UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-Q

(Quarterly Report Under Section 13 of the Securities Exchange Act of 1934)

For the quarter ended:  March 31, 2008

Commission File No. 001-16101

BANCORP RHODE ISLAND, INC.

(Exact Name of Registrant as Specified in Its Charter)

Rhode Island

05-0509802

(State or Other Jurisdiction of

(IRS Employer

Incorporation or Organization)

Identification No.)

ONE TURKS HEAD PLACE, PROVIDENCE, RI 02903

(Address of Principal Executive Offices)

(401) 456-5000

(Issuer's Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [  ]

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]
Non-accelerated filer [  ]

Accelerated filer [X]
Smaller reporting company [  ]

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes [  ]  No [X]

      Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of May 1, 2008:

Common Stock - Par Value $0.01

4,554,485 shares

(class)

(outstanding)

Bancorp Rhode Island, Inc.

Quarterly Report on Form 10-Q

Table of Contents

Description

Page Number

Cover Page

1

Table of Contents

2

Part I - Financial Information

Item 1.

Financial Statements (unaudited)

Consolidated Balance Sheets

3

Consolidated Statements of Operations

4

Consolidated Statements of Changes in Shareholders' Equity

5

Consolidated Statements of Cash Flows

6

Condensed Notes to Consolidated Financial Statements

7-10

Item 2.

Management's Discussion and Analysis of Financial Condition

  and Results of Operations

11-27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28-29

Item 4.

Controls and Procedures

29

Part II - Other Information

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Submission of Matters to a Vote of Security Holders

31

Item 5.

Other Information

31

Item 6.

Exhibits

31

Signature Page

32

Special Note Regarding Forward Looking Statements

      We make certain forward looking statements in this Quarterly Report on Form 10-Q and in other documents that we incorporate by reference into this report that are based upon our current expectations and projections about future events. We intend these forward looking statements to be covered by the safe harbor provisions for "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we are including this statement for purposes of these safe harbor provisions. You can identify these statements by reference to a future period or periods by our use of the words "estimate," "project," "may," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar terms or variations of these terms.

      Actual results may differ materially from those set forth in forward looking statements as a result of risks and uncertainties, including those detailed from time to time in our filings with the Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). Our forward looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward looking statements.

BANCORP RHODE ISLAND, INC.

Consolidated Balance Sheets (unaudited)

March 31,
2008

December 31,
2007

(In thousands)

ASSETS:

Cash and due from banks

$

25,462 

$

20,465 

Overnight investments

33,107 

17,097 

        Total cash and cash equivalents

58,569 

37,562 

Investment securities available for sale (amortized cost of $65,974 and

  $77,193, respectively)

65,894 

76,986 

Mortgage-backed securities available for sale (amortized cost of

  $275,196 and $258,094, respectively)

276,618 

258,195 

        Total securities available for sale

342,512 

335,181 

Stock in Federal Home Loan Bank of Boston

15,671 

15,671 

Loans and leases receivable:

    Commercial loans and leases

576,954 

573,668 

    Residential mortgage loans

236,543 

248,728 

    Consumer and other loans

211,404 

215,736 

        Total loans and leases receivable

1,024,901 

1,038,132 

Allowance for loan and lease losses

(12,593)

(12,619)

        Net loans and leases receivable

1,012,308 

1,025,513 

Premises and equipment, net

13,377 

13,721 

Goodwill, net

12,019 

11,772 

Accrued interest receivable

5,661 

6,557 

Investment in bank-owned life insurance

24,441 

24,186 

Prepaid expenses and other assets

6,162 

6,956 

        Total assets

$

1,490,720 

$

1,477,119 

LIABILITIES:

Deposits:

    Demand deposit accounts

$

179,883 

$

172,634 

    NOW accounts

61,706 

65,191 

    Money market accounts

6,172 

6,054 

    Savings accounts

410,796 

396,838 

    Certificate of deposit accounts

379,673 

374,063 

         Total deposits

1,038,230 

1,014,780 

Overnight and short-term borrowings

48,944 

66,795 

Wholesale repurchase agreements

10,000 

10,000 

Federal Home Loan Bank of Boston borrowings

244,752 

241,505 

Subordinated deferrable interest debentures

13,403 

13,403 

Other liabilities

20,560 

17,528 

        Total liabilities

1,375,889 

1,364,011 

SHAREHOLDERS' EQUITY:

Preferred stock, par value $0.01 per share, authorized 1,000,000 shares:

    Issued and outstanding: none

-- 

-- 

Common stock, par value $0.01 per share, authorized 11,000,000 shares:

    Issued: 4,906,735 shares and 4,867,121 shares, respectively

49 

49 

Additional paid-in capital

71,162 

70,123 

Treasury stock, at cost (352,250 and 305,200 shares, respectively)

(12,055)

(10,189)

Retained earnings

54,803 

53,194 

Accumulated other comprehensive income (loss), net

872

(69)

        Total shareholders' equity

114,831 

113,108 

        Total liabilities and shareholders' equity

$

1,490,720 

$

1,477,119 

See accompanying notes to unaudited consolidated financial statements

BANCORP RHODE ISLAND, INC.
Consolidated Statements of Operations (unaudited)

Three Months Ended
March 31,

2008

2007

(In thousands, except
per share data)

Interest and dividend income:

    Loans and leases

$

16,165

$

16,332

    Available for sale securities

3,933

4,202

    Federal Home Loan Bank of Boston stock dividends

237

281

    Overnight investments

197

287

        Total interest and dividend income

20,532

21,102

Interest expense:

    Deposits

6,692

7,051

    Overnight and short-term borrowings

431

667

    Wholesale repurchase agreements

135

196

    Federal Home Loan Bank of Boston borrowings

2,720

2,591

    Subordinated deferrable interest debentures

250

369

        Total interest expense

10,228

10,874

            Net interest income

10,304

10,228

Provision for loan and lease losses

285

100

            Net interest income after provision for loan and
               lease losses

10,019

10,128

Noninterest income:

