UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-K

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.)

(Address of Principal Executive Offices)

(401) 456-5000

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

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

As of June 30, 2010, the aggregate market value of the voting common equity of the Registrant held by non-affiliates of the Registrant, based on the closing price on the Nasdaq Global Select Market ^SM was $97,056,118.

As of February 28, 2011, there were 4,688,242 shares of common stock (par value $0.01 per share) of the Registrant issued and outstanding.

Documents incorporated by reference:

Portions of Bancorp Rhode Island’s Definitive Proxy Statement for the 2011 Annual Meeting of Shareholders are incorporated by reference into Parts II and III of this Form 10-K.

See pages 58 to 60 for the exhibit index.

 

 

Bancorp Rhode Island, Inc.
Annual Report on Form 10-K
Table of Contents

Description		Page Number
Part I.
Item 1 — Business			1
Item 1A — Risk Factors			17
Item 1B — Unresolved Staff Comments			24
Item 2 — Properties			24
Item 3 — Legal Proceedings			25
Part II.
Item 5 — Market for the Company’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities			26
Item 6 — Selected Consolidated Financial Data			28
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 7A — Qualitative and Quantitative Disclosures about Market Risk			53
Item 8 — Financial Statements and Supplementary Data			54
Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			54
Item 9A — Controls and Procedures			55
Item 9B — Other Information			55
Part III.
Item 10 — Directors, Executive Officers and Corporate Governance			56
Item 11 — Executive Compensation			57
Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			57
Item 13 — Certain Relationships, Related Transactions and Director Independence			57
Item 14 — Principal Accountant Fees and Services			57
Part IV.
Item 15 — Exhibits and Financial Statement Schedules			58
Signatures			61
Exhibit 10.1 (c)
Exhibit 10.2 (b)
Exhibit 10.9 (b)
Exhibit 10.13 (b)
Exhibit 21
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

We make certain forward looking statements in this Annual Report on Form 10-K 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. These forward looking statements include:

•

statements of our goals, intentions and expectations;

•

statements regarding our business plans and prospects and growth and operating strategies;

•

statements regarding the quality of our products and our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

Actual results may differ materially from those set forth in forward looking statements as a result of these and other risks and uncertainties, including those detailed herein under Item 1A, “Risk Factors”, and from time to time in other filings with the Federal Deposit Insurance Corporation (“FDIC”) and the Securities and Exchange Commission (“SEC”). We have included important factors in the cautionary statements included or incorporated in this document, particularly under Item 1A, “Risk Factors”, that we believe could cause actual results or events to differ materially from the forward looking statements that we make. 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.

ITEM 1.		BUSINESS

Introduction

Bancorp Rhode Island, Inc. (“we” or 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 document relates to the operations of the Bank and its wholly-owned subsidiaries, which include BRI Investment Corp. (a Rhode Island passive investment company), Macrolease Corporation (an equipment financing company), Acorn Insurance Agency, Inc. (a licensed insurance agency) and BRI Realty Corp. (a real estate holding company).

The Bank is a commercial bank chartered as a financial institution in the State of Rhode Island and was formed in 1996 as a result of the acquisition of certain assets and liabilities divested in connection with the merger of Fleet Financial Group, Inc. and Shawmut National Corporation. Headquartered in Providence, Rhode Island, the Bank conducts business through 17 full-service branches, with 13 located in Providence County, 3 located in Kent County and 1 located in Washington County. The Bank augments its branch network through online banking services and automatic teller machines (“ATMs”), both owned and leased, located throughout Rhode Island.

The Bank provides a community banking alternative in the greater Providence market which is dominated by three large banking institutions, two national and one regional. Based on total deposits as of June 30, 2010 (excluding one bank that draws its deposits primarily from the internet), the Bank has the fifth largest deposit market share in Rhode Island and is the only mid-sized commercially-focused bank headquartered in Providence, the State’s capital. The Bank offers its customers a wide range of business, commercial real estate, consumer and residential loans, commercial leases, deposit products, nondeposit investment products, cash management and online banking services, private banking and other banking products and services designed to meet the financial needs of individuals and small- to mid-sized businesses. As a full-service community bank, the Bank seeks to differentiate itself from its large bank competitors through superior personal service, responsiveness and local decision-making. The Bank’s deposits are insured by the FDIC, subject to regulatory limits.

The Company’s headquarters and executive management are located at One Turks Head Place, Providence, Rhode Island 02903 and its telephone number is (401) 456-5000. The Bank also maintains an internet website at http://www.bankri.com.

The Company makes available free of charge through its website at http://www.bankri.com all reports it electronically files with, or furnishes to, the SEC, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable after those documents are filed with, or furnished to, the SEC. These filings are also accessible on the SEC’s website at http://www.sec.gov.

Overview

The Company, through the Bank, concentrates its business efforts in three main areas. First, the Bank emphasizes commercial lending. The high concentration of small to mid-size businesses in the Bank’s predominately urban franchise makes deployment of funds in the commercial lending area practicable. Moreover, the Bank believes it can attract commercial customers from larger competitors through a higher level of service and its ability to set policies and procedures, as well as make decisions, locally. Second, the Bank has sought to grow its demand deposit, savings and other transaction-based accounts, collectively referred to as “core deposits.” The Bank has stressed development of full relationships with customers, including its commercial customers, who tend to be more relationship oriented than those who are seeking stand-alone or single transaction products. Third, the Bank seeks to leverage its knowledge and customer base to develop related lines of business. Since inception, the Bank has grown its consumer loan portfolio, acquired an equipment financing company, added sales of investment products, begun a private banking group and recently expanded its residential mortgage origination efforts.

In March 2010, the Bank marked its fourteenth year in business. During the past fourteen years, the Company has grown its assets, deposits and customer base significantly and has expanded the depth and breadth of its management team and staff. Also, the Bank has substantially enlarged and improved its branch network and enhanced its operating systems and infrastructure. The Bank was named the U.S. Small Business Administration’s (“SBA”) No. 1 lender in Rhode Island as of September 30, 2010 for the second consecutive year.

The Company continues to better leverage the footprint it has built and investments it has made. The Company continued its commercial loan and lease growth in 2010, with commercial outstandings increasing 6.5% from $732.4 million at the prior year-end to $780.3 million at December 31, 2010. Consumer loans also increased, while residential mortgages declined compared to 2009.

During the year, the Company added $6.9 million to its allowance for loan and lease losses. The provision exceeded net charge-offs by $2.1 million. The increased provision served to strengthen the ratio of the allowance to loans and leases to 1.61 percent at December 31, 2010, up from 1.49 percent at December 31, 2009. Nonperforming loans and leases at December 31, 2010 totaled $16.5 million, down from $18.3 million a year ago. As a percentage of total loans and leases, nonperforming loans and leases ended 2010 at 1.43%, compared to 1.65% at the end of the year in 2009. The Company believes its asset quality indicators continue to compare favorably to its peer group, reflecting a culture of prudence and diligence in its risk management practices and business approach.

In 2010, the Bank’s core deposits increased by $61.4 million, or 8.6%, which was offset by a decrease in certificate of deposit accounts of $39.5 million, or 10.2%. Overall, the Bank increased its total deposits by $21.9 million, or 2.0%, year-over-year. The increase in total deposits reflects the Bank’s strategic efforts to expand its commercial deposit relationships with existing and new customers and sales of retail deposit products through its branch network and in conjunction with consumer lending programs.

In late 2010, the Bank re-opened the Plainfield Pike branch in Cranston. The branch had been utilized as a self-service bank/ATM location since 2007. As of December 31, 2010, the Plainfield Pike branch had gathered deposits totaling $2.8 million. The East Greenwich, Lincoln (both opened in 2005) and Pawtucket branches (opened in 2007) continued to make progress in deposit gathering in 2010. In the aggregate, these branches’ deposit balances totaled $83.3 million at December 31, 2010, representing growth of $6.1 million, or 7.9%, since December 31, 2009.

Despite declining rates on interest-earning assets, the Company continued to proactively manage its balance sheet, resulting in a 31 basis point increase to the net interest margin year over year. Additionally, the Company’s quarterly dividend increased from $0.17 to $0.19 per share in the fourth quarter of 2010.

Noninterest income increased $397,000, or 4.3%, to $9.6 million in 2010 as compared to 2009. Deposit service charges continue to account for over half of the Company’s noninterest income, although decreasing to 54.2% in 2010 from 58.7% in 2009.

The improvement in the net interest margin coupled with management’s focus on controlling expenses drove the decline in the Company’s efficiency ratio from 68.76% in 2009 to 65.43% in 2010.

Lending Activities

The Bank’s business strategy has been to grow its commercial and consumer loan and lease portfolios while allowing its residential mortgage loan portfolio to decline gradually as a percent of total loans and leases. The Bank has allocated substantial resources to its commercial and consumer lending functions to facilitate and promote such growth. From December 31, 2005 through December 31, 2010, commercial loan and lease outstandings have increased $342.0 million, or 78.0%, and represent 67.5% of total loans and leases at December 31, 2010 compared to 46.1% at December 31, 2005. Consumer loan outstandings have increased $3.9 million, or 1.9%, from December 31, 2005 through December 31, 2010, and decreased from 21.7% of total loans and leases at December 31, 2005 to 18.2% of total loans and leases at December 31, 2010. Meanwhile, residential mortgage loans decreased from 32.2% of total loans and leases at December 31, 2005 to 14.3% of total loans and leases at December 31, 2010.

The Bank offers a variety of loan facilities to serve both commercial and consumer borrowers primarily within the State of Rhode Island and nearby areas of Massachusetts. Approximately 65% of Rhode Island businesses, 75% of Rhode Island jobs and 76% of the Rhode Island population are located in Providence and Kent Counties. More than 98% of Rhode Island businesses have fewer than 100 employees. The Bank believes the financing needs of these businesses generally match the Bank’s lending profile and that the Bank’s branches are well-positioned to facilitate the generation of loans from this customer base.

The Bank’s commercial lending function is organized into two groups. The business lending group originates business loans and leases, often referred to as commercial and industrial loans and leases, including owner-occupied commercial real estate loans, term loans, revolving lines of credit and equipment loans and leases (through the Bank’s subsidiary, Macrolease). The commercial real estate group originates nonowner-occupied commercial real estate, multifamily residential real estate and construction loans.

The Bank’s branch network and business development team also play a role in business lending relationships generally under $500,000. Underwriting, processing and monitoring the bulk of business credit relationships under $500,000 million are supported by the Bank’s lending services group. The lending services group also processes and monitors consumer loans. The creation of the lending services group has enhanced the Bank’s ability to reach more borrowers with the same number of personnel as well as achieve more efficient processing and monitoring of these credits.

The Bank also satisfies a variety of consumer credit needs by providing home equity term loans, home equity lines of credit, direct automobile loans, savings secured loans and personal loans, in addition to residential mortgage loans.

The Bank has tiered lending authorities. Certain senior executives have lending approval authority up to $3.0 million. Extensions of credit to a customer relationship greater than established authority levels (up to the Bank’s house lending limit of $10.0 million) require the approval of the Credit Committee, which consists of members of the Bank’s senior management and one outside director. Exceptions to the Bank’s house lending limit require the approval of a committee of the Board of Directors. Other officers have limited lending authorities that can be exercised subject to lending policy guidelines to facilitate production volume and process flow.

The Bank issues loan commitments to prospective borrowers subject to various conditions. Commitments generally are issued in conjunction with commercial loans and residential mortgage loans and typically are for periods up to 90 days. The proportion of the total value of commitments derived from any particular category of loan varies from time to time and depends upon market conditions. At December 31, 2010, the Bank had $250.8 million of aggregate commitments outstanding to fund loans and leases.

Overall, loans and leases produced total interest income of $59.3 million, or 81.5% of total interest and dividend income, in 2010 and $59.8 million, or 79.4% of total interest and dividend income, during 2009.

Commercial Real Estate and Multifamily Loans — The Bank originates loans secured by mortgages on owner-occupied and nonowner-occupied commercial and multifamily residential properties. At December 31, 2010, owner-occupied commercial real estate loans totaled $179.8 million, or 15.6% of the total loan and lease portfolio. Many of these customers have other commercial borrowing relationships with the Bank, as the Bank finances their other business needs. Generally these customer relationships are handled in the Bank’s business lending group. Nonowner-occupied commercial real estate loans totaled $200.8 million, or 17.4% of the total loan and lease portfolio, and multifamily residential loans totaled $79.9 million, or 6.9% of the total loan and lease portfolio, and are generally handled in the Bank’s commercial real estate group. These real estate secured commercial loans are offered as both fixed and adjustable rate products. The Bank typically charges higher interest rates on these loans than those charged on adjustable rate loans secured by one- to four-family residential units. Additionally, the Bank may charge origination fees on these loans.

The Bank’s underwriting practices for permanent commercial real estate and multifamily residential loans are intended to assure that the property securing these loans will generate a positive cash flow after operating expenses and debt service payments. The Bank requires appraisals before making a loan and generally requires the personal guarantee of the borrower. Permanent loans on commercial real estate and multifamily properties generally are made at a loan-to-value ratio of no more than 80%.

Loans secured by nonowner-occupied commercial real estate and multifamily properties involve greater risks than owner-occupied properties because repayment generally depends on the rental income generated by the property. In addition, because the payment experience on loans secured by nonowner-occupied properties is often dependent on successful operation and management of the property, repayment of the loan is usually more subject to adverse conditions in the real estate market or the general economy than is the case with owner-occupied real estate loans. Also, the nonowner-occupied commercial real estate and multifamily residential business is cyclical and subject to downturns, over-building and local economic conditions. See discussion regarding the Bank’s construction lending activities below.

Commercial and Industrial Loans — The Bank originates non-real estate commercial loans that, in most instances, are secured by equipment, accounts receivable or inventory, as well as the personal guarantees of the principal owners of the borrower. Unlike many community banks, the Bank is able to offer asset-based commercial loan facilities that monitor advances against receivables and inventories on a formula basis. A number of commercial and industrial loans are granted in conjunction with the SBA loan guaranty programs and include some form of SBA credit enhancement. The Bank utilizes credit scoring in evaluating business loans of up to $500,000. Commercial lending activities are supported by noncredit products and services, such as letters of credit and cash management services, which are responsive to the needs of the Bank’s commercial customers.

At December 31, 2010, commercial and industrial loans totaled $157.9 million, or 13.7% of the total loan and lease portfolio. Macrolease-generated equipment loans accounted for $40.8 million of the commercial and industrial portfolio. Generally, commercial and industrial loans have relatively shorter maturities than residential and commercial real estate loans, or are at adjustable rates without interest rate caps. Unlike residential and commercial real estate loans, which generally are based on the borrower’s ability to make repayment from employment and rental income and which are secured by real property whose value tends to be relatively easily ascertainable, commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the business and are generally secured by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial and industrial loans may be significantly dependent on the success of the business itself. Further, the collateral securing the loans may be difficult to value, may fluctuate in value based on the success of the business and may deteriorate over time.

Leases — At December 31, 2010, leases comprised 5.9% of the total loan and lease portfolio. In May 2005, the Bank, through its Macrolease subsidiary, purchased substantially all of the operating assets of Macrolease International Corporation, a privately held national equipment financing company based on Long Island in Plainview, New York. With the Macrolease platform, the Bank originates equipment leases for its own portfolio, as well as originating leases for third parties as a source of noninterest income. From time to time, Macrolease purchases leases from third parties. Macrolease-generated leases were $47.5 million at December 31, 2010. Leases sold during 2010 totaled $1.2 million, which generated $65,000 of noninterest income.

