<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934
For quarter ended: SEPTEMBER 30, 2000
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 (IRS Employer
of 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)
----------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No
--- ---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of NOV. 3, 2000:
Common Stock - Par Value $0.01 3,728,950 Shares
------------------------------ ----------------
(class) (outstanding)
<PAGE> 2
BANCORP RHODE ISLAND, INC.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in
Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis 9 - 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities 21
Item 3 Default upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
Signature Page 22
2
<PAGE> 3
BANCORP RHODE ISLAND, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 16,847 $ 17,636
Federal funds sold 3,900 6,850
Investment securities available for sale (amortized cost of $48,467 and
$51,477 at September 30, 2000 and December 31, 1999, respectively) 47,730 50,503
Mortgage-backed securities available for sale (amortized cost of $95,892 and
$76,458 at September 30, 2000 and December 31, 1999, respectively) 94,803 74,793
Stock in Federal Home Loan Bank of Boston 3,704 3,704
Loans receivable:
Residential mortgage loans 248,194 237,320
Commercial loans 212,313 174,548
Consumer and other loans 50,512 47,090
--------- ---------
TOTAL LOANS 511,019 458,958
Less allowance for loan losses (6,747) (5,681)
--------- ---------
NET LOANS 504,272 453,277
Premises and equipment, net 6,371 5,857
Other real estate owned 30 49
Excess of costs over net assets acquired, net 12,221 13,094
Accrued interest receivable 5,691 4,670
Prepaid expenses and other assets 2,448 1,544
--------- ---------
TOTAL ASSETS $ 698,017 $ 631,977
========= =========
LIABILITIES:
Deposits:
Demand deposit accounts $ 87,471 $ 67,844
NOW accounts 32,423 27,456
Money market accounts 12,798 16,073
Savings accounts 200,674 173,692
Certificate of deposit accounts 259,174 228,351
--------- ---------
TOTAL DEPOSITS 592,540 513,416
Overnight and short-term borrowings 12,440 14,978
Federal Home Loan Bank of Boston borrowings 35,294 48,183
Other borrowings 4,750 4,750
Other liabilities 2,059 2,975
--------- ---------
TOTAL LIABILITIES 647,083 584,302
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Voting: Issued and outstanding 3,448,950 shares at September 30 and
3,448,550 shares at December 31 34 34
Non-Voting: Issued and outstanding 280,000 shares 3 3
Additional paid-in capital 39,621 39,617
Retained earnings 12,761 9,763
Accumulated other comprehensive income (loss), net (1,485) (1,742)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 50,934 47,675
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 698,017 $ 631,977
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
BANCORP RHODE ISLAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income:
Residential mortgage loans $ 4,522 $ 4,196 $ 13,374 $ 12,714
Commercial loans 4,622 3,287 12,893 9,186
Consumer and other loans 1,141 922 3,207 2,518
Investment securities 770 758 2,316 2,088
Mortgage-backed securities 1,419 1,205 4,009 3,631
Federal funds sold and other 346 71 575 375
Federal Home Loan Bank of Boston stock dividends 74 61 208 175
---------- ---------- ---------- -----------
TOTAL INTEREST AND DIVIDEND INCOME 12,894 10,500 36,582 30,687
---------- ---------- ---------- -----------
Interest expense:
NOW accounts 55 46 149 130
Money market accounts 92 125 297 353
Savings accounts 1,656 1,226 4,301 3,517
Certificate of deposit accounts 3,551 2,748 9,927 8,638
Overnight and short-term borrowings 157 104 429 200
Federal Home Loan Bank of Boston borrowings 546 538 1,870 1,551
Other borrowings 71 71 211 210
---------- ---------- ---------- -----------
TOTAL INTEREST EXPENSE 6,128 4,858 17,184 14,599
---------- ---------- ---------- -----------
NET INTEREST INCOME 6,766 5,642 19,398 16,088
Provision for loan losses 410 225 1,132 675
---------- ---------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,356 5,417 18,266 15,413
---------- ---------- ---------- -----------
Noninterest income:
Loan related fees 100 134 206 198
Service charges on deposit accounts 713 573 1,980 1,564
Commissions on loans originated for others 23 8 41 74
Other income 148 206 407 483
---------- ---------- ---------- -----------
TOTAL NONINTEREST INCOME 984 921 2,634 2,319
---------- ---------- ---------- -----------
Noninterest expense:
Salaries and employee benefits 2,540 2,066 7,061 5,897
Occupancy 390 362 1,130 956
Equipment 221 176 666 560
Data processing 339 350 948 1,006
Marketing 238 412 839 796
Professional services 178 224 601 594
Loan servicing 177 215 563 650
Other real estate owned expense 30 32 39 88
Amortization of intangibles 291 291 873 873
Deposit tax and assessments 29 15 81 43
Other 601 472 1,712 1,389
---------- ---------- ---------- -----------
TOTAL NONINTEREST EXPENSE 5,034 4,615 14,513 12,852
---------- ---------- ---------- -----------
INCOME BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE 2,306 1,723 6,387 4,880
Income tax expense 852 592 2,271 1,701
---------- ---------- ---------- -----------
NET INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE 1,454 1,131 4,116 3,179
Cumulative effect of change in accounting principle, net of taxes -- -- -- 109
---------- ---------- ---------- -----------
NET INCOME 1,454 1,131 4,116 3,070
Dividends on preferred stock -- -- -- 88
---------- ---------- ---------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 1,454 $ 1,131 $ 4,116 $ 2,982
========== ========== ========== ===========
Basic earnings per common share:
Income per common share before change in accounting principle $ 0.39 $ 0.30 $ 1.10 $ 0.83
Cumulative effect of change in accounting principle, net of tax -- -- -- (0.03)
---------- ---------- ---------- -----------
Net income per common share $ 0.39 $ 0.30 $ 1.10 $ 0.80
========== ========== ========== ===========
Diluted earnings per common share:
Income per common share before change in accounting principle $ 0.38 $ 0.30 $ 1.10 $ 0.83
