Use these links to rapidly review the documentBancorp Rhode Island, Inc. Annual Report on Form 10-K Table of Contents PART IV



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.

FORM 10-K

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

For
the fiscal year ended December 31, 2007

Commission
File No. 001-16101

BANCORP RHODE ISLAND, INC.(Exact Name of Registrant as Specified in Its Charter)

|Rhode Island(State or Other Jurisdiction of
Incorporation or Organization) |  | 05-0509802(IRS Employer
Identification No.)
|-------------------------------------------------------------------------- |  | -------------------------------------------

ONE TURKS HEAD PLACE, PROVIDENCE, RI 02903(Address of Principal Executive Offices)

(401) 456-5000(Issuer's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share(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 ý

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 ý

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 ý    No o

Indicate by checkmark 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 ý |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | 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 ý

As of June 30, 2007, 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 MarketSM was $150,796,218.

As
of February 28, 2008, there were 4,537,021 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 2008 Annual Meeting of Shareholders are incorporated by reference into Parts II and
III of this Form 10-K.

See
pages 63-65 for the exhibit index.



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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                                                                                                 |  | 16         
|            |  | Item 1B    |  |   |  | Unresolved Staff Comments                                                                                    |  | 21         
|            |  | Item 2     |  |   |  | Properties                                                                                                   |  | 22         
|            |  | Item 3     |  |   |  | Legal Proceedings                                                                                            |  | 22         
|            |  | Item 4     |  |   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 22         
|Part II.    |  | Item 5     |  |   |  | Market for the Company's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 23         
|            |  | Item 6     |  |   |  | Selected Consolidated Financial Data                                                                         |  | 24         
|            |  | Item 7     |  |   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 26         
|            |  | Item 7A    |  |   |  | Qualitative and Quantitative Disclosures About Market Risk                                                   |  | 57         
|            |  | Item 8     |  |   |  | Financial Statements and Supplementary Data                                                                  |  | 58         
|            |  | Item 9     |  |   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 58         
|            |  | Item 9A    |  |   |  | Controls and Procedures                                                                                      |  | 59         
|            |  | Item 9B    |  |   |  | Other Information                                                                                            |  | 59         
|Part III.   |  | Item 10    |  |   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 60         
|            |  | Item 11    |  |   |  | Executive Compensation                                                                                       |  | 61         
|            |  | Item 12    |  |   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 61         
|            |  | Item 13    |  |   |  | Certain Relationships, Related Transactions, and Director Independence                                       |  | 62         
|            |  | Item 14    |  |   |  | Principal Accountant Fees and Services                                                                       |  | 62         
|Part IV.    |  | Item 15    |  |   |  | Exhibits and Financial Statement Schedules                                                                   |  | 63         
|            |  | Signatures |  | 66

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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:



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 subsidiaries.

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 16
full-service branches, with 12 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, 2007 (excluding one bank that draws its deposits primarily from the internet), the Bank is the fifth largest bank in Rhode Island and 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 and leases,
deposit products, nondeposit investment products, cash management and online banking services, private banking and other banking products and services

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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.

One
of the Bank's principal subsidiaries, BRI Investment Corp., a Rhode Island corporation wholly-owned by the Bank, engages in the maintenance and management of intangible investments
and the collection and distribution of the income from such investments.

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 athttp://www.bankri.com.

The
Company makes available free of charge through its website athttp://www.bankri.comall 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 and added sales of investment
products; begun a private banking group and acquired an equipment leasing company.

In
March 2007, the Bank marked its eleventh year in business. During the past eleven plus 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, enhanced its operating systems and infrastructure and has
become an effective competitive force in the Greater Providence marketplace.

During
the past year, the Company continued its transition from a young, high growthde novobank into a more mature institution, which
seeks to better leverage the footprint it has built and investments it has made. Thus, the Company aimed to combine its strong external focus on high quality loan and deposit growth with
(i) the absorption of the Company's major recent initiatives, which included four new branches, the creation of a private bank and acquisition of a leasing subsidiary, and
(ii) internally directed efforts to improve the Company's organizational structure and better control operational costs. Additionally, the Company took measures to deal with the
industry-wide pressure on net interest margins presented by the shape of the yield curve and the intense competition for deposits and quality assets.

In
late 2007, the Company's Chief Financial Officer assumed responsibility for operations, information technology and human resources in addition to overseeing all financial strategy,
balance sheet management, investor relations and accounting. The Company also promoted its Director of Corporate Banking to the position of Chief Lending Officer, with responsibility for all
commercial lending areas, the

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Bank's
Lending Services Unit, the Bank's private banking group, and Macrolease Corporation ("Macrolease"), the Bank's Long Island, NY-based equipment leasing company.

The
Company achieved double-digit commercial loan and lease growth of 10.4% in 2007, with commercial outstandings increasing from $519.8 million at the prior year-end
to $573.7 million at December 31, 2007. The Company's Providence-based lending team and its Macrolease subsidiary have contributed high-quality, high-yielding
assets to the Company's balance sheet. In addition, originations of leases for third parties by Macrolease produced over $1.0 million of noninterest income in 2007, up from $407,000 in the
prior year, an increase of over 150%.

The
Company's loan and lease growth did not come at the expense of credit quality. Nonperforming assets were low at December 31, 2007 at 0.40% of total loans and 0.28% of total
assets, respectively. Net charge-offs for the year were nominal at 0.05% of average loans outstanding.

Competition
for deposits remained intense in the Bank's primary market area. In 2007, the Bank increased its core deposits by $6.0 million, or 0.9%. The Bank increased its savings
accounts by $40.1 million, or 11.3%, during the year, which countered the decrease in demand deposit accounts of $27.6 million, or 13.8%. In 2007, the Bank did not experience the
year-end build-up of customers' demand deposit accounts that it had experienced over the past several years. However, with the Bank's focus on core deposit account gathering,
the Bank was able to reduce its brokered certificate of deposit account balance by $10.0 million from the December 31, 2006 level of $30.0 million. Overall, total deposits
decreased by $1.6 million, or 0.2%, year-over-year.

The
Bank's branches opened in 2004 and 2005 continue to make progress. The Bank's North Kingstown and East Greenwich branches had deposit growth in 2007 of 9.3% and 8.2%, respectively,
while the Lincoln branch had deposit growth of 11.5%. In October 2007, the Bank opened a new branch office in Pawtucket.

Deposit
service charges comprised approximately half of the Company's noninterest income in the past two years. Towards the end of 2006 and into early 2007, the Bank implemented deposit
fee enhancement programs. As a result of these programs, the Bank experienced a 10.3% increase in deposit fee income in 2007.

In
2006, the Bank continued the deployment of its new service model for its branches. With the "Universal Banker" model, customers now have a single in-branch touch point for
all banking services by removing the traditional split between the teller and customer service representative. By having one person service the customer's needs, the Bank believes it can elevate its
service levels, as well as improves operational efficiencies. The Bank phased in this concept gradually throughout 2007 and will continue implementation in 2008.

The
Company continued to proactively manage its balance sheet. The steps taken in 2006 to restructure a portion of the Company's investment portfolio benefited the net interest margin in
2007. The overall increase in yields on investment and mortgage-backed securities of 75 and 20 basis points, respectively, aided in partially offsetting increases in deposit costs. Additionally, the
Company was active in repurchasing shares of its common stock. In November 2007, the Company expanded its original repurchase program of 245,000 shares by an additional 100,000 shares. By the end of
the year, the Company had repurchased 305,200 shares, or 6.3% of its issued shares, for a total cost of $10.2 million. The Company concluded this repurchase program in February 2008. The
Company further managed its capital position by redeeming $5 million of trust preferred securities in September 2007. Additionally, the Company's Board of Directors increased its quarterly
dividend effective third quarter 2007 by $0.01 to $0.16 per share.

The
Company also made strides in improving its operating efficiency. The Company reduced its noninterest expenses in 2007 by $702,000, or 1.8%. This overall decrease compares to
increases of 6.6% in

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2006
and 10.4% in 2005. Throughout 2008, the Company will continue to review its operational process in an effort to identify efficiencies and cost savings with the aim of improving earnings.

Lending Activities

The Bank's business strategy has been to grow its commercial and consumer loan portfolios while allowing its residential mortgage loan portfolio to decline
gradually as a percent of total loans. The Bank has allocated substantial resources to its commercial and consumer lending functions to facilitate and promote such growth. From December 31,
2002, until December 31, 2007, commercial loan and lease outstandings have increased $292.7 million, or 104.2%, and consumer loan outstandings have increased $123.8 million, or
134.7%. Commercial loans and leases increased from 41.9% of total loans and leases at December 31, 2002, to 55.3% of total loans and leases at December 31, 2007, and consumer and other
loans increased from 13.7% of total loans and leases at December 31, 2002, to 20.8% of total loans and leases at December 31, 2007. Meanwhile, residential mortgage loans decreased from
44.4% of total loans and leases at December 31, 2002, to 24.0% of total loans and leases at December 31, 2007.

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
74% of Rhode Island businesses and 79% of Rhode Island jobs 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 commercial real estate group originates nonowner-occupied commercial real estate, multi-family residential real
estate and construction loans. The business lending group originates business loans, often referred to as commercial and industrial loans, including owner-occupied commercial real estate loans, term
loans, revolving lines of credit and equipment leases (through the Bank's subsidiary, Macrolease). The Bank's branch network and business development team also play a role in business lending
relationships under $1 million. Underwriting, processing and monitoring of the bulk of business credit relationships under $1.0 million are supported by the Banks lending services unit
("LSU"). The creation of the LSU has enhanced the Bank's ability to reach more borrowers with the same number of personnel as well as achieve more efficient processing and improved 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 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 volume production 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, 2007, the Bank had $256.9 million of aggregate loan commitments outstanding to fund a variety of loans.

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Overall,
loans and leases produced total interest income of $67.0 million, or 77.9% of total interest and dividend income, in 2007 and $63.0 million, or 77.6%, of total
interest and dividend income, during 2006.

Commercial Real Estate and Multi-Family LoansThe Bank originates loans secured by mortgages on owner-occupied and
nonowner-occupied commercial and multi-family residential properties. At December 31, 2007, owner-occupied commercial real estate loans totaled $157.4 million, or 15.2% of the total loan
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 $103.0 million, or 9.9% of the total loan portfolio, and multi-family residential loans totaled
$42.5 million, or 4.1% of the total loan 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 multi-family 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 multi-family properties generally are made at a loan-to-value ratio of no more than 80%.

Loans
secured by nonowner-occupied commercial real estate and multi-family 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 multi-family residential business is cyclical and subject to downturns, over-building and local economic conditions.

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 U.S. Small
Business Administration's ("SBA") loan guaranty programs and include some form of SBA credit enhancement. The Bank utilizes credit scoring in evaluating business loans of up to $750,000. 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, 2007, commercial and industrial loans totaled $131.9 million, or 12.7% of the total loan 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.

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Leases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 leasing 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. In addition, the Bank historically has purchased equipment leases from originators outside of the Bank. The U.S. Government and its agencies are
the principal lessees on the vast majority of these purchased leases. These "government" leases generally have maturities of five years or less and are not made in reliance on residual collateral
values. At December 31, 2007, leases comprised 10.2% of the commercial loan and lease portfolio, with $43.4 million of Macrolease-generated leases and $15.3 million of purchased
government leases. Included within these amounts were $3.3 million of leases generated for sale at December 31, 2007. The Bank increased its origination efforts intended for third
parties in 2007 with leases originated for sale of $25.1 million, which generated $1.0 million of noninterest income.

Small Business LoansThe Bank utilizes the term "small business loans" to describe business lending relationships of
approximately $250,000 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, 2007, small business loans totaled $45.8 million, or 4.4% of the total loan 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 individuals and professional builders to construct
one- to four-family residential units, either as primary residences or for resale. The Bank also makes construction loans for the purpose of constructing multi-family or
commercial properties. At December 31, 2007, outstanding construction loans totaled $38.8 million, or 3.7% of the total loan portfolio. In addition, the Bank offers
interest-only construction loans during the construction period.

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 multi-family 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. Currently, the Bank

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purchases
fixed- and adjustable-rate ("ARM") mortgage whole loans from other financial institutions both in New England and elsewhere in the country. The Bank anticipates continuing to
purchase residential mortgage loans until such time as its commercial and consumer loan originations are sufficient to fully utilize available cash flows. With the exception of approximately
$40 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, 2007, approximately 36% of the residential mortgage loan portfolio consisted of
loans secured by real estate outside of New England.

Additionally,
largely as an accommodation to the Bank's customers, fixed- and variable-rate mortgages are offered throughout the Bank's branch network. The majority of these
mortgages are transferred to the Bank's correspondent third parties under precommitments to fund these transactions. However, the Bank does retain a portion of these residential mortgages for its own
portfolio. In 2007, fees from these loans originated for third parties increased to $192,000 from $159,000 in the prior year. Overall, the Bank anticipates that its residential mortgage loan portfolio
will decline long-term as it focuses its resources on commercial and consumer lending.