In addition to the Macrolease platform, the Bank purchases equipment leases from originators outside of the Bank. The U.S. Government and its agencies are the principal lessees on the purchased leases. These “government” leases generally have maturities of less than fifteen years and are not made dependent on residual collateral values. At December 31, 2010, the commercial loan and lease portfolio included $19.9 million of purchased government leases.

Small Business Loans — The Bank utilizes the term “small business loans” to describe business lending relationships of approximately $500,000 or less which it originates through business development officers and its branch network. These loans are generally secured by the assets of the business, as well as the personal guarantees of the business’ principal owners. A number of these loans are granted in conjunction with the SBA’s Low-Doc and Express programs and include some form of SBA credit enhancement. At December 31, 2010, small business loans totaled $62.8 million, or 5.4% of the total loan and lease portfolio. Generally, small business loans are granted at higher rates than commercial and industrial loans. These loans have relatively short-term maturities or are at adjustable rates without interest rate caps.

The Bank’s underwriting practices for small business loans are designed to provide quick turn-around and minimize the fees and expenses to the customer. Accordingly, the Bank utilizes a credit scoring process to assist in evaluating potential borrowers. The Bank distinguishes itself from larger financial institutions by providing personalized service through a branch manager or business development officer assigned to the customer relationships. Lending to small businesses may involve additional risks as a result of their more limited financial and personnel resources.

Construction Loans — The Bank originates residential construction loans to builders to construct one- to four-family residential units for resale. The Bank also makes construction loans for the purpose of constructing multifamily or commercial properties. At December 31, 2010, outstanding construction loans totaled $30.3 million, or 2.6% of the total loan and lease portfolio. During the construction period, these loans are generally on an interest-only basis.

The Bank’s underwriting practices for construction loans are similar to those for commercial real estate loans, but they also are intended to assure completion of the project and take into account the feasibility of the project, among other things. As a matter of practice, the Bank generally lends an amount sufficient to pay a percentage of the property’s acquisition costs and a majority of the construction costs, but requires that the borrower have equity in the project. The Bank requires property appraisals and generally the personal guarantee of the borrower, as is the case with commercial real estate loans.

The risks associated with construction lending are greater than those with commercial real estate lending and multifamily lending on existing properties for a variety of reasons. The Bank seeks to minimize these risks by, among other things, often using the inspection services of a consulting engineer for commercial construction loans, advancing money during stages of completion and generally lending for construction of properties within its market area to borrowers who are experienced in the type of construction for which the loan is made, as well as by adhering to the lending standards described above. The Bank generally requires from the borrower evidence of either pre-sale or pre-lease commitments on certain percentages of the construction project for which the loan is made.

Residential Mortgage Loans — The Bank’s one- to four-family residential mortgage loan portfolio consists primarily of whole loans purchased from other financial institutions. In past years, the Bank purchased fixed- and adjustable-rate (“ARM”) mortgage whole loans from other financial institutions both in New England and elsewhere in the country. The Bank performed due diligence procedures when purchasing these mortgages considering the loan characteristics such as debt to income ratio, loan to value ratio, credit score, property type and the level of credit enhancement. Although the Bank has not purchased any mortgages since 2007, the Bank anticipates continuing to purchase residential mortgage loans to the extent its commercial and consumer loan originations are not sufficient to fully utilize available cash flows and opportunities to purchase desirable loans exist. With the exception of approximately $26.0 million of purchased mortgages, servicing rights related to the whole loan mortgage portfolio are retained by the mortgage servicing companies. The Bank pays a servicing fee ranging from .25% to .375% to the mortgage servicing companies for administration of the loan portfolios. As of December 31, 2010, approximately 28% of the residential mortgage loan portfolio consisted of loans secured by real estate outside of New England.

Historically, the Bank has offered fixed- and variable-rate mortgages through its branch network as an accommodation to its customers. In 2010, the Bank began a modest first mortgage origination effort, hiring three originators and intending to sell or portfolio these loans as the Bank’s balance sheet and fee income needs dictate. The Bank originated $26.3 million of mortgage loans for its portfolio during 2010, compared to $3.5 million in 2009. Fees from mortgage loans originated for third parties decreased to $62,000 from $83,000 in the prior year. Overall, the Bank anticipates that its residential mortgage loan portfolio will decline long-term as it continues to focus its resources on commercial and consumer lending.

At December 31, 2010, one- to four-family residential mortgage loans totaled $164.9 million, or 14.3% of the total loan and lease portfolio. The fixed rate portion of this portfolio totaled $57.9 million and had original maturities of 15 to 30 years. The adjustable rate portion of this portfolio totaled $106.3 and generally had original maturities of 30 years. Interest rates on adjustable rate loans are set for an initial period of one, three, five, seven or ten years with annual adjustments for the remainder of the loan. These loans have periodic rate adjustment caps of primarily 2% and lifetime rate adjustment caps of either 5% or 6%. There are no prepayment penalties for the one- to four-family residential mortgage loans.

Although adjustable rate mortgage loans allow the Bank to increase the sensitivity of its assets to changes in market interest rates, the terms of such loans include limitations on upward and downward rate adjustments. These limitations increase the likelihood of prepayments due to refinancings during periods of falling interest rates, particularly if rate adjustment caps keep the loan rate above market rates. Additionally, these limitations could keep the market value of the portfolio below market during periods of rising interest rates, particularly if rate adjustment caps keep the loan rate below market rates.

Consumer and Other Loans — The Bank originates a variety of term loans and lines of credit for consumers. At December 31, 2010, the consumer loan portfolio totaled $210.3 million, or 18.2% of the total loan and lease portfolio. Over the past five years, consumer loans have increased by $3.9 million, or 1.9%. Compared to the prior year-end, consumer loans have increased by $4.2 million, or 2.0%.

Home equity term loans and home equity lines of credit comprised 98.8% of the consumer loan portfolio at December 31, 2010. These loans and lines of credit are generally offered for up to 80% of the appraised value of the borrower’s home, less the amount of the remaining balance of the borrower’s first mortgage. The Bank also offers direct automobile loans, savings secured loans and personal loans.

Asset Quality

As economic conditions began to improve in 2010, nonperforming assets and net charge-offs declined compared to the prior year. At December 31, 2010, the Company had nonperforming assets of $17.6 million, or 1.10% of total assets, compared to $20.0 million, or 1.26% of total assets, at December 31, 2009. The Bank made additions to the allowance for loan and lease losses of $6.9 million and $9.9 million during 2010 and 2009 and experienced net charge-offs of $4.7 million and $8.0 million, respectively. At December 31, 2010, the allowance for loan and lease losses was $18.7 million and represented 1.61% of total loans and leases outstanding. This compares to an allowance for loan and lease losses of $16.5 million, representing 1.49% of total loans and leases outstanding at December 31, 2009. If current economic conditions worsen, management believes that the level of nonperforming assets will increase, as will its level of charged-off loans and leases.

Investment Activities

Investments, an important component of the Company’s diversified asset structure, are a source of earnings in the form of interest and dividends, and provide a source of liquidity to meet lending demands and fluctuations in deposit flows. Overall, the portfolio, comprised primarily of overnight investments, government sponsored enterprise (“GSE”) obligations, mortgage-backed securities (“MBSs”), collateralized mortgage obligations (“CMOs”) and Federal Home Loan Bank of Boston (“FHLB”) stock, represented $376.7 million, or 23.5% of total assets, as of December 31, 2010. The majority of these securities are rated investment grade by at least one major rating agency.

Loans and leases generally provide a better return than investments, and accordingly, the Company seeks to emphasize their generation rather than increasing its investment portfolio. The investments are managed by the Bank’s Chief Financial Officer and Treasurer, subject to the supervision and review of the Asset/Liability Committee and are made in compliance with the Investment Policy approved by the Bank’s Board of Directors.

Overall, in 2010, investments produced total interest and dividend income of $13.5 million, or 18.5%, of total interest and dividend income compared to $15.5 million, or 20.6% of total interest and dividend income, during 2009.

Deposits and Service Charges on Deposit Accounts

Deposits are the principal source of funds for use in lending and for other general business purposes. The Bank attracts deposits from businesses, non-profit entities, governmental entities and the general public by offering a variety of deposit products ranging in maturity from demand-type accounts to certificates of deposit (“CDs”). The Bank relies mainly on quality customer service and diversified products, as well as competitive pricing policies and advertising, to attract and retain deposits. The Bank emphasizes retail deposits obtained locally.

The Bank seeks to develop relationships with its customers in order to become their primary bank. In order to achieve this, the Bank has stressed growing its core deposit account base. Core deposits increased $61.4 million, or 8.6%, compared to the prior year. Within core deposits, demand deposit and money market accounts increased to $264.3 million and $96.3 million, respectively, at December 31, 2010 from $204.3 million and $65.1 million, respectively, at December 31, 2009, while savings balances declined to $341.7 million at December 31, 2010, a decrease of $25.6 million, or 7.0%. Core deposits as a percentage of total deposits increased to 69.0% at December 31, 2010 from 64.8% at December 31, 2009. Certificate of deposit accounts decreased $39.5 million, or 10.2%, to $347.6 million at December 31, 2010. Overall, total deposits increased $21.9 million, or 2.0%, at December 31, 2010 as compared to the prior year.

As a by-product of the Bank’s emphasis on checking account growth, as well as deposit fee enhancement programs, service charges on deposit accounts, which include nonsufficient funds (“NSF”) fees, have grown over the years and represent the largest source of noninterest income for the Company. Service charges on deposit accounts decreased by $199,000, or 3.7%, from $5.4 million for 2009, to $5.2 million for 2010. Management believes the decline was caused primarily by two factors. Effective July 1, 2010, the Board of Governors of the Federal Reserve System (“FRB”) changed its consumer electronic funds transfer regulation (“Regulation E”), limiting the ability of financial institutions to charge NSF fees in certain circumstances. These changes require financial institutions to obtain consumer consent, or require customers to “opt-in”, before charging a consumer for paying overdrafts on automated teller machine and one-time debit card transactions. These restrictions on NSF fees have reduced the Bank’s noninterest income. In addition to the changes to Regulation E, the recessionary environment has prompted consumers’ caution and aversion to unnecessary spending. If this trend continues or worsens, noninterest income may remain at or further decline from levels previously experienced. Additionally, there is legislation pending in the U.S. Senate to further restrict NSF fees by limiting the number of overdrafts for which a financial institution may charge a consumer to one per month with an annual limit of six overdraft fees. If enacted, the proposed change is likely to have further negative effects on the Bank’s noninterest income.

The Bank generally charges early withdrawal penalties on its CDs in an amount equal to three months’ interest on accounts with original maturities of one year or less and six months’ interest on accounts with original maturities longer than one year. Interest credited to an account during any term may be withdrawn without penalty at any time during the term. Upon renewal of a CD, only interest credited during the renewal term may be withdrawn without penalty during the renewal term. The Bank’s withdrawal penalties are intended to offset the potentially adverse effects of the withdrawal of funds during periods of rising interest rates.

As a general policy, the Bank reviews the deposit accounts it offers to determine whether the accounts continue to meet customers’ needs and the Bank’s asset/liability management goals. This review is the responsibility of the Pricing Committee, which meets weekly to determine, implement and monitor pricing policies and practices consistent with the Bank’s Asset/Liability Committee’s strategy, as well as overall earnings and growth goals. The Pricing Committee analyzes the cost of funds and also reviews the pricing of deposit related fees and charges.

Borrowings and Liquidity

The Bank derives cash flows from several sources, including loan and lease repayments, deposit inflows and outflows, sales of available for sale securities and FHLB and other borrowings. Loan and lease repayments and deposit inflows and outflows are significantly influenced by prevailing interest rates, competition and general economic conditions. To broaden its liquidity sources, the Bank uses such resources as brokered deposits and repurchase agreements.

The Bank utilizes borrowings on both a short- and long-term basis to compensate for reductions in normal sources of funds on a daily basis and as opportunities present themselves. The Bank will utilize borrowings and invest excess cash as part of its overall strategy to manage interest rate risk. At December 31, 2010, total borrowings were $335.3 million compared to $350.8 million at December 31, 2009.

Nondeposit Investment Products and Services

Since January 2001, the Bank has managed a nondeposit investment program through which it makes available to its customers a variety of mutual funds, fixed- and variable-annuities, stocks, bonds and other fee-based products. These investment products are primarily offered through an arrangement with Commonwealth Equity Services, Inc., of Waltham, Massachusetts (“Commonwealth”). Commissions on nondeposit investment products for the years ending December 31, 2010 and 2009 were $740,000 and $776,000, respectively.

Employees

At December 31, 2010, the Company had 249 full-time and 25 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 that includes health and dental insurance, life and long-term disability insurance and a 401(k) plan.

Supervision and Regulation

Overview — The Company and the Bank are subject to extensive governmental regulation and supervision. Federal and state laws and regulations govern numerous matters affecting the Bank and/or the Company, including changes in the ownership or control, maintenance of adequate capital, financial condition, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. These regulations are intended primarily for the protection of depositors and customers, rather than for the benefit of shareholders. Compliance with such regulation involves significant costs to the Company and the Bank and may restrict their activities. In addition, the passage of new or amended federal and state legislation could result in additional regulation of, and restrictions on, the operations of the Company and/or the Bank. The Company cannot predict whether any legislation currently under consideration will be adopted or how such legislation or any other legislation that might be enacted in the future would affect the business of either the Company or the Bank. The following descriptions of applicable statutes and regulations are not intended to be complete descriptions of these provisions or their effects on the Company and the Bank, but are brief summaries which are qualified in their entirety by reference to such statutes and regulations.

The Company and the Bank are subject to extensive periodic reporting requirements concerning financial and other information. In addition, the Bank and the Company must file such additional reports as the regulatory and supervisory authorities may require. The Company also is subject to the reporting and other dictates of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the Sarbanes-Oxley Act of 2002. As a listed company on NASDAQ, the Company is subject to NASDAQ rules for such companies. Since 2002, changes to SEC and NASDAQ rules have accelerated the reporting of numerous internal events and increased the Company’s filing obligations and related costs.

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). As a bank holding company, the Company is regulated and supervised by the FRB. In addition, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Act (“Dodd-Frank Act”), the FDIC has backup enforcement authority over a depository institution holding company, such as the Company, if the conduct or threatened conduct of such holding company poses a risk to the Deposit Insurance Fund (“DIF”), although such authority may not be used if such holding company is generally in sound condition and does not pose a foreseeable and material risk to the DIF. The Company is also subject to certain laws of the State of Rhode Island.

The Bank is a Rhode Island chartered non-member bank of the Federal Reserve System. The Bank’s deposits are insured by the DIF of the FDIC. Accordingly, the Bank is subject to regulation, supervision and examination by the FDIC and the Rhode Island Department of Business Regulation (“Department of Business Regulation”).

Rhode Island Regulation

As a state chartered financial institution, the Bank is subject to the continued regulation and supervision and periodic examination by the Department of Business Regulation. Rhode Island law also imposes reporting requirements on the Bank. Rhode Island statutes and regulations govern among other things, investment powers, deposit activity, trust powers and borrowings. The approval of the Department of Business Regulation is required to establish, close or relocate a branch, merge with other banks, amend the Bank’s Charter or By-laws and undertake certain other enumerated activities.