Cumulative effect of change in accounting principle, net of tax -- -- -- (0.03)
---------- ---------- ---------- -----------
Net income per common share $ 0.38 $ 0.30 $ 1.10 $ 0.80
========== ========== ========== ===========
Average common shares outstanding - basic 3,728,701 3,728,550 3,728,600 3,726,497
Average common shares outstanding - diluted 3,793,885 3,748,229 3,748,493 3,743,326
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
BANCORP RHODE ISLAND, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPRE-
ADDITIONAL HENSIVE
PREFERRED COMMON PAID-IN RETAINED INCOME
NINE MONTHS ENDED SEPTEMBER 30, STOCK STOCK CAPITAL EARNINGS (LOSS), NET TOTAL
--------- ------- ---------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
2000
Balance at December 31, 1999 $ -- $ 37 $ 39,617 $ 9,763 $(1,742) $ 47,675
Net income -- -- -- 4,116 -- 4,116
Other comprehensive income,
net of tax:
Unrealized gain (loss) on
securities available for sale 257 257
--------
Comprehensive income 4,373
Exercise of stock options -- -- 4 -- -- 4
Dividends on common stock -- -- -- (1,118) -- (1,118)
------- ------- -------- -------- ------- --------
Balance at September 30, 2000 $ -- $ 37 $ 39,621 $ 12,761 $(1,485) $ 50,934
======= ======= ======== ======== ======= ========
1999
Balance at December 31, 1998 $ 804 $ 37 $ 40,774 $ 5,862 $ 210 $ 47,687
Net income -- -- -- 3,070 -- 3,070
Other comprehensive income,
net of tax:
Unrealized gain (loss) on
securities available for sale (1,473) (1,473)
--------
Comprehensive income 1,597
Exercise of stock options -- -- 49 -- -- 49
Redemption of preferred stock (804) -- (1,206) -- -- (2,010)
Dividends on preferred stock -- -- -- (88) -- (88)
Dividends on common stock -- -- -- (187) -- (187)
------- ------- -------- -------- ------- --------
Balance at September 30, 1999 $ -- $ 37 $ 39,617 $ 8,657 $(1,263) $ 47,048
======= ======= ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
BANCORP RHODE ISLAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,116 $ 3,070
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 1,894 2,429
Provision for loan losses 1,132 675
Loss/(gain) on other real estate owned, net (7) 12
(Increase) decrease in:
Accrued interest receivable (1,021) (177)
Prepaid expenses and other assets (1,037) (328)
Increase (decrease) in:
Other liabilities (916) 706
Other, net 52 206
-------- --------
Net cash provided (used) by operating activities 4,213 6,593
-------- --------
Cash flows from investing activities:
Origination of:
Residential mortgage loans (7,812) (14,282)
Commercial loans (55,624) (45,742)
Consumer loans (13,188) (15,266)
Purchase of:
Investment securities available for sale (7,000) (25,168)
Mortgage-backed securities available for sale (32,222) (17,947)
Residential mortgage loans (38,470) (53,883)
Federal Home Loan Bank of Boston stock -- (359)
Principal payments on:
Investment securities available for sale 10,000 12,000
Mortgage-backed securities available for sale 12,272 17,444
Residential mortgage loans 35,042 81,326
Commercial loans 17,833 17,734
Consumer loans 9,678 7,680
Proceeds from disposition of other real estate owned 163 512
Capital expenditures for premises and equipment (1,207) (1,575)
-------- --------
Net cash provided (used) by investing activities (70,535) (37,526)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 79,124 8,422
Net increase (decrease) in overnight and short-term borrowings (2,538) 6,903
Proceeds from Federal Home Loan Bank of Boston and other borrowings 12,116 32,300
Repayment of Federal Home Loan Bank of Boston and other borrowings (25,005) (20,614)
Proceeds from exercise of stock options 4 49
Redemption of preferred stock -- (2,010)
Dividends on preferred stock -- (88)
Dividends on common stock (1,118) (187)
-------- --------
Net cash provided (used) by financing activities 62,583 24,775
-------- --------
Net increase (decrease) in cash and cash equivalents (3,739) (6,158)
Cash and cash equivalents at beginning of period 24,486 22,011
-------- --------
Cash and cash equivalents at end of period $ 20,747 $ 15,853
======== ========
Supplementary Disclosures:
Cash paid for interest $ 16,971 $ 14,813
Cash paid for income taxes 2,915 2,349
Non-cash transactions:
Additions to other real estate owned in settlement of loans 137 --
Change in other comprehensive income, net of taxes 257 (1,473)
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
BANCORP RHODE ISLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
Bancorp Rhode Island, Inc. (the "Company"), a Rhode Island corporation, was
organized by Bank Rhode Island (the "Bank") to be a bank holding company. The
Company was organized, at the direction of the Bank on February 15, 2000, to
acquire all of the capital stock of the Bank upon the consummation of the
reorganization of the Bank into the holding company form of ownership, which was
completed on September 1, 2000. The Company has no significant assets other than
the common stock of the Bank and various other liquid assets that it invests in
the ordinary course of business. For that reason, substantially all of the
discussion in this Quarterly Report on Form 10-Q relates to the operations of
the Bank and its subsidiaries.
The consolidated financial statements include the accounts of the Company
and its wholly-owned direct subsidiary, the Bank, and its indirect subsidiaries,
BRI Investment Corp. (a Rhode Island passive investment company) and BRI Realty
Corp. (a real estate holding company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
The interim results of consolidated operations are not necessarily
indicative of the results for any future interim period or for the entire year.
These interim consolidated financial statements do not include all disclosures
associated with annual financial statements and, accordingly, should be read in
conjunction with the annual consolidated financial statements and accompanying
notes included in the Bank's Annual Report on Form 10-K filed with the Federal
Deposit Insurance Corporation ("FDIC").
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to change relate to the determination of the
allowance for loan losses.
