-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IkfYum54GEuZdEaHKY6U6dmaS0wTfN/a+ezkaoK+he839WFBcur+GE/QPhGgXnhX c6xfzNVHV1x0Gz3lUrn7EA== 0000903893-96-000243.txt : 19960517 0000903893-96-000243.hdr.sgml : 19960517 ACCESSION NUMBER: 0000903893-96-000243 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL CORP /RI/ CENTRAL INDEX KEY: 0000354948 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 050391383 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01654 FILM NUMBER: 96565542 BUSINESS ADDRESS: STREET 1: 180 WASHINGTON ST CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4014213600 424B1 1 FINAL PROSPECTUS Rule 424(b)(1) - Registration No. 333-1654 PROSPECTUS 550,000 SHARES [LOGO] FIRST FINANCIAL CORP. COMMON STOCK First Financial Corp. (the "Company"), a Rhode Island chartered bank holding company, hereby offers (the "Public Offering") for sale 550,000 shares of common stock, par value $1.00 per share (the "Common Stock"). All of such shares are being sold by the Company. Prior to the Public Offering, there has been no public market for the Common Stock. The public offering price of the Common Stock is $9.75 per share (the "Public Offering Price"). See the section entitled "Underwriting" for a discussion of the factors considered in determining the Public Offering Price. The Common Stock has been approved for quotation on the Nasdaq National Market System under the symbol "FTFN". Sandler O'Neill & Partners, L.P. ("Sandler O'Neill" or the "Underwriter") has indicated its intention to make a market in the Common Stock; however, it has no obligation to make such a market and may discontinue making a market at any time. SEE THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF THE COMPANY'S SUBSIDIARY, FIRST BANK AND TRUST COMPANY (THE "BANK"), AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. _____________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PUBLIC UNDERWRITING ESTIMATED OFFERING DISCOUNT AND PROCEEDS TO PRICE COMMISSIONS(1) COMPANY(2) Per Share $9.75 $0.58 $9.17 Total(3) $5,362,500 $319,000 $5,043,500
__________ (1) See "Underwriting" for information concerning indemnification of the Underwriter and other matters. (2) Before deducting expenses payable by the Company estimated at $450,000. See "Use of Proceeds." (3) The Company has granted to the Underwriter a 30-day option to purchase up to 82,500 additional shares of the Common Stock solely to cover over-allotments, if any. See "Underwriting." If the Underwriter exercises this option in full, the public offering price will total $6,166,875, the underwriting discount and commissions will total $366,850, and the proceeds to the Company will total $5,800,025. _____________ The shares of the Common Stock are offered by the Underwriter subject to prior sale, when, as and if delivered to, and accepted by, the Underwriter. The Underwriter reserves the right to withdraw or cancel such offer and to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the offices of Sandler O'Neill located at Two World Trade Center, 104th Floor, New York, New York 10048 on or about May 17, 1996. _____________ SANDLER O'NEILL & PARTNERS, L.P. _____________ THE DATE OF THIS PROSPECTUS IS MAY 13, 1996 [Insert Map] [In this area is a map of the greater Rhode Island area showing First Financial Corp. Branch Locations] 180 WASHINGTON STREET 645 RESERVOIR AVENUE 1168 MAIN STREET PROVIDENCE, RI 02903 CRANSTON, RI 02920 WYOMING, RI 02893 _____________ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. In connection with the Public Offering, the Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1, as amended (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), of which this Prospectus forms a part. The Company intends to furnish its stockholders with annual reports containing financial statements audited by its independent public accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited condensed financial information. In addition, the Company is subject to the information requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, and in accordance therewith, will file reports, proxy statements and other information with the Commission. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus: (i) assumes no exercise of the Underwriter's overallotment option; (ii) has been adjusted to reflect a 10 for 1 stock split effected by the Company in December of 1994 (the "10 for 1 Stock Split"); and (iii) assumes the exercise of certain outstanding options resulting in the issuance of 28,041 shares of the Common Stock prior to the Public Offering. Unless the context otherwise requires, all references in this Prospectus to the "Company" shall mean First Financial Corp. together with its subsidiary, First Bank and Trust Company (the "Bank"). THE COMPANY First Financial Corp. (the "Company") is a bank holding company that was organized under Rhode Island law in 1980 for the purposes of owning all of the outstanding capital stock of the Bank and providing greater flexibility in helping the Bank achieve its strategic objectives. The primary assets of the Company are the capital stock of the Bank and, upon completion of the Public Offering, the net proceeds therefrom. See "Use of Proceeds." The business of the Company is currently limited to the business of the Bank, which is the Company's sole subsidiary. As of December 31, 1995, the Company had consolidated assets of $100.3 million and consolidated deposits of $89.6 million. See "The Company." The Bank is a Rhode Island state-chartered commercial bank with three banking offices, including its main and executive offices located in Providence, Rhode Island. Today, consistent with its initial strategy, the Bank offers a wide range of lending and deposit products primarily to individuals and small businesses. Deposit services include checking, savings accounts, certificates of deposit, individual retirement accounts and safe deposit box rentals. Loan products include commercial, commercial mortgage, residential mortgage, construction, home equity and a variety of consumer loans. The Bank's strategy of managed growth through varied and often challenging economic cycles has been strategically supplemented by both de novo branch expansion and acquisition. The Bank's first expansion beyond its main office occurred in 1981 with the opening of its Cranston, Rhode Island branch. The Bank was presented with a further growth opportunity in 1991 as a result of the Rhode Island "credit union crisis," when 45 privately-insured banks and credit unions were closed by order of the Governor of Rhode Island, including the Chariho-Exeter Credit Union located in the Wyoming section of Richmond, Rhode Island. In 1992, the Bank acquired certain assets and assumed certain liabilities of the Chariho-Exeter Credit Union. See "Business -- General" and " - -- Acquisition." RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered by prospective investors. 3 THE OFFERING Common Stock Offered by the Company ............ 550,000 shares Common Stock to be Outstanding After the Public Offering ........ 1,261,241 shares Underwriters Overallotment. 82,500 shares Use of Proceeds .......... The Company intends to retain the net proceeds of the Public Offering and use such proceeds for general corporate purposes and to pursue strategic objectives. Depending on certain factors, the Company may use the net proceeds to discharge certain indebtedness of the Company. See "Use of Proceeds." Maximum Purchase ......... In order to promote broader distribution and increase the likelihood that there will be a sufficient number of shareholders for the Company to be eligible for trading on the Nasdaq National Market System, no purchaser will be allowed to purchase in the aggregate more than $100,000 worth of Common Stock in the Public Offering as determined by the Public Offering Price multiplied by the number of shares purchased. Regulatory Limitation .... The Company will not be required to issue shares of Common Stock pursuant to the Public Offering to any person who, in the opinion of the Company, would be required to obtain prior clearance or approval from any state or federal bank regulatory authority to own or control such shares if, at the termination of the Public Offering such clearance or approval has not been obtained or any required waiting period has not expired. See "Regulation and Supervision." Right to Amend or Terminate the Public Offering ............... The Company expressly reserves the right to amend the terms and conditions of the Public Offering. In the event of a material change in the terms of the Public Offering, the Company will file any necessary post-effective amendments to the Registration Statement. The Company expressly reserves the right, at any time prior to delivery of shares of the Common Stock offered, to terminate the Public Offering by giving oral or written notice thereof to Sandler O'Neill and by making a public announcement thereof. Without limiting the manner in which the Company may choose to make a public announcement or any amendment or termination of the Public Offering, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by issuing a release to the local media. 4 Underwriting ............. The Underwriter has agreed, subject to the terms and conditions set forth in the Underwriting Agreement entered into between the Underwriter and the Company (the "Underwriting Agreement"), to purchase from the Company the shares of the Common Stock offered hereby at the Public Offering Price less underwriting discounts set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriter are subject to certain conditions precedent, and that the Underwriter is committed to purchase all of such shares, if any are purchased. See "Underwriting." Right to Reject Offers ... The Underwriter reserves the right to accept or reject all offers to purchase Common Stock pursuant to the Public Offering in whole or in part. DIVIDEND POLICY The Company has paid semi-annual dividends to its shareholders continuously since 1983. Annualized dividends paid by the Company have increased from $.06 for the year ended December 31, 1991, to $.11 for the year ended December 31, 1995. The Company's ability to pay dividends to the holders of the Common Stock is subject to the determination of the Board of Directors of the Company (the "Company Board") and depends upon receipt of dividends from the Bank. The payment of dividends by the Bank is subject to prior consideration by the Board of Directors of the Bank (the "Bank Board") of a number of factors, including, but not limited to, applicable federal and state regulatory restrictions, capital requirements, results of operations and financial conditions, tax considerations and general economic conditions. See "Regulation and Supervision." 5 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated balance sheet data as of December 31, 1995 and 1994 and the selected consolidated statement of income data for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the Company's Consolidated Financial Statements, including the Notes thereto, which have been audited by Arthur Andersen LLP, independent public accountants ("Arthur Andersen"), and are included elsewhere in this Prospectus. The selected consolidated balance sheet data as of December 31, 1993, 1992 and 1991 and the summary consolidated statement of income data for each of the years ended December 31, 1992 and 1991 have been derived from the Company's Consolidated Financial Statements, including the Notes thereto, which have also been audited by Arthur Andersen, but are not included in this Prospectus. The following selected consolidated financial data are qualified by the more detailed Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus, and should be read in conjunction therewith and with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FINANCIAL CONDITION DATA: Total assets ................................................... $100,304 $ 92,822 $ 87,594 $ 96,571 $ 65,343 Investment, securities purchased under agreement to resell, federal funds sold and interest bearing deposits ..................................................... 30,811 30,327 29,634 42,453 26,921 Total loans .................................................... 64,701 58,569 54,453 49,349 34,400 Allowance for possible loan losses ............................. 1,828 2,257 2,300 1,414 575 Total deposits ................................................. 89,591 83,184 78,535 86,695 55,900 Senior debenture ............................................... 2,845 2,736 2,557 2,390 -- Total stockholders' equity ..................................... 7,192 6,559 6,124 5,621 5,394 STATEMENT OF INCOME DATA: Interest income ................................................ 7,732 6,794 6,624 6,510 5,775 Interest expense ............................................... 3,669 2,629 2,803 2,955 2,971 ----- ----- ----- ----- ----- Net interest income ............................................ 4,063 4,165 3,821 3,555 2,804 Provision for possible loan losses ............................. 675 555 545 630 285 --- --- --- --- --- Net interest income after provision for possible loan losses .................................................. 3,388 3,610 3,276 2,925 2,519 Non-interest income ............................................ 474 390 409 477 283 Non-interest expense ........................................... 3,093 2,989 2,805 2,956 2,211 Income taxes ................................................... 251 399 330 177 227 --- --- --- --- --- Net income ..................................................... $ 518 $ 612 $ 550 $ 269 $ 364 ======== ======== ======== ======== ======== PER SHARE DATA(1): Net income ..................................................... $ 0.71 $ 0.84 $ 0.76 $ 0.37 $ 0.50 Book value ..................................................... 10.35 9.60 8.96 8.23 7.89 Cash dividends declared ........................................ 0.11 0.09 0.07 0.06 0.06 Dividend payout ratio .......................................... 14.51% 10.05% 8.69% 15.26% 11.27% Weighted average common and common stock equivalent shares outstanding ........................................... 728,708 727,573 726,459 724,974 724,189
6
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- OPERATING RATIO DATA: Return on average total assets ................................. 0.54% 0.68% 0.61% 0.30% 0.56% Return on average stockholders' equity ......................... 7.45 9.60 9.30 4.83 6.95 Net interest margin(2). ........................................ 4.43 4.82 4.38 4.32 4.64 Loans to deposits ratio ........................................ 72.22 70.41 69.34 56.92 61.54 ASSET QUALITY RATIOS: Nonperforming assets to total assets ........................... 2.00% 1.58% 2.34% 1.13% 1.06% Nonperforming loans to total loans ............................. 0.83 0.89 0.98 1.55 0.17 Net loan charge-offs to average loans(3). ...................... 1.01 0.97 1.11 1.73 0.48 Allowance for possible loan losses to total loans(3). .................................................... 1.47 1.50 1.54 1.71 1.67 Allowance for possible loan losses to nonperforming loans(3). .................................................... 160.63 146.76 132.46 94.12 961.50 CAPITAL RATIOS(4): Tier 1 risk-based capital ...................................... 10.20% 11.11% 10.92% 10.48% 13.47% Total risk-based capital ....................................... 11.46 12.36 12.17 11.64 14.91 Leverage ....................................................... 6.87 7.01 6.81 5.74 8.18
__________ (1) Per share data has been restated to reflect the 10 for 1 Stock Split. Earnings per share is based upon the weighted average number of common and common stock equivalent shares outstanding (2) The net interest margin is net interest income divided by average interest-earning assets. (3) Ratios are exclusive of acquired loans, acquired reserve for loan losses, and activity in the acquired reserve for loan losses associated with the 1992 acquisition of certain assets and the assumption of certain liabilities of the former Chariho-Exeter Credit Union. See "Business -- Acquisition" and "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for further information. (4) Capital Ratios are computed in accordance with guidelines of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The leverage ratio is defined as the ratio of Tier I risk-based capital to adjusted total assets. See "Regulation and Supervision -- Capital Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 7 RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating the Company before purchasing any of the shares of the Common Stock offered hereby. EXPOSURE TO ECONOMIC CONDITIONS The Company's success is dependent to a significant extent upon general economic conditions in the metropolitan Providence area and the area's ability to attract new business. The ability of the Providence area to attract new business depends largely on economic conditions throughout Rhode Island, the rest of Southeastern New England and the United States as a whole. An economic downturn in the geographic markets served by the Bank could increase competitive pressures for quality lending opportunities and adversely affect: (i) the Bank's ability to attract and retain deposits and originate loans; (ii) the ability of the Bank's borrowers to repay loans; (iii) the value of any collateral securing such loans; and (iv) consequently, the financial condition and results of operations of the Company. Given the size of the Bank's loan portfolio secured by real estate, the Bank and consequently the Company, is particularly vulnerable to any economic trend that would result in a decline in real estate values in Rhode Island. See " -- Business Concentration." Rhode Island has experienced an economic slowdown and a resultant decline in real estate values. While conditions appear to have stabilized, the Rhode Island economy continues to be weak, and poor economic conditions in the future could adversely affect the financial condition and results of operations of the Company. See "Business-- Market Area." REAL ESTATE LENDING RISK In the past, the Bank has engaged in significant commercial lending secured by commercial real estate, 1 to 4 family, and multi-family non-owner occupied real estate. As a result of the Bank's overall real estate lending activities, including its commercial loans secured by real estate, any further decline in real estate values would adversely effect the value of collateral securing the Bank's loans and could adversely effect the financial condition and results of operations of the Company. See "Business -- Loan Portfolio and Maturity -- Commercial and Residential Real Estate Loans." INTEREST RATE RISK Interest Rate Sensitivity/"Gap" Analysis. The Company's earnings depend to a great extent upon the level of net interest income generated by the Bank. Net interest income is the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings. From time to time, the maturity and/or repricing of assets and liabilities are not balanced, and a rapid increase or decrease in interest rates could have an adverse effect on net interest margins and results of operations of the Company. The difference between the Company's interest-rate sensitive assets and interest-rate sensitive liabilities for a specified time-frame as a percentage of total assets is referred to as "gap." A company is considered to be asset sensitive, or having a positive gap, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or having a negative gap, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within a given period. A company's gap indicates the impact on net interest income of a movement in interest rates for the relevant time frame. During a period of rising interest rates, a positive gap would tend to increase net interest income, while a negative gap would tend to adversely affect net interest income. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to increase net interest income. At December 31, 1995, the Company had a negative gap of 6.47% of total assets, as its interest-bearing liabilities maturing or repricing within one year exceeded the amount of its interest- earning assets maturing or repricing within that time period by $6.5 million. As a result, disregarding other factors affecting net interest income, the Company's net interest income for 1996 would be 8 expected to increase during a period of declining interest rates and decrease during a period of rising interest rates. See "Management's Discussion And Analysis of Financial Condition and Results of Operations -- Asset/Liability Management." Recent Impact on Cost of Funds. The increase in interest rates in 1994 had a delayed impact on the Company's cost of funds for fiscal 1995 which in turn impacted net interest margin for fiscal 1995. The Company's net interest margin decreased from 4.82% for fiscal 1994 to 4.43% for 1995. The reduction in net interest margin is attributable in part to the combination of a shift of existing core deposits and new deposits into higher-yielding interest-rate sensitive certificates of deposit. These deposits are priced at variable rates tied to the three month yield on U.S. Treasury Bills, reprice every three months and, at December 31, 1995, accounted for approximately 33% of the Company's interest bearing deposits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Net Interest Income." General Impact on Lending Activity. The Bank's lending activity may also be adversely affected by a rise in interest rates. Increases in interest rates may reduce the amount of demand for loans, resulting in a decrease in the amount of loan and commitment fees and income on the sale of loans. In addition, fluctuations in interest rates may also result in disintermediation, which is the flow of funds away from depository institutions into direct investments which pay a higher rate of return, and may affect the value of the Company's investment securities and other interest earning assets. As a result of the Company's assets consisting of a substantial number of loans with interest rates which change in accordance with changes in prevailing market rates, if interest rates rise sharply, certain of the Company's borrowers would be required to make higher interest payments on their loans. Thus, increases in interest rates may cause the Company to experience an increase in delinquent loans and defaults to the extent that borrowers were unable to meet their increased debt servicing obligations. Other Factors Affecting Interest Rates. In addition, interest rates are highly sensitive to many factors which are beyond the control of the Bank, including the influence of domestic and foreign economic conditions, and, in particular, the monetary and fiscal policies of the United States government and federal agencies. The nature, timing and effect of any future changes in federal monetary and fiscal policies on the Bank and its results of operations are not predictable. See "Management's Discussion and Analysis of Financial Condition And Results of Operations -- Asset/liability Management." COMPETITION The banking business is highly competitive, and the profitability of the Company depends upon the Bank's ability to attract loans and deposits in the metropolitan Providence area. The Bank competes with other commercial and savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms and certain other nonfinancial institutions, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing terms than the Bank. Many of these competitors have a statewide, regional and in some cases national presence, are significantly larger than the Company and may have greater financial and other resources than the Company. See "Business -- Competition." Rhode Island permits statewide branch banking and statewide savings and loan branching which may also increase competition for the Bank. On September 29, 1994, the Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") became effective. The Interstate Banking Act expands the authority of bank holding companies and banks to engage in interstate bank acquisitions and interstate branching which may increase competition in the Bank's market. In addition, Rhode Island law permits the establishment of interstate branches by out-of-state banks where the laws of the home state of the out-of-state bank so permit under conditions no more restrictive than under Rhode Island law. In light of the legislative initiatives relating to the banking industry introduced during the past several years, there can be no assurance that the United States Congress will not enact additional legislation that may further remove restrictions on the activities of banks and bank holding companies in a manner that could further increase competitive pressures on the Company and the Bank. See "Business -- Competition," "Regulation and Supervision - -- Interstate Banking Legislation" and " -- 1991 Banking Legislation." 9 REGULATION AND SUPERVISION Bank holding companies, such as the Company, and banks, such as the Bank, operate in a highly regulated environment and are subject to extensive supervision and examination by several federal and state regulatory agencies. The Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to regulation and supervision by the Federal Reserve Board. The Bank, which is chartered under the general laws of the State of Rhode Island, is subject to regulation and supervision by the Rhode Island Department of Business Regulation, Division of Banking (the "Banking Division") and by the Federal Deposit Insurance Corporation (the "FDIC"). These regulations govern and, in many instances limit the policies and activities of the Company and the Bank. In addition, these regulations are intended primarily for the protection of depositors rather than for the benefit of investors. Modification or revised interpretations of the applicable laws and regulations could have a material impact on the Company and the Bank. See "Regulation and Supervision." ALLOWANCE FOR POSSIBLE LOAN LOSSES Although the Bank utilizes its best judgment in providing for possible loan losses, there can be no assurance that it will not have to increase its provisions to the allowance for possible loan losses in the future as a result of adverse developments in the real estate market and the local economy, future increases in non-performing loans, or for other reasons which would adversely affect the Company's results of operations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for possible loan losses and the carrying value of its other non-performing assets based on their judgments about information available to them at the time of their examination. The Bank was most recently examined by the FDIC in March of 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RESTRICTIONS ON ABILITY TO PAY DIVIDENDS The Company's ability to pay dividends to the holders of the Common Stock depends upon the receipt of dividends from the Bank. The payment of dividends by the Bank is influenced by applicable federal and state regulation, capital requirements, results of operations and financial condition, tax considerations and general economic conditions. See "Dividend Policy." The Bank Board is generally empowered to pay dividends to the Company out of the Bank's net profits, to the extent that the Bank Board considers such payment advisable, and the Bank remains adequately capitalized. The Bank is not subject to any regulatory agreement, order or directive that would restrict its ability to pay dividends to the fullest extent otherwise permitted by applicable law and regulation. See "Regulation and Supervision." DEPENDENCE ON KEY PERSONNEL The Company and the Bank are dependent on certain key personnel including, Patrick J. Shanahan, Jr., President and Chief Executive Officer of the Company and the Bank. The Company has entered into an amended and restated employment agreement with Mr. Shanahan, which became effective on February 6, 1996. See "Management -- Employment Agreements." The Bank has obtained a "key-man" term life insurance policy for Mr. Shanahan. The loss of Mr. Shanahan or other members of senior management would have an adverse effect on the Company and the Bank. See "Management." MANAGEMENT'S OWNERSHIP INTEREST AND POSSIBLE EFFECT After consummation of the Public Offering, the executive officers and directors of the Company (the "Management Owners") will beneficially own approximately 19.46% of the outstanding shares of the Common Stock (or approximately 18.26% of such shares of the Common Stock if the Underwriter's over-allotment option is fully exercised). Accordingly, the Management Owners will be able to exert significant influence over the outcome of all matters required to be submitted to the shareholders of the Company for approval, including decisions relating to the election of the Company Board and certain 10 fundamental corporate transactions. The Management Owners will also be able to continue to exercise a significant influence over any proposed merger or consolidation of the Company under applicable Rhode Island law and under the applicable provisions of the Company's Articles of Incorporation which require the affirmative vote of seventy (70%) percent of the outstanding shares of the Common Stock for approval of certain transactions. In addition, the Management Owners' significant ownership interest in the Company may discourage third parties from seeking to acquire control of the Company which may adversely affect the market price of the Common Stock. See "Management," "Principal Stockholders" and "Description of Capital Stock -- Possible Anti-Takeover Effects of the Company's Articles and Bylaws." IMMEDIATE DILUTION OF COMMON STOCK Investors purchasing shares of the Common Stock in the Public Offering will incur immediate dilution of approximately $.51 of their investment, in that the net tangible book value of the Company after the Public Offering will be approximately $9.24 per share as compared with the Public Offering Price of $9.75 per share. The Company's pro forma earnings per share for the fiscal year ended December 31, 1995, assuming a certain return on net proceeds from the Public Offering, would have been $.55 per share, a decrease of $.16 per share, or 23%, from the Company's actual earnings per share for such year. See "Dilution." NO PRIOR TRADING MARKET The Public Offering Price of the shares of the Common Stock has been determined by negotiations between the Company and the Underwriter. See "Underwriting" for information relating to the factors considered in determining the Public Offering Price. Prior to the Public Offering, there has been no public market for the shares of the Common Stock and there can be no assurance that an active public market will develop or be sustained after the Public Offering, or that if such a market develops, the market price will equal or exceed the Public Offering Price. The market price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. In addition, general market price declines or market volatility in the future could affect the market price of the Common Stock. SHARES AVAILABLE FOR RESALE Following completion of the Public Offering, the Company will have 1,261,241 shares of the Common Stock issued and outstanding (1,343,741 shares if the Underwriter's over-allotment option is exercised in full). Substantially all of these shares that are held by persons other than "affiliates" of the Company, including the 550,000 shares offered hereby (632,500 shares if the Underwriter's over- allotment option is exercised in full), will be freely tradeable without restriction under the Securities Act. The Company, as well as the directors and executive officers of the Company who upon completion of the Public Offering will hold 245,391 of the outstanding shares of the Common Stock, in the aggregate, have agreed not to offer, sell, or contract to sell any shares of the Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the Underwriter. See "Underwriting." Upon expiration of this 180-day period, however, all 245,391 shares (representing 19.46% of the total number of shares that will be outstanding following completion of the Public Offering, or 18.26% if the Underwriter's over-allotment is exercised in full), subject to certain limitations (including limitations under Rule 144 of the Securities Act), could be resold by these and other persons who are deemed affiliates of the Company under the Securities Act. If persons holding shares eligible for sale immediately after the Public Offering should sell a substantial amount of the Common Stock in the public market, the prevailing market price of the Common Stock could be adversely affected. See "PRincipal Stockholders" and "SHares Eligible For Future Sale." 11 ANTI-TAKEOVER EFFECTS OF RHODE ISLAND LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS Certain provisions of Rhode Island law and the Company's Articles of Incorporation and By-Laws may be deemed to have an antitakeover effect and may discourage takeover attempts for the Company not first approved by the Company Board (including takeover attempts which certain stockholders may believe are in their best interests). These provisions could delay or frustrate the removal of incumbent directors of the Company or the assumption of control by stockholders, even if such removal or assumption of control would be beneficial to stockholders. These provisions also could discourage or make more difficult a merger, tender offer or proxy contest, even if such events would be beneficial, in the short term, to the interests of stockholders. Such provisions include, among other things, a classified Company Board serving staggered three-year terms, a requirement that certain business combinations require the approval of 70% of the outstanding shares of the Common Stock, vesting of authority in the Chairman of the Company Board, President of the Company, and holders of at least 40% of the outstanding Common Stock (except as otherwise required by law) to call special meetings of stockholders, and certain advance notice requirements for nominations for election to the Company Board. See "Description of Capital Stock -- Possible Anti-Takeover Effects of the Company's Articles and the By-Laws" and " -- Rhode Island Anti-Takeover Laws." 12 RECENT DEVELOPMENTS The following table presents unaudited consolidated financial data as of and for the three months ended March 31, 1996 and 1995. The data presented is derived from the unaudited consolidated financial statements of the Company and includes, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the data for the periods presented.