If it appears to the Department of Business Regulation that a Rhode Island bank has violated its charter, or any law or regulation, or is conducting its business in an unauthorized or unsafe manner, or that the bank has been notified by its federal insurer of such insurer’s intent to terminate deposit insurance, the Director of the Department of Business Regulation (“Director”) may, under certain circumstances, restrict the withdrawal of deposits, order any person to cease violating any Rhode Island statutes or rules and regulations or cease engaging in any unsafe, unsound or deceptive banking practice, order that capital be restored, or suspend or remove directors, committee members, officers or employees who have violated the Rhode Island banking statutes, or a rule or regulation or order thereunder, or who are reckless or incompetent in the conduct of the bank’s business.

Rhode Island law also requires any person or persons desiring to acquire “control,” as defined in the BHC Act, of any Rhode Island financial institution to file an extensive application with the Director. The application requires detailed information concerning the bank, the transaction and the principals involved. The Director may disapprove the acquisition if the proposed transaction would result in a monopoly, the financial stability of the institution would be jeopardized, the proposed management lacks competence, or the acquisition would not promote public convenience and advantage. The Company is also subject to the Rhode Island Business Combination Act.

In addition, whenever the Department of Business Regulation considers it advisable, the Department may conduct an examination of a Rhode Island bank holding company, such as the Company. Every Rhode Island bank holding company also must file an annual financial report with the Department of Business Regulation.

Federal Supervision: FDIC

Overview — The FDIC issues rules and regulations, conducts periodic inspections, requires the filing of certain reports and generally supervises the operations of its insured state chartered banks that, like the Bank, are not members of the Federal Reserve System. The FDIC’s powers have been enhanced in the past two decades by federal legislation. With the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Crime Control Act of 1990, and the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), federal bank regulatory agencies, including the FDIC, were granted substantial additional enforcement powers to restrict the activities of financial institutions and to impose or seek the imposition of increased civil and/or criminal penalties upon financial institutions and the individuals who manage or control such institutions.

The Bank is subject to the FDIC regulatory capital requirements described below under “Regulatory Capital Requirements.” An FDIC-insured bank also must conform to certain standards, limitations, and collateral requirements with respect to certain transactions with affiliates such as the Company. Further, an FDIC-insured bank is subject to laws and regulations that limit the amount of, and establish required approval procedures, reporting requirements and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Company, the Bank, and any subsidiary of the Bank, and to their related interests. FDIC approval also is required prior to the Bank’s redemption of any stock. The prior approval of the FDIC or, in some circumstances, another regulatory agency, is required for mergers and consolidations. In addition, notice to the FDIC is required prior to the closing of any branch office, and the approval of the FDIC is required in order to establish or relocate a branch facility.

Proceedings may be instituted against any FDIC-insured bank, or any officer or director or employee of such bank and any other institution affiliated parties who engage in unsafe and unsound practices, breaches of any fiduciary duty, or violations of applicable laws, regulations, regulatory orders and agreements. The FDIC has the authority to terminate insurance of accounts, to issue orders to cease and desist, to remove officers, directors and other institution affiliated parties, and to impose substantial civil money penalties.

Deposit Insurance — The Bank’s deposits are insured by the DIF of the FDIC to the legal maximum for each separately insured depositor. Under the Dodd-Frank Act, a permanent increase in deposit insurance was authorized to $250,000 (insurance coverage had previously been temporarily raised to that level until December 31, 2013). The coverage limit is per depositor, per insured depository institution for each account ownership category.

On October 14, 2008, the FDIC instituted a Transaction Account Guarantee Program (“TAG program”) that provided for temporary unlimited FDIC coverage of noninterest-bearing deposit transaction accounts, NOW (interest-bearing deposit) accounts earning no more than 0.50% interest and IOLTAs (lawyers’ trust accounts). Coverage under the TAG program, funded through DIF assessments paid by participating financial institutions, was in addition to and separate from the additional coverage announced under the Emergency Economic Stabilization Act of 2008. In August 2009, the FDIC extended the TAG program through June 30, 2010 and, in June 2010, again extended the program for an additional six months, from July 1, 2010 to December 31, 2010. The rule required that interest rates on qualifying NOW accounts offered by banks participating in the program be reduced to 0.25% from 0.50%. The rule provided for an additional extension of the TAG program, without further rulemaking, for a period of time not to exceed December 31, 2011. The Bank elected to participate in the TAG program through the extended period. The DIF assessment for 2009 was 10 basis points and in 2010 ranged from 15 basis points to 25 basis points, depending on the institution’s Risk Category. In July 2010, the Dodd-Frank Act was enacted, which provides for unlimited deposit insurance for noninterest-bearing transactions accounts (excluding NOW accounts, but including IOLTAs) beginning December 31, 2010 for a period of two years. Insured financial institutions are not permitted to opt out of this insurance program and the FDIC will not charge a separate DIF assessment for this coverage.

The Federal Deposit Insurance Act, as amended (“FDIA”), provides that the FDIC shall set deposit insurance assessment rates on a semiannual basis and requires the FDIC to increase deposit insurance assessments whenever the ratio of DIF reserves to insured deposits in the DIF falls below a specified percentage. The DIF reserve ratio calculated by the FDIC at September 30, 2010 was a negative 0.15%. The Dodd-Frank Act increased the required minimum DIF reserve ratio from 1.15% to 1.35% of estimated insured deposits. The FDIC is required to attain this ratio by September 30, 2020.

The FDIC has established a risk-based bank assessment system, the rates of which are determined on the basis of a particular institution’s supervisory rating and capital level. For 2007, assessment rates for well-managed, well-capitalized institutions ranged from $0.05 to $0.07 per $100 of deposits annually. In 2007, the FDIC issued one-time assessment credits that could be used to offset this expense. The Bank paid a minimum assessment of $2,000 in 2007, largely through the utilization of this one-time credit. In 2008, the Bank fully utilized the remainder of this credit.

In December 2008, the FDIC adopted a rule that amended the system for risk-based assessments and changed assessment rates in an attempt to restore targeted reserve ratios in the DIF. Effective January 1, 2009, the risk-based assessment rates were uniformly raised by seven basis points (annualized). On February 27, 2009, the FDIC further modified the risk-based assessment system, effective April 1, 2009, to effectively require larger risk institutions to pay a larger share of the assessment. The rule also provided incentives for institutions to hold long-term unsecured debt and, for smaller institutions, high levels of Tier I capital. The initial base assessment rates range from $0.12 to $0.45 per $100 of deposits annually. After potential adjustments related to unsecured debt, secured liabilities and brokered deposit balances, the final total assessment rates range from $0.07 to $0.775 per $100 of deposits annually. Initial base assessment rates for well-managed, well-capitalized institutions ranged from $0.12 to $0.16 per $100 of deposits annually.

On May 22, 2009, the FDIC imposed a 5 basis point special assessment on the assets less Tier I capital as of June 30, 2009 of all FDIC-insured institutions. The FDIC is authorized to levy an additional 5 basis points in special assessments. Instead of imposing additional special assessments during 2009, the FDIC required all insured depository institutions to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30, 2009. For purposes of estimating the future assessments, each institution’s base assessment rate in effect on September 30, 2009 was used, increased by three basis points beginning in 2011, and the assessment rate was adjusted quarterly for an estimated 5% annual growth rate. The prepaid assessment will be applied against actual quarterly assessments until exhausted, with any funds remaining after June 30, 2013 to be returned to the institution. Requiring this prepaid assessment does not preclude the FDIC from changing assessment rates or from further revising the risk-based assessment system. The Bank prepaid $6.5 million of the assessment on December 30, 2009 and $4.3 million remained as a prepaid balance at December 31, 2010.

The Dodd-Frank Act will have a significant impact on the calculation of deposit insurance assessment premiums going forward. Specifically, the Dodd-Frank Act generally requires the FDIC to define the deposit insurance assessment base for an insured depository institution as an amount equal to the institution’s average consolidated total assets during the assessment period minus average tangible equity. The FDIC issued a final rule that implements this change to the assessment calculation on February 7, 2011. The new rule retains the risk category system for small insured depository institutions like the Bank (i.e., with less than $10 billion in assets), assigning each institution to one of four risk categories based upon the institution’s capital evaluation and supervisory evaluation. For “large institutions” (i.e., institutions with at least $10 billion in assets) and “highly complex institutions” the rule eliminates risk categories and the use of long-term debt issuer ratings for calculating risk-based assessments and requires the use of a “scorecard” that combines an institution’s CAMELS ratings with certain forward-looking financial information to measure the risk to the DIF. The total base assessment rates for small institutions will be between 0.5 and 45 basis points, while assessment rates for large institutions and highly complex institutions will be between 2.5 and 45 basis points, with the minimum and maximum determined by the DIF reserve ratio at the time.

According to the FDIC press release, the new pricing system for large institutions and highly complex institutions will result in higher assessment rates for banks with high-risk asset concentration, less stable balance sheet liquidity or potential higher loss severity in the event of a failure. The new rule will take effect for the second quarter of 2011 and will be reflected in the invoices for assessments due September 30, 2011. However, because the Dodd-Frank Act requires that several changes be made to the Consolidated Reports of Condition and Income (“Call Report”) and the Thrift Financial Report, the effective date is contingent upon these changes being made and may be delayed.

The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines that the institution had engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by the FDIC.

Safety and Soundness Standards — The FDIA also directs each federal banking agency to prescribe standards for safety and soundness for insured depository institutions and their holding companies relating to operations, management, asset quality, earnings and stock valuation.

Examination — The FDIC requires that nearly all insured depository institutions have annual, on-site regulatory examinations and annual audits by an independent public accountant. Management must prepare an annual report, attested to by the independent public accountant, confirming management’s responsibility in preparing financial statements, maintaining internal controls for financial reporting and complying with safety and soundness standards. The audit process must be overseen by an independent audit committee composed of outside directors, provided that the federal banking agencies may permit the committee to include inside directors if the bank is unable to find competent outside directors, so long as outside directors comprise a majority of the committee.

Federal Supervision: FRB

The BHC Act mandates that the prior approval of the FRB must be obtained in order for the Company to engage in certain activities such as acquiring or establishing additional banks or non-banking subsidiaries or merging with other institutions and imposes capital adequacy requirements as described below under “Regulatory Capital Requirements.”

Regulatory Capital Requirements

FDIC Requirements — FDIC-insured institutions must meet specified minimal capital requirements and are subject to varying regulatory restrictions based upon their capital levels. All banks are subject to restrictions on capital distributions (such as dividends, stock repurchases and redemptions) and payment of management fees if, after making such distributions or payment, the institution would be undercapitalized. FDIC-insured banks that have the highest regulatory rating and are not anticipating or experiencing significant growth are required to maintain a capital ratio calculated using Tier I capital (as defined below) to total assets (“Tier I Leverage Ratio”) of at least 3.0%. All other banks are required to maintain a minimum leverage capital ratio of 1.0% to 2.0% above 3.0%, with a minimum of 4.0%.

In addition, the FDIC has adopted capital guidelines based upon ratios of a bank’s capital to total assets adjusted for risk, which require FDIC-insured banks to maintain capital-to-risk weighted asset ratios based on Tier I capital (“Tier I Risk-Based Capital Ratio”) of at least 4.0% and on total capital (“Total Risk-Based Capital Ratio”) of at least 8.0%. The guidelines provide a general framework for assigning assets and off-balance sheet items (such as standby letters of credit) to broad risk categories and provide procedures for the calculation of the Risk-Based Capital Ratio. Tier I (sometimes referred to as “core”) capital consists of common shareholders’ equity, qualifying, non-cumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries. “Supplementary” or Tier 2 capital includes perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. Certain intangible assets are deducted in computing the Capital Ratios.

Prompt Corrective Action Provisions — In order to resolve the problems of undercapitalized institutions, FDICIA established a system known as “prompt corrective action.” Under prompt corrective action provisions and implementing regulations, every institution is classified into one of five categories reflecting the institution’s capitalization. These categories are the following: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. For an institution to be well-capitalized, it must have a Total Risk-Based Capital Ratio of at least 10%, a Tier I Risk-Based Capital Ratio of at least 6% and a Tier I Leverage Ratio of at least 5% and not be subject to any specific capital order or directive. In contrast, an institution will be deemed to be significantly undercapitalized if it has a Total Risk-Based Capital Ratio that is less than 6%, or a Tier I Risk-Based Capital Ratio that is less than 3%, or a leverage ratio that is less than 3%, and will be deemed to be critically undercapitalized if the bank has a ratio of tangible equity to total assets that is equal to or less than 2%.

As of December 31, 2010, the Bank’s Tier I Leverage Ratio was 8.00%, its Tier I Risk-Based Capital Ratio was 11.13% and its Total Risk-Based Capital Ratio was 12.39%. Based upon the above ratios, the Bank is considered “well-capitalized” for regulatory capital purposes.

The activities in which a depository institution may engage and the remedies available to federal regulators vary depending upon the category described above into which an institution’s level of capital falls. At each successive downward capital level, institutions are subject to more restrictions on their activities. For example, only “well-capitalized” institutions may accept brokered deposits without prior regulatory approval (brokered deposits are defined to include deposits with an interest rate which is 75 basis points (“bps”) above prevailing rates paid on similar deposits in an institution’s normal market area).

The FDIC has broad powers to take prompt corrective action to resolve problems of insured depository institutions, depending upon a particular institution’s level of capital. For example, a bank which does not meet applicable minimum capital requirements or is deemed to be in a “troubled” condition may be subject to additional restrictions, including a requirement of written notice to federal regulatory authorities prior to certain proposed changes in senior management or directors of the institution. Undercapitalized, significantly undercapitalized and critically undercapitalized institutions also are subject to a number of other requirements and restrictions.

FRB Requirements — A bank holding company is required by the FRB to adhere to certain capital adequacy standards. It is the position of the FRB that a bank holding company, such as the Company, should be a source of financial strength to its subsidiary banks such as the Bank. In general, the FRB has adopted substantially identical capital adequacy guidelines as the FDIC. Such standards are applicable to bank holding companies and their bank subsidiaries on a consolidated basis for holding companies, like the Company, with consolidated assets in excess of $150 million. If a bank holding company’s capital levels fall below the minimum requirements established by the capital adequacy guidelines, the holding company will be expected to develop and implement a plan, acceptable to the FRB, to achieve adequate levels of capital within a reasonable time. Until such capital levels are achieved, the holding company may be denied approval by the FRB for certain activities such as those described in the preceding paragraph.

The Dodd-Frank Act requires the FRB to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier I capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. As of December 31, 2010, the Company had $13.4 million outstanding of subordinated deferrable interest debentures issued to its three statutory trust subsidiaries. The statutory trust subsidiaries have then participated in the issuance of pooled trust preferred securities. These trust preferred securities were issued prior to May 19, 2010 and, therefore, are eligible to be included in the Company’s Tier I capital. As of December 31, 2010, on a consolidated basis, the Company’s Tier I Leverage Ratio was 8.10%, its Tier I Risk-Based Capital Ratio was 11.27% and its Total Risk-Based Capital Ratio was 12.53%. Based upon the above ratios, the Company is considered “well-capitalized” for regulatory capital purposes.