The unaudited interim consolidated financial statements of the Company have
been prepared in accordance with Generally Accepted Accounting Principles
("GAAP") and prevailing practices within the banking industry and include all
necessary adjustments (consisting of only normal recurring adjustments), that,
in the opinion of management, are required for a fair presentation of the
results and financial condition of the Company.
(2) Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and resulted in the issuance of additional common
stock that then shared in the earnings of the entity.
7
<PAGE> 8
(3) Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities on the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available for sale security or a foreign currency denominated forecasted
transaction. Under SFAS 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. In June 1999, the
FASB issued SFAS 138 which defers the effective date of SFAS 133. SFAS 133 is
now effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. The Company does not expect SFAS 133 to have a material effect on its
financial position or results of operations.
8
<PAGE> 9
BANCORP RHODE ISLAND, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained herein are "Forward Looking Statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward Looking
Statements may be identified by reference to a future period or periods or by
the use of forward looking terminology such as "may," "believes," "intends,"
"expects," and "anticipates" or similar terms or variations of these terms.
Actual results could differ materially from those set forth in Forward Looking
Statements as a result of certain risks and uncertainties, including but not
limited to, changes in political and economic conditions, interest rate
fluctuations, competitive product and pricing pressures, equity and bond market
fluctuations, credit risk, inflation, as well as other risks and uncertainties
detailed from time to time in filings with the FDIC or the Securities and
Exchange Commission ("SEC").
GENERAL
The Company's primary asset is the common stock of Bank Rhode Island. For
that reason, substantially all of the discussion in this Quarterly Report on
Form 10-Q relates to the operations of the Bank. The Bank is a commercial bank
chartered as a financial institution in the State of Rhode Island, 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 middle market businesses. The Bank also has introduced
both commercial and consumer on-line banking products and maintains a web site
at http://www.bankri.com.
At this year's annual meeting, held on May 17, 2000, the Bank's
shareholders authorized a plan of reorganization pursuant to which the Bank
became a wholly-owned subsidiary of the Company. The Company believes that this
holding company structure will provide several advantages over its past
structure including increased financial flexibility. The reorganization into a
holding company structure became effective on September 1, 2000.
The Company and Bank are subject to regulation by certain federal and state
agencies and undergo periodic examinations by those regulatory authorities. The
Bank's deposits are insured by the FDIC, subject to regulatory limits. The Bank
is also a member of the Federal Home Loan Bank of Boston ("FHLB").
NON-GAAP MEASURES OF FINANCIAL PERFORMANCE
Contained within this Form 10-Q are various measures of financial
performance that have been calculated excluding the amortization of intangibles
and any related income taxes. These measures are identified as "cash" or "cash
basis" and have been provided to assist the reader in evaluating the core
performance of the Company. This presentation is not in accordance with GAAP,
but management believes it to be beneficial to gaining a better understanding of
the financial performance of the Company.
9
<PAGE> 10
The Bank's formation in 1996 resulted in the generation of $17.5 million of
goodwill which is being amortized over a 15 year period. The amortization of
this intangible asset reduces the Company's pre-tax income by $1.2 million
annually. Because of the impact of this amortization, certain information has
been presented on both a GAAP and cash basis.
The following table sets forth selected financial measures in accordance
with GAAP and on a cash basis:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------ ------
Basic EPS $ 0.39 $ 0.30 $ 1.10 $ 0.80
Basic Cash EPS $ 0.44 $ 0.35 $ 1.25 $ 0.98
Diluted EPS $ 0.38 $ 0.30 $ 1.10 $ 0.80
Diluted Cash EPS $ 0.43 $ 0.35 $ 1.25 $ 0.98
ROA 0.83% 0.72% 0.82% 0.69%
Cash Basis ROA 0.95% 0.86% 0.95% 0.83%
ROE 11.74% 9.73% 11.43% 9.12%
Cash Basis ROE 13.23% 11.37% 12.99% 10.76%
Efficiency Ratio 64.95% 70.32% 65.87% 69.82%
Cash Basis Efficiency Ratio 61.20% 65.88% 61.91% 65.08%
OVERVIEW
Total assets increased $66.0 million, or 10.4%, to $698.0 million at
September 30, 2000, from $632.0 million at December 31, 1999. This increase was
centered in loans and was funded by growth in total deposits. During the first
nine months of 2000, total loans rose to $511.0 million, from $459.0 million, an
increase of $52.1 million, or 11.3%, and total deposits rose to $592.5 million,
from $513.4 million, an increase of $79.1 million, or 15.4%. Shareholders'
equity was $50.9 million at September 30, 2000, representing a $3.3 million, or
6.8%, increase over shareholders' equity at the end of 1999.
FINANCIAL CONDITION
-- Investments. Total investments (consisting of federal funds sold,
investment securities, mortgage-backed securities ("MBSs") and stock in the
FHLB) totaled $150.1 million, or 21.5% of total assets, at September 30, 2000,
compared to $135.9 million, or 21.5% of total assets, at December 31, 1999. All
$142.5 million of investment securities and MBSs at September 30, 2000 were
classified as available for sale and carried a total of $1.8 million in net
unrealized losses. The increase in total investments was centered in MBSs, which
increased $20.0 million, or 26.8%, as the Company reinvested part of the funds
generated from growth in deposits into MBSs.
-- Loans. Total loans were $511.0 million, or 73.2% of total assets, at
September 30, 2000, compared to $459.0 million, or 72.6% of total assets, at
December 31, 1999. During the first three quarters of 2000, the commercial loan
portfolio (consisting of commercial & industrial, small business, commercial
real estate, multi-family real estate and construction loans) increased $37.8
million, or 21.6%, as the Bank experienced strong demand from local commercial
customers. Particular emphasis is placed on the generation of small- to
medium-sized commercial relationships (those relationships with $4.0 million or
less in loan outstandings). The Bank is active in small
10
<PAGE> 11
business lending (loans of $250,000 or less) in which it utilizes credit scoring
in conjunction with traditional review standards and employs streamlined
documentation. The Bank is also a participant in the U.S. Small Business
Administration ("SBA") Preferred Lender Program ("PLP") in Rhode Island and the
7a Guarantee Loan Program in Massachusetts.