At
December 31, 2007, one- to four-family residential mortgage loans totaled $248.7 million, or 24.0% of the total loan portfolio. The fixed rate
portion of this portfolio totaled $92.9 million and had original maturities of 15 to 30 years. The adjustable rate portion of this portfolio totaled $155.8 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 line of credit loans for consumers. At
December 31, 2007, the consumer loan portfolio totaled $215.7 million, or 20.8% of the total loan portfolio. Over the past 5 years, consumer loans have increased by
$123.8 million, or 134.7%. However, compared to the prior year-end, consumer loans have decreased by $4.8 million, or 2.2%. The Company believes this decrease was reflective
of the softening of the housing market over the past 18 months, which has reduced consumer appetite for home equity loans and credit lines.

Home
equity term loans and home equity lines of credit comprised 98.1% of the consumer loan portfolio at December 31, 2007. 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.

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, U.S. agency securities, corporate debt securities,
mortgage-backed securities ("MBSs"), collateralized mortgage obligations ("CMOs") and Federal Home Loan Bank of Boston ("FHLB") stock, represents $367.9 million, or 24.9% of total assets, as of
December 31, 2007. The vast majority of these securities are rated investment grade by at least one major rating agency.

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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 2007, investments produced total interest and dividend income of $19.0 million, or 22.1% of total interest and dividend income compared to $18.2 million, or
22.4%, of total interest and dividend income, during 2006.

Deposits

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 moderately on a dollar amount basis compared to the prior year (up $6.0 million, or 0.9%). Within core deposits, demand deposit accounts decreased to
$172.6 million at December 31, 2007 from $200.3 million at December 31, 2006. At the end of 2007, the Bank did not experience the year-end build-up
in customers' demand deposit accounts it had in the past several years. Within total deposit growth, however, the balance sheet mix changed from the prior year due to the continuing growth of savings
account balances. Savings balances grew to $396.8 million at December 31, 2007, compared to $356.7 million at December 31, 2006, an increase of $40.1 million, or
11.3%. Core deposits as a percentage of total deposits increased to 63.1% at December 31, 2007 from 62.4% at December 31, 2006.

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
insufficient funds ("NSF") fees) have grown over the years and represents the largest source of noninterest income for the Company. Service charges on deposit accounts produced a double-digit
percentage increase from the prior year with an increase of $523,000, or 10.3%, from $5.1 million for 2006, to $5.6 million for 2007.

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 and 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.

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Borrowings

The Bank also derives cash flows from several sources, including loan repayments, deposit inflows and outflows, sales of available for sale investment securities
and FHLB and other borrowings. Loan repayments and deposit inflows and outflows are significantly influenced by prevailing interest rates, competition and general economic conditions.

The
Bank utilizes borrowings on both a shorter- and longer-term basis to compensate for reductions in normal sources of funds on a daily basis and as opportunities present
themselves. Additionally, the Bank will utilize borrowings as part of the Bank's overall strategy to manage interest rate risk. At December 31, 2007, total borrowings stood at
$331.7 million compared to $337.1 million at December 31, 2006.

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 offered through an arrangement with Commonwealth Equity Services, Inc., of Waltham,
Massachusetts ("Commonwealth"). Commissions on nondeposit investment products for the years ending December 31, 2007, 2006 and 2005 were $575,000, $872,000 and $849,000, respectively.

Employees

At December 31, 2007, the Company had 229 full-time and 39 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 (the
"Exchange Act"), and the Sarbanes-Oxley Act of 2002. Since 2002, changes to SEC 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 (the "BHC Act"). As a bank holding company, the Company is regulated by the Board
of Governors of the Federal Reserve System (the "FRB"), and also is subject to certain laws of the State of Rhode Island.

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The Bank is a Rhode Island chartered non-member bank of the Federal Reserve System. The Bank's deposits are insured by the Bank Insurance Fund (the "BIF") of the FDIC.
Accordingly, the Bank is subject to the supervision and regulation of the FDIC and the Rhode Island Department of Business Regulation (the "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 (the "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

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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 BIF of the FDIC to the legal maximum for each separately insured
depositor. The Federal Deposit Insurance Act, as amended (the "FDI Act"), 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 BIF reserves to insured deposits in the BIF is less than 1.25%.

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. Under the Federal Deposit Insurance Reform Act of 2005, which became law in 2006, the Bank received a one-time assessment credit of $585,000 that could be applied against premiums,
subject to certain limitations. Banks are now assessed rates ranging from 5 basis points per $100 of deposits for banks in Risk Category I (within which the Bank is classified) to 43 basis
points for banks assigned to Risk Category IV. The Bank paid a minimum assessment of $2,000 in 2007, largely through the utilization of this one-time credit. In 2008, the Bank
anticipates fully utilizing the remainder of this credit. This assessment increase is expected to have an adverse effect on the Company's earnings for 2008 and future years as compared to prior years.

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 FDI Act 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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."

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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 1 capital (as defined below) to total assets ("Tier 1 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 assets ratios based on Tier 1 capital ("Tier 1 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 1 (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 1 Risk- Based Capital Ratio of at least 6% and a Tier 1
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 1 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, 2007, the Bank's Tier 1 Leverage Ratio was 7.72%, its Tier 1 Risk-Based Capital Ratio was 10.87% and its Total Risk-Based
Capital Ratio was 12.09%. 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.

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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. As of December 31, 2007, on a consolidated basis, the Company's
Tier 1 Leverage Ratio was 7.87%, its Tier 1 Risk-Based
Capital Ratio was 11.06% and its Total Risk-Based Capital Ratio was 12.28%. Based upon the above ratios, the Company is considered "well capitalized" for regulatory capital purposes.

Basel AccordU.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel
Committee on Banking Supervision (the "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 (the "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 and that it is the agencies intention to have
the standardized proposal finalized before the Core Banks begin the first transitional floor period under Basel II. Accordingly, the Company is not yet in a position to determine the effect of such
rules on its risk capital requirements.

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

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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.

Loans
outstanding to executive officers and directors of the Bank, including their immediate families and affiliated companies ("related parties"), aggregated $7.6 million at
December 31, 2007 and $5.4 million at December 31, 2006. 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 facilitated the interstate expansion and consolidation of banking
organizations by permitting (i) bank holding companies such as the Company, that are adequately capitalized and managed, to acquire banks located in states outside their home states regardless
of whether such acquisitions are authorized under the law of the host state, (ii) the interstate merger of banks after June 1, 1997, subject to the right of individual states to "opt in"
early or "opt out" of this authority prior to such date, (iii) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host
state, (iv) foreign banks to establish, with approval of the appropriate regulators in the United States, branches outside their home states to the same extent that national or state banks
located in such state would be authorized to do so and (v) banks to receive deposits, renew time deposits, close loans and receive payments on loans and other obligations as agent for any bank
or thrift affiliate, whether the affiliate is located in the same or different state. Rhode Island adopted "opt in" legislation, which permits full interstate banking acquisition and branching.

Gramm-Leach-Bliley Act

In late 1999, Congress enacted the Gramm-Leach-Bliley Act (the "G-L-B Act"), which repealed provisions of the 1933 Glass-Steagall Act that
required separation of the commercial and investment banking industries. The G-L-B 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 G-L-B 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 G-L-B 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 G-L-B 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
G-L-B 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.

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The
G-L-B 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
G-L-B Act provides protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. The G-L-B 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 G-L-B 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 USA PATRIOT 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: money laundering;
suspicious activities and currency transaction reporting; and currency crimes.

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,
management's assessment and 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.

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Check 21The Check Clearing for the 21st Century Act, or "Check 21" as it is commonly known, became
effective in late 2004. Check 21 facilitates check collection by creating a new negotiable instrument called a "substitute check", which permits, but does not require, banks to replace original checks
with substitute checks or information from the original check and process check information electronically. Banks that do use substitute checks must comply with certain notice and recredit rights.
Check 21 is expected to cut the time and cost involved in physically transporting paper items and reduce float, i.e., the time between the deposit of a check in a bank and payment, especially
in cases in which items were not already being delivered same-day or overnight. The Bank is currently implementing the Check 21 authority and expects to incur minimal additional costs
until all banks have adopted Check 21.

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.

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 implement national
monetary policy. The nature and impact on the Bank of any future changes in such policies cannot be predicted.

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

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, and from non-bank competitors.

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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.

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

The population in the Rhode Island area declined slightly in 2007, with slow growth over the past several years. Economic growth in Rhode Island has been slow to
moderate during the same time period, while New England has trailed other parts of the nation in terms of general economic growth. Further, the Rhode Island unemployment rate continues to exceed the
national average rate. Additionally, Rhode Island businesses, like many companies throughout the United States, are facing rising 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.

Based
upon recent forecasts, the State of Rhode Island is projecting a significant budget shortfall in the current fiscal year with larger projected budget deficits in future years.
State and local government entities represent one of the largest employers in our market area. Proposed measures to address these budget shortfalls include reductions in State employee workforce and
related health and pension benefits, cutbacks in social service programs, reductions in State aid to cities and towns and caps on historic preservation tax credits. In addition, there may be tax
increases on both individuals and businesses to close the budget gap. The proposed reduction in State aid to cities and towns in Rhode Island may also lead to local property tax increases or
reductions in municipal services. These measures, combined with 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.

Our
borrowers' ability to honor their repayment commitments is generally dependent upon the level of economic activity and general health of the regional and local economy. Furthermore,
economic conditions beyond our control, such as the strength of credit demand by customers and changes in the general levels of interest rates, may have a significant impact on our operations,
including decreases in the value of collateral securing loans. Therefore, an economic recession in this market area adversely
affecting growth could cause significant increases in nonperforming assets, thereby reducing operating profits or causing operating losses, impairing liquidity and eroding capital.

Fluctuations in interest rates could adversely impact our net interest margin.

Our earnings and cash flows are heavily dependent on net interest margin, which is the difference between interest income that we earn on loans and investments
and the interest expense paid on deposits and other borrowings. When maturities of assets and liabilities are not balanced, a rapid increase or decrease in interest rates could have an adverse effect
on our net interest margin and results of operation. Interest rates are highly sensitive to factors that are beyond our control, including general economic conditions, inflation rates, flattening 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. The nature, timing and effect of any future changes in interest rates on
us and our future results of operations are not predictable.

17

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Change in the composition of our loan and lease portfolio may result in greater risk of losses.

At December 31, 2007, 55.3% of our loan and lease portfolio consisted of commercial real estate, business and construction loans and leases, an increase
from 51.8% of our loan and lease portfolio at December 31, 2006. We intend to continue to emphasize the origination of these types of loans and leases. These loans generally have greater risk
of nonpayment and loss than residential mortgage loans because repayment of these types of loans often depends on the successful business operation and income stream of the borrowers. Such loans
typically involve larger loan balances to single borrowers or groups of related borrowers than do individual one-to four-family residential loans. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a single one-to
four-family residential mortgage loan.

Our allowance for loan and lease losses may be insufficient to cover actual loan and lease losses.

The risk of loan and lease losses varies with, among other things, 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, 2007, the allowance for loan and lease losses totaled $12.6 million,
representing 1.22% of total loans.

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. There can be no assurance that new and relocated branches will generate an acceptable level of net income or that we will be able to
successfully establish new branch locations in the future. In addition, there can be no assurance that we will be successful in developing new business lines or that any new products or services
introduced will be profitable.

Our growth is substantially dependent on our management team.

Our future success and profitability are substantially dependent upon the management and banking abilities of our senior executives, who have substantial
background and experience in banking and financial services, as well as personal contacts, in the Rhode Island market and the region generally. Competition for such personnel is intense, and there is
no assurance we will be successful in retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to business and could have a material adverse effect on our
business, financial condition and results of operations.

18

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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
three years. Also, customers in the past few years have indicated a preference for higher-yielding term deposit and savings account products. Nonperforming asset levels and loan and lease losses have
been low since inception. Industry experience suggests that this is unlikely to continue indefinitely.

Our controls and procedures may fail or be circumvented.

Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Systems of
controls are based upon certain assumptions and can only provide reasonable, not absolute, assurance that system objectives are met. Potential failure or circumvention of our controls and procedures
or failure to comply with regulations related to controls and procedures could have an adverse effect on our business, results of operations and financial condition.

We face various technological risks.

We rely heavily on communication and information systems to conduct business. Potential failures, interruptions or breaches in system security could result in
disruptions or failures in our key systems, such as general ledger, deposit or loan systems. We have developed policies and procedures aimed at preventing and limiting the effect of failure,
interruption or security breaches of information systems; however, there cannot be assurance that these incidences will not occur, or if they do occur, that they will be appropriately addressed. The
occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in the loss of business, subject us to increased regulatory scrutiny or
subject us to civil litigation and possible financial liability, any of which could have an adverse effect on our results of operation and financial condition.

We encounter technological change continually.

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 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.

19

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The
laws and regulations applicable to the banking industry could change at any time. There is no way to predict the effects of these changes on our business and profitability. Because
government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance with new laws and regulations applicable to the
banking industry could adversely affect operations and profitability.

Risks Related to the Company's Common Stock

Our common stock has limited liquidity.

