SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q Quarterly Report Under Section 13 of the Securities Exchange Act of 1934 For quarter ended: March 31, 2003 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) Not Applicable ---------------------------------------------------------------------------- (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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No ( X ) Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of May 9, 2003: Common Stock - Par Value $0.01 3,790,850 shares ------------------------------ ---------------- (class) (outstanding) 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 - 18 Item 3 Quantitative and Qualitative Disclosures About Market Risk 19 - 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 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act 23 - 24 2 BANCORP RHODE ISLAND, INC. Consolidated Balance Sheets March 31, December 31, 2003 2002 --------- ------------ (In thousands) ASSETS: Cash and due from banks $ 24,350 $ 25,336 Overnight investments 7,900 17,623 Investment securities available for sale (amortized cost of $96,274 and $99,803 at March 31, 2003 and December 31, 2002, respectively) 97,501 101,329 Mortgage-backed securities available for sale (amortized cost of $139,920 and $154,225 at March 31, 2003 and December 31, 2002, respectively) 141,711 156,114 Stock in Federal Home Loan Bank of Boston 7,900 7,683 Loans receivable: Residential mortgage loans 304,389 297,763 Commercial loans 298,612 280,967 Consumer and other loans 101,374 91,928 ------------------------ Total loans 704,375 670,658 Less allowance for loan losses (10,435) (10,096) ------------------------ Net loans 693,940 660,562 Premises and equipment, net 11,296 9,702 Other real estate owned 31 58 Goodwill, net 10,766 10,766 Accrued interest receivable 6,084 6,183 Investment in bank owned life insurance 14,972 14,768 Prepaid expenses and other assets 3,291 2,753 ------------------------ Total assets $1,019,742 $1,012,877 ======================== LIABILITIES: Deposits: Demand deposit accounts $ 135,639 $ 137,920 NOW accounts 106,259 100,476 Money market accounts 11,187 10,660 Savings accounts 297,340 290,981 Certificate of deposit accounts 212,527 221,874 ------------------------ Total deposits 762,952 761,911 Overnight and short-term borrowings 18,691 27,364 Federal Home Loan Bank of Boston borrowings 157,997 143,941 Company-obligated mandatorily redeemable capital securities 8,000 8,000 Other liabilities 4,653 5,234 ------------------------ Total liabilities 952,293 946,450 ------------------------ SHAREHOLDERS' EQUITY: Preferred stock, par value $0.01 per share, authorized 1,000,000 shares: Issued and outstanding: none -- -- Common stock, par value $0.01 per share, authorized 11,000,000 shares: Voting: Issued and outstanding 3,790,850 shares 2003 and 3,777,450 shares in 2002 38 38 Additional paid-in capital 40,276 40,134 Retained earnings 25,143 24,002 Accumulated other comprehensive income (loss), net 1,992 2,253 ------------------------ Total shareholders' equity 67,449 66,427 ------------------------ Total liabilities and shareholders' equity $1,019,742 $1,012,877 ======================== See accompanying notes to consolidated financial statements 3 BANCORP RHODE ISLAND, INC. Consolidated Statements of Operations Three Months Ended March 31, ------------------------ 2003 2002 ---------- ---------- (In thousands, except per share data) Interest and dividend income: Residential mortgage loans $ 4,174 $ 4,927 Commercial loans 4,683 4,288 Consumer and other loans 1,289 939 Mortgage-backed securities 1,480 2,100 Investment securities 1,139 708 Overnight investments 39 73 Federal Home Loan Bank of Boston stock dividends 62 62 ------------------------ Total interest and dividend income 12,866 13,097 ------------------------ Interest expense: NOW accounts 326 42 Money market accounts 28 35 Savings accounts 1,148 1,217 Certificate of deposit accounts 1,600 2,289 Overnight and short-term borrowings 51 59 Federal Home Loan Bank of Boston borrowings 1,762 1,762 Company-obligated mandatorily redeemable capital securities 137 76 ------------------------ Total interest expense 5,052 5,480 ------------------------ Net interest income 7,814 7,617 Provision for loan losses 400 400 ------------------------ Net interest income after provision for loan losses 7,414 7,217 ------------------------ Noninterest income: Service charges on deposit accounts 952 855 Commissions on nondeposit investment products 174 249 Income from bank owned life insurance 203 95 Loan related fees 104 91 Commissions on loans originated for others 109 94 Gains on sales of mortgage-backed securities 104 23 Gains on sales of investment securities 54 -- Other income 216 159 ------------------------ Total noninterest income 1,916 1,566 ------------------------ Noninterest expense: Salaries and employee benefits 3,298 3,047 Occupancy 603 467 Equipment 336 249 Data processing 845 440 Marketing 297 296 Professional services 277 382 Loan servicing 228 223 Other real estate owned expense 15 (9) Other expenses 974 762 ------------------------ Total noninterest expense 6,873 5,857 ------------------------ Income before income taxes 2,457 2,926 Income tax expense 785 1,032 ------------------------ Net income $ 1,672 $ 1,894 ======================== Per share data: Basic earnings per common share $ 0.44 $ 0.51 Diluted earnings per common share $ 0.42 $ 0.48 Average common shares outstanding - basic 3,779,007 3,747,171 Average common shares outstanding - diluted 4,021,127 3,977,319 See accompanying notes to consolidated financial statements 4 BANCORP RHODE ISLAND, INC. Consolidated Statements of Changes in Shareholders' Equity Accumulated Other Compre- Additional hensive Common Paid-in Retained Income Three months ended March 31, Stock Capital Earnings (Loss), Net Total ---------------------------- ------ ---------- -------- ----------- ----- 2003 ---- Balance at December 31, 2002 $38 $40,134 $24,002 $ 2,253 $66,427 Net income -- -- 1,672 -- 1,672 Other comprehensive income, net of tax: Unrealized gain (loss) on securities available for sale (364) (364) Realized gain (loss) on securities available for sale net of taxes of $55 103 103 ------- Comprehensive income 1,411 Exercise of stock options -- 134 -- -- 134 Common stock issued for incentive stock award, net -- 8 -- -- 8 Dividends on common stock -- -- (531) -- (531) ----------------------------------------------------- Balance