    Service charges on deposit accounts

1,435

1,316

    Income from bank-owned life insurance

255

251

    Gain on sale of available for sale securities

242

--

    Net gains on lease sales and commissions on loans

       originated for others

219

387

    Commissions on nondeposit investment products

210

120

    Loan related fees

163

155

    Other income

379

333

        Total noninterest income

2,903

2,562

Noninterest expense:

    Salaries and employee benefits

5,139

5,262

    Occupancy

865

906

    Data processing

719

704

    Professional services

635

652

    Marketing

364

373

    Equipment

308

333

    Loan servicing

167

193

    Loan workout and other real estate owned

156

9

    Other expenses

1,107

1,079

        Total noninterest expense

9,460

9,511

        Income before income taxes

3,462

3,179

Income tax expense

1,136

1,001

        Net income

$

2,326

$

2,178

Weighted average common shares outstanding - basic

4,557

4,815

Weighted average common shares outstanding - diluted

4,639

4,962

Per share data:

Basic earnings per common share

$

0.51

$

0.45

Diluted earnings per common share

$

0.50

$

0.44

Cash dividends declared per common share

$

0.16

$

0.15

See accompanying notes to unaudited consolidated financial statements

BANCORP RHODE ISLAND, INC.
Consolidated Statements of Changes in Shareholders' Equity (unaudited)

Three months ended March 31,

Common
Stock

Additional
Paid-in
Capital

Treasury
Stock

Retained
Earnings

Accumulated
Other
Compre-
hensive
Income
(Loss)

Total

(In thousands, except per share data)

2007

Balance at December 31, 2006

$48

$67,960

$        -- 

$47,091 

$(3,014)

$112,085 

    Net income

--

--

-- 

2,178 

-- 

2,178 

    Other comprehensive income:

        Unrealized holding gains on
          securities available for sale,
          net of taxes of $(411)

765 

765 

    Total comprehensive income

2,943 

    Exercise of stock options

--

785

-- 

-- 

-- 

785 

    Stock repurchase

--

--

(223)

-- 

-- 

(223)

    Share-based compensation

--

38

-- 

-- 

-- 

38 

    Tax benefit from exercise of stock
      options

--

453

-- 

-- 

-- 

453 

    Dividends on common stock ($ 0.15
      per common share)

--

--

-- 

(724)

-- 

(724)

Balance at March 31, 2007

$48

$69,236

$     (223)

$48,545 

$(2,249)

$115,357 

2008

Balance at December 31, 2007

$49

$70,123

$(10,189)

$53,194 

$     (69)

$113,108 

    Net income

--

--

-- 

2,326 

-- 

2,326 

    Other comprehensive income:

        Unrealized holding gains on
          securities available for sale,
          net of taxes of $(592)

1,098 

1,098 

        Reclassification adjustment,
          net of taxes of $85

(157)

(157)

    Total comprehensive income

3,267 

    Exercise of stock options

--

431

-- 

-- 

-- 

431 

    Macrolease acquisition

--

362

-- 

-- 

-- 

362 

    Stock repurchase

--

--

(1,866)

-- 

-- 

(1,866)

    Share-based compensation

--

68

-- 

-- 

-- 

68 

    Tax benefit from exercise of stock
      options

--

178

-- 

-- 

-- 

178 

    Dividends on common stock ($ 0.16
      per common share)

--

--

-- 

(717)

-- 

(717)

Balance at March 31, 2008

$49

$71,162

$(12,055)

$54,803 

$    872 

$114,831 

See accompanying notes to unaudited consolidated financial statements

BANCORP RHODE ISLAND, INC.
Consolidated Statements of Cash Flows (unaudited)

Three Months Ended
March 31,

2008

2007

(In thousands)

Cash flows from operating activities:

    Net income

$   2,326 

$   2,178 

    Adjustments to reconcile net income to net cash from operating activities:

        Depreciation, amortization and accretion, net

(576)

(164)

        Provision for loan and lease losses

285 

100 

        Income from bank-owned life insurance

(255)

(251)

        Share-based compensation

68 

38 

        Net gains on lease sales

(173)

(341)

        Gain on sale of available for sale securities, net

(242)

-- 

        Proceeds from sales of leases

5,483 

8,198 

        Leases originated for sale

(3,763)

(7,857)

        (Increase) decrease in accrued interest receivable

896 

(155)

        Decrease in prepaid expenses and other assets

288 

827 

        Increase (decrease) in other liabilities

(1,853)

3,358 

        Other, net

(20)

6 

            Net cash provided by operating activities

2,464 

5,937 

Cash flows from investing activities:

    Investment securities available for sale:

        Purchases

(20,000)

(24,992)

        Maturities and principal repayments

36,215 

8,006 

    Mortgage-backed securities available for sale:

        Purchases

(41,072)

-- 

        Maturities and principal repayments

11,109 

11,339 

        Proceeds from sales

13,109 

-- 

    Net decrease in loans and leases

12,407 

11,506 

    Purchases of loans and leases, including purchased interest

-- 

(13,979)

    Proceeds from sale of Federal Home Loan Bank of Boston stock

-- 

859 

    Capital expenditures for premises and equipment

(131)

(1,580)

    Proceeds from sale of premises and equipment

34 

-- 

            Net cash provided by (used in) investing activities

11,671 

(8,841)

Cash flows from financing activities:

    Net increase in deposits

23,450 

12,189 

    Net decrease in overnight and short-term borrowings

(17,851)

(4,739)

    Proceeds from long-term borrowings

10,000 

30,000 

    Repayment of long-term borrowings

(6,753)

(40,022)

    Exercise of stock options

431 

785 

    Repurchase of common stock

(1,866)

(223)

    Tax benefit from exercise of stock options

178 

453 

    Dividends on common stock

(717)

(724)

            Net cash provided by (used in) financing activities

6,872 

(2,281)