Even though our common stock is currently traded on the Nasdaq Stock Market's Global Select MarketSM, it has less liquidity than the average stock
quoted on a national securities exchange. Because of this limited liquidity, it may be more difficult for investors to sell a substantial number of shares and any such sales may adversely affect the
stock price.

We
cannot predict the effect, if any, that future equity offerings, issuance of common stock in acquisition transactions, or the availability of shares of common stock for sale in the
market, will have on the market price of our common stock. We cannot give assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the
market, would not cause the price of our common stock to decline or impair future ability to raise capital through sales of common stock.

Fluctuations in the price of our stock could adversely impact your investment.

The market price of our common stock may be subject to significant fluctuations in response to variations in the quarterly operating results, changes in
management, announcements of new products or services by us or competitors, legislative or regulatory changes, general trends in the industry and other events or factors unrelated to our performance.
The stock market has experienced price and volume fluctuations which have affected the market price of the common stock of many companies for reasons frequently unrelated to the operating performance
of these companies, thereby adversely affecting the market price of these companies' common stock. Accordingly, there can be no assurance that the market price of our common stock will not decline.

There are limitations on our ability to pay dividends.

Our ability to pay dividends is subject to the financial condition of the Bank, as well as other business considerations. Payment of dividends by the Company is
also restricted by statutory limitations. These limitations could have the effect of reducing the amount of dividends we can declare.

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 of Directors also has the authority, without further action by shareholders, to issue additional preferred stock in one or more series and to fix by resolution, the rights,
preferences and privileges of such series to the extent permitted by law. Our Board could designate certain rights and privileges for such preferred stock which would discourage unsolicited tender
offers or takeover proposals or have anti-takeover effects. Our Articles also provide for three classes of directors to be elected for

20

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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 25.8% of our outstanding common stock as of December 31, 2007. 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.

21

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ITEM 2.    PROPERTIES

The Bank presently has a network of 16 branch offices located in Providence, Kent and Washington Counties. Eight of these branch office facilities are owned and
eight are leased. Facilities are generally leased for a period of one to ten 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'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:

|Location                                    |  | Size
(Square feet) |   | Year Opened
or Acquired |  | Owned or
Leased |  | Lease
Expiration Date
|------------------------------------------- |  | ------------------ | - | ----------------------- |  | --------------- |  | ---------------------
|Branch offices:                             |  |                    |   |                         |  |                 |  |                      
|1047 Park Avenue, Cranston, RI              |  | 4,700              |   | 1996                    |  | Owned           |  | N.A.                 
|383 Atwood Avenue, Cranston, RI             |  | 4,700              |   | 1996                    |  | Owned           |  | N.A.                 
|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          |  | 12/31/09             
|1440 Hartford Avenue, Johnston, RI          |  | 4,700              |   | 1996                    |  | Land Leased     |  | 12/31/12             
|625 G. Washington Highway, Lincoln, RI      |  | 1,000              |   | 2005                    |  | Owned           |  | N.A.                 
|1140 Ten Rod Road, North Kingstown, RI      |  | 4,000              |   | 2004                    |  | Land Leased     |  | 6/30/19              
|499 Smithfield Avenue, Pawtucket, RI        |  | 3,500              |   | 2007                    |  | Land Leased     |  | 5/31/21              
|One Turks Head Place, Providence, RI        |  | 5,000              |   | 1996                    |  | Leased          |  | 4/30/09              
|165 Pitman Street, Providence, RI           |  | 3,300              |   | 1998                    |  | Leased          |  | 10/31/08             
|445 Putnam Pike, Smithfield, RI             |  | 3,500              |   | 1996                    |  | Leased          |  | 7/31/09              
|1062 Centerville Road, Warwick, RI          |  | 2,600              |   | 1996                    |  | Owned           |  | N.A.                 
|1300 Warwick Avenue, Warwick, RI            |  | 4,200              |   | 1996                    |  | Leased          |  | 6/30/09              
|2975 West Shore Road, Warwick, RI           |  | 3,500              |   | 2000                    |  | Leased          |  | 3/31/10              
|1175 Cumberland Hill Road, Woonsocket, RI   |  | 3,300              |   | 1998                    |  | Owned           |  | N.A.                 
|Administrative and operational offices:     |  |                    |   |                         |  |                 |  |                      
|2104 Plainfield Pike, Cranston, RI          |  | 700                |   | 2002                    |  | Owned           |  | N.A.                 
|625 G. Washington Highway, Lincoln, RI      |  | 23,600             |   | 2003                    |  | Owned           |  | N.A.                 
|One Turks Head Place, Providence, RI        |  | 20,600             |   | 1999                    |  | Leased          |  | 6/30/09              
|One Ames Court, Plainview, NY               |  | 4,400              |   | 2005                    |  | Leased          |  | 1/31/13              
|Planned branch offices:                     |  |                    |   |                         |  |                 |  |                      
|40 Newport Avenue, East Providence, RI      |  | (A                 | ) | N.A.                    |  | Leased          |  | 12/31/17             

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ITEM 3.    LEGAL PROCEEDINGS

The Company is involved only in routine litigation incidental to the business of banking, none of which the Company's management expects to have a material
adverse effect on the Company.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders in the fourth quarter of 2007.

22

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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
MarketSM under the symbol "BARI." The following table sets forth certain information regarding our common stock for the periods indicated.

Stock PriceDividend PaidHigh

Low2006:First Quarter

$
35.65

$
32.75

$
0.15Second Quarter


39.94


33.31


0.15Third Quarter


45.40


38.91


0.15Fourth Quarter


45.37


42.09


0.152007:First Quarter

$
44.75

$
42.10

$
0.15Second Quarter


44.41


36.04


0.15Third Quarter


39.84


32.07


0.16Fourth Quarter


36.70


32.61


0.16


As
of February 28, 2008, there were approximately 1,500 holders of record of our common stock.

Stock Repurchase ProgramThe Company has maintained a stock repurchase program authorized by the Company's board of directors,
which has enabled the Company to proactively manage its capital position. The program, which was initially approved on April 18, 2006, authorized the Company to repurchase up to 245,000 shares
of its common stock from time to time through open market or privately negotiated purchases. On November 26, 2007, the Company expanded the stock repurchase program to 345,000 shares and also
adopted a written purchase plan pursuant to Rule 10b5-1 of the Exchange Act.

The
table below summarizes the Company's repurchases of common stock during the quarter ended December 31, 2007.

|                         |  | Total number
of shares
purchased |  | Average price
paid per share |       | Total number
of shares
purchased as
part of
announced plan |         | Maximum
number of
shares that may
yet be purchased
under the plan
|------------------------ |  | -------------------------------- |  | ---------------------------- | ----- | ---------------------------------------------------------- | ------- | -----------------------------------------------------------------
|10/1/07 through 10/31/07 |  | 1,700                            |  | $                            | 33.80 |                                                            | 1,700   |                                                                  
|11/1/07 through 11/30/07 |  | 188,900                          |  | $                            | 33.97 |                                                            | 188,900 |                                                                  
|12/1/07 through 12/31/07 |  | 62,400                           |  | $                            | 34.14 |                                                            | 62,400  |                                                                  

The
following graph and table show changes in the value of $100 invested on December 31, 2002 through December 31, 2007 in our common stock, the SNL Bank $1 Billion
to $5 Billion Index, the SNL New England Bank 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.

Historically,
the Company has used the SNL New England Bank Index to compare its relative performance. Effective this year, the Company is adopting the SNL Bank $1 Billion to
$5 Billion Index as a replacement for the SNL New England Bank Index. The Company believes the SNL $1 Billion to $5 Billion Index provides a more appropriate comparison for
assessing its relative performance. The SNL New England Bank Index is market capitalization-weighted and one large constituent bank (State Street Corp) comprised 82.3% of the SNL New England Bank
Index at December 31, 2007, diminishing its

23

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appropriateness
as a comparison index. Comparatively, at December 31, 2007, the SNL $1 Billion to $5 Billion Index was comprised of 166 banks, with its largest constituent bank
comprising 2.8% of the index.

Total Return Performance

GRAPHIC

|                           |  | Period Ending
|-------------------------- |  | -------------
|
|
|Bancorp Rhode Island, Inc. |  | 100.00       
|SNL Bank $1B-$5B Index     |  | 100.00       
|SNL New England Bank Index |  | 100.00       
|Russell 3000 Index         |  | 100.00       

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The following table represents selected consolidated financial data as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003. 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, |                    
|------------------------------ | ----------------------------------- | ----------------------------------------- | -------------------
|
|
|Statements of operations data: |                                     |                                           |                    
|                               | Interest income                     |                                           | $                  
|                               | Interest expense                    |                                           |                    
|                               |                                     |                                           |                    
|                               |                                     |                                           | Net interest income
|                               | Provision for loan and lease losses |                                           |                    
|                               | Noninterest income                  |                                           |                    
|                               | Noninterest expense                 |                                           |                    
|                               |                                     |                                           |                    
|                               |                                     |                                           | Income before taxes
|                               | Income taxes                        |                                           |                    
|                               |                                     |                                           |                    
|                               |                                     |                                           | Net income         
|                               |                                     |                                           |                    

24

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|Per share data:             |                                                            |  |   |           |   |   |           |   |   |           |   |   |           |   |   |          
|--------------------------- | ---------------------------------------------------------- |  | - | --------- | - | - | --------- | - | - | --------- | - | - | --------- | - | - | ---------
|                            | Basic earnings per common share                            |  | $ | 1.89      |   | $ | 1.62      |   | $ | 2.14      |   | $ | 2.17      |   | $ | 1.89     
|                            | Diluted earnings per common share                          |  | $ | 1.84      |   | $ | 1.57      |   | $ | 2.04      |   | $ | 2.04      |   | $ | 1.77     
|                            | Dividends per common share                                 |  | $ | 0.62      |   | $ | 0.60      |   | $ | 0.60      |   | $ | 0.58      |   | $ | 0.56     
|                            | Dividend pay-out ratio                                     |  |   | 33.7      | % |   | 38.2      | % |   | 29.4      | % |   | 28.4      | % |   | 31.6     
|                            | Book value per common share                                |  | $ | 24.79     |   | $ | 23.39     |   | $ | 22.21     |   | $ | 19.68     |   | $ | 18.53    
|                            | Tangible book value per common share                       |  | $ | 22.21     |   | $ | 21.03     |   | $ | 19.83     |   | $ | 16.99     |   | $ | 15.76    
|                            | Average common shares outstandingBasic                    |  |   | 4,791,625 |   |   | 4,766,854 |   |   | 4,478,081 |   |   | 3,975,413 |   |   | 3,819,232
|                            | Average common shares outstandingDiluted                  |  |   | 4,918,763 |   |   | 4,920,569 |   |   | 4,697,134 |   |   | 4,222,856 |   |   | 4,085,878
|Balance sheet data:         |                                                            |  |   |           |   |   |           |   |   |           |   |   |           |   |   |          
|                            | Total assets                                               |  | $ | 1,477,119 |   | $ | 1,479,099 |   | $ | 1,442,782 |   | $ | 1,239,069 |   | $ | 1,093,971
|                            | Investment securities                                      |  |   | 76,986    |   |   | 103,425   |   |   | 150,959   |   |   | 104,600   |   |   | 98,595   
|                            | Mortgage-backed securities                                 |  |   | 258,195   |   |   | 240,462   |   |   | 234,858   |   |   | 159,946   |   |   | 106,618  
|                            | Total loans and leases receivable                          |  |   | 1,038,132 |   |   | 1,004,292 |   |   | 950,806   |   |   | 886,301   |   |   | 814,282  
|                            | Allowance for loan and lease losses                        |  |   | 12,619    |   |   | 12,377    |   |   | 11,665    |   |   | 11,454    |   |   | 10,690   
|                            | Goodwill, net                                              |  |   | 11,772    |   |   | 11,317    |   |   | 11,234    |   |   | 10,766    |   |   | 10,766   
|                            | Deposits                                                   |  |   | 1,014,780 |   |   | 1,016,423 |   |   | 980,969   |   |   | 880,674   |   |   | 811,283  
|                            | Borrowings                                                 |  |   | 331,703   |   |   | 337,097   |   |   | 344,769   |   |   | 271,386   |   |   | 203,622  
|                            | Total shareholders' equity                                 |  |   | 113,108   |   |   | 112,085   |   |   | 104,832   |   |   | 78,923    |   |   | 72,107   
|Average balance sheet data: |                                                            |  |   |           |   |   |           |   |   |           |   |   |           |   |   |          
|                            | Total assets                                               |  | $ | 1,469,574 |   | $ | 1,451,959 |   | $ | 1,347,510 |   | $ | 1,168,454 |   | $ | 1,046,741
|                            | Investment securities                                      |  |   | 112,461   |   |   | 144,460   |   |   | 131,711   |   |   | 102,827   |   |   | 91,153   
|                            | Mortgage-backed securities                                 |  |   | 229,872   |   |   | 227,973   |   |   | 209,004   |   |   | 132,946   |   |   | 123,524  
|                            | Total loans and leases receivable                          |  |   | 1,014,951 |   |   | 980,598   |   |   | 916,273   |   |   | 848,550   |   |   | 747,174  
|                            | Allowance for loan and lease losses                        |  |   | 12,503    |   |   | 12,002    |   |   | 11,560    |   |   | 11,072    |   |   | 10,739   
|                            | Goodwill, net                                              |  |   | 11,318    |   |   | 11,290    |   |   | 11,067    |   |   | 10,766    |   |   | 10,766   
|                            | Deposits                                                   |  |   | 1,010,162 |   |   | 965,194   |   |   | 928,374   |   |   | 858,739   |   |   | 779,540  
|                            | Borrowings                                                 |  |   | 326,398   |   |   | 362,721   |   |   | 306,344   |   |   | 227,365   |   |   | 192,068  
|                            | Total shareholders' equity                                 |  |   | 114,872   |   |   | 106,874   |   |   | 95,922    |   |   | 74,704    |   |   | 69,010   
|Operating ratios:           |                                                            |  |   |           |   |   |           |   |   |           |   |   |           |   |   |          
|                            | Interest rate spread                                       |  |   | 2.29      | % |   | 2.50      | % |   | 2.92      | % |   | 3.07      | % |   | 2.91     
|                            | Net interest margin                                        |  |   | 2.96      | % |   | 3.06      | % |   | 3.35      | % |   | 3.44      | % |   | 3.28     
|                            | Efficiency ratio (a)                                       |  |   | 73.08     | % |   | 75.62     | % |   | 69.66     | % |   | 70.55     | % |   | 70.15    
|                            | Return on average assets                                   |  |   | 0.62      | % |   | 0.53      | % |   | 0.71      | % |   | 0.74      | % |   | 0.69     
|                            | Return on average equity                                   |  |   | 7.87      | % |   | 7.22      | % |   | 9.98      | % |   | 11.53     | % |   | 10.45    
|Asset quality ratios:       |                                                            |  |   |           |   |   |           |   |   |           |   |   |           |   |   |          
|                            | Nonperforming loans to total loans                         |  |   | 0.40      | % |   | 0.14      | % |   | 0.04      | % |   | 0.08      | % |   | 0.30     
|                            | Nonperforming assets to total assets                       |  |   | 0.28      | % |   | 0.10      | % |   | 0.03      | % |   | 0.06      | % |   | 0.23     
|                            | Allowance for loan and lease losses to nonperforming loans |  |   | 304.15    | % |   | 875.94    | % |   | 2,810.84  | % |   | 1,562.62  | % |   | 434.20   
|                            | Allowance for loan and lease losses to total loans         |  |   | 1.22      | % |   | 1.23      | % |   | 1.23      | % |   | 1.29      | % |   | 1.31     
|                            | Net loans charged-off to average loans outstanding         |  |   | 0.05      | % |   | 0.05      | % |   | 0.13      | % |   | 0.01      | % |   | 0.08     
|Capital ratios:             |                                                            |  |   |           |   |   |           |   |   |           |   |   |           |   |   |          
|                            | Average shareholders' equity to average total assets       |  |   | 7.82      | % |   | 7.36      | % |   | 7.11      | % |   | 6.40      | % |   | 6.59     
|                            | Tier I leverage ratio                                      |  |   | 7.87      | % |   | 8.37      | % |   | 8.21      | % |   | 7.06      | % |   | 6.76     
|                            | Tier I risk-based capital ratio                            |  |   | 11.06     | % |   | 12.05     | % |   | 12.62     | % |   | 10.01     | % |   | 9.71     
|                            | Total risk-based capital ratio                             |  |   | 12.28     | % |   | 13.27     | % |   | 13.87     | % |   | 11.26     | % |   | 10.92    

