| The risks and uncertainties described below are not the only ones facing our Company |
| Additional risks and uncertainties may also impair our business operations |
| If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer |
| Risks Related to Our Business Competition with other financial institutions could adversely affect our franchise growth and profitability |
| We face significant competition from a variety of traditional and nontraditional financial service providers both within and outside of Rhode Island, both in making loans and generating deposits |
| Our most significant competition comes from one national and two large regional banking institutions that have significant market share positions in Rhode Island |
| These large banks have well-established, broad 15 ______________________________________________________________________ distribution networks and greater financial resources than we do, which have enabled them to market their products and services extensively, offer access to a greater number of locations and products, and price competitively |
| We also face competition from a number of local financial institutions with branches in Rhode Island and in nearby Massachusetts, some of which have been acquired by both local and out-of-state service providers |
| Additionally, we face competition from out-of-state financial institutions which have established loan production offices in our marketplace, and from non-bank competitors |
| Competition for deposits also comes from short-term money market funds, other corporate and government securities funds and non-bank financial institutions such as brokerage firms, insurance companies and credit unions, the latter of which have recently experienced a resurgence in this market |
| Many of our non-bank competitors have fewer regulatory constraints as those imposed on federally insured state chartered banks, which gives these competitors an advantage over us in providing certain services |
| Such competition may limit our growth and profitability in the future |
| Changes in regional and national economic conditions could adversely affect our profitability |
| The population in our market area is growing slowly and economic growth in the Rhode Island area has been slow to moderate over the past several years |
| New England, hard hit by the 2001 recession, has trailed other parts of the nation in terms of general economic growth |
| Additionally, Rhode Island businesses, like many companies throughout the United States, are struggling with rapidly increasing health care costs, which may adversely affect the earnings and growth potential for such companies, which may in turn negatively impact Rhode Island’s ability to attract and retain businesses in the state |
| Our borrowers’ ability to honor their repayment commitments is generally dependent upon the level of economic activity and general health of the regional economy |
| Furthermore, economic conditions beyond our control, such as the strength of credit demand by customers and changes in the general levels of interest rates, may have a significant impact on our operations, including decreases in the value of collateral securing loans |
| Therefore, an economic recession in this market area adversely affecting growth could cause significant increases in nonperforming assets, thereby reducing operating profits or causing operating losses, impairing liquidity and eroding capital |
| Fluctuations in interest rates could adversely impact our net interest margin |
| Our earnings and cash flows are heavily dependent on net interest margin, which is the difference between interest income that we earn on loans and investments and the interest expense paid on deposits and other borrowings |
| When maturities of assets and liabilities are not balanced, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operation |
| Interest rates are highly sensitive to factors that are beyond our control, including general economic conditions, inflation rates, flattening of the yield curve, business activity levels, money supply and the policies of various government and regulatory authorities |
| For example, increases in the discount rate by the Board of Governors of the Federal Reserve System usually lead to rising interest rates, which affects interest income, interest expense and investment portfolio |
| In addition, governmental policies such as the creation of a tax deduction for individual retirement accounts could increase savings rates and may affect our cost of funds |
| The nature, timing and effect of any future changes in interest rates on us and our future results of operations are not predictable |
| Change in the composition of our loan and lease portfolio may result in greater risk of losses |
| At December 31, 2005, 46dtta1prca of our loan and lease portfolio consisted of commercial real estate, business, construction loans and leases, a slight increase from 45dtta4prca of our loan and lease portfolio at December 31, 2004 |
| We intend to continue to emphasize the origination of these types of loans and leases |
| 16 ______________________________________________________________________ These loans generally have greater risk of nonpayment and loss than residential mortgage loans because repayment of these types of loans often depends on the successful business operation and income stream of the borrowers |
| Such loans typically involve larger loan balances to single borrowers or groups of related borrowers than do individual one-to four-family residential loans |
| Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a single one-to four-family residential mortgage loan |
| Our allowance for loan and lease losses may be insufficient to cover actual loan and lease losses |
| The risk of loan and lease losses varies with, among other things, general economic conditions, the character and size of the portfolio, delinquency trends, industry loss experience, nonperforming loan trends, the creditworthiness of borrowers and, in the case of a collateralized loan, the value of the collateral |