    Net increase (decrease) in cash and cash equivalents

21,007 

(5,185)

    Cash and cash equivalents at beginning of period

37,562 

61,764 

    Cash and cash equivalents at end of period

$ 58,569 

$ 56,579 

Supplementary Disclosures:

    Cash paid for interest

$ 10,932 

$ 11,725 

    Cash paid for income taxes

1,205 

12 

    Non-cash transactions:

        Purchase of investment securities not yet settled

5,000 

-- 

        Change in accumulated other comprehensive income, net of taxes

941 

765 

        Transfer of leases held for sale to loans and leases receivable

474 

-- 

        Macrolease acquisition

247 

-- 

See accompanying notes to unaudited consolidated financial statements

BANCORP RHODE ISLAND, INC.
Notes to Consolidated Financial Statements (unaudited)

(1)  Basis of Presentation

      Bancorp Rhode Island, Inc. (the "Company"), a Rhode Island corporation, is the holding company for Bank Rhode Island (the "Bank"). The Company has no significant assets other than the common stock of the Bank. For this reason, substantially all of the discussion in this Quarterly Report on Form 10-Q relates to the operations of the Bank and its subsidiaries.

      In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for credit losses, review of goodwill for impairment and income taxes.

      The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Bank Rhode Island, along with the Bank's wholly-owned subsidiaries, BRI Investment Corp. (a Rhode Island passive investment company), BRI Realty Corp. (a Rhode Island real estate holding company), Acorn Insurance Agency, Inc. (a licensed insurance agency) and Macrolease Corporation (an equipment leasing company). All significant intercompany accounts and transactions have been eliminated in consolidation.

      The unaudited interim consolidated financial statements of the Company conform to U.S. generally accepted accounting principles and prevailing practices within the banking industry and include all necessary adjustments (consisting of only normal recurring adjustments) that, in the opinion of management, are required for a fair presentation of the results and financial condition of the Company. Certain prior period amounts have been reclassified to conform to the current year classification. Such reclassifications have no effect on previously reported net income or shareholders' equity.

      The unaudited interim results of consolidated operations are not necessarily indicative of the results for any future interim period or for the entire year. These interim consolidated financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual consolidated financial statements and accompanying notes included in the Company's 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC").

(2)  Earnings Per Share

      Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of additional common stock that then share in the earnings of the Company.

(3)  Supplemental Executive Retirement Plans

      The Bank maintains Supplemental Executive Retirement Plans ("SERPs") for certain of its senior officers under which participants designated by the Board of Directors are entitled to an annual retirement benefit. Expenses associated with the SERPs were $169,000 and $143,000 for the three months ending March 31, 2008 and 2007, respectively. Accrued liabilities associated with the SERPs were $2.9 million and $2.8 million for March 31, 2008 and December 31, 2007, respectively.

(4)  Recently Adopted Accounting Pronouncements

      In March 2006, the FASB Emerging Issues Task Force ("EITF") issued interpretive guidance in Issue 06-4 ("EITF 06-4"), in which agreements by companies to share a portion of the proceeds of life insurance policies with an employee during the postretirement period is a postretirement benefit arrangement that must be accounted for under SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under EITF 06-4, the EITF also concluded the purchase of a split-dollar life insurance policy does not constitute a settlement of the postretirement benefit as defined in SFAS 106. Thus, companies are required to record an accrual for this postretirement benefit upon adoption of EITF 06-4. The adoption of EITF 06-4 on January 1, 2008 did not have a material impact on the Company's consolidated financial statements.

      In September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurements." SFAS 157 provides guidance for measuring assets and liabilities at fair value. In February 2008, the FASB issued Staff Position ("FSP") 157-2, "Effective Date of FASB Statement No. 157." This FSP delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The adoption of SFAS 157 on January 1, 2008 did not have a material impact on the Company's consolidated financial statements.

      SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact and willing to transact.

      SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about what assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

      Level 1: Inputs are unadjusted quoted prices in active markets for assets or liabilities identical to those reported at fair value.

      Level 2: Inputs other than quoted prices included within Level 1 inputs that are observable either directly or indirectly. These inputs include quoted prices in active or not active markets or inputs derived from or corroborated by observable market data.

      Level 3: Inputs are unobservable inputs for an asset or liability. These inputs are used to determine fair value only when observable inputs are not available.

      The Company did not make any changes to its valuation techniques during the three months ended March 31, 2008.

      The following table summarizes the financial assets measured at fair value on a recurring basis:

Fair Value Measurements at March 31, 2008 Using

(In thousands)

March 31, 2008

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)

Available for sale securities

$342,511

--

$341,622

$889

      Available for sale securities are reported at fair value primarily utilizing observable inputs (Level 2). The Company obtains fair value measurements from independent pricing services, which base their fair value measurements upon observable inputs such as reported trades of comparable securities, broker quotes, the Treasury yield curve, benchmark interest rates, market spread relationships, historic and consensus prepayment rates, credit information and the security's terms and conditions.

      The Company used significant unobservable inputs (Level 3) to value one of its available for sale securities, which is a private placement mezzanine tranche of a collateralized debt obligation backed by trust preferred securities. There is limited trading in this security and in comparable securities. The security was valued based upon market-maker bid level pricing estimates.

      The following table shows a reconciliation of the beginning and ending balances for fair value measurements using significant unobservable inputs:

Fair Value
Measurements Using
Significant
Unobservable Inputs

Available for sale securities

(In thousands)

Balance, January 1, 2008

$974 

    Total unrealized losses included in other
    comprehensive income

   (85)

    Purchases

--

    Sales/Maturities

--

    Transfers in and/out of Level 3

--

Balance, March 31, 2008

$889 

      The following table summarizes the financial assets measured at fair value on a non-recurring basis.