---

25

---



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 athttp://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 2007, the Company continued its balance sheet conversion to a more commercial profile and improved its profitability. The Company increased its commercial loan
and lease portfolio by over 10%. Net income and diluted earnings per common share improved in 2007, while the Company reduced its operating costs. For a fuller narrative commentary on these matters,
refer to Item 1, "Business."

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

The
Company's net interest income represents the difference between 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 31. Information as to the components of interest income and interest expense and average rates is provided under"Average Balances, Yields and
Costs"on page 30.

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."

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

26

---



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."

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

The
deposit market in Rhode Island is highly concentrated. The State's three largest banks have an aggregate market share of 85% (based upon June 2007 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.

In
2007, approximately 79.3% of the Company's total revenues (defined as net interest income plus noninterest income) were derived from its net interest income. In a continuing effort to
diversify its sources of revenue, the Company has sought to expand its sources of noninterest income (primarily fees and charges for products and services the Bank offers). Service charges on deposit
accounts remain
the largest component of noninterest income, while the Bank has recently seen growth in gains on lease sales and commissions on loans originated for others.

In
2007, the Bank experienced an overall decrease in net interest margin, as the 2007 net interest margin of 2.96% was 10 basis points ("bps") lower than 2006 net interest margin of
3.06%. This decrease was primarily attributable to the shape of the yield curve and competition for deposits, loans and customers in the Bank's market area.

The
future operating results of the Company will again depend on the ability to maintain and expand 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 credit losses, review of goodwill for
impairment and income taxes. In 2007, the Company reassessed the

27

---



risk
elements within the components of its loan and lease portfolio. There have been no other significant changes in the methods or assumptions used in accounting policies that require material
estimates or assumptions.

Allowance for credit losses

Arriving at an appropriate level of allowance for loan and lease losses and reserve for unfunded lending commitments, collectively referred to as the allowance
for credit 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. A similar process is employed with respect to unfunded lending commitments.

Nonperforming
commercial, commercial real estate and small business loans and leases in excess of a specified dollar amount are deemed to be "impaired." 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 commercial, commercial real estate, small business, residential mortgage and consumer 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.

Management
uses available information to establish the allowance for loan and lease losses at the level it believes is appropriate. However, future additions to the allowance may be
necessary based on changes in estimates or assumptions resulting from changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for credit losses. Such agencies may require the Company 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 Statement of Financial Accounting Standards ("SFAS") 142
"Goodwill and Other Intangible Assets" and SFAS 147 "Acquisitions of Certain Financial
Institutions", the Company ceased amortizing this goodwill and began to review 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 $1.0 million of goodwill through December 31, 2007.

28

---



Goodwill
is evaluated for impairment using market value comparisons for similar institutions, such as price to earnings multiples, price to deposit multiples and price to equity
multiples. This 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 were to
determine that its goodwill were 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.

Income taxes

Certain areas of accounting for income taxes require management's judgment, including determining the expected realization of deferred tax assets. 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 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 2007 was $41.2 million, compared to $42.2 million for 2006 and $42.9 million for 2005. The net interest margin
decreased in 2007 to 2.96%, compared to 3.06% in 2006. In 2005, the net interest margin was 3.35%. The decrease in net interest income of $984,000, or 2.3%, during 2007 was primarily attributable to
the shape of the yield curve and competition for deposits, loans and customers
in the Bank's market area. Average earning assets increased $14.6 million, or 1.1%, and average interest-bearing liabilities increased $6.2 million, or 0.5%, during 2007, compared to
2006.

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. Available for sale securities are stated at amortized cost.

29

---





|                                     |                                             | Year ended December 31,         |                                           
|------------------------------------ | ------------------------------------------- | ------------------------------- | ------------------------------------------
|
|
|
|Assets                               |                                             |                                 |                                           
|Earning assets:                      |                                             |                                 |                                           
|                                     | Overnight investments                       |                                 | $                                         
|                                     | Investment securities                       |                                 |                                           
|                                     | Mortgage-backed securities                  |                                 |                                           
|                                     | Stock in the FHLB                           |                                 |                                           
|                                     | Loans receivable:                           |                                 |                                           
|                                     |                                             | Commercial loans and leases     |                                           
|                                     |                                             | Residential mortgage loans      |                                           
|                                     |                                             | Consumer and other loans        |                                           
|                                     |                                             |                                 |                                           
|                                     |                                             |                                 | Total earning assets                      
|                                     |                                             |                                 |                                           
|Cash and due from banks              |                                             |                                 | 24,178                                    
|Allowance for loan and lease losses  |                                             |                                 | (12,503                                   
|Premises and equipment               |                                             |                                 | 14,458                                    
|Goodwill, net                        |                                             |                                 | 11,318                                    
|Accrued interest receivable          |                                             |                                 | 5,865                                     
|Bank-owned life insurance            |                                             |                                 | 23,627                                    
|Prepaid expenses and other assets    |                                             |                                 | 8,594                                     
|                                     |                                             |                                 |                                           
|                                     |                                             |                                 | Total assets                              
|                                     |                                             |                                 |                                           
|Liabilities and Shareholders' Equity |                                             |                                 |                                           
|Interest-bearing liabilities:        |                                             |                                 |                                           
|                                     | Deposits:                                   |                                 |                                           
|                                     |                                             | NOW accounts                    |                                           
|                                     |                                             | Money market accounts           |                                           
|                                     |                                             | Savings accounts                |                                           
|                                     |                                             | Certificate of deposit accounts |                                           
|                                     | Overnight and short-term borrowings         |                                 |                                           
|                                     | Wholesale repurchase agreements             |                                 |                                           
|                                     | FHLB borrowings                             |                                 |                                           
|                                     | Subordinated deferrable interest debentures |                                 |                                           
|                                     |                                             |                                 |                                           
|                                     |                                             |                                 | Total interest-bearing liabilities        
|                                     |                                             |                                 |                                           
|Noninterest-bearing deposits         |                                             |                                 | 182,093                                   
|Other liabilities                    |                                             |                                 | 18,142                                    
|                                     |                                             |                                 |                                           
|                                     |                                             |                                 | Total liabilities                         
|Shareholders' equity                 |                                             |                                 | 114,872                                   
|                                     |                                             |                                 | Total liabilities and shareholders' equity
|                                     |                                             |                                 |                                           
|Net interest income                  |                                             |                                 |                                           
|                                     |                                             |                                 |                                           
|Net interest rate spread             |                                             |                                 |                                           
|Net interest rate margin             |                                             |                                 |                                           

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

30

---



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, |  
|----------------- | ----------------------------------------------- | ----------------------- | -
|
|
|
|Interest income:  |                                                 |                         |  
|                  | Overnight investments                           |                         | $
|                  | Investment securities                           |                         |  
|                  | Mortgage-backed securities                      |                         |  
|                  | Stock in the FHLB                               |                         |  
|                  | Commercial loans and leases                     |                         |  
|                  | Residential mortgage loans                      |                         |  
|                  | Consumer and other loans                        |                         |  
|                  |                                                 |                         |  
|                  |                                                 | Total interest income   |  
|                  |                                                 |                         |  
|Interest expense: |                                                 |                         |  
|                  | NOW accounts                                    |                         |  
|                  | Money market accounts                           |                         |  
|                  | Savings accounts                                |                         |  
|                  | Certificate of deposit accounts                 |                         |  
|                  | Overnight & short-term borrowings               |                         |  
|                  | FHLB and other borrowings                       |                         |  
|                  | Capital trust and other subordinated securities |                         |  
|                  |                                                 |                         |  
|                  |                                                 | Total interest expense  |  
|                  |                                                 |                         |  
|                  |                                                 | Net interest income     |  
|                  |                                                 |                         |  

Comparison of Years Ended December 31, 2007 and December 31, 2006

General

Net income for 2007 increased $1.3 million, or 17.3%, to $9.0 million from $7.7 million for 2006. Earnings per diluted common share ("EPS")
increased also from $1.57 for 2006 to $1.84 for 2007. The 2007 earnings represented a return on average assets of 0.62% and a return on average equity of 7.87% for
2007, as compared to a return on average assets of 0.53% and a return on average equity of 7.22% for 2006.

Included
within net income and EPS for 2007 were gains on available for sale ("AFS") securities of approximately $165,000 or $0.03, net of taxes. Comparatively, net income and EPS in
2006 were negatively impacted by approximately $558,000 or $0.11, net of taxes, due to the investment portfolio restructuring the Company undertook in the third quarter of 2006 in an effort to improve
earnings in future periods.

To
provide additional analysis regarding the Company's operating results, the following tables set forth certain non-GAAP information relating to the reconciliation of GAAP
net income, EPS and related operating ratios to pro forma amounts, which adjust for AFS securities gains and losses over the past two years. Management believes this information is useful to the
investor in comparing the Company's operating results to those from the prior year. This information should not be viewed as a substitute for operating results determined in accordance with GAAP, nor
is it necessarily comparable to non-GAAP information which may be presented by other companies.

