tax rate from the 39.9% combined statutory federal and state tax rates.
<PAGE> 26
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. 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.
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, MBSs 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 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. As a result of the low interest rate environment present at the end
of 2001, prepayments on MBSs accelerated and negatively impacted the yield
on 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%. 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%.
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.
<PAGE> 27
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. Management evaluates several
factors including new loan originations, delinquency rates, 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 nondeposit 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>
Service charges on deposit accounts $3,451 $2,722
Commissions on loans originated for others 288 74
Loan related fees 285 258
Gain on sale of MBSs 4 -
Other income 1,203 524
-----------------
Total noninterest income $5,231 $3,578
=================
</TABLE>
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%). The Company has experienced substantial growth in both loans and
core deposits in recent years that resulted in the increased operating
costs evidenced in 2001. In addition, the softening of both the national
and local economies in 2001 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%, for 2001.
<PAGE> 28
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 goodwill 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, reduced the Company's effective tax rate from the 39.9% combined
statutory federal and state tax rates.
Financial Condition
Loans Receivable
Total loans were $670.7 million, or 66.2% of total assets, at December 31,
2002, compared to $611.0 million, or 70.9% of total assets, at December 31,
2001, an increase of $59.7 million, or 9.8%. Total loans as of December 31,
2002, may be segmented in three broad categories: residential mortgages
that aggregate $297.8 million, or 44.4% of the portfolio; commercial loans
that aggregate $281.0 million, or 41.9% of the portfolio; and consumer and
other loans that aggregate $91.9 million, or 13.7% of the portfolio.
The Company utilizes the term "small business loans" to describe business
lending relationships of $250,000 or less.
<PAGE> 29
The following is a summary of loans receivable:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c> <c>
Residential mortgage loans:
One- to four-family adjustable rate $277,265 $285,589 $212,197 $196,863 $211,076
One- to four-family fixed rate 19,310 23,306 34,609 39,037 45,671
-----------------------------------------------------------
Subtotal 296,575 308,895 246,806 235,900 256,747
Premium on loans acquired 1,248 1,381 1,166 1,446 2,110
Net deferred loan origination fees (60) (64) (49) (26) -
-----------------------------------------------------------
Total residential mortgage loans $297,763 $310,212 $247,923 $237,320 $258,857
===========================================================
Commercial loans:
Commercial real estate - nonowner occupied $ 81,242 $ 73,369 $ 69,315 $ 56,181 $ 39,654
Commercial real estate - owner occupied 59,249 46,698 38,272 33,968 36,908
Commercial & industrial 57,389 53,677 51,470 40,109 30,655
Small business 28,750 24,122 19,170 13,322 6,804
Multi-family 18,952 14,927 15,933 16,270 13,221
Construction 18,101 14,027 7,070 6,379 3,482
Leases and other 17,613 12,715 11,731 8,499 3,370
-----------------------------------------------------------
Subtotal 281,296 239,535 212,961 174,728 134,094
Net deferred loan origination fees (329) (171) (143) (180) (61)
-----------------------------------------------------------
Total commercial loans $280,967 $239,364 $212,818 $174,548 $134,033
===========================================================
Consumer and other loans:
Home equity - term loans $ 47,906 $ 22,930 $ 23,292 $ 19,710 $ 16,996
Home equity - lines of credit 37,381 28,460 26,215 24,166 18,400
Automobile 3,409 6,335 4,643 - -
Installment 967 1,240 1,348 1,279 1,010
Savings secured 602 656 987 1,005 935
Unsecured and other 1,063 1,153 1,044 590 972
-----------------------------------------------------------
Subtotal 91,328 60,774 57,529 46,750 38,313
Premium on loans acquired 103 192 144 - -
Net deferred loan origination costs 497 422 411 340 199
-----------------------------------------------------------
Total consumer and other loans $ 91,928 $ 61,388 $ 58,084 $ 47,090 $ 38,512
===========================================================
Total loans receivable $670,658 $610,964 $518,825 $458,958 $431,402
===========================================================
</TABLE>
During 2002, residential mortgage loans decreased $12.4 million, or 4.0%,
as repayments of $188.5 million were slightly greater than the total of
purchases ($166.9 million) and originations ($9.3 million). As a result of
the low interest rate environment present during 2002, residential mortgage
loans prepayments accelerated, ending the second half of 2002 at prepayment
speeds in excess of those anticipated. 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 outside 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 $41.6 million, or 17.4%, during 2002. 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
total 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 $4.6 million, or 19.2%, during 2002. 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 2002, consumer loan
outstandings increased $30.5 million, or 49.7%, to $91.9 million at
December 31, 2002, from $61.4 million at December 31, 2001. During 2002, in
an effort to take advantage of the current environment for mortgage
refinancings, the Bank promoted its fifteen-year fixed-rate home equity
loan product, generating $25.0 million of net loan growth. The remainder of
the growth was in the Bank's home equity line of credit product, which had
$8.9 million of net loan growth.
The table below shows loan originations, purchases, sales and repayment
activities.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c> <c>
Originations and Principal Additions:
Loans purchased:
Residential mortgage loans $ 166,935 $ 186,013 $ 48,491 $ 53,747 $ 107,559
Consumer and other loans - 4,902 4,891 - -
----------------------------------------------------------------
Total loans purchased 166,935 190,915 53,382 53,747 107,559
----------------------------------------------------------------
Loans originated:
Residential mortgage loans 9,345 18,037 9,985 17,659 13,093
Commercial loans 84,132 59,186 65,465 62,430 41,872
Consumer and other loans 51,951 22,332 17,950 18,704 16,837
----------------------------------------------------------------
Total loans originated 145,428 99,555 93,400 98,793 71,802
----------------------------------------------------------------
Principal Reductions:
Charge-offs/transfers to OREO:
Residential mortgage loans (58) (304) (148) (412) (950)
Commercial loans (400) (981) (93) (176) (15)
Consumer and other loans (93) (61) (20) (80) (163)
----------------------------------------------------------------
Total charge-offs/transfers to OREO (551) (1,346) (261) (668) (1,128)
----------------------------------------------------------------
Principal payments:
Residential mortgage loans (188,542) (141,657) (47,422) (91,841) (118,679)
Commercial loans (41,971) (31,631) (27,139) (21,620) (22,547)
Consumer and other loans (21,304) (23,928) (12,042) (10,187) (11,739)
----------------------------------------------------------------
Total principal payments (251,817) (197,216) (86,603) (123,648) (152,965)
----------------------------------------------------------------
Change in total loans receivable (before
net items) $ 59,995 $ 91,908 $ 59,918 $ 28,224 $ 25,268
================================================================
</TABLE>
The following table sets forth certain information at December 31, 2002,
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,
One Year But Within After Five
or Less Five Years Years
-------- ---------- ----------
(In thousands)
<s> <c> <c> <c>
Construction loans $18,101 $ - $ -
Commercial & industrial loans (including leases) 44,798 20,050 10,154
Small business loans 14,831 12,569 1,350
-----------------------------------
Total $77,730 $32,619 $11,504
===================================
</TABLE>
<PAGE> 31
The following table sets forth as of December 31, 2002, 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) 13,578 16,626
Small business loans 10,228 3,691
---------------------
Total $23,806 $20,317
=====================
</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 Company 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, 2002, were $224,000 of
impaired loans. At December 31, 2001 and 2000, the Company did not have any
impaired loans.
Nonperforming Assets. At December 31, 2002, the Company had nonperforming
assets of $794,000, or 0.08% of total assets. This compares to
nonperforming assets of $1.0 million, or 0.12% of total assets, at December
31, 2001, and nonperforming assets of $538,000, or 0.07% of total assets,
at December 31, 2000. Nonperforming assets at December 31, 2002, consisted
of residential mortgage loans aggregating $291,000, commercial loans
aggregating $428,000, consumer loans aggregating $17,000 and OREO
aggregating $58,000. Nonperforming assets at December 31, 2001 and 2000,
were 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, 2002 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,
------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Nonaccrual Loans $ 736 $ 753 $ 508 $1,112 $1,563
Loans past due 90 days or more, but still accruing - - - - -
Impaired loans (not included in nonaccrual loans) - - - - -
------------------------------------------------
Total nonperforming loans 736 753 508 1,112 1,563
Other real estate owned 58 264 30 49 394
------------------------------------------------
Total nonperforming assets $ 794 $1,017 $ 538 $1,161 $1,957
================================================
Nonperforming loans as a percent of total loans 0.11% 0.12% 0.10% 0.24% 0.36%
Nonperforming loans as a percent of total assets 0.08% 0.12% 0.07% 0.18% 0.33%
</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, 2002, nonaccrual loans totaled $736,000. Interest on nonaccrual loans
that would have been recorded as additional income for the year ended
December 31, 2002, had the loans been current in accordance with their
original terms, totaled $25,000. This compares with $31,000 and $35,000 of
foregone interest income on nonaccrual loans for the years ended December
31, 2001 and 2000, respectively.