Fair Value Measurements at March 31, 2008 Using

(In thousands)

March 31, 2008

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)

Impaired loans

$3,653

--

$3,653

--

      Impaired loans, which are measured for impairment using the fair value of the collateral (Level 2) for collateral dependent loans, had a carrying amount of $4.2 million, with a valuation allowance of $568,000, resulting in an additional provision for loan losses of $82,000 for the three months ended March 31, 2008.

      In February 2007, the FASB issued SFAS No. 159 ("SFAS 159"), "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that will help investors and other users of financial statements to understand more easily the effect on earnings of the company's choice to use fair value. It also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of this standard.

      In November 2007, the SEC issued SAB No. 109 ("SAB 109"), "Written Loan Commitments Recorded at Fair Value Through Earnings." SAB 109 supersedes SAB No. 105, "Application of Accounting Principles to Loan Commitments," and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The guidance in SAB 109 is applied on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of SAB 109 on January 1, 2008 did not have a material impact on the Company's consolidated financial statements.

(5)  Recent Accounting Pronouncements

      In December 2007, the FASB issued SFAS No. 141 ("SFAS 141R"), "Business Combinations (Revised 2007)." SFAS 141R replaces SFAS No. 141, "Business Combinations," and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS No. 5, "Accounting for Contingencies." The Company does not anticipate the adoption of SFAS 141R will materially impact its consolidated financial statements upon adoption on January 1, 2009.

BANCORP RHODE ISLAND, INC.
Management's Discussion and Analysis

ITEM 2.  Management's Discussion and Analysis

General

      The Company's principal subsidiary, Bank Rhode Island, is a commercial bank chartered as a financial institution in the State of Rhode Island. The Bank pursues a community banking mission and is principally engaged in providing banking products and services to individuals and businesses in Rhode Island and nearby areas of Massachusetts. The Bank is subject to competition from a variety of traditional and nontraditional financial service providers both within and outside of Rhode Island. The Bank offers its customers a wide range of business, commercial real estate, consumer and residential loans and leases, deposit products, nondeposit investment products, cash management, private banking and other banking products and services designed to meet the financial needs of individuals and small- to mid-sized businesses. The Bank also offers both commercial and consumer online banking products and maintains a web site at http://www.bankri.com. The Company and Bank are subject to the regulations of certain federal and state agencies and undergo periodic examinations by certain of those regulatory authorities. The Bank's deposits are insured by the FDIC, subject to regulatory limits. The Bank is also a member of the Federal Home Loan Bank of Boston ("FHLB"). The Company's common stock is traded on the Nasdaq Global Select Market^SM under the symbol "BARI." The Company's financial reports can be accessed through its website within 24 hours of filing with the SEC.

Critical Accounting Policies

      Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets or net income, are considered critical accounting policies. The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. As discussed in the Company's 2007 Annual Report on Form 10-K, management has identified the accounting for the allowance for loan and lease losses, review of goodwill for impairment and accounting for income taxes as the Company's most critical accounting policies. There have been no significant changes in the methods or assumptions used in accounting policies that require material estimates or assumptions.

Overview

      The primary drivers of the Company's operating income are net interest income, which is strongly affected by the net yield on interest-earning assets ("net interest margin"), and the quality of the Company's assets.

      The Company's net interest income represents the difference between interest income and its cost of funds. Interest income depends on the amount of interest-earning assets outstanding during the year and the interest rates earned thereon. Cost of funds is a function of the average amount of deposits and borrowed money outstanding during the year and the interest rates paid thereon. The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin generally exceeds the net interest spread as a portion of interest-earning assets are funded by various noninterest-bearing sources (primarily noninterest-bearing deposits and shareholders' equity). The increases (decreases) in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate, are summarized in the Rate/Volume Analysis tables shown on page 24. Information as to the components of interest income and interest expense and average rates is provided under "Average Balances, Yields and Costs" on page 23.

      Because the Company's assets are not identical in duration and in repricing dates to its liabilities, the spread between the two is vulnerable to changes in market interest rates as well as the overall shape of the yield curve. These vulnerabilities are inherent to the business of banking and are commonly referred to as "interest rate risk." How to measure interest rate risk and, once measured, how much risk to take are based on numerous assumptions and other subjective judgments. See also discussion under "Interest Rate Risk" on page 28.

      The quality of the Company's assets also influences its earnings. Loans and leases that are not paid on a timely basis and exhibit other weaknesses can result in the loss of principal and/or interest income. Additionally, the Company must make timely provisions to the allowance for loan and lease losses based on estimates of probable losses inherent in the loan and lease portfolio; these additions, which are charged against earnings, are necessarily greater when greater probable losses are expected. Further, the Company incurs expenses as a result of resolving troubled assets. All of these reflect the "credit risk" that the Company takes on in the ordinary course of business and is further discussed under "Financial Condition - Asset Quality" on page 17.

      The Company's business strategy has been to concentrate its asset generation efforts on commercial and consumer loans and its deposit generation efforts on checking and savings accounts. These deposit accounts are commonly referred to as "core deposit accounts." This strategy is based on the Company's belief that it can distinguish itself from its larger competitors, and indeed attract customers from them, through a higher level of service and through its ability to set policies and procedures, as well as make decisions, locally. The loan and deposit products referenced also tend to be geared more toward customers who are relationship oriented than those who are seeking stand-alone or single transaction products. The Company believes that its service-oriented approach enables it to compete successfully for relationship-oriented customers. Additionally, the Company is predominantly an urban franchise with a high concentration of businesses, which makes deployment of funds in the commercial lending area practicable. Commercial loans are attractive to the Company, among other reasons, because of their higher yields. Similarly, core deposits are attractive to the Company because of their generally lower interest cost and potential for fee income.

      The Company also seeks to leverage business opportunities presented by its customer base, franchise footprint and resources. In 2005, the Bank formed a private banking division and completed the Bank's first acquisition, acquiring the operations of an equipment leasing company located in Long Island, New York ("Macrolease"). The Bank is using the Macrolease platform to generate additional income by originating equipment leases for third parties, as well as increasing the Bank's portfolio of equipment leases.