During the first nine months of 2000, the consumer loan portfolio increased
$3.4 million, or 7.3%, and its residential mortgage loan portfolio increased
$10.9 million, or 4.6%. While the Bank continues to concentrate its origination
efforts on commercial and consumer loan opportunities, the Company anticipates
that the Bank will continue to originate residential mortgage loans on a limited
basis for its customers. Until such time as the Bank can originate sufficient
commercial and consumer loans to utilize available cash flow, or to otherwise
meet investment objectives, it also intends to continue purchasing residential
mortgage loans as opportunities develop.
The following is a breakdown of loans receivable:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
Residential mortgage loans:
One - to four-family adjustable rate $ 210,476 $ 196,863
One - to four-family fixed rate 36,521 39,037
--------- ---------
Subtotal 246,997 235,900
Premium on loans acquired 1,239 1,446
Net deferred loan origination fees (42) (26)
--------- ---------
Total residential mortgage loans $ 248,194 $ 237,320
========= =========
Commercial loans:
Commercial real estate - nonowner occupied $ 63,747 $ 56,181
Commercial and industrial 53,097 40,109
Commercial real estate - owner occupied 43,467 33,968
Small business 17,692 13,322
Multi-family real estate 16,591 16,270
Construction 4,210 6,379
Leases and other 13,670 8,499
--------- ---------
Subtotal 212,474 174,728
Net deferred loan origination fees (161) (180)
--------- ---------
Total commercial loans $ 212,313 $ 174,548
========= =========
Consumer loans:
Home equity - lines of credit $ 24,247 $ 24,166
Home equity - term loans 22,868 19,710
Installment 1,233 1,279
Savings secured 992 1,005
Unsecured and other 787 590
--------- ---------
Subtotal 50,127 46,750
Net deferred loan origination costs 385 340
--------- ---------
Total consumer loans $ 50,512 $ 47,090
========= =========
11
<PAGE> 12
-- Deposits and Borrowings. Total deposits increased by $79.1 million, or
15.4%, during the first nine months of 2000, from $513.4 million, or 81.2% of
total assets, at December 31, 1999, to $592.5 million, or 84.9% of total assets,
at September 30, 2000. Increases of $48.3 million, or 16.9%, in core accounts
(checking and savings accounts) along with $30.8 million, or 13.5%, in
certificates of deposit comprised the increase in total deposits. The unusually
strong deposit growth experienced during the first three quarters of 2000
resulted from increased market presence, coupled with customer displacement
caused by Fleet Financial/BankBoston divestitures and may not continue at this
rate into the future.
The following table sets forth certain information regarding deposits:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------------------------- --------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE
AMOUNT TOTAL RATE AMOUNT TOTAL RATE
-------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 32,423 5.5% 0.66% $ 27,456 5.4% 0.64%
Money market accounts 12,798 2.1% 2.62% 16,073 3.1% 2.70%
Savings accounts 200,674 33.9% 3.39% 173,692 33.8% 2.78%
Certificate of deposit accounts 259,174 43.7% 5.58% 228,351 44.5% 4.95%
-------- ----- -------- -----
Total interest bearing deposits 505,069 85.2% 4.32% 445,572 86.8% 3.76%
Noninterest bearing accounts 87,471 14.8% -- 67,844 13.2% --
-------- ----- -------- -----
Total deposits $592,540 100.0% 3.68% $513,416 100.0% 3.26%
======== ===== ==== ======== ===== ====
</TABLE>
Total borrowings decreased $15.4 million, or 22.7%, during the first nine
months of 2000 as part of the deposit growth was utilized to repay maturing
borrowings. The Company, through the Bank's membership in the FHLB, has access
to a variety of borrowing alternatives, and management will from time to time
take advantage of these opportunities to fund asset growth. However, on a
long-term basis, the Company intends to concentrate on increasing the Bank's
core deposits.
ASSET QUALITY
The definition of nonperforming assets includes nonperforming loans and
other real estate owned ("OREO"). OREO consists of real estate acquired through
foreclosure proceedings and real estate acquired through acceptance of a deed in
lieu of foreclosure. Nonperforming loans are defined as nonaccrual loans, loans
past due 90 days or more, but still accruing, and impaired loans. Under certain
circumstances, the Bank may restructure the terms of a loan as a concession to a
borrower. These restructured loans are considered impaired loans.
-- Nonperforming Assets. At September 30, 2000, nonperforming assets were
$1.4 million, and represented .20% of total assets. This compares to
nonperforming assets of $1.2 million, or .18% of total assets, at December 31,
1999. Nonperforming assets at September 30, 2000, consisted of nonaccrual
commercial loans aggregating $900,000, nonaccrual residential mortgage loans
aggregating $484,000, and OREO aggregating $30,000. Included in nonaccrual loans
were $794,000 and $329,000 of impaired loans at September 30, 2000 and December
31, 1999, respectively. Reserves of $49,000 were maintained against impaired
loans at September 30, 2000. No reserves were necessary against impaired loans
as of December 31, 1999. The Company evaluates the underlying collateral of each
nonperforming loan and continues to pursue the collection of interest and
principal.
12
<PAGE> 13
Delinquencies. At September 30, 2000, loans with an aggregate balance of
$24,000 were 60 to 89 days past due, a decrease of $69,000, or 74.2%, from
$93,000 reported at December 31, 1999. The majority of these loans at both dates
were residential mortgage loans and are secured.
The following table sets forth information regarding nonperforming assets
and loans 60-89 days past due as to interest at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans accounted for on a nonaccrual basis $1,385 $1,112
Loans past due 90 days or more, but still accruing -- --
------ ------
Total nonperforming loans 1,385 1,112
Other real estate owned 30 49
------ ------
Total nonperforming assets $1,415 $1,161
====== ======
Delinquent loans 60-89 days past due $ 24 $ 93
Nonperforming loans as a percent of total loans .27% .24%
Nonperforming assets as a percent of total assets .20% .18%
Delinquent loans 60-89 days past due as a percent of total loans .00% .02%
</TABLE>
As the loan portfolio continues to grow and mature, or if economic
conditions worsen, management believes it likely that the level of nonperforming
assets will increase, as will its level of delinquencies and charge-offs.