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, --------------- 1996 1995 ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FINANCIAL CONDITION DATA: Total assets .................................................................. $ 99,760 $ 94,108 Investment, securities purchased under agreement to resell, federal funds sold and interest bearing deposits .............................. 28,091 30,851 Total loans ................................................................... 67,010 59,148 Allowance for possible loan losses ............................................ 1,758 2,114 Total deposits ................................................................ 88,841 83,923 Senior debenture .............................................................. 2,907 2,782 Total stockholders' equity .................................................... 7,341 6,838 STATEMENT OF INCOME DATA: Interest income ............................................................... 2,023 1,860 Interest expense .............................................................. 970 813 --- --- Net interest income ........................................................... 1,053 1,047 Provision for possible loan losses ............................................ 70 105 -- --- Net interest income after provision for possible loan losses .................. 983 942 Non-interest income ........................................................... 112 110 Non-interest expense .......................................................... 808 763 Income taxes .................................................................. 87 100 -- --- Net income .................................................................... $ 200 $ 189 ======== ======== PER SHARE DATA: Net income .................................................................... $ 0.28 $ 0.26 Book value .................................................................... 10.57 10.01 Cash dividends declared ....................................................... 0.03 -- Dividend payout ratio ......................................................... 10.24% -- Weighted average common and common stock equivalent shares outstanding ................................................................... 711,483 728,215 OPERATING RATIO DATA: Return on average total assets ................................................ 0.81% 0.81% Return on average stockholders' equity ........................................ 11.01 11.27 Net interest margin[f1] ....................................................... 4.47 4.70 Loans to deposits ratio ....................................................... 75.43 70.48 ASSET QUALITY DATA: Nonperforming loans ........................................................... $ 515 $ 787 Other real estate owned ....................................................... 1,265 1,066 Total nonperforming assets .................................................... 1,780 1,853 Loans 30-89 days delinquent ................................................... 250 1,050
13
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, --------------- 1996 1995 ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSET QUALITY RATIOS: Nonperforming assets to total assets .......................................... 1.78% 1.97% Nonperforming loans to total loans ............................................ 0.77 1.33 Net loan charge-offs to average loans[f2] ..................................... 0.08 0.32 Allowance for possible loan losses to total loans[f2] ......................... 1.45 1.35 Allowance for possible loan losses to nonperforming loans[f2] ................. 172.06 89.15 CAPITAL RATIOS[F3]: Tier 1 risk-based capital ..................................................... 10.25% 10.96% Total risk-based capital ...................................................... 11.50 12.09 Leverage ...................................................................... 7.08 7.13
__________ (1) The net interest margin is net interest income divided by average interest-earning assets. (2) Asset quality data and ratios are exclusive of acquired loans, acquired reserve for loan losses, and activity in the acquired reserve for loan losses associated with the 1992 acquisition of certain assets and the assumption of certain liabilities of the former Chariho-Exeter Credit Union. See "Business -- Acquisition" and "Notes to Consolidated Financial Statements" for further information. (3) Capital ratios are computed in accordance with guidelines of the Federal Reserve Board. The leverage ratio is defined as the ratio of Tier 1 risk-based capital to adjusted total assets. See "Regulation and Supervision -- Capital Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Total assets decreased $500,000, or 0.5%, from $100.3 million at December 31, 1995 to $99.8 million at March 31, 1996, and increased $5.7 million, or 6.1%, from $94.1 million at March 31, 1995 to $99.8 million at March 31, 1996. The loan portfolio increased $2.3 million, or 3.6%, from $64.7 million at December 31, 1995 to $67.0 million at March 31, 1996, and increased $7.9 million, or 13.4%, from $59.1 million at March 31, 1995 to $67.0 million at March 31, 1996. Total deposits decreased $800,000, or .9%, from $89.6 million at December 31, 1995 to $88.8 million at March 31, 1996, and increased $4.9 million, or 5.8%, from $83.9 million at March 31, 1995 to $88.8 million at March 31, 1996. For the three months ended March 31, 1996, the Company reported net income of $200,000, compared to net income of $189,000 for the three months ended March 31, 1995, or an increase of 6.1%. Fully diluted net income per share for the quarter ended March 31, 1996 was $.28, an increase of 7.7% from $.26 per share in the first quarter of 1995. The Company's improved earnings performance resulted from (i) increased loan originations and a consequent increase in the Company's loans to deposits ratio to 75.43% at March 31, 1996 compared to 70.48% at March 31, 1995; and (ii) improvement in asset quality reflected by decreases in nonperforming loans, nonperforming assets, delinquent loans, net loan charge-offs, and increases in the percentage of the allowance for possible loan losses to total loans and to nonperforming loans. Net interest income (the difference between interest earned on loans and investments and interest paid on deposits and other borrowings) increased to $1,053,000 at March 31, 1996, compared to $1,047,000 for the first quarter of 1995. This increase was the result of an increase in interest earning assets which was partially offset by a decrease in net interest margin. The provision for loan losses decreased to $70,000 for the three months ended March 31, 1996, compared to $105,000 for the corresponding 1995 period. 14 THE COMPANY The Company is a bank holding company that was organized under Rhode Island law in 1980 for the purposes of owning all the outstanding capital stock of the Bank and providing greater flexibility in helping the Bank achieve its business objectives. The primary assets of the Company are the capital stock of the Bank and, upon completion of the Public Offering, the net proceeds therefrom. See "Use of Proceeds." The business of the Company is currently limited to the business of the Bank, which is the Company's sole subsidiary. The Bank is a Rhode Island chartered commercial bank that was formally organized in 1971 and opened for business on February 14, 1972 at its main office in downtown Providence, Rhode Island. Since its inception, the Bank's strategic mission has been to manage the growth of its investors' equity interest by providing loan and deposit products to small and mid-sized businesses in Rhode Island and nearby Southeastern Massachusetts. After three non-profitable years, the Bank retained Mr. Shanahan as chief executive officer at year-end 1975. At that time, the Bank had equity of approximately $1 million and assets of approximately $14 million. The Bank has continued to expand its products and services, and today offers a broad range of lending and deposit products primarily to individuals and small businesses ($10 million or less in revenue). Deposit services include checking, savings accounts, certificates of deposit, individual retirement accounts and safe deposit box rentals. Loan products include commercial, commercial mortgage, residential mortgage, construction, home equity and a variety of consumer loans. Historically, the Bank has placed an emphasis on commercial real estate lending which the Bank has found attractive for several reasons. Generally, the pricing structure for this type of lending is consistent with the Bank's asset/liability management objectives. In addition, such loans allow the Bank the opportunity to enhance its earnings through the imposition of a variety of fees not customary to other types of lending. Also, many of the commercial real estate loans to local businesses have the same business purpose and use of proceeds commonly found in larger typical commercial and industrial asset-based loans. As of December 31, 1995, shareholders' equity of the Company had increased to $7.2 million, deposits of the Bank had increased to $89.6 million and consolidated assets of the Company had increased to $100.3 million. The Bank has been profitable in every year since 1976. The Bank's strategy of managed growth through varied and often challenging economic cycles has been strategically supplemented by both de novo branch expansion and acquisition. The Bank's first expansion beyond its main office occurred in 1981 with the opening of its Cranston, Rhode Island branch. This branch is located on the corner of Park and Reservoir Avenue, which is generally considered one of the busiest intersections in Rhode Island. As of December 31, 1995, deposits at this branch had increased to $44.2 million. The Bank was presented with a further growth opportunity in 1991 as a result of the Rhode Island "credit union crisis," when 45 privately-insured banks and credit unions were closed by the Governor of Rhode Island. In 1992, the Bank acquired certain assets and assumed certain liabilities (the "Acquisition") of the Chariho-Exeter Credit Union ("Chariho-Exeter") located in the Wyoming section of Richmond, Rhode Island, a market the Bank believed and still believes provides business- growth opportunities. The Company believed the acquisition of Chariho-Exeter would allow the Bank to increase its total assets and profitability. This growth would allow the Bank to expand both its services within the communities it was then serving and to penetrate new market areas. The Bank viewed the South County area of Rhode Island, formerly served by Chariho-Exeter, as an opportune market in which to seek to expand its products and services. In addition, as a community-oriented financial institution, the Bank was attracted to a transaction that would assist other Rhode Islanders in gaining access to their frozen deposits. See "Business -- Acquisition." At the core of the Bank's business remains its ability to meet the lending and deposit needs of customers in its market area. By directing its efforts toward small and small to mid-sized business and consumers, the Bank's loan portfolio has grown to $64.7 million at December 31, 1995 and is comprised of a broad mix of commercial real estate, residential and consumer loans. With the economic challenges faced in the Rhode Island marketplace, certain portions of these portfolios have experienced difficulties. 15 See "Business -- Lending Activities -- Loan Portfolio Composition and Maturity." Nonetheless, the Bank has remained profitable on an annual basis since 1976. Most recently, the Bank has experienced growth in business loans to borrowers with favorable cash flow attributes seeking working capital financing secured by real estate. This growth has been driven, in part, by the addition of two lending officers who concentrate on customers that fall into this category. Evidencing the Bank's success in catering to this business market, the Bank was listed in Entrepreneur Magazine as one of the 294 banks in the country most likely to grant a small business loan, and as the 9th largest dollar lender of Small Business Administration ("SBA") funds in the Providence region for the 1995 fiscal year. Total SBA funds loaned by the Bank were approximately $2.5 million and represented a substantial increase over the same period for the 1994 fiscal year. For a more detailed description of the Bank's loan growth and lending staff additions, see "BUSINESS -- Lending Activities -- Loan Portfolio Composition and Maturity." The Bank's ability to attract these new lending relationships and the related deposits is dependent on its willingness and ability to service the needs of its customers. The Company believes that the Bank is particularly well-situated to serve the banking needs of the metropolitan Providence area. The Company believes that the local character of the business environment coupled with the Company's knowledge of its customers and their needs, together with its comprehensive retail and small business products and rapid decision-making at the branch level, create opportunities that will enable the Bank to compete effectively. Further, the Company believes that the accessibility and responsiveness of the Bank's personnel allow the Bank to compete effectively for certain segments within its market, in particular local professionals and businesses who demand and receive customized and personalized banking products and services. The Company believes that its personalized, community-oriented approach to delivering services makes the Bank particularly well situated to compete in light of recent industry consolidation and attrition among its community bank competitors. The proliferation of mergers among New England's regional banks, along with the consolidation of smaller financial institutions into the branch networks of such regional banks, has resulted in a number of very large centralized banking organizations. The Company believes that this structural change tends to centralize decision-making and may disrupt the close relationships previously established between the local bank and the businesses and residents of a community. The Bank believes that many customers of the banks involved in and affected by business combinations will reconsider their banking relationships. In addition, these reorganizations may cause certain banking facilities to become available for acquisition, either with or without deposit relationships. In short, the Company believes its objectives of achieving returns for its investors can be accomplished through internal growth, opportunistic expansion, and attention to customer service. The Bank further believes that the current reorganization of the Rhode Island banking market will provide opportunities for the Bank to attract new lending and depositor relationships at an accelerated rate. The principal executive office of the Company is located at 180 Washington Street, Providence, Rhode Island 02903-3237 and its telephone number is (401) 421-3600. 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of the Common Stock offered by the Company hereby, after deducting the underwriting discount and estimated offering expenses of $769,000 payable by the Company, will be approximately $4,593,500 ($5,350,025 if the Underwriters' over-allotment option is exercised in full). After the receipt of the net proceeds from the Public Offering, the Company currently intends to retain them at the Company level. The Company anticipates that it will use the net proceeds for general corporate purposes, including assessing and exploiting, where appropriate, opportunities to assist the Bank in the growth of the Bank's deposits and deposit relationships, expansion of the Bank's lending activities, increased marketing activities, technological improvements designed to enhance customer services and payments of interest on the Senior Debenture. The Company may also apply a portion of the net proceeds to pay off certain obligations evidenced by the Senior Debenture that was issued by the Company in connection with the Acquisition, if, in the judgment of the Company Board, to do so would be in the best interest of the Company and its shareholders. See "Business -- Acquisition." The Senior Debenture currently bears interest at a variable rate equal to the average five-year Treasury rate plus 1% until maturity and matures on May 31, 1999 (subject to an extension period at the option of the Company). As of December 31, 1995, the outstanding indebtedness under the Senior Debenture was $2.85 million, including accrued and unpaid interest. See "Business -- Indebtedness." Although the Company may use a portion of the net proceeds to engage in strategic acquisitions if, and when, opportunities arise, the Company has no understanding or agreements concerning any acquisitions and is not currently negotiating with respect to any such matter. The Company has not yet allocated specific amounts of the net proceeds to any particular use. Pending such allocation, the net proceeds will be invested in United States government securities or short-term investment securities. DIVIDEND POLICY Holders of the Common Stock are entitled to receive dividends when, as and if, declared by the Company Board out of funds legally available for such purpose. The Company has paid semi-annual dividends to its stockholders continuously since 1983. Annualized dividends paid by the Company have increased from $.06 for the year ended December 31, 1991, to $.11 for the year ended December 31, 1995. Subject to the discretion of the Company Board as to whether dividends will be paid, and if so, the amount, timing and frequency of such dividends, the Company currently expects to continue to pay cash dividends to the holders of the Common Stock, provided that the Bank continues to be able to pay dividends to the Company. The Company's ability to pay dividends on the Common Stock depends upon receipt of dividends from the Bank. In determining whether, and to what extent, the Bank should pay future dividends to the Company and the Company should pay future dividends to the holders of the Common Stock, the Company and/or the Bank Board will consider the Company's consolidated financial condition and results of operations, tax considerations, industry standards, general economic conditions, regulatory policies, capital requirements and general business practices. The payment of dividends by the Company and the Bank is also restricted by the requirements of federal and state law. See "Regulation and Supervision." 17 DILUTION The net tangible book value of the Company as of December 31, 1995, was $7,069,882 or $10.35 per share of the Common Stock. Net tangible book value per share is equal to the Company's total tangible assets less its total liabilities, divided by the total number of shares of the Common Stock. After giving effect to the sale of the 550,000 shares of the Common Stock offered by the Company hereby (assuming the prior issuance of 28,041 shares to Mr. Shanahan at an exercise price per share of $2.50 upon his exercise of options under the 1986 Stock Option Agreement (as defined in the section entitled "MANAGEMENT -- Stock Options") and excluding shares that may be sold pursuant to the Underwriter's overallotment option) and the receipt by the Company of the estimated net proceeds therefrom, after deducting the underwriting discount and estimated offering expenses payable by the Company, the pro forma net tangible book value of the Company as of December 31, 1995 would have been approximately $11,649,679, or $9.24 per share. This represents an immediate dilution in net tangible book value of $1.11 per share to existing stockholders and an immediate dilution of $.51 per share to new investors. The following table illustrates this per share dilution: Public Offering price per share...................................... $9.75 Net tangible book value per share as of December 31, 1995.......... $10.35 Decrease per share attributable to exercise of options............. $ (.43) Decrease per share attributable to new investors................... $ (.68) ------ Pro forma net tangible book value per share as of December 31, 1995.. $9.24 ------ Dilution per share to new investors.................................. $ .51 =====
Net income of the Company for the year ended December 31, 1995, was $518,000 or $.71 per share of the weighted average common and common stock equivalent shares outstanding. Net income per share is equal to the Company's total income less total expense and income taxes, divided by the weighted average common and common stock equivalent shares outstanding. After giving effect to the sale of the 550,000 shares of the Common Stock offered by the Company hereby (assuming the prior issuance of 28,041 shares to Mr. Shanahan at an exercise price per share of $2.50 upon his exercise of options under the 1986 Stock Option Agreement and excluding shares that may be sold pursuant to the Underwriter's overallotment option) and the receipt by the Company of the estimated net proceeds therefrom, after deducting the underwriting discount and estimated offering expenses payable by the Company and adding interest income, net of taxes, of $173,803 based on an investment of the net proceeds at 5.75%, which represents an estimate of the average yield on short-term U.S. Treasury securities, the pro forma earnings per share of the Company for the year ended December 31, 1995 would have been approximately $.55 per share. This represents an immediate dilution in earnings per share of $.16 per share for the year ended December 31, 1995. The following table illustrates this per share dilution: Earnings per share for the year ended December 31, 1995 ............. $ .71 Decrease per share attributable to new investors .................... $ (.16) Pro forma earnings per share for the year ended December 31, 1995 ... $ .55
The foregoing tables exclude 66,800 shares of the Common Stock held by the Company as treasury stock. No shares of the Common Stock have been purchased from the Company in the last five (5) years other than those which will have been acquired by Mr. Shanahan prior to the Public Offering upon his exercise of options under the 1986 Stock Option Agreement. 18 CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1995, and as adjusted to reflect the sale by the Company of 550,000 shares of the Common Stock pursuant to the Public Offering and the receipt by the Company of the estimated net proceeds therefrom, after deducting the underwriting discount and estimated offering expenses payable by the Company. The capitalization information set forth in the table below is qualified by the more detailed Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus, and should be read in conjunction with such Consolidated Financial Statements and Notes.
DECEMBER 31, 1995 ----------------- PRO FORMA ACTUAL ADJUSTMENTS AS ADJUSTED ------ ----------- ----------- (IN THOUSANDS) SENIOR DEBENTURE(1)(2) .......................................................... $ 2,845 $ -- $ 2,845 ------- ----- ------- STOCKHOLDERS' EQUITY(3)(4): Common Stock, $1.00 Par value; 5,000,000 shares authorized and 750,000 shares issued, actual; and 5,000,000 shares authorized and 1,328,041 shares issued, as adjusted ................................................................ 750 578 1,328 Surplus(5) ................................................................... 500 4,002 4,502 Retained earnings ............................................................ 6,014 -- 6,014 Unrealized gain on securities available-for-sale, net of related income taxes ...................................................................... 75 -- 75 Less: Treasury stock, at cost ................................................ 147 -- 147 --- ----- --- Total stockholders' equity ............................................... 7,192 4,580 11,772 ----- ----- ------ TOTAL CAPITALIZATION ............................................................ $10,037 $ 4,580 $14,617 ======= ======= =======
__________ (1) For a discussion of the Senior Debenture, see "Business -- Indebtedness." (2) Assumes no prepayment of the Senior Debenture out of proceeds from the Public Offering. (3) Assumes the prior issuance of 28,041 shares of the Common Stock to Mr. Shanahan upon his exercise of certain stock options outstanding as of December 31, 1995 at an exercise price per share of $2.50. (4) Assumes no exercise of the Underwriter's over-allotment option to purchase 82,500 shares of the Common Stock. (5) Assumes offering expenses of $769,000 including underwriting discount of $319,000. Set forth below is a summary of FDIC and Federal Reserve Board capital requirements, the Company's and the Bank's capital ratios, and the Company's and the Bank's capital ratios adjusted to reflect the sale of the Common Stock in the Public Offering and the receipt of the net proceeds therefrom, as of December 31, 1995.
REGULATORY PRO FORMA MINIMUM(2) ACTUAL AS ADJUSTED ---------- ------ ----------- REGULATORY CAPITAL RATIOS: The Company(1) Risk-based: Tier 1 ............................................ 4.00% 10.20% 16.87% Totals ............................................ 8.00 11.46 18.12 Leverage .............................................. 3.00 6.87 10.87 The Bank Risk-based: Tier 1 ............................................ 4.00% 15.02% 15.02% Totals ............................................ 8.00 16.26 16.26 Leverage .............................................. 3.00 10.17 10.17
__________ (1) The regulatory capital guidelines with respect to bank holding companies are not applicable unless the bank holding company has either consolidated assets in excess of $150 million or either: (i) engages in any bank activity involving significant leverage; or (ii) has a significant amount of outstanding debt that is held by the general public. Otherwise, the Federal Reserve Board applies its capital adequacy requirements on a "bank only" basis. See "Regulation and Supervision -- Capital Requirements." (2) The 3% regulatory minimum leverage ratio applies only to certain highly-rated banks. Other institutions are subject to higher requirements. 19 CONSOLIDATED STATEMENTS OF INCOME DATA The consolidated statements of income data for the years ended December 31, 1995, 1994 and 1993 have been derived from the Company's Consolidated Financial Statements, including the Notes thereto, which have been audited by Arthur Andersen, and are included elsewhere in this Prospectus. The following consolidated statements of income data are qualified by the more detailed Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus, and should be read in conjunction therewith and with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- INTEREST INCOME: Interest and fees on loans ............................................... $ 5,994,034 $ 5,513,587 $ 5,298,681 Interest on investment securities -- U.S. Government and agency obligations ............................... 1,432,729 1,010,386 983,074 Collateralized mortgage obligations .................................. 154,783 96,948 13,259 Marketable equity securities ......................................... 1,320 1,020 860 Interest on cash equivalents ............................................. 149,153 171,650 328,303 --------- --------- --------- Total interest income ................................................ 7,732,019 6,793,591 6,624,177 --------- --------- --------- INTEREST EXPENSE: Interest on deposits ..................................................... 3,429,019 2,449,860 2,621,004 Interest on debenture .................................................... 239,653 178,976 167,268 Interest on reverse repurchase agreements ................................ -- -- 14,437 --------- --------- --------- Total interest expense ............................................... 3,668,672 2,628,836 2,802,709 --------- --------- --------- Net interest income .................................................. 4,063,347 4,164,755 3,821,468 PROVISION FOR POSSIBLE LOAN LOSSES .......................................... 675,000 555,000 545,000 --------- --------- --------- Net interest income after provision for possible loan losses ............. 3,388,347 3,609,755 3,276,468 --------- --------- --------- NONINTEREST INCOME: Service charges on deposits .............................................. 285,413 256,102 256,115 Gain on loan sales ....................................................... 94,467 29,133 -- Other .................................................................... 93,978 104,406 152,455 --------- --------- --------- Total noninterest income ............................................. 473,858 389,641 408,570 --------- --------- --------- NONINTEREST EXPENSE: Salaries and employee benefits ........................................... 1,566,105 1,554,326 1,385,515 Occupancy expense ........................................................ 337,032 342,179 364,251 Equipment expense ........................................................ 196,172 175,420 227,289 Other real estate owned (gains) losses, and expenses ..................... 187,776 44,033 (25,575) Computer services ........................................................ 150,603 130,042 123,395 Deposit insurance assessments ............................................ 95,483 176,972 179,739 Other operating expenses ................................................. 559,740 565,375 549,940 --------- --------- --------- Total noninterest expense ................................................ 3,092,911 2,988,347 2,804,554 --------- --------- --------- Income before provision for income taxes ................................. 769,294 1,011,049 880,484 PROVISION FOR INCOME TAXES .................................................. 251,517 399,148 330,129 --------- --------- --------- Net income ........................................................... $ 517,777 $ 611,901 $ 550,355 =========== =========== =========== Earnings per share ....................................................... $ 0.71 $ 0.84 $ 0.76 =========== =========== =========== Weighted average common and common stock equivalent shares outstanding ............................................................ 728,708 727,573 726,459 =========== =========== ===========
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company, a bank holding company, conducts all of its business through its wholly-owned subsidiary, the Bank, which opened for business on February 14, 1972. The Bank offers a variety of personal financial products and services designed to satisfy the deposit and loan needs of its retail, commercial and consumer customers. The Bank provides these services through three banking branches, one located in each of Providence, Cranston and Richmond, Rhode Island. These branches provide a broad range of services throughout Rhode Island, including the greater Providence area, as well as in Southeastern Massachusetts. See "Business." In 1992, the Bank acquired certain assets and assumed certain liabilities from the receiver of Chariho-Exeter (the "Acquisition"), a failed credit union located in the Wyoming section of Richmond, Rhode Island, pursuant to an acquisition agreement (the "Acquisition Agreement") among the Company, the receiver for Chariho-Exeter and the Rhode Island Depositors Economic Protection Corporation ("DEPCO"). See "Business -- The Acquisition." The Bank reopened the Chariho-Exeter facility as the third branch of the Bank providing to the local community formerly served by Chariho-Exeter the same services as those provided at the Bank's other two branches. Through the Acquisition, the Bank acquired $33.4 million in assets, which included $19.5 million in loans and an acquired allowance for possible loan losses of nearly $3.9 million. In connection with the Acquisition, the Company issued a $3 million debenture to DEPCO (the "Senior Debenture") to assist in financing the Acquisition. Because the acquired allowance for possible loan losses is temporary, separate disclosures have been made to segregate the acquired allowance and the Bank's allowance for possible loan losses. As of December 31, 1995, the carrying value of the Senior Debenture was $2.85 million. As of December 31, 1995, the remaining balance of the acquired allowance for possible loan losses was $966,000, and the balance of acquired loans was $6.2 million. See "Business -- Indebtedness -- Senior Debenture" and " -- Lending Activities." The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related notes thereto, included elsewhere in this Prospectus. FINANCIAL CONDITION General. As the holding company for the Bank, the sole subsidiary of the Company, the activities of the Company consist primarily of those of the Bank. Total Assets. The Company's total assets increased $7.5 million, or 8.1%, from $92.8 million at December 31, 1994 to $100.3 million at December 31, 1995. This increase was primarily the result of an increase in the Bank's deposit base, internal growth through earnings, and an increase in the carrying value of investment securities available for sale. Deposit growth was directed to an increase in the loan portfolio through loan originations. The Company's total assets increased $5.2 million, or 5.9%, from $87.6 million at December 31, 1993 to $92.8 million at December 31, 1994. This increase was primarily the result of an increase in deposits and, to a lesser extent, growth in earnings. Investment Securities. The Company's total investment securities increased by $1.7 million, or 6%, from $28.1 million at December 31, 1994 to $29.8 million at December 31, 1995. At December 31, 1995, U.S. Treasury securities, government agency discount notes and an equity security, with a combined aggregate market value of $15.1 million (amortized cost: $15.0 million), were classified as available-for-sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At December 31, 1995, government agency debt securities and collateralized mortgage obligations with a market value of $14.6 million (amortized cost: $14.6 million) were classified as held-to-maturity which is consistent with the Bank's intent and ability. At December 31, 1994, U.S. Treasury securities, government agency discount notes and an equity security, with a combined aggregate market value of $14.9 million (amortized cost: $15.1 million), were classified as available-for-sale. At December 31, 1994, government agency debt securities and collateralized mortgage obligations, 21 with a combined aggregate market value of $12.7 million (amortized cost: $13.2 million), were classified as held-to-maturity. For the year ended December 31, 1995, the net unrealized gain on investment securities was $47,000 as compared to net unrealized loss of $652,000 at December 31, 1994. Despite the segmentation of its investment securities, the Bank anticipates that it will hold all securities to maturity and not recognize any gross gain or loss on disposition. The net appreciation of total investment securities for the year ended December 31, 1995, is attributable to a general decline in interest rates. Total investment securities increased $600,000, or 2.2%, from $27.5 million at December 31, 1993 to $28.1 million at December 31, 1994. This increase was primarily attributable to an increase in deposits, offset somewhat by the January 1, 1994 adoption of SFAS No. 115. Through the adoption of SFAS No. 115, the Bank segmented its investment portfolio and accounted for that portion identified as available-for-sale at estimated market value. At December 31, 1994, the Bank had a net unrealized loss on investment securities available for sale of $191,000. Prior to January 1, 1994, investment securities, which the Bank intended to and had the capability of holding on a long-term basis or until maturity, were classified as held-to-maturity and carried at amortized cost. Loans. The Bank's total loan portfolio increased $6.2 million, or 10.6% from $58.6 million at December 31, 1994 to $64.8 million at December 31, 1995. Commercial real estate loans (defined as loans made for the purchase of investment property, loans made for real estate development and loans made to finance certain corporate activities secured by real estate) accounted for substantially all of this growth with an increase of $7.3 million, or 29.1% from $25.1 million to $32.4 million. See "Business -- Lending Activities." Total loans increased $4.1 million, or 7.5%, from $54.5 million at December 31, 1993 to $58.6 million at December 31, 1994. This increase was primarily attributable to an increase in commercial real estate loans. The addition of another experienced commercial loan officer at the end of 1993 was the primary reason for the increase of commercial real estate lending in 1994. The funds to meet this growth in total loans came from a comparable increase in the Bank's deposit base. Non-Performing Assets: Current. At December 31, 1995, the Bank had non-performing assets of $2.0 million, an increase from December 31, 1994 of $540,000, or 37%, which represented 2.11% of total assets. This increase was primarily due to the increase in other real estate owned ("OREO") properties. As of December 31, 1995, the Bank's non-performing assets consisted of 19 OREO properties aggregating $1,470,000 (at carrying values ranging from $10,000 to $216,000) and 4 non-performing loans aggregating $536,000. Of the non-performing loans, one loan, in the amount of $416,000, was secured by commercial real estate and has been non-accruing since 1993. In recent bankruptcy proceedings involving the debtor, the court released the property for sale. The Bank anticipates full recovery of this loan. OREO is comprised mainly of commercial properties and land. Commercial real estate included in OREO amounted to $1,199,000 at December 31, 1995. Although the Bank believes the Rhode Island economy is in a current period of stabilization and although it has engaged in aggressive collection and workout efforts, the Bank has experienced difficulty in satisfactorily resolving problems with the commercial real estate segment of its loan portfolio as a result of continued weakness in the local economy, especially in the local real estate markets. In particular, commercial real estate lending to finance multi-family properties and mixed use commercial properties several years ago has led to the increase in OREO properties. Although the Bank received payments from time to time, the Bank determined that foreclosure and disposition of OREO properties was appropriate to reduce the Bank's exposure to loss. The Bank believes that the portfolio of non-performing assets has stabilized, due in part to a reduction in the level of delinquencies with respect to loans originated after 1993 and in part to aggressive marketing efforts to dispose of OREO. However, there can be no assurance that non-performing assets will not increase in the future. Delinquencies. At December 31, 1995, 11 loans totalling $266,000 were between 30 and 89 days past due, a decrease from loans totalling $1.3 million that were 30 to 89 days past due at December 31, 1994. The largest loan in this category equalled $81,000. The Company believes that this improvement was the direct result of the aggressive foreclosure and collection efforts directed toward borrowers late with payments, as well as enforcement of stringent credit review and documentation standards beginning in late 1993. 