      The deposit market in Rhode Island is highly concentrated. The State's three largest banks have an aggregate market share of approximately 85% in Providence and Kent Counties, the Bank's primary marketplace (based upon June 2007 FDIC statistics, excluding one bank that draws its deposits primarily from the internet). Competition for loans and deposits remains intense. This competition has resulted in considerable advertising and promotional product offerings by competitors, including print, radio and television media.

      For the three months ended March 31, 2008, approximately 78.0% of the Company's revenues (defined as net interest income plus noninterest income) were derived from its level of net interest income. In a continuing effort to diversify its sources of revenue, the Company has sought to expand its sources of noninterest income (primarily fees and charges for products and services the Bank offers). Service charges on deposit accounts remain the largest component of noninterest income, while the Bank has recently seen growth in gains on lease sales.

      The future operating results of the Company are dependent upon on its ability to maintain and expand its net interest margin, while minimizing its exposure to credit risk, along with increasing sources of noninterest income, while controlling the growth of noninterest or operating expenses.

Financial Condition - Executive Summary

      Selected balance sheet data is presented in the table below as of the dates indicated:

(In thousands)

March 31,
2008

December 31,
2007

September 30,
2007

June 30,
2007

March 31,
2007

Balance sheet data:

    Total assets

$1,490,720

$1,477,119

$1,492,695

$1,466,715

$1,483,157

    Loans and leases receivable

1,024,901

1,038,132

1,025,875

1,024,235

1,007,448

    Securities available for sale

342,512

335,181

330,749

330,304

350,655

    Core deposits ^(a)

658,557

640,717

637,290

641,164

638,317

    Certificates of deposit

379,673

374,063

381,821

384,543

390,295

    Borrowings

317,099

331,703

339,692

313,776

322,336

    Total shareholders' equity

114,831

113,108

117,868

115,080

115,357

Core deposit ratio

63.4%

63.1%

62.5%

62.5%

62.1%

Core deposits consist of demand deposit, NOW, money market and savings accounts.

      Total assets increased by $13.6 million since December 31, 2007. Total loans and leases decreased by $13.2 million during the first quarter of 2008, as the increase in commercial loans of $3.3 million, or 0.6%, was offset by decreases in the primarily purchased residential mortgage loan portfolio of $12.2 million, or 4.9% and a decrease in consumer and other loans of $4.3 million, or 2.0%. Available for sale securities increased $7.3 million, or 2.2%, since year-end. The Bank increased its core deposits by $17.8 million, or 2.8%, since year-end. Within this growth, savings accounts grew by $14.0 million, or 3.5%, and demand deposit accounts increased by $7.2 million, or 4.2%. Borrowings decreased by $14.6 million, or 4.4%, primarily from a decrease in customer retail repurchase agreements. Shareholders' equity as a percentage of total assets was 7.7% at March 31, 2008 and December 31, 2007.

      The Company's financial position at March 31, 2008 as compared to the prior year quarter-end (March 31, 2007) reflects net growth of $17.5 million in total loans and leases. This increase reflects the continuing conversion of the balance sheet to a more commercial profile with increases in commercial loans and leases of $44.5 million (up 8.4%). Consumer loans declined $4.6 million (down 2.1%) from the prior year quarter-end. The residential mortgage portfolio declined $22.4 million (down 8.7%) from March 31, 2007 as repayments exceeded new purchases. Also, available for sale securities at March 31, 2008 declined by $8.1 million (down 2.3%). Deposits have increased $9.6 million, or 0.9%, since the prior year quarter-end, with growth centered in savings accounts (up $39.7 million). This increase was offset by decreases in NOW accounts (down $17.3 million), certificate of deposit accounts (down $10.6 million), demand deposit accounts (down $1.6 million), and money market accounts (down $525,000). Borrowings have decreased since March 31, 2007 by $5.2 million, reflecting the Company's redemption of the subordinated deferrable interest debentures held by BRI Statutory Trust II in September 2007.

Financial Condition - Detailed Analysis

Investments

      Total investments consists of available for sale securities (investment securities and mortgage-backed securities ("MBSs")), stock in the FHLB and overnight investments. Total investments comprised $391.3 million, or 26.2% of total assets, at March 31, 2008, compared to $367.9 million, or 24.9% of total assets, at December 31, 2007, representing an increase of $23.3 million, or 6.3%. All $342.5 million of investment securities and MBSs at March 31, 2008 were classified as available for sale and recorded at fair value. These available for sale securities carried a total of $1.3 million in net unrealized gains at the end of the quarter, compared to $106,000 of net unrealized losses at December 31, 2007.

      The Company's securities in an unrealized loss position were deemed to be not other-than-temporarily impaired after considering that substantially all available for sale securities were rated "investment grade" with unrealized losses primarily caused by market interest rate changes. In addition, the Company has the intent and ability to hold all securities with unrealized losses until recovery or maturity. In making these other-than-temporary impairment determinations, management considers, among other things, the length of time and extent to which the fair value has been less than cost and the credit worthiness and near-term prospects of the issuer. Also, management considers capital adequacy, interest rate risk, liquidity and business plans in assessing the intent and ability to hold all securities with unrealized losses until recovery or maturity.

      The Company's available for sale securities are reported at fair value primarily utilizing observable inputs (Level 2 under SFAS 157). The Company obtains fair value measurements from independent pricing services, which base their fair value measurements upon observable inputs such as reported trades of comparable securities, broker quotes, the Treasury yield curve, benchmark interest rates, market spread relationships, historic and consensus prepayment rates, credit information and the security's terms and conditions. The Company validates its valuation techniques by periodically performing procedures such as understanding the models used by pricing sources and obtaining market values from other pricing sources. See also Note 4 - Recently Adopted Accounting Pronouncements in the accompanying notes to unaudited consolidated financial statements on page 8 for further discussion.