U.S. Treasury Capital Purchase Program — On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”), became law, giving the U.S. Department of the Treasury (“Treasury”) authority to take certain actions to restore liquidity and stability to the U.S. banking markets. Based upon its authority in the EESA, the Treasury established a number of programs, including the Capital Purchase Program (“CPP”). Pursuant to the CPP, the Treasury purchased senior preferred stock, along with warrants to purchase common stock, from certain financial institutions. During the time the Treasury holds securities issued pursuant to this program, participating financial institutions are required to comply with (1) certain provisions regarding executive compensation paid to senior executives and certain other highly compensated employees, and (2) corporate governance disclosure and certification requirements. Participation in this program also imposes certain restrictions upon an institution’s dividends to common shareholders and stock repurchase activities.

In December 2008, the Company became a participant in the CPP and issued the Treasury $30 million of preferred stock and a warrant to purchase 192,967 shares of common stock at an exercise price of $23.32 per share. In the third quarter of 2009, the Company repurchased the preferred stock and common stock warrant and exited the CPP. The repurchase of the preferred stock resulted in the recognition of $1.3 million in prepayment charges on the discount associated with its issuance. During the eight months the Company was a CPP participant, it was subject to the restrictions and requirements described above.

As previously mentioned, as of December 31, 2010, the Company and the Bank remained well-capitalized under the standards established by the FRB and FDIC. The Company’s tangible common equity ratios of 7.31% and 6.87% at December 31, 2010 and 2009, respectively, also demonstrate the Company’s capital strength.

Basel Accord — U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision (“Basel Committee”), continue to consider and to make changes to the risk-based capital adequacy framework, which could affect the appropriate capital guidelines to which the Company and the Bank are subject.

In 2005, the federal banking agencies issued an advance notice of proposed rulemaking concerning potential changes in the risk-based capital rules (“Basel 1-A”) that are designed to apply to and potentially reduce the risk capital requirements of bank holding companies, such as the Company, that are not among the “core” 20 or so largest U.S. bank holding companies (“Core Banks”). In December 2006, the FDIC issued a revised Interagency Notice of Proposed Rulemaking concerning Basel 1-A, which would allow banks and bank holding companies that are not among the Core Banks to either adopt Basel 1-A or remain subject to the existing risk-based capital rules. In July 2007, an interagency press release stated that the federal banking agencies have agreed to issue a proposed rule that would provide non-Core Banks with the option to adopt an approach consistent with the standardized approach of Basel II. This proposal would replace Basel 1-A. In December 2007, the federal banking agencies issued the final regulation that will implement Basel II for the Core Banks, permitting only the advanced approach. The final rule implementing Basel II reiterated that non-Core Banks would have the option to take the standardized approach. The rule also allows a banking organization’s primary Federal supervisor to determine whether the application of the rule would not be appropriate in light of the bank’s asset size, level of complexity, risk profile or scope of operations. The Bank is currently not required to comply with Basel II.

In December 2009, the Basel Committee on Banking Supervision released for comment a proposal to strengthen global capital regulations, with additional guidance published in July and September 2010. These capital reforms, which have become known as “Basel III”, were endorsed by the G20 at the summit held in Seoul, South Korea in November 2010. The key elements of Basel III include raising the quality, consistency and transparency of the capital base, strengthening the risk coverage of the capital framework, introducing a leverage ratio that is different from the U.S. leverage ratio measures and promoting the build-up of capital buffers. Many detailed elements of Basel III proposals remain to be finalized in 2011 and would then need to be implemented by U.S. regulators. As proposed, Basel III would be phased in over a four-year period up to 2019 when full implementation would have been achieved.

The Dodd-Frank Act contains several provisions relating to capital requirements for U.S. banking institutions. For example, the so-called “Collins Amendment” requires U.S. regulators to impose more stringent capital requirements on U.S. institutions. Although Basel III and the Dodd-Frank Act have similar objectives, there are differences in the capital requirements imposed by the Dodd-Frank Act and the standards proposed under Basel III. There are also important differences in the implementation schedules.

The short-term and long-term impact of the new Basel III capital standards and the forthcoming new capital rules to be proposed for non-Basel III U.S. banks is uncertain. Although any U.S. proposal would apply to banking organizations subject to the Basel II regime to which the Company is not currently subject, the proposal might also impact the Company and other banking organizations.

Restrictions on Transactions with Affiliates and Insiders

The Bank is subject to certain federal statutes limiting transactions with non-banking affiliates and insiders. Section 23A of the Federal Reserve Act limits loans or other extensions of credit to, asset purchases with and investments in, affiliates of the Bank, such as the Company, to ten percent (10%) of the Bank’s capital and surplus. Further, such loans and extensions of credit, as well as certain other transactions, are required to be secured in specified amounts. Section 23B of the Federal Reserve Act, among other things, requires that certain transactions between the Bank and its affiliates must be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. In the absence of comparable transactions, any transaction between the Bank and its affiliates must be on terms and under circumstances, including credit standards that in good faith would be offered to or would apply to nonaffiliated persons.

The restrictions on loans to officers, directors, principal shareholders and their related interests (collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all institutions and their subsidiaries. These restrictions include limits on loans to one borrower and conditions that must be met before such loans can be made. Loans made to insiders and their related interests cannot exceed the institution’s total unimpaired capital and surplus. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. All extensions of credit by the Bank to its insiders are in compliance with these restrictions and limitations.

The Dodd-Frank Act changed the definition of “covered transaction” in Sections 23A and 23B and limitations on asset purchases from insiders. With respect to the definition of “covered transaction,” the Dodd-Frank Act defines that term to include the acceptance of debt obligations issued by an affiliate as collateral for a bank’s loan or extension of credit to another person or company. In addition, a “derivative transaction” with an affiliate is now deemed to be a “covered transaction” to the extent that such a transaction causes a bank or its subsidiary to have a credit exposure to the affiliate. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. The Dodd-Frank Act will additionally prohibit an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.

Loans outstanding to executive officers and directors of the Bank, including their immediate families and affiliated companies (“related parties”), aggregated $8.6 million at December 31, 2010 and $8.4 million at December 31, 2009. Loans to related parties are made in the ordinary course of business under normal credit terms, including interest rates and collateral, prevailing at the time of origination for comparable transactions with other unaffiliated persons, and do not represent more than normal credit risk.

Interstate Banking

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal Act”) permits interstate banking and branching, which allows banks to expand nationwide through acquisition, consolidation or merger. Under this law, an adequately capitalized and managed bank holding company may acquire banks in any state or merge banks across state lines if permitted by state law. Further, banks may establish and operate branches in any state subject to the restrictions of applicable state law. Under Rhode Island law, an out-of-state bank or bank holding company may merge with or acquire a Rhode Island state-chartered bank or bank holding company if the law of the state in which the acquiring bank is located permits such merger.

The Dodd-Frank Act eliminates interstate branching restrictions that were implemented as part of the Riegle-Neal Act, and removes many restrictions on de novo interstate branching by national and state-chartered banks. The FDIC and the Office of the Comptroller of the Currency (“OCC”) now have authority to approve applications by insured state nonmember banks and national banks, respectively, to establish de novo branches in states other than the bank’s home state to the same extent as a bank chartered by that state would be permitted to branch. Accordingly, banks will be able to enter new markets more freely.

Gramm-Leach-Bliley Act

In late 1999, Congress enacted the Gramm-Leach-Bliley Act (“GLB Act”), which repealed provisions of the 1933 Glass-Steagall Act that required separation of the commercial and investment banking industries. The GLB Act expands the range of non-banking activities that certain bank holding companies may engage in while preserving existing authority for bank holding companies to engage in activities that are closely related to banking. In order to engage in these new non-banking activities, a bank holding company must qualify and register with the FRB as a “financial holding company” by demonstrating that each of its banking subsidiaries is “well-capitalized” and “well-managed” and has a rating of “Satisfactory” or better under the Community Reinvestment Act of 1977.

Under the GLB Act and its implementing regulations, financial holding companies may engage in any activity that (i) is financial in nature or incidental to a financial activity under the GLB Act or (ii) is complementary to a financial activity and does not impose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The GLB Act and its accompanying regulations specify certain activities that are financial in nature such as acting as principal, agent or broker for insurance; underwriting, dealing in or making a market in securities; and providing financial and investment advice. The new financial activities authorized by the GLB Act may also be engaged in by a “financial subsidiary” of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investments and development and merchant banking, which must be conducted in a financial holding company. The FRB and the Secretary of the Treasury have the authority to decide whether other activities are also financial in nature or incidental thereto, taking into account changes in technology, changes in the banking marketplace, competition for banking services and other pertinent factors. Although the Company may meet the qualifications to become a financial holding company, it has no current plans to elect such status.

The GLB Act also establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the SEC will regulate their securities activities and state insurance regulators will regulate their insurance activities. In addition, the GLB Act provides protection against the transfer and use by financial institutions of consumers’ nonpublic, personal information. The GLB Act contains a variety of additional provisions, which, among others, impose additional regulatory requirements on certain depository institutions and reduce certain other regulatory burdens, modify the laws governing the Community Reinvestment Act of 1977, and address a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.

In granting other types of financial institutions more flexibility, the GLB Act has increased the number and type of institutions engaging in the same or similar activities as those of the Company and the Bank, thereby creating a more competitive atmosphere.

Other Aspects of Federal and State Laws

Community Reinvestment Act — The Community Reinvestment Act of 1977 (“CRA”) and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. Under CRA, banks are rated on their performance in meeting these credit needs and the rating of a bank’s performance is public. In connection with the filing of an application to conduct certain transactions, the CRA performance record of the banks involved are reviewed. Under the Bank’s last CRA examination, the Bank received a “Satisfactory” rating.

USA PATRIOT Act — The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The PATRIOT Act requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, the following matters, among others: customer identification programs, money laundering; suspicious activities and currency transaction reporting; currency crimes; and cooperation between financial institutions and law enforcement authorities.

Sarbanes-Oxley Act of 2002 — In July 2002, Congress enacted the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) which imposed significant additional requirements and restrictions on publicly-held companies, such as the Company. These provisions include requirements governing the independence, composition and responsibilities of audit committees, financial disclosures and reporting and restrictions on personal loans to directors and officers. Sarbanes-Oxley, among other things, mandates chief executive and chief financial officer certifications of periodic financial reports, additional financial disclosures concerning off-balance sheet items, and speedier transaction reporting requirements for executive officers, directors and 10% shareholders. Rules promulgated by the SEC pursuant to Sarbanes-Oxley impose obligations and restrictions on auditors and audit committees intended to enhance their independence from management. In addition, penalties for non-compliance with the Exchange Act are heightened. The Company has not experienced any significant difficulties in complying with this legislation. However, the Company has incurred, and expects to continue to incur, costs in connection with its compliance with Section 404 of Sarbanes-Oxley which requires management to undertake an assessment of the adequacy and effectiveness of the Company’s internal controls over financial reporting and requires the Company’s auditors to attest to, and report on, the operating effectiveness of these controls.

Insurance Sales — Rhode Island legislation enacted in 1996 permits financial institutions to participate in the sale of insurance products, subject to certain restrictions and license requirements. The regulatory approvals required from the Department of Business Regulation and the FDIC depend upon the form and structure used to engage in such activities.

Miscellaneous — The Company and/or the Bank also are subject to federal and state statutory and regulatory provisions covering, among other things, reserve requirements, security procedures, currency and foreign transactions reporting, insider and affiliated party transactions, management interlocks, sales of non-deposit investment products, loan interest rate limitations, truth-in-lending, electronic funds transfers, funds availability, truth-in-savings, home mortgage disclosure and equal credit opportunity.

Recent Regulatory Developments

Dodd-Frank Wall Street Reform and Consumer Protection Act - In response to the current national and international economic recession, and in an effort to stabilize and strengthen the financial markets and banking industries, the United States Congress and governmental agencies have taken a number of significant actions over the past several years, including the passage of legislation and the implementation of a number of programs. The most recent of these actions was the passage into law, on July 21, 2010, of the Dodd-Frank Act, which is the most comprehensive change to banking laws and the financial regulatory environment since the Great Depression of the 1930s. The Dodd-Frank Act affects almost every aspect of the nation’s financial services industry and mandates change in several key areas, including regulation and compliance, securities regulation, executive compensation, regulation of derivatives, corporate governance and consumer protection. While these changes in the law will have a major impact on large financial institutions, even relatively smaller institutions such as the Company will be affected.

For example, state consumer financial protection laws historically have been preempted in their application to national banking associations by the National Bank Act and rules and interpretations adopted by the OCC under that statute. Federal preemption of these laws will be diminished under the new regulatory regime, as Congress has authorized states to enact their own substantive protections and to allow state attorney generals to initiate civil actions to enforce federal consumer protections. In this respect, the Company will be subject to regulation by a new consumer protection bureau known as the Bureau of Consumer Financial Protection (the “Bureau”) under the FRB. The Bureau will consolidate enforcement currently undertaken by myriad financial regulatory agencies and will have substantial power to define the rights of consumers and responsibilities of providers, including the Company.

In addition, among the many changes mandated by the Dodd-Frank Act that can be expected to have an effect on the Company and the Bank are the following:

	•		Change of the deposit insurance assessment base from the amount of insured deposits to consolidated assets less tangible capital, elimination of the ceiling on the size of the DIF and increase to the floor applicable to the size of the DIF, which are expected to require financial institutions with assets in excess of $10 billion to pay a higher percentage of the aggregate insurance assessment than smaller institutions, such as the Bank;
	•		Permanent increase of the standard maximum amount of deposit insurance per customer to $250,000, and unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions;
	•		Repeal of the current prohibition on the payment of interest on demand deposits effective July 21, 2011, thereby permitting, and perhaps competitively compelling, depository institutions to pay interest on business transaction and other accounts;
	•		Requires the FRB to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer;
	•		New minimum capital requirements for holding companies will be adopted and any new trust preferred securities (issued after May 19, 2010) will no longer be eligible as Tier I capital;
	•		New regulations on mortgage originators and new disclosure requirements and appraisal reforms intended to curb predatory lending; and
	•		New corporate governance requirements, including with regard to executive compensation and proxy access by shareholders, which apply to all public companies, not just financial institutions.

Many aspects of the Dodd-Frank Act are subject to intensive agency rulemaking and subsequent public comment prior to implementation over the next six to 18 months and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the Tier I capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek other sources of capital in the future. It is also likely that the Company’s expenses will increase as a result of new compliance requirements.

Overdraft Protection — Effective July 1, 2010, the FRB amended Regulation E, to limit the ability to assess overdraft fees for paying ATM and one-time debit card transactions that overdraw a consumer’s account, unless the consumer opts into such payment of overdrafts. The new rule does not apply to overdraft services with respect to checks, ACH transactions or recurring debit card transactions, or to the payment of overdrafts pursuant to a line of credit or a service that transfers funds from another account. Financial institutions are required to provide to customers written notice describing overdraft services, fees imposed, and other information, and to provide customers with a reasonable opportunity to opt in to the service. Before financial institutions may assess fees for paying discretionary overdrafts, a customer must affirmatively opt in. Due to low customer opt-in rates, the Company’s noninterest income was negatively affected during the second half of 2010.

S.A.F.E. Act Registration Requirements - In connection with implementation of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”), the federal banking agencies announced final rules in July 2010 to implement the provisions of the SAFE Act requiring employees of agency-related institutions to register with the Nationwide Mortgage Licensing System and Registry, a database created by the states to support the licensing of mortgage loan originators. Residential mortgage loan originators must register prior to originating residential mortgage loans. The initial period for federal registration of residential mortgage loan originators has begun, and will run from January 31, 2011 through July 29, 2011.