22 Loan Impairment. The Bank, in its judgment, adversely classifies certain loans using an internal loan rating system based on criteria used by bank regulatory authorities. Generally, loans are adversely classified based on payment history, the borrower's financial condition and certain other factors. Delinquent loans may or may not be adversely classified depending upon management's judgment with respect to each individual loan. Certain of these loans may become non-performing in future periods. At December 31, 1995, the Bank classified $1.2 million of loans as substandard based on the rating system adopted by the Bank. This amount includes the $416,000 non-accruing commercial real estate loan discussed above in the section entitled " -- Non-Performing Assets: Current." Of the remaining $800,000 of loans classified as substandard, a majority of which are included in the commercial real estate loan portfolio, the Bank estimates a potential loss exposure of $273,000. This potential exposure has been fully reserved in the allowance for possible loan losses at December 31, 1995. Non-Performing Assets: Prior Period Comparisons. At December 31, 1994, the Bank had non-performing assets totalling $1.5 million, which represented 1.69% of total assets. This compares to $2.1 million, or 2.55%, of total assets at December 31, 1993. Of the total non-performing assets at December 31, 1994, $945,000 were in the Bank's OREO portfolio, while $521,000 consisted of three loans which were on non-accrual status, the largest of which was the $416,000 commercial real estate loan referred to above. This particular loan was also non-accruing at December 31, 1993 and comprised the majority of the $532,000 non-performing loans as of that date. The OREO portfolio of $1.5 million at December 31, 1993 was reduced during 1994 through the sale of slightly more than $1.0 million in OREO properties. Deposits and Borrowings. The Bank devotes considerable time and resources to gathering deposits through its retail branch network system. The Bank has relied on its deposit gathering efforts, rather than FHLB advances, to leverage capital. Total deposits increased $6.4 million from $83.2 million at December 31, 1994 to $89.6 million at December 31, 1995. During 1994, deposits increased $4.7 million, or 6.0%, from $78.5 million at December 31, 1993 to $83.2 million at December 31, 1994. The preponderance of growth of deposits has consisted of time deposits and, in particular, within the Bank's variable rate certificate of deposit product. At the Company level, the Senior Debenture has increased by means of accretion of the original discount. See "Business -- Sources of Funds." RESULTS OF OPERATIONS General. The Company's results of operations depend primarily on its net interest income, which is the difference between interest and dividend income on interest-earning assets and interest expense on its interest-bearing liabilities. Its interest-earning assets consist primarily of loans and investment securities, while its interest-bearing liabilities consist primarily of deposits and the Senior Debenture. The Company's net income is also affected by its level of non-interest income, including fees and service charges, as well as by its non-interest expenses, such as salary and employee benefits, provisions to the allowance for possible loan losses, occupancy costs and, when necessary, expenses related to OREO and to the administration of non-performing and other classified assets. The Company's results of operations reflect those of the Bank together with interest expense and the related federal tax benefit associated with the Senior Debenture. The level of non-performing assets has impacted the Bank's operating results by necessitating additional provisions to the allowance for possible loan losses which are reflected as charges against income. In addition, the Bank's operating results have been impacted by expenses related to OREO. For the years ended December 31, 1995 and 1994, the Company recorded net income of $518,000 and $612,000, respectively. The provision for possible loan losses for 1995 totalled $675,000 as compared to $555,000 for the prior year. Net income for the years ended December 31, 1994 and 1993, was $612,000 and $550,000, respectively. The provision for possible loan losses for the year ended December 31, 1994 was $555,000 as compared to $545,000 for the prior year. Expenses associated with carrying and disposing OREO were $188,000 for the year ended December 31, 1995 as compared to $44,000 for the year ended December 31, 1994. For the year ended December 31, 1994, OREO related expenses (income) amounted to $44,000, as compared to $(25,000) for the prior year. Although non-performing loans have remained relatively flat at each of December 31, 1995, 1994 and 1993, respectively, OREO 23 properties increased during 1995. This increase was primarily the result of the Bank's efforts to resolve impaired loans swiftly, with the goal of minimizing loss. The difference between the carrying value of the loans and the value of the underlying collateral is reflected as a charge to the allowance for possible loan losses. The provisions to the allowance for possible loan losses, reflected as charges against income, were necessary to restore the allowance to a level which the Bank believed was necessary to absorb future possible loan losses, if any. See "Business -- Allowance for Possible Loan Losses." The Bank's provisions to the allowance for possible loan losses and for OREO expenses and losses are related to the recent economic downturn and a decrease in commercial real estate market values from the record highs of the mid-and-late-1980's. Conditions in the local real estate market and the overall local economy are likely to be significant determinants of the quality of the Company's assets in future periods and, ultimately, its results of operations. Net Interest Income. For the year ended December 31, 1995, the Company's net interest income was $4.1 million, a decrease of $100,000, or 2.4% from $4.2 million for the year ended December 31, 1994. The Company's net interest margin declined to 4.43% for the year ended December 31, 1995, from 4.82% for the year ended December 31, 1994. In its attempt to satisfy an increased loan demand, the Company shifted its earning assets from lower yielding investments to higher yielding loans and increased its loan to deposit ratio from 70.41% to 72.22%. This partially offset the impact on the Company's cost of funds during 1995 of 1994's rising interest rate environment and the shifting of existing core savings deposits and the gathering of new deposits into higher yielding time deposits during the year. Net interest income for the year ended December 31, 1994, was $4.2 million as compared to $3.8 million for the year ended December 31, 1993. The Company's net interest margin increased from 4.38% to 4.82% for the year ended December 31, 1994. This increase in net interest income and net interest margin resulted primarily from: (i) the ability to satisfy a healthy loan demand; (ii) rising interest rates favorably influencing the rate sensitive portion of the Company's earning assets; and (iii) delay in increasing deposit product pricing in response to increasing interest rates in 1994. The Bank's strategy for improving its net interest income has several components. The Bank expects to continue efforts to originate high-quality commercial and residential mortgage loans. Further, the Bank will seek to expand its strong working relationship with the small business community and the SBA. In addition, the Bank will continue efforts to reduce its cost of funds by marketing transaction accounts to increase the percentage of this deposit category to total deposits. Finally, the Bank is able to take advances from the FHLB to match-fund certain portions of its loan portfolio, especially its residential mortgage loan portfolio. This match-funding reduces long-term interest rate risk and potentially enhances the stability of net interest income. The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances. 24 AVERAGE BALANCES AND INTEREST RATES (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 1993 ---- ---- ---- INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------- ------- ---- ------- ------- ---- ------- ------- ---- INTEREST EARNING ASSETS: Loans(1) ........................... $61,043 $5,994 9.82% $56,812 $5,514 9.70 $51,585 $5,299 10.27 Investment securities taxable -- AFS(2) ........................... 13,575 758 5.58 14,633 621 4.24 12 1 8.33 Investment securities taxable -- HTM(2) ........................... 14,357 831 5.79 10,672 487 4.56 24,933 996 4.00 Securities purchased under agreement to resell ........................ 2,796 149 5.33 4,348 172 3.96 10,753 328 3.05 ----- --- ---- ----- --- ---- ------ --- ---- TOTAL INTEREST-EARNING ASSETS ......... 91,771 7,732 8.43 86,465 6,794 7.86 87,283 6,624 7.59 ----- ---- ----- ---- ----- ---- NONINTEREST-EARNING ASSETS: Cash and due from banks ............ 2,073 2,628 2,592 Premises and equipment ............. 1,810 1,553 1,656 Other real estate owned ............ 1,206 1,101 380 Allowance for possible loan losses . (2,086) (2,205) (1,842) Other assets ....................... 875 700 687 --- --- --- TOTAL NONINTEREST-EARNING ASSETS ...... 3,878 3,777 3,473 TOTAL ASSETS .......................... $95,649 $90,242 $90,756 ======= ======= ======= INTEREST BEARING LIABILITIES: Deposits: Interest bearing demand and NOW deposits ......................... $ 2,642 56 2.12 $ 2,877 63 2.19 $ 2,738 61 2.23 Savings deposits ............... 22,216 582 2.62 27,741 734 2.65 27,885 792 2.84 Money market deposits .......... 2,149 55 2.56 2,473 66 2.67 2,341 64 2.73 Time deposits .................. 46,008 2,736 5.95 34,677 1,587 4.58 34,239 1,704 4.98 Securities sold under agreement to repurchase ....................... -- -- -- -- -- -- 541 14 2.59 Senior debenture ................... 2,818 240 8.52 2,644 179 6.77 2,472 168 6.80 ----- --- ---- ----- --- ---- ----- --- ---- TOTAL INTEREST-BEARING LIABILITIES .... 75,833 3,669 4.84 70,412 2,629 3.73 70,216 2,803 3.99 ----- ---- ----- ---- ----- ---- NONINTEREST-BEARING LIABILITIES: Noninterest-bearing deposits ....... 12,397 12,791 14,336 Other liabilities .................. 473 668 284 --- --- --- TOTAL NONINTEREST-BEARING LIABILITIES . 12,870 13,459 14,620 STOCKHOLDERS' EQUITY .................. 6,946 6,371 5,920 ----- ----- ----- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $95,649 $90,242 $90,756 ======= ======= ======= NET INTEREST INCOME ................... $ 4,063 $4,165 $3,821 ======= ====== ====== NET INTEREST SPREAD(3) ............... 3.59% 4.13% 3.60% ==== ==== ==== NET INTEREST MARGIN(4) ............... 4.43% 4.82% 4.38% ==== ==== ====
__________ (1) Loans are net of unearned discount. Non-accrual loans are included in the average balances used in calculating this table. (2) Effective January 1, 1994, the Company adopted SFAS No. 115. See "Notes to Consolidated Financial Statements." This statement requires classification of investment securities into Available-For-Sale (AFS) and Held-To-Maturity (HTM). Prior to January 1, 1994, it was the Company's ability and intention to hold all debt instruments to maturity. (3) The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. (4) The net interest margin is net interest income divided by average interest-earning assets. 25 The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume). RATE VOLUME ANALYSIS OF NET INTEREST INCOME (DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 COMPARED WITH COMPARED WITH COMPARED WITH DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992 ----------------- ----------------- ----------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO -------------------------- -------------------------- -------------------------- VOLUME(3) RATE TOTAL VOLUME(3) RATE TOTAL VOLUME(3) RATE TOTAL --------- ---- ----- --------- ---- ----- --------- ---- ----- INTEREST EARNING ASSETS: Loans(1) ....................... $ 412 $ 68 $ 480 $ 509 $(294) $ 215 $ 253 $ 88 $ 341 Investment securities taxable -- AFS(2) ....................... (59) 196 137 621 (1) 620 -- -- -- Investment securities taxable -- HTM(2) ....................... 213 131 344 (649) 140 (509) 447 (246) 201 Securities purchased under agreement to resell, federal funds sold interest bearing deposits ..................... (82) 59 (23) (254) 98 (156) (334) (94) (428) --- -- --- ---- -- ---- ---- --- ---- TOTAL INTEREST EARNING ASSETS $ 484 $ 454 $ 938 $ 227 $ (57) $ 170 $ 366 $ (252) $ 114 ===== ===== ====== ====== ===== ====== ===== ====== ===== INTEREST BEARING LIABILITIES: Interest-bearing demand and NOW deposits .................... $ (5) $ (2) $ (7) $ 3 $ (1) $ 2 $ 9 $ (12) $ (3) Savings deposits .............. (144) (8) (152) (5) (53) (58) (69) (55) (124) Money market deposits ......... (8) (3) (11) 3 (1) 2 (5) (15) (20) Time deposits ................. 674 475 1,149 20 (137) (117) 351 (250) (101) Securities sold under agreement to repurchase ............... -- -- -- (14) -- (14) (125) (43) (168) Senior debenture .............. 15 46 61 12 (1) 11 67 (5) 62 -- -- -- -- -- -- -- -- -- TOTAL INTEREST BEARING LIABILITIES $ 532 $ 508 $1,040 $ 9 $ (193) $ (174) $ 216 $ (368) $(152) ===== ===== ====== ====== ====== ======= ===== ====== ===== NET CHANGE IN NET INTEREST INCOME $ (48) $ (54) $ (102) $ 208 $ 136 $ 344 $ 150 $ 116 $ 266 ===== ===== ====== ====== ===== ======= ===== ====== =====
_________ (1) Loans are net of unearned discount. Non-accrual loans are included in the average balances used in calculating this table. (2) Effective January 1, 1994, the Company adopted SFAS No. 115. See "Notes to Consolidated Financial Statements." This statement requires classification of investment securities into Available For Sale (AFS) and Held To Maturity (HTM). Prior to January 1, 1994, it was the Company's ability and intention to hold all debt instruments to maturity. (3) Changes in rate/volume have been allocated to volume variances throughout this table. Total interest income for the year ended December 31, 1995 was $7.7 million, compared to $6.8 million for the year ended December 31, 1994. This increase of $900,000, or 13.2%, was attributable primarily to a $5.3 million, or 6.1%, increase in average interest-earning assets, which included a $4.2 million, or 7.4% increase in average loan balances. This increase in higher yielding average loan balances, combined with an increase in investment securities' yields, resulted in an overall increase of .57% in the yield on interest-earning assets. Yields on investment securities increased primarily as a result of the relatively short duration of the portfolio and the ability to reinvest or reprice in a rising rate environment. 26 Total interest income for the year ended December 31, 1994 was $6.8 million compared to $6.6 million for the year ended December 31, 1993. The increase in 1994 was attributable to a .27% increase in the average yield on interest-earning assets. Despite an $800,000 decline in average interest-earning assets, the higher yielding loan portfolio increased on average by $5.2 million. The loan portfolio increase was funded primarily by the Company's interest bearing cash equivalents, such as overnight Repurchase Agreements, Federal Funds Sold, and interest bearing deposits with other financial institutions. The interest income increase in 1994 was also, to a lesser extent, attributable to the rising interest rate environment which had a positive impact on the yield from the Company's investment securities and cash equivalents. Total interest expense for the year ended December 31, 1995 was $3.6 million, compared to $2.6 million for the year ended December 31, 1994. The increase in total interest expense of $1.0 million, or 38.5%, was due primarily to an increase of 1.11% in average cost of funds, and a $5.4 million increase in interest-bearing liabilities. The increase in the average cost of funds is primarily attributable to: (i) the lagged impact of the rising interest rate environment during 1994; (ii) the shifting of existing core savings deposits into higher yielding time deposits; and (iii) the gathering of new deposits into higher yielding time deposits. Total interest expense for the year ended December 31, 1994, was $2.6 million compared to $2.8 million for the year ended December 31, 1993. The decrease in total interest expense of $.2 million, or 7.1%, for the year ended December 31, 1994 was due to a .26% decrease in the average cost of funds, which decrease resulted from a delay in increasing deposit product pricing in a rising interest rate environment. Provisions to the Allowance for Possible Loan Losses. The provision to the allowance for possible loan losses was $675,000 for the year ended December 31, 1995, compared to $555,000 for the year ended December 31, 1994. The increased provision was necessary to restore the allowance for possible loan losses to a level considered to be adequate by the Bank. In 1995, the Bank's net charge-offs amounted to $577,000. Of this amount, nearly $483,000 was related to commercial real estate and multi-family investment property. Loans identified by the Bank as impaired loans decreased from $2.3 million at December 31, 1994 to $1.2 million at December 31, 1995. This decrease was primarily the result of foreclosures, which caused an increase in both the Bank's OREO portfolio and the level of net charge-offs during 1995. The provision to the allowance for possible loan losses was $555,000 for the year ended December 31, 1994, compared to $545,000 for the year ended December 31, 1993. Net charge-offs amounted to $495,000 for the year ended December 31, 1994, compared to $466,000 for the year ended December 31, 1993. The provisions in each respective year were made in response to the amount of the net charge-offs during the year, the level of non-performing and delinquent loans, and the Bank's assessment of the future impact of the economic and financial prospects of the Bank's real estate secured loan portfolio. In May 1992, the Bank acquired certain assets and assumed certain liabilities of Chariho-Exeter. See "Business -- Acquisition" and "Notes to Consolidated Financial Statements." In connection with the Acquisition, the Bank acquired loans with a value of $19.5 million and an allowance for possible loan losses of $3.9 million. Under the terms of the Acquisition Agreement, the Bank may, through May 1, 1999, charge-off acquired loans against the acquired allowance. Since the acquired allowance for possible loan losses is temporary, separate disclosures have been made to segregate the acquired allowance and the Bank's allowance for possible loan losses. The respective balances of acquired loans and acquired allowance at years' end were as follows:
AT DECEMBER 31, --------------- 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Acquired Loans ................................... $6,147 $7,634 $ 8,684 ====== ====== ======= Acquired Allowance ............................... $ 966 $1,493 $1,596 ====== ====== ======
27 Non-Interest Income. Non-interest income increased from $390,000 for the year ended December 31, 1994 to $474,000 for the year ended December 31, 1995. This increase was principally the result of gains on the sale of the guaranteed portion of SBA loans. In 1995, the guaranteed portion of four SBA loans sold by the Bank amounted to approximately $1 million. From these sales, the Bank recognized a total gain of $94,000 as non-interest income. The Bank retained servicing of these loans and recorded servicing fee income of $15,000 in 1995. In 1994, the Bank sold the guaranteed portion of two SBA loans and recognized a gain of $29,000. It is the Bank's intention to continue to originate and sell the guaranteed portion of SBA loans so long as favorable market conditions exist. Also, in an attempt to develop a revenue stream from sources other than net interest income, the Bank intends to develop its serviced loan portfolio, which approximates $1.3 million at December 31, 1995. The Bank relies on deposit account service charges and other service-related fees to provide a predictable level of revenue to the Bank. The following table identifies the major sources of non-interest income to the Bank.
YEARS ENDED AT DECEMBER 31, --------------------------- 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Service Charges and Fees on Deposit Accounts ... $285 $256 $ 256 Safe Deposit Box Renewal ....................... 25 25 31 Other Service Fees ............................. 37 56 67 Gain on Sale of Loans .......................... 94 29 -- Loan Servicing Fee ............................. 15 -- -- Other .......................................... 18 24 55 -- -- -- $474 $390 $409 ==== ==== ====
In 1994, non-interest income decreased $19,000 from $409,000 for the year ended December 31, 1993 to $390,000 for the year ended December 31, 1994, despite the recognition of $29,000 in gains on the sale of loans. The primary reason for the decrease was the continued reduction, and resultant decline in deposit service charges and related service fees, of deposit accounts assumed in 1992 as part of the Acquisition. See "Business -- Acquisition." Non-Interest Expense. The following table identifies the major components of non-interest expense for the respective periods presented:
YEARS ENDED AT DECEMBER 31, --------------------------- 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Salaries and Employee Benefits ................ $1,566 $1,554 $ 1,386 Occupancy Expense ............................. 337 342 364 Equipment Expense ............................. 196 175 227 OREO (Gains) Losses, Write-downs, and carrying costs, net .................................. 188 44 (25) Other Operating Expenses: FDIC Insurance Premium ..................... 95 177 180 Computer Service ........................... 151 130 123 Regulatory Examination Fees ................ 15 11 47 Legal Fees ................................. 68 55 51 Directors' Fees ............................ 59 54 49 Postage .................................... 44 45 45 Advertising ................................ 45 40 24 Office Supplies, Forms, Stationary, Printing, etc. ............................ 78 77 65 Miscellaneous .............................. 251 284 269 --- --- --- $3,093 $2,988 $2,805 ====== ====== ======
28 Total non-interest expense for the year ended December 31, 1995 was $3,093,000 as compared to $2,988,000 for the year ended December 31, 1994. For the year ended December 31, 1994, total non-interest expense increased $183,000, or 6.5%, to $2,988,000 from $2,805,000 for the year ended December 31, 1993. The single largest expense accounting for this increase was the $168,000 increase in salaries and employee benefits. Salaries and employee benefits increased $12,000, or .7%, from $1,554,000 for the year ended December 31, 1994 to $1,566,000 for the year ended December 31, 1995. This increase reflected the addition of a commercial loan officer during 1995 together with a general pay adjustment for nearly all employees. The overall increase in salaries and benefits was offset somewhat by an increase in deferred loan origination costs of $69,000 from $72,000 for the year ended December 31, 1994 to $141,000 for the year ended December 31, 1995. This increase in deferred costs was a direct result of an increase in loan originations. Salaries and benefits increased $168,000, or 12%, to $1,554,000 for the year ended December 31, 1994 from $1,386,000 for the year ended December 31, 1993. This increase was primarily the result of the addition of a commercial loan officer at the end of 1993, a general increase in pay scales, and an increase in pension costs attributable to the addition of new employees resulting from the Acquisition who qualified for participation in the Bank's pension plan. Equipment expense increased $21,000 from $175,000 for the year ended December 31, 1994 to $196,000 for the year ended December 31, 1995. This increase was attributable to depreciation charges associated with the purchase in late 1994 of nearly $156,000 of item processing computer equipment. Equipment expense decreased $52,000 from $227,000 for the year ended December 31, 1993 to $175,000 for the year ended December 31, 1994. This decrease was the result of the cancellation of several equipment service contracts and the move to a self-insurance program for equipment related repairs and maintenance. OREO (gains) losses, write-downs and carrying costs increased $144,000 from $44,000 for the year ended December 31, 1994 to $188,000 for the year ended December 31, 1995, and $69,000 from $(25,000) for the year ended December 31, 1993 to $44,000 for the year ended December 31, 1994. These increases were the result of higher carrying and/or disposition costs associated with a larger OREO portfolio. See "Business -- Lending Activities -- Allowance for Possible Loan Losses and OREO Activity." Since 1992, the Bank has paid its FDIC insurance premium at the rate of $.23 per $100.00 of assessable deposits. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), this assessment rate was, until recently, the lowest rate for insured depository institutions. The Bank has qualified for this rate on the basis of its strong capital position and supervisory evaluation. In August 1995, the FDIC lowered the premium from $.23 to $.04 of assessable deposits, retroactive to June 1, 1995. On November 30, 1995, the Bank was notified that effective January 1, 1996, its annual assessment would be reduced to the minimum statutory requirement of $2,000. For a discussion of FDIC insurance premiums, see "REGULATION AND SUPERVISION -- 1991 Banking Legislation." Other increases or decreases in general and administrative expenses have been largely due to the Bank's increased item processing, greater efficiency and productivity, and decisions to increase or curtail discretionary programs, projects and spending. The Company anticipates that non-interest expense will increase for the year ended December 31, 1996 as compared to the year ended December 31, 1995 as a result of reporting requirements applicable to public companies under the Exchange Act. After the Public Offering, the Company will be required to file reports, proxy statements, and other information with the Commission. It is not known to what extent, if any, non-interest expense will increase, or what affect, if any, it will have on the operations of the Company. Income Taxes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, assets and liabilities are adjusted through the provisions for income taxes. 29 For federal income tax purposes, the Company files a consolidated tax return. However, for state tax purposes, separate returns for the Company and the Bank are filed. Because the Company and not the Bank records the interest expense with respect to the Senior Debenture for state tax return purposes, and since Rhode Island does not allow for net operating loss carrybacks or carryforwards, the Company obtains no state tax benefit from the Senior Debenture interest expense. In 1995, the Internal Revenue Service examined the Company's 1992 federal consolidated tax return. No adjustments resulted from the examination of the return. Under Rhode Island law, taxable income of the Bank has been taxed at a statutory rate of 8%. However, because interest income on U.S. Treasury obligations and certain government agency debt securities is excludable from income for state tax purposes, the Bank paid $200 of state income taxes in 1995, $3,500 in 1994, and $7,000 in 1993. The Bank has also paid a tax on its deposits which amounted to $31,000 in 1995, $33,000 in 1994 and $44,000 in 1993. Under recently enacted legislation, the statutory rate for taxable income of financial institutions has been increased from 8% to 9% in 1995, and the tax on deposits will be phased-out during 1996 and 1997. Asset/Liability Management. The principal objective of the Bank's asset and liability management is to minimize interest rate risk on net interest income and stockholders' equity. This objective is accomplished by managing the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or repricing dates. The Bank's actions in this regard are taken under the guidance of the Bank's Asset/Liability Management Committee which is comprised of members of the Bank's senior management and two members of the Bank Board. The Bank's Asset/Liability Management Committee is actively involved in formulating the economic assumptions that the Bank uses in its financial planning and budgeting process and establishes policies which control and monitor the Bank's sources, uses and pricing of funds. The effect of interest rate changes on the assets and liabilities of a financial institution such as the Bank may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity "gap" is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely. The Bank has historically sought to maintain a relatively narrow gap position and has, in some instances, foregone investment in higher yielding assets where such investment, in management's opinion, exposed the Bank to undue interest rate risk. However, the Bank does not attempt to perfectly match interest rate sensitive assets and liabilities and will selectively mismatch its assets and liabilities to a controlled degree where it considers it both appropriate and prudent to do so. In managing its interest rate risk exposure, the Bank does not engage in any off-balance sheet hedging or speculative activities. Other than fixed rate loan commitments, the Bank is prohibited, by internal policy, from engaging in the use of off-balance sheet financial instruments. There are a number of relevant time periods in which to measure the Bank's gap position, such as at the 3, 6, and 12 month points and beyond in the maturity schedule. Management tends to focus most closely on the gap up to the one year point in making its principal funding and investing decisions. 30 The following table presents the repricing schedule for the Company's interest-earning assets and interest-bearing liabilities at December 31, 1995:
WITHIN OVER THREE OVER ONE OVER FIVE THREE TO TWELVE YEAR TO YEARS TO OVER MONTHS MONTHS FIVE YEARS TEN YEARS TEN YEARS TOTAL ------ ------ ---------- --------- --------- ----- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS(1): Securities purchased under agreement to resell ............... $ 1,035 $ -- $ -- $ -- $ -- $ 1,035 Investment securities .............. 11,683 6,383 11,710 -- -- 29,776 Loans -- fixed rate ................ 6,774 9,695 23,020 8,614 -- 48,103 Loans -- variable rate ............. 16,686 -- -- -- -- 16,686 ------ ------ Total interest earning assets ........ 36,178 16,078 34,730 8,614 -- 95,600 ------ ------ ------ ----- ----- ------ INTEREST BEARING LIABILITIES(2): Money Market accounts(3) ........... 307 911 584 -- -- 1,802 Savings deposits and NOW accounts(3) ....................... 1,910 5,695 14,785 -- -- 22,390 Time deposits ...................... 31,048 16,022 5,845 -- -- 52,915 Senior debenture ................... -- 2,845 -- -- -- 2,845 ------ ----- ------ ----- ----- ----- Total interest bearing liabilities ... 33,265 25,473 21,214 -- -- 79,952 ------ ------ ------ ------ ------ ------ NET INTEREST SENSITIVITY GAP DURING THE PERIOD ......................... $ 2,913 $ (9,395) $ 13,516 $ 8,614 $ -- $ 15,648 -------- -------- -------- -------- ------ -------- CUMULATIVE GAP ....................... $ 2,913 $ (6,482) $ 7,034 $ 15,648 $ 15,648 $ 15,648 -------- -------- -------- -------- -------- -------- Interest-sensitive assets as a percent of interest-sensitive liabilities (cumulative) ....................... 108.76% 88.96% 108.80% 119.57% 119.57% 119.57% Interest-sensitive assets as a percent of total assets (cumulative) ....... 36.07% 52.10% 86.72% 95.31% 95.31% 95.31% Net interest sensitivity gap as a percent of total assets ............ 2.90% (9.37)% 13.48% 8.59% -- % 15.60% Cumulative gap as a percent of total assets ............................. 2.90% (6.47)% 7.01% 15.60% 15.60% 5.60%