      The investment portfolio provides the Company a source of short-term liquidity and acts as a counterbalance to loan and deposit flows. During the first quarter of 2008, the Company purchased $66.1 million of available for sale securities, while maturities/calls and principal repayments totaled $47.3 million. Additionally, in the first quarter of 2008, the Company sold $13.1 million of mortgage-backed securities generating gains of $242,000. Fluctuations in market interest rates led to a large number of calls on the Company's investment holdings in the 2008 first quarter resulting in increased volume of investment and mortgage-backed security purchases compared to the first quarter of 2007.

Loans and Leases

      Total loans and leases decreased by $13.2 million since December 31, 2007 to stand at $1.02 billion at March 31, 2008. As a percentage of total assets, loans and leases decreased to 68.8% at March 31, 2008, compared to 70.3% at December 31, 2007. The Company attempts to concentrate its asset growth in its loan and lease portfolios to maximize the yield on new assets and to take advantage of demand for both commercial and home equity loan products in its market area. Total loans and leases as of March 31, 2008 is comprised of three broad categories: commercial loans and leases that aggregate $577.0 million, or 56.3% of the portfolio; residential mortgages that aggregate $236.5 million, or 23.1% of the portfolio; and consumer and other loans that aggregate $211.4 million, or 20.6% of the portfolio.

      Commercial loans and leases - The commercial loan and lease portfolio (consisting of commercial real estate, business lending, equipment leases, multi-family real estate, construction and small business loans) increased $3.3 million, or 0.6%, during the first three months of 2008. During this period, the Bank recorded approximately the same amount of new commercial commitments as compared to the first quarter of 2007. However, portfolio growth was largely offset by an increase in prepayments.

      The Bank's business lending group originates business loans, also referred to as commercial and industrial loans, including owner-occupied commercial real estate loans, term loans and revolving lines of credit. Within the business lending portfolio, commercial and industrial loans increased $1.2 million, or 0.9%, while owner-occupied commercial real estate loans decreased by a similar amount of $1.7 million, or 1.1%, since year-end.

      The Bank's commercial real estate ("CRE") group originates nonowner-occupied commercial real estate, multi-family residential real estate and construction loans. These real estate secured commercial loans are offered as both fixed and adjustable-rate products. Since December 31, 2007, CRE loans have increased $1.7 million, or 0.9%, on a net basis, reflective of the increased repayment activity referred to above.

      With the Macrolease platform, the Bank originates equipment leases for its own portfolio, as well as originates leases for third parties as a source of noninterest income. In addition, the Bank historically has purchased equipment leases from originators outside of the Bank. The U.S. Government and its agencies are the principal lessees on the vast majority of these purchased leases. These "government" leases generally have maturities of five years or less and are not dependent on residual collateral values. At March 31, 2008, leases comprised 10.5% of the commercial loan and lease portfolio, with $47.7 million of Macrolease-generated leases and $13.1 million of purchased government leases. Included within these amounts were $1.2 million of leases generated for sale at March 31, 2008.

      At March 31, 2008, small business loans were $46.3 million, compared to $45.8 million at December 31, 2007, representing 8.0% of the commercial portfolio at each period end. These loans reflect those historically originated by the Bank's small business lending group and branch system and now primarily originated by the Bank's branch system. The Bank utilizes credit scoring and streamlined documentation, as well as traditional review standards in originating these credits.

      The Bank is a participant in the U.S. Small Business Administration ("SBA") Preferred Lender Program in both Rhode Island and Massachusetts. SBA guaranteed loans are found throughout the portfolios managed by the Bank's various lending groups.

      The Company believes it is well positioned for continued commercial growth. The Bank places particular emphasis on the generation of small- to medium-sized commercial relationships (those with $10 million or less in total loan commitments). Additionally, the Bank offers asset-based commercial loan facilities that monitor advances against receivables and inventories on a formula basis.

      Residential mortgage loans - During the first three months of 2008, residential mortgage loans decreased $12.2 million, or down 4.9%. During this period, the Bank did not originate or purchase any mortgages. Comparatively, in the 2007 first quarter, the Bank purchased $5.7 million of mortgages and did not originate any mortgages for its own portfolio. Since inception, the Bank has concentrated its portfolio lending efforts on commercial and consumer lending opportunities, but originates mortgage loans for its own portfolio on a limited basis. The Bank does not employ any outside mortgage originators, but periodically purchases residential mortgage loans from third-party originators. The Bank may purchase residential mortgage loans to utilize available cash flow as opportunities arise. At March 31, 2008, the Bank did not have any commitments to purchase residential mortgage loans within the next 60 days.

      Consumer loans - The consumer loan portfolio decreased $4.3 million, or 2.0%, during the first three months of 2008 as repayments of $9.8 million exceeded originations of $5.5 million. The decline in growth through March 31, 2008 was reflective of the softening of housing prices in the local market area over the past few years. The Company believes the softening prices have reduced consumer appetite for borrowing against the value of their homes. However, the Company continues to promote consumer lending as it believes that these ten- to twenty-year fixed rate products, along with floating rate lines of credit, possess attractive cash flow characteristics in the current interest rate environment.

      The following is a summary of loans and leases receivable:

March 31,
2008

December 31,
2007

(In thousands)

Commercial loans and leases:

    Commercial real estate - owner occupied

$   155,750 

$   157,431 

    Commercial and industrial

133,085 

131,927 

    Commercial real estate - nonowner occupied

101,604 

102,990 

    Small business

46,311 

45,778 

    Multi-family

47,238 

42,536 

    Construction

37,169 

38,832 

    Leases and other ^(a)

60,813 

58,702 

        Subtotal

581,970 

578,196 

    Unearned lease income

(6,378)

(5,742)

    Net deferred loan origination costs

1,362 

1,214 

        Total commercial loans and leases

576,954 

573,668 

Residential mortgage loans:

    One- to four-family adjustable rate

143,833 

155,087 

    One- to four-family fixed rate

91,626 

92,485 

        Subtotal

235,459 

247,572 

    Premium on loans acquired

1,125 

1,198 

    Net deferred loan origination fees

(41)

(42)

        Total residential mortgage loans

236,543 

248,728 

Consumer loans:

    Home equity - term loans

143,494 

149,192 

    Home equity - lines of credit

63,680 

62,357 

    Unsecured and other

2,860 

2,774 

        Subtotal

210,034 

214,323 

    Net deferred loan origination costs

1,370 

1,413 

        Total consumer loans

211,404 

215,736 

        Total loans and leases receivable

$1,024,901 

$1,038,132 

(a)

Included within commercial loans and leases were leases held for sale of $1.2 million at March 31, 2008 and $3.3 million at December 31, 2007, respectively.