31

---



The
following tables summarize the impact of AFS securities gains and losses for the periods indicated below:

Year ended December 31,(In thousands, except per share data)

2007

2006Net income (GAAP)

$
9,045

$
7,711Adjust for:AFS security (gains) losses, net of tax


(165
)

558Pro forma net income

$
8,880

$
8,269Diluted earnings per share (GAAP)

$
1.84

$
1.57Effect of:AFS security (gains) losses, net of tax


(0.03
)

0.11Pro forma diluted earnings per share

$
1.81

$
1.68


|
|

Year Ended December 31, 2007Return on Average Assets

Return on Average Equity

Efficiency RatioGAAP ratios

0.62
%
7.87
%
73.08
%Effect of:AFS security (gains) losses, net of tax

-0.01
%
-0.14
%
0.36
%Pro forma ratios

0.61
%
7.73
%
73.44
%


|
|

Year Ended December 31, 2006Return on Average Assets

Return on Average Equity

Efficiency RatioGAAP ratios

0.53
%
7.22
%
75.62
%Effect of:AFS security (gains) losses, net of tax

0.04
%
0.52
%
-1.25
%Pro forma ratios

0.57
%
7.74
%
74.37
%


On
a pro forma basis, operating results for 2007 improved as compared to 2006. Margin compression did lead to a decline in net interest income of $984,000, or 2.3%, which was partly
countered by an increase in total average earning assets of approximately $14.6 million. Noninterest income excluding securities gains and losses increased by $684,000, or 6.9%, led primarily
by gains on lease sales and increases in deposit service charges. Additionally, earnings benefited from a decline in noninterest expenses of $702,000, or 1.8%.

Net Interest Income

For 2007, net interest income was $41.2 million, compared to $42.2 million for 2006. The net interest margin for 2007 was 2.96% compared to a net
interest margin of 3.06% for 2006. The decrease in net interest income of $984,000, or 2.3%, was attributable to margin pressures as the average earning assets increased $14.6 million, or 1.1%,
and average interest-bearing liabilities increased $6.2 million, or 0.5%,
over the preceding year. The decrease of 10 bps in the net interest margin was primarily due to the shape of the yield curve and competition for deposits, loans and customers in the Bank's market
area.

32

---



Interest IncomeInvestments

Total investment income (consisting of interest on overnight investments, investment securities and MBSs, and dividends on FHLB stock) was $19.0 million
for 2007, compared to $18.2 million for 2006. This increase in total investment income of $822,000, or 4.5%, was attributable to a 45 basis point increase in the overall yield on investments,
from 4.57% in 2006 to 5.02% in 2007, along with a decrease in the average balance of investments of approximately $20 million.

Interest IncomeLoans and Leases

Interest from loans was $67.0 million for 2007, and represented a yield on total loans of 6.61%. This compares to $63.0 million of interest, and a
yield of 6.42%, for 2006. Increased interest income resulting from growth in the average balance of loans of $34.4 million, or 3.5%, was augmented by an increase in the yield on loans of 19
bps.

The
average balance of the various components of the loan portfolio changed as follows: commercial loans and leases increased $66.5 million, or 14.0%; consumer and other loans
increased $753,000, or 0.34%; and residential mortgage loans decreased $32.9 million, or 11.4%. The yield on the various components of the loan portfolio changed as follows: commercial loans
and leases increased 8 bps, to 7.34%; consumer and other loans increased 14 bps, to 6.21%; and residential mortgage loans increased 7 bps, to 5.39%. The yields on loans and leases benefited primarily
from higher yields on new originations and repricing of existing variable rate assets.

Interest ExpenseDeposits and Borrowings

Interest paid on deposits and borrowings increased by $5.8 million, or 15.0%, due to both market area competition as well as higher market interest rates
during 2007. The overall average cost for interest-bearing liabilities increased 49 bps from 3.39% for 2006, to 3.88% for 2007. The average balance of
total interest-bearing liabilities increased $6.2 million, or 0.5%, remaining constant at $1.15 billion for 2006 and 2007. The growth in deposit average balances was centered primarily
in savings accounts (up $27.0 million, or 7.7%) and CD accounts (up $26.8 million, or 7.5%). These increases were partially offset by a decrease in NOW accounts (down
$8.9 million, or 12.4%) and money market accounts (down $2.5 million, or 28.2%).

The
average balance of borrowings decreased as compared to the prior year, with increases in short-term borrowings (up $12.9 million, or 29.1%) surpassed by decreases
in FHLB funding (down $39.3 million, or 14.0%), as well as declines in wholesale repurchase agreements (down $8.6 million, or 42.9%). In September 2007, the Company redeemed
$5.2 million of debentures held by BRI Statutory Trust II, resulting in a decline in the average balance of subordinated debentures (down $1.4 million, or 7.4%). This redemption resulted
in $137,000 of additional interest expense from previously unamortized debt issuance costs. Overall, the cost of nondeposit borrowings increased 23 bps in 2007 to 4.78%, compared to 4.55% in the prior
year.

The
rise in deposit and borrowing costs can be attributed to a number of factors. Customer demand remains strong for higher-yielding deposit products, due in part to relatively high
short-term rates for the majority of 2007. Competition for deposits continues to be strong. Additionally, bank and non-bank advertising continues to be prevalent in the Bank's
local market area, which has increased customer awareness of attractive rates. Moreover, online banking has enabled customers to more actively manage their finances and has facilitated the movement of
available funds from demand deposit accounts and lower-yielding deposit accounts into higher-yielding deposit products. In an effort to attract and retain customers and deposit relationships, the Bank
has offered higher-yielding savings accounts in addition to the normally higher-yielding CDs.

33

---



Provision for Loan and Lease Losses

The provision for loan and lease losses was $700,000 for 2007, compared to $1.2 million for 2006. The primary reasons for the change in the provision for
loan and lease losses were lower relative growth in commercial loans and a reassessment of risk within the components of the loan and lease portfolio. The allowance, expressed as a percentage of total
loans and leases, was 1.22% as of December 31, 2007, compared to 1.23% at the prior year-end and stood at 304.2% of nonperforming loans and leases at December 31, 2007,
compared to 876.0% of nonperforming loans and leases at December 31, 2006. Net charge-offs for 2007 were $458,000, compared to $490,000 for 2006.

In
2006, the Company reclassified the reserve for unfunded lending commitments from the allowance for loan and lease losses to other liabilities. The Company has reclassified prior
period amounts accordingly, as illustrated within the activity analysis table on page 50. These reclassifications resulted in adjustments to prior period ending and average balances of the
allowance for loan and lease losses and other liabilities, the allocation of the allowance for loan and lease losses, as well as previously reported expense amounts for the provision for loan and
lease losses and other expenses and related asset quality ratios. Also see discussion under "Allowance for Credit Losses."

Management
evaluates several factors including new loan originations, actual and estimated charge-offs, risk characteristics of the loan and lease portfolio and general
economic conditions when determining the provision for loan and lease losses. As the loan and lease portfolio continues to grow and mature, or if economic conditions worsen, management believes it
possible that the level of nonperforming assets may increase, which in turn may lead to increases to the provision for loan and lease losses. Also see discussion under
"Allowance for Credit Losses."

Noninterest Income

Total noninterest income increased by $1.8 million or 20.0%, from $9.0 million for 2006, to $10.8 million for 2007. The following table sets
forth the components of noninterest income:

Year ended December 31,2007

2006(In thousands)Service charges on deposit accounts

$
5,578

$
5,055Net gains on lease sales and commissions on loans originated for others


1,216


566Income from bank-owned life insurance


1,038


785Loan related fees


649


694Commissions on nondeposit investment products


575


872Gain/(loss) on AFS securities


254


(859
)Other income


1,475


1,875Total noninterest income

$
10,785

$
8,988


Noninterest
income for 2007 benefited from gains on AFS securities of $254,000, while noninterest income for 2006 was negatively impacted by losses on AFS securities of $859,000
attributable to the investment portfolio restructuring described on page 39. Excluding securities gains and losses, noninterest income increased $684,000, or 6.9%. Deposit account service
charges continue to represent the largest source of noninterest income for the Company and produced growth of $523,000, or 10.3%, as the Company implemented a revenue enhancement program. The
Macrolease platform sold $21.8 million of leases in 2007, generating $1.0 million of noninterest income, compared to $407,000 in the prior year. Income from bank-owned life
insurance ("BOLI") increased $253,000, or 32.2% from the prior year as a result of additional purchases of insurance during 2006, as well as the tax-free exchange the Company

34

---



conducted
for a portion of its BOLI to other life insurance carriers in the fourth quarter of 2006. These increases were offset by volume based decreases in commissions on nondeposit investment
products (down $297,000, or 34.1%) and loan related fees (down $45,000, or 6.5%). Additionally, other income decreased $400,000, or 21.3%, mainly due to decreases in customer external sweep income and
reduced commissions on historic tax credits.

Noninterest Expense

Noninterest expenses for 2007 decreased a total of $702,000, or 1.8%, to $38.0 million. The following table sets forth the components of noninterest
expense:

Year ended December 31,2007

2006(In thousands)Salaries and employee benefits

$
20,859

$
20,636Occupancy and equipment


4,872


4,971Data processing


2,850


2,880Professional services


2,212


2,186Marketing


1,562


1,880Loan servicing


767


917Loan workout and other real estate owned


190


188Other expenses


4,713


5,069Total noninterest expense

$
38,025

$
38,727


The
Company realized savings in marketing costs (down $318,000, or 16.9%), loan servicing (down $150,000, or 16.4%) and occupancy and equipment ($99,000, or 2.0%). Additionally, other
miscellaneous expenses decreased by $356,000, or 7.0%, for the year with savings from increased operating efficiencies. Partially offsetting these items were increases in salaries and benefits (up
$223,000, or 1.1%) and professional services (up $26,000, or 1.2%).

Additionally,
with respect to prior year other expenses, the Company recorded insurance recovery proceeds of $803,000 in December 2006 relating to a loss the Company incurred in the
first quarter of
2006 of $868,000. These amounts are recorded net within other expenses in the preceding table and on the Consolidated Statement of Operations for the year ended December 31, 2006.

Overall,
the Company's efficiency ratio improved to 73.08% for 2007, from 75.62% for 2006. After adjusting for securities gains and losses, the efficiency ratio improved on a pro forma
basis to 73.44% for 2007, from 74.37% for 2006. However, these efficiency ratios continue to be negatively impacted by the compression in the net interest margin, which has partially lessened the
impact of cost savings realized and noninterest income improvement.

Income Tax Expense

The Company recorded income tax expense of $4.3 million for 2007, compared to $3.6 million for 2006. This represented total effective tax rates of
32.0% and 31.7%, 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.

35

---



Comparison of Years Ended December 31, 2006 and December 31, 2005

General

Net income for 2006 decreased $1.9 million, or 19.4%, from $9.6 million for 2005. EPS decreased from $2.04 for 2005 to $1.57 for 2006. The 2006
earnings represented a return on average assets of 0.53% and a return on average equity of 7.22% for 2006, as compared to a return on average assets of 0.71% and a return on average equity of 9.98%
for 2005.

Net
income and EPS for 2006 were negatively impacted by approximately $558,000 or $0.11, net of taxes, due to the investment portfolio restructuring the Company undertook in the third
quarter of 2006 in an effort to improve earnings in future periods. The effect of these security losses on shareholders' equity was minimal as the securities had been carried at market value on the
balance sheet.

To
provide additional analysis regarding the Company's operating results, the following tables set forth certain non-GAAP information relating to the reconciliation of GAAP
net income, EPS and related operating ratios to pro forma amounts, which adjust for AFS securities gains and losses in 2006 and 2005. Management believes this information is useful to the investor in
comparing the Company's operating results to those from the prior year. This information should not be viewed as a substitute for operating results determined in accordance with GAAP, nor is it
necessarily comparable to non-GAAP information which may be presented by other companies.

The
following tables summarize the impact of AFS securities gains and losses for the periods indicated below:

Year ended December 31,(In thousands, except per share data)

2006

2005Net income (GAAP)

$
7,711

$
9,569Adjust for:AFS security losses (gains), net of tax


558


(118
)Pro forma net income

$
8,269

$
9,451Diluted earnings per share (GAAP)

$
1.57

$
2.04Effect of:AFS security losses (gains), net of tax


0.11


(0.03
)Pro forma diluted earnings per share

$
1.68

$
2.01


|
|

Year Ended December 31, 2006Average Assets

Average Equity

EfficiencyGAAP ratios

0.53
%
7.22
%
75.62
%Effect of:AFS security losses (gains), net of tax

0.04
%
0.52
%
-1.25
%Pro forma ratios

0.57
%
7.74
%
74.37
%


36

---



|
|

Year Ended December 31, 2005Return on Average Assets

Return on Average Equity

Efficiency RatioGAAP ratios

0.71
%
9.98
%
69.66
%Effect of:AFS security losses (gains), net of tax

-0.01
%
-0.12
%
0.24
%Pro forma ratios

0.70
%
9.86
%
69.90
%


On
a pro forma basis, operating results for 2006 were down as compared to 2005. Margin compression led to a decline in net interest income of $673,000, despite an increase in total
average earning assets of approximately $100 million. The increases in noninterest income of $754,000, led primarily by increases in deposit service charges and income from loans and leases
originated for third parties, were offset by increased noninterest expenses. In addition to costs for additions to the senior management team, noninterest expenses for 2006 also include the full year
operating costs of Macrolease, the private banking group and the two newest branches, all of which began midway through 2005.

Net Interest Income

For 2006, net interest income was $42.2 million, compared to $42.9 million for 2005. The net interest margin for 2006 was 3.06% compared to a net
interest margin of 3.35% for 2005. The decrease in net interest income of $673,000, or 1.6%, was attributable to margin pressures as the average earning assets increased $99.6 million, or 7.8%,
and average interest-bearing liabilities increased $87.7 million, or 8.3%, over the preceding year. The decrease of 29 bps in the net interest margin was due to the compression of the yield
curve, competitive asset pricing, increases in CD balances and heightened competition for savings and other core deposits in the Company's market area.