The following table sets forth certain information regarding nonaccrual
loans.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
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 $291 0.04% $656 0.11% $398 0.08%
Commercial loans 428 0.07% 42 0.00% 109 0.02%
Consumer and other loans 17 0.00% 55 0.01% 1 0.00%
-----------------------------------------------------------------------
Total nonaccrual loans $736 0.11% $753 0.12% $508 0.10%
=======================================================================
</TABLE>
Delinquencies. At December 31, 2002, $857,000 of loans were 30 to 89 days
past due. This compares to $3.7 million and $1.1 million of loans 30 to 89
days past due as of December 31, 2001 and 2000, respectively. The majority
of these loans at December 31, 2002 and 2001 were commercial loans, while
at December 31, 2000 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,
----------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
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 $197 0.03% $ 526 0.09% $ 584 0.11%
Commercial loans 563 0.08% 2,878 0.47% 168 0.03%
Consumer and other loans 70 0.01% 143 0.02% 39 0.01%
-----------------------------------------------------------------------
Total loans delinquent 30 to 59 days 830 0.12% 3,547 0.58% 791 0.15%
-----------------------------------------------------------------------
Loans delinquent for 60 to 89 days:
Residential mortgage loans 11 0.00% 131 0.02% 278 0.05%
Commercial loans - - - - 39 0.01%
Consumer and other loans 16 0.01% - - 20 0.01%
-----------------------------------------------------------------------
Total loans delinquent 60 to 89 days 27 0.01% 131 0.02% 337 0.07%
-----------------------------------------------------------------------
Total loans delinquent 30 to 89 days $857 0.13% $3,678 0.60% $1,128 0.22%
=======================================================================
</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, 2002, the Company had $8.4 million of assets that were
classified as substandard. This compares to $8.7 million and $5.8 million
of assets that were classified as substandard at December 31, 2001 and
2000, 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, 2002, included in the $8.4 million of
assets that were classified as substandard, were $7.6 million of performing
loans. This compares to $7.9 million and $5.3 million of adversely
classified performing assets as of December 31, 2001 and 2000,
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,
----------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ------------------ ----------------- ----------------- -----------------
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 $ 1,757 44.4% $1,835 50.8% $1,460 47.8% $1,395 51.7% $1,558 60.0%
Commercial loans 5,250 41.9% 4,191 39.2% 3,210 41.0% 2,007 38.0% 1,277 31.1%
Consumer and other loans 1,027 13.7% 787 10.0% 731 11.2% 566 10.3% 456 8.9%
Unallocated 2,062 - 1,711 - 1,893 - 1,713 - 1,727 -
--------------------------------------------------------------------------------------------
Total $10,096 100.0% $8,524 100.0% $7,294 100.0% $5,681 100.0% $5,018 100.0%
============================================================================================
</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 its year-end allowance for loan losses is
adequate.
A portion of the allowance for loan losses is not allocated to any specific
segment of the loan portfolio. This non-specific allowance is maintained
for two primary reasons: (i) there exists an inherent subjectivity and
imprecision to the analytical processes employed, and (ii) the prevailing
business environment, as it is affected by changing economic conditions and
various external factors, may impact the portfolio in ways currently
unforeseen. Management, therefore, has established and maintains a non-
specific allowance for loan losses. The amount of this measurement
imprecision allocation was $2.1 million at December 31, 2002, compared to
$1.7 million at December 31, 2001.
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 2002, 2001 and 2000, the Bank made additions to the allowance of
$1.9 million, $1.7 million and $1.5 million and experienced net charge-offs
(recoveries) of $303,000, and $439,000 and ($71,000), respectively. At
December 31, 2002, the allowance for loan losses stood at $10.1 million and
represented 1371.74% of nonperforming loans and 1.51% of total loans
outstanding. This compares to an allowance for loan losses of $8.5 million,
representing 1132.01% of nonperforming loans and 1.40% of total loans
outstanding at December 31, 2001.
<PAGE> 35
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands)
<s> <c> <c> <c> <c> <c>
Balance at beginning of year $ 8,524 $7,294 $5,681 $5,018 $4,340
Loans charged-off:
Residential mortgage loans - - (11) (128) (174)
Commercial loans (400) (406) (94) (176) (15)
Consumer and other loans (93) (61) (20) (80) (163)
---------------------------------------------------
Total loans charged-off (493) (467) (125) (384) (352)
---------------------------------------------------
Recoveries of loans previously charged-off:
Residential mortgage loans 40 - - 29 -
Commercial loans 110 - 191 1 3
Consumer and other loans 40 28 5 17 10
---------------------------------------------------
Total recoveries of loans previously charged-off 190 28 196 47 13
---------------------------------------------------
Net (charge-offs) recoveries (303) (439) 71 (337) (339)
Provision for loan losses charged against income 1,875 1,669 1,542 1,000 1,017
---------------------------------------------------
Balance at end of year $10,096 $8,524 $7,294 $5,681 $5,018
===================================================
Net charge-offs (recoveries) to average loans outstanding 0.05% 0.08% (0.01%) 0.08% 0.08%
===================================================
</TABLE>
Investments
Total investments (consisting of fed funds sold and overnight investments,
investment securities, MBSs, and FHLB stock) totaled $282.7 million, or
27.9% of total assets, at December 31, 2002. This compares to total
investments of $210.7 million, or 24.4% of total assets, as of December 31,
2001. The increase of $72.1 million, or 34.2%, was primarily in overnight
investments and investment securities. These were purchased to reinvest the
funds generated from unusually high prepayment levels of residential
mortgage loans and continued deposit growth.
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, but in an effort to
diversify the portfolio and increase yields, the Company has started to
invest in corporate debt instruments. At December 31, 2002, the Company had
a total of $20.6 million in corporate debt. All investment securities and
MBSs at December 31, 2002 and 2001, were classified as securities available
for sale, and at December 31, 2002, carried a total of $3.4 million in net
unrealized gains, compared to $1.4 million in net unrealized gains at
December 31, 2001.
<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, 2002:
U.S. Agency obligations $ 75,137 $1,203 $ (2) $ 76,338
Corporate debt securities 20,367 210 - 20,577
Trust preferred securities 4,299 184 (69) 4,414
U.S. Agency mortgage-backed securities 150,152 1,856 (61) 151,947
Collateralized mortgage obligations 4,073 94 - 4,167
--------------------------------------------
Total $254,028 $3,547 $(132) $257,443
============================================
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
============================================
</TABLE>
The following table sets forth the contractual maturities of investment and
mortgage-backed securities available for sale and the weighted average
yields of such securities:
<TABLE>
<CAPTION>
After One, After Five,
Within But Within But Within After
One Year Five Years Ten Years 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, 2002:
U.S. Agency obligations $2,029 3.26% $74,309 4.03% $ - - $ - -
Corporate debt securities - - 20,577 5.92% - - - -
Trust preferred securities - - - - - - 4,414 8.40%
U.S. Agency mortgage-backed securities - - - - 1,534 2.24% 150,413 4.25%
Collateralized mortgage obligations - - - - - - 4,167 6.35%
------ ------- ------ --------
Total $2,029 3.26% $94,886 4.44% $1,534 2.24% $158,994 4.42%
====================================================================================
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%
====================================================================================
</TABLE>
<PAGE> 37
Bank-Owned Life Insurance
In 2002, the Bank purchased $14.2 million of bank-owned life insurance
("BOLI"). The Bank purchased these policies for the purpose of protecting
itself against the loss due to the death of key employees and to offset the
Bank's future obligations to its employees under its retirement and benefit
plans. The value of this life insurance was $14.8 million at December 31,
2002. The Bank recorded income from the BOLI policies of $568,000 in 2002.
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 2002, to $761.9 million, or 75.2% of total assets, at December 31,
2002, from $670.4 million, or 77.8% of total assets, at December 31, 2001.
This increase of $91.5 million, or 13.6%, in total deposits was centered in
core accounts and broken down as follows: demand deposit accounts up $25.0
million, or 22.1%; NOW and savings accounts up $92.2 million, or 30.8%;
while certificates of deposit accounts were down $26.4 million, or 10.6%.
By comparison, the increase in total deposits during 2001 was $38.8
million, or 6.1%. Part of the growth in NOW accounts resulted from the
introduction of the Asset Manager. This account is positioned to compete
against brokerage and mutual fund money market accounts, and as such, bears
an interest rate considerably higher than traditional NOW accounts.
The following table sets forth certain information regarding deposits:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------
2002 2001 2000
--------------------------- --------------------------- ---------------------------
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 $100,476 13.2% 1.37% $ 44,445 6.6% 0.40% $ 36,910 5.8% 0.64%
Money market accounts 10,660 1.4% 1.00% 9,914 1.5% 1.40% 12,283 1.9% 2.59%
Savings accounts 290,981 38.2% 1.70% 254,861 38.0% 1.90% 210,728 33.4% 3.52%
Certificate of deposit accounts 221,874 29.1% 3.07% 248,268 37.0% 4.15% 265,623 42.1% 5.76%
--------------- --------------- ---------------
Total interest bearing deposits 623,991 81.9% 2.12% 557,488 83.1% 2.77% 525,544 83.2% 4.43%
Noninterest bearing accounts 137,920 18.1% - 112,925 16.9% - 106,088 16.8% -
--------------- --------------- ---------------
Total deposits $761,911 100.0% 1.74% $670,413 100.0% 2.31% $631,632 100.0% 3.69%
==================================================================================
</TABLE>
At December 31, 2002, certificate of deposit accounts with balances greater
than $100,000 aggregated $30.5 million, compared to $35.4 million and $32.1
million at December 31, 2001 and 2000, respectively.
