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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, 2003
Commission File No. 001-16101
BANCORP RHODE ISLAND, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Rhode Island 05-0509802
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
ONE TURKS HEAD PLACE, PROVIDENCE, RI 02903
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(Address of Principal Executive Offices)
(401) 456-5000
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(Issuer's Telephone Number, Including Area Code)
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
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(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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of June 30, 2003, the aggregate market value of the voting common
equity of the Registrant held by non-affiliates of the Registrant, based on
the closing price on The Nasdaq Stock Market was $65,935,000.
As of February 27, 2004, there were 3,971,153 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 2003 Annual Report to Shareholders
and Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders
are incorporated by reference into Parts II and III of this Form 10-K.
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Bancorp Rhode Island, Inc.
Annual Report on Form 10-K
Table of Contents
Description Page Number
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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 Equity
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
Item 9A -- Controls and Procedures 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 and Related
Stockholder Matters 17
Item 13 -- Certain Relationships and Related
Transactions 17
Item 14 -- Principal Accountant Fees and Services 17
Part IV. Item 15 -- Exhibits, Financial Statement Schedules
and Reports on Form 8-K 18
Signatures 21
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 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, 2003, the Bank is the
fifth largest bank in Rhode Island and the only mid-sized commercially
focused bank headquartered in the greater Providence area. The Bank offers a
wide variety of deposit products, nondeposit investment products,
commercial, residential and consumer loans, 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 website at
http://www.bankri.com.
The Company makes available free of charge through its website at
http://www.bankri.com all reports it electronically files with, or furnishes
to, the SEC, including its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, as well as any amendments to
those reports, as soon as reasonably practicable after those documents are
filed with, or furnished to, the SEC. These filings are also accessible on
the SEC's website at http://www.sec.gov.
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 and consumer loan portfolios 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 and consumer loans. The Bank has
allocated
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substantial resources to its commercial and consumer lending functions to
facilitate and promote such growth. From March 22, 1996, when the Bank
commenced operations, until December 31, 2003, commercial loan outstandings
have increased $246.9 million, or 289.1%, and consumer loan outstandings
have increased $83.7 million, or 260.7%.
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. From time to time, 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 $7.0 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, 2003, the Bank had $165.8
million of aggregate loan commitments outstanding to fund a variety of
loans.
Commercial Real Estate and Multi-Family Loans. The Bank originates
loans secured by mortgages on owner-occupied and nonowner-occupied
commercial and multi-family residential properties. At December 31, 2003,
owner-occupied commercial real estate loans totaled $77.3 million, or 9.5%
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 $78.1
million, or 9.6% of the total loan portfolio, and multi-family residential
loans totaled $28.7 million, or 3.5% 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
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this customer base. At December 31, 2003, commercial and industrial loans
(including leases) totaled $87.5 million, or 10.7% 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.
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, 2003, small business loans totaled $30.4 million, or 3.7% 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, 2003, outstanding construction loans
totaled $30.6 million, or 3.8% 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 fixed and
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, 2003, approximately 31% 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
5
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 and consumer loan
portfolios, as well as facilitate overall growth of customer relationships.
At December 31, 2003 one- to four-family residential mortgage loans
totaled $366.2 million, or 45.0% of the total loan portfolio. The fixed rate
portion of this portfolio totaled $131.7 million and had original maturities
of 15 and 30 years. The adjustable rate portion of this portfolio totaled
$232.5 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, 2003, the consumer
loan portfolio totaled $115.8 million, or 14.2% 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, 2003, purchased automobile loans totaled $1.5
million, or 0.2% of the total 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 overnight investments,
represents 19.7% of total assets, or $215.5 million, as of December 31,
2003.
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. Since 2002,
the Company has also retained the services of an outside investment advisory
firm to assist in the management of this portfolio and further diversify the
portfolio through the purchase of corporate debt securities and
collateralized mortgage obligations ("CMOs").
Overall, investments produced total interest and dividend income of
$9.3 million, or 18.0% of total interest and dividend income, in 2003 and
$12.4 million, or 23.2% of total interest and dividend income, during 2002.