at March 31, 2003 $38 $40,276 $25,143 $ 1,992 $67,449 ===================================================== 2002 ---- Balance at December 31, 2001 $37 $39,826 $18,336 $ 898 $59,097 Net income -- -- 1,894 -- 1,894 Other comprehensive income, net of tax: Unrealized gain (loss) on securities available for sale (1,080) (1,080) Realized gain (loss) on securities available for sale net of taxes of $8 (15) (15) ------- Comprehensive income 799 Exercise of stock options 1 43 -- -- 44 Common stock issued for incentive stock award, net -- 8 -- -- 8 Dividends on common stock -- -- (488) -- (488) ----------------------------------------------------- Balance at March 31, 2002 $38 $39,877 $19,742 $ (197) $59,460 ===================================================== See accompanying notes to consolidated financial statements 5 BANCORP RHODE ISLAND, INC. Consolidated Statements of Cash Flows Three Months Ended March 31, ---------------------- 2003 2002 -------- -------- (In thousands) Cash flows from operating activities: Net income $ 1,672 $ 1,894 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 922 637 Provision for loan losses 400 400 Gain on sale of investment securities (54) -- Gain on sale of mortgage-backed securities (104) (23) Gain on sale of other real estate owned 10 (29) Income from bank-owned life insurance (204) (95) Compensation expense from restricted stock grant 8 8 (Increase) decrease in: Accrued interest receivable 99 (535) Prepaid expenses and other assets (403) (2,133) Increase (decrease) in: Other liabilities (581) 2,364 Other, net 4 43 --------------------- Net cash provided (used) by operating activities 1,769 2,531 --------------------- Cash flows from investing activities: Origination of: Residential mortgage loans (6,032) (1,761) Commercial loans (24,597) (21,311) Consumer loans (17,725) (7,122) Purchase of: Investment securities available for sale (16,573) (17,984) Mortgage-backed securities available for sale (33,640) (55,820) Residential mortgage loans (50,081) (34,462) Federal Home Loan Bank of Boston stock (217) (2,015) Principal payments on: Investment securities available for sale 18,000 3,006 Mortgage-backed securities available for sale 22,645 16,154 Residential mortgage loans 49,313 51,486 Commercial loans 6,982 18,514 Consumer loans 8,166 6,612 Proceeds from sale of investment securities 2,060 -- Proceeds from sale of mortgage-backed securities 25,164 3,766 Proceeds from sale of other real estate owned -- 293 Capital expenditures for premises and equipment (1,970) (287) Purchase of bank-owned life insurance -- (10,000) --------------------- Net cash provided (used) by investing activities (18,505) (50,931) --------------------- Cash flows from financing activities: Net increase (decrease) in deposits 1,041 22,265 Net increase (decrease) in overnight and short-term borrowings (8,673) 5,245 Proceeds from long-term borrowings 29,000 40,295 Repayment of long-term borrowings (14,944) (2,004) Proceeds from issuance of common stock 134 44 Dividends on common stock (531) (488) --------------------- Net cash provided (used) by financing activities 6,027 65,357 --------------------- Net increase (decrease) in cash and cash equivalents (10,709) 16,957 Cash and cash equivalents at beginning of period 42,959 29,174 --------------------- Cash and cash equivalents at end of period $ 32,250 $ 46,131 ===================== Supplementary Disclosures: Cash paid for interest $ 5,244 $ 5,595 Cash paid for income taxes 27 45 Non-cash transactions: Change in other comprehensive income, net of taxes (261) (1,095) See accompanying notes to consolidated financial statements 6 BANCORP RHODE ISLAND, INC. Notes to Consolidated Financial Statements (1) Basis of Presentation Bancorp Rhode Island, Inc. (the "Company"), a Rhode Island corporation, was organized by Bank Rhode Island (the "Bank") to be a bank holding company and to acquire all of the capital stock of the Bank. The reorganization of the Bank into the holding company form of ownership was completed on September 1, 2000. The Company has no significant operating entities other than the Bank. For that reason, substantially all of the discussion in this Quarterly Report on Form 10-Q relates to the operations of the Bank and its subsidiaries. The consolidated financial statements include the accounts of the Company and its wholly-owned direct subsidiaries, the Bank, BRI Statutory Trust I and BRI Statutory Trust II (issuers of trust preferred securities), and its indirect subsidiaries, BRI Investment Corp. (a Rhode Island passive investment company), BRI Realty Corp. (a real estate holding company) and Acorn Insurance Agency, Inc. (a licensed insurance agency). All significant intercompany accounts and transactions have been eliminated in consolidation. The interim results of consolidated operations are not necessarily indicative of the results for any future interim period or for the entire year. These interim consolidated financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual consolidated financial statements and accompanying notes included in the Company's Annual Report to Shareholders filed with the Securities and Exchange Commission. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses and goodwill valuation. The unaudited interim consolidated financial statements of the Company have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America ("GAAP") and prevailing practices within the banking industry and include all necessary adjustments (consisting of only normal recurring adjustments), that, in the opinion of management, are required for a fair presentation of the results and financial condition of the Company. (2) Earnings Per Share Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and resulted in the issuance of additional common stock that then shared in the earnings of the entity. 