Incentive Compensation Policies and Restrictions - In July 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies (thereby including both the Company and the Bank). Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

In addition, on February 7, 2011, the federal banking agencies, along with the National Credit Union Administration, the SEC and the Federal Housing Finance Agency, published for comment a proposed rule that would regulate incentive-based compensation for entities deemed to be a “covered financial institution”, which would include both the Company and the Bank. Such institutions would need to file an annual report with their primary federal regulator detailing the structure of incentive-based plans. These proposed rules implement Section 956 of the Dodd-Frank Act and incorporate many of the executive compensation principles described above, including a prohibition on compensation practices that encourage covered persons to take inappropriate risks by providing such person with excessive compensation. Comments are due within 45 days of publication in the Federal Register.

Interagency Appraisal and Evaluation Guidelines - In December 2010, the federal banking agencies issued the Interagency Appraisal and Evaluation Guidelines. This guidance, which updated guidance originally issued in 1994, sets forth the minimum regulatory standards for appraisals. It incorporates previous regulatory issuances affecting appraisals, addresses advances in information technology used in collateral evaluation, and clarifies standards for use of analytical methods and technological tools in developing evaluations. This guidance also requires institutions to utilize strong internal controls to ensure reliable appraisals and evaluations and to monitor and periodically update valuations of collateral for existing real estate loans and transactions.

To the extent that the previous information describes statutory and regulatory provisions applicable to the Company, it is qualified in its entirety by reference to the full text of those provisions. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company.

Proposed Legislation and Regulatory Action

Various legislation, regulations and statutes affecting financial institutions and the financial industry will likely continue to be introduced. Such legislation, regulations and statutes may further change the operating environment of the Company in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether the proposed legislation, regulations and statutes are enacted. If enacted, the effect that these changes or the implementation of these changes, would have on the financial condition or results of operations of the Company or the Bank is uncertain.

Effect of Governmental Policy

The Company’s revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Banking is a business that depends heavily on interest rate differentials. One of the most significant factors affecting the Bank’s earnings is the difference between the interest rates paid by the Bank on its deposits and its other borrowings, on the one hand, and, on the other hand, the interest rates received by the Bank on loans extended to its customers and on securities held in the Bank’s portfolio. The value and yields of its assets and the rates paid on its liabilities are sensitive to changes in prevailing market rates of interest. Thus, the earnings and growth of the Bank will be influenced by general economic conditions, the monetary and fiscal policies of the federal government, and policies of regulatory agencies, particularly the FRB, which implements national monetary policy. Management cannot predict the nature or impact of future changes in monetary and fiscal policies.

ITEM 1A.		RISK FACTORS

Overview

Investing in our common stock involves a degree of risk. 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

Negative developments in the financial services industry and U.S. and global credit markets have and may continue to have an adverse effect on our operations and results.

During 2008 and the first half of 2009, capital and credit markets experienced unprecedented levels of volatility and disruption. These negative developments in the capital markets have resulted in uncertainty in the financial markets in general and a significant economic downturn in 2009 which continued through 2010. Loan portfolio performances have deteriorated at most institutions, including the Bank, resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans. The competition for our deposits has increased significantly due to liquidity concerns at many of these same institutions. Stock prices of bank holding companies, like ours, have been negatively affected by the current condition of the financial markets, as has our ability, if needed, to raise capital or borrow in the debt markets compared to recent years. Additionally, legislators and regulators have promulgated new laws and regulations regarding lending and funding practices and liquidity standards, and financial institution regulatory agencies have been and are expected to continue to be aggressive in responding to concerns and trends identified in examinations, including the issuance of many formal enforcement actions. Negative developments in the financial services industry and the impact of new legislation in response to those developments have, and may continue to negatively impact our operations by restricting our business operations and imposing increased costs, and adversely impact our financial performance.

The continuation of adverse market conditions in the U.S. economy and the markets in which we operate could adversely impact us.

The continued deterioration of overall market conditions adversely affected our financial performance in 2010. A continued economic downturn or prolonged economic stagnation in the U.S. markets and our markets may have further negative impacts on our business. The failure of the U.S. economy in general and the economy in areas where we lend (or previously provided real estate financings) to improve could result in, among other things, a further deterioration in credit quality or a continued reduced demand for credit, including a resultant adverse effect on our loan and lease portfolios and provision for loan and lease losses. Negative conditions in our market could adversely affect our borrowers’ ability to repay their loans and leases and the value of the underlying collateral, which in turn, may negatively impact our financial results. We do not expect that the difficult conditions in the financial markets and in our own local market are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system.

In response to the financial crisis affecting the banking system and financial markets, the U.S. Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”) and the American Recovery and Reinvestment Act of 2009 (“ARRA”). The U.S. Treasury and banking regulators have implemented, and likely will continue to implement, various other programs under this legislation to address capital and liquidity issues in the banking system, including the Troubled Asset Relief Program (“TARP”), the FDIC’s temporary liquidity guaranty (“TLG”) program and various forms of assistance to homeowners in restructuring mortgage payments on qualifying loans. The actual impact that any of the recent, or future, legislative and regulatory initiatives will have on the financial markets and the overall economy cannot be accurately predicted. In addition, TARP and the TLG are winding down, and the effects of this wind-down cannot be predicted. Any failure of these initiatives to help stabilize or improve the financial markets and the economy, and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

The Dodd-Frank Act and other recent legislative and regulatory initiatives contain numerous provisions and requirements that could detrimentally affect our business.

On July 21, 2010, the President of the United States signed the Dodd-Frank Act. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. Among other things, the Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws, weakens the federal preemption rules that have been applicable for national banks and federal savings associations, imposes certain capital requirements on financial institutions, eliminates the federal prohibitions on paying interest on demand deposits, broadens the base for FDIC deposit insurance assessments, requires publicly traded companies to provide non-binding votes on executive compensation and so-called “golden parachute” payments, and directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives. Many provisions may have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. The specific impact of the Dodd-Frank Act on the Company’s current activities or new financial activities we may consider in the future, our financial performance, and the markets in which we operate will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. However, it is expected that at a minimum they will increase our operating and compliance costs, may require us to increase our regulatory capital and may limit our ability to pursue business opportunities in an efficient manner.

Current regional and local economic conditions could adversely affect our profitability.

Our operations are located principally in Rhode Island. As a result of this geographic concentration, our results depend largely upon economic and business conditions in this area. Rhode Island, like many other states in New England and across the country, is facing a mix of growing budget deficits, increasing foreclosures and decreasing home prices. Furthermore, Rhode Island’s unemployment rate continues to exceed the national average and is currently the fifth highest unemployment rate in the United States and the highest in New England.

In order to address the precarious circumstances facing Rhode Island and estimated budget shortfalls in the coming years, the state legislature is grappling with decisions over deep spending cuts in welfare programs and other social services, reductions in the state’s employee workforce and severe cutbacks in state aid to cities and towns. It is also possible that tax increases on both individuals and businesses will be needed in the near future to close the budget gap. These measures, combined with high unemployment and the general slowdown in the national economy, could negatively impact the operations and financial condition of the Bank’s customers, and thus the quality of the Bank’s assets, as well as the Bank’s ability to originate new business. Additionally, Rhode Island businesses, like many companies throughout the United States, are being forced to deal with ever-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.

Continued stagnation or further deterioration economic and business conditions in our service area could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, which in turn may have a material adverse effect on our results of operations.

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 two national banking institutions and one large regional banking institution that have significant market share positions in Rhode Island. These large banks have well-established, broad 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, a variety of competitors who seek deposits over the internet and non-bank competitors.

Competition for deposits also comes from short-term money market funds, other corporate and government securities funds and non-bank financial service providers such as mutual fund companies, brokerage firms, insurance companies and credit unions. 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.

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 or inversion of the yield curve, business activity levels, money supply and the policies of various government and regulatory authorities. For example, decreases in the discount rate by the Board of Governors of the Federal Reserve System usually lead to falling interest rates, which affects interest income and interest expense. Falling interest rates have an immediate impact on the Company’s variable-rate assets, while the Company is generally unable to bring deposit and borrowing costs down as quickly. Changes in market interest rates, or changes in the relationships between short-term and long-term market interest rates, or changes in the relationships between different interest rate indices, can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income, or a decrease in our interest rate spread. The nature, timing and effect of any future changes in interest rates on us and our future results of operations are not predictable.

Increases in FDIC insurance premiums may adversely affect our net income and profitability.

In 2009, the FDIC substantially increased assessment rates of insured institutions, imposed an additional special assessment and required banks to prepay three years’ worth of estimated deposit insurance premiums. The Dodd-Frank Act makes permanent the $250,000 insurance limit for insured deposits and extends coverage for noninterest-bearing transaction accounts through December 31, 2012. The Dodd-Frank Act also broadens the base for FDIC insurance assessments (which will now be based on the average consolidated total assets less tangible equity capital of a financial institution) and requires the FDIC to increase the deposit insurance fund reserve ratio from 1.15% to 1.35% of insured deposits by 2020. These legislative changes may result in further increases in FDIC insurance assessments. We are generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. Any future premium increases or special assessments would adversely impact our earnings.

Restrictions on debit card interchange fees may adversely affect our profitability.

Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. No later than April 21, 2011, the FRB is required to establish standards for reasonable and proportional fees which may take into account the costs of preventing fraud. Although the restrictions on interchange fees do not apply to banks (such as Bank Rhode Island) that, together with their affiliates, have assets of less than $10 billion, the Bank may be forced to reduce its debit card interchange fees in order to compete with larger institutions. In addition, merchants will now control the entire transaction process and may drive customers to cheaper price-controlled cards instead of cards issued by the Bank, which could be detrimental to our business.

Changes in customer behavior could adversely affect our profitability.

Changes in customer behavior regarding use of deposit accounts could result in lower fee revenue, higher borrowing costs and higher operational costs for the Company. We obtain a large portion of our fee revenue from service charges on our deposit accounts and depend on low-interest cost deposits as a significant source of funds. In recent years, customers have demonstrated improved cash management, which has reduced the amount of service charges they incur. Recent changes to consumer electronic funds transfer regulations have further limited our ability to charge overdraft fees. In addition, competition from other financial institutions could result in higher numbers of closed accounts and increased account acquisition costs. We actively monitor customer behavior and try to adjust policies and marketing efforts accordingly to attract new and retain existing deposit account customers, but there can be no assurance that such efforts will be successful.

Our focus on commercial lending may result in greater risk of losses.

At December 31, 2010, 67.5% of our loan and lease portfolio consisted of commercial real estate, business and construction loans and leases, an increase from 65.9% of our loan and lease portfolio at December 31, 2009. We intend to continue to emphasize the origination of these types of loans and leases. Historically, these loans have had a 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. Additionally, the primary focus of our business strategy is to serve small- to medium-sized businesses and most of our commercial customers are small- to medium-sized firms. During periods of economic weakness, small- to medium-sized businesses may be impacted more severely and more quickly than larger businesses. Consequently, the ability of such businesses to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition.

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, business and economic conditions, the character and size of the portfolio, loan growth, 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, 2010, the allowance for loan and lease losses totaled $18.7 million, representing 1.61% of total loans and leases. There can be no assurance that, in the current environment, credit performance will not be materially worse than anticipated and, as a result, materially and adversely affect the Company’s business, financial position and results of operation.

We may experience a decline in the market value of our available for sale securities.

A decline in the market value of our investment securities may require us to recognize an “other-than-temporary” impairment against such securities under U.S. generally accepted accounting principles (“GAAP”) if we were to determine that, with respect to any securities in unrealized loss positions, we do not have the ability and intent to hold such securities to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale.

The current economic environment and recent volatility of financial markets increase the difficulty of assessing investment securities impairment and the same influences increase the risk of potential impairment on these assets. During the year ended December 31, 2010, we incurred losses for other-than-temporarily impairment of securities of $1.0 million. We believe we have adequately reviewed our investment securities for impairment and that our investment securities are carried at fair value. However, over time, the economic and market environment may provide additional insight regarding the fair value of certain securities, which could change our judgment regarding impairment. This could result in realized losses relating to other-than-temporary declines being charged against future earnings. Given the current market conditions and the significant judgments involved, there is continuing risk that further declines in fair value may occur and additional other-than-temporary impairments may be charged to earnings in future periods, resulting in realized losses.

Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns, on the investment securities that we own.

During 2008, the U.S. Government, through the Federal Housing Authority and the FDIC, commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. The programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans. In addition, members of the U.S. Congress have indicated support for additional legislative relief for homeowners, including an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings. These loan modification programs, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the mortgage-backed securities, collateralized mortgage obligations and other securities that we own. Additionally, we may experience an increased level of restructured loans in our residential mortgage portfolio.

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, cash flows, liquidity and results of operations could be materially and adversely affected.

Expanding the franchise 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, we are likely to experience higher operating expenses relative to operating income from the new branches, which may limit increases in profitability. 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 and an attractive mix of deposits that will create an acceptable level of net income. In recent years, low interest rates and significant competitive deposit pricing pressures in our market have extended the average timeframe for a new branch to achieve profitability, which has adversely affected our earnings. There can be no assurance that any new and/or 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. Loss of key personnel 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 and local economic conditions, interest rate fluctuations and other factors that may affect banks in general, all of which factors may limit or reduce our growth and profitability. For example, the yield curve has been flat-to-inverted during parts of the last five years. Nonperforming asset levels and loan and lease losses significantly increased since the economic downturn. If weak economic conditions, levels of high unemployment and decreased consumer spending continue or worsen, our operations could be negatively affected through higher credit losses, lower transaction related revenues and lower average deposit balances.

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 can be no 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.

Our business is highly reliant on third party vendors and our ability to manage the operational risks associated with outsourcing those services.

We rely on third parties to provide services that are integral to our operations, including data processing and information processing services that support our day-to-day banking services. Any disruption in the services provided by these third parties, or any reputational risk or damage they may suffer as a result of such disruptions could have an adverse effect on our reputation, operations and our ability to meet the needs of our customers. The loss of these third party relationships could produce disruption of service and significant costs in connection with replacing these services.

We encounter technological change continually.

The financial services industry continually undergoes technological change. 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, fees charged to customers 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.

Recent government efforts to strengthen the U.S. financial system have resulted in a broad array of legislative and regulatory initiatives, including EESA, ARRA and the Dodd Frank Act. Because the Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and the effects the law and regulations will have on us will not be known for months or even years. The environment in which banking organizations will operate after the financial crisis, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the business model and profitability of banking organizations that cannot now be foreseen.

Furthermore, 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 our operations and profitability.

Risks Related to the Company’s Common Stock

Our common stock has limited liquidity.

Even though our common stock is currently traded on the Nasdaq Stock Market’s Global Select Market ^SM, 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. Stock prices of bank holding companies, like ours, have been negatively affected by the current condition of the financial markets. 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.

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 10% 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 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 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 24.5% of our outstanding common stock (including presently exercisable options) as of December 31, 2010. 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.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

The Bank presently has a network of 17 branch offices located in Providence, Kent and Washington Counties. Nine of these branch office facilities are owned (of which three are located on land subject to ground lease) and eight are leased. Facilities are generally leased for a period of one to 20 years with renewal options. The termination of any short-term lease would not have a material adverse effect on the operations of the Bank. The Company also has three administrative offices, of which one is owned and two are leased. The Company’s offices are in good physical condition and are considered appropriate to meet the banking needs of the Bank’s customers.