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.
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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 $152,000, or 4.0%, from $3.8 million for 2002, to $3.9
million for 2003, 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
Since January 2001, the Bank has managed a nondeposit investment
program through which it makes available to its customers a variety of
mutual funds, fixed and variable annuities, stocks, bonds and other fee
based products. These investment products are offered through an arrangement
with Commonwealth Equity Services, Inc., of Waltham, Massachusetts
("Commonwealth"). Commissions on nondeposit investment products for the
years ending December 31, 2003, 2002 and 2001 were $875,000, $978,000 and
$535,000, respectively.
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 a
patent pending for the business practices associated with the CampusMate
product. As of December 31, 2003, the Bank was providing CampusMate services
to three colleges or universities located in Rhode Island and one university
located in Pennsylvania.
Employees
At December 31, 2003, the Company had 225 full-time and 48 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 Rhode Island and nearby areas
of Massachusetts. 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. Bank of America is expected to enter the market in 2004 through
its pending acquisition of Fleet. In addition to the three large
institutions named, merger and acquisition activity has resulted in the
acquisition of other financial institutions with branches in Rhode Island,
as
7
well as in nearby Massachusetts, by other large regional competitors. These
national and regional banks have well-established distribution networks and
greater financial resources than the Bank, which have enabled them to market
their products and services extensively, offer access to a greater number of
locations and products, and price competitively.
In addition, the Bank faces competition for loans from local banks and
out-of-state financial institutions that have established loan production
offices as well as from non-bank competitors. Competition for deposits also
comes from local banks, short-term money market funds, other corporation and
government securities funds and other non-bank financial institutions such
as brokerage firms and insurance companies. Non-bank competitors also
include credit unions, which following a devastating series of closures and
bankruptcies in the early 1990's, are currently experiencing a resurgence in
the State of Rhode Island. 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 or benefit from tax advantages not available
to the Company. As a result, such non-bank competitors have advantages over
the Bank in providing certain services. In 2002, and part of 2003, banks in
general have seen an inflow of money from the stock markets as a result of
the poor performance of equity securities. Whether these funds remain, or
for how long, or if they 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. Currently, the Greater Boston area
is experiencing some softness in the commercial real estate markets. If this
softness expands to include the Rhode Island marketplace, it could have an
adverse impact on the Bank's borrowers. Additionally, there is concern that
the pending acquisition of Fleet by Bank of America may have a negative
impact on employment in Rhode Island and the Boston area. That in turn could
adversely impact the local economy as well as the Bank's customer base.
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").
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Rhode Island Regulation
As a state chartered financial institution, the Bank is subject to the
continued regulation and supervision and periodic examination by the
Department of Business Regulation. Rhode Island law also imposes reporting
requirements on the Bank. Rhode Island statutes and regulations govern among
other things, investment powers, deposit activity, trust powers and
borrowings. The approval of the Department of Business Regulation is
required to establish, close or relocate a branch, merge with other banks,
amend the Bank's Charter or By-laws and undertake certain other enumerated
activities.
If it appears to the Department of Business Regulation that a Rhode
Island bank has violated its charter, or any law or regulation, or is
conducting its business in an unauthorized or unsafe manner, or that the
bank has been notified by its federal insurer of such insurer's intent to
terminate deposit insurance, the Director of the Department of Business
Regulation (the "Director") may, under certain circumstances, restrict the
withdrawal of deposits, order any person to cease violating any Rhode Island
statutes or rules and regulations or cease engaging in any unsafe, unsound
or deceptive banking practice, order that capital be restored, or suspend or
remove directors, committee members, officers or employees who have violated
the Rhode Island banking statutes, or a rule or regulation or order
thereunder, or who are reckless or incompetent in the conduct of the bank's
business.
Rhode Island law also requires any person or persons desiring to
acquire "control," 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%.
9
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.