Total borrowings (consisting of overnight and short-term borrowings, along
with FHLB borrowings) increased $44.9 million, or 35.5%, during 2002, to
$171.3 million, from $126.4 million at December 31, 2001. The Company had
$51.9 million of borrowings outstanding at the end of 2000. The increase
during 2002 was the result of growth in overnight borrowings associated
with the Company's cash management services along with the Company
utilizing FHLB borrowings to take advantage of long-term borrowing rates to
partially fund its asset growth. 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 June 26, 2002, the Company, through one of its statutory trust
subsidiaries, issued $5.0 million of trust preferred securities, bringing
its total outstanding of trust preferred securities to $8.0 million. The
securities issued in June 2002 have a floating interest rate equal to 3
month LIBOR plus 3.45% and mature in 30 years. The regulatory capital
generated from issuing these securities helped support the Company's
continued asset growth.
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
guidelines for 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,
2002, net interest income simulation indicated that the Company's exposure
to changing interest rates was outside of the 10% guidance 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 twenty-four month period beginning
January 1, 2003:
<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 $ 1,694 5.57%
Up 100 basis point ramp 999 3.28%
Down 100 basis point ramp (567) (1.87%)
Down 200 basis point ramp (1,261) (4.15%)
Subsequent 12-Month Period:
Up 200 basis point ramp $ 3,023 10.21%
Up 100 basis point ramp 2,425 8.19%
Down 100 basis point ramp (1,557) (5.26%)
Down 200 basis point ramp (4,495) (15.18%)
</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, 2002, the Company's cumulative one-year gap was
a positive $155.7 million, or 15.4% of total assets, compared to positive
$97.4 million, or 11.3% of total assets, at the end of 2001. While the
Company's cumulative one-year gap at December 31, 2002, was higher than in
past years, it is projected to decrease during 2003.
The following table presents the repricing schedule for interest-earning
assets and interest-bearing liabilities at December 31, 2002. To the extent
applicable, amounts of assets and liabilities that mature or reprice within
a particular period where 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
<PAGE> 40
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, the
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 $ 17,623 $ - $ - $ - $ - $ 17,623
Investment securities 14,006 18,078 7,999 55,421 5,825 101,329
Mortgage-backed securities 48,858 14,478 14,172 64,931 13,675 156,114
FHLB Stock 7,683 - - - - 7,683
Residential mortgage loans 65,726 40,640 50,504 123,991 16,902 297,763
Commercial loans 95,881 18,903 27,934 129,593 8,856 280,967
Consumer and other loans 42,060 7,858 6,259 19,763 15,988 91,928
-------------------------------------------------------------------------------
Total interest-earning assets 291,837 99,957 106,868 393,699 61,046 953,407
-------------------------------------------------------------------------------
Interest-bearing liabilities:
NOW accounts 8,373 8,373 16,746 66,984 - 100,476
Money market accounts 888 888 1,776 7,108 - 10,660
Savings accounts 24,249 24,249 48,496 193,987 - 290,981
Certificate of deposit accounts 46,119 27,694 59,782 85,756 2,523 221,874
Overnight & short-term borrowings 27,364 - - - - 27,364
FHLB borrowings 14,951 11,060 16,946 95,984 5,000 143,941
Capital trust securities 5,000 - - - 3,000 8,000
-------------------------------------------------------------------------------
Total interest-bearing liabilities 126,944 72,264 143,746 449,819 10,523 803,296
-------------------------------------------------------------------------------
Net interest sensitivity gap during
the period $164,893 $ 27,693 $(36,878) $(56,120) $ 50,523 $150,111
===============================================================================
Cumulative gap - 12/31/02 $164,893 $192,586 $155,708 $ 99,588 $150,111
=================================================================
Cumulative gap - 12/31/01 $107,354 $131,515 $ 97,398 $112,571 $134,762
=================================================================
Interest-sensitive assets as a percent of
interest-sensitive liabilities (cumulative) 229.89% 196.68% 145.40% 112.56% 118.69%
Cumulative gap as a percent of total assets 16.28% 19.01% 15.37% 9.83% 14.82%
</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.
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.
<PAGE> 41
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, 2002, federal funds sold and
overnight investments, investment securities and mortgage-backed securities
available for sale amounted to $275.1 million, or 27.2% of total assets.
This compares to $205.0 million, or 23.8% of total assets, at December 31,
2001. The Bank is a member of the FHLB and, as such, has access to both
short- and long-term borrowings. In addition, the Bank maintains a line of
credit at the FHLB as well as a line of credit with a correspondent bank.
There have been no adverse trends in the Company's liquidity or capital
reserves. Management believes that the Company has adequate liquidity to
meet its commitments.
The following table sets forth the contractual obligations of the Company:
<TABLE>
<CAPTION>
Payments Due or Commitment Expiring - By Period
----------------------------------------------------------
Less than One to Four to After
One Three Five Five
Total Year Years Years Years
----- --------- ------ ------- -----
(In thousands)
<s> <c> <c> <c> <c> <c>
Contractual cash obligations:
FHLB borrowings $143,941 $ 24,100 $42,000 $35,534 $42,307
Mandatorily redeemable trust preferred 8,000 - - - 8,000
Lease obligations 6,729 906 1,826 1,732 2,265
Other
TT&L 3,000 3,000 - - -
Customer repo's 24,364 24,364 - - -
----------------------------------------------------------
Total contractual cash obligations $186,034 $ 52,370 $43,826 $37,266 $52,572
----------------------------------------------------------
Other commitments:
Commitments to originate or purchase loans $ 58,727 $ 58,727 $ - $ - $ -
Unused lines of credit and other commitments 116,470 54,220 16,854 368 45,028
Letters of credit 2,389 2,389 - - -
----------------------------------------------------------
Total other commitments $177,586 $115,336 $16,854 $ 368 $45,028
==========================================================
</TABLE>
Capital Resources
Total shareholders' equity of the Company at December 31, 2002 was $66.4
million, as compared to $59.1 million at December 31, 2001. Major activity
in shareholders' equity during 2002 can be summarized as follows: net
income for the year was $7.7 million, dividends paid on Common Stock
totaled $2.0 million and changes in unrealized gains and losses on
securities equaled $1.4 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, 2002, the Bank's Tier I leverage
ratio stood at 6.06%. 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 9.43% and a Total risk-weighted capital ratio of
10.68% at December 31, 2002.
<PAGE> 42
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, 2002, the
Company's Tier I leverage ratio was 6.19%, its Tier I Risk-based capital
ratio was 9.63% and its Total Risk-based capital ratio was 10.88%.
As of December 30, 2002, the Company and the Bank met all applicable
minimum capital requirements and were considered "well capitalized" by both
the FRB and the FDIC.
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
SFAS 142, "Goodwill and Other Intangible Assets." SFAS 142 addresses
financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes Accounting Principles Board ("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, 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 SFAS 141, "Business Combinations"
with respect to goodwill accounting for bank branch acquisitions. The
conclusion set forth in the October 17th Action Alert states that paragraph
5 of SFAS 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" 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 acquisition associated with the formation of
the Company's banking subsidiary in March 1996 was such that the fair value
of the liabilities assumed exceeded the fair value of tangible and
intangible assets acquired. Based upon the conclusion set forth in the
October 17th Action Alert, during the first two quarters of 2002, the
Company continued amortizing its intangible attributable to its March 1996
acquisition from Fleet Financial Group, Inc.
On October 1, 2002, FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 states that the specialized accounting
guidance in paragraph 5 of SFAS 72 will not apply after September 30, 2002,
and if certain criteria are met, any unidentifiable intangible asset will
be reclassified to goodwill upon adoption of the Statement. Financial
institutions meeting conditions outlined in SFAS 147 will be required to
restate previously issued financial statements for fiscal periods beginning
after December 15, 2001. The objective of the
<PAGE> 43
restatement requirement is to present the balance sheet and income
statement as if the amount accounted for under SFAS 72 as an unidentifiable
intangible asset had been reclassified to goodwill as of the date SFAS 142
was initially applied. The transition provisions of SFAS 147 are effective
on October 1, 2002; however early application is permitted. The Company
adopted SFAS 147 during the third quarter of 2002, and therefore has
restated the first and second quarters to remove any amortization of
goodwill, net of taxes. At January 1, 2002, the Company had $10.7 million
of intangible assets that have now been reclassified as goodwill and will
no longer be amortized, but will be reviewed periodically for impairment.
The following table sets forth the reconcilement of net income and earnings
per share excluding goodwill amortization for the years ended December 31,
2002, 2001 and 2000.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Reported net income (in thousands) $7,662 $6,315 $5,618
Add back: Goodwill amortization, net of taxes - 756 756
----------------------------
Adjusted net income $7,662 $7,071 $6,374
============================
Basic earnings per share $ 2.04 $ 1.69 $ 1.51
Add back: Goodwill amortization, net of taxes - 0.20 0.20
----------------------------
Adjusted basic earnings per share $ 2.04 $ 1.89 $ 1.71
============================
Diluted earnings per share $ 1.92 $ 1.62 $ 1.49
Add back: Goodwill amortization, net of taxes - 0.19 0.20
----------------------------
Adjusted diluted earnings per share $ 1.92 $ 1.81 $ 1.69
============================
</TABLE>
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and does
not apply to goodwill or intangible assets that are not being amortized and
certain other long-lived assets. SFAS 144 supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" and the accounting and reporting provisions of APB Opinion 30,
"Reporting Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a segment of a business (as previously defined in that
Opinion). SFAS 144 also amends Accounting Research Bulletin ("ARB") 51,
"Consolidated Financial Statements", to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary.
SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 with early adoption encouraged. The
Company adopted SFAS 144 on January 1, 2002. The adoption of this Statement
did not have a material impact on the Company's financial position or
results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Companies are able to
eliminate a "ramp-up" effect that the SFAS 123 transition rule creates in
the year of adoption. Companies can choose to elect a method that will
provide for comparability amongst years reported. In addition, this
Statement amends the disclosure requirement of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about
the fair value based method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
amendments to SFAS 123 are effective for financial statements for fiscal
years ending after December 15, 2002. The Company does not believe the
adoption of this Statement will have a material impact on the Company's
financial position or results of operations.
<PAGE> 44
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
accounting principles generally accepted in the United States of America.
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, on the recommendation of the Audit Committee, 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.
/s/ Merrill W. Sherman /s/ Albert R. Rietheimer
Merrill W. Sherman Albert R. Rietheimer
President and Chief Financial Officer and
Chief Executive Officer Treasurer
<PAGE> 45
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 2 to the consolidated financial statements, Bancorp
Rhode Island, Inc. and subsidiaries adopted Statement of Financial
Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets"
and SFAS 147, "Acquisition of Certain Financial Institutions", effective
January 1, 2002.
/s/ KPMG LLP
KPMG LLP
Providence, Rhode Island
January 23, 2003
<PAGE> 46
BANCORP RHODE ISLAND, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Assets:
Cash and due from banks (Note 2) $ 25,336 $ 24,261
Federal funds sold and overnight investments 17,623 4,913
Investment securities available for sale (amortized cost of
$99,803 and $49,193, respectively) (Notes 3, 10, and 11) 101,329 49,453
Mortgage-backed securities available for sale (amortized cost of
$154,225 and $149,549, respectively) (Notes 4 and 11) 156,114 150,650
Stock in the Federal Home Loan Bank of Boston (Note 11) 7,683 5,668
Loans receivable (Notes 5 and 11):
Residential mortgage loans 297,763 310,212
Commercial loans 280,967 239,364
Consumer and other loans 91,928 61,388
-----------------------
Total loans receivable 670,658 610,964
Allowance for loan losses (Note 6) (10,096) (8,524)
-----------------------
Net loans receivable 660,562 602,440
Premises and equipment, net (Note 7) 9,702 7,184
Other real estate owned (Note 8) 58 264
Goodwill, net (Note 2) 10,766 10,766
Accrued interest receivable 6,183 5,803
Investment in bank-owned life insurance 14,768 -
Prepaid expenses and other assets 2,753 848
-----------------------
Total assets $1,012,877 $862,250
=======================
Liabilities:
Deposits (Note 9):
Demand deposit accounts $ 137,920 $112,925
NOW accounts 100,476 44,445
Money market accounts 10,660 9,914
Savings accounts 290,981 254,861
Certificate of deposit accounts 221,874 248,268
-----------------------
Total deposits 761,911 670,413
Overnight and short-term borrowings (Note 10) 27,364 13,033
Federal Home Loan Bank of Boston borrowings (Note 11) 143,941 113,365
Company-obligated mandatorily redeemable capital securities (Note 12) 8,000 3,000
Other liabilities 5,234 3,342
-----------------------
Total liabilities 946,450 803,153
-----------------------
Commitments and contingencies (Notes 7, 16 and 20)
Shareholders' equity (Notes 1 and 18):
Preferred stock, par value $0.01 per share, authorized 1,000,000 shares:
Issued and outstanding: none - -
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding: 3,777,450 shares in 2002
and 3,753,550 shares in 2001 38 37
Additional paid-in capital 40,134 39,826
Retained earnings 24,002 18,336
Accumulated other comprehensive income, net (Notes 3 and 4) 2,253 898
-----------------------
Total shareholders' equity 66,427 59,097
-----------------------
Total liabilities and shareholders' equity $1,012,877 $862,250
=======================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 47
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
2002 2001 2000
---- ---- ----
(In thousands, except per share data)
<s> <c> <c> <c>
Interest and dividend income:
Residential mortgage loans $ 18,646 $ 21,694 $ 17,982
Commercial loans 18,396 18,078 17,737
Consumer and other loans 4,072 4,569 4,472
Mortgage-backed securities 8,428 7,720 5,576
Investment securities 3,375 3,044 3,056
Federal funds sold and overnight investments 313 510 930
Federal Home Loan Bank of Boston stock dividends 277 288 282
-------------------------------------
Total interest and dividend income 53,507 55,903 50,035
-------------------------------------
Interest expense:
NOW accounts 705 209 205
Money market accounts 130 221 375
Savings accounts 5,083 6,507 6,137
Certificate of deposit accounts 8,118 13,458 13,685
Overnight and short-term borrowings 322 461 636
Federal Home Loan Bank of Boston borrowings 7,377 5,280 2,359
Other borrowings - 138 281
Company-obligated mandatorily redeemable capital securities 445 263 -
-------------------------------------
Total interest expense 22,180 26,537 23,678
-------------------------------------
Net interest income 31,327 29,366 26,357
Provision for loan losses (Note 6) 1,875 1,669 1,542
-------------------------------------
Net interest income after provision for loan losses 29,452 27,697 24,815
-------------------------------------
Noninterest income:
Service charges on deposit accounts 3,763 3,451 2,722
Commisions on nondeposit investment products 978 535 -
Income from bank-owned life insurance 568 - -
Loan related fees 688 285 258
Commissions on loans originated for others 325 288 74
Gains on sales of mortage-backed securities 23 4 -
Other income 738 668 524
-------------------------------------
Total noninterest income 7,083 5,231 3,578
-------------------------------------
Noninterest expense:
Salaries and employee benefits (Note 14) 13,185 11,287 9,552
Occupancy (Note 7) 1,933 1,744 1,530
Equipment 1,073 878 899
Data processing 1,987 1,779 1,340
Marketing 1,234 979 1,069
Professional services 1,380 883 891
Loan servicing 927 945 761
Other real estate owned (Note 8) 26 353 31
Amortization of goodwill - 1,164 1,164
Deposit tax and assessments 117 117 109
Other expenses (Note 15) 3,162 3,067 2,316
-------------------------------------
Total noninterest expense 25,024 23,196 19,662
-------------------------------------
Income before income taxes 11,511 9,732 8,731
Income tax expense (Note 13) 3,849 3,417 3,113
-------------------------------------
Net income $ 7,662 $ 6,315 $ 5,618
=====================================
Per share data (Notes 2 and 19):
Basic earnings per common share $ 2.04 $ 1.69 $ 1.51
Diluted earnings per common share $ 1.92 $ 1.62 $ 1.49
Average common shares outstanding - basic 3,758,214 3,730,910 3,728,688
Average common shares outstanding - diluted 3,996,670 3,900,028 3,768,589
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 48
BANCORP RHODE ISLAND, INC.
Consolidated Statements of Changes in Shareholders' Equity
For Years Ended December 31, 2002, 2001 and 2000
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid-in Retained Comprehensive
Stock Stock Capital Earnings Income/(Loss) Total
--------- ------ ---------- -------- ------------- -----
(In thousands)
<s> <c> <c> <c> <c> <c> <c>
Balance at December 31, 1999 $ - $37 $39,617 $ 9,763 $(1,742) $47,675
Net income - - - 5,618 - 5,618
Other comprehensive income:
Unrealized holding gains on securities
available for sale, 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:
Unrealized holding gains on securities
available for sale, net of taxes of $(556) 1,082 1,082
Realized gains on securities
available for sale, 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
Net income - - - 7,662 - 7,662
Other comprehensive income:
Unrealized holding gains arising on securities
available for sale, net of taxes of $(706) 1,370 1,370
Realized gains on securities
available for sale, net of taxes of $8 (15) (15)
-------
Comprehensive income 9,017
Exercise of stock options - 1 275 - - 276
Common stock issued for incentive stock award, net - - 33 - - 33
Dividends on common stock - - - (1,996) - (1,996)
--------------------------------------------------------------------
Balance at December 31, 2002 $ - $38 $40,134 $24,002 $ 2,253 $66,427
====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 49
BANCORP RHODE ISLAND, INC.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Cash flows from operating activities:
Net income $ 7,662 $ 6,315 $ 5,618
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,827 3,168 2,558
Provision for loan losses 1,875 1,669 1,542
Gain on sales of mortgage-backed securities (23) (4) -
Loss (gain) on other real estate owned (29) (25) (7)
Income from bank-owned life insurance (568) - -
Compensation expense from restricted stock grant 33 30 -
(Increase) decrease in accrued interest receivable (380) (173) (960)
(Increase) decrease in prepaid expenses and other assets (2,603) (374) (290)
Increase (decrease) in other liabilities 1,892 735 (368)
Increase (decrease) in other, net 190 17 204
------------------------------------
Net cash provided by operating activities 10,876 11,358 8,297
------------------------------------
Cash flows from investing activities:
Origination of:
Residential mortgage loans (9,321) (17,997) (9,960)
Commercial loans (83,883) (59,067) (65,421)
Consumer loans (52,199) (22,515) (18,111)
Purchase of:
Investment securities available for sale (96,658) (54,026) (9,000)
Mortgage-backed securities available for sale (78,065) (77,620) (58,999)
Residential mortgage loans (167,551) (186,869) (48,503)
Consumer and other loans - (5,045) (5,043)
Federal Home Loan Bank of Boston stock (2,015) (1,964) -
Principal payments on:
Investment securities available for sale 46,006 52,263 13,000
Mortgage-backed securities available for sale 69,050 41,617 17,785
Residential mortgage loans 188,542 141,657 47,422
Commercial loans 41,971 31,631 27,139
Consumer loans 21,304 23,928 12,042
Proceeds from sale of mortgage-backed securities 3,731 3,832 -
Proceeds from disposition of other real estate owned 293 670 163
Proceeds from sale of premises and equipment - 18 -
Capital expenditures for premises and equipment (3,781) (1,821) (1,476)
Purchase of bank-owned life insurance (14,200) - -
------------------------------------
Net cash used in investing activities (136,776) (131,308) (98,962)
------------------------------------
Cash flows from financing activities:
Net increase in deposits 91,498 38,781 118,216
Net increase (decrease) in overnight and short-term borrowings 14,331 (814) (1,131)
Proceeds from FHLB and other borrowings 40,351 83,082 15,116
Repayment of FHLB and other borrowings (9,775) (7,759) (30,007)
Proceeds from capital trust securities 5,000 3,000 -
Proceeds from issuance of common stock 276 175 4
Dividends on common stock (1,996) (1,794) (1,566)
------------------------------------
Net cash provided by financing activities 139,685 114,671 100,632
------------------------------------
Net increase (decrease) in cash and cash equivalents 13,785 (5,279) 9,967
Cash and cash equivalents at beginning of year 29,174 34,453 24,486
------------------------------------
Cash and cash equivalents at end of year $ 42,959 $ 29,174 $ 34,453
====================================
Supplementary disclosures:
Cash paid for interest $ 22,738 $ 26,122 $ 23,471
Cash paid for income taxes 4,599 4,095 3,975
Non-cash transactions:
Additions to other real estate owned in settlement of loans 58 879 137
Change in other comprehensive income, net of taxes 1,355 1,079 1,561
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 50
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") 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.