Interest IncomeInvestments

Total investment income (consisting of interest on overnight investments, investment securities and MBSs, and dividends on FHLB stock) was $18.2 million
for 2006, compared to $15.7 million for 2005. This increase in total investment income of $2.5 million, or 16.0%, was attributable to a 25 basis point increase in the overall yield on
investments, from 4.32% in 2005 to 4.57% in 2006, along with an increase in the average balance of investments of approximately $35 million.

Interest IncomeLoans and Leases

Interest from loans was $63.0 million for 2006, and represented a yield on total loans of 6.42%. This compares to $53.8 million of interest, and a
yield of 5.87%, for 2005. Increased interest income resulting from growth in the average balance of loans of $64.3 million, or 7.0%, was augmented by an increase in the yield on loans of 55
bps.

The
average balance of the various components of the loan portfolio changed as follows: commercial loans and leases increased $52.4 million, or 12.4%; consumer and other loans
increased $31.2 million, or 16.7%; and residential mortgage loans decreased $19.3 million, or 6.3%. The yield on the various components of the loan portfolio changed as follows:
commercial loans and leases increased 61 bps, to 7.26%; consumer and other loans increased 66 bps, to 6.07%; and residential mortgage loans increased 23 bps, to 5.32%. The yields on loans and leases
benefited primarily from the interest rate increases in 2006.

Interest ExpenseDeposits and Borrowings

Interest paid on deposits and borrowings increased by $12.4 million, or 46.4%, due to both market area competition as well as rises in
short-term market interest rates during 2006. The overall average cost for interest-bearing liabilities increased 88 bps from 2.51% for 2005, to 3.39% for 2006. The average

37

---



balance
of total interest-bearing liabilities increased $87.7 million, or 8.3%, from $1.06 billion in 2005, to $1.15 billion in 2006. The growth in deposit average balances was
centered primarily in CD accounts (up $51.4 million, or 16.9%) and savings accounts (up $11.9 million, or 3.5%). These increases were partially offset by a decrease in NOW accounts (down
$23.1 million, or 24.5%) and money market accounts (down $8.8 million, or 50.2%).

In
addition, the average balance of borrowings increased as compared to the prior year, as the Bank utilized short-term borrowings (up $21.2 million, or 92.2%), FHLB
funding (up $24.6 million, or 9.6%) and wholesale repurchase agreements (up $10.6 million, or 112.4%) to fund a portion of the new asset growth. The balance of wholesale repos has
remained constant at $20 million since midway through the fourth quarter of 2005. Overall, the cost of nondeposit borrowings increased 60 bps in 2006 to 4.55%, compared to 3.95% in the prior
year.

The
rise in liability costs can be attributed to a number of factors. With the rises in interest rates during 2006, customer demand for higher-yielding deposit products has strengthened.
Additionally,
competition for deposits has become intense and extensive bank advertising has increased customer awareness of attractive rates. Moreover, online banking has enabled customers to more actively manage
their finances and has facilitated the movement of available funds from demand deposit accounts and normally lower-costing deposit accounts into higher-yielding deposit products. In an effort to
attract and retain customers and deposit relationships, the Bank has offered not only the typically higher-costing CDs, but also higher-yielding savings and NOW accounts.

Provision for Loan and Lease Losses

The provision for loan and lease losses was $1.2 million for 2006, compared to $1.4 million for 2005. The allowance, expressed as a percentage of
total loans and leases, was 1.23% as of December 31, 2006, compared to 1.23% at the prior year-end and stood at 876.0% of nonperforming loans and leases at December 31, 2006,
compared to 2,810.8% of nonperforming loans and leases at December 31, 2005. Net charge-offs for 2006 were $490,000, compared to $1.2 million for 2005.

In
2006, the Company reclassified the reserve for unfunded lending commitments (December 31, 2005 year-end balance of $503,000) from the allowance for loan and
lease losses to other liabilities. The Company has reclassified prior period amounts accordingly, as illustrated within the activity analysis table on page 50. These reclassifications resulted
in adjustments to the prior period ending and average balances of the allowance for loan and lease losses and other liabilities, the allocation of the allowance for loan and lease losses, as well as
previously reported expense amounts for the provision for loan and lease losses and other expenses and related asset quality ratios. Also see discussion under "Allowance for
Credit Losses."

Management
evaluates several factors including new loan originations, actual and estimated charge-offs, risk characteristics of the loan and lease portfolio and general
economic conditions when determining the provision for loan and lease losses. As the loan and lease portfolio continues to grow and mature, or if economic conditions worsen, management believes it
possible that the level of nonperforming assets will increase, which in turn may lead to increases to the provision for loan and lease losses. Also see discussion under
"Allowance for Credit Losses."

38

---



Noninterest Income

Total noninterest income decreased by $286,000, or 3.1%, from $9.3 million for 2005, to $9.0 million for 2006. The following table sets forth the
components of noninterest income:

Year ended December 31,2006

2005(In thousands)Service charges on deposit accounts

$
5,055

$
4,561Commissions on nondeposit investment products


872


849Income from bank-owned life insurance


785


691Loan related fees


694


1,024Net gains on lease sales and commissions on loans originated for others


566


429(Loss)/gain on AFS securities


(859
)

181Other income


1,875


1,539Total noninterest income

$
8,988

$
9,274


In
September 2006, the Company restructured a portion of its investment portfolio to improve earnings in future periods by capitalizing on a temporary increase in security valuations due
to movements in the
yield curve. The Company sold $62 million of its available for sale securities and reinvested the sales proceeds into higher-yielding securities. This investment portfolio restructuring
resulted in losses of $859,000; however, the effect of these security losses on shareholders' equity was minimal as the securities had been carried at market value on the balance sheet.

Excluding
securities gains and losses, noninterest income increased $754,000, or 8.3%. Deposit account service charges continued to represent the largest source of noninterest income for
the Company and produced the highest growth within the category with an increase of $494,000, or 10.8%, to $5.1 million for 2006, compared to $4.6 million in the prior year. Income from
leases and loans originated for third parties increased $137,000, or 31.9%, due to increased volume. Income from BOLI increased $94,000, or 13.6% from the prior year as a result of additional
purchases of insurance throughout the year. The Company also conducted a tax-free exchange of a portion of its BOLI to other life insurance carriers in the fourth quarter of 2006, in order
to increase income from BOLI in future years. In addition, the Company experienced a moderate increase in commissions on nondeposit investment products of $23,000, or 2.7%. Other income increased by
$336,000, or 21.8%, with increases in customer external sweep income. These increases in noninterest income were partially offset by a decrease in loan related fees of $330,000, or 32.2%. Loan related
fees in 2005 were higher primarily as a result of increased prepayment activity in 2005.

39

---



Noninterest Expense

Noninterest expenses for 2006 increased a total of $2.4 million, or 6.6%, to $38.7 million. The following table sets forth the components of
noninterest expense:

Year ended December 31,2006

2005(In thousands)Salaries and employee benefits

$
20,636

$
19,476Occupancy and equipment


4,971


4,695Data processing


2,880


2,759Professional services


2,186


2,017Marketing


1,880


1,584Loan servicing


917


968Loan workout and other real estate owned


188


217Other expenses


5,069


4,627Total noninterest expense

$
38,727

$
36,343


Overall,
noninterest expenses reflected the continued growth of the Company resulting in higher operating costs. Such growth includes the Bank opening two new branches in Lincoln and
East Greenwich, Rhode Island and the addition of Macrolease and One Trust & Private Banking (all occurring during the second quarter of 2005). Also, additions were made to the Company's
business ranks. The increases in costs were centered in the following areas: salaries and benefits (up $1.2 million, or 6.0%) and occupancy and equipment costs (up $276,000, or 5.9%).

Marketing
costs were up by $296,000, or 18.7%, reflective of increased advertising spending and sponsorship of customer events. Additionally, professional services costs increased
$169,000, or 8.4%, partially as a result of increased investor relations costs. Also, data processing costs increased $121,000, or 4.4%. Other expenses increased by $442,000, or 9.6%, as compared to
2005, with increases in costs of customer related sweep activity, which were in line with the related increase in noninterest income.

Other
expenses for 2006 also included $89,000 related to director stock options, the fair value of which was required to be expensed in connection with the adoption of
SFAS 123-R, "Share-Based Payment." In 2005, the Company was not required to recognize expenses for the estimated fair value of stock
options as the Company accounted for stock options under SFAS 123,"Accounting for Stock-Based Compensation."Under SFAS 123, the Company
utilized the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and did not recognize expenses for the granting of stock options. Including
stock option costs for employee grants, stock option expenses for 2006 were $186,000 compared to $49,000 for 2005. The costs recorded in 2005 related exclusively to the December 2005 acceleration of
vesting of then-outstanding stock options.

Additionally,
in December 2006, the Company recorded insurance recovery proceeds of $803,000 relating to a loss the Company incurred in the first quarter of 2006 of $868,000. These
amounts are recorded net within other expenses in the preceding table and on the Consolidated Statement of Operations for the year ended December 31, 2006.

Overall,
the Company's efficiency ratio increased to 75.62% for 2006, from 69.66% for 2005; however, after adjusting for securities gains and losses, the pro forma efficiency ratios were
74.37% and 69.90%, respectively.

40

---



Income Tax Expense

The Company recorded income tax expense of $3.6 million for 2006, compared to $4.8 million for 2005. This represented total effective tax rates of
31.7% and 33.6%, 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 $1.04 billion, or 70.3% of total assets, at December 31, 2007, compared to $1.00 billion, or 67.9% of total
assets, at December 31, 2006, an increase of $33.8 million, or 3.4%. This increase was centered in commercial loans (where the Company concentrates its origination efforts)
and was partially offset by decreases in residential mortgage loans (which the Company primarily purchases) and consumer loans. Total loans and leases as of December 31, 2007 are segmented in
three broad categories: commercial loans and leases that aggregate $573.7 million, or 55.3% of the portfolio; residential mortgages that aggregate $248.7 million, or 24.0% of the
portfolio; and consumer and other loans that aggregate $215.7 million, or 20.8% of the portfolio.

41

---



The following is a summary of loans and leases receivable:

|                             |                                            | December 31,                      |  
|---------------------------- | ------------------------------------------ | --------------------------------- | -
|
|
|Commercial loans and leases: |                                            |                                   |  
|                             | Commercial real estateowner occupied      |                                   | $
|                             | Commercial & industrial                    |                                   |  
|                             | Commercial real estatenonowner occupied   |                                   |  
|                             | Small business                             |                                   |  
|                             | Multi-family                               |                                   |  
|                             | Construction                               |                                   |  
|                             | Leases and other(1)                        |                                   |  
|                             |                                            |                                   |  
|                             |                                            | Subtotal                          |  
|                             | Unearned lease income(1)                   |                                   |  
|                             | Net deferred loan origination costs (fees) |                                   |  
|                             |                                            |                                   |  
|                             |                                            | Total commercial loans and leases |  
|                             |                                            |                                   |  
|Residential mortgage loans:  |                                            |                                   |  
|                             | One- to four-family adjustable rate        |                                   |  
|                             | One- to four-family fixed rate             |                                   |  
|                             |                                            |                                   |  
|                             |                                            | Subtotal                          |  
|                             | Premium on loans acquired                  |                                   |  
|                             | Net deferred loan origination fees         |                                   |  
|                             |                                            |                                   |  
|                             |                                            | Total residential mortgage loans  |  
|                             |                                            |                                   |  
|Consumer and other loans:    |                                            |                                   |  
|                             | Home equityterm loans                     |                                   |  
|                             | Home equitylines of credit                |                                   |  
|                             | Unsecured and other                        |                                   |  
|                             |                                            |                                   |  
|                             |                                            | Subtotal                          |  
|                             | Premium on loans acquired                  |                                   |  
|                             | Net deferred loan origination costs        |                                   |  
|                             |                                            |                                   |  
|                             |                                            | Total consumer and other loans    |  
|                             |                                            |                                   |  
|                             |                                            | Total loans and leases receivable |  
|                             |                                            |                                   |  

---

Commercial loans and leasesDuring 2007, the commercial loan and lease portfolio (consisting of commercial real estate,
commercial & industrial, equipment leases, multi-family real estate, construction and small business loans) increased $53.9 million, or 10.4%. The primary drivers of this growth occurred
in the commercial & industrial and commercial real estate areas.

The
Bank's business lending group originates business loans, also referred to as commercial and industrial loans, including owner-occupied commercial real estate loans, term loans and
revolving lines of credit. Within the business lending portfolio, commercial and industrial loans increased $25.9 million, or 24.4%, and owner-occupied commercial real estate loans increased
$16.6 million, or 11.8%, since year-end 2006.