7 (3) Recent Accounting Developments In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Companies are able to eliminate a "ramp-up" effect that the SFAS 123 transition rule creates in the year of adoption. Companies can choose to elect a method that will provide for comparability amongst years reported. In addition, this Statement amends the disclosure requirement of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments to SFAS 123 are effective for financial statements for fiscal years ending after December 15, 2002. The adoption of this Statement did not have a material impact on the Company's financial position or results of operations. The following table summarizes the differences between the fair value and intrinsic value methods of accounting for stock-based compensation: Three Months Ended March 31, ---------------------------- 2003 2002 ------ ------ Net income (in thousands): As reported $1,672 $1,894 Compensation cost, net of taxes (1) (23) (40) ------------------ Pro forma $1,649 $1,854 ================== Earnings per common share: Basic: As reported $ 0.44 $ 0.51 Compensation cost, net of taxes (1) (0.00) (0.02) ------------------ Pro forma $ 0.44 $ 0.49 ================== Diluted: As reported $ 0.42 $ 0.48 Compensation cost, net of taxes (1) (0.01) (0.01) ------------------ Pro forma $ 0.41 $ 0.47 ==================8 BANCORP RHODE ISLAND, INC. Management's Discussion and Analysis ITEM 2. Management's Discussion and Analysis Certain statements contained herein are "Forward Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward Looking Statements may be identified by reference to a future period or periods or by the use of forward looking terminology such as "may," "believes," "intends," "expects," and "anticipates" or similar terms or variations of these terms. Actual results may differ materially from those set forth in Forward Looking Statements as a result of certain risks and uncertainties, including but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures, equity and bond market fluctuations, credit risk, inflation, as well as other risks and uncertainties detailed from time to time in filings with the Securities and Exchange Commission ("SEC"). GENERAL ------- The Company's principal subsidiary, Bank Rhode Island, is a commercial bank chartered as a financial institution in the State of Rhode Island. The Bank pursues a community banking mission and is principally engaged in providing banking products and services to individuals and businesses in Rhode Island. The Bank is subject to competition from a variety of traditional and nontraditional financial service providers both within and outside of Rhode Island. The Bank offers its customers a wide range of deposit products, nondeposit investment products, commercial, residential and consumer loans, and other traditional banking products and services designed to meet the needs of individuals and small- to mid-sized businesses. The Bank also offers both commercial and consumer on-line banking products and maintains a web site at http://www.bankri.com. The Company and Bank are subject to regulation by a number of federal and state agencies and undergo periodic examinations by certain of those regulatory authorities. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The Bank is also a member of the Federal Home Loan Bank of Boston ("FHLB"). OVERVIEW -------- Total assets increased $6.9 million, or 0.7%, to $1.0 billion at March 31, 2003 from December 31, 2002. This increase was centered in the Company's residential, commercial and consumer loan portfolios and was funded by a combination of checking and savings deposit growth, borrowings from the FHLB and decreases in overnight investments, investment securities and mortgage- backed securities ("MBSs"). Since the end of 2002, residential mortgage loans increased $6.6 million, or 2.2%, commercial loans increased $17.6 million, or 6.3%, consumer loans increased $9.4 million, or 10.3%, checking and savings deposits increased $10.4 million, or 1.9%, and FHLB borrowings increased $14.1 million, or 9.8%. Shareholders' equity was $67.4 million at March 31, 2003, and represented 6.6% of total assets. 9 FINANCIAL CONDITION ------------------- -- Investments. Total investments (consisting of overnight investments, investment securities, MBSs, and stock in the FHLB) totaled $255.0 million, or 25.0% of total assets, at March 31, 2003, compared to $282.7 million, or 27.9% of total assets, at December 31, 2002. All $239.2 million of investment securities and MBSs at March 31, 2003 were classified as available for sale and carried a total of $3.0 million in net unrealized gains at the end of the quarter. The decrease in total investments of $27.7 million, or 9.8%, was utilized to partially fund the growth in the loan portfolios. -- Loans. Total loans were $704.4 million, or 69.1% of total assets, at March 31, 2003, compared to $670.7 million, or 66.2% of total assets, at December 31, 2002. The Company concentrated its asset growth during the first quarter in its loan portfolios to maximize the yield on new assets and to take advantage of continued strong demand for both commercial and home equity loan products in its market area. The commercial loan portfolio (consisting of commercial & industrial, small business, leases, commercial real estate, multi-family real estate, and construction loans) increased $17.6 million, or 6.3%, during the first quarter. The Company believes it is well positioned for continued commercial loan growth. Particular emphasis is placed on generation of small- to medium-sized commercial relationships (those relationships with $6.0 million or less in loan commitments). The Bank is also active in small business lending (loans of $250,000 or less) in which it utilizes credit scoring, in conjunction with traditional review standards, and employs streamlined documentation. The Bank is a participant in the U.S. Small Business Administration ("SBA") Preferred Lender Program in Rhode Island and the 7a Guarantee Loan Program in Massachusetts. The consumer loan portfolio increased $9.4 million, or 10.3%, during the first quarter of 2003. This growth was centered in fifteen-year fixed- rate home equity loans. In the current interest rate environment, this fifteen-year fixed-rate product provides an attractive alternative to first- mortgage refinances and the Company anticipates that growth in this product will continue. Despite the continuing low interest rate environment, and the resulting higher level of prepayments, the residential mortgage loan portfolio increased $6.6 million, or 2.2%, during the first quarter, as purchases of hybrid ARMS and fixed-rate loans ($50.1 million) and originations ($6.0 million) were greater than repayments ($49.3 million). As long as market interest rates remain low, the Company expects prepayment activity to be above average historical levels. 