| Based upon such factors, our management arrives at an appropriate allowance for loan and lease losses by maintaining a risk rating system that classifies all loans and leases into varying categories by degree of credit risk, and establishes a level of allowance associated with each category |
| As part of our ongoing evaluation process, including a formal quarterly analysis of allowances, we make various subjective judgments as to the appropriate level of allowance with respect to each category, judgments as to the categorization of any individual loan or lease, as well as additional subjective judgments in ascertaining the probability and extent of any potential losses |
| If our subjective judgments prove to be incorrect, our allowance for loan and lease losses may not cover inherent losses in our loan and lease portfolio, or if bank regulatory officials or changes in economic conditions require us to increase the allowance for loan and lease losses, earnings could be significantly and adversely affected |
| Material additions to our allowance would materially decrease net income |
| At December 31, 2005, the allowance for loan and lease losses totaled dlra12dtta2 million, representing 1dtta28prca of total loans |
| Our growth strategy may limit increases in profitability |
| We have sought to increase the size of our franchise by pursuing business development opportunities and have grown substantially since inception |
| To the extent additional branches are opened, through the current expansion plan or otherwise, we are likely to experience higher operating expenses relative to operating income from the new branches, which may limit increases in profitability over the course of the expansion plan |
| The ability to increase profitability by establishing new branches is dependent on our ability to identify advantageous branch locations and generate new deposits and loans from those locations that will create an acceptable level of net income |
| There can be no assurance that new and relocated branches will generate an acceptable level of net income or that we will be able to successfully establish new branch locations in the future |
| In addition, there can be no assurance that we will be successful in developing new business lines or that any new products or services introduced will be profitable |
| Our growth is substantially dependent on our management team |
| Our future success and profitability are substantially dependent upon the management and banking abilities of our senior executives, who have substantial background and experience in banking and financial services, as well as personal contacts, in the Rhode Island market and the region generally |
| Competition for such personnel is intense, and there is no assurance we will be successful in retaining such personnel |
| Changes in key personnel and their responsibilities may be disruptive to business and could have a material adverse effect on our business, financial condition and results of operations |
| Our operating history is not necessarily indicative of future operating results |
| The Company, as the holding company of the Bank, has no significant assets other than the common stock of the Bank |
| While we have operated profitably since the first full quarter of operations, future operating results may be affected by many factors, including regional economic conditions, interest rate 17 ______________________________________________________________________ fluctuations and other factors that may affect banks in general, all of which factors may limit or reduce our growth and profitability |
| For example, in the past, we have consistently grown our core deposit base, including checking account balances |
| However, customers indicated a preference for higher-yielding term deposit products in 2005 and core deposits remained essentially flat |
| We cannot predict whether this increased demand for CD’s is temporary or reflects a longer-term trend |
| Similarly, nonperforming asset levels and loan and lease losses have been low since inception |
| Industry experience suggests that this is unlikely to continue indefinitely |
| Our controls and procedures may fail or be circumvented |
| Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures |
| Systems of controls are based upon certain assumptions and can only provide reasonable, not absolute, assurance that system objectives are met |
| Potential failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have an adverse effect on our business, results of operations and financial condition |
| We face various technological risks |
| We rely heavily on communication and information systems to conduct business |
| Potential failures, interruptions or breaches in system security could result in disruptions or failures in our key systems, such as general ledger, deposit or loan systems |
| We have developed policies and procedures aimed at preventing and limiting the effect of failure, interruption or security breaches of information systems; however, there cannot be assurance that these incidences will not occur, or if they do occur, that they will be appropriately addressed |
| The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in the loss of business, subject us to increased regulatory scrutiny or subject us to civil litigation and possible financial liability, any of which could have an adverse effect on our results of operation and financial condition |
| We encounter technological change continually |
| Effective use of technology increases efficiency and enables banks and financial services institutions to better serve customers and reduce costs |
| Our future success depends, in part, upon our ability to meet the needs of customers by effectively using technology to provide the products and services that satisfy customer demands, as well as create operational efficiencies |