ALLOWANCE FOR LOAN LOSSES
During the first nine months of 2000, $1.1 million of provisions to the
allowance for loan losses were made and $66,000 of net charge-offs took place,
bringing the balance in the allowance to $6.7 million at September 30, 2000,
compared to $5.7 million at December 31, 1999. The allowance, expressed as a
percentage of total loans, was 1.32% as of September 30, 2000, compared to 1.24%
at the prior year-end and stood at 487.2% of nonperforming loans at September
30, 2000, compared to 510.9% of nonperforming loans at December 31, 1999.
Assessing the adequacy of the allowance for loan losses involves
substantial uncertainties and is based upon management's evaluation of the
amounts required to meet estimated charge-offs in the loan portfolio after
weighing various factors. Among these factors are the risk characteristics of
the loan portfolio, the quality of specific loans, the level of nonaccruing
loans, current economic conditions, trends in delinquencies and charge-offs, and
the value of underlying collateral, all of which can change frequently. Based on
this evaluation, the management believes that the allowance for loan losses, as
of September 30, 2000, is adequate.
While management evaluates currently available information in establishing
the allowance for loan losses, future adjustments to the allowance may be
necessary if conditions differ substantially from the assumptions used in making
the evaluations. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review a financial institution's
allowance for loan losses and carrying amounts of other real estate owned. Such
agencies may require the financial institution to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
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<PAGE> 14
RESULTS OF OPERATIONS
The Company's operating results depend primarily on its "net interest
income," or the difference between its interest income and its cost of money,
and on the quality of its assets. Interest income depends on the average amount
of interest-earning assets outstanding during the period and the interest rates
earned thereon. Cost of money is a function of the average amount of deposits
and borrowed money outstanding during the period and the interest rates paid
thereon. The quality of assets further influences the amount of interest income
lost on nonaccrual loans and the amount of additions to the allowance for loan
losses.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
-- Overview. The Company reported net income for the third quarter of 2000
of $1.5 million, up $323,000, or 28.6%, from the third quarter of 1999. Diluted
earnings per common share were $0.38 for the third quarter of 2000, compared to
$0.30 for the third quarter of 1999. Cash earnings per common share were $0.43
for the 2000 period, compared to $0.35 for the 1999 period.
The Company reported a return on average assets of 0.83% and a return on
average equity of 11.74% for the 2000 period, as compared to a return on average
assets of 0.72% and a return on average equity of 9.73% for the 1999 period.
Cash basis return on average assets and cash basis return on average equity were
0.95% and 13.23% for the 2000 period, and 0.86% and 11.37% for the 1999 period,
respectively.
-- Net Interest Income. For the quarter ended September 30, 2000, net
interest income was $6.8 million, compared to $5.6 million for the 1999 period.
Net interest margin for the third quarter of 2000 was 4.11% compared to a net
interest margin of 3.84% for the 1999 period. The increase in net interest
income of $1.1 million, or 19.9%, was primarily attributable to the Company's
overall growth, coupled with an increase in the yield on its earning assets. The
increase in yield on earning assets resulted from higher market interest rates
and a change in mix toward commercial and consumer loans. Average earning assets
increased $71.9 million, or 12.3%, and average interest-bearing liabilities
increased $53.1 million, or 10.6%, over the comparable period a year earlier. In
addition, the average yield on earning assets increased 67 basis points, from
7.18% in 1999 to 7.85% in 2000.
-- Interest Income. Investments. Total investment income was $2.6 million
for the quarter ended September 30, 2000, compared to $2.1 million for the third
quarter of 1999. This increase in total investment income of $514,000, or 24.5%,
was attributable to an increase of $18.8 million, or 13.4%, in the average
balance of investments (resulting from growth in deposits), along with an
increase in the overall yield of investments of 59 basis points (resulting from
increases in market interest rates). The Company's investments at September 30,
2000 were primarily comprised of Treasury and Agency securities and MBSs with
remaining maturities or repricing periods of less than five years. In addition
to assisting in overall tax planning, management believes that this composition,
along with a structured maturity ladder, provides more stable earnings and
predictable cash flows from the portfolio. As a result of the rising interest
rate environment present during the past year, prepayments on MBSs have slowed.
These lower prepayment levels have had a positive impact on the yield of MBSs
purchased at a premium.
14
<PAGE> 15
-- Interest Income. Loans. Interest from loans was $10.3 million for the
three months ended September 30, 2000, and represented a yield on total loans of
8.26%. This compares to $8.4 million of interest, and a yield of 7.55%, for the
third quarter of 1999. Interest from commercial loans increased $1.3 million, or
40.6%, between the two quarters and represented the fastest growing segment of
the total loan portfolio. Income from consumer and other loans increased
$219,000, or 23.8%, and residential mortgage loan income increased $326,000, or
7.8%. Since 1996, origination efforts have been concentrated on commercial and
consumer loan opportunities, with residential mortgage loans purchased as cash
flows dictated. The average balance of the various components of the loan
portfolio changed from the third quarter of 1999 as follows: commercial loans
increased $47.9 million, or 31.0%, consumer and other loans increased $5.8
million, or 13.0%, and residential mortgage loans decreased $618,000, or 0.3%.
In response to rising market interest rates, the yields on the various loan
portfolio components changed as follows: commercial loans increased 65 basis
points, to 9.07%; consumer and other loans increased 81 basis points, to 9.00%,
and residential mortgage loans increased 55 basis points, to 7.43%. As with
MBSs, the rising interest rate and slower prepayment environment present since
last year has positively impacted the yield on the loan portfolio.