The following are the locations of the Bank’s offices:

Size

Year Opened

Owned or

Lease

Location

(Square feet)

or Acquired

Leased

Expiration Date

Branch offices:

1047 Park Avenue, Cranston, RI

4,700

1996

Owned

Not Applicable

383 Atwood Avenue, Cranston, RI

4,700

1996

Owned

Not Applicable

2104 Plainfield Pike, Cranston, RI

700

2002

Owned

Not Applicable

1269 South County Trail, East Greenwich, RI

2,600

2005

Leased

5/31/25

999 South Broadway, East Providence, RI

3,200

1996

Leased

11/30/12

195 Taunton Avenue, East Providence, RI

3,100

1996

Leased

12/31/20

1440 Hartford Avenue, Johnston, RI

4,700

1996

Land Leased

12/31/12

625 G. Washington Highway, Lincoln, RI

1,000

2005

Owned

Not Applicable

1140 Ten Rod Road, North Kingstown, RI

4,000

2004

Land Leased

6/30/18

499 Smithfield Avenue, Pawtucket, RI

3,500

2007

Land Leased

5/31/21

One Turks Head Place, Providence, RI

5,000

1996

Leased

4/30/14

165 Pitman Street, Providence, RI

3,300

1998

Leased

10/31/13

445 Putnam Pike, Smithfield, RI

3,500

1996

Leased

7/31/19

1062 Centerville Road, Warwick, RI

2,600

1996

Owned

Not Applicable

1300 Warwick Avenue, Warwick, RI

4,200

1996

Leased

6/30/14

2975 West Shore Road, Warwick, RI

3,500

2000

Leased

3/31/14

1175 Cumberland Hill Road, Woonsocket, RI

3,300

1998

Owned

Not Applicable

Administrative and operational offices:

625 G. Washington Highway, Lincoln, RI

23,600

2003

Owned

Not Applicable

One Turks Head Place, Providence, RI

20,600

1999

Leased

6/30/14

One Ames Court, Plainview, NY

4,400

2005

Leased

1/31/13

Planned branch office:

40 Newport Avenue, East Providence, RI

(A

)

Not Applicable

Leased

12/31/17

ITEM 3.		LEGAL PROCEEDINGS

On June 5, 2008, Empire Merchandising Corp. (“EMC”) and Joseph Pietrantonio (collectively, the “Plaintiffs”) filed a complaint in the Providence County Superior Court against the Bank and EMC’s outside accountants, Bernard Labush and Stevan H. Labush, alleging damages arising out of an embezzlement scheme perpetrated by EMC’s bookkeeper beginning around January 2004 and continuing until September 2005. EMC had checking and payroll accounts and a $250,000 line of credit with the Bank. Mr. Pietrantonio personally guaranteed EMC’s repayment obligations under the line of credit, which was secured by a first security interest in all of EMC’s assets. The Plaintiffs allege that the Bank made unauthorized advances to EMC under the line of credit via online requests by the bookkeeper, failed to take reasonable and necessary measures to ensure authorized access to EMC’s accounts and failed to notify Mr. Pietrantonio of unusual overdraft activity in the EMC accounts, all of which facilitated the embezzlement scheme and ultimately led to the final collapse of EMC in January 2007. In addition, EMC alleges that the Bank should have forgiven the line of credit indebtedness and released its lien on EMC’s assets and that the Bank’s failure to do so prevented EMC from obtaining additional financing and contributed to the demise of EMC’s business. The Plaintiffs asserted the following causes of action against the Bank: breach of contract, breach of implied covenant of good faith and fair dealing, negligence, infliction of emotional distress, unjust enrichment and interference with advantageous relationship. The Bank denied any liability and asserted a counterclaim seeking repayment of indebtedness due under the line of credit and the personal guaranty of Mr. Pietrantonio.

The case was tried before a jury in February 2011. On March 10, 2011, the jury returned a verdict against the Bank, finding that the Bank was negligent and had breached the line of credit agreement with EMC and that the Bank had intentionally inflicted emotional distress on Mr. Pietrantonio. The jury awarded damages of $1.4 million to EMC for the loss of business and $500,000 to Mr. Pietrantonio for lost wages and emotional distress. The Company intends to file appropriate post trial motions challenging the verdict and will appeal any adverse judgement to the Rhode Island Supreme Court. The Company believes that substantially all of the damage award should be covered by insurance and therefore has not accrued a legal expense for this matter.

PART II

ITEM 5.		MARKET FOR THE COMPANY’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Prices and Dividends — Our common stock is traded on the Nasdaq Global Select Market ^SM under the symbol “BARI.” The following table sets forth certain information regarding our common stock for the periods indicated.

		Stock Price								Dividend
		High				Low				Paid
2009:
First Quarter		$	21.88			$	15.44			$	0.17
Second Quarter			21.97				17.50				0.17
Third Quarter			27.00				19.40				0.17
Fourth Quarter			27.00				24.50				0.17
2010:
First Quarter		$	29.64			$	23.53			$	0.17
Second Quarter			29.65				25.02				0.17
Third Quarter			29.98				25.35				0.17
Fourth Quarter			30.99				27.30				0.19

As of February 28, 2011, there were 88 holders of record of our common stock (which does not reflect shareholders with beneficial ownership in shares held in nominee name).

The following graph and table show changes in the value of $100 invested on December 31, 2005 through December 31, 2010 in our common stock, the SNL Bank $1 Billion to $5 Billion Index and the Russell 3000 Index. The investment values are based on share price appreciation plus dividends paid in cash, assuming that dividends were reinvested on the date they were paid.

		Period Ending
Index		12/31/05				12/31/06				12/31/07				12/31/08				12/31/09				12/31/10
Bancorp Rhode Island, Inc.			100.00				131.98				106.47				66.39				85.19				97.73
Russell 3000			100.00				115.71				122.46				75.01				98.91				114.59
SNL Bank $1B-$5B Index			100.00				115.72				84.36				67.88				49.93				57.38

ITEM 6.		SELECTED CONSOLIDATED FINANCIAL DATA

The following table represents selected consolidated financial data as of and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006. The selected consolidated financial data set forth below does not purport to be complete and should be read in conjunction with, and are qualified in their entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere herein.

		As of and for the
		year ended December 31,
		2010				2009				2008				2007				2006
		(Dollars in thousands, except per share data)
Statements of operations data:
Interest income		$	72,802			$	75,277			$	80,298			$	86,070			$	81,202
Interest expense			19,395				26,955				34,930				44,826				38,974
Net interest income			53,407				48,322				45,368				41,244				42,228
Provision for loan and lease losses			6,860				9,917				4,520				700				1,202
Noninterest income			9,562				9,165				10,609				10,785				8,988
Noninterest expense			41,203				39,529				37,886				38,025				38,727
Income before taxes			14,906				8,041				13,571				13,304				11,287
Income taxes			5,071				2,502				4,427				4,259				3,576
Net income			9,835				5,539				9,144				9,045				7,711
Preferred stock dividends			—				(892	)			(50	)			—				—
Prepayment charges and accretion of preferred stock discount			—				(1,405	)			(8	)			—				—
Net income applicable to common shares		$	9,835			$	3,242			$	9,086			$	9,045			$	7,711
Per share data:
Basic earnings per common share		$	2.10			$	0.71			$	1.99			$	1.89			$	1.62
Diluted earnings per common share		$	2.10			$	0.70			$	1.96			$	1.84			$	1.57
Dividends per common share		$	0.70			$	0.68			$	0.66			$	0.62			$	0.60
Dividend pay-out ratio			33.3	%			97.1	%			33.7	%			33.7	%			38.2	%
Book value per share of common stock		$	27.53			$	26.16			$	26.34			$	24.68			$	23.28
Tangible book value per share of common stock		$	24.91			$	23.50			$	23.71			$	22.10			$	20.92
Average common shares outstanding — basic			4,658,668				4,604,308				4,561,396				4,793,055				4,766,854
Average common shares outstanding — diluted			4,687,316				4,626,434				4,631,208				4,918,763				4,920,569
Balance sheet data:
Total assets		$	1,603,759			$	1,589,946			$	1,528,178			$	1,476,323			$	1,478,303
Available for sale securities			360,025				381,839				326,406				335,181				343,887
Total loans and leases receivable			1,155,489				1,111,847				1,077,742				1,038,132				1,004,292
Allowance for loan and lease losses			18,654				16,536				14,664				12,619				12,377
Goodwill, net			12,262				12,239				12,019				11,772				11,317
Deposits			1,120,166				1,098,284				1,042,192				1,014,780				1,016,423
Borrowings			335,289				350,757				320,015				331,703				337,097
Total shareholders’ equity			128,678				120,661				149,090				112,593				111,570
Common shareholders’ equity			128,678				120,661				120,495				112,593				111,570
Average balance sheet data:
Total assets		$	1,573,772			$	1,558,278			$	1,484,071			$	1,468,778			$	1,451,163
Available for sale securities			354,477				362,706				335,132				342,333				372,433
Total loans and leases receivable			1,126,972				1,107,640				1,052,552				1,014,951				980,598
Allowance for loan and lease losses			17,604				16,159				13,350				12,503				12,002
Goodwill, net			12,242				12,055				11,982				11,318				11,290
Deposits			1,115,407				1,073,366				1,018,510				1,010,162				965,194
Borrowings			318,792				333,866				332,602				326,398				362,721
Total shareholders’ equity			127,276				139,551				115,977				114,357				106,359
Common shareholders’ equity			127,276				121,911				113,668				114,357				106,359
Operating ratios:
Interest rate spread			3.24	%			2.85	%			2.72	%			2.29	%			2.50	%
Net interest margin			3.56	%			3.25	%			3.21	%			2.96	%			3.06	%
Efficiency ratio (a)			65.43	%			68.76	%			67.68	%			73.08	%			75.62	%
Return on assets			0.62	%			0.36	%			0.62	%			0.62	%			0.53	%
Return on common equity			7.73	%			2.66	%			7.99	%			7.91	%			7.25	%
Tangible common equity ratio			7.31	%			6.87	%			7.15	%			6.88	%			6.83	%
Asset quality ratios:
Nonperforming loans and leases to total loans and leases			1.43	%			1.65	%			1.33	%			0.40	%			0.14	%
Nonperforming assets to total assets			1.10	%			1.26	%			1.00	%			0.28	%			0.10	%
Allowance for loan and lease losses to nonperforming loans and leases			112.97	%			90.29	%			102.05	%			304.15	%			875.94	%
Allowance for loan and lease losses to total loans and leases			1.61	%			1.49	%			1.36	%			1.22	%			1.23	%
Net loans and leases charged-off to average loans and leases			0.42	%			0.73	%			0.24	%			0.05	%			0.05	%

		As of and for the
		year ended December 31,
		2010				2009				2008				2007				2006
		(Dollars in thousands, except per share data)
Capital ratios:
Average common shareholders’ equity to average total assets			8.09	%			7.82	%			7.66	%			7.79	%			7.33	%
Tier I leverage ratio			8.10	%			7.65	%			10.04	%			7.87	%			8.37	%
Tier I risk-based capital ratio			11.27	%			10.71	%			14.23	%			11.06	%			12.05	%
Total risk-based capital ratio			12.53	%			11.97	%			15.48	%			12.28	%			13.27	%

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

Bancorp Rhode Island, Inc., a Rhode Island corporation, is the holding company for Bank Rhode Island. The Company has no significant assets other than the common stock of the Bank. For this reason, substantially all of the discussion in this document relates to the operations of the Bank and its subsidiaries.

The Bank 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 businesses and individuals 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 on-line 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 those regulatory authorities. The Bank’s deposits are insured by the FDIC, subject to regulatory limits. The Bank is also a member of the FHLB.

Overview

In 2010, the Company continued its balance sheet conversion to a more commercial profile. The Company increased its commercial loan and lease portfolio by 6.5% and improved its net interest income. As a result of the increased net interest income, lower net charge-offs and resulting provisions to the loan and lease loss reserve, redemption of the preferred stock issued to the Treasury under the CPP in 2009 and reduced FDIC insurance costs, diluted EPS increased to $2.10 in 2010 from $0.70 in 2009. For a fuller narrative commentary on these matters, refer to Item 1, “Business.”

The primary driver of the Company’s operating income is 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 its 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. 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 table shown on page 34. Information as to the components of interest income and interest expense and average rates is provided under “Average Balances, Yields and Costs” on page 33.

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 discussion under “Asset and Liability Management” on page 53.

The quality of the Company’s assets also influences its earnings. Loans and leases that are not being paid on a timely basis and exhibit other weaknesses can result in the loss of principal and/or loss of interest income. Additionally, the Company must make timely provisions to its 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 will incur expenses as a result of resolving troubled assets. All of these form the “credit risk” that the Company takes on in the ordinary course of its business and is further discussed under “Financial Condition — Asset Quality” on page 42.

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 making deployment of funds in the commercial lending area practicable. Commercial loans are attractive, among other reasons, because of their higher yields. Similarly, core deposits are attractive because of their generally lower interest cost and potential for fee income.

The deposit market in Rhode Island is highly concentrated. The State’s three largest banks have an aggregate market share of 88% (based upon June 2010 FDIC statistics, excluding one bank that draws its deposits primarily from the internet) in Providence and Kent Counties, the Bank’s primary marketplace. 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.

The Company also seeks to leverage business opportunities presented by its customer base, franchise footprint and resources. In 2005, the Bank completed the acquisition of an equipment financing company located in Long Island, New York (“Macrolease”) and formed a private banking division. Historically, the Bank has used the Macrolease platform to generate additional income by originating equipment loans and leases for third parties and to grow the loan and lease portfolio. Due to the lack of purchasers in the market for these loans and leases during recent years, the amount of Macrolease-generated loans and leases held by the Bank has grown substantially. Currently, the Bank seeks to maintain the level of Macrolease-generated loans and leases at approximately $100.0 million. Additionally, the Bank continues to seek generation of additional income by originating equipment loans and leases for third parties as opportunities arise.

In 2010, approximately 84.8% of the Company’s total revenues (defined as net interest income plus noninterest income) were derived from its net interest income compared to 84.1% in 2009. 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.

In 2010, the Bank experienced an overall increase in net interest margin, as the 2010 net interest margin of 3.56% was 31 basis points (“bps”) higher than the 2009 net interest margin of 3.25%.

The future operating results of the Company will depend on the ability to maintain net interest margin, while minimizing exposure to credit risk, along with increasing sources of noninterest income, while controlling the growth of noninterest or operating expenses.

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 Company considers the following to be its critical accounting policies: allowance for loan and lease losses, review of goodwill for impairment, valuation of available for sale securities and income taxes. There have been no significant changes in the methods or assumptions used in accounting policies that require material estimates or assumptions.

Allowance for loan and lease losses

Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a significant degree of judgment. First and foremost in arriving at an appropriate allowance is the creation and maintenance of a risk rating system that accurately classifies all loans, leases and commitments into varying categories by degree of credit risk. Such a system also establishes a level of allowance associated with each category of loans and requires early identification and reclassification of deteriorating credits. Besides numerous subjective judgments as to the number of categories, appropriate level of allowance with respect to each category and judgments as to categorization of any individual loan or lease, additional subjective judgments are involved when ascertaining the probability as well as the extent of any probable losses. The Company’s ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan and lease portfolio, business and economic conditions, loan growth, delinquency trends, nonperforming loan trends, charge-off experience and other asset quality factors. These factors are based on observable information, as well as subjective assessment and interpretation.