_________ (1) Adjustable and floating-rate assets and liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed rate loans are included in the periods in which they are scheduled to be repaid, adjusted for assumed prepayments. (2) Does not include $12.5 million of demand accounts because they are non-interest bearing. (3) Money market, savings and NOW accounts which have no stated maturity reflect certain decay assumptions based upon industry experience. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. 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 and to earning enhancement opportunities in a changing marketplace. Primary 31 sources of liquidity consist of deposit inflows, loan repayments, securities sold under agreement to repurchase, maturity of investment securities and sales of securities from the available for sale portfolio. These sources fund the Bank's lending and investment activities. At December 31, 1995, 1994 and 1993, cash and due from banks, securities purchased under agreement to resell, and short-term investments (maturing within one year) amounted to $13.2 million, $16.3 million and $17.2 million, respectively, or 13.1%, 17.6% and 19.7% of total assets, respectively. Management is responsible for establishing and monitoring liquidity targets as well as strategies and tactics to meet these targets. Concurrently with its acceptance for membership in the FHLB, the Bank reduced its liquidity position through the growth of its loan portfolio. Through membership in the FHLB, the Bank has access to both short and long-term borrowings of up to $4.2 million, which would assist the Bank in meeting its liquidity needs and funding its asset mix. At December 31, 1995, the Bank held state and municipal demand deposits of $2.3 million which it considered highly volatile. Nonetheless, the Bank believes that there are no adverse trends in the Bank's liquidity or capital reserves, and the Bank believes that it maintains adequate liquidity to meet its commitments. In contrast to the Bank, the Company maintains no liquidity because substantially all of its assets consist of stock of the Bank. The Company's primary liquidity needs consist of interest payments on the Senior Debenture and payment of Rhode Island franchise taxes. The Company's primary sources of funds are potential issuances of its capital stock, borrowings and dividends received from the Bank, subject to regulatory compliance. Capital Resources. Total stockholders' equity of the Company at December 31, 1995 was $7,192,000, as compared to $6,559,000 at December 31, 1994. The increase of $633,000 resulted from net income for the year ended December 31, 1995 of $518,000 and appreciation in the available-for-sale component of investment securities portfolio of $190,000 minus a dividend payment of $75,000. Total stockholders' equity of the Company increased from $6,124,000 at December 31, 1993 to $6,559,000 at December 31, 1994. This increase was attributable to net income of $612,000 minus a change in unrealized loss on securities available for sale of $115,000 and a dividend payment of $62,000. The Bank is subject to the leverage and risk-based capital ratio requirements of the FDIC. The Bank is deemed to be "well capitalized" by the FDIC and is classified as such for FDIC insurance- assessment purposes. See " -- Non-Interest Expense." At December 31, 1995, the Bank's Leverage Capital Ratio was 10.17%, as compared to 10.40% and 10.27% at December 31, 1994 and 1993, respectively. The FDIC's minimum Leverage Capital Ratio for "adequately capitalized" financial institutions is 3%, although this minimum leverage ratio applies only to certain of the most highly-rated banks. Other institutions are subject to higher requirements. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. According to these standards, the Bank had a Tier I Risk-Based Capital Ratio of 15.02% and a Total Risk-Based Capital Ratio of 16.26% at December 31, 1995, as compared to a Tier I Risk-Based Capital Ratio of 16.41% and a Total Risk-Based Capital Ratio of 17.66% at December 31, 1994, and a Tier I Risk-Based Capital Ratio of 16.39% and a Total Risk-Based Capital Ratio of 17.63% at December 31, 1993. The minimum risk-based Tier I and Total Capital Ratios at each of these dates were 4.0% and 8.0%, respectively. The capital structure of the Company and the Bank differ as a result of the maintenance of the Senior Debenture at the Company level, and the related impact through earnings of interest expense and associated tax benefit. See "Business - -- Acquisition" and " -- Indebtedness" for further information regarding the Senior Debenture and the infusion of its proceeds as additional capital to the Bank. At December 31, 1995 the Company's Leverage Capital Ratio was 6.87%, as compared to 7.01% and 6.81% at December 31, 1994 and 1993, respectively. The Company's Tier I Risk-Based Capital Ratio was 10.20% and its Total Risk-Based Capital Ratio was 11.46% at December 31, 1995, 11.11% and 12.36%, respectively, at December 31, 1994; and 10.92% and 12.17%, respectively at December 31, 1993. See "Regulation and Supervision" for further information. 32 BUSINESS GENERAL The Company is a bank holding company that was organized under Rhode Island law in 1980 for the purposes of owning all the outstanding capital stock of the Bank and providing greater flexibility in helping the Bank achieve its business objectives. The Bank is a Rhode Island chartered commercial bank that was originally chartered and opened for business on February 14, 1972. The Bank provides a broad range of lending and deposit products primarily to individuals and small businesses ($10 million or less in total revenues). Although the Bank has full commercial banking and trust powers, it has not exercised its trust powers and does not, at the current time, provide asset management or trust administration services. The Bank's deposits are insured by the FDIC up to applicable limits. See "Regulation and Supervision." The Bank offers a variety of consumer financial products and services designed to satisfy the deposit and loan needs of its retail customers. The Bank's retail products include interest-bearing and noninterest-bearing checking accounts, money market accounts, passbook and statement savings accounts, club accounts, and short-term and long-term certificates of deposit. The Bank also offers customary check collection services, wire transfers, safe deposit box rentals, and automated teller machine (ATM) cards and services. Loan products include commercial, commercial mortgage, residential mortgage, construction, home equity and a variety of consumer loans. The Bank's strategy of managed growth through varied and often challenging economic cycles has been strategically supplemented by both de novo branch expansion and acquisition. The Bank's first expansion beyond its main office occurred in 1981 with the opening of its Cranston, Rhode Island branch. The Bank was presented with a further growth opportunity in 1991 as a result of the Rhode Island "credit union crisis," when 45 privately-insured banks and credit unions were closed by the Rhode Island Governor. In 1992, the Bank acquired certain assets and assumed certain liabilities of the Chariho-Exeter Credit Union located in the Wyoming section of Richmond, Rhode Island. See " -- Acquisition." The core of the Bank's business remains its ability to meet the lending and deposit needs of customers in its market area. By directing its efforts toward small or small to medium size businesses and consumers, the Bank's loan portfolio has increased to $64.7 million at December 31, 1995 and is comprised of a broad mix of commercial real estate, residential and consumer loans. With the economic challenges faced in the Rhode Island marketplace, certain portions of these portfolios have experienced difficulties. See "-- Lending Activities -- Loan Portfolio Composition and Maturity." Nonetheless, the Bank has remained profitable on an annual basis since 1976. Most recently, the Bank has experienced growth in business loans to borrowers with favorable cash flow attributes seeking working capital financing secured by real estate. This growth has been driven, in part, by the addition of two lending officers who concentrate on customers that fall into this category one of whom was hired in 1993, and the other of whom was hired in 1995. Evidencing the Bank's success in catering to this business market, the Bank was listed in Entrepreneur Magazine as one of the 294 banks in the country most likely to grant a small business loan, and as the 9th largest dollar lender of SBA funds in the Providence region for the 1995 fiscal year. Total SBA funds loaned by the Bank were approximately $2.5 million and represented a substantial increase over the same period for the 1994 fiscal year. The Bank recently received the designation of "certified lender" by the SBA. As a result of this designation, the SBA is contractually obligated to respond within three business days to SBA loan requests submitted by the Bank. For a more detailed description of the Bank's loan growth and lending staff additions, see "-- Lending Activities -- Loan Portfolio Composition and Maturity." The Bank's ability to attract these new lending relationships and the related deposits is dependent on its willingness and ability to provide service to customers with identified needs. The Company believes that the Bank is particularly well-situated to serve the banking needs of the metropolitan Providence area. The Company believes that the local character of the business environment coupled with the Company's knowledge of the customers and their needs, together with its comprehensive retail and small business products and rapid decision-making at the branch level, create opportunities that will enable the Bank to effectively compete. Further, the Company believes that the accessibility and responsiveness of the Bank's personnel allow the Bank to compete effectively for certain segments within its market, in particular local professionals and businesses, who demand and receive customized and personalized banking products and services. 33 ACQUISITION On May 1, 1992, the Bank acquired certain assets and assumed certain liabilities of Chariho-Exeter. On May 4, 1992, the Bank reopened the Chariho-Exeter facility as the third branch of the Bank providing the same service to the local community formerly served by Chariho-Exeter as those provided at the Bank's other two branches. Although the Acquisition was accounted for as a purchase, no goodwill or other intangible asset was recorded because the purchase price did not exceed the fair value of the assets acquired. Through the Acquisition, the Bank acquired $33.4 million in assets, which included $19.5 million in loans and an acquired allowance for possible loan losses of nearly $3.9 million. Under the Acquisition Agreement, the Bank may, through May 1, 1999, charge-off uncollected acquired loans to this acquired allowance for possible loan losses. At May 1, 1999, any remaining acquired allowance, less an amount equal to 1% of the remaining acquired loans, must be repaid to DEPCO in the form of cash. In 1991, forty-five Rhode Island institutions were closed during the Rhode Island "credit union crisis," precipitated by the inability of those institutions to obtain federal deposit insurance in the wake of the failure of one of Rhode Island's private insurers. Of these closed institutions, the Company was particularly interested in Chariho-Exeter. During 1991, this failed credit union was placed into receivership and its assets and liabilities were placed under liquidation management with DEPCO, a quasi-governmental authority formed through enabling legislation of the Rhode Island General Assembly. DEPCO was given the responsibility of liquidating assets in satisfaction of depositors' and creditors' liabilities. The Company believed the acquisition of Chariho-Exeter would allow the Bank to increase its total assets and profitability. This growth would allow the Bank to expand both its services within the communities it was then serving and to penetrate new market areas. The Bank viewed the South County area of Rhode Island, formerly served by Chariho-Exeter, as an opportune market in which to seek to expand its products and services. In addition, as a community-oriented financial institution, the Bank was attracted to a transaction that would assist other Rhode Islanders in gaining access to their frozen deposits. In connection with the Acquisition, the Company issued the Senior Debenture to assist in financing the Acquisition. See "-- Indebtedness -- Senior Debenture." The proceeds of the Senior Debenture were invested as a contribution of capital to the Bank. If, at any time prior to May 1, 1999, net acquired loan losses exceed the acquired allowance for possible loan losses, such excess may be deducted from the Company's debt obligations under the Senior Debenture. As part of the Acquisition, the Bank assumed $33.4 million in deposits which were immediately converted to the Bank's statement savings accounts. On May 4, 1992, when the new Wyoming branch facility was opened, the Bank anticipated material deposit outflows as a result of the pent-up demand depositors would have for their funds, which had been frozen for over sixteen months. In 1992, total deposits at the Wyoming branch fell to below $20 million. Since 1992, deposit levels have stabilized and increased gradually to $22.3 million as of December 31, 1995, as the Bank continues to establish a presence in the South County market. MARKET AREA Although its main office is located in downtown Providence, the Bank's Cranston branch is its largest office with deposits of $44.2 million at December 31, 1995. The Providence branch and the Wyoming branch had approximately $23.1 million and $22.3 million, respectively, in deposits at December 31, 1995. Through its Providence and Cranston locations, the Bank believes it is the last remaining community bank in the metropolitan Providence area and will seek to capitalize on that unique strategic positioning by continuing to provide for the lending and deposit needs of its commercial and consumer customers in its market area and by targeting customers who desire the convenience and personal service not otherwise available as the result of the recent major banking consolidations. These events, and the Bank's perseverance throughout, have given the Bank the opportunity to further build its image as a metropolitan community bank and, through the steps outlined above, the Bank believes it is advantageously positioned for success in the Rhode Island market. 34 The Bank's two metropolitan branches compete primarily against large regional financial institutions. At June 30, 1994, the most recent date for which market-share data is available, the Providence branch held a .43% market share of total deposits within the City of Providence, the Cranston branch held a 2.82% market share of total deposits within the City of Cranston, and the Wyoming branch held a 28.22% market share of total deposits within the Town of Richmond. As of June 30, 1994, the Bank had seen a three-year compounded growth (decline) rate in deposits of 11.65% and (3.80)% in its Cranston and Providence branches, respectively. Similar information for the Wyoming branch is not meaningful due to the Acquisition of Chariho-Exeter. LENDING ACTIVITIES General. The Bank lends primarily to individuals and small businesses, including partnerships, professional corporations and associations, and limited liability companies. Loans made by the Bank to individuals include owner-occupied residential mortgage loans, unsecured and secured personal lines of credit, home equity loans, mortgage loans on investment (generally non-owner occupied 1-4 family) and vacation properties, installment loans, student loans, and overdraft line of credit protection. Loans made by the Bank to businesses include typical asset-based loans, commercial real estate loans (loans to individuals secured by residential property of 5 units or more are considered commercial real estate loans) and lines of credit. Within the commercial real estate portfolio, a loan may be secured by real estate although the purpose of the loan is not to finance the purchase or development of real estate nor is the principal source of repayment the sale or operation of the real estate collateral. The Bank will often secure commercial loans for working capital or equipment financing with real estate together with equipment and other assets. The Bank characterizes such loans as "commercial real estate," consistent with bank regulatory requirements. Generally, the Bank lends only to borrowers located in Rhode Island or nearby Southeastern Massachusetts or Connecticut. Occasionally, the Bank will lend to a borrower in its market area where collateral securing obligations is vacation property located outside the market area. At December 31, 1995, the Bank had gross loans outstanding of $64.8 million, which represented approximately 64.6% of the Company's total assets. The interest rates charged on the Bank's loans vary with the degree of risk, term and amount of the loans and are further subject to competitive pressures, money market rates, the availability of funds, and legal and regulatory requirements. Many of the Bank's residential and commercial real estate loans are either tied to a rate index (e.g. Wall Street Prime Rate) or fixed rate subject to rate review and/or call within three to five years. At December 31, 1995, approximately 83.3% of the Bank's outstanding loans will reprice or be subject to rate review within five years. At December 31, 1995, approximately 92.2% of the Bank's outstanding loans were secured in whole or in part by real estate (this includes first and second residential mortgages and home equity lines of credit). See "-- Loan Portfolio Composition and Maturity." At December 31, 1995, over 80% of the residential real estate loan portfolio was secured by a first priority lien on the real estate securing such loans, with the balance secured by second and lower priority liens on such real estate. As a general practice, the Bank seeks first priority liens on its commercial real estate loans. The majority of the Bank's real estate loan portfolio is secured by a first priority lien. The Bank's policy on real estate lending standards establishes certain maximum loan to value ("LTV") ratios for real estate-related loans depending on the type of collateral securing such loans. These maximum LTV ratios range from 50% for those loans secured by undeveloped real estate up to 90% for loans secured by residential real estate. Notwithstanding these maximum LTV ratios, as a general practice, the Bank imposes higher collateralization requirements than those established in its policy on real estate lending standards. Loan Underwriting, Review and Risk Assessment. When considering loan applications, the primary factors taken into consideration by the Bank are: (i) the cash flow and financial condition of the borrower; (ii) the value of any underlying collateral; and (iii) the character and integrity of the borrower. These factors are evaluated in a number of ways including an analysis of financial statements, credit reviews, trade reviews, and visits to the borrower's place of business. The total indebtedness of the 35 borrower to the Bank determines the maximum limit which a lending officer has the authority to approve a particular credit. Total indebtedness means the total of all borrowings, including the loan being requested, whether funded or unfunded, to a particular borrower and all related loan accounts. The authority of individual loan officers is limited to the approval of secured loans equal to or less than either $200,000 or $150,000, depending on the individual loan officer, and unsecured loans equal to or less than either $25,000 or $10,000, depending on the individual loan officer. The authority of the chief executive officer is limited to the approval of secured loans equal to or less than $400,000 and unsecured loans equal to or less than $300,000. All loan requests in excess of an individual loan officer's limit must be approved by the Bank's Credit Committee for secured loans equal to or less than $500,000 and for unsecured loans equal to or less than $300,000. Loan requests in excess of the Credit Committee's limit must be presented to the Bank Board. Generally the Bank requires personal guarantees and supporting financial statements from one or more of the principals of any entity borrowing money from the Bank. Loan business is generated primarily through referrals and direct-calling efforts. Referrals of loan business come from the Bank's directors, stockholders of the Company, existing customers of the Bank and professionals such as lawyers, accountants, financial intermediaries and brokers. At December 31, 1995, the Bank's statutory lending limit to any single borrower approximated $1.7 million, subject to certain exceptions provided under applicable law. The Bank also has a policy of extending loans, under the same terms and conditions applicable to any other borrower, to directors and executive officers of the Company and the Bank limiting the aggregate principal amount of such loans to 100% of capital and otherwise complying with applicable regulatory requirements. At December 31, 1995, the aggregate principal amount of all loans to directors and executive officers and related entities was $1.7 million. The Bank has an informal loan peer review function and a loan loss review committee. The loan peer review committee, which meets monthly, is an informal committee comprised of the Bank's chief executive officer and other loan officers. Every loan of $150,000 or more is reviewed annually by the loan peer review committee. All loans that undergo loan peer review receive a grade ranging from A to F based on a number of criteria, including the financial strength of the borrower as determined, in part, by such borrower's liquidity, debt service coverage and historical performance. Any loan rated D or worse will automatically be placed on a "watchlist." Certain C rated loans for which the committee has identified potential problems may also be placed on the watchlist. The loans on the watchlist are reviewed monthly by the Bank's Credit Committee in order to determine what actions should be taken with respect to such loans, whether any loans should be added or deleted from the watchlist, and to make recommendations regarding loan loss reserve levels to the loan loss review committee. The loan loss review committee, comprised of the Bank's executive officers and all other loan officers, reviews loans on the watchlist on a quarterly basis in order to establish loan loss reserve levels. Loan Portfolio Composition and Maturity. The following table sets forth the loan balances for certain categories at the dates indicated and the percent of each category to total gross loans.
AT DECEMBER 31, --------------- 1995 1994 1993 ---- ---- ---- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) Commercial ......................... $ 3,549 5.5% $ 3,935 6.7% $ 4,439 8.1% Commercial real estate(1) .......... 32,413 50.0 25,094 42.8 20,857 38.3 Residential real estate ............ 23,658 36.5 24,284 41.4 23,565 43.2 Home equity lines of credit ........ 3,672 5.7 4,110 7.0 4,304 7.9 Consumer ........................... 1,497 2.3 1,227 2.1 1,376 2.5 ----- --- ----- --- ----- --- 64,789 58,650 54,541 Unearned discount .................. 88 81 88 Allowance for possible loan losses . 1,828 2,257 2,300 ----- ----- ----- Net loans .......................... $62,873 100.0% $56,312 100.0% $52,153 100.0% ======= ===== ======= ===== ======= =====
__________ (1) Of the Commercial real estate portfolio, $7,752,000 as of December 31, 1995, $6,604,000 as of December 31, 1994 and $4,835,000 as of December 31, 1993, consisted of non-owner-occupied residential investment real estate property. 36 The following table sets forth the same loan composition as presented above, but excludes the acquired loans and acquired Allowance for Possible Loan Losses associated with the Acquisition discussed under "-- Acquisition."
AT DECEMBER 31, --------------- 1995 1994 1993 ---- ---- ---- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) Commercial ........................ $ 3,549 6.0% $ ,935 7.7% $ 4,439 9.7% Commercial real estate ............ 32,022 54.6 24,696 48.4 20,454 44.6 Residential real estate ........... 17,981 30.7 17,231 33.8 15,675 34.2 Home equity lines of credit ....... 3,672 6.3 4,110 8.1 4,304 9.4 Consumer .......................... 1,418 2.4 1,044 2.0 985 2.1 ----- --- ----- --- --- --- 58,642 51,016 45,857 Unearned discount ................. 88 81 88 Allowance for possible loan losses 862 764 704 --- --- --- Net Loans ......................... $57,692 100.0% $50,171 100.0% $45,065 100.0% ======= ===== ======= ===== ======= =====
Total loans outstanding increased $5.1 million from $49.4 million at 1992 year end to $54.5 million at 1993 year end. The majority of this increase occurred within the commercial and residential real estate portion of the loan portfolio. A favorable interest rate environment encouraged an expansion of the residential real estate loan portfolio through home purchases and refinancings, exclusive of the effect of the repayment of loans acquired in the Acquisition. The commercial real estate loan portfolio also increased as businesses sought working capital and expansion funds. The Bank believed, as it does today, that opportunities existed to satisfy the banking and borrowing needs of the small business community. The Bank also responded to those opportunities created by banking industry consolidation and actively sought small business customers adversely affected by it. In late 1993, the Bank added an additional experienced commercial loan officer to its staff. In 1994, the Bank focused on commercial lending secured by real estate to borrowers for small business plant purchases, expansion, working capital and other corporate purpose. Despite a series of monetary tightening moves by the Federal Reserve Board which resulted in a significantly higher interest rate environment, the Bank's loan portfolio increased $4.1 million or 7.5% from $54.5 million at 1993 year end to $58.6 million at 1994 year end. This growth took place entirely within the commercial real estate portion of the loan portfolio. In early 1995, the Bank continued to encounter strong loan demand from small businesses and hired another experienced commercial loan officer with primary responsibility in this area. The Bank believes a primary reason for this increased demand was the frustration of small business borrowers with the number and magnitude of mergers, consolidations and down-sizing within the banking industry which in turn led such borrowers to seek banking relationships with banks which were responsive to their needs. As of December 31, 1995, the loan portfolio had increased $6.1 million since December 31, 1994. Substantially all of this growth occurred within the commercial real estate portfolio, which increased $7.3 million over this period. Residential real estate and home equity lines of credit decreased nearly $1.1 million over the same period primarily due to relatively high interest rates and competition through the use of below-market introductory interest rates. The Bank is committed to the development, marketing and delivery of basic consumer loan products to reverse these decreases. The following table sets forth the repricing frequency of fixed and variable rate loans included in the Bank's total loan portfolio at December 31, 1995. Loans having no stated schedule of repayments or no stated maturity (due on demand) are reported as due in three months or less. 37
COMMERCIAL HOME AND EQUITY RESIDENTIAL LINES OF COMMERCIAL REAL ESTATE CREDIT CONSUMER TOTAL ---------- ----------- ------ -------- ----- (DOLLARS IN THOUSANDS) FIXED RATE Amounts due: Three Months or Less $ 502 $ 4,073 $ -- $ 229 $ 4,804 After three months through one year 67 8,723 95 172 9,057 After one year through five years 138 22,865 42 367 23,412 Beyond five years 33 10,747 -- 50 10,830 -- ------ --- -- ------ 740 46,408 137 818 48,103 --- ------ --- --- ------ VARIABLE RATE Repricing Frequency: Quarterly 2,809 9,663 3,535 679 16,686 Annually -- -- -- -- -- Every five years but less frequently than annually -- -- -- -- -- Less frequently than every five years -- -- -- -- -- ----- ----- ----- ----- ----- 2,809 9,663 3,535 679 16,686 ----- ----- ----- --- ------ Total $ 3,549 $ 56,071 $ 3,672 $ 1,497 $ 64,789 ======= ======== ======= ======= ========
Scheduled contractual principal repayments do not, in many cases, reflect the actual maturities of loans. The average maturity of loans is substantially less than their average contractual terms because of prepayments and, in the case of conventional mortgage loans, due-on-sale clauses, which generally give the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage. In addition, because many of the Bank's residential and commercial real estate loans are fixed rate loans subject to rate review and/or call option within three to five years, such loans are considered by the Bank to have a stated maturity equal to the rate review period. Prevailing interest rates at the time of scheduled rate reviews may cause the Bank to reset rates on these loans. However, such loans may not actually mature at that time. The average life of mortgage loans tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially lower than current mortgage loan rates (due to refinancing at lower rates). Under the latter circumstances, the weighted average yield on loans decreases as higher yielding loans are repaid or refinanced at lower rates. As of December 31, 1995, $519,000 of loans scheduled to mature within three months or less, were non-accruing. Commercial Loans. Subject to federal and state restrictions, the Bank is authorized to make secured or unsecured commercial business loans for general corporate purposes. Commercial loans include working capital loans, equipment financing, standby letters of credit, and secured and unsecured demand, term and time loans. Commercial loans do not include business loans secured by real estate. See " -- Commercial and Residential Real Estate Loans." At December 31, 1995, the Bank had outstanding commercial loans totalling $3.5 million which represented 5.5% of total loans. Of the Bank's total commercial loan portfolio, $2.8 million or 79.1% consisted of loans priced on a floating rate basis at a margin over the Bank's base lending rate or Wall Street Prime Rate. At December 31, 1995, the Bank's base rate was 10.00% while the Prime Rate was 8.50%. Commercial and Residential Real Estate Loans. At December 31, 1995, the Bank had outstanding residential first and second mortgage loans and home equity lines of credit of approximately $27.3 million, represented 42.2% of the Bank's total loan portfolio. Of this amount, $21.7 million represented loans originated directly by the Bank, while approximately $5.6 million represents loans acquired in the 38 Acquisition. The decline in market values of residential homes and condominiums over the past several years and the continuing weakness in the local economy increased the Bank's risk of loss of these loans in the event of borrower default. However, over the past three years, the majority of net loan charge-offs related to commercial real estate and multi-family residential investment property discussed below. Net charge-offs of owner occupied residential mortgage loans and home equity loans were minimal. In December 1995, the Bank launched a program to originate first residential fixed rate mortgages which conform to the eligibility requirements of the Federal National Mortgage Association ("FNMA" or "Fannie Mae"). Most fixed rate conforming loans are originated by the Bank and sold to correspondents. The Bank funds these loans at time of closing. The Bank does not originate Adjustable Rate Mortgages ("ARMS") for its own portfolio. The Bank does, however, originate fixed rate residential first mortgage loans for its own portfolio with a 15 to 30 year amortization period and a rate review and/or call option at three or five year intervals. Consequently, as the Bank attempts to satisfy the needs of its customers, it maintains an element of interest rate sensitivity embedded in the terms of the loan. As previously discussed, the Bank has and plans to continue to commit substantial resources to the promotion and development of commercial lending (i.e. small business plant purchases, expansion and working capital) secured by real estate, which loans are characterized as "commercial real estate loans." At December 31, 1995, outstanding commercial real estate loans approximated $32.4 million or 50.0% of total loans outstanding. Of this amount, $400,000 represents acquired loans from the Acquisition. Over the past two years, the Bank has placed a renewed emphasis on: (i) small business lending; (ii) obtaining loan guarantees from the SBA; and (iii) cash-flow analysis and an overall assessment of the borrower's financial strength and ability to repay with a secondary view towards collateral values. The Bank has limited its commercial construction and land development financing and intends to continue to do so in the future. At December 31, 1995, total construction and land development loans approximated $4.3 million. Commercial real estate loans are generally priced at a floating rate indexed to the Bank's base lending rate or to the Prime Rate. If a loan is priced at a fixed rate, it is generally structured with a three-year or five-year rate review and/or call option. At December 31, 1995, 80.8% of all residential and commercial real estate loans are subject to repricing within five years. Consumer Loans. At December 31, 1995, the Bank's consumer loan portfolio approximated $1.5 million or 2.3% of total loans outstanding. The Bank offers a full range of consumer lending products including new and used automobile loans, passbook and certificate of deposit loans, and other personal secured and unsecured loans. Although the Bank makes an effort to price these loans competitively, it faces substantial competition from consumer finance companies and, therefore, the Bank does not view this market as possessing significant growth potential. NON-PERFORMING ASSETS For discussion of the Bank's non-performing assets, restructured loans and delinquent loans, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." Non-performing assets include non-performing loans and OREO. The non-performing loans category includes loans on which the accrual of interest is discontinued when the collectibility of principal or interest is in doubt, or when payments of principal or interest have become 90 days past due and have arrearages that have not been eliminated. In certain instances, non-performing loans may also include loans that have become 90 days past due but remain on accrual status because the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. OREO consists of real estate acquired by the Bank through foreclosure proceedings. In addition to the preceding two categories, the Bank may, under appropriate circumstances, restructure loans as a concession to a borrower. Such restructured loans are not included in non-performing assets unless they become delinquent or are placed on non-accrual status. Under generally accepted 39 accounting principles, the Bank is required to account for certain loan modifications or restructurings as "troubled debt restructurings" ("TDR"). TDRs do not necessarily result in non-accrual loans. In general, the modification or restructuring of a loan constitutes a TDR if the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. At each of the years ended December 31, 1995, 1994 and 1993, no TDRs were included in the Bank's loan portfolio. The commercial loan officer hired in late 1993, in addition to other responsibilities, was hired to oversee the loan servicing and loan administration functions. The Bank also established a loan-loss review and loan peer review function. See " -- Lending Activities -- Loan Underwriting, Review and Risk Assessment." These changes resulted and continue to result in greater emphasis on: (i) cash flow analysis, rather than collateral value analysis in reaching lending decisions; (ii) stringent credit review and loan documentation standards; and (iii) more vigorous collection activities on delinquent loans. The following table sets forth information regarding non-performing assets and delinquent loans 30-89 days past due as to interest or principal, and held by the Bank at the dates indicated. The amounts and ratios shown are exclusive of the loans and allowance for possible loan losses acquired in the Acquisition. See "-- Acquisition."
DECEMBER 31 ----------- 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Loans past due 90 days or more but not include in non-accrual loans ......................................... $ 17 $ -- $ 30 Non-accrual loans ............................................. 519 521 502 Total non-performing loans .................................... 536 521 532 Other real estate owned ....................................... 1,470 945 1,522 ----- --- ----- Total non-performing assets ................................... $2,006 $1,466 $2,054 ====== ====== ====== Delinquent loans 30-89 days past due .......................... $ 266 $1,314 $1,110 ====== ====== ====== Non-performing loans as a percent of gross loans .............. 0.91% 1.02% 1.16% Non-performing assets as a percent of total assets ............ 2.11% 1.69% 2.55% Delinquent loans 30-89 days past due as a percent of gross loans ............................................... 0.45% 2.58% 2.43%
Had nonaccrual loans been accruing, interest income would have been higher by $57,357, $44,940 and $32,010 for the years ended December 31, 1995, 1994 and 1993, respectively. At December 31, 1995, 1994 and 1993, all acquired loans were performing. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is established through provisions charged against income. Assessing the adequacy of the allowance for possible loan losses involves substantial uncertainties and is based upon management's evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing various factors. Among the factors are: (i) the risk characteristics of the loan portfolio generally; (ii) the quality of specific loans; (iii) the level of non-accruing loans; (iv) current economic conditions; (v) trends in delinquencies and prior charge-offs; and (vi) the value of the underlying collateral. Ultimate loan losses may vary significantly from current estimates. The Bank reviews non-performing and performing loans to ascertain whether any impairment exists within the loan portfolio. The Bank evaluates these problem loans and estimates the potential loss exposure when assessing the adequacy of the allowance for possible loan losses. Because the allowance for possible loan losses is based on various estimates and includes a high degree of judgment, subsequent changes in general economic conditions and the economic prospects of the borrowers may require changes in those estimates. 40 The annual provision to the Bank's allowance for possible loan losses was $675,000, $555,000, and $545,000 for the fiscal years ended 1995, 1994 and 1993 respectively. During the 1995 fiscal year, it became apparent that a number of delinquent loans would not reach favorable resolution. Consequently, to minimize its exposure, the Bank instituted foreclosure proceedings and pursued other collection efforts. This resulted in a charge-off of loan balances or deficiency balances (the difference between the loan balance and estimated net realizable value of underlying collateral) of $715,000 of which $569,000 related to commercial real estate and multi-family investment property. Charge-offs net of recoveries for the year ended December 31, 1995 approximated $577,000, as compared to approximately $495,000 and $466,000 for the years ended December 31, 1994 and 1993, respectively. The following table is an analysis of the Bank's Allowance for Possible Loan Losses over the last three years. This table excludes the loans and Allowance for Possible Loan Losses acquired in the Acquisition. All statistical data is exclusive of the acquired loans and related allowance. See "Notes to Consolidated Financial Statements" for information relative to the activity in the acquired Allowance for Possible Loan Losses.