-- Interest Expense. Interest paid on deposits and borrowings increased
$1.3 million, or 26.1%, to $6.1 million for the three months ended September 30,
2000, from $4.9 million paid during the third quarter of 1999. The overall
average cost of interest-bearing liabilities increased 55 basis points, from
3.86% for the third quarter of 1999 to 4.41% for the third quarter of 2000, and
resulted in $751,000 of additional interest expense. Liability costs are
dependent on a number of factors including general economic conditions, national
and local interest rates, competition in the local deposit marketplace, interest
rate tiers offered and cash flow needs. In general, deposit costs during the
third quarter of 2000 showed signs of reacting (on a delayed basis) to the
increases in market rates that occurred during the second quarter. Average costs
for the various components of interest-bearing liabilities changed from the
third quarter of 1999 as follows: NOW accounts increased 1 basis point, to
0.66%, money market accounts decreased 9 basis points, to 2.63%, savings
accounts increased 55 basis points, to 3.32%, certificate of deposit accounts
increased 68 basis points, to 5.51%, and borrowings increased 60 basis points to
6.15%. Meanwhile, the average balance of interest-bearing liabilities increased
$53.1 million, from $499.1 million in the third quarter of 1999 to $552.2
million in the third quarter of 2000, as the Bank actively sought core deposits
to fund asset growth and benefited from the unusual market conditions created by
the Fleet Financial/BankBoston divestitures.
-- Provision for Loan Losses. The provision for loan losses was $410,000
for the quarter ended September 30, 2000, up $185,000, or 82.2%, from the same
quarter last year. The commercial loan portfolio grew at an annualized rate of
28.8% during the first nine months of 2000 and net charge-offs for the third
quarter of 2000 were $33,000 higher than in the prior year period. When
determining the provision for the quarter, management evaluates several factors
including new loan originations, actual and estimated charge-offs and the risk
characteristics of the loan portfolio. Also see discussion under "Allowance for
Loan Losses."
-- Noninterest Income. Total noninterest income increased $63,000, or 6.8%,
to $984,000 for the third quarter of 2000, from $921,000 for the 1999 quarter.
Service Charges on Deposit Accounts, which represent the largest source of
noninterest income, rose $140,000, or 24.4%, from $573,000 for the quarter ended
September 30, 1999, to $713,000 for the same period in 2000. Loan Related Fees
decreased $34,000, or 25.4%, as prepayment penalties were less in the 2000
period than in the
15
<PAGE> 16
prior year and Other Income decreased $58,000, or 28.2%, as the 1999 period
included a $43,000 one-time refund of deposit taxes which did not recur in the
2000 period.
-- Noninterest Expense. Total noninterest expense for the third quarter of
2000 increased $419,000, or 9.1%, to $5.0 million from $4.6 million in 1999.
This increase occurred primarily in the following areas: Salaries and Benefits
(up $474,000, or 22.9%), Occupancy and Equipment (up $73,000, or 13.6%) and
Other Expenses (up $129,000, or 27.3%) and primarily represent increased costs
associated with the overall growth of the institution. As a result of a
relatively strong local economy, the Company anticipates continued upward
pressure on such expenses as compensation and occupancy. Marketing expense
decreased $174,000, or 42.2%, from the third quarter of 1999 as a result of the
timing of promotional programs. Professional Services decreased $46,000, or
20.5%, as the 1999 period contained costs pertaining to an organization and
operational review which the 2000 period did not. The Company's cash basis
efficiency ratio for the third quarter of 2000 was 61.20%, compared to 65.88%
for the third quarter of 1999, an improvement of 468 basis points.
-- Income Tax Expense. Income tax expense was $852,000 for the three months
ended September 30, 2000, compared to $592,000 for the same period during 1999.
This represented total effective tax rates of 36.9% and 34.4%, respectively.
Tax-favored income from U.S. Treasury and Agency securities and the utilization
of a Rhode Island passive investment company has reduced the effective tax rate
from the 39.9% combined statutory federal and state tax rates.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
-- Overview. Net income for the first nine months of 2000, increased $1.0
million, or 34.1%, to $4.1 million, or $1.10 per diluted common share, from $3.1
million, or $0.80 per diluted common share, for the first three quarters of
1999. Net income for the 1999 period was reduced by a one-time charge of
$109,000 resulting from a change in accounting principle which required
remaining unamortized organizational costs to be charged against earnings.
Operating income, which excludes this one-time charge, was $4.1 million for the
2000 period, compared to $3.2 million for the same period last year, an increase
of $937,000, or 29.5%. Diluted cash earnings per common share were $1.25 for the
2000 period, compared to $0.98 for the 1999 period.
This performance represented a return on average assets of 0.82% and a
return on average equity of 11.43% for the 2000 period, as compared to a return
on average assets of 0.69% and a return on average equity of 9.12% for the 1999
period. Cash basis return on average assets and cash basis return on average
equity were 0.95% and 12.99% for the 2000 period, and 0.83% and 10.76% for the
1999 period, respectively.
-- Net Interest Income. For the nine months ended September 30, 2000, net
interest income was $19.4 million, compared to $16.1 million for the first three
quarters of 1999. The net interest margin for the first nine months of 2000 was
4.10% compared to a net interest margin of 3.74% for the 1999 period. The
increase in net interest income of $3.3 million, or 20.6%, was attributable to
the overall growth of the Company, along with the improvement in its net
interest margin. Average earning assets increased $55.8 million, or 9.7%, and
average interest-bearing liabilities increased $41.7 million, or 8.4%, over the
comparable period a year earlier. The increase of 36 basis points in the net
interest margin resulted from higher yields on the investment and loan
portfolios (in response to increases in market interest rates and a shift in
asset mix toward commercial and consumer loans), in addition to higher yields on
residential mortgage loans and MBSs (due to a slowdown in
16
<PAGE> 17
prepayments) which were not fully offset by corresponding increases in deposit
costs as the Bank was able to manage the cost of its core deposit accounts.
-- Interest Income. Investments. Total investment income was $7.1 million
for the nine months ended September 30, 2000, compared to $6.3 million for the
first three quarters of 1999. This increase in total investment income of
$839,000, or 13.4%, was attributable to a 57 basis point increase in the overall
yield on investments, to 6.48%, coupled with a $4.8 million increase in the
average balance of investments. The increase in overall yield on investments
comes as a result of higher market interest rates and a slowing of prepayments,
particularly on MBSs.