The Bank 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 and review of goodwill
for impairment.
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 and BRI Statutory Trust II (issuers 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> 51
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 and 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, 2002 and 2001, the average daily
amount required to be held was $705,000 and $531,000, 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, 2002 and 2001, 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, 2002 and 2001, 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.
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.
<PAGE> 52
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
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, industry
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
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.
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.
<PAGE> 53
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Impairment of Long-Lived Assets Except Goodwill
The Company reviews long-lived assets, including premises and equipment and
other intangible assets for impairment at least annually or whenever events
or changes in business circumstances indicate that the remaining useful
life may warrant revision or that the carrying amount of the long-lived
asset may not be fully recoverable. The Company performs undiscounted cash
flow analyses to determine if impairment exists. If impairment is
determined to exist, any related impairment loss is calculated based on
fair value. Impairment losses on assets to be disposed of, if any, are
based on the estimated proceeds to be received, less costs of disposal.
Goodwill
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 goodwill. Prior to 2002, this intangible was being
amortized to expense using the straight-line method over 15 years and
resulted in an annual pre-tax charge to earnings of $1.2 million.
On October 1, 2002, FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 states that the specialized accounting
guidance in paragraph 5 of SFAS 72 will not apply after September 30, 2002,
and if certain criteria are met, any unidentifiable intangible asset will
be reclassified to goodwill upon adoption of the Statement. Financial
institutions meeting conditions outlined in SFAS 147 will be required to
restate previously issued financial statements for fiscal periods beginning
after December 15, 2001. The objective of the restatement requirement is to
present the balance sheet and income statement as if the amount accounted
for under SFAS 72 as an unidentifiable intangible asset had been
reclassified to goodwill as of the date SFAS 142 was initially applied. The
transition provisions of SFAS 147 are effective on October 1, 2002; however
early application is permitted. The Company adopted SFAS 147 during the
third quarter of 2002, and therefore has restated the first and second
quarters to remove any amortization of goodwill, net of taxes. At January
1, 2002, the Company had $10.7 million of intangible assets that have now
been reclassified as goodwill and will no longer be amortized, but will be
reviewed annually for impairment.
The following table sets forth the reconcilement of net income and earnings
per share excluding goodwill amortization for the years ended December 31,
2002, 2001 and 2000.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Reported net income (in thousands) $7,662 $6,315 $5,618
Add back: Goodwill amortization, net of taxes - 756 756
----------------------------
Adjusted net income $7,662 $7,071 $6,374
============================
Basic earnings per share $ 2.04 $ 1.69 $ 1.51
Add back: Goodwill amortization, net of taxes - 0.20 0.20
----------------------------
Adjusted basic earnings per share $ 2.04 $ 1.89 $ 1.71
============================
Diluted earnings per share $ 1.92 $ 1.62 $ 1.49
Add back: Goodwill amortization, net of taxes - 0.19 0.20
----------------------------
Adjusted diluted earnings per share $ 1.92 $ 1.81 $ 1.69
============================
</TABLE>
<PAGE> 54
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Bank-Owned Life Insurance
Bank-owned life insurance ("BOLI") represents life insurance on the lives
of certain employees who have provided positive consent allowing the Bank
to be the beneficiary of such policies. Since the Bank is the beneficiary
of the insurance policies, increases in the cash value of the policies, as
well as insurance proceeds received, are recorded in other noninterest
income, and are not subject to income taxes. The cash value of the policies
is included in assets. The Bank reviews the financial strength of the
insurance carriers prior to the purchase of BOLI and at least annually
thereafter and BOLI with any individual carrier is limited to 10% of
capital plus reserves.
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 using the intrinsic
value method 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 various
information as if the fair value based method of accounting had been
applied.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123 to
provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. Companies are able to eliminate a "ramp-up" effect that the
SFAS 123 transition rule creates in the year of adoption. Companies can
choose to elect a method that will provide for comparability amongst years
reported. In addition, this Statement amends the disclosure requirement for
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the fair value based method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The amendments to SFAS 123 are effective for financial
statements for fiscal years ending after December 15, 2002.
<PAGE> 55
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes the differences between the fair value and
intrinsic value methods of accounting for stock-based compensation:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Net income (in thousands):
As reported $7,662 $6,315 $5,618
Compensation cost, net of taxes (1) (158) (134) (126)
----------------------------
Pro forma $7,504 $6,181 $5,492
============================
Earnings per common share:
Basic:
As reported $ 2.04 $ 1.69 $ 1.51
Compensation cost, net of taxes (1) (0.04) (0.03) (0.04)
----------------------------
Pro forma $ 2.00 $ 1.66 $ 1.47
============================
Diluted:
As reported $ 1.92 $ 1.62 $ 1.49
Compensation cost, net of taxes (1) (0.04) (0.04) (0.03)
----------------------------
Pro forma $ 1.88 $ 1.58 $ 1.46
============================
<FN>
<F1> The stock-based employee compensation cost, net of related tax
effects, that would have been included in the determination of net
income if the fair value based method had been applied to all awards
granted since 1995.
</FN>
</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 2002 and 2001 and 25% in 2000; average risk-free interest rates
of 4.27% in 2002, 4.90% in 2001 and 6.65% in 2000; and a dividend rate of
2.57% in 2002, 2.92% in 2001 and 4.26% in 2000.
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.
Guarantees
FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others",
considers standby letters of credit, excluding commercial letters of credit
and other lines of credit, a guarantee of the Bank. The Bank enters into a
standby letter of credit to guarantee performance of a customer to a third
party. The credit risk involved is represented by the contractual
<PAGE> 56
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
amounts of those instruments. Under the standby letters of credit, the Bank
is required to make payments to the beneficiary of the letters of credit
upon request by the beneficiary so long as all performance criteria have
been met. Most guarantees extend up to one year. At December 31, 2002, the
maximum potential amount of future payments is $2.2 million.
Pledged collateral including cash, accounts receivable, inventory,
property, plant, equipment and real estate supported all standby letters of
credit outstanding at December 31, 2002. The collateral obtained is
determined based on management's credit evaluation of the customer. Should
the Bank be required to make payments to the beneficiary of a letter of
credit, repayment to the Bank is required. When cash collateral is present
the recourse provisions of the agreements allow the Bank to collect the
cash used to collateralize the agreement. If any other business assets are
used as collateral and cash is not available, the Bank creates a loan for
the customer with the same criteria of its other lending activities. At
December 31, 2002, cash collateral supported $385,000 of the outstanding
standby letters of credit. The fair value of the guarantees is $16,000 and
is not reflected on the balance sheet.
(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, 2002:
U.S. Agency obligations $75,137 $1,203 $ (2) $ 76,338
Corporate debt securities 20,367 210 - 20,577
Trust Preferred securities 4,299 184 (69) 4,414
-------------------------------------------
Total $99,803 $1,597 $ (71) $101,329
===========================================
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 $ 514 $(254) $ 49,453
===========================================
</TABLE>
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, 2002:
U.S. Agency obligations $2,000 $2,029 3.26% $73,137 $74,309 4.03%
Corporate debt securities - - -% 20,367 20,577 5.92%
Trust preferred securities - - -% - - -%
------------------- --------------------
Total $2,000 $2,029 3.26% $93,504 $94,886 4.44%
====================================================================
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%
====================================================================
<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, 2002:
U.S. Agency obligations $ - $ - -% $ - $ - -%
Corporate debt securities - - -% - - -%
Trust preferred securities - - -% 4,299 4,414 8.40%
------------------- --------------------
Total $ - $ - -% $ 4,299 $ 4,414 8.40%
====================================================================
At December 31, 2001:
U.S. Agency obligations $ - $ - -% $ - $ - -%
Trust preferred securities - - -% 3,189 3,009 8.59%
------------------- --------------------
Total $ - $ - -% $ 3,189 $ 3,009 8.59%
====================================================================
</TABLE>
<PAGE> 57
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
The weighted average remaining life of investment securities available for
sale at December 31, 2002 and 2001 was 4.1 years and 4.6 years,
respectively. Included in the weighted average remaining life calculation
at December 31, 2002 and 2001, were $57.7 million and $37.5 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
2002, 2001 or 2000.