| Additionally, many of our competitors have greater resources to invest in technological improvements |
| Inability to keep pace with technological change affecting the financial services industry could have an adverse impact on our business and as a result, our financial condition and results of operation |
| Extensive government regulation and supervision have a significant impact on our operations |
| We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various regulatory agencies |
| These regulations are intended primarily for the protection of depositors and customers, rather than for the benefit of investors |
| Our compliance with these regulations is costly and restricts certain activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices |
| We are also subject to capitalization guidelines established by regulators, which require maintenance of adequate capital to support growth |
| Furthermore, the addition of new branches requires the approval of the FDIC as well as state banking authorities in Rhode Island |
| 18 ______________________________________________________________________ The laws and regulations applicable to the banking industry could change at any time |
| There is no way to predict the effects of these changes on our business and profitability |
| Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance with new laws and regulations applicable to the banking industry could adversely affect operations and profitability |
| Risks Related to the Company’s Common Stock Our common stock has limited liquidity |
| Even though the our common stock is currently traded on the Nasdaq Stock Market’s National Market System, it has less liquidity than the average stock quoted on a national securities exchange |
| Because of this limited liquidity, it may be more difficult for investors to sell a substantial number of shares and any such sales may adversely affect the stock price |
| We cannot predict the effect, if any, that future equity offerings, issuance of common stock in acquisition transactions, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock |
| We cannot give assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair future ability to raise capital through sales of common stock |
| Fluctuations in the price of our stock could adversely impact your investment |
| The market price of our common stock may be subject to significant fluctuations in response to variations in the quarterly operating results, changes in management, announcements of new products or services by us or competitors, legislative or regulatory changes, general trends in the industry and other events or factors unrelated to our performance |
| The stock market has experienced price and volume fluctuations which have affected the market price of the common stock of many companies for reasons frequently unrelated to the operating performance of these companies, thereby adversely affecting the market price of these companies’ common stock |
| Accordingly, there can be no assurance that the market price of our common stock will not decline |
| There are limitations on our ability to pay dividends |
| Our ability to pay dividends is subject to the financial condition of the Bank, as well as other business considerations |
| Payment of dividends by the Company is also restricted by statutory limitations |
| These limitations could have the effect of reducing the amount of dividends we can declare |
| Shareholders may experience dilution if we issue additional stock in the future |
| If our Board of Directors should determine in the future that there is a need to obtain additional capital through the issuance of additional shares of our common stock or securities convertible into shares of common stock, such issuances could result in dilution to shareholders |
| Similarly, if the Board of Directors decides to grant additional stock options for the purchase of shares of common stock, the addition of such stock options may expose shareholders to dilution |
| Certain Anti-Takeover measures affect the ability of shareholders to effect takeover transactions |
| We are subject to the Rhode Island Business Combination Act which, subject to certain exceptions, prohibits business combinations involving certain shareholders of publicly held corporations for a period of five years after such shareholders acquire 10prca or more of the outstanding voting stock of the corporation |
| In addition, our Articles of Incorporation and By-laws, among other things, provide that, in addition to any 19 ______________________________________________________________________ vote required by law, the affirmative vote of two-thirds of the holders of our voting stock, voting as a single class, is required for approval of all business combinations |
| Our Board of Directors also has the authority, without further action by shareholders, to issue additional preferred stock in one or more series and to fix by resolution, the rights, preferences and privileges of such series to the extent permitted by law |
| Our Board could designate certain rights and privileges for such preferred stock which would discourage unsolicited tender offers or takeover proposals or have anti-takeover effects |
| Our Articles also provide for three classes of directors to be elected for staggered three year terms, which make it more difficult to change the composition of our Board |
| All of these provisions may make it more difficult to effect a takeover transaction |
| Directors and executive officers own a significant portion of our common stock |
| Our directors and executive officers, as a group, beneficially owned approximately 18dtta2prca of our outstanding common stock as of December 31, 2005 |
| As a result of their ownership, the directors and executive officers would have the ability, if they vote their shares in a like manner, to significantly influence the outcome of all matters submitted to shareholders for approval, including the election of directors |