Nonperforming commercial loans and leases in excess of $100,000 are deemed to be “impaired.” In addition, loans that have been modified as troubled debt restructurings, including residential mortgage and consumer loans regardless of dollar amount, are deemed to be impaired loans. The estimated reserves necessary for each of these credits is determined by reviewing the fair value of the collateral if collateral dependent, the present value of expected future cash flows, or where available, the observable market price of the loans. Provisions for losses on the remaining loans and leases are based on pools of similar loans or leases using a combination of payment status, historical loss experience, industry loss experience, market economic factors, delinquency rates and qualitative adjustments.

While management evaluates currently available information in establishing the allowance for loan and lease losses, future additions to the allowance may be necessary if conditions differ substantially from the assumptions used in making evaluations. 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 adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Review of goodwill for impairment

In March 1996, the Bank acquired certain assets and assumed certain liabilities from Fleet Financial Group, Inc. and related entities. This acquisition was accounted for utilizing the purchase method of accounting and generated $17.5 million of goodwill. This goodwill was amortized in the years prior to 2002, resulting in a net balance of $10.8 million on the Company’s balance sheet as of December 31, 2001. Effective January 1, 2002, in accordance with newly issued U.S. GAAP requirements, the Company ceased amortizing this goodwill and currently reviews it at least annually for impairment.

On May 1, 2005, the Bank acquired certain operating assets from Macrolease International Corporation. This acquisition was accounted for utilizing the purchase method of accounting and has generated $1.5 million of goodwill through December 31, 2010.

The Company evaluates goodwill for impairment by comparing the fair value of the Company to its carrying value, including goodwill. If the fair value of the Company exceeds the carrying value, goodwill is not deemed to be impaired. If the fair value is less than the carrying value, a further analysis is required to determine the amount of impairment, if any.

Management preliminarily utilizes the Company’s market capitalization as a reasonable estimate of its fair value. Market capitalization, however, does not consider the value of a control premium (the premium a market participant would pay to own an entire company rather than a piece of the company). If the Company’s market capitalization is less than its carrying value, management assesses the fair value of the Company further using market value comparisons for similar institutions, such as price to earnings multiples, price to book value multiples and price to tangible book value multiples. The Company’s valuation technique utilizes verifiable market multiples, as well as subjective assessment and interpretation. The application of different market multiples, or changes in judgment as to which market transactions are reflective of the Company’s specific characteristics, could affect the conclusions reached regarding possible impairment. In the event that the Company was to determine that its goodwill was impaired, the recognition of an impairment charge could have an adverse impact on its results of operations in the period that the impairment occurred or on its financial position.

Valuation of available for sale securities

Debt securities can be classified as trading, available for sale or held-to-maturity. Securities are classified as trading and carried at fair value, with unrealized gains and losses included in earnings, if they are bought and held principally for the purpose of selling in the near term. Debt securities are classified as held-to-maturity and carried at amortized cost only if the Company has the positive intent and the ability to hold these securities to maturity. Securities not classified as either held-to-maturity or trading are classified as available for sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of estimated income taxes. As of December 31, 2010 and 2009, all of the Company’s investment securities were classified as available for sale.

The Company performs regular analysis on the available for sale securities portfolio to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired. Management considers various factors in making these determinations including the length of time and extent to which the fair value has been less than amortized cost, projected future cash flows, credit subordination and the creditworthiness, capital adequacy and near-term prospects of the issuers. Management also considers capital adequacy, interest rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the securities before recovery.

If the Company determines that a decline in fair value is other-than-temporary and that it is more likely than not that the Company will not sell or be required to sell the security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in earnings and the noncredit portion is recognized in accumulated other comprehensive income. The credit portion of the other-than-temporary impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the security. If the Company determines that a decline in fair value is other-than-temporary and it is more likely than not that the Company will sell or be required to sell the security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the security will be recognized in earnings. Continued adverse or further deteriorated economic and market conditions could result in additional losses from other-than-temporary impairment.

Income taxes

Certain areas of accounting for income taxes require management’s judgment, including determining the expected realization of deferred tax assets and the adequacy of liabilities for uncertain tax positions. Judgments are made regarding various tax positions, which are often subjective and involve assumptions about items that are inherently uncertain. If actual factors and conditions differ materially from estimates made by management, the actual realization of the net deferred tax assets or liabilities for uncertain tax positions could vary materially from the amounts previously recorded.

Deferred tax assets arise from items that may be used as a tax deduction or credit in future income tax returns, for which a financial statement tax benefit has already been recognized. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years’ taxable income to which refund claims could be carried back. Valuation allowances are recorded against those deferred tax assets determined not likely to be realized. Deferred tax liabilities represent items that will require a future tax payment. They generally represent tax expense recognized in the Company’s financial statements for which payment has been deferred, or a deduction taken on the Company’s tax return but not yet recognized as an expense in the Company’s financial statements. Deferred tax liabilities are also recognized for certain non-cash items such as goodwill.

Results of Operations

Net Interest Income

Net interest income for 2010 was $53.4 million, compared to $48.3 million for 2009 and $45.4 million for 2008. The net interest margin increased in 2010 to 3.56%, compared to 3.25% in 2009. The net interest margin in 2008 was 3.21%. The increase in net interest income of $5.1 million, or 10.5%, during 2010 was primarily attributable to achieving a lower cost of funding, despite increased levels of average earnings assets at lower average yields. Average earning assets increased $12.7 million, or 0.9%, and average interest-bearing liabilities decreased $12.4 million, or 1.0%, during 2010, compared to 2009.

Average Balances, Yields and Costs

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 years 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 and include nonperforming loans and leases. Available for sale securities are stated at amortized cost.

		Year ended December 31,
		2010												2009												2008
						Interest												Interest												Interest
		Average				earned/				Average				Average				earned/				Average				Average				earned/				Average
		balance				paid				yield				balance				paid				yield				balance				paid				yield
		(Dollars in thousands)
Assets
Earning assets:
Overnight investments		$	2,674			$	7				0.25	%		$	1,456			$	10				0.78	%		$	8,577			$	264				3.07	%
Available for sale securities			354,477				13,497				3.81	%			362,706				15,514				4.28	%			335,132				16,422				4.90	%
Stock in the FHLB			16,274				—				0.00	%			15,912				—				0.00	%			15,671				610				3.89	%
Loans receivable:
Commercial loans and leases			756,293				42,829				5.66	%			703,982				40,823				5.80	%			617,254				39,709				6.43	%
Residential mortgage loans			165,999				7,570				4.56	%			192,853				9,486				4.92	%			226,483				12,095				5.34	%
Consumer and other loans			204,680				8,899				4.35	%			210,805				9,444				4.48	%			208,815				11,198				5.36	%
Total earning assets			1,500,397				72,802				4.85	%			1,487,714				75,277				5.06	%			1,411,932				80,298				5.69	%
Cash and due from banks			16,075												18,186												23,062
Allowance for loan and lease losses			(17,604	)											(16,159	)											(13,350	)
Premises and equipment			12,184												12,512												13,195
Goodwill, net			12,242												12,055												11,982
Accrued interest receivable			4,312												4,252												4,888
Bank-owned life insurance			30,601												29,323												25,033
Prepaid expenses and other assets			15,565												10,395												7,329
Total assets		$	1,573,772											$	1,558,278											$	1,484,071
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Deposits:
NOW accounts		$	70,243			$	48				0.07	%		$	65,471			$	60				0.09	%		$	60,438			$	162				0.27	%
Money market accounts			80,272				583				0.73	%			31,157				367				1.18	%			5,249				69				1.31	%
Savings accounts			366,691				1,739				0.47	%			377,755				3,380				0.89	%			388,060				7,042				1.81	%
Certificate of deposit accounts			369,372				5,660				1.53	%			409,564				11,061				2.70	%			389,021				14,306				3.68	%
Overnight and short-term borrowings			38,952				63				0.16	%			44,298				86				0.19	%			54,878				902				1.64	%
Wholesale repurchase agreements			17,479				564				3.19	%			13,699				551				3.97	%			10,000				540				5.32	%
FHLB borrowings			248,958				10,068				3.99	%			262,466				10,720				4.03	%			254,321				10,960				4.31	%
Subordinated deferrable interest debentures			13,403				670				5.00	%			13,403				730				5.45	%			13,403				949				7.08	%
Total interest-bearing liabilities			1,205,370				19,395				1.61	%			1,217,813				26,955				2.21	%			1,175,370				34,930				2.97	%
Noninterest-bearing deposits			228,829												189,419												175,742
Other liabilities			12,297												11,495												16,982
Total liabilities			1,446,496												1,418,727												1,368,094
Shareholders’ equity			127,276												139,551												115,977
Total liabilities and shareholders’ equity		$	1,573,772											$	1,558,278											$	1,484,071
Net interest income						$	53,407											$	48,322											$	45,368
Net interest rate spread											3.24	%											2.85	%											2.72	%
Net interest rate margin											3.56	%											3.25	%											3.21	%

Rate/Volume Analysis

The following table sets forth certain information regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (changes in rate multiplied by old average balance) and (ii) changes in volume (changes in average balances multiplied by old rate). The net change attributable to the combined impact of rate and volume was allocated proportionally to the individual rate and volume changes.

		Year ended December 31,
		2010 vs. 2009												2009 vs. 2008
		Increase/(decrease) due to												Increase/(decrease) due to
		Rate				Volume				Total				Rate				Volume				Total
		(In thousands)
Interest income:
Overnight investments		$	(10	)		$	7			$	(3	)		$	(120	)		$	(134	)		$	(254	)
Available for sale securities			(1,305	)			(712	)			(2,017	)			(1,791	)			883				(908	)
Stock in the FHLB			—				—				—				(619	)			9				(610	)
Commercial loans and leases			(776	)			2,782				2,006				(5,064	)			6,178				1,114
Residential mortgage loans			(701	)			(1,215	)			(1,916	)			(923	)			(1,686	)			(2,609	)
Consumer and other loans			(97	)			(448	)			(545	)			(1,528	)			(226	)			(1,754	)
Total interest income			(2,889	)			414				(2,475	)			(10,045	)			5,024				(5,021	)
Interest expense:
NOW accounts			(16	)			4				(12	)			(114	)			12				(102	)
Money market accounts			(187	)			403				216				(8	)			306				298
Savings accounts			(1,545	)			(96	)			(1,641	)			(3,479	)			(183	)			(3,662	)
Certificate of deposit accounts			(4,322	)			(1,079	)			(5,401	)			(3,960	)			715				(3,245	)
Overnight & short-term borrowings			(13	)			(10	)			(23	)			(669	)			(147	)			(816	)
Wholesale repurchase agreements			(122	)			135				13				(156	)			167				11
FHLB borrowings			(112	)			(540	)			(652	)			(623	)			383				(240	)
Capital trust and other subordinated securities			(60	)			—				(60	)			(219	)			—				(219	)
Total interest expense			(6,377	)			(1,183	)			(7,560	)			(9,228	)			1,253				(7,975	)
Net interest income		$	3,488			$	1,597			$	5,085			$	(817	)		$	3,771			$	2,954

Comparison of Years Ended December 31, 2010 and December 31, 2009

General

Net income for 2010 increased $4.3 million, or 77.6%, to $9.8 million from $5.5 million for 2009. Diluted earnings per diluted common share (“EPS”) increased from $0.70 for 2009 to $2.10 for 2010. The 2010 earnings represented a return on assets of 0.62% and a return on common equity of 7.73% for 2010, as compared to a return on assets of 0.36% and a return on common equity of 2.66% for 2009.

Net Interest Income

For 2010, net interest income was $53.4 million, compared to $48.3 million for 2009. The net interest margin for 2010 was 3.56% compared to a net interest margin of 3.25% for the prior year. Although the yield on the Company’s interest-earning assets declined by 21 bps compared to 2009, net interest income increased $5.1 million, or 10.5%, as a result of cost of funds on interest-bearing liabilities declining by 60 bps.

Interest Income — Investments

Total investment income (consisting of interest on overnight investments, available for sale securities and dividends on FHLB stock) was $13.5 million for 2010 compared to $15.5 million for 2009. This decrease in total investment income of $2.0 million, or 13.0%, was attributable to a 46 basis point decrease in the overall yield on investments, from 4.08% in 2009 to 3.62% in 2010, along with a decrease in the average balance of investments of approximately $6.6 million.

Interest Income — Loans and Leases

Interest from loans and leases was $59.3 million for 2010, and represented a yield on total loans and leases of 5.26%. This compares to $59.8 million of interest and a yield of 5.39% for 2009. Increased interest income resulting from growth in the average balance of loans and leases of $19.3 million, or 1.7%, was counteracted by a decrease in the yield on loans and leases of 13 bps.

The average balance of the various components of the loan and lease portfolio changed as follows: commercial loans and leases increased $52.3 million, or 7.4%; consumer and other loans decreased $6.1 million, or 2.9%; and residential mortgage loans decreased $26.9 million, or 13.9%. The yield on the various components of the loan and lease portfolio changed as follows: commercial loans and leases decreased 14 bps, to 5.66%; consumer and other loans decreased 13 bps, to 4.35%; and residential mortgage loans decreased 36 bps, to 4.56%. The yields on loans and leases declined primarily from lower yields on new originations and repricing of existing variable rate assets.

Interest Expense — Deposits and Borrowings

Interest paid on deposits and borrowings decreased by $7.6 million, or 28.0%, due to lower market interest rates during 2010. The overall average cost for interest-bearing liabilities decreased 60 bps from 2.21% for 2009 to 1.61% for 2010. The average balance of total interest-bearing liabilities decreased $12.4 million, or 1.0%, to $1.21 billion for 2010.

The growth in interest-bearing deposit average balances of $2.6 million, or 0.3%, during 2010 was attributable to money market accounts (up $49.1 million, or 157.6%) and NOW accounts (up $4.8 million, or 7.3%). The increase was partially offset by decreases in CD accounts (down $40.2 million, or 9.8%) and savings accounts (down $11.1 million, or 2.9%). The cost of interest-bearing deposits in total decreased 77 bps in 2010 to 0.91%, compared to 1.68% in the prior year.

The average balance of borrowings decreased as compared to the prior year, with decreases in FHLB funding (down $13.5 million, or 5.1%) and decreases in short term borrowings (down $5.3 million, or 12.1%) offset by increases in wholesale repurchase agreements (up $3.8 million, or 27.6%). Overall, the cost of nondeposit borrowings decreased 5 bps in 2010 to 3.57%, compared to 3.62% in the prior year, reflecting the market interest rate declines experienced in 2010.

Provision for Loan and Lease Losses

The provision for loan and lease losses was $6.9 million for 2010, compared to $9.9 million for 2009. The provision served to improve the ratio of the allowance for loan and lease losses to 1.61% as of December 31, 2010, compared to 1.49% at the prior year-end. The allowance for loan and lease losses expressed as a percentage of nonperforming loans and leases was 112.97% at December 31, 2010 and 90.29% at December 31, 2009. Net charge-offs for 2010 were $4.7 million compared to $8.0 million for 2009.

Management evaluates several factors including new loan and lease originations, actual and estimated charge-offs and the risk characteristics of the loan and lease portfolio and general economic conditions when determining the provision for loan and lease losses. If the current weak economic or market conditions continue or worsen, management believes it is likely that the level of adversely classified assets would increase. This in turn may necessitate further increases to the provision for loan and lease losses in future periods. Also see discussion under “Allowance for Loan and Lease Losses.”