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) AVERAGE LOANS OUTSTANDING .............................................. $57,048 $51,250 $42,057 ======= ======= ======= ALLOWANCE FOR POSSIBLE LOAN LOSSES AT BEGINNING OF PERIOD .............. $ 764 $ 704 $ 625 ------- ------- ------- CHARGED-OFF LOANS: Commercial .......................................................... 48 23 30 Commercial Real Estate: Non-owner occupied 1-4 family ................................... 47 51 -- Non-owner occupied multi-family ................................. 411 525 212 Commercial ...................................................... 158 21 221 Residential Real Estate: Owner occupied 1-4 family ....................................... -- -- -- Non-owner occupied 1-4 family ................................... 35 -- 83 Home Equity Lines of Credit ......................................... 5 -- 18 Consumer ............................................................ 11 5 13 -- - -- Total charged-off loans ...................................... 715 625 577 --- --- --- RECOVERIES ON LOANS PREVIOUSLY CHARGED OFF: Commercial .......................................................... 44 94 30 Commercial Real Estate: Non-owner occupied 1-4 family ................................... -- -- -- Non-owner occupied multi-family ................................. 67 -- 69 Commercial ...................................................... 19 -- -- Residential Real Estate: Owner occupied 1-4 family ....................................... -- 25 -- Non-owner occupied 1-4 family ................................... -- -- 9 Home Equity Lines of Credit ......................................... -- -- -- Consumer ............................................................ 8 11 3 Total recoveries ............................................. 138 130 111 --- --- --- NET LOANS CHARGED-OFF .................................................. 577 495 466 PROVISION FOR POSSIBLE LOAN LOSSES ..................................... 675 555 545 --- --- --- ALLOWANCE FOR POSSIBLE LOAN LOSSES AT END OF PERIOD .................... $ 862 $ 764 $ 704 ======= ======= ======= Net loans charged-off to average loans ................................. 1.01% 0.97% 1.11% Allowance for possible loan losses to gross loans at end of period ..... 1.47 1.50 1.54 Allowance for possible loan losses to non-performing loans ............. 160.63 146.76 132.46 Net loans charged-off to allowance for possible loan losses at beginning of period ............................................................ 75.52 70.31 74.56 Recoveries to charge-offs .............................................. 19.30 20.80 19.24
41 The following table represents the allocation of the Bank's allowance for possible loan losses and the percentage of each loan category to total loans, net of unearned discount, for the periods ending as indicated:
DECEMBER 31, ------------ 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Loan Category: Commercial ........................... $ 35 6.1% $ 33 7.7% $ 44 9.7% Commercial Real Estate ............... 463 54.7 449 48.5 375 44.7 Residential Real Estate .............. 312 30.7 238 33.8 234 34.2 Home Equity Lines of Credit .......... 37 6.3 35 8.1 40 9.4 Consumer ............................. 15 2.2 9 1.9 11 2.0 -- --- - --- -- --- Total ............................ $862 100.0% $764 100.0% $704 100.0% ==== ===== ==== ===== ==== =====
This allocation of the allowance for possible loan losses reflects management's judgment of the relative risks of the various categories of the Bank's loan portfolio. This allocation should not be considered an indication of the future amounts or types of loan charge-offs. At December 31, 1995, the Bank classified $1.2 million of loans as substandard based on the rating system adopted by the Bank. This amount includes the $416,000 non-accruing commercial real estate loan discussed above in the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Non-Performing Assets: Current." Of these amounts, a majority of which are included in the commercial real estate loan portfolio, the Bank estimates a potential loss exposure of $273,000. This potential exposure has been fully reserved in the allowance for possible loan losses at December 31, 1995. The following table summarizes the gross activity in OREO during the periods indicated:
AMOUNT (IN THOUSANDS) Balance at December 31, 1992 .......................... $ 325 Property Acquired ..................................... 1,407 Sales and other adjustments ........................... (200) Write-downs (charged to operations) ................... (10) --- Balance at December 31, 1993 .......................... 1,522 Property Acquired ..................................... 501 Sales and other adjustments ........................... (1,033) Write-downs (charged to operations) ................... (45) --- Balance at December 31, 1994 .......................... 945 Property Acquired ..................................... 1,257 Sales and other adjustments ........................... (607) Write-downs (charged to operations) ................... (125) ---- Balance at December 31, 1995 .......................... $ 1,470 =======
The balance of OREO at December 31, 1995 consisted of: Land Development ...................................... $ 216 1-4 Family Residential Real Estate .................... 55 Multi-Family (5 or more) Residential Properties ....... 285 Commercial Real Estate ................................ 914 --- $1,470 ======
See "MAnagement's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Non-Performing Assets: Current" and "Notes to Consolidated Financial Statements" for further information. 42 INVESTMENT ACTIVITIES The investment policy of the Bank is an integral part of the overall asset/liability management of the Bank. The Bank's investment policy is to establish a portfolio which will provide liquidity necessary to facilitate funding of loans and to cover deposit fluctuations while at the same time achieving a satisfactory return on the funds invested. The Bank intends to maximize earnings from its investment portfolio consistent with the safety and liquidity of those investment assets. The securities in which the Bank may invest are subject to regulation and, for the most part, are limited to securities which are considered investment grade securities. See "Regulation and Supervision -- 1991 Banking Legislation." In addition, the Bank has an internal investment policy which restricts investments to: (i) United States treasury securities; (i) obligations of United States government agencies and corporations; (iii) collateralized mortgage obligations, including securities issued by FNMA, the Government National Mortgage Association ("GNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"); (iv) securities of states and political subdivisions; (v) corporate debt, all of which must be considered investment grade by a recognized rating service; and (vi) corporate stock. See "Notes to Consolidated Financial Statements" for further information. On January 1, 1994, the Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Under this statement, securities are classified as held-to-maturity, available-for-sale or trading. Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at cost, adjusted for the amortization of premium or the accretion of discount. Debt and equity securities with readily determinable market values which are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are carried at fair value, with unrealized gains and losses included in current earnings. At each of the years ended December 31, 1995, 1994 and 1993, the Bank had no securities classified as trading. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and are carried at fair value, with unrealized after-tax gains and losses reported as a separate component of stockholders' equity. Securities classified as available-for-sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, changes in prepayment risk, and other factors. Prior to January 1, 1994, debt securities were designated at the time they were purchased as either held-for-sale or held-to-maturity, based on management ability and intent at the time. Management had the ability and intent to hold all debt securities on a long-term basis or until maturity. Consequently, prior to 1994, all debt securities were classified as securities held-to-maturity and carried at cost, adjusted for the amortization of premium or the accretion of discount. The following table sets forth the amortized cost and estimated market value of the Bank's investment portfolio at the dates indicated:
DECEMBER 31, ------------ 1995 1994 1993 ---- ---- ---- ESTIMATED ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE COST VALUE ---- ----- ---- ----- ---- ----- (IN THOUSANDS) HELD-TO-MATURITY: U.S. Government and agency obligations ........................ $ 12,596 $ 12,551 $ 10,752 $ 10,410 $ 25,566 $ 25,529 Collateralized mortgage obligations .. 2,048 2,016 2,395 2,276 1,957 1,942 ----- ----- ----- ----- ----- ----- $ 14,644 $ 14,567 $ 13,147 $ 12,686 $ 27,523 $ 27,471 ======== ======== ======== ======== ======== ======== AVAILABLE-FOR-SALE: U.S. Government and agency obligations ........................ $ 14,995 $ 15,088 $ 15,102 $ 14,890 $ -- $ -- Marketable equity security ........... 12 44 12 32 12 25 -- -- -- -- -- -- $ 15,007 $ 15,132 $ 15,114 $ 14,922 $ 12 $ 25 ======== ======== ======== ======== ======== ========
Included in the Bank's held-to-maturity investment portfolio at December 31, 1995, are $5.7 million in structured notes with an estimated fair value of $5.6 million. 43 The following table sets forth certain information regarding maturity distribution and weighted average yields of the Bank's investment portfolio at December 31, 1995:
WITHIN ONE YEAR ONE TO FIVE YEARS OVER FIVE YEARS TOTAL SECURITIES --------------- ----------------- --------------- ---------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE RATE VALUE RATE VALUE RATE VALUE RATE ----- ---- ----- ---- ----- ---- ----- ---- HELD-TO-MATURITY: U.S. Government and agency obligations ...... $ 7,449 5.45% $ 5,147 5.84% $ -- -- % $12,596 5.61% Collateralized mortgage obligations(1) .......... 1,043 5.88 1,005 4.89 -- -- 2,048 5.39 ----- ---- ----- ---- ----- ----- ----- ---- 8,492 5.50 6,152 5.68 -- -- 14,644 5.58 ----- ---- ----- ---- ----- ----- ------ ---- AVAILABLE FOR SALE: U.S. Government and agency obligations(1) ... 9,530 5.73 5,558 6.17 -- -- 15,088 5.89 Marketable equity security ................ 44 3.03 -- -- -- -- 44 3.03 -- ---- ----- ---- ------ ----- -- ---- 9,574 5.72 5,558 6.17 -- -- 15,132 5.88 ----- ---- ----- ---- ------ ----- ------- ---- Total ................. $18,066 5.62% 11,710 5.91% $ -- -- % $29,776 5.73% ======== ==== ====== ==== ====== ===== ======= ====
__________ (1) Fixed rate collateralized mortgage obligations are presented on a scheduled cash flow basis. Variable rate U.S. Government and agency obligations are presented on a repricing frequency basis. SOURCES OF FUNDS Deposits obtained through the Bank's offices and automated teller machines ("ATM") have traditionally been the principal source of the Bank's funds for use in lending, investing and for other general business purposes. At December 31, 1995, the Bank had a total of approximately 2,713 demand deposit accounts with an average balance of approximately $4,593 each; 4,140 passbook, statement savings and NOW accounts with an average balance of approximately $5,421 each; 87 money market accounts with an average balance of approximately $20,883 each, and 3,395 certificates of deposit with an average balance of approximately $15,590 (including 45 certificates of deposit of $100,000 or more totalling $5.8 million). The Bank's office and service hours are supplemented by the Bank's ATM card service which facilitates various deposit and/or withdrawal transactions. The Bank's ATM card may be used in the "CIRRUS", and "NYCE" ATM networks, and the "Maestro" point-of-sale ("POS") network. These networks provide the Bank's ATM cardholders with access to ATMs and POS machines throughout Rhode Island, New England, the United States and more than 34 foreign countries. The following table sets forth the average balances and average rates paid on the Bank's deposits for the periods indicated:
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE ------- ---- ------- ---- ------- ---- (DOLLARS IN THOUSANDS) Non-interest-bearing deposits: $12,397 $12,791 $ 14,336 Interest bearing deposits: NOW and savings accounts 24,858 2.56% 30,618 2.60% 30,623 2.79% Money market accounts 2,149 2.56 2,473 2.67 2,341 2.73 Certificates of deposit under $100,000 41,034 6.23 31,634 4.75 31,390 5.00 Certificates of deposit over $100,000 4,974 3.62 3,043 3.45 2,849 4.77 -------- ----- ----- ----- Total $85,412 $80,559 $ 81,539 ======= ======= ========
44 Time certificates of deposit in denominations of $100,000 or more, at December 31, 1995, had the following schedule of maturities:
TIME REMAINING TO MATURITY AMOUNT -------------------------- ------ (IN THOUSANDS) Less than 3 months ........................................... $ 837 3 to 6 months ................................................ 972 6 to 12 months ............................................... 1,481 More than 12 months .......................................... 2,551 ----- Total ..................................................... $ 5,841 =======
Included in total certificates of deposit at December 31, 1995, are $25.1 million which are variably rate priced (indexed to the three month yield on U.S. Treasury Bills) and are subject to repricing on a quarterly basis. Non-Interest Bearing Deposits include $2.3 million of municipal accounts at December 31, 1995, $2.2 million of which are accounts of the State of Rhode Island. These municipal balances are considered highly volatile. INDEBTEDNESS General. While the Bank has not traditionally placed significant reliance on borrowings as a source of liquidity, it applied and was accepted, for membership to the FHLB in 1995 in order to provide additional sources of liquidity and funding, thereby increasing flexibility. At December 31, 1995, the Bank had adequate liquidity available to respond to current liquidity demands. Senior Debenture. In connection with the Acquisition, the Company issued the Senior Debenture to DEPCO to assist in financing the Acquisition. See "-- Acquisition." As of December 31, 1995, the remaining balance of the Senior Debenture was $2.85 million. Under the terms of the Senior Debenture, interest begins to accrue on the third anniversary of the Senior Debenture and is payable semiannually thereafter. The Senior Debenture bears interest at the average five-year Treasury rate (indexed rate) plus 1% until maturity and at the indexed rate plus 4% during the extension period. A discount of $717,005 was recorded to reduce the carrying value of the Senior Debenture at the date of issuance in recognition of its favorable interest terms. This discount is being amortized over the initial term of the Senior Debenture on the level yield method at 7%. The Senior Debenture is scheduled to mature on May 31, 1999; however, the Company may, at its option, extend the maturity date to May 1, 2002, for up to one-half of the then outstanding principal balance. See "-- Lending Activities," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" for further information. COMMUNITY REINVESTMENT ACT The Bank is committed to serving the banking needs of the entire community, including low and moderate income areas consistent with its obligations under the Community Reinvestment Act. See "Regulation and Supervision -- Community Reinvestment Act." There are several ways in which the Bank attempts to fulfill this commitment, including working with economic development agencies, undertaking special projects, and becoming involved with neighborhood outreach programs. The Bank has undertaken as part of its mission to contribute to the economic and social development of the communities in which it operates. The Bank believes that its contribution is to deliver competitive services that are responsive to the needs of its employees, customers, shareholders, and local communities. At its last CRA-compliance examination, the Bank was given a "satisfactory" ranking which is the second highest rating of the four assigned by the FDIC. In addition to memberships and directorships in a number of civic, charitable and not-for-profit organizations, the Bank seeks to meet with specific community-based groups which may provide insight into the credit and housing needs of the local community. The Bank has had periodic discussions with officials from the Providence Plan Housing Corporation and the Providence Community Action 45 Program. These groups are primarily concerned with developing affordable housing opportunities within the City of Providence. The Bank has focused on the small business lending needs of the Southeast Asian Community, specifically, the need for technical assistance in developing business plans and requests for financing. Additionally, the Bank's community outreach efforts rely on the calling activities of the Bank's loan officers and branch managers. These individuals periodically contact the area's underserved small businesses to promote the Bank's services and to gain a better understanding of their business needs. To a lesser extent, loan officers have contacted local realtors to ascertain community credit needs and to inform the realtors of the Bank's residential mortgage and referral program. Loan officers are also members of, and routinely contact the Providence and surrounding area's respective Chambers of Commerce. The Bank has identified two primary needs within its communities: small business loans with reduced documentation requirements and unconventional mortgage products with flexible underwriting guidelines. To address the small business lending demand, the Bank participates in the SBA loan programs; specifically, the 7A and 504 programs, as well as the SBA's Low Doc program. In response to the need for unconventional mortgage products, during 1994 and 1995 the Bank allocated and subsequently used approximately $5 million exclusively for the origination of fixed rate, long-term loans with flexible underwriting guidelines. PROPERTIES The Bank delivers its products and services through its three branch network system. The Bank owns its main office building which is located at 180 Washington Street, Providence, Rhode Island. This location consists of a two-story masonry and steel frame building containing (with basement storage) approximately 6,800 square feet of space. The ground floor of this building is used for retail banking as the Providence branch. Attached to this building is a two lane drive-up facility, the only drive-up facility located in downtown Providence. The building also houses a built-in ATM. The second floor of this location is used predominately for executive, administrative, and support staff office space. This building is located on two lots which are owned by the Bank and which have a total area of approximately 10,000 square feet. This land space is also used for customer parking and access and egress through the drive-up facility. The Bank also owns an adjacent lot of approximately 3,300 square feet which is used solely as employee parking. In 1981, the Bank leased and opened a branch office building at the corner of Park and Reservoir Avenues, Cranston, Rhode Island. This one-story masonry and steel frame building (including the lower level) has approximately 7,400 square feet space. The ground floor of this location contains the Cranston branch, the Bank's largest branch as measured by deposits. The building also has a three lane drive-up facility and an ATM. The basement of this building is used predominately by the Operations Department along with several administrative offices. The building is situated on approximately 21,000 square feet of leased land. The lease has an original noncancellable term of 15 years with four successive renewal options, each for an additional five years ending in the year 2009. The Bank is presently in the second of the four renewal options which expires in the year 1999. Upon the expiration of the lease in the year 2009, the Bank will have the right to renew the lease upon the same terms and conditions, except for the term and annual rent to be paid thereunder which are to be determined by mutual agreement or, if not so determined, by arbitration. See "Notes to Consolidated Financial Statements" for further information. In late 1994 the Bank acquired an adjacent parcel of land, which approximates 4,700 square feet, for use as expanded customer parking and access to the facility from Reservoir Avenue. The Bank also owns land across the street from this building. This land, with total area of approximately 3,300 square feet, is used solely for employee parking. As part of the Acquisition, the Bank purchased the former credit union's land and building and reopened the facility as the Bank's Wyoming branch at 1168 Main Street, Richmond, Rhode Island. The facility is located in the Wyoming section in the Town of Richmond. The two story wood frame building has nearly 6,500 square feet space (exclusive of unfinished basement area) on a land area of approximately 40,400 square feet. The branch location has a built-in ATM and a two lane drive-up facility. 46 LEGAL PROCEEDINGS The Company is involved in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, final disposition of these lawsuits will not have a material adverse effect on the financial condition or results of operations of the Company. COMPETITION In attracting deposits and making loans, the Bank encounters competition from other institutions, including larger downtown Providence and suburban-based commercial banking organizations, savings banks, credit unions, other financial institutions and non-bank financial service companies serving Rhode Island. The principal methods of competition include the level of loan interest rates, interest rates paid on deposits, efforts to obtain deposits, range of services provided and the quality of these services. These competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. See "Risk Factors -- Competition." EMPLOYEES As of December 31, 1995, the Company had 38 full-time and 10 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 which includes health insurance, life insurance, and a defined benefit pension plan. 47 REGULATION AND SUPERVISION Banks and bank holding companies are subject to extensive government regulation through Federal and state statutes and regulations which are subject to changes that may have significant impact on the way in which such entities may conduct business. The likelihood and potential effects of any such changes cannot be predicted. Legislation enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and nonbanking institutions, including insurance companies, brokerage firms, mutual funds, investment banks and major retailers. In addition, the enactment of recent banking legislation such as the FDICIA and the Interstate Banking Act have affected the banking industry by, among other things, broadening the regulatory powers of the federal banking agencies in a number of areas and enabling banks and bank holding companies to expand the geographic area in which they may provide banking services. The following summary is qualified in its entirety by the text of the relevant statutes and regulations. THE COMPANY General. The Company, as a bank holding company, is subject to regulation and supervision by the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and by the Rhode Island Department of Business Regulation, Division of Banking (the "Banking Division"). The Company is required to file semiannually and annually a report of its operations with, and is subject to examination by, the Federal Reserve Board. BHCA -- Activities and Other Limitations. The Bank Holding Company Act ("BHCA") prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or, except where a majority of shares are already owned, increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. The BHCA also generally prohibits a bank holding company from acquiring any bank located outside of the state in which the existing bank subsidiaries of the bank holding company are located unless specifically authorized by applicable state law. However, the Interstate Banking Act provides that, among other things, substantially all state law barriers to the acquisition of banks by out-of-state bank holding companies will be eliminated. The law will also permit interstate branching by banks effective as of June 1, 1997, subject to the ability of states to opt-out completely or set an earlier effective date. See " -- Interstate Banking Legislation." No approval under the BHCA is required, however, for a bank holding company already owning or controlling 50% of the voting shares of a bank to acquire additional shares of such bank. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, including greater convenience, increased competition or gains in efficiency, against the possible adverse effects, including undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board has by regulation determined that certain activities are so closely related to banking, within the meaning of the BHCA, that such activities are permissible by bank holding companies. These activities include making or servicing loans such as would be made by a mortgage, consumer finance, credit card, or factoring company; performing trust company functions; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. The Federal Reserve Board also has determined that certain other activities, including real estate brokerage and 48 syndication, land development, property management and underwriting of life insurance not related to credit transactions, are not so closely related to banking and bank holding companies are prohibited from engaging in such activities. Commitments to Affiliated Institutions. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when it might not do so absent such policy. The legality and precise scope of this policy is unclear, however, in light of Federal judicial precedent. Apart from its ability to contribute proceeds from the Public Offering, the Company's ability to serve as a source of strength to the Bank through the contribution of capital is limited at the present time. Limitations of Acquisitions of Common Stock. The federal Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been given 60 days' prior written notice of such proposed acquisition and within that time period the Federal Reserve Board has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. An acquisition may be made prior to expiration of the disapproval period if the Federal Reserve Board issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute the acquisition of control. Notwithstanding the above, any "company" would be required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding common stock of, or such lesser number of shares as constitute control over, the Company. Such approval would be contingent upon, among other things, the acquirer registering as a bank holding company if not already so registered, divesting all impermissible holdings and ceasing any activities not permissible for a bank holding company. The Company will not be required to issue shares of Common Stock pursuant to the Public Offering to anyone who, in the Company's sole judgment and discretion, is required to obtain prior clearance, approval or nondisapproval from any state or federal bank regulatory authority to own or control such shares unless, prior to the completion of the Public Offering, evidence of such clearance, approval or nondisapproval has been provided to the Company. Rhode Island Law. Rhode Island law requires the prior approval of the Banking Division in order for a Rhode Island bank or bank holding company to acquire 5% or more of the voting stock, or merge or consolidate with an out-of-state bank or bank holding company. In examining the transaction, the Banking Division must determine whether the transaction is permitted under the law of the state of the out-of-state bank or bank holding company under conditions not substantially more restrictive than those imposed by Rhode Island law. In determining whether to approve the transaction, the Banking Division must determine whether the transaction is in the public interest, will promote the safety and soundness of the Rhode Island institution and needs of the communities served thereby, and will serve the needs of the state generally. In addition, a merger requires the prior approval of two-thirds of the shareholders of the Rhode Island bank and such percentage of the shareholders of the out-of-state bank as required by the laws of such state. Under Rhode Island law, subject to the approval of the Banking Division, an out-of-state bank or bank holding company may acquire direct or indirect control of more than 5% of the voting stock or merge or consolidate with or acquire substantially all of the assets and liabilities of a Rhode Island bank or bank holding company provided that the laws of the state in which the out-of-state bank is located, or in which operations of the bank subsidiaries of an out-of-state bank holding company are principally conducted, expressly authorize, as determined by the Banking Division, under conditions no more restrictive than those imposed by the laws of Rhode Island, the acquisition by a Rhode Island bank or bank holding company of 5% of the voting stock or the merger or consolidation with or acquisition of all of the assets of banks or bank holding companies located in that state. 49 Additionally, under Rhode Island law, no "person" may acquire 25% of the voting stock, or such lesser number of shares as constitutes control, of a Rhode Island depository institution without the prior approval of the Banking Division. Dividends. The Company is a legal entity separate and distinct from the Bank. The revenues of the Company (on a parent company only basis) are derived primarily from interest and dividends paid to the Company by the Bank. The right of the Company, and consequently the right of creditors and stockholders of the Company, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries), except to the extent that certain claims of the Company in a creditor capacity may be recognized. It is the policy of the FDIC and the Federal Reserve Board that banks and bank holding companies, respectively, should pay dividends only out of current earnings and only if after paying such dividends, the bank or bank holding company would remain adequately capitalized. Federal banking regulators also have authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. In addition, it is the position of the Federal Reserve Board that a bank holding company is expected to act as a source of financial strength to its subsidiary banks. Various federal and state laws, regulations and policies limit the ability of the Bank to pay dividends to the Company. The payment of any future dividends by the Bank will be determined based on a number of factors, including the Bank's liquidity, asset quality profile, capital adequacy and recent earnings history. For a discussion of the policy of the Company with respect to the payment of dividends, see "DIVIDEND POLICY." Under Rhode Island law, the board of directors has the power to declare and pay dividends in cash, property or securities of a corporation unless: (a) such corporation is or would be thereby made insolvent; or (b) the declaration or payment of such dividend would be contrary to any restrictions contained in the charter. Rhode Island law further provides that no distribution may be made: (i) if the corporation would become unable to pay its debts as they become due in the usual course of business; or (ii) the corporation's total assets would be less than the sum of its liabilities, unless the charter permits otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Certain Transactions by Bank Holding Companies and Their Affiliates. There are various legal restrictions on the extent to which bank holding companies, such as the Company, and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in "covered transactions" with their insured depository institution subsidiaries, such as the Bank. Such borrowings and other covered transactions by an insured depository institution subsidiary (and its subsidiaries) with its non-depository institution affiliates are limited to the following amounts: (a) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and (b) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. "Covered transactions" are defined by statute for these purposes to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the Federal Reserve Board, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Covered transactions are also subject to certain collateral security requirements. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service. 50 THE SUBSIDIARY BANK General. The Bank is subject to extensive regulation and examination by the Banking Division and by the FDIC, which insures its deposits to the maximum extent permitted by law, and to certain requirements established by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of, and collateral for, certain loans. The prior approval of the FDIC and the Banking Division is required for the Bank to establish or relocate an additional branch office, assume deposits, or engage in any merger, consolidation or purchase or sale of all or substantially all of the assets of any bank or savings association. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. Examinations and Supervision. The FDIC and the Banking Division regularly examine the operations of the Bank, including (but not limited to) their capital adequacy, reserves, loans, investments, earnings, liquidity, compliance with laws and regulations, record of performance under the Community Reinvestment Act (see below) and management practices. In addition, the Bank is required to furnish quarterly and annual reports of income and condition to the FDIC and periodic reports to the Banking Division. The enforcement authority of the FDIC includes the power to impose civil money penalties, terminate insurance coverage, remove officers and directors and issue cease- and-desist orders to prevent unsafe or unsound practices or violations of law or regulations. In addition, under recent federal banking legislation, the FDIC has authority to impose additional restrictions and requirements with respect to banks that do not satisfy applicable regulatory capital requirements. See "-- 1991 Banking Legislation -- Prompt Corrective Action." Dividends and Affiliate Transactions. The Bank is subject to certain restrictions on loans to the Company, on investments in the stock or securities thereof, on the taking of stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the Company. The Bank also is subject to certain restrictions on most types of transactions with the Company, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliates. In addition, there are various limitations on the distribution of dividends to the Company by the Bank. See "Dividend Policy." CAPITAL REQUIREMENTS The FDIC has established guidelines with respect to the maintenance of appropriate levels of capital by FDIC-insured banks. At such time, if ever, that the Company exceeds $150 million in consolidated assets or either: (i) engages in any non-bank activity involving significant leverage; or (ii) has a significant amount of outstanding debt that is held by the general public, it will become subject to various capital adequacy requirements of the Federal Reserve Board applicable to all such bank holding companies. Until such time, the Federal Reserve Board applies the following guidelines on a bank only basis. The Federal Reserve Board has adopted substantially identical capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. If a banking organization's capital levels fall below the minimum requirements established by such guidelines, a bank or bank holding company will be expected to develop and implement a plan acceptable to the FDIC or the Federal Reserve Board, respectively, to achieve adequate levels of capital within a reasonable period, and may be denied approval to acquire or establish additional banks or non-bank businesses, merge with other institutions or open branch facilities until such capital levels are achieved. Recently enacted federal legislation requires federal bank regulators to take "prompt corrective action" with respect to insured depository institutions that fail to satisfy minimum capital requirements and imposes significant restrictions on such institutions. See "-- 1991 Banking Legislation -- Prompt Corrective Action." The guidelines generally require banks and bank holding companies to maintain at least half of its total capital comprised of common equity, retained earnings and a limited amount of perpetual preferred stock, less goodwill ("Tier I Capital"). Additionally, these guidelines require banks and bank holding 51 companies to maintain a ratio of Tier I Capital to risk-weighted assets of at least four (4%) percent and a ratio of total capital to risk-weighted assets of at least eight (8%) percent ("Total Risk-Based Capital Ratio"). Hybrid capital instruments, perpetual preferred stock which is not eligible to be included as Tier I Capital, term subordinated debt and intermediate-term preferred stock and, subject to limitations, general allowances for loan losses, is known as "Tier 2 Capital." The sum of Tier 1 and Tier 2 Capital is "Total Risk-Based Capital." Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital), for assets such as cash, to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and consumer loans. Single-family residential first mortgage loans which are not either 90 days or more past-due or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighting system, as are certain privately issued mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I Capital to total assets of 3.0% (the "Tier I Leverage Capital Ratio"). Total assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I Capital. The Federal Reserve Board has announced that the 3.0% Tier I Leverage Capital Ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. A bank holding company operating at or near such level is expected to have well-diversified risk, including no undue interest-rate risk exposure; excellent asset quality; high liquidity; and adequate earnings; and in general be considered a strong banking organization, rated composite 1 under the BOPEC rating system for bank holding companies. Organizations not meeting these characteristics, as well as institutions with supervisory, financial, or operational weaknesses, are required to operate above minimum capital standards. Organizations experiencing or anticipating significant growth also are required to maintain capital ratios, including tangible capital positions, above the minimum levels. Thus, for all but the most highly rated organizations meeting the conditions set forth above, the minimum Tier I Leverage Capital Ratio is 3% plus an additional cushion of at least 100 to 200 basis points. In all cases, bank holding companies are required to hold capital commensurate with the level and nature of all risks, including the volume and severity of problem loans, to which they are exposed. For purposes of the Leverage Capital Ratio, Tier 1 Capital is defined consistent with the Risk-Based Capital Guidelines. As in the case of the Risk-Based Capital Guidelines, the Leverage Capital Ratio, as applied by the Federal Reserve Board, applies only to bank holding companies with consolidated assets in excess of $150 million or either (i) engaged in any non-bank activity involving significant leverage; or (ii) having a significant amount of outstanding debt that is held by the general public. However, as is the case with the Risk-Based Capital Guidelines, the Federal Reserve Board applies these guidelines on a bank only basis. Other bank holding companies will be expected to maintain Tier I Leverage Capital Ratios of at least 4.0% to 5.0% or more, depending on their overall condition. The Company currently is in compliance with the above-described Federal Reserve Board regulatory capital requirements. At December 31, 1995, the Company had a Tier I Risk-Based Capital Ratio and a Total Risk-Based Capital Ratio equal to 10.20% and 11.46%, respectively, and a Tier I Leverage Capital Ratio equal to 6.87%. The FDIC has established a minimum 3.0% Tier I Leverage Capital Ratio requirement for the most highly-rated, state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I Leverage Capital Ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulation, highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered strong banking organizations, rated Composite 1 under the Uniform Financial Institutions Rating System. A 52 bank having less than the minimum leverage capital requirement shall, within 60 days of the date as of which it fails to comply with such requirement, submit to its FDIC regional director for review and approval a reasonable plan describing the means and timing by which the bank shall achieve its minimum leverage capital requirement. A bank which fails to file such plan with the FDIC is deemed to be operating in an unsafe and unsound manner, and could subject the bank to a cease-and-desist order from the FDIC. The FDIC's amended regulation also provides that any insured depository institution with a ratio of Tier I Capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act (the "FDIA") and is subject to potential termination of deposit insurance. However, such an institution will not be subject to an enforcement proceeding thereunder solely on account of its capital ratios if it has entered into and is in compliance with a written agreement with the FDIC to increase its Tier 1 leverage capital ratio to such level as the FDIC deems appropriate and to take such other action as may be necessary for the institution to be operated in a safe and sound manner. The FDIC capital regulation also provides, among other things, for the issuance by the FDIC or its designee(s) of a capital directive, which is a final order issued to a bank that fails to maintain minimum capital to restore its capital to the minimum leverage capital requirement within a specified time period. Such directive is enforceable in the same manner as a final cease-and-desist order. At December 31, 1995, the Bank was in compliance with all minimum federal regulatory capital requirements which are generally applicable to FDIC-insured banks. As of such date, the Bank had Tier I Risk-Based Capital Ratio and Total Risk-Based Capital Ratio equal to 15.02% and 16.26%, respectively, and Tier I Leverage Capital Ratio equal to 10.17%. Effective January 17, 1995, the federal banking agencies adopted amendments to their risk-based capital standards to provide for the concentration of credit risk and certain risks arising from nontraditional activities, as well as a bank's ability to manage these risks, as important factors in assessing a bank's overall capital adequacy. 