-- Interest Income. Loans. Interest from loans was $29.5 million for the
nine months ended September 30, 2000, and represented a yield on total loans of
8.11%. This compares to $24.4 million of interest, and a yield of 7.51%, for the
first nine months of 1999. This increase of $5.1 million, or 20.7%, in interest
on loans was due primarily to an increase in commercial loan average balances,
(up $46.4 million, or 31.6%) coupled with an increase in the overall yield on
the loan portfolio resulting from higher market interest rates and slower
prepayments. The yields on the various components of the loan portfolio changed
as follows: commercial loans increased 55 basis points, to 8.92%; consumer and
other loans increased 68 basis points, to 8.80%; and residential mortgage loans
increased 43 basis points, to 7.32%. In addition, the average balance of
consumer and other loans increased $7.2 million, or 17.4%. The Bank has
continued to concentrate its origination efforts on commercial and consumer loan
opportunities, but will also originate residential mortgage loans on a limited
basis.
-- Interest Expense. Interest paid on deposits and borrowings increased
$2.6 million, or 17.7%, to $17.2 million for the nine months ended September 30,
2000, from the same period during 1999. The overall average cost for
interest-bearing liabilities increased 33 basis points from 3.94% for the first
nine months of 1999, to 4.27% for the first nine months of 2000 primarily in
response to rising market interest rates. Deposit costs are dependent on a
number of factors including general economic conditions, national and local
interest rates, competition in the local marketplace, interest rate tiers
offered, and the Company's cash flow needs. During the first half of 2000, the
Bank was able to manage the cost of its interest-bearing liabilities so that
they increased at a slower rate than general market interest rates. In the third
quarter of 2000, the rates paid on deposits and borrowings continued to move
upward in response to the market increases earlier in the year. Meanwhile, the
average balance of interest-bearing liabilities increased $41.7 million, from
$495.0 million in 1999, to $536.7 million in 2000, as the Bank actively sought
deposits to fund asset growth. The Bank continued to experience strong average
balance growth in core accounts, specifically noninterest bearing demand deposit
accounts (up $11.0 million, or 16.0%) and savings accounts (up $15.6 million, or
9.1%). In addition, the utilization of short-term borrowed funds increased (up
$4.2 million, or 70.8%).
-- Provision for Loan Losses. The provision for loan losses was $1.1
million for the nine months ended September 30, 2000, compared to $675,000 for
the same period last year. Management evaluates several factors including new
loan originations, actual and estimated charge-offs and the risk characteristics
of the loan portfolio when determining the provision for the quarter. Also see
discussion under "Allowance for Loan Losses."
17
<PAGE> 18
-- Noninterest Income. Total noninterest income increased $315,000, or
13.6%, to $2.6 million for the first nine months of 2000, from the first three
quarters of 1999. Service charges on deposit accounts, which represents the
largest source of noninterest income, rose $416,000, or 26.6%, from $1.6 million
for the nine months ended September 30, 1999, to $2.0 million for the same
period in 2000, primarily as a result of growth in core deposit accounts.
Noninterest income related to loans and loan originations remained substantially
unchanged between the two periods. Other Income decreased $76,000, or 15.7%, as
the 1999 period contained a $43,000 one-time refund of prior years' deposit
taxes. Income from investment product sales decreased $75,000, or 82.4%. The
Bank is currently exploring different providers for this product line.
-- Noninterest Expense. Noninterest expenses for the first three quarters
of 2000 increased a total of $1.7 million, or 12.9%, to $14.5 million, from
$12.9 million in 1999. This increase occurred primarily as a result of the
overall growth of the Bank and was centered in the following areas: Salaries and
Benefits (up $1.2 million, or 19.7%), Occupancy and Equipment (up $280,000, or
18.5%) and Other Expenses (up $323,000, or 23.3%). Partially offsetting these
increases were decreases in: Data Processing (down $58,000, or 5.8%) due to lack
of Y2K expenditures in the current year, Loan Servicing (down $87,000, or 13.4%)
due to decreases in mortgage loans serviced by others and OREO Expense (down
$49,000, or 55.7%) due to decreased levels of foreclosures. The Company's cash
basis efficiency ratio improved from 65.08% for the 1999 period, to 61.91% for
the 2000 period.
-- Income Tax Expense. Income tax expense of $2.3 million was recorded for
the first nine months of 2000, compared to $1.7 million for the same period
during 1999. This represented total effective tax rates of 35.6% and 34.9%,
respectively. Tax-favored income from U.S. Treasury and Agency securities along
with the utilization of a Rhode Island passive investment company has reduced
the effective tax rate from the 39.9% combined statutory federal and state tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
-- Liquidity. Liquidity is defined as the ability to meet current and
future financial obligations of a short-term nature. The Company further defines
liquidity as the ability to respond to the needs of depositors and borrowers, as
well as to earnings enhancement opportunities, in a changing marketplace.
The primary source of funds for the payment of dividends and expenses by
the Company is dividends paid to it by the Bank. Bank regulatory authorities
generally restrict the amounts available for payment of dividends if the effect
thereof would cause the capital of the Bank to be reduced below applicable
capital requirements. These restrictions indirectly affect the Company's ability
to pay dividends. The primary sources of liquidity for the Bank consist of
deposit inflows, loan repayments, borrowed funds, maturity of investment
securities and sales of investment securities from the available for sale
portfolio. Management believes that these sources are sufficient to fund the
Bank's lending and investment activities.
Management is responsible for establishing and monitoring liquidity targets
as well as strategies and tactics to meet these targets. In general, the Company
maintains a high degree of flexibility with a liquidity target of 10% to 25% of
total assets. At September 30, 2000, cash, federal funds sold, and investment
securities and MBSs available for sale amounted to $163.3 million, or 23.4% of
total assets. This compares to $149.8 million, or 23.7% of total assets at
December 31, 1999. The Bank is a member of the FHLB and, as such, has access to
both short- and long-term borrowings. In
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<PAGE> 19
addition, the Bank maintains a line of credit at the FHLB as well as lines of
credit with two correspondent banks. There have been no adverse trends in the
Company's liquidity or capital reserves. Management believes that the Company
has adequate liquidity to meet its commitments.