(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, 2002:
U.S. Small Business Administration $ 25,930 $ 58 $ (27) $ 25,961
Federal National Mortgage Association 67,215 958 (32) 68,141
Federal Home Loan Mortgage Corporation 57,007 840 (2) 57,845
Collateralized Mortgage Obligations 4,073 94 - 4,167
--------------------------------------------
Total $154,225 $1,950 $ (61) $156,114
============================================
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
============================================
</TABLE>
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, 2002:
U.S. Small Business Administration $1,544 $1,534 2.24% $ 24,386 $ 24,427 2.37%
Federal National Mortgage Association - - -% 67,215 68,141 4.78%
Federal Home Loan Mortgage Corporation - - -% 57,007 57,845 4.44%
Collateralized Mortgage Obligations - - -% 4,073 4,167 6.35%
------------------- ----------------------
Total $1,544 $1,534 2.24% $152,681 $154,580 4.31%
=======================================================================
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%
=======================================================================
</TABLE>
<PAGE> 58
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
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, 2002 and 2001 was 25.0 years and 25.7 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,
--------------------------
2002 2001 2000
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Amortized cost of mortgage-backed securities sold $3,708 $3,828 $ -
Gains realized on sales of mortgage-backed securities 23 4 -
--------------------------
Net proceeds from sales of mortgage-backed securities $3,731 $3,832 $ -
==========================
</TABLE>
(5) Loans Receivable
The following is a summary of loans receivable:
<TABLE>
<CAPTION>
December 31,
---------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Residential mortgage loans:
One- to four-family adjustable rate $277,265 $285,589
One- to four-family fixed rate 19,310 23,306
---------------------
Subtotal 296,575 308,895
Premium on loans acquired 1,248 1,381
Net deferred loan origination fees (60) (64)
---------------------
Total residential mortgage loans $297,763 $310,212
=====================
Commercial loans:
Commercial real estate - nonowner occupied $ 81,242 $ 73,369
Commercial real estate - owner occupied 59,249 46,698
Commercial and industrial 57,389 53,677
Small business 28,750 24,122
Multi-family 18,952 14,927
Construction 18,101 14,027
Leases and other 17,613 12,715
---------------------
Subtotal 281,296 239,535
Net deferred loan origination fees (329) (171)
---------------------
Total commercial loans $280,967 $239,364
=====================
Consumer and other loans:
Home equity - term loans $ 47,906 $ 22,930
Home equity - lines of credit 37,381 28,460
Automobile 3,409 6,335
Installment 967 1,240
Savings secured 602 656
Unsecured and other 1,063 1,153
---------------------
Subtotal 91,328 60,774
Premium on loans acquired 103 192
Net deferred loan origination costs 497 422
---------------------
Total consumer and other loans $ 91,928 $ 61,388
=====================
Total loans receivable $670,658 $610,964
=====================
</TABLE>
<PAGE> 59
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
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 a
group of borrowers in that industry exceeds 25% of the Bank's capital plus
reserves. At December 31, 2002, 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 in which they reside. 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.
The Bank's lending limit to any single borrowing relationship is limited by
law to approximately $12.5 million. At December 31, 2002, the Bank had no
outstanding commitments to any single borrowing relationship that was in
excess of $6.6 million.
At December 31, 2002, the risk elements contained within the loan portfolio
were centered in $736,000 of nonaccrual loans and $27,000 of loans past due
60 to 89 days. This compares to $753,000 of nonaccrual loans and $131,000
of loans past due 60 to 89 days as of December 31, 2001, and $508,000 of
nonaccrual loans and $337,000 of loans past due 60 to 89 days as of
December 31, 2000. Included in nonaccural loans as of December 31, 2002,
were $224,000 of impared loans. No specific reserves were necessary in
conjunction with these impaired loans. As of December 31, 2001 and 2000,
the Bank did not have any loans that were considered impaired. The average
balance of impaired loans was $91,000 during 2002, $1.0 million during 2001
and $648,000 during 2000.
The reduction in interest income associated with nonaccrual loans was as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Income in accordance with original terms $ 62 $ 68 $ 48
Income recognized (37) (37) (13)
----------------------
Foregone interest income $ 25 $ 31 $ 35
======================
</TABLE>
<PAGE> 60
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
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. These loans comply with the
provisions of Regulation O under the Federal Reserve Act and, accordingly,
are permissable under Section 402 of the Sarbanes-Oxley Act of 2002. An
analysis of the activity of these loans is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Balance at beginning of year $ 5,521 $ 6,385
Additions 8,080 1,329
Repayments (5,290) (2,193)
Reductions due to no longer being a related party (1,650) -
-------------------
Balance at end of year $ 6,661 $ 5,521
===================
</TABLE>
(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,
------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Balance at beginning of year $ 8,524 $ 7,294 $5,681
Provision for loan losses charged against income 1,875 1,669 1,542
Loans charged-off (493) (467) (125)
Recoveries of loans previously charged-off 190 28 196
------------------------------
Balance at end of year $10,096 $ 8,524 $7,294
==============================
</TABLE>
The following table represents the allocation of the allowance for loan
losses as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Loan category:
Residential mortgage loans $ 1,757 $1,835
Commercial loans 5,250 4,191
Consumer and other loans 1,027 787
Unallocated 2,062 1,711
------------------
Total $10,096 $8,524
==================
</TABLE>
<PAGE> 61
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(7) Premises and Equipment
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Land $ 984 $ 793
Office buildings and improvements 2,816 2,346
Leasehold improvements 3,448 2,700
Data processing equipment and software 5,026 3,619
Furniture, fixtures and other equipment 3,793 3,054
-------------------
Subtotal 16,067 12,512
Less accumulated depreciation and amortization (6,365) (5,328)
-------------------
Total premises and equipment $ 9,702 $ 7,184
===================
</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 $1.3
million, $1.0 million and $941,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
Rent expense for the years ended December 31, 2002, 2001 and 2000 was
$866,000, $815,000 and $686,000, 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
Less Payments
(In thousands)
<s> <c>
2003 $ 906
2004 909
2005 917
2006 869
2007 863
Thereafter 2,265
------
$6,729
======
</TABLE>
(8) Other Real Estate Owned
The following table provides a summary of OREO:
<TABLE>
<CAPTION>
December 31,
--------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
One- to four-family residential property $58 $287
-------------
Subtotal 58 287
Allowance for losses - (23)
-------------
Total $58 $264
=============
</TABLE>
<PAGE> 62
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
A summary of the activity in the allowance for losses on OREO follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Balance at beginning of year $ 23 $31
Provisions/(recovery of previous provisions) (7) -
Net charge-offs (16) (8)
------------
Balance at end of year $ - $23
============
</TABLE>
The following summarizes the operating results from OREO:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Collection and repossession expenses $ 41 $367 $42
Net expenses of holding properties 14 11 (4)
Provision for losses/(recoveries) (7) - -
Net gains from dispositions (22) (25) (7)
---------------------
Total $ 26 $353 $31
=====================
</TABLE>
(9) Deposits
Certificate of deposit accounts had the following schedule of maturities:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
1 year or less remaining $136,094 $204,248
More than 1 year to 2 years remaining 62,379 27,774
More than 2 years to 4 years remaining 13,093 15,737
More than 4 years remaining 10,308 505
---------------------
Total $221,874 $248,264
=====================
</TABLE>
At December 31, 2002, 2001 and 2000, certificate of deposit accounts with
balances $100,000 or more aggregated $30.5 million, $35.4 million and $32.1
million, respectively.
(10) Overnight and Short-Term Borrowings
Overnight and short-term borrowings are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Treasury tax and loan notes $ 3,000 $ 691
Retail reverse repurchase agreements 24,364 12,342
-------------------
Total $27,364 $13,033
===================
</TABLE>
<PAGE> 63
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,
-----------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Outstanding at end of year $3,000 $ 691
Outstanding collateralized by securities with:
Par Value 4,000 4,000
Market value 4,271 4,007
Average outstanding for the year 1,090 1,038
Maximum outstanding at any month end 3,000 3,000
Weighted average rate at end of year 0.99% 1.40%
Weighted average rate paid for the year 1.43% 1.50%
</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,
-----------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Outstanding at end of year $24,364 $12,342
Maturity date 1/2/03 1/2/02
Outstanding collateralized by securities with:
Par value $24,735 $14,300
Market value 25,111 14,397
Average outstanding for the year 21,988 14,041
Maximum outstanding at any month end 33,149 18,216
Weighted average rate at end of year 0.96% 1.70%
Weighted average rate paid for the year 1.39% 3.04%
</TABLE>
Additionally, at December 31, 2002, 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> 64
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, 2002 December 31, 2001
----------------------------------- -----------------------------------
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 $ 24,100 $ 49,100 4.51% $ 7,000 $ 20,000 3.59%
Over 1 year to 2 years 32,000 34,000 5.76% 20,100 32,100 4.92%
Over 2 years to 3 years 10,000 10,000 4.93% 28,000 30,000 6.08%
Over 3 years to 5 years 35,534 45,534 4.61% 11,000 21,000 5.53%
Over 5 years 42,307 5,307 5.07% 47,265 10,265 5.14%
---------------------- ----------------------
Total $143,941 $143,941 5.01% $113,365 $113,365 5.27%
========================================================================
<FN>
<F1> Callable FHLB advances are shown in the respective periods assuming
that the callable debt is redeemed at the next 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, 2002, 2001 and 2000 was $149.5
million, $191.6 million and $269.7 million, respectively. In addition, the
Bank has a short-term line of credit with the FHLB. Unused borrowing
capacity under this line was $15.0 million at December 31, 2002 and $11.2
million for December 31, 2001 and 2000. 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, 2002, the Bank's FHLB stock holdings, recorded at cost, were $7.7
million.