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, 2003, the
Bank's Tier 1 leverage ratio was 6.59%, its total Risk-Based Capital Ratio
was 10.68% and its Tier 1 Risk-Based Capital Ratio was 9.46%. 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.
10
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.
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, 2003, on a consolidated basis, the Company's Tier 1
Leverage Ratio was 6.76%, its total Risk-Based Capital Ratio was 10.92% and
its Tier 1 Risk-Based Capital Ratio was 9.71%. 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 $10.2 million at December 31, 2003 and $6.7 million at
December 31, 2002. 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
11
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 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 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
12
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 by the SEC
pursuant to Sarbanes-Oxley impose obligations and restrictions on auditors
and audit committees intended to enhance their independence from 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.
13
ITEM 2. PROPERTIES
The Bank presently has a network of 13 branch offices located in
Providence and Kent Counties and an additional branch office scheduled to
open in April 2004 in Washington County. Seven 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:
Size Year Opened Owned or Lease
Location (Square feet) or Acquired Leased Expiration Date
------------- ----------- -------- ---------------
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
Ten Rod Road, North Kingstown, RI 4,000 2004 Land Leased 6/30/19
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
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 2003.
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 2003
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 pursuant to Item 201 of
Regulation S-K is incorporated herein by reference to the Section entitled
"Selected Consolidated Financial Data" contained on pages 18 through 19 of
the Company's 2003 Annual Report to Shareholders filed as Exhibit 13 to this
Annual Report on Form 10-K.
As described in Note 18 to the Company's Consolidated Financial
Statements contained in the Company's 2003 Annual Report to Shareholders
filed as Exhibit 13 to this Annual Report on Form 10-K, during the fiscal
year ended December 31, 2003, the Company issued a total of 66,315 shares of
its common stock to Malcolm G. Chace, Chairman of the Company, for $663,150,
upon exercise of a warrant (with a $10 per share exercise price), which was
originally issued by the Bank in connection with its formation. The shares
were issued in a private placement under Section 4(2) of the Securities Act
of 1933, as amended, pursuant to four separate exercises as follows: 10,000
shares on May 19, 2003, 10,000 shares on July 8, 2003, 10,000 shares on
August 20, 2003 and 36,315 shares on September 30, 2003.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by
reference to the Section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained on pages 20 through
43 of the Company's 2003 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 38 through 40 of the Company's 2003 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, 2003 and
2002 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, 2003,
together with the accompanying notes and the Independent Auditors' Report
contained on pages 45 through 77 of the Company's 2003 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.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act of 1934, the Company
carried out an evaluation of the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of the end of the
period covered by this report. 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 the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective as of the end of the period covered by
this report.
15
There have been no significant changes in the Company's internal
control over financial reporting during the Company's most recent fiscal
quarter that has materially affected, or is reasonably likely to affect, the
Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning directors required by this item, including
the Audit Committee and the Audit Committee financial expert, 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 2004 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 55 President and Chief Executive Officer
Albert R. Rietheimer 47 Chief Financial Officer and Treasurer
Donald C. McQueen 47 Vice President and Assistant Secretary
Margaret D. Farrell 54 Secretary
James V. DeRentis 42 Bank Executive Vice President - Retail
Banking
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.
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.
Code of Ethics.
The Company has adopted a Code of Ethics which applies to all
directors, officers and employees of the Company and the Bank, including the
Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") (who is
both the principal financial and accounting officer), Controller and Chief
Auditor, as supplemented by a Code of Ethical Conduct for Executive Officers
and Senior Financial Officers, which meets the requirements of a "code of
ethics" as defined in Item 406 of Regulation S-K. The Company will provide a
copy of the Codes to shareholders, without charge, upon request directed to
the Investor Relations Contact listed on the Company's website,
http://www.bankri.com, under "Investor Relations". The Company intends to
post the Codes on the Company's website under "Investor Relations" and to
disclose any amendment to, or waiver of, a provision of the Codes for the
CEO, CFO, Controller or persons performing similar functions by posting such
information on its website.
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 2004 Annual Meeting of Shareholders to be
filed with the SEC.