Noninterest Income

Total noninterest income increased by $397,000, or 4.3%, from $9.2 million for 2009 to $9.6 million for 2010. The following table sets forth the components of noninterest income:

		Year ended December 31,
		2010				2009
		(In thousands)
Service charges on deposit accounts		$	5,178			$	5,377
Income from bank-owned life insurance			1,267				1,245
Gain on sale of available for sale securities			1,260				61
Loan related fees			836				869
Commissions on nondeposit investment products			740				776
Net gains on lease sales and commissions on loans originated for others			127				408
Impairment of available for sale securites			(1,032	)			(384	)
Other income			1,186				813
Total noninterest income		$	9,562			$	9,165

Deposit account service charges continue to represent the largest source of noninterest income for the Company even though this account did not produce growth in 2010. The decrease in service charges on deposit accounts of $199,000, or 3.7%, was driven by changes to Regulation E limiting NSF fees, as well as customer management of account balances to avoid paying additional fees. Losses on impairment of available for sale securities increased $648,000, or 168.8%, and net gains on lease sales and loan commissions were down $281,000, or 68.9%, due to reduced volume and lack of buyers for leases. A decrease in the volume of nondeposit investment product activity provided less noninterest income of $36,000, or 4.6%. Additionally, loan related fees decreased $33,000, or 3.8%. These decreases were offset by increases in gains on the sale of available for sale securities (up $1.2 million, or 1,965.6%), other income (up $373,000, or 45.9%) and income from bank-owned life insurance (“BOLI”) (up $22,000, or 1.8%).

Noninterest Expense

Noninterest expenses for 2010 increased a total of $1.7 million, or 4.2%, to $41.2 million. The following table sets forth the components of noninterest expense:

		Year ended December 31,
		2010				2009
		(In thousands)
Salaries and employee benefits		$	22,973			$	20,573
Occupancy			3,340				3,552
Data processing			2,623				2,640
Professional services			2,283				2,612
FDIC insurance			1,934				2,527
Operating			1,860				1,877
Marketing			1,211				1,318
Equipment			1,029				1,001
Loan workout and other real estate owned			987				688
Loan servicing			646				665
Other expenses			2,317				2,076
Total noninterest expense		$	41,203			$	39,529

Salaries and benefits increased $2.4 million, or 11.7%, largely due to an expansion of the workforce, increased share-based compensation costs and reduced deferrals on loan and lease originations. Loan workout and other real estate owned costs increased $299,000, or 43.5%, equipment costs increased $28,000, or 2.8%, and other miscellaneous expenses increased $241,000, or 11.6%. Professional services costs decreased $329,000, or 12.6%, compared to 2009 when the Company incurred costs to enter into a standstill agreement with a dissident shareholder and retained in-house counsel (reducing certain legal costs). Additionally, occupancy costs decreased $212,000, or 6.0%, marketing decreased $107,000, or 8.1%, loan servicing decreased $19,000, or 2.9%, operating expenses decreased $17,000, or 0.9%, and data processing decreased $17,000, or 0.6%.

Additionally, FDIC insurance costs decreased $593,000, or 23.5%, for the year ended December 31, 2010. In 2009, the FDIC imposed a 5 basis point special assessment on assets less Tier I capital on all FDIC-insured financial institutions. The Bank incurred a charge of $733,000 as a result of the special assessment levied. Excluding the special assessment, FDIC insurance costs rose as a result of increased deposit balances in 2010.

Overall, with the increase in noninterest income and the increase in noninterest expense, the Company’s efficiency ratio was 65.43% for 2010, compared to 68.76% for 2009.

Income Tax Expense

The Company recorded income tax expense of $5.1 million for 2010, compared to $2.5 million for 2009. This represented total effective tax rates of 34.0% and 31.1%, respectively. Tax-favored income from BOLI, along with the utilization of a Rhode Island passive investment company, has reduced the Company’s effective tax rate from the 40.9% combined statutory federal and state tax rates.

Comparison of Years Ended December 31, 2009 and December 31, 2008

General

Net income for 2009 decreased $3.6 million, or 39.4%, to $5.5 million from $9.1 million for 2008. Diluted EPS decreased from $1.96 for 2008 to $0.70 for 2009. The 2009 earnings represented a return on assets of 0.36% and a return on common equity of 2.66% for 2009, as compared to a return on assets of 0.62% and a return on common equity of 7.99% for 2008.

Net Interest Income

For 2009, net interest income was $48.3 million, compared to $45.4 million for 2008. The net interest margin for 2009 was 3.25% compared to a net interest margin of 3.21% for the prior year. Although the yield on the Company’s interest-earning assets declined by 63 bps compared to 2008, net interest income increased $3.0 million, or 6.5%, as a result of cost of funds on interest-bearing liabilities declining by 76 bps.

Interest Income — Investments

Total investment income (consisting of interest on overnight investments, available for sale securities and dividends on FHLB stock) was $15.5 million for 2009 compared to $17.3 million for 2008. This decrease in total investment income of $1.8 million, or 10.2%, was attributable to a 73 basis point decrease in the overall yield on investments, from 4.81% in 2008 to 4.08% in 2009, along with an increase in the average balance of investments of approximately $20.7 million.

Interest Income — Loans and Leases

Interest from loans and leases was $59.8 million for 2009, and represented a yield on total loans and leases of 5.39%. This compares to $63.0 million of interest and a yield of 5.99% for 2008. Increased interest income resulting from growth in the average balance of loans and leases of $55.1 million, or 5.2%, was counteracted by a decrease in the yield on loans and leases of 60 bps.

The average balance of the various components of the loan and lease portfolio changed as follows: commercial loans and leases increased $86.7 million, or 14.1%; consumer and other loans increased $2.0 million, or 1.0%; and residential mortgage loans decreased $33.6 million, or 14.8%. The yield on the various components of the loan and lease portfolio changed as follows: commercial loans and leases decreased 63 bps, to 5.80%; consumer and other loans decreased 88 bps, to 4.48%; and residential mortgage loans decreased 42 bps, to 4.92%. The yields on loans and leases declined primarily from lower yields on new originations and repricing of existing variable rate assets.

Interest Expense — Deposits and Borrowings

Interest paid on deposits and borrowings decreased by $8.0 million, or 22.8%, due to lower market interest rates during 2009. The overall average cost for interest-bearing liabilities decreased 76 bps from 2.97% for 2008 to 2.21% for 2009. The average balance of total interest-bearing liabilities increased $42.4 million, or 3.6%, to $1.22 billion for 2009.

The growth in deposit average balances of $41.2 million, or 4.9%, during 2009 was centered primarily in money market accounts (up $25.9 million, or 493.6%) and CD accounts (up $20.5 million, or 5.3%). These increases were partially offset by a decrease in savings accounts (down $10.3 million, or 2.7%). The cost of deposits in total decreased 88 bps in 2009 to 1.68%, compared to 2.56% in the prior year.

The average balance of borrowings increased as compared to the prior year, with increases in FHLB funding (up $8.1 million, or 3.2%) and increases in wholesale repurchase agreements (up $3.7 million, or 37.0%) offset by decreases in short term borrowings (down $10.6 million, or 19.3%). Overall, the cost of nondeposit borrowings decreased 39 bps in 2009 to 3.62%, compared to 4.01% in the prior year, reflecting the market interest rate declines experienced in 2009.

Provision for Loan and Lease Losses

The provision for loan and lease losses was $9.9 million for 2009, compared to $4.5 million for 2008. Additions were made to the provision in 2009 in response to increased nonperforming and adversely classified loans and leases, increased levels of charge-offs, weakened economic conditions and growth in the commercial loan and lease portfolio. The increased provision served to improve the ratio of the allowance for loan and lease losses to 1.49% as of December 31, 2009, compared to 1.36% at the prior year-end. The allowance for loan and lease losses expressed as a percentage of nonperforming loans and leases was 90.29% at December 31, 2009 and 102.05% at December 31, 2008. Net charge-offs for 2009 were $8.0 million compared to $2.5 million for 2008.

Management evaluates several factors including new loan and lease originations, actual and estimated charge-offs and the risk characteristics of the loan and lease portfolio and general economic conditions when determining the provision for loan and lease losses. If the current weak economic or market conditions continue or worsen, management believes it is likely that the level of adversely classified assets would increase. This in turn may necessitate further increases to the provision for loan and lease losses in future periods. Also see discussion under “Allowance for Loan and Lease Losses.”

Noninterest Income

Total noninterest income decreased by $1.4 million, or 13.6%, from $10.6 million for 2008 to $9.2 million for 2009. The following table sets forth the components of noninterest income:

		Year ended December 31,
		2009				2008
		(In thousands)
Service charges on deposit accounts		$	5,377			$	5,711
Income from bank-owned life insurance			1,245				1,080
Loan related fees			869				803
Commissions on nondeposit investment products			776				745
Net gains on lease sales and commissions on loans originated for others			408				454
Impairment of available for sale securities			(384	)			(219	)
Gain on sale of available for sale securities			61				725
Other income			813				1,310
Total noninterest income		$	9,165			$	10,609

Deposit account service charges continue to represent the largest source of noninterest income for the Company even though this account did not produce growth in 2009. Service charges on deposit accounts were down $334,000 or 5.8%. Additionally, gains on the sale of available for sale securities decreased $664,000 or 91.6%. Other income also decreased $497,000, or 37.9%, and losses on impairment of available for sale securities increased $165,000, or 75.3%. Net gains on lease sales and loan commissions were down $46,000 or 10.1%. These decreases were offset by increases in income from bank-owned life insurance (up $165,000, or 15.3%) and loan related fees (up $66,000, or 8.2%) primarily as a result of a newly available interest rate swap product discussed below. An increase in the volume of nondeposit investment product activity provided additional noninterest income of $31,000, or 4.2%.

In the fourth quarter of 2008, the Company began offering interest rate swaps with commercial loan borrowers to aid them in managing their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating rate loan payments to fixed rate loan payments. The Company concurrently enters into a mirroring swap with a third party financial institution. The third party financial institution exchanges the client’s fixed rate loan payments for floating rate loan payments. The Company retains the risks associated with the potential failure of counterparties and inherent in making loans.

The interest rate swap contracts are carried at fair value with changes recorded as a component of loan related fees in other noninterest income. For the years ended December 31, 2009 and 2008, net gains on these interest rate swap contracts, which include fee income and adjustments for credit valuation, amounted to approximately $230,000 and $250,000, respectively.

Noninterest Expense

Noninterest expenses for 2009 increased a total of $1.6 million, or 4.3%, to $39.5 million. The following table sets forth the components of noninterest expense:

		Year ended December 31,
		2009				2008
		(In thousands)
Salaries and employee benefits		$	20,573			$	20,091
Occupancy and equipment			4,553				4,578
Data processing			2,640				2,816
FDIC insurance			2,527				694
Professional services			2,612				2,968
Marketing			1,318				1,607
Loan workout and other real estate owned			688				543
Loan servicing			665				643
Other expenses			3,953				3,946
Total noninterest expense		$	39,529			$	37,886

FDIC insurance increased $1.8 million, or 264.1%, due to the special assessment imposed by the FDIC on financial institutions during the second quarter of 2009 and an increase in assessment rates for 2009. On May 22, 2009, the FDIC imposed a 5 basis point special assessment on assets less Tier I capital as of June 30, 2009 on all FDIC-insured financial institutions. The Bank incurred a charge of $733,000 as a result of the special assessment levied. The FDIC has authority to levy an additional 5 basis points in special assessments after September 30, 2009. In addition to the special assessment, FDIC regular assessments increased for 2009. During 2008, financial institutions were assessed rates ranging from 5 basis points per $100 of deposits for institutions in Risk Category I to 43 basis points for institutions assigned to Risk Category IV. In 2009, rates ranged from 12 to 50 basis points per $100 of deposits.

Additionally, salaries and benefits increased $482,000, or 2.4%, and loan workout and other real estate owned expenses increased $145,000, or 26.7%. These increases were partially offset by decreases in professional services (down $356,000, or 12.0%), marketing (down $289,000, or 18.0%) and data processing (down $176,000, or 6.3%).

Overall, with the decrease in noninterest income and the increase in noninterest expense, the Company’s efficiency ratio was 68.76% for 2009, compared to 67.68% for 2008.

Income Tax Expense

The Company recorded income tax expense of $2.5 million for 2009, compared to $4.4 million for 2008. This represented total effective tax rates of 31.1% and 32.6%, respectively. Tax-favored income from BOLI, along with the utilization of a Rhode Island passive investment company, has reduced the Company’s effective tax rate from the 40.9% combined statutory federal and state tax rates.

Financial Condition

Loans and Leases Receivable

Total loans and leases were $1.16 billion, or 72.0% of total assets, at December 31, 2010, compared to $1.11 billion, or 69.9% of total assets, at December 31, 2009, an increase of $43.6 million, or 3.9%. This increase was centered in commercial loans and leases (where the Company concentrates its origination efforts). Additionally, consumer loans increased. These increases were partially offset by a decrease in residential mortgage loans (which the Company primarily purchases, although origination efforts have increased for 2010). Total loans and leases as of December 31, 2010 are segmented in three broad categories: commercial loans and leases that aggregate $780.3 million, or 67.5%, of the portfolio; residential mortgages that aggregate $164.9 million, or 14.3% of the portfolio; and consumer and other loans that aggregate $210.3 million, or 18.2% of the portfolio.

The following is a summary of loans and leases receivable:

		December 31,
		2010				2009				2008				2007				2006
		(In thousands)
Commercial loans and leases:
Commercial real estate — nonowner occupied		$	200,809			$	180,416			$	133,782			$	102,990			$	102,390
Commercial real estate — owner occupied			179,766				168,425				175,472				157,431				140,812
Commercial and industrial			157,879				167,968				164,569				131,927				106,017
Multifamily			79,934				66,350				53,159				42,536				34,294
Small business			62,841				56,148				50,464				45,778				41,785
Construction			30,349				23,405				22,300				38,832				37,237
Leases and other (1)			73,054				75,057				63,799				58,702				62,979
Subtotal			784,632				737,769				663,545				578,196				525,514
Unearned lease income (1)			(6,159	)			(7,693	)			(6,980	)			(5,742	)			(6,651	)
Net deferred loan origination costs			1,791				2,321				1,857				1,214				927
Total commercial loans and leases			780,264				732,397				658,422				573,668				519,790
Residential mortgage loans:
One- to four-family adjustable rate			106,341				115,855				126,689				155,087				165,140
One- to four-family fixed rate			57,948				56,724				85,057				92,485				96,880
Subtotal			164,289				172,579				211,746				247,572				262,020
Premium on loans acquired			598				738				953				1,198				1,979
Net deferred loan origination fees			(10	)			(23	)			(34	)			(42	)			(54	)
Total residential mortgage loans			164,877				173,294				212,665				248,728				263,945
Consumer and other loans:
Home equity — term loans			125,114				119,909				127,142				149,192				152,484
Home equity — lines of credit			82,778				83,771				76,038				62,357				64,208
Unsecured and other			1,511				1,410				2,216				2,774				2,359
Subtotal			209,403				205,090				205,396				214,323				219,051
Net deferred loan origination costs			945				1,066				1,259				1,413				1,506
Total consumer and other loans			210,348				206,156				206,655				215,736				220,557
Total loans and leases receivable		$	1,155,489			$	1,111,847			$	1,077,742			$	1,038,132			$	1,004,292