10 While origination efforts continue to be concentrated on commercial and consumer loan opportunities, the Company also originates residential mortgage loans on a limited basis. Additionally, until such time as the Company can generate sufficient commercial and consumer loans to utilize available cash flow, or to otherwise meet investment objectives, it also intends to continue purchasing residential mortgage and automobile loans as opportunities develop. The following is a breakdown of loans receivable: March 31, December 31, 2003 2002 --------- ------------ (In thousands) Residential mortgage loans: One- to four-family adjustable rate $276,265 $277,265 One- to four-family fixed rate 26,953 19,310 --------------------- Subtotal 303,218 296,575 Premium on loans acquired 1,228 1,248 Net deferred loan origination fees (57) (60) --------------------- Total residential mortgage loans $304,389 $297,763 ===================== Commercial loans: Commercial real estate - nonowner occupied $ 82,518 $ 81,242 Commercial and industrial 62,855 57,389 Commercial real estate - owner occupied 60,383 59,249 Small business 29,229 28,750 Multi-family real estate 21,232 18,952 Construction 19,782 18,101 Leases and other 22,941 17,613 --------------------- Subtotal 298,940 281,296 Net deferred loan origination fees (328) (329) --------------------- Total commercial loans $298,612 $280,967 ===================== Consumer loans: Home equity - term loans $ 57,620 $ 47,906 Home equity - lines of credit 37,639 37,381 Automobile 2,722 3,409 Installment 778 967 Savings secured 530 602 Unsecured and other 1,471 1,063 --------------------- Subtotal 100,760 91,328 Premium on loans acquired 83 103 Net deferred loan origination costs 531 497 --------------------- Total consumer loans $101,374 $ 91,928 ===================== Total loans receivable $704,375 $670,658 ===================== 11 -- Deposits and Borrowings. Total deposits increased by $1.0 million, or 0.1%, during the first quarter of 2003, from $761.9 million, or 75.2% of total assets, at December 31, 2002, to $763.0 million, or 74.8% of total assets, at March 31, 2003. The decrease in the relative percentage of total assets resulted from first quarter total asset growth being primarily funded by FHLB borrowings. In addition, the composition of total deposits also changed during the quarter. Core deposit accounts (checking and savings) increased $10.4 million, or 1.9%, during the quarter, while certificates of deposit decreased $9.3 million, or 4.2%, during this time period. The Bank continues its strategy of emphasizing core deposit growth over certificate of deposit growth. The decline in certificates of deposits also reflects customer movement away from extended term deposits in response to the current low interest rate environment. At March 31, 2003, core deposit accounts comprised 72.1% of total deposits, compared to 70.9% of total deposits at December 31, 2002. The following table sets forth certain information regarding deposits: March 31, 2003 December 31, 2002 ------------------------------ ------------------------------ Percent Weighted Percent Weighted of Average of Average Amount Total Rate Amount Total Rate ------ ------- -------- ------ ------- -------- (Dollars in thousands) NOW accounts $106,259 13.9% 1.31% $100,476 13.2% 1.37% Money market accounts 11,187 1.5% 0.94% 10,660 1.4% 1.00% Savings accounts 297,340 39.0% 1.51% 290,981 38.2% 1.70% Certificate of deposit accounts 212,527 27.8% 2.94% 221,874 29.1% 3.07% ----------------- ----------------- Total interest bearing deposits 627,313 82.2% 1.95% 623,991 81.9% 2.12% Noninterest bearing accounts 135,639 17.8% -- 137,920 18.1% -- ----------------- ----------------- Total deposits $762,952 100.0% 1.60% $761,911 100.0% 1.74% ============================================================= The Company, through the Bank's membership in the FHLB, has access to a variety of borrowing alternatives, and management will from time to time take advantage of these opportunities to fund asset growth. During the first quarter of 2003, FHLB borrowings increased $14.1 million, or 9.8%, as the Company sought to take advantage of lower borrowing rates to fund its asset growth. The proceeds from these new borrowings were primarily reinvested in the Company's loan portfolios and allowed the Company to continue to grow its balance sheet. However, on a long-term basis, the Company intends to continue concentrating on increasing its core deposits. Asset Quality ------------- The definition of nonperforming assets includes nonperforming loans and other real estate owned ("OREO"). OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure. Nonperforming loans are defined as nonaccrual loans, loans past due 90 days or more, but still accruing and impaired loans. Under certain circumstances the Company may restructure the terms of a loan as a concession to a borrower. These restructured loans are considered impaired loans. -- Nonperforming Assets. At March 31, 2003, the Company had nonperforming assets of $5.2 million, which represented 0.51% of total assets. This compares to nonperforming assets of $794,000, or 0.08% of total assets, at December 31, 2002. The growth in nonperforming assets was concentrated in two commercial relationships placed on nonaccrual status aggregating $4.3 million. Total nonperforming assets at March 31, 2003, consisted of nonaccrual residential mortgage loans aggregating $252,000, nonaccrual commercial loans aggregating $4.9 million, nonaccrual consumer loans aggregating $20,000 and other real estate owned aggregating $31,000. The Company evaluates the underlying collateral of each nonperforming loan and continues to pursue the collection of interest and principal. The current level of nonperforming assets remains below peer averages, but as the loan portfolio continues to grow and mature, or if economic conditions worsen, management believes it possible that the level of nonperforming assets could increase, as could its level of charged-off loans. Included in nonaccrual loans were $4.7 million, at March 31, 2003, and $224,000, at December 31, 2002, of impaired loans. Specific reserves against these impaired loans were $431,000 and $-0- at March 31, 2003 and December 31, 2002, respectively. Delinquencies. At March 31, 2003, loans with an aggregate balance of $108,000 were 60 to 89 days past due, an increase of $81,000, or 300.0%, from the $27,000 reported at December 31, 2002. The majority of these loans at both dates were residential mortgage loans and are secured. The following table sets forth information regarding nonperforming assets and loans 60-89 days past due as to interest at