Deposits

      Total deposits increased by $23.5 million, or 2.3%, during the first three months of 2008, from $1.01 billion, or 68.7% of total assets, at December 31, 2007, to $1.04 billion, or 69.6% of total assets, at March 31, 2008.

      The following table sets forth certain information regarding deposits:

March 31, 2008

December 31, 2007

Amount

Percent
Of
Total

Weighted
Average
Rate

Amount

Percent
of
Total

Weighted
Average
Rate

(In thousands)

NOW accounts

$     61,706

5.9%

0.28%

$     65,191

6.4%

0.60%

Money market accounts

6,172

0.6%

1.75%

6,054

0.6%

2.32%

Savings accounts

410,796

39.6%

2.22%

396,838

39.1%

3.01%

Certificate of deposit accounts

379,673

36.6%

4.17%

374,063

36.9%

4.46%

    Total interest bearing deposits

858,347

82.7%

2.94%

842,146

83.0%

3.46%

Noninterest bearing accounts

179,883

17.3%

--   

172,634

17.0%

--   

    Total deposits

$1,038,230

100.0%

2.42%

$1,014,780

100.0%

2.86%

      The overall composition of total deposits remained relatively the same during the first three months of the year. At March 31, 2008, core deposit accounts comprised 63.4% of total deposits, up moderately from 63.1% of total deposits at December 31, 2007. The Bank continued its strategy of emphasizing the normally lower cost core deposits over CDs. This strategy resulted in an increase in core deposits since December 31, 2007 of $17.8 million, or 2.8%.

      During the first three months of 2008, competition for deposits remained strong in the Company's market areas. During this period, the Bank increased its total deposits by $23.5 million as compared to December 31, 2007, with growth in most deposit categories. Savings and CD accounts grew $14.0 million and $5.6 million, respectively, over the past three months. By March 31, 2008, demand deposit accounts grew to $179.9 million, an increase of $7.2 million from $172.6 million at December 31, 2007. These increases offset the decline of NOW accounts of $3.5 million. At March 31, 2008, brokered CDs were $10.0 million, or 1.0% of total deposits, down from $20.0 million, or 2.0% of total deposits, at the prior year-end. The Bank may utilize brokered CDs if their rates are attractive compared to wholesale funding.

Borrowings

      Overnight and short-term borrowings decreased $17.9 million during the first three months of 2008 from the December 31, 2007 level of $66.8 million, with one larger customer retail repurchase agreement comprising the majority of this decline. Through the Bank's membership in the FHLB, the Company has access to a number of different funding structures. FHLB borrowings increased by $3.2 million from the December 31, 2007 amount of $241.5 million. Wholesale repurchase agreements remained constant with the December 31, 2007 balance of $10.0 million. The Bank may utilize wholesale repurchase agreement funding in the future if spreads are favorable compared to FHLB borrowings or for diversification purposes.

      On a long-term basis, the Company intends to continue concentrating on increasing its core deposits, and will utilize FHLB borrowings or wholesale repurchase agreements as cash flows dictate, as opportunities present themselves and as part of the Bank's overall strategy to manage interest rate risk.

Asset Quality

      The definition of nonperforming assets includes nonperforming loans and other real estate owned ("OREO"). OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure. Nonperforming loans are defined as nonaccrual loans, loans past due 90 days or more but still accruing and impaired loans. Under certain circumstances the Company may restructure the terms of a loan as a concession to a borrower. These restructured loans are generally considered impaired loans.

      Nonperforming assets - At March 31, 2008, the Company had nonperforming assets of $8.6 million, which represented 0.58% of total assets. This compares to nonperforming assets of $4.1 million, or 0.28% of total assets, at December 31, 2007. Total nonperforming assets at March 31, 2008 consisted of nonaccrual loans and leases with commercial loans and leases aggregating $5.1 million, residential mortgage loans aggregating $2.4 million and commercial loans and leases 90 days past due, but still accruing of $1.1 million. Nonperforming assets at December 31, 2007 were comprised of nonaccrual residential and commercial loans. With respect to loans past due 90 days, but still accruing at March 31, 2008, this balance was comprised of commercial leases to government entities, which were primarily attributable to administrative delays as opposed to underlying credit or cash flow issues. These leases were within commercial loans and leases 60 to 89 days past due of $3.4 million at December 31, 2007.

      Included in nonaccrual loans and leases at March 31, 2008 were $4.8 million of impaired loans and leases, with specific impairment reserves against these loans of $568,000. At December 31, 2007, there were $3.0 million of impaired loans and leases with specific impairment reserves of $486,000. The increase in nonaccrual loans and leases since year-end relates primarily to a few commercial loans and lease credits.

      The Company evaluates the underlying collateral of each nonperforming loan and continues to pursue the collection of interest and principal. Management believes that the current level of nonperforming assets remains low relative to the size of the Company's loan portfolio. As the loan portfolio continues to grow and mature, or if economic conditions worsen, management believes it possible that the level of nonperforming assets may increase, as may its level of charged-off loans.

      Delinquencies - At March 31, 2008, loan balances of $779,000 were 60 to 89 days past due, down from $3.7 million at December 31, 2007.