1991 BANKING LEGISLATION General. On December 19, 1991, the FDICIA was enacted. FDICIA extensively revised the regulatory and funding provisions of the FDIA and made revisions to several banking statutes. In addition, there has been certain other recent banking legislation. Certain of these changes are summarized below. Risk Based Deposit Insurance Assessments. FDICIA provides for, among other things, increased funding for the Bank Insurance Fund (the "BIF"). A significant portion of the additional funding to the BIF is in the form of borrowings to be repaid by insurance premiums assessed on BIF members. FDICIA also provides authority for special assessments against insured deposits and for the development of a general risk-based assessment system. The FDIC originally set assessment rates for BIF-insured institutions ranging from 0.23% to 0.31% of deposits, based on a risk assessment of the institution. Each financial institution is assigned to one of three capital groups -- "well capitalized", "adequately capitalized" or "undercapitalized" -- and further assigned to one of three subgroups within each capital group, on the basis of supervisory evaluations, the institution's financial condition and the risk posed to the applicable insurance fund. A well capitalized institution is one that has a Total Risk-Based Capital Ratio of 10% or more, a Tier I Risk-Based Capital Ratio of 6% or more, and a Tier I Leverage Capital Ratio of 5% or more. An adequately capitalized institution has a Total Risk-Based Capital Ratio of 8% or more, a Tier 1 Risk-Based Capital Ratio of 4% or more, and a Tier I Leverage Capital Ratio of 4% or more, but does not qualify as a well-capitalized institution. An undercapitalized institution is one that does not meet either of the foregoing definitions. The actual assessment rate applicable to a particular institution, therefore, depends in part upon the risk assessment classification so assigned to the institution by the FDIC. Under the FDIC rule implementing the new risk-based system, an institution's deposit insurance assessment rate is determined by assigning the institution to a capital category and a supervisory subgroup to determine which one of the nine risk classification categories is applicable, in substantially 53 the same manner as for the transitional system discussed above. The FDIC is authorized to raise the assessment rates in certain circumstances. If the FDIC determines to increase the assessment rates for all institutions, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and may raise BIF insurance premiums again in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Company and the Bank, the extent of which is not currently quantifiable. On August 8, 1995, in view of the successful recapitalization of the BIF, the FDIC lowered the assessment rate schedule for BIF-insured institutions from a range of 0.23% to 0.31% of domestic deposits to a range of 0.04% to 0.31% of domestic deposits, with intermediate rates of 0.07%, 0.14%, 0.21% and 0.28%. The FDIC estimated that approximately 90% of BIF-insured institutions qualify for the lowest rate of 0.04%. This reduction in the assessment rate schedule was made retroactive to June 1, 1995 (the FDIC having determined that the BIF achieved the statutorily-required reserve ratio of 1.25% on May 31, 1995, and on September 15, 1995, the FDIC paid refunds (reflecting the new rate schedule) to banks which overpaid the BIF assessments for the period June 1, 1995 through September 30, 1995. The Bank received a refund of $39,000. On November 14, 1995, the FDIC again lowered the assessment rate schedule for BIF-insured institutions, effective for the semiannual assessment period beginning January 1, 1996, from a range of 0.04% to 0.31% of domestic deposits to a range of the statutory annual minimum assessment of $2,000 per institution (regardless of size) to 0.27% of domestic deposits, with intermediate rates of 0.03%, 0.10%, 0.17% and 0.24%. The FDIC indicated that it took this action in view of the historically high reserve ratio of the BIF (approximately 1.30% of insured deposits), the general health of the banking industry, the low projected losses to the BIF, and the strength of the economy. The FDIC has estimated that approximately 92% of BIF-insured institutions will qualify for the minimum annual assessment of $2,000, and the Bank, effective January 1, 1996, qualified for the minimum annual assessment under this new assessment rate schedule. The new assessment rate schedule does not reflect the possible impact upon assessment rates of the proposed legislation to recapitalize the SAIF, discussed below. Although the BIF has now been capitalized, the SAIF remains seriously undercapitalized, and the Congress is currently considering legislation to recapitalize the SAIF. Although the passage of some form of legislation to recapitalize the SAIF appears likely in the near future, the ultimate form of such legislation, including the timing and amounts of any payments to be made thereunder by BIF-insured institutions, and the effect (if any) of such legislation on possible future losses of the BIF or the insurance assessment rate schedule for BIF-insured institutions, can not be determined at this time. As of December 31, 1995, the Bank was classified as "well capitalized" under these provisions. See "Management's Discussion and Analysis of Financial Condition and Results Of Operations -- Results of Operations -- Non-Interest Expense." Prompt Corrective Action. Under Section 38 of the FDIA, as added by the FDICIA, each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the FDIA, which became effective on December 19, 1992. Under the regulations, a bank shall be deemed to be (i) "well capitalized" if it has Total Risk-Based Capital Ratio of 10.0% or more, has a Tier I Risk-Based Capital Ratio of 6.0% or more, has a Tier I Leverage Capital Ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has a Total Risk-Based Capital Ratio of 8.0% or more, a Tier I Risk- Based Capital Ratio of 4.0% or more and a Tier I Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a Total Risk-Based Capital Ratio that is less than 8.0%, a Tier I Risk-Based Capital Ratio that is less than 4.0% or a Tier I Leverage Capital Ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized" if it has a Total Risk-Based Capital Ratio that is less than 6.0%, a Tier I Risk-Based Capital Ratio that is less than 3.0% or a Tier I Leverage Capital Ratio that is less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations also 54 specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. Such guaranty shall be limited to the lesser of (i) an amount equal to 5.0% of the institution's total assets at the time the institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount necessary at such time to restore the relevant capital measures of the institution to the levels required for the institution to be classified as adequately capitalized. Such a guarantee shall expire after the federal banking agency notifies the institution that it has remained adequately capitalized for each of four consecutive calendar quarters. An institution which fails to submit a written capital restoration plan within the requisite period, including any required performance guarantee, or fails in any material respect to implement a capital restoration plan, shall be subject to the restrictions in Section 38 of the FDIA which are applicable to significantly undercapitalized institutions. A "critically undercapitalized institution" is to be placed in conservatorship or receivership within 90 days unless the FDIC formally determines that forbearance from such action would better protect the deposit insurance fund. Unless the FDIC or other appropriate federal banking regulatory agency makes specific further findings and certifies that the institution is viable and is not expected to fail, an institution that remains critically undercapitalized on average during the fourth calendar quarter after the date it becomes critically undercapitalized must be placed in receivership. Immediately upon becoming undercapitalized, an institution shall become subject to the provisions of Section 38 of the FDIA (i) restricting payment of capital distributions and management fees, (ii) requiring that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital, (iii) requiring submission of a capital restoration plan, (iv) restricting the growth of the institution's assets and (v) requiring prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: requiring the institution to raise additional capital; restricting transactions with affiliates; restricting interest rates paid by the institution on deposits; requiring replacement of senior executive officers and directors; restricting the activities of the institution and its affiliates; requiring divestiture of the institution or the sale of the institution to a willing purchaser; and any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. Brokered Deposits. The FDIA restricts the use of brokered deposits by certain depository institutions. Under the FDIA and applicable regulations, (i) a "well capitalized insured depository institution" may solicit and accept, renew or roll over any brokered deposit without restriction, (ii) an "adequately capitalized insured depository institution" may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC and (iii) an "undercapitalized insured depository institution" may not (x) accept, renew or roll over any brokered deposit or (y) solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution's normal market area or in the market area in which such deposits are being solicited. The term 55 "undercapitalized insured depository institution" is defined to mean any insured depository institution that fails to meet the minimum regulatory capital requirement prescribed by its appropriate federal banking agency. The FDIC may, on a case-by-case basis and upon application by an adequately capitalized insured depository institution, waive the restriction on brokered deposits upon a finding that the acceptance of brokered deposits does not constitute an unsafe or unsound practice with respect to such institution. Currently, the Bank is deemed to be a "well capitalized" insured depository institution for purposes of the restrictions on the use of brokered deposits by such institutions. The Bank historically has not relied upon brokered deposits as a source of funding and, at December 31, 1995, the Bank did not have any brokered deposits. Activities and Investments of Insured State-Chartered Banks. Section 24 of the FDIA, as amended by the FDICIA, generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under the FDIC's final regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of a bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors', trustees', and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. Safety and Soundness Guidelines. FDICIA also required the federal banking agencies to develop regulations for all insured depository institutions and depository institution holding companies prescribing standards relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, and such other operational and managerial standards as the banking agencies deem appropriate. The Community Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing the federal banking agencies to publish guidelines rather than regulations concerning safety and soundness. The Federal Reserve Board has finalized these safety and soundness guidelines. These guidelines relate to the management policies of financial institutions and are designed, in large part, to implement the safety and soundness criteria outlined in FDICIA. These guidelines will be published after the other federal bank regulatory agencies have developed their guidelines. At this time, it is not known what effect the applicable guidelines will have on the current practices of the Bank. FDICIA also contains a variety of other provisions that may affect the Bank's respective operations, including reporting requirements, regulatory guidelines for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. Certain of the provisions in FDICIA have recently been or will be implemented through the adoption of regulations by the various federal banking agencies and, therefore, their precise impact cannot be assessed at this time. COMMUNITY REINVESTMENT ACT The Federal Community Reinvestment Act (the "CRA") requires the FDIC and the Commissioner to evaluate the Bank's performance in helping to meet the credit needs of the community. The Bank defines its CRA marketplace to include the cities of Providence, Cranston, and the Richmond section of Rhode Island, all within the State of Rhode Island. This definition is not intended to restrict the availability of credit services throughout the Bank's general service area, but represents a special commitment the Bank has made to participate in the revitalization efforts of the community. As a part of the CRA program, the Bank is subject to periodic examinations by the FDIC and the State of Rhode Island, and maintains comprehensive records of its CRA activities for this purpose. The FDIC conducts examinations of insured institutions' CRA compliance and rates such institutions as "Outstanding," 56 "Satisfactory," "Needs to Improve" and "Substantial Noncompliance." As of its last CRA examination, the Bank received a rating of "Satisfactory." Failure of an institution to receive at least a "Satisfactory" rating could inhibit such institution's undertaking certain activities, including acquisitions of other financial institutions, which require regulatory approval based, in part, on CRA compliance considerations. The Bank is specifically interested in making financing available for creditworthy individuals and small businesses in its defined lending area. The Bank evaluates credit applications without regard to race, color, religion, national origin, gender, marital status or age, and does not discriminate against any loan applicant whose income may come entirely or in part from any public assistance program, or against any applicant who has exercised in good faith any right under the Consumer Protection Act. The Bank has been designated a "certified lender" by the SBA. As a result of this designation, the SBA is contractually obligated to respond within three business days to SBA loan requests submitted by the Bank. The federal bank regulatory agencies have jointly issued amendments to the regulations implementing the CRA that will substantially revise the current CRA framework effective January 1, 1996. They rely more than the current CRA regulations upon objective criteria of the performance of institutions under three key assessment tests: a lending test, a service test and an investment test. The amendments to the regulations are not expected to have a material adverse effect on operations of the Bank. For a discussion of the Company's and the Bank's CRA-compliance policy, see the section entitled "BUSINESS -- Community Reinvestment Act." REGULATORY ENFORCEMENT AUTHORITY The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") included substantial enhancement to the enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. FIRREA significantly increased the amount of and grounds for civil money penalties and requires, except under certain circumstances, public disclosure of final enforcement actions by the federal banking agencies. INTERSTATE BANKING LEGISLATION On September 29, 1994 the Interstate Banking Act became law. Under the new law, different types of interstate transactions and activities will be permitted, each with different effective dates. Interstate transactions and activities provided for under the new law include: (i) bank holding company acquisitions of separately held banks in a state other than a bank holding company's home state; (ii) mergers between insured banks with different home states, including consolidations of affiliated insured banks; (iii) establishment of interstate branches either de novo or by branch acquisition; and (iv) affiliated banks acting as agents for one another for certain banking functions without regard to state law prohibitions on interstate branching or unauthorized banking. In general, nationwide interstate bank acquisitions will be permissible one year after the date of enactment, irrespective of state law limitations. Interstate mergers will be permissible on July 1, 1997, unless a state passes legislation either to prevent or to permit the earlier occurrence of interstate mergers. States may at any time enact legislation permitting interstate de novo branching. Banks may act as agents for affiliated depository institutions beginning within one year after enactment. Once the applicable effective date has occurred (and, in the case of interstate mergers and de novo branching, subject to applicable state law "opt-out" or "opt-in" provisions), the appropriate federal bank regulator may approve the respective interstate transactions only if certain criteria are met. First, 57 in order for a banking institution (a bank or bank holding company) to receive approval for an interstate transaction, it must be "adequately capitalized" and "adequately managed." The phrase "adequately capitalized" is generally defined as meeting or exceeding all applicable federal regulatory capital standards, while the phrase "adequately managed" is left undefined. Second, the appropriate federal bank regulator must consider the applicant's and its affiliated institutions' records under the CRA, as well as the applicant's record under applicable state community reinvestment laws. The new law applies deposit "concentration limits" to interstate acquisition and merger transactions. Specifically, a banking institution may not receive federal approval for interstate expansion if it and its affiliates would control (i) more than 10% of the deposits held by all insured depository institutions in the United States, or (ii) 30% or more of the deposits of all insured depository institutions in any state in which the banks or branches involved in the transactions (or any affiliated depository institution) overlap. States may, by statute, regulation or order, raise or lower the 30% limit. In addition, the new law preempts certain existing state law restrictions on interstate banking (such as regional compacts and reciprocity requirements), effective one year after enactment. However, in order to receive federal approval for an interstate merger or de novo branching transaction, an applicant still also must comply with any non-discriminatory host state filing and other requirements. The foregoing references to laws and regulations which are applicable to the Company and the Bank are brief summaries thereof which do not purport to be complete and which are qualified in their entirety by reference to such laws and regulations. 58 TAXATION Federal Taxation. The Company and the Bank are subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code of 1986, as amended (the "Code"). The Bank is also, under Subchapter H of the Code, subject to certain special rules applicable to banking institutions as to securities, reserves for loan losses, and any common trust funds. The Company and the Bank, as members of an affiliated group of corporations within the meaning of Section 1504 of the Code, file a consolidated federal income tax return, which has the effect of eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income. In addition to regular corporate income tax, corporations are subject to an alternative minimum tax which generally is equal to 20% of alternative minimum taxable income (taxable income, increased by tax preference items and adjusted for certain regular tax items). The preference items which are generally applicable include an amount equal to 75% of the amount by which a bank's adjusted current earnings (generally alternative minimum taxable income computed without regard to this preference and prior to reduction for net operating losses) exceeds its alternative minimum taxable income without regard to this preference. Alternative minimum tax paid can be credited against regular tax due in later years. State Taxation. The State of Rhode Island imposes an excise tax on the Rhode Island income of banks at the rate of 9% percent. In addition, the Company is subject to an income tax for those years in which the Company generates taxable income, and a franchise tax for those years in which the Company does not generate taxable income. Since the Company has never, to date, generated any taxable income, it has historically been subject to the franchise tax, which is based upon the Company's par value of authorized common stock. For the above taxes, the definition of taxable income under Rhode Island law is substantially similar to the definition of federal taxable income, except that interest income on U.S. Treasury and certain U.S. agency obligations are excluded from the definition of Rhode Island state income. In addition, the Bank is not permitted to carry net operating losses, if any, forward or back for Rhode Island tax purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Income Taxes." 59 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The Company Board is divided into three classes. One class is comprised of three directors and two classes are comprised of two directors each. The directors of the Company are elected by the shareholders of the Company for staggered three year terms, or until their successors are elected and qualified. Currently, the members of the Company Board are also the members of the Bank Board. The directors of the Bank are elected annually for a term of one year. The executive officers of the Company and the Bank are elected by the Company Board and Bank Board, respectively, and hold office until their respective successors have been elected and qualified or until such person's death, resignation or removal by the applicable Board. The executive officers and directors of the Company and the Bank are as follows:
COMPANY BOARD NAME AGE(1) POSITION TERM EXPIRES ---- ------ -------- ------------ Patrick J. Shanahan, Jr.(2) ....... 51 President and Chief Executive Officer of the Company and Chairman of the Board, President and Chief Executive Officer of the Bank 1998 William A. Carroll ................ 78 Chairman of the Board of the Company and Director of the Bank 1997 John A. Macomber .................. 48 Treasurer of the Company and Vice President and Treasurer of the Bank -- Raymond F. Bernardo ............... 78 Director of the Company and the Bank 1996 Joseph A. Keough .................. 54 Director of the Company and the Bank 1996 Peter L. Mathieu, Jr., M.D. ....... 71 Director of the Company and the Bank 1996 Joseph V. Mega .................... 62 Director of the Company and the Bank 1998 William P. Shields ................ 58 Director of the Company and the Bank 1997
__________ (1) As of December 31, 1995. (2) The terms of Mr. Shanahan's employment as President and Chief Executive Officer are governed by an employment agreement. See " -- Employment Agreement." BIOGRAPHICAL INFORMATION OF EXECUTIVE OFFICERS AND DIRECTORS Patrick J. Shanahan, Jr., has served as President and Chief Executive Officer of the Company since 1980. Mr. Shanahan has served as Chairman of the Board of Directors of the Bank since 1989 and President and Chief Executive Officer of the Bank since 1975. William A. Carroll, has served as Chairman of the Board of Directors of the Company since 1980, and as a Director of the Bank since 1976. Mr. Carroll has served as President of Lorac Union Corp. since 1947. John A. Macomber has served as Treasurer of the Company, and as Vice President and Treasurer of the Bank since 1992. Mr. Macomber served as Senior Vice President and Treasurer of Greater Providence Deposit Corporation from 1985 to 1992. Mr. Macomber is a certified public accountant. Raymond F. Bernardo has served as a Director of the Company since 1980, and as Director of the Bank from 1977. Now retired, Mr. Bernardo served as Chief Executive Officer of K.G.R. Realty Co. since 1970 through 1995, and as President and Chief Executive Officer of Providence Granite Co. Inc. from 1947 through 1983. 60 Joseph A. Keough has served as a Director of the Company since 1980, and as Director of the Bank since 1977. Mr. Keough is an attorney with Keough and Gearon, a position he has held since 1970. Mr. Keough has also served as Chief Judge of the Pawtucket Municipal Court since 1980. Peter L. Mathieu, Jr., M.D. has served as a Director of the Company since 1980, and as Director of the Bank since 1976. Dr. Mathieu has been a Pediatrician, Allergist, Immunologist and Endocrinologist in private practice since 1950. Joseph V. Mega has served as a Director of the Company since 1994, and as a Director of the Bank since 1993. He has owned and operated and served as the President of Crugnale Bakery in Providence, Rhode Island since 1976. William P. Shields has served as a Director of the Company and the Bank since 1993. Since December, 1993, Mr. Shields has been a Commissioner of the Board of Elections of the State of Rhode Island. From 1987 to 1994, Mr. Shields was the Secretary and Treasurer of Bonnett Liquors. Mr. Shields served as a Deputy Director of Administration of the Office of the Attorney General of Rhode Island from 1986 to 1992. CERTAIN NON-EXECUTIVE OFFICERS Certain non-executive officers of the Bank who are expected to make significant contributions to the business of the Company are as follows:
NAME AGE(1) POSITION ---- ------ -------- Robert D. McCormick .............. 50 Vice President -- Commercial Lending Francis B. Geary ................. 56 Vice President -- Commercial Lending Anthony J. DePamphilis, Jr. ...... 36 Vice President -- Information Systems and Operations Donna M. Dupuis .................. 38 Vice President -- Internal Audit Betty C. Ricci ................... 41 Vice President -- Retail Banking
__________ (1) As of December 31, 1995. BIOGRAPHICAL INFORMATION OF CERTAIN NON-EXECUTIVE OFFICERS Robert D. McCormick joined the Bank as Vice President and commercial loan officer in 1993, and has served as Vice President and manager of Credit and Loan Administration of the Bank since 1994. Mr. McCormick served as Vice President and as Senior Commercial Lender at New England Savings Bank from 1991 to 1993. Prior to that Mr. McCormick was employed at Rhode Island Hospital Trust National Bank from 1981 to 1991, and served there as Vice President and Division Head of Corporate Banking prior to his departure. Francis B. Geary has served as Vice President of Commercial Lending and as a commercial loan officer of the Bank since 1995, and is responsible for business development. Mr. Geary served Old Stone Bank from 1969 to 1993 most recently as Senior Vice President and Division Head, and as Senior Asset Manager for the Resolution Trust Corporation from 1993 to 1994. Anthony J. DePamphilis, Jr. joined the Bank as a Loan Processor in 1985 and has served in numerous capacities, most recently as Vice President of Information Systems and Operations of the Bank since 1995. 61 Donna M. Dupuis joined the Bank as a Branch Teller in 1978, and has served as Vice President of Internal Audit of the Bank since 1992. Ms. Dupuis served as Treasurer of the Company and the Bank from 1986 to 1992. Betty C. Ricci joined the Bank in 1973 as a Clerk in the Operations Department, and has served as Vice President of Retail Banking of the Bank since 1995. Ms. Ricci served as Vice President of Operations of the Bank from 1984 to 1995. COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY AND THE BANK The Company Board meets quarterly and the Bank Board meets monthly. Each Board of Directors may have additional special meetings upon the request of the Chairman of the Board, the President or any three members of their respective Boards of Directors. During the year ended December 31, 1995, the Company Board met four times and the Bank Board met eleven times. No director attended fewer than 80% of the total of board meetings held by either the Company or the Bank during the year ended December 31, 1995. The Company Board and the Bank Board have appointed certain committees. Each has an Audit Committee comprised of the same members. In addition, among other committees, the Bank Board has established a CRA/Compliance Committee, Asset/Liability Committee ("ALCO"), and, as of February 6, 1995, a Compensation Committee. The Audit Committee reviews the scope and results of the annual audit of the Company's consolidated financial statements conducted by the Company's independent public accountants, the scope of other services provided by the Company's independent public accountants, proposed changes in the Company's financial and accounting standards and principles, and the Company's policies and procedures with respect to its internal accounting, auditing and financial controls, and makes recommendations to the Company Board on the engagement of the independent public accountants, as well as other matters which may come before it or as directed by the Company Board. The Audit Committee of the Company and the Bank consists of Messrs. Keough, Bernardo, Carroll and Shields, and is chaired by Mr. Keough. The Audit Committee meets quarterly. The CRA/Compliance Committee is responsible for overseeing, coordinating and evaluating the Bank's performance under the Community Reinvestment Act and the Bank Secrecy Act. The Committee reviews specific policies and policy statements and assesses the Bank's compliance with those policies and overall compliance with federal and state law. The CRA/Compliance Committee of the Bank consists of Messrs. Mathieu and Mega. The CRA/Compliance Committee meets quarterly. The ALCO establishes, coordinates, communicates and controls the management of asset/liability procedures. The primary roll of the committee is to establish and monitor the volume and mix of the Bank's assets and deposits (sources and uses of funds). The objective of the committee is to manage assets and deposits of the Bank while promoting consistency with the Bank's goals for liquidity, capital growth, risk, and profitability. The ALCO consists of Messrs. Keough, Shanahan, DePamphilis, Macomber and Ms. Ricci and is chaired by Mr. Macomber. The ALCO Committee meets semiannually. The Compensation Committee will be responsible for establishing the compensation of the Company's directors, officers and employees, including salaries, bonuses, commissions, benefit plans, the grant of options and other forms of, or matters relating to, compensation. The Compensation Committee consists of Messrs. Carroll, Bernardo and Mega. The Compensation Committee is expected to meet semiannually. DIRECTOR'S COMPENSATION Currently, all directors of the Company receive a director's fee of three hundred dollars ($300) for each Company Board meeting attended. Each director receives an annual retainer of $3,000 and a director's fee of three hundred dollars ($300) for each Bank Board meeting attended up to a maximum of six hundred dollars ($600) for meetings attended on any given day. In addition, each non-employee 62 director of the Company and the Bank receives a fee of three hundred ($300) dollars for all committee meetings attended. The Company and the Bank have recently implemented a deferred compensation plan for their directors which allows such directors to defer the receipt of director's fees paid by the Company and the Bank until their services with the Company Board and Bank Board terminate. EXECUTIVE COMPENSATION The following table sets forth in summary form all compensation paid by the Company and the Bank to Mr. Shanahan for services rendered in all capacities to the Company and the Bank for the fiscal year ended December 31, 1995. No other executive officer received compensation in excess of $100,000 for such year. SUMMARY COMPENSATION TABLE
NAME AND ALL OTHER PRINCIPAL POSITION YEAR SALARY($) COMPENSATION(1) ------------------ ---- --------- ---------------- Patrick J. Shanahan, Jr. President and Chief Executive Officer ......... 1995 $213,675 $8,759
__________ (1) Includes $1,259 in insurance premiums paid by the Company for a term life insurance policy in favor of Mr. Shanahan, and $7,500 paid to Mr. Shanahan as director fees. EMPLOYMENT AGREEMENTS Effective as of February 6, 1996, the Company entered into an amended and restated employment agreement with Patrick J. Shanahan, Jr. (the "Employment Agreement"). The Employment Agreement is intended to ensure that the Company will be able to retain Mr. Shanahan's services after the Public Offering. The continued success of the Company and the Bank depend to a significant degree on the skills and competence of Mr. Shanahan. The Employment Agreement provides that Mr. Shanahan's base salary from January 1, 1996 to December 31, 1996 will be $223,500, and that such salary shall be reviewed each year and that there shall be an annual increase of not less than five (5%) percent. In addition to base salary, the Employment Agreement provides for, among other things, participation in other fringe benefits applicable to executive officers including the Company's supplemental executive retirement plan. See " -- Supplemental Executive Retirement Plan." The Employment Agreement provides that either the Company or Mr. Shanahan may terminate the agreement upon 90 days notice to the other. The Employment Agreement provides for termination by the Company for cause as defined in the Employment Agreement at any time without further compensation. In the event the Company chooses to terminate Mr. Shanahan's employment for reasons other than cause, Mr. Shanahan would be entitled to continue to receive from the Company his existing base salary and all benefits for twenty-four (24) months from the date of termination. Under the Employment Agreement, if Mr. Shanahan voluntarily terminates the Employment Agreement upon a change of control of the Company (as defined in the Employment Agreement), or Mr. Shanahan is deemed involuntarily terminated as a result of certain events or circumstances following a change of control, then Mr. Shanahan would be entitled, at his sole discretion, to either: (i) the payments and benefits due under the Employment Agreement upon termination by the Company other than for cause as set forth above; or (ii) 2.99 times the "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended, plus certain other entitlements, but excluding his W-2 earnings resulting from the exercise of stock options, payable in one lump sum on the date of termination. 63 In the event of a change in control of the Company, were Mr. Shanahan to opt for the lump-sum payment of 2.99 times the "base amount", the total amount of payments under the Employment Agreement, based solely on cash compensation paid to Mr. Shanahan over the past five fiscal years and excluding any benefits under any employee benefit plan which may be payable, would be approximately $578,000. STOCK OPTIONS No stock options were granted to Mr. Shanahan for the year ended December 31, 1995. Pursuant to a stock option agreement dated November 24, 1986, between the Company and Mr. Shanahan (as amended, the "1986 Stock Option Agreement"), the Company granted Mr. Shanahan an option to purchase 6,000 shares of the Common Stock at a price of $25.00 per share. As a result of the 10 for 1 Stock Split, the number of shares to which Mr. Shanahan became entitled upon exercise of the option was increased to 60,000 shares (the "Option Shares"), and the exercise price was reduced to $2.50 per share, each in accordance with the terms of the 1986 Stock Option Agreement. The Company granted the option to Mr. Shanahan as further inducement to his remaining with the Company and the Bank. Mr. Shanahan's options under the 1986 Stock Option Agreement expire on the tenth anniversary of the grant date, or November 24, 1996 (the "Option Expiration Date"). The Company has no other options outstanding. The following table sets forth information with respect to: (i) option exercises by Mr. Shanahan for the fiscal year ended December 31, 1995; (ii) the number of unexercised options held by Mr. Shanahan as of December 31, 1995; and (iii) the value of unexercised in-the-money options (options for which the fair market value of the Common Stock exceeds the exercise price) as of December 31, 1995. In the fiscal year 1995, there were no option exercises by Mr. Shanahan. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES ACQUIRED OPTIONS AT DECEMBER 31, 1995 AT DECEMBER 31, 1995(1) NAME ON EXERCISE(#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- -------------- ----------------- ------------------------- ------------------------- Patrick J. Shanahan, Jr. ..... -- -- 60,000/0 $435,000/0
__________ (1) Based on the Public Offering Price of $9.75 Per share, less the aggregate exercise price. In order to realize the economic benefit inherent in the options granted pursuant to the 1986 Stock Option Agreement, Mr. Shanahan must exercise the options in full before the Option Expiration Date. It is currently anticipated that Mr. Shanahan will exercise his options under the 1986 Stock Option Agreement prior to the completion of the Public Offering. The aggregate exercise price to Mr. Shanahan for this exercise will be $150,000 (the "Aggregate Exercise Price"). In addition, as a result of the exercise, Mr. Shanahan will incur potential federal and state income tax liability on the difference between the fair market value of the Option Shares at the time of exercise and the Aggregate Exercise Price (the "Option Value"). In connection with this income tax liability, upon the exercise, Mr. Shanahan will be required to immediately pay to the Company the applicable minimum state and federal withholding tax as applied to the Option Value (the "Immediate Withholding Tax"). Assuming a fair market value equivalent to $9.75 per share (the Public Offering Price), it is estimated that the Immediate Withholding Tax will be $161,603. In order to allow Mr. Shanahan to exercise these options and fund both the Aggregate Exercise Price and the Immediate Withholding Tax, the Company Board has approved an amendment to the 1986 Stock Option Agreement to permit a manner of exercise by which both the Option Exercise Price and the Immediate Withholding Tax otherwise payable by Mr. Shanahan to the Company will be offset against the shares otherwise issuable to Mr. Shanahan upon his exercise of his options under the 64 1986 Stock Option Agreement. As a result, the 60,000 shares of the Common Stock Mr. Shanahan otherwise would have received will be reduced by a number of shares equivalent in value to the sum of the Aggregate Exercise Price and the Immediate Withholding Tax. The Company estimates that after such offsets, Mr. Shanahan will be issued 28,041 shares of the Common Stock upon the exercise. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company has recently implemented a non-qualified supplemental executive retirement plan (the "SERP") to provide certain officers and highly compensated employees with additional retirement benefits. Benefits under the SERP are intended to supplement benefits payable under the defined Pension Plan (as defined below, see " -- Pension Plans") which are subject to: (i) federal law limitations applicable to qualified pension plans; and (ii) early retirement penalties set forth in the Pension Plan. Benefits payable under the SERP are designed to recover those benefits that would be payable under the Pension Plan if not for such limitations. See " -- Pension Plans." The SERP is a non-qualified, unfunded benefit plan. Participants in the SERP have been determined by the Company Board. From February 6, 1996 forward, participants in the SERP will be determined by the Company Compensation Committee. Benefits are determined on the basis of the participant's three highest years' base salary. Benefits are payable only upon death, retirement in accordance with the terms of the SERP, or termination of employment with the Company. As of December 31, 1995, the only participant in the SERP was Mr. Shanahan. The Company incurred an expense of $65,674 with respect to the SERP for the year ended December 31, 1995. If Mr. Shanahan were to retire at age 52 on January 1, 1997, his annual benefit under the SERP would be approximately $63,000. The Company may establish an irrevocable grantor's trust ("rabbi trust") in connection with the SERP. This trust would be funded with contributions from the Company for the purpose of providing the benefits promised under the terms of the SERP. The SERP participants would have only the rights of unsecured creditors with respect to the trust's assets, and would not recognize income with respect to benefits provided by the SERP until such benefits are received by the participants. The assets of the rabbi trust would be considered part of the general assets of the Company and would be subject to the claims of the Company's creditors in the event of the Company's insolvency. Earnings on the trust's assets would be taxable to the Company. PENSION PLANS The Bank is a member of the Financial Institutions Retirement Fund ("FIRF") which sponsors a multiple employer pension plan (the "Pension Plan"). Contributions to the Pension Plan are determined on an actuarial basis for the benefit of all qualifying employees. Employees become eligible for participation on attainment of age 21 and completion of one year of service to the Bank. The Pension Plan provides an annual benefit upon retirement calculated by adding the products of (i): (a) 1.5% multiplied by; (b) the employee's years of benefit service multiplied by; (c) the employee's highest average salary for three consecutive years of service ("High-3 Average Compensation"); up to the Covered Compensation Level (defined generally as the average of the maximum social security wage base for the 35-year period preceding social security retirement age), and (ii): (x) 2.0% multiplied by; (y) the employee's years of benefit service multiplied by; (z) the employee's High-3 Average Compensation to the extent it exceeds the Covered Compensation Level. Under the terms of the Pension Plan, benefits are calculated as a 10 year certain and continuous annuity. Participants may elect payment in the "regular form" or in another one of the annuity forms available under the Pension Plan. Benefit payments generally begin at age 65, but they can begin earlier in a reduced amount, or, if the employee continues working past age 65, later in an increased amount. Administrative expenses for the Pension Plan are paid by the Company. Benefits under the Pension Plan become fully vested upon 5 or more years of service to the Company. Benefits are not offset against Social Security. The following table sets forth estimated annual benefits payable upon retirement at age 65 assuming the employee chooses the regular form of benefit under the Pension Plan. 65 PENSION PLAN TABLE
YEARS OF BENEFIT SERVICE ------------------------ HIGH-3 AVERAGE COMPENSATION 5 10 20 30 40 ------------ - -- -- -- -- $ 25,000 ...................... $ 1,900 $ 3,800 $ 7,500 $ 11,300 $ 15,600 50,000 ...................... 4,300 8,600 17,200 25,900 35,200 75,000 ...................... 6,800 13,600 27,200 40,900 55,200 100,000 ...................... 9,300 18,600 37,200 55,900 75,200 125,000 ...................... 11,800 23,600 47,200 70,900 95,200 150,000 and over(1) .......... 14,300 28,600 57,200 85,900 112,888(2)
__________ (1) Federal law does not permit qualified retirement plans to recognize compensation in excess of $150,000. (2) Represents the maximum amount payable under the pension plan in 1996. For purposes of the table, Mr. Shanahan had 21 years of benefit service with the Company as of December 31, 1995. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to February 6, 1996, the Company Board did not have a compensation committee and functions that would have been performed by such a committee were performed by the Company Board as a whole. Mr. Shanahan was prior to February 6, 1996, and still is, the President and Chief Executive Officer of the Company as well as a director of the Company. CERTAIN TRANSACTIONS The Bank has had, and expects to have in the future, various loan and other banking transactions in the ordinary course of business with the directors, executive officers, and principal shareholders of the Company, the Bank and entities with which such persons may be associated. All such transactions: (i) have been and will be made in the ordinary course of business; (ii) have been and will be made on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transactions with unrelated persons; and (iii) in the opinion of management do not and will not involve more than the normal risk of collectibility or otherwise present other terms less favorable to the Bank than would otherwise be obtained with unrelated persons. As of December 31, 1995, the total dollar amount of extensions of credit to directors, executive officers, principal stockholders, and any of their associates was approximately $1.7 million, which represented approximately 24% of total shareholders' equity as of such date. 66 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of December 31, 1995, and as adjusted to reflect the sale of the shares of the Common Stock offered hereby and the exercise prior thereto by Mr. Shanahan of all 60,000 options under the 1986 Stock Option Agreement, by: (i) Mr. Shanahan, (ii) each of the Company's Directors, (iii) all directors and executive officers of the Company as a group, and (iv) each other person (including any "group," as that term is used in Section 13(d)(3) of the Exchange Act) who is known by the Company to own beneficially 5% or more of the Common Stock. In general, beneficial ownership includes shares over which the director, officer or 5% shareholder has sole or shared voting or investment power and shares which such person has the right to acquire within 60 days of December 31, 1995.