the dates indicated. March 31, December 31, 2003 2002 --------- ------------ (Dollars in thousands) Loans accounted for on a nonaccrual basis $5,190 $ 736 Loans past due 90 days or more, but still accruing -- -- Impaired loans (not included in nonaccrual loans) -- -- -------------------- Total nonperforming loans 5,190 736 Other real estate owned 31 58 -------------------- Total nonperforming assets $5,221 $ 794 ==================== Delinquent loans 60-89 days past due $ 108 $ 27 Nonperforming loans as a percent of total loans 0.74% 0.11% Nonperforming assets as a percent of total assets 0.51% 0.08% Delinquent loans 60-89 days past due as a percent of total loans 0.02% 0.01% Adversely Classified Assets. The Company's management adversely classifies certain assets as "substandard," "doubtful" or "loss" based on criteria established under banking regulations. An asset is considered substandard if inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if existing deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. At March 31, 2003, the Company had $11.0 million of assets that were classified as substandard and $465,000 of assets that were classified as doubtful. This compares to $8.4 million of assets that were classified as substandard at December 31, 2002. The Company had no assets that were classified as doubtful at December 31, 2002 and no assets classified as loss at either date. Performing loans may or may not be adversely classified depending upon management's judgment with respect to each individual loan. At March 31, 2003, included in the assets that were classified as substandard, were $6.3 million of performing loans. This compares to $7.6 million of adversely classified performing loans as of December 31, 2002. These amounts constitute assets that, in the 13 opinion of management, could potentially migrate to nonperforming status. An increase in nonperforming loans may also lead to an increase in the provision for loan losses in future periods. Allowance for Loan Losses ------------------------- During the first quarter of 2003, the Company made provisions to the allowance for loan losses totaling $400,000 and had $61,000 of net charge- offs, bringing the balance in the allowance to $10.4 million, compared to $10.1 million at December 31, 2002. The allowance, expressed as a percentage of total loans, was 1.48% as of March 31, 2003, compared to 1.51% at the prior year end and stood at 201.1% of nonperforming loans at March 31, 2003, compared to 1371.7% of nonperforming loans at December 31, 2002. Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon management's evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing various factors. Management's methodology to estimate loss exposure includes an analysis of individual loans deemed to be impaired, reserve allocations for various loan types based on payments status or loss experience and an unallocated allowance that is maintained based on management's assessment of many factors including the growth, composition and quality of the loan portfolio, historical loss experiences, general economic conditions and other pertinent factors. Based on this evaluation, management believes that the allowance for loan losses, as of March 31, 2003, is adequate. A portion of the allowance for loan losses is not allocated to any specific segment of the loan portfolio. This non-specific allowance is maintained for two primary reasons: (i) there exists an inherent subjectivity and imprecision to the analytical processes employed, and (ii) the prevailing business environment, as it is affected by changing economic conditions and various external factors, may impact the portfolio in ways currently unforeseen. Management, therefore, has established and maintains a non-specific allowance for loan losses. While management evaluates currently available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institution's allowance for loan losses and carrying amounts of other real estate owned. Such agencies may require the financial institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. RESULTS OF OPERATIONS --------------------- The Company's operating results depend primarily on its "net interest income," or the difference between its interest income and its cost of money, and on the quality of its assets. Interest income depends on the average amount of interest-earning assets outstanding during the period and the interest rates earned thereon. The Company's 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. Earnings are further influenced by the quality of assets through the amount of interest income lost on nonaccrual loans, the amount of additions to the allowance for loan losses and the amount of losses and other expenses incurred as a result of resolving troubled assets. Three Months Ended March 31, 2003 and 2002 ------------------------------------------ 14 -- Overview. The Company reported net income for the first quarter of 2003 of $1.7 million, down $222,000, or 11.7%, from the first quarter of 2002. Diluted earnings per common share were $0.42 for the first quarter of 2003, compared to $0.48 for the first quarter of 2002. The Company reported a return on average assets of 0.67% and a return on average equity of 10.18% for the 2003 period, as compared to a return on average assets of 0.86% and a return on average equity of 12.75% for the 2002 period. During the first quarter of 2003 the Company made some significant investments in the future of the Bank, including opening a new Operations Center, as well as beginning the conversion to a new core data processing system, which resulted in significant start-up charges for the quarter. The data processing conversion is continuing and is scheduled to be completed during the second quarter. -- Net Interest Income. For the quarter ended March 31, 2003, net interest income was $7.8 million, compared to $7.6 million for the 2002 period. The net interest margin for the first quarter of 2003 was 3.33% compared to a net interest margin of 3.63% for the 2002 period. The increase in net interest income of $197,000, or 2.6%, was primarily attributable to the continued growth of the Company. Average earning assets were $98.9 million, or 11.6%, higher, and average interest-bearing liabilities were $82.5 million, or 11.4%, higher, than the comparable period a year earlier. The decrease of 30 basis points in the net interest margin primarily resulted from a drop in market interest rates, coupled