(12) Company-Obligated Mandatorily Redeemable Capital Securities
On January 23, 2001, the Company sponsored the creation of BRI Statutory
Trust I (the "Trust I"), a Connecticut statutory trust. The Company is the
owner of all of the common securities of Trust I. On February 22, 2001,
Trust I 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 Trust
I'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 Trust I. 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 Trust I's
obligations under the Capital Securities, to the extent Trust I has funds
available therefor.
On June 4, 2002, the Company sponsored the creation of BRI Statutory Trust
II (the "Trust II"), a Connecticut statutory trust. The Company is the
owner of all of the common securities of Trust II. On June 26, 2002, Trust
II issued $5.0 million of its floating rate (quarterly reset to 3 month
LIBOR plus 3.45%) Capital Securities through a pooled trust preferred
securities offering. At December 31, 2002, the rate of the Capital
Securities was 4.85%. The proceeds from this issuance, along with the
Company's $155,000 capital contribution for
<PAGE> 65
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Trust II's common securities, were used to acquire $5.2 million of the
Company's floating rate (quarterly reset to 3 month LIBOR plus 3.45%)
Junior Subordinated Notes due June 26, 2032, and constitute the primary
asset of Trust II. 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 Trust II's
obligations under the Capital Securities, to the extent Trust II has funds
available therefor.
(13) Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
2002 2001 2000
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Current expense:
Federal $4,037 $3,897 $ 4,133
State 85 39 95
-----------------------------
Total current expense 4,122 3,936 4,228
-----------------------------
Deferred benefit
Federal (273) (519) (1,115)
State - - -
-----------------------------
Total deferred benefit (273) (519) (1,115)
-----------------------------
Total income tax expense $3,849 $3,417 $ 3,113
=============================
</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,
-------------------------
2002 2001 2000
---- ---- ----
<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 0.5 0.2 0.7
Bank-owned life insurance (1.7) - -
Other, net 0.6 0.9 1.0
------------------------
Effective combined federal and state income tax rate 33.4% 35.1% 35.7%
========================
</TABLE>
<PAGE> 66
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,
-------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Gross deferred tax assets:
Allowance for loan losses $ 3,433 $ 2,898
Accrued retirement 155 102
Stock issuance costs 103 103
Organizational costs 12 18
Other 77 90
-------------------
Total gross deferred tax assets 3,780 3,211
-------------------
Gross deferred tax liabilities:
Purchase accounting adjustments (1,240) (944)
Unrealized gain on securities available for sale (1,161) (463)
-------------------
Total gross deferred tax liabilities (2,401) (1,407)
-------------------
Net deferred tax asset $ 1,379 $ 1,804
===================
</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, 2002 or 2001 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.
(14) 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 $281,000,
$240,000 and $191,000 for the years ended December 31, 2002, 2001 and 2000,
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 which may be advantageous for personal income tax or other
planning reasons. Expenses associated with the Nonqualified Plan were
$35,000, $34,000 and $24,000 for the years ended December 31, 2002, 2001
and 2000, respectively.
<PAGE> 67
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Supplemental Executive Retirement Plans
The Bank maintains Supplemental Executive Retirement Plans (the "SERPs")
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 SERPs were $153,000, $103,000 and $58,000 for
the years ended December 31, 2002, 2001 and 2000, 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 spanning a three year
period, which have been achieved. The restricted shares vest 50% on January
1, 2005 and 50% on January 1, 2006.The restricted shares are 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. In addition, the Company will make a "gross-up" payment
sufficient to pay any taxes of the CEO (including those on the "gross-up"
payment) arising as a result of the vesting of the restricted stock.
Expenses associated with the Restricted Stock Agreement were $63,000 and
$49,000 for the years ended December 31, 2002 and 2001.
Employee Stock Option Plans
The Company maintains Incentive and Nonqualified Stock Option Plans (the
"Employee Stock Option Plans") 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 Plans is 585,000.
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 Plans
expire ten years from the grant date.
The following table summarizes changes in options outstanding under the
Employee Stock Option Plans during 2000, 2001 and 2002 and options
exercisable at December 31, 2002:
<TABLE>
<CAPTION>
Number of Weighed
Unexercised Average
Options Option Price
----------- ------------
<s> <c> <c>
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
-----------------------
Granted 73,950 20.55
Exercised (15,900) 10.09
Forfeited/Canceled (1,450) 12.88
-----------------------
Options outstanding at December 31, 2002 395,750 $13.09
=======================
Options exercisable at December 31, 2002 271,703 $11.59
=======================
</TABLE>
<PAGE> 68
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 65,000 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 2000, 2001 and 2002 and options exercisable at
December 31, 2002:
<TABLE>
<CAPTION>
Number of Weighed
Unexercised Average
Options Option Price
----------- ------------
<s> <c> <c>
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
-----------------------
Granted 10,000 20.21
Exercised (8,000) 14.46
Forfeited/Canceled (500) 22.15
-----------------------
Options at December 31, 2002 33,500 $16.48
=======================
Options exercisable at December 31, 2002 30,500 $16.33
=======================
</TABLE>
Change of Control Agreements
The Bank has entered into Employment Agreements with its President and
Chief Executive Officer, two Executive Vice Presidents and Chief Financial
Officer and Treasurer. These agreements generally provide for the continued
payment of specified compensation and benefits for the remainder of the
term of the agreement upon termination without cause. The agreements also
provide that if the executive is terminated in conjunction with a Change in
Control, they are entitled to a severance payment equal to 2.99 times base
salary plus bonus for the President and Chief Executive Officer and 2.00
times base salary plus bonus for the Executive Vice Presidents and the
Chief Financial Officer and Treasurer. If payments under the employment
agreements following a Change in Control are subject to the "golden
parachute" excise tax, the Company will make a "gross-up" payment
sufficient to ensure that the net after-tax amount retained by the
executive (taking into account all taxes, including those on the "gross-up"
payment) is the same as if such excise tax had not applied.
<PAGE> 69
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(15) Other Operating Expenses
Major components of other operating expenses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Telephone $ 479 $ 541 $ 470
Forms and supplies 499 512 371
Postage 288 305 251
Correspondent bank fees 194 209 128
Insurance 219 178 128
Director fees 207 158 120
Recruiting 109 125 117
Other 1,167 1,039 731
----------------------------
Total $3,162 $3,067 $2,316
============================
</TABLE>
(16) 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,
---------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Commitments to originate or purchase loans $ 58,727 $ 13,965
Unused lines of credit and other commitments 116,470 118,820
Letters of credit 2,389 2,466
</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> 70
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(17) 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, 2002 December 31, 2001
----------------------- -----------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
(In thousands)
<s> <c> <c> <c> <c>
Assets:
Cash and due from banks $ 25,336 $ 25,336 $ 24,261 $ 24,261
Federal funds sold and overnight investments 17,623 17,623 4,913 4,913
Investment securities 101,329 101,329 49,453 49,453
Mortgage-backed securities 156,114 156,114 150,650 150,650
Stock in the FHLB 7,683 7,683 5,668 5,668
Loans receivable, net of allowance for loan losses:
Residential mortgage loans 295,555 303,249 307,916 313,175
Commercial loans 274,370 287,996 234,121 242,612
Consumer and other loans 90,637 91,202 60,403 61,494
Accrued interest receivable 6,183 6,183 5,803 5,803
Liabilities:
Deposits:
Demand deposit accounts 137,920 137,920 112,925 112,925
NOW accounts 100,476 100,476 44,445 44,445
Money market accounts 10,660 10,660 9,914 9,914
Savings accounts 290,981 290,981 254,861 254,861
Certificate of deposit accounts 221,874 224,824 248,268 250,758
Overnight and short-term borrowings 27,364 27,364 13,033 13,033
FHLB borrowings 143,941 151,771 113,365 115,639
Company-obligated manditorily redeemable capital securities 8,000 8,900 3,000 3,000
Accrued interest payable 1,281 1,281 1,839 1,839
</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> 71
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.
Company-obligated manditorily 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.
<PAGE> 72
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
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.
(18) Shareholders' Equity
Capital guidelines issued by the Federal Reserve Board ("FRB") 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, 2002, 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.
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, 2002:
Bancorp Rhode Island, Inc.
- --------------------------
Tier I capital (to average assets) $61,408 6.19% $29,779 3.00% $49,631 5.00%
Tier I capital (to risk-weighted assets) 61,408 9.63% 25,506 4.00% 38,260 6.00%
Total capital (to risk-weighted assets) 69,401 10.88% 51,013 8.00% 63,766 10.00%
Bank Rhode Island
- -----------------
Tier I capital (to average assets) $60,097 6.06% $29,760 3.00% $49,599 5.00%
Tier I capital (to risk-weighted assets) 60,097 9.43% 25,494 4.00% 38,240 6.00%
Total capital (to risk-weighted assets) 68,090 10.68% 50,987 8.00% 63,734 10.00%
At December 31, 2001:
Bancorp Rhode Island, Inc.