42

---



With
the Macrolease platform, the Bank originates equipment leases for its own portfolio, as well as originates leases for third parties as a source of noninterest income. In addition,
the Bank historically has purchased equipment leases from originators outside of the Bank. The U.S. Government and its agencies are the principal lessees on the vast majority of these leases. These
"government" leases generally have maturities of five years or less and are not dependent on residual collateral values. At December 31, 2007, leases comprised 10.2% of the commercial loan and
lease portfolio, with $43.4 million of Macrolease-generated leases and $15.3 million of purchased government leases. Included within these amounts were $3.3 million of leases
generated for sale at December 31, 2007.

The
Bank's commercial real estate ("CRE") group originates nonowner-occupied commercial real estate, multi-family residential real estate and construction loans. These real estate
secured commercial loans are offered as both fixed and adjustable-rate products. Since December 31, 2006, CRE loans have increased $10.4 million, or 6.0%, on a net basis.
During the past twelve months, the Bank originated over $40 million of new CRE loans; however repayments were near $30 million during the same period.

At
December 31, 2007, small business loans (business lending relationships of approximately $250,000 or less) were $45.8 million, compared to $41.8 million at
December 31, 2006, representing 8.0% of the commercial portfolio at each year end. These loans reflect those originated by the Bank's business development group, as well as throughout the
Bank's branch system. The Bank utilizes credit scoring and streamlined documentation, as well as traditional review standards in originating these credits.

The
Bank is a participant in the SBA Preferred Lender Program in both Rhode Island and Massachusetts. SBA guaranteed loans are found throughout the portfolios managed by the Bank's
various lending groups.

The
Company believes it is well positioned for continued commercial growth. Particular emphasis is placed on generation of small- to medium-sized commercial relationships (those
relationships with $10.0 million or less in total loan commitments). Unlike many community banks, the Bank offers asset-based commercial loan facilities that monitor advances against
receivables and inventories on a formula basis.

Residential mortgage loansResidential mortgage loans decreased $15.2 million, or 5.8%, as repayments
($48.7 million) exceeded the total of purchases ($34.4 million) and originations ($725,000). Since inception, the Bank has concentrated its portfolio lending efforts on commercial and
consumer lending opportunities, but originates mortgage loans for its own portfolio on a limited basis. The Bank does not employ any outside mortgage originators, but from time to time, purchases
residential
mortgage loans from third-party originators. Until such time as the Bank can originate sufficient commercial and consumer loans to utilize available cash flow, it intends to continue purchasing
residential mortgage loans as opportunities develop.

Consumer loansDuring 2007, consumer loan outstandings decreased $4.8 million, or 2.2%, to $215.7 million at
December 31, 2007, from $220.6 million at December 31, 2006. The decline in growth was reflective of the softening of housing prices in the local market area over the past
18 months. The Company believes the softening prices have reduced consumer appetite for borrowing against the value of their homes. However, the Company continues to promote consumer lending as
it believes that these ten- to twenty-year fixed-rate products, along with the floating lines of credit, still possess attractive cash flow characteristics in the
current interest rate environment.

43

---



The
table below shows loan and lease originations, purchases and repayment activities.

|                                      |                                    | Year ended December 31,     |                                                               
|------------------------------------- | ---------------------------------- | --------------------------- | --------------------------------------------------------------
|
|
|Originations and principal additions: |                                    |                             |                                                               
|                                      | Loans and leases purchased:        |                             |                                                               
|                                      |                                    | Commercial loans and leases |                                                               
|                                      |                                    | Residential mortgage loans  |                                                               
|                                      |                                    |                             |                                                               
|                                      |                                    |                             | Total loans and leases purchased                              
|                                      |                                    |                             |                                                               
|                                      | Loans and leases originated:       |                             |                                                               
|                                      |                                    | Commercial loans and leases |                                                               
|                                      |                                    | Residential mortgage loans  |                                                               
|                                      |                                    | Consumer and other loans    |                                                               
|                                      |                                    |                             |                                                               
|                                      |                                    |                             | Total loans and leases originated                             
|                                      |                                    |                             |                                                               
|Principal reductions:                 |                                    |                             |                                                               
|                                      | Net charge-offs/transfers to OREO: |                             |                                                               
|                                      |                                    | Commercial loans and leases |                                                               
|                                      |                                    | Residential mortgage loans  |                                                               
|                                      |                                    | Consumer and other loans    |                                                               
|                                      |                                    |                             |                                                               
|                                      |                                    |                             | Total net charge-offs/transfers to OREO                       
|                                      |                                    |                             |                                                               
|                                      | Principal payments:                |                             |                                                               
|                                      |                                    | Commercial loans and leases |                                                               
|                                      |                                    | Residential mortgage loans  |                                                               
|                                      |                                    | Consumer and other loans    |                                                               
|                                      |                                    |                             |                                                               
|                                      |                                    |                             | Total principal payments                                      
|                                      |                                    |                             |                                                               
|                                      |                                    |                             | Change in total loans and leases receivable (before net items)
|                                      |                                    |                             |                                                               

The
following table sets forth certain information at December 31, 2007, regarding the aggregate dollar amount of certain loans maturing in the loan portfolio based on scheduled
payments to maturity. Actual loan principal payments may vary from this schedule due to refinancings, modifications and other changes in loan terms. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.

Principal repayments contractually dueOne year or less

After one, but within five years

After five years(In thousands)Commercial & industrial loans (including leases)

$
67,134

$
93,126

$
24,626Construction/permanent loans


16,770


6,519


15,543Home equity lines of credit


69





62,288Interest-only residential first mortgages





18,132


22,583Small business loans


18,247


18,468


9,063Total

$
102,220

$
136,245

$
134,103


44

---



The
following table sets forth as of December 31, 2007, the dollar amount of certain loans due after one year that have fixed interest rates or floating or adjustable interest
rates.

Loans due after one yearFixed rates

Floating or
adjustable rates(In thousands)Commercial & industrial loans (including leases)

$
88,446

$
29,306Construction/permanent loans


1,786


20,276Home equity lines of credit


6


62,282Interest-only residential first mortgages


7,649


33,066Small business loans


14,855


12,676Total

$
112,742

$
157,606


Asset Quality

The definition of nonperforming assets includes nonperforming loans and other real estate owned ("OREO"). OREO consists of real estate acquired through
foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure. Nonperforming loans are defined as nonaccrual loans, loans past due 90 days or more but
still accruing and impaired loans. Under certain circumstances, the Company may restructure the terms of a loan as a concession to a borrower. These restructured loans are generally considered
impaired loans. There were $3.0 million of impaired loans included in nonaccrual loans at December 31, 2007, compared to $141,000 of impaired loans at December 31, 2005. There
were no impaired loans at December 31, 2006.

Nonperforming AssetsAt December 31, 2007, the Company had nonperforming assets of $4.1 million, or 0.28%, of
total assets. This compares to nonperforming assets of $1.4 million or 0.10% of total assets, at December 31, 2006, and nonperforming assets of $415,000, or 0.03% of total assets, at
December 31, 2005. Nonperforming assets at December 31, 2007 consisted of commercial loans and leases aggregating $3.3 million, residential loans aggregating $822,000,
restructured loans and leases of $37,000 and commercial loans and leases 90 days past due, but still accruing of $100,000. Nonperforming assets at December 31, 2006 and 2005 were
primarily comprised of nonaccrual commercial loans and nonaccrual residential loans. The Company evaluates the underlying collateral of each nonperforming asset and continues to pursue the collection
of interest and principal. Management believes that the December 31, 2007 level of nonperforming assets is low relative to the size of the Company's loan portfolio. As the loan portfolio
continues to grow and mature, or if economic conditions worsen, management believes it possible that the level of nonperforming assets will increase, as will its level of charged-off
loans.

45

---



The
following table sets forth information regarding nonperforming assets.

|                                                           |                            | December 31, |      
|---------------------------------------------------------- | -------------------------- | ------------ | -----
|
|
|Nonaccrual loans and leases                                |                            | $            | 4,012
|Restructured loans and leases                              |                            |              | 37   
|Loans past due 90 days or more, but still accruing         |                            |              | 100  
|Impaired loans (not included in nonaccrual loans)          |                            |              |     
|                                                           |                            |              |      
|                                                           | Total nonperforming loans  |              |      
|Other nonperforming assets                                 |                            |              |     
|                                                           |                            |              |      
|                                                           | Total nonperforming assets |              | $    
|                                                           |                            |              |      
|Nonperforming loans as a percent of total loans and leases |                            |              | 0.40 
|Nonperforming assets as a percent of total assets          |                            |              | 0.28 

Nonaccrual LoansAccrual of interest income on all loans is discontinued when concern exists as to the collectibility of
principal or interest, or typically when a loan becomes over 90 days delinquent. Additionally, when a loan is placed on nonaccrual status, all interest previously accrued but not collected is
reversed against current period income. Residential mortgage loans are removed from nonaccrual when they become less than 90 days past due, and in the case of commercial and consumer loans,
when concern no longer exists as to the collectibility of principal or interest. Interest collected on nonaccruing loans is either applied against principal or reported as income according to
management's judgment as to the collectibility of principal. At December 31, 2007, nonaccrual loans totaled $4.0 million. Interest on nonaccrual loans that would have been recorded as
additional income for the year ended December 31, 2007, had the loans been current in accordance with their original terms, totaled $156,000. This compares with $50,000 and $23,000 of foregone
interest income on nonaccrual loans for the years ended December 31, 2006 and 2005, respectively.

The
following table sets forth certain information regarding nonaccrual loans.

|                  |                             | December 31,           |  
|----------------- | --------------------------- | ---------------------- | -
|
|
|
|Nonaccrual loans: |                             |                        |  
|                  | Residential mortgage loans  |                        | $
|                  | Commercial loans and leases |                        |  
|                  | Restructured Loans          |                        |  
|                  | Consumer and other loans    |                        |  
|                  |                             |                        |  
|                  |                             | Total nonaccrual loans |  
|                  |                             |                        |  

DelinquenciesAt December 31, 2007, $12.6 million of loans and leases were 30 to 89 days past due. This
compares to $5.9 million and $5.3 million of loans 30 to 89 days past due as of December 31, 2006 and 2005, respectively. The majority of these loans at December 31,
2007, 2006 and 2005 were commercial loans and leases. Within loans past due 30 to 89 days at December 31, 2007 were $3.8 million of commercial leases to government entities, which
were primarily attributable to administrative delays as opposed to underlying credit or cash flow issues. This amount compares to $679,000 of government leases past due 30 to 89 days at
December 31, 2006 and none at December 31, 2005.

46

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Management reviews delinquent loans frequently to assess problem situations and to quickly address these problems. In the case of consumer and commercial loans, the Bank contacts the
borrower when a loan becomes delinquent. When a payment is not made, generally within 10-15 days of the due date, a late charge is assessed. After 30 days of delinquency, a
notice is sent to the borrower advising that failure to cure the default may result in formal demand for payment in full. In the event of further delinquency, the matter is generally referred to legal
counsel to commence civil proceedings to collect all amounts owed. In the case of residential mortgage loans, delinquency and collection proceedings are conducted by either the Bank, or its mortgage
servicers, in accordance with standard servicing guidelines. In any circumstance where the Bank is secured by real property or other collateral, the Bank enforces its rights to the collateral in
accordance with applicable law.

The
following table sets forth information as to loans delinquent for 30 to 89 days.

|                                               |                             | December 31,                                    |                                                
|---------------------------------------------- | --------------------------- | ----------------------------------------------- | -----------------------------------------------
|
|
|
|Loans and leases delinquent for 30 to 59 days: |                             |                                                 |                                                
|                                               | Commercial loans and leases |                                                 | $                                              
|                                               | Residential mortgage loans  |                                                 |                                                
|                                               | Consumer and other loans    |                                                 |                                                
|                                               |                             |                                                 |                                                
|                                               |                             | Total loans and leases delinquent 30 to 59 days |                                                
|                                               |                             |                                                 |                                                
|Loans and leases delinquent for 60 to 89 days: |                             |                                                 |                                                
|                                               | Commercial loans            |                                                 |                                                
|                                               | Residential mortgage loans  |                                                 |                                                
|                                               | Consumer and other loans    |                                                 |                                                
|                                               |                             |                                                 |                                                
|                                               |                             | Total loans and leases delinquent 60 to 89 days |                                                
|                                               |                             |                                                 |                                                
|                                               |                             |                                                 | Total loans and leases delinquent 30 to 89 days
|                                               |                             |                                                 |                                                

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

At
December 31, 2007, the Company had $9.5 million of assets that were classified as substandard. This compares to $8.2 million and $6.8 million of assets
that were classified as substandard at December 31, 2006 and 2005, respectively. The Company had no assets that were classified as loss or doubtful at any of these dates. Performing loans may
or may not be adversely classified depending upon management's judgment with respect to each individual loan. At December 31, 2007, included in the $9.5 million of assets that were
classified as substandard, were $5.3 million of performing loans. This

47

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compares
to $8.2 million and $6.4 million of adversely classified performing assets at December 31, 2006 and 2005, respectively. These amounts constitute assets that, in the
opinion of management, could potentially migrate to nonperforming or doubtful status. Management believes that the December 31, 2007 level of adversely classified assets is low relative to the
size and composition of the Company's loan portfolio. As the loan and lease portfolio continues to grow and mature, or if economic conditions worsen, management believes it possible that the level of
adversely classified assets will increase. This in turn may necessitate an increase to the provision for loan and lease losses in future periods.