with higher prepayment activity on mortgage-related assets, present since the first quarter of 2002. -- Interest Income. Investments. Total investment income was $2.7 million for the quarter ended March 31, 2003, compared to $2.9 million for the 2002 quarter. The decrease in total investment income was $223,000, or 7.6%, and was primarily attributable to a decrease in market interest rates, partially offset by an increase in average balances. The average yield on investments decreased 61 basis points, and the average balance of investments increased $15.2 million, from the first quarter of 2002 to the first quarter of 2003. The Company's investments are primarily comprised of US Agency securities and MBSs with remaining maturities or repricing periods of less than five years. However, in an effort to diversify the portfolio and increase yields, the Company has started to invest in corporate debt securities and collateralized mortgage obligations ("CMOs"). -- Interest Income. Loans. Interest from loans was $10.1 million for the three months ended March 31, 2003, and represented a yield on total loans of 5.97%. This compares to $10.2 million of interest, and a yield of 6.80%, for the first quarter of 2002. Declining market interest rates, coupled with increased prepayment activity, resulted in residential mortgage loan interest decreasing $753,000, or 15.3%, from the first quarter of 2002. Interest from commercial loans increased $395,000, or 9.2%, and income from consumer and other loans increased $350,000, or 37.3%, as increased average balances more than offset any decline in average yields. In response to declining market interest rates, the yields on the various loan portfolio components changed from the first quarter of 2002 as follows: residential mortgage loans decreased 100 basis points, to 5.60%; commercial loans decreased 66 basis points, to 6.55%, and consumer and other loans decreased 78 basis points, to 5.37%. The average balance of the various components of the loan portfolio changed from the first quarter of 2002 as follows: commercial loans increased $48.9 million, or 20.3%, and consumer and other loans increased $35.4 million, or 57.3%, while residential mortgage loans remained stable at approximately $298 million. Since its inception, the Bank has concentrated its 15 origination efforts on commercial and consumer loan opportunities, while purchasing residential mortgage loans, and to a limited degree, automobile loans, as cash flows dictated. -- Interest Expense. Interest paid on deposits and borrowings decreased $428,000, or 7.8%, to $5.1 million for the three months ended March 31, 2003, from $5.5 million for the same period during 2002. The decrease in total interest expense was primarily attributable to a decrease in market interest rates. The overall average cost for interest-bearing liabilities decreased 53 basis points from 3.08% for the first quarter of 2002 to 2.55% for the first quarter of 2003. Liability costs are dependent on a number of factors including general economic conditions, national and local interest rates, competition in the local deposit marketplace, interest rate tiers offered and the Company's cash flow needs. Average costs for the various components of interest-bearing liabilities changed from the first quarter of 2002 as follows: NOW accounts increased 93 basis points, to 1.32% (as a result of the introduction of Asset Manager, a premium rate checking account); money market accounts decreased 36 basis points, to 1.01%; savings deposits decreased 29 basis points, to 1.57%; certificate of deposit accounts decreased 85 basis points, to 2.96%; and borrowings decreased 38 basis points to 4.40%. Meanwhile, the average balance of total interest- bearing liabilities increased $82.5 million, from $720.8 million in the first quarter of 2002 to $803.3 million in the first quarter of 2003, as NOW and savings average balances increased a total of $87.9 million, or 28.5%. -- Provision for Loan Losses. The provision for loan losses was $400,000 for the quarter ended March 31, 2003, identical to the same quarter last year. Management evaluates several factors including new loan originations, actual and estimated charge-offs, the risk characteristics of the loan portfolio and general economic conditions when determining the provision for each quarter. Also see discussion under "Allowance for Loan Losses." While nonperforming loans increased during the quarter, they remained below peer averages and actual loan charge-offs continued to be minimal. As the loan portfolio continues to grow and mature, or if economic conditions worsen, management believes it possible that the level of nonperforming assets could increase further, which in turn could lead to increases in the provision for loan losses in future periods. -- Noninterest Income. Total noninterest income increased $350,000, or 22.3%, to $1.9 million for the first quarter of 2003, from $1.6 million for the first quarter of 2002. Service charges on deposit accounts, which continues to represent the largest source of noninterest income for the Company, rose $97,000, or 11.3%, from $855,000 for the three months ended March 31, 2002, to $952,000 for the same period in 2003 in response to continued growth in checking and savings accounts. Income from bank-owned life insurance ("BOLI") increased $108,000, or 113.7%, as the amount invested in BOLI increased and the 2002 period reflects BOLI income for less than a full quarter. During the 2003 period, the Company sold both investment securities and MBSs in an effort to restructure its portfolio. The Company realized a net gain of $158,000 from these sales, while the 2002 period contained only $23,000 of net gains. Commissions on loans originated for others increased $15,000, or 16.0%, as fixed-rate mortgage loan refinancing activity continued in response to low market interest rates. Lastly, Other income increased $57,000, or 35.8%, primarily from increased cash management fees. Partially offsetting these increases, Commissions on nondeposit investment products decreased $75,000, or 30.1%, as the number of nondeposit investments sales declined from the same quarter a year ago. -- Noninterest Expense. Noninterest expenses for the first quarter of 2003 increased a total of $1.0 million, or 17.3%, to $6.9 million from $5.9 million in 2002. This increase occurred primarily in the following areas: Salaries and employee benefits (up $251,000, or 8.2%), Occupancy