      The following table sets forth information regarding nonperforming assets and loans 60-89 days past due as of the dates indicated:

March 31,
2008

December 31,
2007

(In thousands)

Loans and leases accounted for on a nonaccrual basis

$7,449

$4,012

Restructured loans and leases

34

37

Loans and leases past due 90 days or more, but still accruing

1,138

100

Impaired loans and leases (not included in nonaccrual loans and leases)

--

--

    Total nonperforming loans and leases

8,621

4,149

Other real estate owned

--

--

    Total nonperforming assets

$8,621

$4,149

Delinquent loans 60-89 days past due

$   779

$3,702

Nonperforming loans and leases as a percent of total loans and leases

0.84%

0.40%

Nonperforming assets as a percent of total assets

0.58%

0.28%

Delinquent loans and leases 60-89 days past due as a percent of total loans

0.08%

0.36%

      Adversely classified assets - The Company's management classifies certain assets as "substandard," "doubtful" or "loss" based on criteria established under banking regulations. An asset is considered substandard if inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if existing deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

      At March 31, 2008, the Company had $10.9 million of assets that were classified as substandard. This compares to $9.5 million of assets that were classified as substandard at December 31, 2007. The Company had no assets that were classified as doubtful or loss at either date. Performing loans may or may not be adversely classified depending upon management's judgment with respect to each individual loan. At March 31, 2008, included in the assets that were classified as substandard were $3.4 million of performing loans. This compares to $5.3 million of adversely classified performing loans as of December 31, 2007. These amounts constitute assets that, in the opinion of management, could potentially migrate to nonperforming or doubtful status. Management believes that the March 31, 2008 level of adversely classified assets is low relative to the size of the Company's loan and lease portfolio. If a significant downturn in the local or regional market occurs or if other economic or market conditions worsen, management believes it possible that the level of adversely classified assets may increase. This in turn may necessitate an increase to the provision for loan losses in future periods.

Allowance for Loan and Lease Losses

      During the first three months of 2008, the Company made additions to the allowance for loan and lease losses of $285,000 and experienced net charge-offs of $311,000 compared to additions to the allowance for loan and lease losses of $100,000 and net charge-offs of $39,000 for the first three months of 2007. The net charge-offs were primarily from commercial real estate and small business portfolios. At March 31, 2008, the allowance for loan and lease losses stood at $12.6 million and represented 146.1% of nonperforming loans and 1.23% of total loans and leases outstanding. This compares to an allowance for loan and lease losses of $12.6 million, representing 304.2% of nonperforming loans and 1.22% of total loans and leases outstanding at December 31, 2007.

      An analysis of the activity in the allowance for loan and lease losses is as follows:

Three Months
Ended
March 31, 2008

Year Ended
December 31, 2007

(In thousands)

    Balance at beginning of period

$12,619 

$12,377 

    Loans charged-off:

        Commercial loans and leases

(298)

(184)

        Residential mortgage loans

-- 

(248)

        Consumer and other loans

(30)

(96)

            Total loans charged-off

(328)

(528)

    Recoveries of loans previously charged-off:

        Commercial loans and leases

13 

32 

        Residential mortgage loans

-- 

-- 

        Consumer and other loans

4 

38 

            Total recoveries of loans previously charged-off

17 

70 

            Net charge-offs

(311)

(458)

    Provision for loan and lease losses charged against income

285 

700 

    Balance at end of period

$12,593 

$12,619 

      The following table represents the allocation of the allowance for loan and lease losses as of the dates indicated:

March 31,
2008

December 31,
2007

(In thousands)

    Loan category

        Commercial loans and leases

$  8,721

$  8,786

        Residential mortgage loans

1,118

1,002

        Consumer and other loans

1,603

1,637

        Unallocated

1,151

1,194

            Total

$12,593

$12,619

      Assessing the appropriateness of the allowance for loan and lease losses involves substantial uncertainties and is based upon management's evaluation of the amounts required to meet estimated charge-offs in the loan and lease portfolio after weighing various factors. Management's methodology to estimate loss exposure includes an analysis of individual loans and leases deemed to be impaired, reserve allocations for various loan types based on payment status or loss experience and an unallocated allowance that is maintained based on management's assessment of many factors including the growth, composition and quality of the loan portfolio, historical loss experiences, general economic conditions and other pertinent

factors. These risk factors are reviewed and revised by management where conditions indicate that the estimates initially applied are different from actual results. Based on this evaluation, management believes that the allowance for loan and lease losses, as of March 31, 2008, is appropriate.

      A portion of the allowance for loan and lease losses is not allocated to any specific segment of the loan portfolio. This non-specific allowance, also referred to as unallocated allowance, is maintained for two primary reasons: (i) there exists an inherent subjectivity and imprecision to the analytical processes employed, and (ii) the prevailing business environment, as it is affected by changing economic conditions and various external factors, may impact the portfolio in ways currently unforeseen. Management, therefore, has established and maintains a non-specific allowance for loan and lease losses. The amount of this measurement imprecision allocation was $1.2 million at both March 31, 2008 and December 31, 2007.

      The allocation of the allowance for loan and lease losses at March 31, 2008 remained relatively consistent with the allocation at December 31, 2007. The moderate changes within the allocation were primarily attributable to assessment of risk within each category as well as changes in loan balances.

      While management evaluates currently available information in establishing the allowance for loan and lease losses, future adjustments to the allowance for loan and lease losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Management performs a comprehensive review of the allowance for loan and lease losses on a quarterly basis. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institution's allowance for loan and lease losses and carrying amounts of other real estate owned. Such agencies may require the financial institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Results of Operations - Executive Overview

      Selected income statement and per share data and operating ratios are presented in the table below for the three-month periods indicated:

(In thousands,
except per share data)

For the three-month periods ended

March 31,
2008

December 31,
2007

September 30,
2007

June 30,
2007

March 31,
2007

Income statement data:

    Net interest income

$10,304

$10,459

$10,265

$10,292

$10,228

    Noninterest income

2,903

2,703

2,856