16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by
reference to the Sections entitled "Common Stock Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information"
in the Company's Definitive Proxy Statement for the 2004 Annual Meeting of
Shareholders to be filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the Section entitled "Transactions with Management" in the
Company's Definitive Proxy Statement for the 2004 Annual Meeting of
Shareholders to be filed with the SEC.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by
reference to the Section entitled "Independent Accountant Fees and Services"
in the Company's Definitive Proxy Statement for the 2004 Annual Meeting of
Shareholders to be filed with the SEC.
17
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements contained within the
Company's 2003 Annual Report to Shareholders are incorporated herein
by reference in Item 8.
1. Independent Auditors' Report
2. Consolidated Balance Sheets as of December 31, 2003 and 2002
3. Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001
4. Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001
5. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001
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)
3.2(a) Amendment to By-laws of the Company (2)
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 (4) +
10.6(a) Amendment to Amended and Restated Non-Employee Director Stock
Plan (5) +
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 (6) +
10.7 (d) Amendment No. 5 to Bank Rhode Island Supplemental Executive
Retirement Plan (7) +
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 (8) +
18
(3) Exhibits (continued)
Exhibit No. Description
----------- -----------
10.9 Warrant for 136,315 shares of Common Stock issued to Fleet
Financial Group, Inc. (1)
10.10 Bank Rhode Island 2002 Supplemental Executive Retirement
Plan (8) +
10.10(a) Amendment No. 1 to Bank Rhode Island 2002 Supplemental
Executive Retirement Plan (9) +
10.11 Restricted Stock Agreement by and among Bancorp Rhode Island,
Inc., Bank Rhode Island and Merrill W. Sherman (10) +
10.12 Form of Bank Rhode Island Split Dollar Agreement (7) +
10.13 2002 Incentive and Nonqualified Stock Option Plan (5) +
11 Computation of earnings per share (11)
13 Annual Report to Shareholders for 2003, portions of which
have been incorporated by reference herein is 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
31.1 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
31.2 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
32.1 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.
32.3 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.
--------------------
(1) Incorporated by reference from the Company's Registration Statement on
Form S-4, SEC File No. 333-33182
(2) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2003.
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
(4) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2000.
(5) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2002.
(6) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
(7) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 2002.
(8) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
(9) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2003.
19
(10) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 2001.
(11) 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.
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 21, 2003, announcing the
Company's third quarter consolidated earnings.
20
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: February 27, 2004 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, 2003, 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: February 27, 2004 Date: February 27, 2004
/s/ Karen Adams /s/ Meredith A. Curren /s/ Bogdan Nowak
--------------------------------- ----------------------------- -------------------------
Karen Adams, Director Meredith A. Curren, Director Bogdan Nowak, Director
Date: February 27, 2004 Date: February 27, 2004 Date: February 27, 2004
/s/ Anthony F. Andrade /s/ Karl F. Ericson /s/ Cheryl W. Snead
--------------------------------- ----------------------------- -------------------------
Anthony F. Andrade, Director Karl F. Ericson, Director Cheryl W. Snead, Director
Date: February 27, 2004 Date: February 27, 2004 Date: February 27, 2004
/s/ John R. Berger /s/ Margaret D. Farrell
--------------------------------- ----------------------------- -------------------------
John R. Berger, Director Margaret D. Farrell, Director Pablo Rodriguez, Director
Date: February 27, 2004 Date: February 27, 2004 Date: February , 2004
/s/ Malcolm G. Chace /s/ Mark R. Feinstein /s/ John A. Yena
--------------------------------- ----------------------------- -------------------------
Malcolm G. Chace, Director and Mark R. Feinstein, Director John A. Yena, Director
Chairman of the Board Date: February 27, 2004 Date: February 27, 2004
Date: February 27, 2004
/s/ Ernest J. Chornyei, Jr. /s/ Edward J. Mack
--------------------------------- -----------------------------
Ernest J. Chornyei, Jr., Director Edward J. Mack, Director
Date: February 27, 2004 Date: February 27, 2004
21