and Equipment (up $223,000, or 31.1%), Data processing (up $405,000, or 92.0%) and Other expenses 16 (up $212,000, or 27.8%). In addition to incurring increased operating costs as a result of the continuing growth in both loans and core deposits, the Company made significant investments during the first quarter of 2003 in the future of the Bank. These investments included the opening of a brand new Operations Center and commencing the conversion to a new core data processing system. Both of these investments included some start-up costs such as for relocation, setup and training. The core data processing conversion is continuing and is scheduled to be completed during the second quarter of 2003, and as a result, the Company will continue to incur some start-up costs in the second quarter. Partially offsetting these increases was a decrease in Professional services (down $105,000, or 27.5%), as the 2002 period included professional fees associated with reviewing alternative data processing systems, which fees were not present in the 2003 period. As a result of the increased noninterest expenses, the Company's efficiency ratio increased to 70.64% in 2003, from 63.78% in the 2002 period. -- Income Tax Expense. Income tax expense of $785,000 was recorded for the three months ended March 31, 2003, compared to $1.0 million for the same period during 2002. This represented total effective tax rates of 31.9% and 35.3%, respectively. Tax-favored income from U.S. Agency securities and BOLI (in the 2003 period), along with the utilization of a Rhode Island passive investment company has reduced the effective tax rate from the 39.9% combined statutory federal and state tax rates. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- -- Liquidity. Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers, as well as to earnings enhancement opportunities, in a changing marketplace. The primary source of funds for the payment of dividends and expenses by the Company is dividends paid to it by the Bank. Bank regulatory authorities generally restrict the amounts available for payment of dividends if the effect thereof would cause the capital of the Bank to be reduced below applicable capital requirements. These restrictions indirectly affect the Company's ability to pay dividends. The primary sources of liquidity for the Bank consist of deposit inflows, loan repayments, borrowed funds, maturity of investment securities and sales of securities from the available for sale portfolio. Management believes that these sources are sufficient to fund the Bank's lending and investment activities. Management is responsible for establishing and monitoring liquidity targets as well as strategies and tactics to meet these targets. In general, the Company seeks to maintain a high degree of flexibility. At March 31, 2003, overnight investments, investment securities and MBSs available for sale amounted to $247.1 million, or 24.2% of total assets. This compares to $275.1 million, or 27.2% of total assets at December 31, 2002. The Bank is a member of the FHLB and, as such, has access to both short- and long-term borrowings. In addition, the Bank maintains a line of credit at the FHLB as well as a line of credit with a correspondent bank. There have been no adverse trends in the Company's liquidity or capital reserves. Management believes that the Company has adequate liquidity to meet its commitments. -- Capital Resources. Total shareholders' equity of the Company at March 31, 2003 was $67.4 million, as compared to $66.4 million at December 31, 2002. This increase of $1.0 million was the 17 result of net income for the quarter of $1.7 million, plus proceeds from issuance of stock of $134,000, less dividends of $531,000. All FDIC-insured institutions must meet specified minimal capital requirements. These regulations require banks to maintain a minimum leverage capital ratio. In addition, the FDIC has adopted capital guidelines based upon ratios of a bank's capital to total assets adjusted for risk. The risk- based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. These regulations require banks to maintain minimum capital levels for capital adequacy purposes and higher capital levels to be considered "well capitalized." Capital guidelines have also been issued by the Federal Reserve Board ("FRB") for bank holding companies. These guidelines require the Company to maintain minimum capital levels for capital adequacy purposes. In general, the FRB has adopted substantially identical capital adequacy guidelines as the FDIC. Such standards are applicable to bank holding companies and their bank subsidiaries on a consolidated basis. As of March 31, 2003, the Company and the Bank met all applicable minimum capital requirements and were considered "well capitalized" by both the FRB and the FDIC. The Company's and the Bank's actual and required capital amounts and ratios are as follows: Minimum Required Minimum Required For Capital To Be Considered Actual Adequacy Purposes "Well Capitalized" ---------------- ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- At March 31, 2003: Bancorp Rhode Island, Inc. -------------------------- Tier I capital (to average assets) $62,692 6.30% $29,859 3.00% $49,766 5.00% Tier I capital (to risk weighted assets) 62,692 9.35% 26,820 4.00% 40,230 6.00% Total capital (to risk weighted assets) 71,095 10.60% 53,639 8.00% 67,049 10.00% Bank Rhode Island ----------------- Tier I capital (to average assets) $61,172 6.15% $29,858 3.00% $49,763 5.00% Tier I capital (to risk weighted assets) 61,172 9.13% 26,809 4.00% 40,214 6.00% Total capital (to risk weighted assets) 69,575 10.38% 53,618 8.00% 67,023 10.00% At December 31, 2002: Bancorp Rhode Island, Inc. -------------------------- Tier I capital (to average assets) $61,408 6.19% $29,779 3.00% $49,631 5.00% Tier I capital (to risk weighted assets) 61,408 9.63% 25,506 4.00% 38,260 6.00% Total capital (to risk weighted assets) 69,401 10.88% 51,013 8.00% 63,766 10.00% Bank Rhode Island ----------------- Tier I capital (to average assets) $60,097 6.06% $29,760 3.00% $49,599 5.00% Tier I capital (to risk weighted assets) 60,097 9.43% 25,494 4.00% 38,240 6.00% Total capital (to risk weighted assets) 68,090 10.68% 50,987 8.00% 63,734 10.00% 18 BANCORP RHODE ISLAND, INC. Quantitative and Qualitative Disclosures About Market Risk ITEM 3. Quantitative and Qualitative Disclosures About Market Risk INTEREST RATE RISK ------------------ The principal market