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.
<TABLE>
<CAPTION>
PUBLIC UNDERWRITING ESTIMATED
OFFERING DISCOUNT AND PROCEEDS TO
PRICE COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $9.75 $0.58 $9.17
Total(3) $5,362,500 $319,000 $5,043,500
</TABLE>
__________
(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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
6
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
__________
(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.
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
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
</TABLE>
13
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
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
</TABLE>
__________
(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:
<TABLE>
<S> <C> <C>
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
=====
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
__________
(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.
<TABLE>
<CAPTION>
REGULATORY PRO FORMA
MINIMUM(2) ACTUAL AS ADJUSTED
---------- ------ -----------
<S> <C> <C> <C>
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
</TABLE>
__________
(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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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)
<TABLE>
<CAPTION>
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
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
==== ==== ====
</TABLE>
__________
(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)
<TABLE>
<CAPTION>
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
--------- ---- ----- --------- ---- ----- --------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
===== ===== ====== ====== ===== ======= ===== ====== =====
</TABLE>
_________
(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:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Acquired Loans ................................... $6,147 $7,634 $ 8,684
====== ====== =======
Acquired Allowance ............................... $ 966 $1,493 $1,596
====== ====== ======
</TABLE>
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.
<TABLE>
<CAPTION>
YEARS ENDED AT DECEMBER 31,
---------------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
==== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS ENDED AT DECEMBER 31,
---------------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
_________
(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.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1995 1994 1993
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= =====
</TABLE>
__________
(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."
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1995 1994 1993
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= =====
</TABLE>
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
<TABLE>
<CAPTION>
COMMERCIAL HOME
AND EQUITY
RESIDENTIAL LINES OF
COMMERCIAL REAL ESTATE CREDIT CONSUMER TOTAL
---------- ----------- ------ -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======= ======== ======= ======= ========
</TABLE>
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."
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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%
==== ===== ==== ===== ==== =====
</TABLE>
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:
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS)
<S> <C>
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
=======
</TABLE>
The balance of OREO at December 31, 1995 consisted of:
<TABLE>
<S> <C>
Land Development ...................................... $ 216
1-4 Family Residential Real Estate .................... 55
Multi-Family (5 or more) Residential Properties ....... 285
Commercial Real Estate ................................ 914
---
$1,470
======
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994 1993
---- ---- ----
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
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
----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======== ==== ====== ==== ====== ===== ======= ====
</TABLE>
__________
(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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ========
</TABLE>
44
Time certificates of deposit in denominations of $100,000 or more, at
December 31, 1995, had the following schedule of maturities:
<TABLE>
<CAPTION>
TIME REMAINING TO MATURITY AMOUNT
-------------------------- ------
(IN THOUSANDS)
<S> <C>
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
=======
</TABLE>
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:
<TABLE>
<CAPTION>
COMPANY BOARD
NAME AGE(1) POSITION TERM EXPIRES
---- ------ -------- ------------
<S> <C> <C> <C>
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
</TABLE>
__________
(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:
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
---- ------ --------
<S> <C> <C>
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
</TABLE>
__________
(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 $100,000 for such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) COMPENSATION(1)
------------------ ---- --------- ----------------
<S> <C> <C> <C>
Patrick J. Shanahan, Jr.
President and Chief Executive Officer ......... 1995 $213,675 $8,759
</TABLE>
__________
(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 $2.50 per share, each in accordance with the terms
of the 1986 Stock Option Agreement. The Company granted the option to Mr.
Shanahan as further inducement to his remaining with the Company and the Bank.
Mr. Shanahan's options under the 1986 Stock Option Agreement expire on the tenth
anniversary of the grant date, or November 24, 1996 (the "Option Expiration
Date"). The Company has no other options outstanding.
The following table sets forth information with respect to: (i) option
exercises by Mr. Shanahan for the fiscal year ended December 31, 1995; (ii) the
number of unexercised options held by Mr. Shanahan as of December 31, 1995; and
(iii) the value of unexercised in-the-money options (options for which the fair
market value of the Common Stock exceeds the exercise price) as of December 31,
1995. In the fiscal year 1995, there were no option exercises by Mr. Shanahan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED OPTIONS AT DECEMBER 31, 1995 AT DECEMBER 31, 1995(1)
NAME ON EXERCISE(#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------------- ----------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Patrick J. Shanahan, Jr. ..... -- -- 60,000/0 $435,000/0
</TABLE>
__________
(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
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE
------------------------
HIGH-3 AVERAGE
COMPENSATION 5 10 20 30 40
------------ - -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 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)
</TABLE>
__________
(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.
<TABLE>
<CAPTION>
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)
------------------- -------------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
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
</TABLE>
_________
* 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.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ------
<S> <C>
Sandler O'Neill & Partners, L.P. .......................... 550,000
-------
Total .................................................. 550,000
=======
</TABLE>
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
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
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES
AVAILABLE TOTAL
COMMON RETAINED FOR SALE, NET TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS OF TAXES STOCK EQUITY
----- ------- -------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
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
=== ==== =========== =========== =========== =========== =========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---- ----- ------ ------------
<S> <C> <C> <C> <C>
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
=========== ========= ======= ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---- ----- ------ ------------
<S> <C> <C> <C> <C>
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
=========== ======= ======== ============
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------- ------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ============
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
========== ========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
---- ----
<S> <C> <C>
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
========== ===========
</TABLE>
(5) TIME DEPOSITS
At December 31, 1995, scheduled maturities of time deposits were as follows:
<TABLE>
<CAPTION>
DENOMINATION
------------
$100,000
MATURITY OR MORE OTHER TOTAL
- -------- ------- ----- -----
<S> <C> <C> <C>
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
========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
---- ----
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
======== ======== =========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34%, as summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
======== ======== =========
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
---- ----
<S> <C> <C>
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)
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
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
===========
</TABLE>
(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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------ ----------
<S> <C> <C>
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
</TABLE>
(14) THE COMPANY (PARENT COMPANY ONLY)
The condensed separate financial statements of the Company are presented
below.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
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
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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 ............................ $ -- $ -- $ --
======= ======== ========
</TABLE>
F-18
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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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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
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