- --------------------------
Tier I capital (to average assets) $50,433 5.93% $25,508 3.00% $42,513 5.00%
Tier I capital (to risk-weighted assets) 50,433 9.86% 20,462 4.00% 30,694 6.00%
Total capital (to risk-weighted assets) 56,803 11.10% 40,925 8.00% 51,156 10.00%
Bank Rhode Island
- -----------------
Tier I capital (to average assets) $49,702 5.84% $25,526 3.00% $42,544 5.00%
Tier I capital (to risk-weighted assets) 49,702 9.72% 20,458 4.00% 30,687 6.00%
Total capital (to risk-weighted assets) 56,121 10.97% 40,916 8.00% 51,145 10.00%
</TABLE>
<PAGE> 73
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
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.
(19) Earnings Per Share
The following table is a reconciliation of basic EPS and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
2002 2001 2000
---- ---- ----
<s> <c> <c> <c>
Basic EPS Computation:
Numerator:
Net income (in thousands) $ 7,662 $ 6,315 $ 5,618
========================================
Denominator:
Common shares outstanding 3,758,214 3,730,910 3,728,688
Stock options - - -
Warrants - - -
----------------------------------------
Total shares 3,758,214 3,730,910 3,728,688
========================================
Basic EPS $ 2.04 $ 1.69 $ 1.51
========================================
Diluted EPS Computation:
Numerator:
Net income (in thousands) $ 7,662 $ 6,315 $ 5,618
========================================
Denominator:
Common shares outstanding 3,758,214 3,730,910 3,728,688
Stock options 166,019 115,572 24,534
Warrants 72,437 53,546 15,367
----------------------------------------
Total shares 3,996,670 3,900,028 3,768,589
========================================
Diluted EPS $ 1.92 $ 1.62 $ 1.49
========================================
</TABLE>
(20) Regulation and Litigation
The Company and the Bank are subject to extensive regulation and
examination by the FRB, 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 gov-
<PAGE> 74
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
erning 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.
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.
(21) Parent Company Statements
The following are condensed financial statements for Bancorp Rhode Island,
Inc. (the "Parent Company"):
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Assets:
Cash and due from banks $ 17 $ 20
Overnight investments 1,169 736
Investment in subsidiaries 73,379 61,465
Prepaid and other assets 270 108
-------------------
Total assets $74,835 $62,329
===================
Liabilities:
Income taxes payable $ (50) $ (47)
Notes payable to subsidiaries 8,248 3,093
Other liabilities 210 186
-------------------
Total liabilities 8,408 3,232
-------------------
Shareholders' equity:
Preferred stock: par value $0.01 per share, authorized 1,000,000 shares
Issued and outstanding: none - -
Common stock: par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding: 3,777,450 shares in 2002 and
3,753,550 shares in 2001 38 37
Additional paid-in capital 40,134 39,826
Retained earnings 24,002 18,336
Accumulated other comprehensive income, net 2,253 898
-------------------
Total shareholders' equity 66,427 59,097
-------------------
Total liabilities and shareholders' equity $74,835 $62,329
===================
</TABLE>
<PAGE> 75
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
2002 2001
---- ----
(In thousands, except per share data)
<s> <c> <c>
Income:
Dividends received from subsidiaries $ 2,750 $ 2,250
Interest on overnight investments 44 16
-------------------------
Total income 2,794 2,266
-------------------------
Expenses:
Interest on notes payable 458 271
Compensation expense 63 49
Directors' fees 86 63
Professional services 174 159
Other expenses 1 -
-------------------------
Total expenses 782 542
-------------------------
Income before income taxes 2,012 1,724
Income tax expense (benefit) (246) (176)
-------------------------
Income before equity in undistributed earnings of subsidiaries 2,258 1,900
Equity in undistributed earnings of subsidiaries 5,404 4,415
-------------------------
Net income $ 7,662 $ 6,315
=========================
Basic earnings per common share: $ 2.04 $ 1.69
Diluted earnings per common share: $ 1.92 $ 1.62
Average common shares outstanding - basic 3,758,214 3,730,910
Average common shares outstanding - diluted 3,996,670 3,900,028
<CAPTION>
Statements of Cash Flow
Year Ended December 31,
------------------------
2002 2001
---- ----
(In thousands)
<s> <c> <c>
Cash flows from operating activities:
Net income $ 7,662 $ 6,315
Adjustment to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (5,404) (4,415)
Compensation expense from restricted stock grant 33 30
(Increase) decrease in other assets (162) (108)
Increase (decrease) in other liabilities 21 (185)
-------------------
Net cash provided by operating activities 2,150 2,007
-------------------
Cash flows from financing activities:
Proceeds from notes payable 5,155 3,093
Investment in subsidiaries (5,155) (3,093)
Proceeds from issuance of common stock 276 175
Dividends on common stock (1,996) (1,794)
-------------------
Net cash used by financing activities (1,720) (1,619)
-------------------
Net increase (decrease) in cash and due from banks 430 388
Cash and cash equivalents at beginning of year 756 368
-------------------
Cash and cash equivalents at end of year $ 1,186 $ 756
===================
Supplementary disclosures:
Cash paid (received) for income taxes $ (243) $ (175)
Non-cash transactions:
Change in other comprehensive income, net of taxes 1,355 1,079
</TABLE>
The Parent Company's Statements of Changes in Shareholders' Equity is
identical to the Consolidated Statements of Changes in Shareholders' Equity
and therefore is not presented here.
<PAGE> 76
BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (Continued)
(22) Quarterly Results of Operations (unaudited)
<TABLE>
<CAPTION>
2002 Quarter Ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except per share data)
<s> <c> <c> <c> <c>
Interest income $13,097 $13,539 $13,577 $13,294
Interest expense 5,480 5,522 5,676 5,502
---------------------------------------------------
Net interest income 7,617 8,017 7,901 7,792
Provision for loan losses 400 450 575 450
---------------------------------------------------
Net interest income after provision for loan losses 7,217 7,567 7,326 7,342
Noninterest income 1,566 1,518 1,796 2,203
Noninterest expense 5,857 6,246 6,234 6,687
---------------------------------------------------
Income before taxes 2,926 2,839 2,888 2,858
Income taxes 1,032 930 957 930
---------------------------------------------------
Net income $ 1,894 $ 1,909 $ 1,931 $ 1,928
===================================================
Basic EPS $ 0.51 $ 0.51 $ 0.51 $ 0.51
Diluted EPS $ 0.48 $ 0.48 $ 0.48 $ 0.48
<CAPTION>
2001 Quarter Ended
-----------------------------------------------------
March 31 June 30 September 30 December 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
</TABLE>
<PAGE> 77
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
information regarding the Common Stock for the periods indicated.
<TABLE>
<CAPTION>
Stock Price
----------------- Dividend
High Low Paid
---- --- --------
<s> <c> <c> <c>
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
2002
First Quarter $22.95 $17.45 $0.13
Second Quarter 24.12 21.50 0.13
Third Quarter 23.25 18.50 0.13
Fourth Quarter 23.25 16.50 0.14
</TABLE>
As of March 7, 2003 there were approximately 1,400 holders of record of the
common stock.
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
2975 West Shore Road
Warwick, RI 02886
1175 Cumberland Hill Road
Woonsocket, RI 02895
2104 Plainfield Pike
Cranston, RI 02921
(Full Service Drive-up ATM)
233 Lambert Lind Highway
Warwick, RI 02886
(Full Service Drive-up ATM)
17 Coventry Shoppers Park
Coventry, RI 02816
(Full Service ATM - Vestibule)
625 George Washington Highway
Lincoln, RI 02865
<PAGE> 78
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>6
<FILENAME>bri-21.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
Name Jurisdiction of Organization
---- ----------------------------
Bank Rhode Island Rhode Island
BRI Statutory Trust I Connecticut
BRI Statutory Trust II Connecticut
BRI Investment Corp. Rhode Island
<PAGE> 23
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>7
<FILENAME>bri-23.txt
<DESCRIPTION>EXHIBIT 23
<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 statements on
Form S-8, File Nos. 333-46438 and 333-89148, of Bancorp Rhode Island, Inc.
of our report dated January 23, 2003, relating to the consolidated balance
sheets of Bancorp Rhode Island, Inc. and subsidiaries as of December 31,
2002 and 2001, 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, 2002, which report appears in the
Annual Report on Form 10-K. Our report refers to the adoption of Statement
of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangible Assets" and SFAS 147, "Acquisitions of Certain Financial
Institutions."
/s/ KPMG LLP
Providence, Rhode Island
March 25, 2003
<PAGE> 24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>8
<FILENAME>bri-991.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
EXHIBIT 99.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Bancorp Rhode Island, Inc. (the
"Company") on Form 10-K for the year ending December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), the undersigned President and Chief Executive Officer hereby
certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated this 25th day of March, 2003.
/s/ Merrill W. Sherman
- -----------------------------
Merrill W. Sherman
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has
been provided to Bancorp Rhode Island, Inc. and will be retained by Bancorp
Rhode Island, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.
<PAGE> 25
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>9
<FILENAME>bri-992.txt
<DESCRIPTION>EXHIBIT 99.2
<TEXT>
EXHIBIT 99.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Bancorp Rhode Island, Inc. (the
"Company") on Form 10-K for the year ending December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), the undersigned Chief Financial Officer and Treasurer hereby
certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated this 25th day of March, 2003.
/s/ Albert R. Rietheimer
- -----------------------------
Albert R. Rietheimer
Chief Financial Officer and Treasurer
A signed original of this written statement required by Section 906 has
been provided to Bancorp Rhode Island, Inc. and will be retained by Bancorp
Rhode Island, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.
<PAGE> 26
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----