-- Capital Resources. Total shareholders' equity of the Company at
September 30, 2000 was $50.9 million, as compared to $47.7 million at December
31, 1999. This increase of $3.3 million in total shareholders' equity was the
result of the Company's net income for the nine month period of $4.1 million and
changes in unrealized losses on investment securities of $257,000, less
dividends paid of $1.1 million. Capital guidelines issued by the Federal Reserve
Board require the Company to maintain minimum capital levels for capital
adequacy purposes. At September 30, 2000, the Company's Tier 1 leverage ratio
was 5.89%, its Tier 1 Risked-based capital ratio was 9.50% and its Total
Risk-based capital ratio was 10.76%. At September 30, 2000, all of the Company's
capital ratios met all of the requirements to which they are subject.
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." At September 30, 2000, the Bank's Tier I leverage capital ratio
was 5.83%. The Bank is also subject to risk-based capital measures. 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. According to these
standards, the Bank had a Tier I risk adjusted capital ratio of 9.39% and a
total risk adjusted capital ratio of 10.64% at September 30, 2000. The minimum
Tier I leverage, Tier I risk adjusted, and total risk adjusted capital ratios
necessary to be classified for regulatory purposes as a "well capitalized"
institution are 5.00%, 6.00% and 10.00%, respectively. The Bank, therefore, is
considered to be "well capitalized." The Bank's actual and required capital
amounts and ratios are as follows:
<TABLE>
<CAPTION>
MINIMUM REQUIRED MINIMUM REQUIRED
FOR CAPITAL TO BE CONSIDERED
ACTUAL ADEQUACY PURPOSES "WELL CAPITALIZED"
------------------- ----------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
AT SEPTEMBER 30, 2000:
Tier I capital (to average assets) $39,778 5.83% $20,478 3.00% $34,129 5.00%
Tier I capital (to risk weighted assets) 39,778 9.39% 16,950 4.00% 25,425 6.00%
Total capital (to risk weighted assets) 45,093 10.64% 33,900 8.00% 42,375 10.00%
AT DECEMBER 31, 1999:
Tier I capital (to average assets) $36,323 5.88% $18,537 3.00% $30,896 5.00%
Tier I capital (to risk weighted assets) 36,323 9.70% 14,974 4.00% 22,461 6.00%
Total capital (to risk weighted assets) 41,015 10.96% 29,948 8.00% 37,435 10.00%
</TABLE>
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<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk facing the Company is interest rate risk. The
Company's objective regarding interest rate risk is to manage its assets and
funding sources to produce results which are consistent with its liquidity,
capital adequacy, growth and profitability goals, while minimizing the
vulnerability of its operations to changes in market interest rates.
Simulation modeling is the primary tool used by the Company to measure the
interest rate risk inherent in its balance sheet at a given point of time by
showing the effect on net interest income, over a twenty-four month period, of
interest rate ramps of up to 200 basis points.
The following table presents the estimated impact of interest rate ramps on
estimated net interest income over a twenty-four month period beginning October
1, 2000:
ESTIMATED EXPOSURE
TO NET INTEREST INCOME
----------------------
DOLLAR PERCENT
CHANGE CHANGE
-------- -------
(DOLLARS IN THOUSANDS)
INITIAL TWELVE MONTH PERIOD:
Up 200 basis points $ (292) (1.07%)
Up 100 basis points (138) (0.51%)
Down 100 basis points 92 0.34%
Down 200 basis points 152 0.56%
SUBSEQUENT TWELVE MONTH PERIOD:
Up 200 basis points $(1,206) (4.32%)
Up 100 basis points (532) (1.91%)
Down 100 basis points 172 0.62%
Down 200 basis points (26) (0.09%)
While the Company reviews simulation assumptions and methodology to ensure
that they reflect historical experience, it should be noted that income
simulation may not always prove to be an accurate indicator of interest rate
risk because the actual repricing, maturity and prepayment characteristics of
individual products may differ from the estimates used in the simulations.
The Company also uses interest rate sensitivity gap analysis to provide a
more general overview of its interest rate risk profile. The interest rate
sensitivity gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period.
For purposes of gap analysis, NOW, Money Market and Savings accounts have been
spread evenly over a three year period. At September 30, 2000, the Company's one
year cumulative gap was a negative $28.6 million, or 4.1% of total assets.
For additional discussion on interest rate risk see the section titled
"Asset and Liability Management" contained on pages 32 to 34 of the Bank's 2000
Annual Report on Form 10-K filed with the FDIC.
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<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiaries are a party, or to which any of their property is
subject, other than ordinary routine litigation incidental to the
business of banking.
ITEM 2. CHANGE IN SECURITIES
On September 1, 2000 the Bank completed its reorganization into a
holding company structure and each outstanding share of Bank stock was
converted into a share of Company stock.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
No defaults upon senior securities have taken place.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No information to report.
ITEM 5. OTHER INFORMATION
No information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.5(a) -- Amended and Restated 1996 Incentive and
Non-Qualified Stock Option Plan
Exhibit 10.6(a) -- Amended and Restated Non-Employee Director
Stock Plan
Exhibit 27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 1, 2000 and filed on
September 5, 2000, reporting the effectiveness of the Plan of
Reorganization
21
<PAGE> 22
BANCORP RHODE ISLAND, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Bank
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BANCORP RHODE ISLAND, INC.
November 8, 2000 By: /s/ Merrill W. Sherman
---------------- --------------------------
(Date) Merrill W. Sherman
President and
Chief Executive Officer
November 8, 2000 By: /s/ Albert R. Rietheimer
---------------- --------------------------
(Date) Albert R. Rietheimer
Chief Financial Officer
and Treasurer
22