PERCENTAGE OF AMOUNT AND NATURE AMOUNT AND NATURE COMMON STOCK OF BENEFICIAL PERCENTAGE OF OF BENEFICIAL BENEFICALLY OWNERSHIP COMMON STOCK NAME AND ADDRESS OWNERSHIP AS OF OWNED AS OF IMMEDIATELY BENEFICIALLY OWNED OF BENEFICIAL OWNER DECEMBER 31, 1995(1)(2)(3) DECEMBER 31, 1995 PRIOR TO OFFERING AFTER THE OFFERING(4) ------------------- -------------------------- ----------------- ----------------- --------------------- EXECUTIVE OFFICERS AND DIRECTORS Patrick J. Shanahan, Jr.(5) ................... 106,180(6) 14.29% 74,221(7) 5.89% 10 Celestia Court North Kingstown, Rhode Island 02852 William A. Carroll(8) ......................... 87,450 12.80% 87,450 6.93% c/o Lorac/Union Tool Co. 97 Johnson Street Providence, Rhode Island 02906 Peter L. Mathieu, Jr., M.D.(9) ................ 58,800 8.61% 58,800 4.66% 225 Waterman Street Providence, Rhode Island 02906 Raymond F. Bernardo ........................... 19,420 2.84% 19,420 1.54% P.O. Box 201 Jamestown, Rhode Island 02835 Joseph A. Keough .............................. 3,000 * 3,000 * Keough & Gearon 100 Armistice Boulevard Pawtucket, R.I. 02860 Joseph V. Mega(10) ............................ 2,500 * 2,500 * 26 Mystery Farm Drive Cranston, Rhode Island 02921 ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (6 PERSONS) ........................... 277,350 37.31% 245,391 19.46% FIVE PERCENT OR GREATER SHAREHOLDERS Edward w. Ricci (deceased)(11) ................ 99,700 14.59% 99,700 7.90% 201 Lorimar Avenue Providence, Rhode Island 02906 Ralph Shuster, Inc. ........................... 52,500 7.68% 52,500 4.16% P.O. Box 2762 Providence, Rhode Island 02907-0762
_________ * Less than 1%. (1) Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to shares of the Common Stock beneficially owned subject to community property laws where applicable. (2) Shares not outstanding but deemed beneficially owned by virtue of the right of a person or group to acquire them within 60 days of December 31, 1995 are treated as outstanding only for purposes of determining the number of and percent owned by such person or group. 67 (3) The number of shares of the Common Stock outstanding as of December 31, 1995 was 683,200. (4) The number of shares issued and outstanding after the Public Offering is 1,261,241. This estimate gives effect to the issuance of: (i) 550,000 shares of Common Stock sold by the Company in the Public Offering; and (ii) 28,041 shares of Common Stock to Mr. Shanahan upon his exercise of options under the 1986 Stock Option Agreement prior to the Public Offering. The percent of shares beneficially owned after the Public Offering gives effect to the issuance of (i): 550,000 shares of Common Stock sold by the Company in the Public Offering; and (ii) 28,041 shares of Common Stock to Mr. Shanahan upon his exercise of options under the 1986 Stock Option Agreement prior to the Public Offering. All figures and percentages assume no exercise of the Underwriters over-allotment option to sell up to an additional 82,500 shares of Common Stock. All figures assume no purchase by any of the persons set forth in the above table of shares of Common Stock offered by the Company in the Public Offering. (5) Includes 8,150 shares owned in the name of either Mr. Shanahan or Margaret F. Shanahan, his wife. (6) Includes 60,000 shares of the Common Stock subject to options granted to Mr. Shanahan under the 1986 Stock Option Agreement. (7) Assumes the issuance of 28,041 shares of Common Stock to Mr. Shanahan upon his exercise of the 1986 Stock Option Agreement after offsetting amounts otherwise owed to the Company by Mr. Shanahan for the Aggregate Exercise Price and Immediate Withholding Tax prior to the Public Offering. See " -- Stock Options." (8) Includes 10,000 shares owned by Mr. Carroll's wife. Mr. Carroll disclaims beneficial ownership of all shares held by his wife. (9) Includes 40,600 shares owned in joint tenancy with Betty Burkhardt Mathieu, M.D., his wife. (10) Shares are owned in joint tenancy with Antonette M. Mega, his wife. (11) Includes 10,000 shares owned by the wife of the late Mr. Edward W. Ricci. 68 DESCRIPTION OF CAPITAL STOCK At December 31, 1995, the Company's authorized capital stock consisted of 5,000,000 shares of common stock, $1.00 par value per share (the "Common Stock") of which: (i) 750,000 shares were issued; (ii) 683,200 were outstanding; and (iii) 66,800 shares were held as treasury stock. In addition, at December 31, 1995, there were outstanding stock options to acquire 60,000 shares of the Common Stock pursuant to the 1986 Stock Option Agreement. See "Management -- Stock Options." Immediately after the closing of the Public Offering (assuming the exercise of certain outstanding options resulting in the issuance of 28,041 shares of the Common Stock), the Company's authorized capital stock will consist of 5,000,000 shares of common stock, $1.00 par value per share, of which the Company expects that: (i) 1,328,041 shares will be issued; (ii) 1,261,241 will be outstanding; and (iii) 66,800 will be held as treasury stock. COMMON STOCK Holders of the Common Stock are entitled to one vote per share for each share held of record on all matters submitted to a vote of shareholders. There are no cumulative voting rights. Accordingly, holders of a majority of the shares of the Common Stock entitled to vote in any election of Directors may elect all of the Directors standing for election. Holders of the Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Company out of funds legally available for such purpose. Upon liquidation, dissolution or winding up of the Company, holders of the Common Stock are entitled to share ratably in the assets of the Company legally available for distribution to the holders of the Common Stock. Holders of the Common Stock have no preemptive, subscription, redemption or conversion rights. All outstanding shares of the Common Stock are, and the shares offered by the Company upon completion of the Public Offering will be, when issued and paid for, validly issued, fully paid and non-assessable. POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES AND BY-LAWS General. There are provisions in the Articles and By-laws which may be deemed to have an anti-takeover effect and may discourage takeover attempts not first approved by the Company Board. These provisions are intended to avoid costly takeover battles and lessen the Company's vulnerability to a hostile change in control, thereby enhancing the possibility that the Company Board can maximize shareholder value in connection with an unsolicited offer to acquire the Company. However, these provisions can also have the effect of depressing the Company's stock price because they are an impediment to potential investors and their ability to gain control of the Company, and thus discourage activities such as unsolicited merger proposals, acquisitions, or tender offers (which shareholders might otherwise believe to be in their best interests). These provisions may also reduce the temporary fluctuations in the trading price of the Common Stock which are caused by accumulations of stock, thereby depriving the shareholders of certain opportunities to sell their stock at temporarily higher prices. The Company Board believes that these provisions are appropriate to protect the interests of the Company and all of its shareholders. Classified Board of Directors. The Company has a classified Board of Directors which provides for the Company Board to be divided into three classes, as nearly equal in number as possible, with each class of the directors to be elected annually for three-year terms. This extension of time may also tend to discourage a tender offer or takeover bid by making it more difficult for a majority of shareholders to change the composition of the Company Board. Certain Provisions of the By-laws with respect to the Company Board. The By-laws provide that any stockholder desiring to make a nomination for the election of directors at a meeting of stockholders must submit written notice to the Company no less than 14 nor more than 50 days prior to any meeting. Management believes that it is in the best interest of the Company and its stockholders to provide sufficient time to enable management to disclose information about a dissident slate of nominees for 69 directors. This advance notice requirement may also give management time to solicit its own proxies in an attempt to defeat any dissident slate of nominees should management determine that doing so is in the best interest of shareholders generally. The By-laws also provide that the number of directors on the Company Board shall not be less than three nor more than thirteen. The power to determine the number of directors within these numerical limitations is vested in the shareholders at the Company's annual meeting. However, between such annual meetings, the number so fixed may at any time be increased by the affirmative vote of a majority of the Company Board. The overall effect of such provisions may be to prevent a person or entity from immediately acquiring control of the Company through an increase in the number of directors and election of his or its nominees to fill the newly created vacancies. The By-laws also provide that members of the Company Board may be removed by the Company Board or by the affirmative vote of at least 70% of the shares of the Common Stock at a meeting duly called for such purpose. These provisions could delay or frustrate the removal of incumbent directors, or the assumption of control by the shareholders or by a third party, even if such removal or assumption of control would be beneficial to stockholders. Meetings. A special meeting of the shareholders of the Company may only be called by the Chairman of the Company Board, the President of the Company, or by the holders of at least 40% of the shares of the Common Stock. This provision could frustrate the assumption of control by a third party seeking to call a shareholder meeting for the purpose(s) of removing directors or considering an offer to acquire the Company or other change in control. Certain Business Transactions. The Articles contain a provision which provides that certain business combinations require the affirmative vote of the holders of seventy (70%) percent of the Common Stock. This "supermajority" requirement could result in the Company Board and management (who owned or controlled approximately 37.31% of the Common Stock as of December 31, 1995, inclusive of 60,000 stock options exercisable by Mr. Shanahan) exercising a stronger influence over any proposed takeover by refusing to approve a proposed business combination and by obtaining sufficient additional votes, including votes obtained through the issuance of additional shares to parties friendly to their interests, to preclude the seventy (70%) percent shareholder approval requirement. After the Public Offering, it is anticipated that the Company Board and management will hold approximately 19.46% of the outstanding shares of the Common Stock. The Articles also provide that this business combination requirement can only be amended by an affirmative vote of holders of at least seventy (70%) percent of the Common Stock. However, if the amendment, repeal or modification has been approved by all of the members of the Company Board, twenty-five (25%) percent of whom are deemed "Continuing Directors," as defined in the Articles, then only the affirmative votes of two-thirds of the shareholders is required. RHODE ISLAND BUSINESS COMBINATION PROVISIONS Pursuant to Rhode Island law, a corporation shall not engage in any business combination with an interested stockholder (generally defined as the beneficial owner of 10% or more of the corporation's outstanding voting stock or an affiliate of the corporation who within five years prior to the date in question was the beneficial owner of 10% or more of the corporation's outstanding voting stock) for a period of five years following the date (the "stock acquisition date") the stockholder became an interested stockholder unless the board of directors of the corporation approved the business combination or transaction pursuant to which the interested stockholder became such prior to the stock acquisition date. Notwithstanding the foregoing, even after the expiration of the five years, the corporation may not engage in transactions with an interested stockholder unless: (a) the holders of two-thirds of the outstanding voting stock, excluding any stock owned by the interested stockholder or any affiliate or associate of the interested stockholder, have approved the business combination at a meeting called for such purpose no earlier than five years after the stock acquisition date; or (b) the business combination meets each of the following conditions: (i) the nature, form and adequacy of the 70 consideration to be received by the corporation's stockholders in the business combination transaction satisfies certain specific enumerated criteria; (ii) the holders of all the outstanding share of stock of the corporation not beneficially owned by the interested stockholder are entitled to receive the specific consideration in the business combination transaction; and (iii) the interested stockholder shall not acquire additional shares of voting stock of the corporation except in certain specifically identified transactions. The restrictions prescribed by the statute will not be applicable to any business combination (a) involving a corporation that does not have a class of voting stock registered under the Exchange Act, unless the charter provides otherwise; (b) involving a corporation which did not have a class of voting stock registered under the Exchange Act at the time the corporation's charter was amended to provide that the corporation shall be subject to the statutory restriction provisions and the interested stockholder's stock acquisition date is prior to the effective date of the charter amendment; (c) involving a corporation whose original charter contains a provision expressly electing not to be subject to the statutory restrictions or which adopted an amendment expressly electing not to be subject to the statutory restrictions either to its by-laws prior to March 31, 1991 or to its charter if such charter amendment is approved by the affirmative vote of holders, other than the interested stockholders, and their affiliates and associates, of two-thirds of the outstanding voting stock, excluding the voting stock of the interested stockholders; provided, that the amendment to the charter shall not be effective until twelve (12) months after the vote of the stockholders and shall not apply to any business combination of the corporation with an interested stockholder whose stock acquisition date is on or prior to the effective date of the amendment; or (d) involving a corporation with an interested stockholder who became an interested stockholder inadvertently, if the interested stockholder divests itself of such number of shares so that it is no longer the beneficial owner of 10% of the outstanding voting stock and, but for such inadvertent ownership, was not an interested stockholder within the five-year period preceding the announcement of the business combination. The Articles do not contain any provisions expressly relating to the non-applicability of the statute. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Registrar and Transfer Company. 71 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Public Offering, without taking into account shares of the Common Stock that may be issued after December 31, 1995, other than those shares that will have been issued to Mr. Shanahan prior to the Public Offering upon his exercise of all the options under the 1986 Stock Option Agreement, the Company will have 1,261,241 shares of the Common Stock outstanding. Of these shares, all of the 550,000 shares sold in the Public Offering will be freely tradable by persons other than "affiliates" (as such term is defined under the Securities Act) of the Company without restriction under the Securities Act. In addition, 683,200 shares of the Common Stock, which were issued by the Company pursuant to a registration statement declared effective by the Commission in 1981 (the "1981 Registered Offering"), will be freely tradable by persons other than affiliates of the Company without restriction under the Securities Act. The remaining 28,041 shares of Common Stock, which will be issued to Mr. Shanahan upon his exercise of the 1986 Stock Option Agreement, will be treated as "restricted securities" (as such term is defined under Rule 144 under the Securities Act) and may not be resold in a public offering except in compliance with the registration requirements of the Securities Act or pursuant to an exemption therefrom, including those provided by Rules 144 and 701 promulgated under the Securities Act. In general, under Rule 144, as currently in effect, beginning 90 days after the date of this Prospectus, any holder of "restricted securities" (as such term is defined under Rule 144), including an affiliate of the Company as to which at least two years have elapsed since the later of the date of their acquisition from the Company or an affiliate, would be entitled within any three-month period to sell a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Common Stock (approximately 12,612 shares immediately after the completion of the Public Offering) or the average weekly trading volume of the Common Stock in the over-the-counter market during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Affiliates of the Company must comply with the restrictions and requirements of Rule 144 (except for the two-year holding period requirement) in order to sell shares of the Common Stock which are not "restricted securities" (such as shares acquired by affiliates in the Public Offering and the 1981 Registered Offering). Further, under Rule 144(k) a person who is not deemed an "affiliate" of the Company at any time during the three months preceding a sale and holds shares as to which at least three years have elapsed since the later of their acquisition from the Company or an affiliate may sell such shares under Rule 144 without regard to volume limitations, manner of sale provisions, notice requirements or availability of current public information concerning the Company. Subject to certain limitations on the aggregate offering price of securities offered and sold in reliance on Rule 701, and other conditions, Rule 701 may be relied upon with respect to the resale of shares of the Common Stock originally purchased from the Company by its employees, directors, officers, consultants or advisors between May 20, 1988 (the effective date of Rule 701) and the date the Company becomes subject to the reporting requirements of the Act, pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options (including exercises after the date of this Prospectus). Shares of the Common Stock issued in reliance on Rule 701 are also "restricted securities" and, beginning 90 days after the date of this Prospectus, may be sold by affiliates, subject to the provisions described above regarding manner of sale, notice requirements, volume limitations and the availability of current public information under Rule 144, but without compliance with its two-year minimum holding period requirement, and by persons other than affiliates, subject only to the provisions regarding manner of sale under Rule 144. Subject to the lock-up agreements described below, the affiliates may, in certain circumstances, be eligible to sell all or any portion of shares they hold (the "Affiliate Shares") in the public market pursuant to Rule 144 or Rule 701, as described below. There will be approximately 245,391 Affiliate Shares upon completion of the Public Offering (including 28,041 shares that will have been issued to Mr. 72 Shanahan upon his exercise of options under the 1986 Stock Option Agreement). Approximately 217,350 of the Affiliate Shares will be eligible for sale in the public market in accordance with Rule 144 beginning 90 days after the date of the Prospectus. In addition, beginning after such ninetieth day, Mr. Shanahan will be entitled to sell the 28,041 shares issued to him upon his exercise of options under the 1986 Stock Option Agreement subject to the provisions of Rule 144 and Rule 701. All of the Affiliate Shares are subject to lock-up agreements in favor of the Underwriter. Directors and executive officers who in the aggregate will, upon completion of the Public Offering, hold approximately 245,391 shares of the Common Stock (including 28,041 shares that will have been issued to Mr. Shanahan upon his exercise of options under the 1986 Stock Option Agreement), have agreed pursuant to certain agreements that they will not, without the prior written consent of the Underwriter, sell, transfer, assign or otherwise dispose of any of their shares for a period of 180-days from the date of this Prospectus. See "Underwriting." Prior to this offering, there has been no public market for the Common Stock. No precise prediction can be made as to effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. The Company is unable to estimate the number of shares that may be sold in the public market pursuant to Rule 144, since this will depend on the market price of the Common Stock, the personal circumstances of the sellers, and other factors. Nevertheless, sales of significant amounts of the Common Stock in the public market could adversely affect the market price of the Common Stock. 73 UNDERWRITING The Underwriter has agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite its name at the Public Offering Price less underwriting discounts set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriter are subject to certain conditions precedent, and that the Underwriter is committed to purchase all of such shares, if any are purchased.
NUMBER OF UNDERWRITER SHARES ----------- ------ Sandler O'Neill & Partners, L.P. .......................... 550,000 ------- Total .................................................. 550,000 =======
The Underwriter has advised the Company that the Underwriter proposes initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriter may allow to selected dealers a concession of not more than $.35 per share, and the Underwriter may allow, and such dealers may reallow, a concession of not more than $.05 to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Underwriter. No reduction in such terms shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Common Stock is offered subject to receipt and acceptance by the Underwriter, and to certain other conditions, including the right to reject any order in whole or in part. The Company has an option to the Underwriter, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 82,500 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial 550,000 shares to be purchased by the Underwriter. To the extent that the Underwriter exercises this option, the Underwriter will be committed, subject to certain conditions, to purchase such additional shares. The Underwriter may purchase such shares only to cover over-allotments made in connection with this offering. The Underwriting Agreement provides that the Company will indemnify the Underwriter against certain liabilities, including civil liabilities under the Act, or will contribute to payments the Underwriter may be required to make in respect thereof. The Underwriting Agreement also provides that the Company will pay the Underwriter's expenses in an amount not to exceed $100,000. The closing of this offering is subject to certain conditions, including receipt by the Underwriter of certain certificates, legal opinions, comfort letters from the Company's independent public accountants and other information, all as more specifically described in the Underwriting Agreement. This offering may be commenced in anticipation of satisfying these conditions, but there can be no assurance that all of the conditions to closing will be satisfied and failure to satisfy such conditions may result in termination of this offering. The Company and each of its directors and officers, who immediately after the Public Offering will hold in the aggregate approximately 245,391 shares of Common Stock (including 28,041 shares that will have been issued to Mr. Shanahan upon his exercise of options under the 1986 Stock Option Agreement prior to the Public Offering), have agreed not to sell or offer to sell or otherwise dispose of any shares of Common Stock of the Company or any right to acquire such shares for a period of 180 days after the date of this Prospectus without the prior written consent of the Underwriter, except for the shares to be sold by the Company in the Public Offering. Prior to this offering, there has been no public market for the Common Stock. Consequently, the public offering price has been determined by negotiations between the Company and the Underwriter. Among the factors considered in such negotiations were the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, the Company's past and present operations, its past and present earnings and the trend of such earnings, 74 the prospects for future earnings of the Company, the general condition of the securities market at the time of the offering and the market prices of publicly traded common stocks of comparable companies in recent periods. The Common Stock has been approved for quotation on the Nasdaq National Market System under the symbol "FTFN". CERTAIN LEGAL MATTERS The validity of the shares offered hereby will be passed upon for the Company by Dick & Hague, Ltd., Johnston, Rhode Island, and certain other legal matters will be passed upon for the Company by Bingham, Dana & Gould LLP, Boston, Massachusetts and Dick & Hague, Ltd. with respect to certain matters of Rhode Island law. Certain legal matters will be passed upon for the Underwriter by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. EXPERTS The consolidated financial statements of the Company and its subsidiary as of December 31, 1995 and 1994 and for each of the years in the three year period ended December 31, 1995 included in this Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. ADDITIONAL INFORMATION The Company has filed with the Commission the Registration Statement with respect to the Common Stock offered hereby. This Prospectus forms a part of the Registration Statement. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statement and to the schedules and exhibits filed as part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement, including all schedules and exhibits thereto, may be copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. Copies also may be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. 75 FIRST FINANCIAL CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants ................................................. F-2 Consolidated Balance Sheets as of December 31, 1995 and 1994 ............................. F-3 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 ................................................................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 .................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 ............................................................................... F-6 Notes to Consolidated Financial Statements ............................................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of FIRST FINANCIAL CORP.: We have audited the accompanying consolidated balance sheets of First Financial Corp. (a Rhode Island corporation) and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Financial Corp. and subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1995, in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements, effective January 1, 1994, the Company changed its method of accounting for securities. ARTHUR ANDERSEN LLP Boston, Massachusetts January 11, 1996 (except with respect to the matters discussed in the third paragraph of Note 7 and the first paragraph of Note 11 as to which the date is February 22, 1996.) F-2 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------ 1995 1994 ---- ---- ASSETS CASH AND DUE FROM BANKS ............................................................ $ 1,866,249 $ 2,548,584 ------------ ------------ SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL .................................... 1,035,000 2,259,000 --------- --------- SECURITIES (Notes 1 and 2): Held-to-maturity (market value: $14,566,501 in 1995 and $12,686,154 in 1994) ... 14,644,165 13,146,548 Available-for-sale (amortized cost: $15,006,743 in 1995 and $15,113,314 in 1994) 15,131,595 14,921,825 ---------- ---------- Total investment securities ................................................. 29,775,760 28,068,373 FEDERAL HOME LOAN BANK STOCK ....................................................... 348,100 -- ------- ---------- LOANS (Notes 1, 7 and 9): Commercial ..................................................................... 3,549,458 3,935,106 Commercial real estate ......................................................... 32,412,836 25,094,412 Residential real estate ........................................................ 23,657,622 24,283,591 Home equity lines of credit .................................................... 3,671,892 4,109,597 Consumer ....................................................................... 1,496,933 1,227,222 --------- --------- 64,788,741 58,649,928 Less -- Unearned discount ...................................................... 88,141 80,814 Allowance for possible loan losses (Notes 3 and 12) ............................ 1,828,040 2,257,307 --------- --------- Net loans ...................................................................... 62,872,560 56,311,807 ---------- ---------- OTHER REAL ESTATE OWNED (Note 1) ................................................... 1,470,310 944,841 --------- ------- PREMISES AND EQUIPMENT, net (Notes 4 and 7) ........................................ 1,816,893 1,835,150 --------- --------- OTHER ASSETS ....................................................................... 1,118,950 854,062 --------- ------- TOTAL ASSETS ....................................................................... $100,303,822 $ 92,821,817 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: Demand ......................................................................... $ 12,483,433 $ 12,034,673 Savings and money market accounts .............................................. 24,191,981 32,039,871 Time deposits (Note 5) ......................................................... 52,915,128 39,109,782 ---------- ---------- Total deposits .............................................................. 89,590,542 83,184,326 ---------- ---------- ACCRUED EXPENSES AND OTHER LIABILITIES ............................................. 677,059 342,552 ------- ------- SENIOR DEBENTURE, net of Unamortized discount of $155,368 in 1995 and $264,221 in 1994 (Note 12) ................................................................... 2,844,632 2,735,779 --------- --------- COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY (Notes 2 and 11): Common Stock, $1 par value Authorized -- 5,000,000 shares in 1995 and 1,000,000 shares in 1994 Issued -- 750,000 shares ...................................................... 750,000 750,000 Surplus ........................................................................ 500,000 500,000 Retained earnings .............................................................. 6,013,638 5,571,013 Unrealized gain (loss) on securities available-for-sale, net of taxes .......... 74,911 (114,893) ------ -------- 7,338,549 6,706,120 Less -- Treasury stock, at cost, 66,800 shares ................................. 146,960 146,960 ------- ------- Total stockholders' equity .................................................. 7,191,589 6,559,160 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $100,303,822 $ 92,821,817 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- INTEREST INCOME: Interest and fees on loans (Note 1) ............................... $ 5,994,034 $ 5,513,587 $ 5,298,681 Interest on investment securities -- U.S. Government and agency obligations ........................ 1,432,729 1,010,386 983,074 Collateralized mortgage obligations ........................... 154,783 96,948 13,259 Marketable equity securities .................................. 1,320 1,020 860 Interest on cash equivalents (Note 1) ............................. 149,153 171,650 328,303 ------- ------- ------- Total interest income ......................................... 7,732,019 6,793,591 6,624,177 --------- --------- --------- INTEREST EXPENSE: Interest on deposits .............................................. 3,429,019 2,449,860 2,621,004 Interest on debenture (Note 12) ................................... 239,653 178,976 167,268 Interest on reverse repurchase agreements ......................... -- -- 14,437 --------- --------- ------ Total interest expense ........................................ 3,668,672 2,628,836 2,802,709 --------- --------- --------- Net interest income ........................................... 4,063,347 4,164,755 3,821,468 PROVISION FOR POSSIBLE LOAN LOSSES (Note 1) .......................... 675,000 555,000 545,000 ------- ------- ------- Net interest income after provision for possible loan losses ...... 3,388,347 3,609,755 3,276,468 --------- --------- --------- NONINTEREST INCOME: Service charges on deposits ....................................... 285,413 256,102 256,115 Gain on loan sales ................................................ 94,467 29,133 -- Other ............................................................. 93,978 104,406 152,455 ------ ------- ------- Total noninterest income ...................................... 473,858 389,641 408,570 ------- ------- ------- NONINTEREST EXPENSE: Salaries and employee benefits (Note 10) .......................... 1,566,105 1,554,326 1,385,515 Occupancy expense ................................................. 337,032 342,179 364,251 Equipment expense ................................................. 196,172 175,420 227,289 Other real estate owned (gains) losses, and expenses .............. 187,776 44,033 (25,575) Computer services ................................................. 150,603 130,042 123,395 Deposit insurance assessments ..................................... 95,483 176,972 179,739 Other operating expenses .......................................... 559,740 565,375 549,940 ------- ------- ------- Total noninterest expense ..................................... 3,092,911 2,988,347 2,804,554 --------- --------- --------- Income before provision for income taxes ...................... 769,294 1,011,049 880,484 PROVISION FOR INCOME TAXES (Note 8) .................................. 251,517 399,148 330,129 ------- ------- ------- Net income .................................................... $ 517,777 $ 611,901 $ 550,355 =========== =========== =========== Earnings per share ................................................... $ 0.71 $ 0.84 $ 0.76 =========== =========== =========== Weighted average common and common stock equivalent shares outstanding 728,708 727,573 726,459 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE TOTAL COMMON RETAINED FOR SALE, NET TREASURY STOCKHOLDERS' STOCK SURPLUS EARNINGS OF TAXES STOCK EQUITY ----- ------- -------- -------- ----- ------ Balance, December 31, 1992 ............ $ 750,000 $ 500,000 $ 4,518,068 $ -- $ (146,960) $ 5,621,108 Net income ............................ -- -- 550,355 -- -- 550,355 Dividends ($.07 per share) ............ -- -- (47,824) -- -- (47,824) ------- ------- ------- ------- ------- ------- Balance, December 31, 1993 ............ 750,000 500,000 5,020,599 -- (146,960) 6,123,639 Net income ............................ -- -- 611,901 -- -- 611,901 Dividends ($.09 per share) ............ -- -- (61,487) -- -- (61,487) Change in net unrealized gain (loss) on securities available-for-sale ....... -- -- -- (114,893) -- (114,893) ------- ------- ------- -------- ------- -------- Balance, December 31, 1994 ............ 750,000 500,000 5,571,013 (114,893) (146,960) 6,559,160 Net income ............................ -- -- 517,777 -- -- 517,777 Dividends ($.11 per share) ............ -- -- (75,152) -- -- (75,152) Change in net unrealized gain (loss) on securities available-for-sale ....... -- -- -- 189,804 -- 189,804 ------- ------- ------- ------- ------- ------- Balance, December 31, 1995 ............ $ 750,000 $ 500,000 $ 6,013,638 $ 74,911 $ (146,960) $ 7,191,589 === ==== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...................................................................... $ 517,777 $ 611,901 $ 550,355 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses ............................................ 675,000 555,000 545,000 Depreciation and amortization ................................................. 171,201 147,740 147,138 Losses (gains) on OREO ........................................................ 112,302 30,742 (29,222) Gain on sales of loans ........................................................ (94,467) (29,133) -- Proceeds from sales of loans .................................................... 1,002,982 338,078 -- Loans originated for sale ....................................................... (908,515) (308,945) -- Net (accretion) on investment securities held-to-maturity ....................... (11,698) (82,186) (46,253) Net (accretion) amortization on investment securities available-for-sale ........ (89,580) 46,187 -- Net increase (decrease) in unearned discount .................................... 7,327 7,159 (4,317) Net (increase) decrease in other assets ......................................... (264,888) (271,367) 291,152 Accretion of discount on debenture .............................................. 192,312 178,976 167,268 Net increase (decrease) in deferred loan fees ................................... 37,297 (3,907) 62,676 Net increase (decrease) in accrued expenses and other liabilities ............... 124,512 (36,058) 112,342 ------- ------- ------- Net cash provided by operating activities ................................ 1,471,562 1,184,187 1,796,139 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Federal Home Loan Bank stock ........................................ (348,100) -- -- Proceeds from maturities of investment securities held-to-maturity .............. 10,318,259 37,481,225 82,000,000 Proceeds from maturities of investment securities available-for-sale ............ 32,380,000 5,500,000 -- Purchase of investment securities held-to-maturity .............................. (11,804,178) (35,080,210) (90,389,574) Purchase of investment securities available-for-sale ............................ (32,183,850) (8,590,672) -- Net increase in loans ........................................................... (8,534,422) (5,115,528) (6,216,429) Purchase of premises and equipment .............................................. (152,944) (387,387) (29,204) Sales of OREO ................................................................... 616,274 1,021,778 226,722 ------- --------- ------- Net cash used in investing activities .................................... (9,708,961) (5,170,794) (14,408,485) ---------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase(decrease) in demand accounts ....................................... 448,760 987,195 (10,942,004) Net (decrease) increase in savings and money market accounts .................... (7,847,890) (763,206) 850,424 Net increase in time deposits ................................................... 13,805,346 4,425,079 1,932,295 Net decrease in reverse repurchase agreements ................................... -- -- (1,600,000) Dividends paid .................................................................. (75,152) (61,487) (47,824) ------- ------- ------- Net cash provided by (used in) financing activities ...................... 6,331,064 4,587,581 (9,807,109) --------- --------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................... (1,906,335) 600,974 (22,419,455) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................................... 4,807,584 4,206,610 26,626,065 --------- --------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR ............................................. $ 2,901,249 $ 4,807,584 $ 4,206,610 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid ................................................................... $ 3,606,104 $ 2,434,918 $ 2,629,589 ============ ============ ============ Income taxes paid ............................................................... $ 331,250 $ 473,250 $ 163,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Transfer of loans to OREO ....................................................... $ 1,257,259 $ 500,570 $ 1,407,339 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1995, 1994 and 1993 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and the Bank, after elimination of all intercompany transactions and balances. Certain reclassifications have been made to prior year balances to conform with the current year presentation. Cash and Cash Equivalents For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and securities purchased under agreement to resell, which represent short-term investments in government securities purchased from another institution. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Loans Interest on commercial, real estate and consumer loans is accrued based on the principal amounts outstanding. Loans are placed on nonaccrual status when, in the judgment of management, the collection of principal or interest becomes doubtful. In making this judgment, management considers a number of factors, including the length of time the loan has been delinquent (greater than 90 days) and the financial condition of the borrower. Effective January 1, 1995, the Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 (SFAS No. 114, as amended). A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114, as amended, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the face value of the collateral if the loan is collateral-dependent. Currently, all impaired loans have been measured through the latter method. All loans on nonaccrual status are considered to be impaired under SFAS No. 114. All adversely classified loans at December 31, 1995 are also considered to be impaired. When the measure of the impaired loan is less than the recorded investments in the loan, the impairment is recorded through a valuation allowance. All loans are individually evaluated for impairment according to the Bank's normal loan review process, including overall credit evaluation and rating, nonaccrual status and payment experience. Loans identified as impaired are individually further evaluated to determine the estimated extent of impairment. For collateral-based loans, the extent of impairment is the shortfall, if any, between the collateral value less costs to dispose of such collateral and the carrying value of the loan. As a result of adopting SFAS No. 114, as amended, no additional allowance for loan losses was required as of January 1, 1995. The Bank's policy is to discontinue the accrual of interest on loans when scheduled payments become past due in excess of 90 days, and when, in the judgment of management, the ultimate collectibility of principal or interest becomes doubtful. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is generally reversed against interest income in the current F-7 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) period. Interest income is recognized on an accrual basis for impaired loans, until such loans are placed on nonaccrual status. The Bank recognizes interest income on these nonaccrual loans on a cash basis when the ultimate collectibility of principal is no longer considered doubtful. Otherwise, cash payments on nonaccrual loans are applied to principal. Provision and Allowance for Possible Loan Losses The balance of the allowance and the amount of the annual provision charged to expense are estimated amounts based on past loan loss experience, changes in the character and size of the loan portfolio, current and expected economic conditions, and other pertinent factors. Ultimate losses may vary from the current estimates. These estimates are reviewed periodically, and as adjustments become necessary, they are reported as an expense in the periods in which they become known. The allowance is maintained at a level considered by management to be adequate to cover reasonably foreseeable loan losses. Losses are charged against the allowance for possible loan losses when management believes that the collectibility of principal is unlikely. Investment Securities On January 1, 1994, the Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which had an immaterial impact as of that date. This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Under this statement, securities are classified as held-to- maturity, available-for-sale or trading. Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at cost, adjusted for the amortization of premium or the accretion of discount. Debt and equity securities with readily determinable market values which are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are carried at fair value, with unrealized gains and losses included in current earnings. At December 31, 1995 and 1994, the Bank had no securities classified as trading. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and are carried at fair value, with unrealized after-tax gains and losses reported as a separate component of stockholders' equity. Income Taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, assets and liabilities are adjusted through the provision for income taxes. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The following is a summary of the lives over which the Bank computes depreciation: Buildings and Improvements ....................................... 10-40 years Furniture and Fixtures ........................................... 10-20 years Equipment ........................................................ 5-10 years F-8 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) When a property is retired or otherwise disposed of, the asset and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the consolidated statements of income. Costs of major additions and improvements are capitalized, and expenditures for maintenance and repairs are charged to operations as incurred. Other Real Estate Owned Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Expenses from operations and changes in valuations are included in other real estate owned (gains) losses and expenses. Earnings Per Share Earnings per share is determined by dividing net income by the weighted average number of common shares and common stock equivalent shares outstanding. Common stock equivalent shares represent the assumed exercise of outstanding stock options, net of shares assumed to be repurchased using the treasury stock method, if dilutive. (2) INVESTMENT SECURITIES The estimated market value and carrying value at December 31, 1995 and 1994 are as follows:
DECEMBER 31, 1995 ----------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ---- ----- ------ ------------ Held-to-maturity -- U.S. Government & agency obligations ........... $12,595,739 $ 16,430 $ 61,600 $ 12,550,569 Collateralized mortgage obligations ............ 2,048,426 2,488 34,982 2,015,932 --------- ----- ------ --------- $14,644,165 $ 18,918 $96,582 $ 14,566,501 =========== ========= ======= ============ Available-for-sale -- U.S. Government & agency obligations ........... $14,994,993 $ 97,762 $ 4,660 $ 15,088,095 Marketable equity security ..................... 11,750 31,750 -- 43,500 ------ ------ ----- ------ $15,006,743 $ 129,512 $ 4,660 $ 15,131,595 =========== ========= ======= ============
DECEMBER 31, 1994 ----------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ---- ----- ------ ------------ Held-to-maturity -- U.S. Government & agency obligations ........... $10,751,972 $ -- $342,119 $ 10,409,853 Collateralized mortgage obligations ............ 2,394,576 -- 118,275 2,276,301 --------- ------ ------- --------- $13,146,548 $ -- $460,394 $ 12,686,154 =========== ====== ======== ============ Available-for-sale -- U.S. Government & agency obligations ........... $15,101,564 $ -- $211,239 $ 14,890,325 Marketable equity security ..................... 11,750 19,750 -- 31,500 ------ ------ ------- ------ $15,113,314 $19,750 $211,239 $ 14,921,825 =========== ======= ======== ============
There were no sales of securities during the years ended December 31, 1995, 1994 and 1993. F-9 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (2) INVESTMENT SECURITIES -- (CONTINUED) A schedule of the maturity distribution of U.S. Government and agency obligations is as follows:
DECEMBER 31, 1995 ----------------- HELD-TO-MATURITY AVAILABLE-FOR-SALE ---------------- ------------------ AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST MARKET VALUE COST MARKET VALUE ---- ------------ ---- ------------ Within one year ................................ $ 749,659 $ 755,905 $ 9,497,412 $ 9,530,495 Over one year to five years .................... 11,846,080 11,794,664 5,497,581 5,557,600 ---------- ---------- --------- --------- $12,595,739 $12,550,569 $14,994,993 $ 15,088,095 =========== =========== =========== ============
At December 31, 1995, approximately $6,700,000 of debt securities maturing in the one-to-five-year period are subject to periodic rate adjustment within one year. At December 31, 1995, the collateralized mortgage obligations have principal payment windows which extend through September 1998. Investment securities having a book value of $1,407,800 and $1,150,079, at December 31, 1995 and 1994, respectively, were pledged as collateral for public deposits and other purposes, as required by law. (3) ALLOWANCE FOR POSSIBLE LOAN LOSSES In 1992, the Bank acquired certain assets and assumed certain deposit liabilities of the former Chariho-Exeter Credit Union ("Chariho"). The Bank and the State of Rhode Island Depositors Economic Protection Corporation ("DEPCO") established a reserve for possible loan losses of $3,850,000 for loans acquired. This reserve is available only for loans of Chariho existing as of the acquisition date. The following analysis summarizes activity for both the acquired reserve and the Bank's reserve for possible loan losses.
DECEMBER 31, ------------ 1995 1994 1993 ---- ---- ---- Bank Reserve: Balance at beginning of period ........................... $ 764,106 $ 704,102 $ 624,603 Provision ............................................ 675,000 555,000 545,000 Loan charge-offs ..................................... (715,507) (624,867) (577,119) Recoveries ........................................... 138,094 129,871 111,618 ------- ------- ------- Balance at end of period ................................. 861,693 764,106 704,102 ------- ------- ------- Acquired Reserve: Balance at beginning of period ........................... 1,493,201 1,595,753 789,539 Loan charge-offs ..................................... (528,210) (462,596) (415,377) Recoveries ........................................... 1,356 360,044 1,221,591 ----- ------- --------- Balance at end of period ................................. 966,347 1,493,201 1,595,753 ------- --------- --------- Total Reserve ............................................... $1,828,040 $2,257,307 $ 2,299,855 ========== ========== ===========
As set forth in the Chariho Acquisition Agreement, the remaining balance, if any, in the acquired reserve at May 1, 1999, less an amount equal to 1% of the remaining acquired loans, must be refunded to DEPCO. Conversely, in the event the reserve is inadequate, additional loan charge-offs will reduce the amount owed on the debenture issued to DEPCO in connection with the acquisition. At December 31, 1995, the remaining balance of acquired loans was $6,147,000. F-10 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (3) ALLOWANCE FOR POSSIBLE LOAN LOSSES -- (CONTINUED) At December 31, 1995, the Bank's recorded investment in impaired loans was $1,223,781 of which $786,908 was determined to require a valuation allowance of $273,068 as calculated under SFAS No. 114, as amended. The average recorded investment in impaired loans during 1995 was $1,844,050. At December 31, 1995 and 1994, nonaccrual loans totaled $519,193 and $521,293, respectively. Had nonaccrual loans been accruing, interest income would have increased by $57,357, $44,940 and $32,010 for the years ended December 31, 1995, 1994 and 1993, respectively. For the year ended December 31, 1995, interest income on impaired loans totaled $75,692. At December 31, 1995 and 1994, all acquired loans were performing. (4) PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
DECEMBER 31, ------------ 1995 1994 ---- ---- Land and improvements ..................................... $ 673,407 $ 598,892 Buildings and improvements ................................ 1,254,336 1,241,385 Furniture, fixtures and equipment ......................... 1,170,592 1,138,745 --------- --------- 3,098,335 2,979,022 Less -- Accumulated depreciation .......................... 1,281,442 1,143,872 --------- --------- $1,816,893 $ 1,835,150 ========== ===========
(5) TIME DEPOSITS At December 31, 1995, scheduled maturities of time deposits were as follows:
DENOMINATION ------------ $100,000 MATURITY OR MORE OTHER TOTAL - -------- ------- ----- ----- 1996 ........................................ $3,289,679 $26,209,607 $ 29,499,286 1997 ........................................ 2,304,664 16,225,444 18,530,108 1998 ........................................ -- 4,069,407 4,069,407 1999 ........................................ 100,000 239,836 339,836 2000 ........................................ 146,757 329,734 476,491 - ---- ------- ------- ------- $5,841,100 $47,074,028 $ 52,915,128 ========== =========== ===========
Included in total time deposits are $25,092,737 of certificates of deposit which are subject to repricing on a quarterly basis (indexed to the three month yield on U.S. Treasury bills). These time deposits have maturities which extend through 1998. (6) FEDERAL HOME LOAN BANK ADVANCES During 1995, the Bank became a member of the Federal Home Loan Bank of Boston. At December 31, 1995, the Bank had no outstanding advances and had an unused borrowing capacity of $4,177,200 with the Federal Home Loan Bank of Boston. (7) COMMITMENTS AND CONTINGENCIES Leases The Bank leases the land on which its Cranston branch office is located. The annual rental expense under this lease, which contains renewal options extending to 2009, is $18,500 through May 1999, at which time annual rental expense increases to $21,500 through May 2004 and $24,500 through May 2009. F-11 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (7) COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Litigation As of December 31, 1995, the Bank was involved in certain lawsuits that arose in the ordinary course of business. Management has reviewed these actions with legal counsel and has taken into consideration the views of counsel as to the outcome of the litigation. In management's opinion, final disposition of such lawsuits will not have a materially adverse effect on the Bank's financial position or results of operations. Employment Contract In February 1996, the Bank amended the employment agreement with its chief executive officer. This agreement provides for, among other things, a lump sum severance payment equal to 2.99 times annual base salary (as defined) in the event of a "change-in-control" (as defined) and upon either elective or involuntary termination thereafter. This Agreement, which has an indefinite term, provides for an annual increase in salary of not less than 5%. Financial Instruments With Off-balance-sheet Risk and Concentration of Credit Risk In the normal course of business, the Bank enters into various commitments, such as commitments to extend credit and guarantees (including standby letters of credit), which are not reflected in the accompanying consolidated financial statements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the accompanying consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Off-balance-sheet instruments, whose contract amounts present credit risk, include the following:
DECEMBER 31, ------------ 1995 1994 ---- ---- Unused portion of existing lines of credit ......... $4,048,403 $5,826,461 Unadvanced construction loans ...................... 1,043,653 446,654 Firm commitments to extend credit .................. 2,468,000 135,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of the credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial real estate. The Bank originates primarily residential and commercial real estate loans and, to a lesser extent, commercial and installment loans to customers primarily located in the State of Rhode Island and, to an even lesser extent, southeastern Massachusetts. The Bank operates two branches in the metropolitan Providence area, and one branch in South County, Rhode Island. Its primary source of revenue is providing loans to customers who are predominantly small and middle-market businesses and middle-income individuals. F-12 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (8) INCOME TAXES The provision for income taxes consists of the following components:
DECEMBER 31, ------------ 1995 1994 1993 ---- ---- ---- Federal -- Current .................................. $332,667 $365,655 $ 327,991 Deferred (prepaid) ....................... (82,400) 22,700 (3,490) State ....................................... 1,250 10,793 5,628 ----- ------ ----- $251,517 $399,148 $ 330,129 ======== ======== =========
The provision for income taxes differs from the amount computed by applying the statutory rate of 34%, as summarized below:
DECEMBER 31, ------------ 1995 1994 1993 ---- ---- ---- Provision for income taxes at statutory rate . $261,560 $343,757 $ 299,365 State taxes, net of federal benefit .......... 825 7,123 3,714 Other ........................................ (10,868) 48,268 27,050 ------- ------ ------ $251,517 $399,148 $ 330,129 ======== ======== =========
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 1995 and 1994 are as follows:
DECEMBER 31, ------------ 1995 1994 ---- ---- Gross deferred tax assets: Reserve for possible loan losses ....................................... $169,680 $156,726 Deferred loan origination fees ......................................... 25,648 12,834 Capital losses carryforward ............................................ 34,300 34,300 OREO writedowns ........................................................ 64,000 26,000 Other .................................................................. 26,298 ------ ------- Gross deferred tax assets ................................................. 319,926 229,860 Valuation allowance ....................................................... (34,300) (34,300) ------- ------- Gross Deferred tax assets -- net of valuation allowance ................... 285,626 195,560 ------- ------- Gross deferred tax liabilities: Depreciation ........................................................... 178,661 180,574 Installment sales ...................................................... 31,265 21,686 ------ ------ Gross deferred tax liabilities ............................................ 209,926 202,260 ------- ------- Net deferred tax asset (liability) ........................................ $ 75,700 $ (6,700) ======== ========
The valuation allowance relates to capital loss carryforwards that may not be utilized for federal income tax purposes. F-13 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (9) RELATED PARTY TRANSACTIONS Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and do not involve more than normal risk of collectibility. In 1995, related party loan activity was as follows:
Balance at beginning of period ......................... $ 1,783,740 Originations ......................................... 1,155,782 Payments ............................................. (1,191,310) Other ................................................ (9,596) ------ Balance at end of period ................................ $ 1,738,616 ===========
(10) EMPLOYEE BENEFIT PLAN The Bank is a member of the FIRF, which sponsors the Pension Plan, a multiple employer pension plan. As a participant in the Pension Plan, the Bank expenses its contributions to this plan, which is accounted for as a defined contribution plan. The Bank's pension expense under the Pension Plan was $66,685, $83,889 and $60,459, for the years ended December 31, 1995, 1994 and 1993, respectively. Effective January 1, 1995, the Bank established a nonqualified retirement plan to provide supplemental retirement benefits to designated employees whose pension benefits under the Pension Plan is otherwise limited by the Internal Revenue Code regulations. A liability and transition asset of $121,707 were recorded in accordance with Statement of Financial Accounting Standards (SFAS) No. 87, "Employer's Accounting for Pensions". The following table sets forth the non-qualified plan's funded status, amounts recognized in the consolidated balance sheet as of December 31, 1995, and net pension expense for the year ended December 31, 1995:
Actuarial present value of benefit obligation: Vested accumulated benefit obligation ....................................... $(187,451) ========= Projected benefit obligation ................................................ $(322,747) Plan assets at fair value ................................................... -- --------- $(322,747) Unrecognized prior service cost ............................................. $ 257,003 Unrecognized net asset being recognized over 10 years ....................... $(121,707) --------- Accrued pension cost ........................................................ $(187,451) ========= Net pension expense: Service costs -- benefits attributable to service during the period ......... $ 15,771 Interest cost on projected benefit obligation ............................... 21,417 Amortization of unrecognized prior service cost ............................. 28,556 ------ $ 65,744 ========= For calculating 1995 pension costs for this nonqualified plan the following assumptions were used: Assumed discount rate ....................................................... 7.5% Rate of increase in compensation level ...................................... 5.0% Amortization period for unrecognized prior service cost ..................... 10 year
F-14 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (11) STOCKHOLDERS' EQUITY In November 1986, the Company granted a non-statutory option ("Stock Option Agreement") to purchase 60,000 shares of common stock to its Chief Executive Officer at an exercise price of $2.50 per share, the estimated fair market value of the Company's stock at that time. These options are exercisable for a period of 10 years from the date of grant. All of these options remain outstanding. In February of 1996, the Company amended the Stock Option Agreement to allow the offset of the shares otherwise issuable under the Stock Option Agreement by the number of shares required to exercise the options and pay the minimum withholding tax requirement. In 1995, the Company's stockholders approved an increase in the number of authorized shares from 1,000,000 shares to 5,000,000 shares with a par value of $1 per share. Also, in 1994, the Company's stockholders approved an increase in the number of authorized shares from 500,000 shares with a par value of $10 per share to 1,000,000 shares with a par value of $1 per share. Effective as of December 1, 1994, the Company Board approved the 10-for-1 Stock Split. All share information contained herein has been restated to reflect the split. (12) CHARIHO-EXETER CREDIT UNION ACQUISITION In May 1992, the Bank entered into the Acquisition Agreement with the receiver for Chariho and DEPCO. In connection with the Acquisition Agreement, the Company entered into a Securities Purchase Agreement with DEPCO. Under this agreement, the Company issued the Senior Debenture, a $3 million variable rate debenture to DEPCO. The Company invested the proceeds on the issuance of the debenture as a contribution of capital to the Bank. Under the terms of the debenture, interest began to accrue on the third anniversary of the Senior Debenture and is payable semiannually thereafter. The Senior Debenture bears interest at the average five-year Treasury rate (indexed rate) plus 1% until maturity and at the indexed rate plus 4% during the extension period. A discount of $717,005 was recorded to reduce the carrying value of the Senior Debenture at the date of issuance in recognition of its favorable interest terms. This discount is being accreted over the initial term of the Senior Debenture on the level yield method at 7%. The discount accretion for the years ended December 31, 1995, 1994 and 1993 amounted to $192,312, $178,976 and $167,268, respectively, and is classified as interest expense in the accompanying consolidated statements of income. The Senior Debenture is scheduled to mature on May 31, 1999; however, the Company may, at its option, extend the maturity date to May 1, 2002 for up to one half of the then outstanding principal balance. As discussed in Note 3, the Bank may, through May 1, 1999, charge net acquired loan losses in excess of the acquired loan loss reserve of $3,850,000 against the outstanding Senior Debenture to the extent of $3,000,000. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" as amended by Statement of Financial Accounting Standards (SFAS) No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," collectively F-15 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (13) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) referred to as SFAS No. 107 requires that the Company disclose estimated fair values for certain of its financial instruments. Financial instruments include such items as loans, securities, deposits, swaps and other instruments as defined in the standard. The statement requires that where available, quoted market prices be used to estimate fair values. Many of the Bank's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is the Bank's general practice and intent to hold the majority of its financial instruments, such as loans and deposits, to maturity and not engage in trading or sales activities. Therefore, valuation techniques permitted by the statement, such as present value calculations, were used for the purposes of this disclosure. Management notes that reasonable comparability between financial institutions may not necessarily be made due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. The methods and assumptions used to estimate the fair values of each class of financial instruments are as follows: Cash and Due from Banks, and Securities Purchased Under Agreements to Resell. These items are generally short-term in nature and, accordingly, the carrying amounts reported in the consolidated balance sheet are reasonable approximations of their fair values. Securities Held-to-Maturity and Available-for-Sale. Fair values are based principally on quoted market prices. Loans. The fair value of accruing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or for classified loans using a discount rate that reflects the risk inherent in the loan. The fair value of nonaccrual loans is estimated based on the estimated fair market value of the underlying collateral held. Deposits. The fair value of demand, NOW, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using discounted value of contractual cash flows. The discount rates are the rates currently offered for deposits of similar remaining maturities. Senior Debenture. The face value of the senior debenture is considered to approximate its fair value. Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Accordingly, the fair market value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material. F-16 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (13) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) As of December 31, 1995, the estimated fair value of the Company's financial instruments are as follows:
CARRYING ESTIMATED AMOUNT FAIR VALUE ------ ---------- ASSETS Cash and due from banks and securities purchased under agreement to resell $ 2,901,249 2,901,249 Securities: Held-to-Maturity ...................................................... 14,644,165 14,566,501 Available-for-sale .................................................... 15,131,595 15,131,595 Federal Home Loan Bank stock ............................................. 348,100 348,100 Loans -- Net ............................................................. 62,872,560 63,253,000 LIABILITIES Deposits ................................................................. 89,590,542 89,964,000 Senior debenture ......................................................... 2,844,632 3,000,000
(14) THE COMPANY (PARENT COMPANY ONLY) The condensed separate financial statements of the Company are presented below. CONDENSED BALANCE SHEETS
DECEMBER 31, ------------ 1995 1994 ---- ---- ASSETS Investment in subsidiary bank .......................................... $ 10,648,596 $ 9,857,997 ------------ ------------ Total Assets ........................................................ $ 10,648,596 $ 9,857,997 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Senior debenture, net of unamortized discount .......................... $ 2,844,632 $ 2,735,779 Intercompany payable ................................................... 612,375 563,058 ------------ ------------ 3,457,007 3,298,837 ------------ ------------ Stockholders' Equity: Common Stock ........................................................ 750,000 750,000 Surplus ............................................................. 500,000 500,000 Retained Earnings ................................................... 6,013,638 5,571,013 Unrealized gain (loss) on securities available-for-sale, net of taxes 74,911 7,338,549 ------------ ------------ (114,893) 6,706,120 Less -- Treasury Stock ................................................. 146,960 146,960 ------------ ------------ Total Stockholders' Equity .......................................... 7,191,589 6,559,160 ------------ ------------ Total liabilities and Stockholders' Equity .......................... $ 10,648,596 $ 9,857,997 ============ ============
F-17 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Years Ended December 31, 1995, 1994 and 1993 (14) THE COMPANY (PARENT COMPANY ONLY) -- (CONTINUED) CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- Dividend Income ................................................... $ 75,152 $ 61,488 $ 47,824 Interest Expense .................................................. 239,653 178,976 167,268 ------- ------- ------- Net (Loss) before income taxes and equity in undistributed earnings of subsidiary ................................................... (164,501) (117,488) (119,444) Applicable income taxes (benefit) ................................. (81,483) (60,852) (56,871) ------- ------- ------- Net (Loss) before equity in undistributed earnings of subsidiary .. (83,018) (56,636) (62,573) Equity in undistributed earnings of subsidiary .................... 600,795 668,537 612,928 ------- ------- ------- Net Income ........................................................ $ 517,777 $ 611,901 $ 550,355 ========= ========= =========
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ..................................................... $ 517,777 $ 611,901 $ 550,355 Adjustments to reconcile net income to net cash provided by operating activities -- Equity in undistributed earnings of subsidiary ............. (600,795) (668,537) (612,928) Accretion of discount on debenture ......................... 192,312 178,976 167,268 Net decrease in accrued expenses and other liabilities ..... (34,142) (60,852) (56,871) ------- ------- ------- Net cash provided by operating activities ............... 75,152 61,488 47,824 ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ................................................. (75,152) (61,488) (47,824) Net cash used in financing activities ................... (75,152) (61,488) (47,824) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. -- -- -- CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................... -- -- -- ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR ............................ $ -- $ -- $ -- ======= ======== ========
F-18 ================================================================================ NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. _______________ TABLE OF CONTENTS
PAGE ---- Prospectus Summary ........................................................ 3 Risk Factors .............................................................. 8 Recent Developments ....................................................... 13 The Company ............................................................... 15 Use of Proceeds ........................................................... 17 Dividend Policy ........................................................... 17 Dilution .................................................................. 18 Capitalization ............................................................ 19 Consolidated Statements of Income Data .................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations .............................................................. 21 Business .................................................................. 33 Regulation and Supervision ................................................ 48 Taxation .................................................................. 59 Management ................................................................ 60 Certain Transactions ...................................................... 66 Principal Stockholders .................................................... 67 Description of Capital Stock .............................................. 69 Shares Eligible For Future Sale ........................................... 72 Underwriting .............................................................. 74 Certain Legal Matters ..................................................... 75 Experts ................................................................... 75 Additional Information .................................................... 75 Index to Financial Statements ............................................. F-1
UNTIL JUNE 7, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ================================================================================ ================================================================================ 550,000 SHARES FIRST FINANCIAL CORP. COMMON STOCK __________ PROSPECTUS __________ SANDLER O'NEILL & PARTNERS, L.P. May 13, 1996 ================================================================================ -----END PRIVACY-ENHANCED MESSAGE-----