risk facing the Company is interest rate risk. The Company's objective regarding interest rate risk is to manage its assets and funding sources to produce results which are consistent with its liquidity, capital adequacy, growth and profitability goals, while minimizing the vulnerability of its operations to changes in market interest rates. The Company's actions in this regard are taken under the guidance of the Bank's Asset/Liability Committee ("ALCO"). The ALCO manages the Company's interest rate risk position using both income simulation and interest rate sensitivity "gap" analysis. The ALCO has established internal parameters for monitoring the income simulation and gap analysis. These guidelines serve as benchmarks for evaluating actions to balance the current position against overall strategic goals. The ALCO monitors current exposures and reports these to the Board of Directors. Simulation is used as the primary tool for measuring the interest rate risk inherent in the Company's balance sheet at a given point in time by showing the effect on net interest income, over a 24-month period, of interest rate ramps of up to 200 basis points. These simulations take into account repricing, maturity and prepayment characteristics of individual products. The ALCO reviews simulation results to determine whether the downside exposure resulting from changes in market interest rates remains within established tolerance levels over both a 12-month and 24-month horizon, and develops appropriate strategies to manage this exposure. The Company's guidelines for interest rate risk specify that if interest rates were to shift up or down 200 basis points over a 12-month period, estimated net interest income for those 12 months and the subsequent 12 months, should decline by no more than 5.0% or 10.0%, respectively. As of March 31, 2003, net interest income simulation indicated that the Company's exposure to changing interest rates was outside of the 10% tolerance level established for the second year of a 200 basis point decline. This exposure primarily results from the unusually low current rates paid on deposit accounts and the extremely high prepayment speeds anticipated for mortgage-related assets if market rates declined 200 basis points. The current rates on many deposit accounts are so low, that they cannot decline 200 basis points without becoming negative. This results in a floor of zero percent for these deposit accounts, and this floor causes compression of the net interest margin for modeling purposes. The ALCO reviews the methodology utilized for calculating interest rate risk exposure and may, from time to time, adopt modifications to this methodology. While the ALCO reviews simulation assumptions and methodology to ensure that they reflect historical experience, it should be noted that income simulation may not always prove to be an accurate indicator of interest rate risk because the actual repricing, maturity and prepayment characteristics of individual products may differ from the estimates used in the simulations. 19 The following table presents the estimated impact of interest rate ramps on the Company's estimated net interest income over a twenty-four month period beginning April 1, 2003: Estimated Exposure to Net Interest Income ---------------------- Dollar Percent Change Change ------ ------- (Dollars in thousands) Initial Twelve Month Period: Up 200 basis points $ 1,332 4.26% Up 100 basis points 805 2.58% Down 100 basis points (350) (1.12%) Down 200 basis points (823) (2.63%) Subsequent Twelve Month Period: Up 200 basis points $ 2,467 8.10% Up 100 basis points 2,131 7.00% Down 100 basis points (1,212) (3.98%) Down 200 basis points (3,866) (12.69%) The Company also uses interest rate sensitivity gap analysis to provide a more general overview of its interest rate risk profile. The interest rate sensitivity gap is defined as the difference between interest- earning assets and interest-bearing liabilities maturing or repricing within a given time period. At March 31, 2003, the Company's one year cumulative gap was a positive $125.2 million, or 12.28% of total assets. For additional discussion on interest rate risk see the section titled "Asset and Liability Management" on pages 39 to 41 of the Company's 2002 Annual Report to Shareholders. ITEM 4. Controls and Procedures As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There have been no significant changes in the Company's internal controls or, to the Company's knowledge, in other factors that could significantly affect such internal controls subsequent to the date of the Company's evaluation of its internal controls. 20 BANCORP RHODE ISLAND, INC. Other Information PART II. Other Information ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or its subsidiaries are a party, or to which any of their property is subject, other than ordinary routine litigation incidental to the business of banking. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS No information to report. 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 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K No information to report. 21 BANCORP RHODE ISLAND, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Bancorp Rhode Island, Inc. May 12, 2003 /s/ Merrill W. Sherman ------------ ----------------------------------- (Date) Merrill W. Sherman President and Chief Executive Officer May 12, 2003 /s/ Albert R. Rietheimer ------------ ----------------------------------- (Date) Albert R. Rietheimer Chief Financial Officer and Treasurer 22 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Merrill W. Sherman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Bancorp Rhode Island, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Merrill W. Sherman ----------------------------- Merrill W. Sherman President and Chief Executive Officer 23 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Albert R. Rietheimer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Bancorp Rhode Island, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Albert R. Rietheimer ----------------------------- Albert R. Rietheimer Chief Financial Officer and Treasurer 24 The stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method had been applied to all awards granted since 1995. The fair value of each option granted was estimated as of the date of the grant using the Black-Scholes option- pricing model. No new options were granted during the first quarter of 2003.