Allowance for Credit Losses

The allowance for loan and lease losses and reserve for unfunded lending commitments, collectively referred to as the allowance for credit losses, have been
established for credit losses inherent in the loan and lease portfolio and inherent in the unfunded lending commitments through a charge to earnings. The allowance for credit losses is maintained at a
level management considers appropriate to provide for the current inherent risk of loss based upon an evaluation of known and inherent risks in the loan and lease portfolio, as well as the unfunded
lending commitments.

Loans
deemed uncollectible are charged against the allowance for loan and lease losses, while recoveries of amounts previously charged-off are added to the allowance for loan
and lease losses. Amounts are charged-off once the probability of loss has been established, with consideration given to such factors as the customer's financial condition, underlying
collateral and guarantees, and general and industry economic conditions.

When
an insured institution classifies problem loans as either substandard or doubtful, it is required to establish allowances for loan losses in an amount deemed prudent by management.
Additionally, general loss allowances are established to recognize the inherent risk associated with lending activities, and have not been allocated to particular problem loans.

In
addition to the allowance for loan and lease losses, management also estimates probable losses related to unfunded lending commitments. In 2006, the Company reclassified the reserve
for unfunded lending commitments from the allowance for loan and lease losses to other liabilities for all periods presented. Additions to the reserve for unfunded lending commitments are made by
charges to other expenses.

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

|                            |       | December 31, |      
|--------------------------- | ----- | ------------ | -----
|
|
|
|Commercial loans and leases |       | $            | 8,786
|Residential mortgage loans  |       |              | 1,002
|Consumer and other loans    |       |              | 1,637
|Unallocated                 |       |              | 1,194
|                            |       |              |      
|                            | Total |              | $    
|                            |       |              |      

Assessing the appropriateness of the allowance for loan and leases losses involves substantial uncertainties and is based upon management's
evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing various factors. Management's methodology to estimate loss exposure includes an
analysis of individual loans deemed to be impaired, reserve allocations for

48

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various
loan types based on payment status or loss experience and an unallocated allowance that is maintained based on management's assessment of many factors including the growth, composition and
quality of the loan portfolio, historical loss experiences, general economic conditions and other pertinent factors. These risk factors are continuously reviewed and revised by management where
conditions indicate that the estimates initially applied are different from actual results. Management employs a similar process with respect to unfunded lending commitments.

A
portion of the allowance for loan and lease losses is not allocated to any specific segment of the loan portfolio. This non-specific allowance is maintained for two primary
reasons: (i) there exists an inherent subjectivity and imprecision to the analytical processes employed, and (ii) the prevailing business environment, as it is affected by changing
economic conditions and various external factors, may impact the portfolio in ways currently unforeseen. Management, therefore, has established
and maintains a non-specific allowance for loan and lease losses. The amount of this measurement imprecision allocation was $1.2 million at December 31, 2007, compared to
$907,000 at December 31, 2006. With respect to changes within the allocation of the allowance for loan and lease losses, allocations at December 31, 2007 reflect both changes in loan and
lease balances as well as reassessment of risks within the various loan and lease categories.

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

The
factors supporting the allowance for loan and lease losses and the reserve for unfunded lending commitments do not diminish the fact that the entire allowance for loan and lease
losses and the reserve for unfunded lending commitments are available to absorb losses in the entire loan portfolio and related commitment portfolio, respectively. The Company's primary concern is the
appropriateness of the total allowance for loan and lease losses and reserve for unfunded lending commitments. Based on the evaluation described above, management believes that the
year-end allowance for loan and lease losses and reserve for unfunded lending commitments are appropriate.

During
2007, 2006 and 2005, the Bank made additions to the allowance for loan and lease losses of $700,000, $1.2 million and $1.4 million and experienced net
charge-offs of $458,000, $490,000 and $1.2 million, respectively. At December 31, 2007, the allowance for loan and leases losses stood at $12.6 million and represented
304.2% of nonperforming loans and 1.22% of total loans outstanding. This compares to an allowance for loan and lease losses of $12.4 million, representing 875.9% of nonperforming loans and
1.23% of total loans outstanding at December 31, 2006.

During
2007, the Bank made additions to the reserve for unfunded lending commitments of $29,000, bringing the balance to $596,000 at December 31, 2007. This compares to the
December 31, 2006 balance in the reserve for unfunded lending commitments of $567,000.

49

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An
analysis of the activity in the allowance for credit losses is as follows:

|                                                          |                                                     | Year ended December 31,                          |       
|--------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------ | ------
|
|
|Allowance for Loan and Lease Losses                       |                                                     |                                                  |       
|Balance at beginning of year                              |                                                     | $                                                | 12,377
|Loans charged-off:                                        |                                                     |                                                  |       
|                                                          | Commercial loans and leases                         |                                                  |       
|                                                          | Residential mortgage loans                          |                                                  |       
|                                                          | Consumer and other loans                            |                                                  |       
|                                                          |                                                     |                                                  |       
|                                                          |                                                     | Total loans charged-off                          |       
|                                                          |                                                     |                                                  |       
|Recoveries of loans previously charged-off:               |                                                     |                                                  |       
|                                                          | Commercial loans and leases                         |                                                  |       
|                                                          | Residential mortgage loans                          |                                                  |       
|                                                          | Consumer and other loans                            |                                                  |       
|                                                          |                                                     |                                                  |       
|                                                          |                                                     | Total recoveries of loans previously charged-off |       
|                                                          |                                                     |                                                  |       
|                                                          |                                                     | Net (charge-offs) recoveries                     |       
|Provision for loan losses charged against income          |                                                     |                                                  | 700   
|                                                          |                                                     |                                                  |       
|Balance at end of year                                    |                                                     |                                                  | 12,619
|                                                          |                                                     |                                                  |       
|Reserve for Unfunded Lending Commitments(1)               |                                                     |                                                  |       
|                                                          | Balance at beginning of year                        |                                                  |       
|                                                          | (Credit) provision for unfunded lending commitments |                                                  |       
|                                                          |                                                     |                                                  |       
|                                                          | Balance at end of year                              |                                                  |       
|Allowance for Credit Losses                               |                                                     |                                                  |       
|                                                          |                                                     |                                                  |       
|                                                          | Balance at end of year                              |                                                  | $     
|                                                          |                                                     |                                                  |       
|Net charge-offs (recoveries) to average loans outstanding |                                                     |                                                  | 0.05  

---

Investments

Total investments (consisting of overnight investments, investment securities, MBSs, and FHLB stock) totaled $367.9 million, or 24.9% of total assets, at
December 31, 2007. This compares to total investments of $397.7 million, or 26.9% of total assets, as of December 31, 2006. The decrease of $29.8 million, or 7.5%, was
centered in decreases of investment securities of $26.4 million and overnight investments of $20.2 million. These declines were partially offset by an increase in mortgage-backed
securities of $17.7 million. All investment securities and MBSs at December 31, 2007 and 2006 were classified as securities available for sale. At December 31, 2007, the
investment portfolio carried a total net unrealized loss of $106,000, compared to $4.6 million of net unrealized loss at December 31, 2006, with the primary driver of the change in
unrealized gain/loss being the impact of changes in interest rates.

The
Company's securities in an unrealized loss position were deemed to be not other-than-temporarily impaired after considering that substantially all of the
securities were rated "investment grade" with unrealized losses primarily caused by market interest rate changes. In addition, the Company has the intent and ability to hold all securities with
unrealized losses until recovery or

50

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maturity.
In making these other-than-temporary impairment determinations, management considers, among other things, the length of time and extent to which the fair value has
been less than cost and the credit worthiness and near-term prospects of the issuer. Also, management considers capital adequacy, interest rate risk, liquidity and business plans in
assessing the intent and ability to hold all securities with unrealized losses until recovery or maturity.

The
investment portfolio provides the Company a source of short-term liquidity and acts as a counterbalance to loan and deposit flows. During 2007, the Company's available
for sale portfolio purchases of $96.8 million were less than maturities, sales and principal repayments of $110.1 million as the Company redeployed funds into higher-yielding internally
generated assets.

A
summary of investment and mortgage-backed securities available for sale follows:

|                      |                                        |       |   | Unrealized |         |  
|--------------------- | -------------------------------------- | ----- | - | ---------- | ------- | -
|
|
|
|At December 31, 2007: |                                        |       |   |            |         |  
|                      | U.S. Agency obligations                |       | $ | 68,185     |         | $
|                      | Corporate debt securities              |       |   | 6,028      |         |  
|                      | Trust preferred securities             |       |   | 2,980      |         |  
|                      | U.S. Agency mortgage-backed securities |       |   | 183,723    |         |  
|                      | Collateralized mortgage obligations    |       |   | 74,371     |         |  
|                      |                                        |       |   |            |         |  
|                      |                                        | Total |   | $          | 335,287 |  
|                      |                                        |       |   |            |         |  
|At December 31, 2006: |                                        |       |   |            |         |  
|                      | U.S. Agency obligations                |       | $ | 85,992     |         | $
|                      | Corporate debt securities              |       |   | 12,122     |         |  
|                      | Trust preferred securities             |       |   | 6,152      |         |  
|                      | U.S. Agency mortgage-backed securities |       |   | 157,323    |         |  
|                      | Collateralized mortgage obligations    |       |   | 86,935     |         |  
|                      |                                        |       |   |            |         |  
|                      |                                        | Total |   | $          | 348,524 |  
|                      |                                        |       |   |            |         |  
|At December 31, 2005: |                                        |       |   |            |         |  
|                      | U.S. Agency obligations                |       | $ | 125,915    |         | $
|                      | Corporate debt securities              |       |   | 21,214     |         |  
|                      | Trust preferred securities             |       |   | 6,199      |         |  
|                      | U.S. Agency mortgage-backed securities |       |   | 174,542    |         |  
|                      | Collateralized mortgage obligations    |       |   | 62,907     |         |  
|                      |                                        |       |   |            |         |  
|                      |                                        | Total |   | $          | 390,777 |  
|                      |                                        |       |   |            |         |  

51

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The
following table sets forth the contractual maturities of investment and mortgage-backed securities available for sale and the weighted average yields of such securities:

|                      |                                        | Within one year |       | After one, but
within five years |   | After five, but
within ten years |   | After ten years |        
|--------------------- | -------------------------------------- | --------------- | ----- | -------------------------------- | - | -------------------------------- | - | --------------- | -------
|
|
|At December 31, 2007: |                                        |                 |       |                                  |   |                                  |   |                 |        
|                      | U.S. Agency obligations                |                 | $     | 22,386                           |   | 4.45                             | % | $               | 45,789 
|                      | Corporate debt securities              |                 |       | 3,954                            |   | 4.97                             | % |                 | 1,902  
|                      | Trust preferred securities             |                 |       |                                 |   | 0.00                             | % |                 |       
|                      | U.S. Agency mortgage-backed securities |                 |       |                                 |   | 0.00                             | % |                 |       
|                      | Collateralized mortgage obligations    |                 |       |                                 |   | 0.00                             | % |                 |       
|                      |                                        |                 |       |                                  |   |                                  |   |                 |        
|                      |                                        |                 | Total |                                  | $ | 26,340                           |   | 4.53            | %      
|                      |                                        |                 |       |                                  |   |                                  |   |                 |        
|At December 31, 2006: |                                        |                 |       |                                  |   |                                  |   |                 |        
|                      | U.S. Agency obligations                |                 | $     | 9,959                            |   | 2.90                             | % | $               | 75,330 
|                      | Corporate debt securities              |                 |       | 6,034                            |   | 5.33                             | % |                 | 5,990  
|                      | Trust preferred securities             |                 |       |                                 |   | 0.00                             | % |                 |       
|                      | U.S. Agency mortgage-backed securities |                 |       |                                 |   | 0.00                             | % |                 |       
|                      | Collateralized mortgage obligations    |                 |       |                                 |   | 0.00                             | % |                 |       
|                      |                                        |                 |       |                                  |   |                                  |   |                 |        
|                      |                                        |                 | Total |                                  | $ | 15,993                           |   | 3.81            | %      
|                      |                                        |                 |       |                                  |   |                                  |   |                 |        
|At December 31, 2005: |                                        |                 |       |                                  |   |                                  |   |                 |        
|                      | U.S. Agency obligations                |                 | $     | 14,815                           |   | 2.81                             | % | $               | 109,179
|                      | Corporate debt securities              |                 |       | 5,045                            |   | 4.94                             | % |                 | 15,618 
|                      | Trust preferred securities             |                 |       |                                 |   | 0.00                             | % |                 |       
|                      | U.S. Agency mortgage-backed securities |                 |       |                                 |   | 0.00                             | % |                 |       
|                      | Collateralized mortgage obligations    |                 |       |                                 |   | 0.00                             | % |                 |       
|                      |                                        |                 |       |                                  |   |                                  |   |                 |        
|                      |                                        |                 | Total |                                  | $ | 19,860                           |   | 3.35            | %      
|                      |                                        |                 |       |                                  |   |                                  |   |                 |        

Bank-Owned Life Insurance

The Bank has purchased BOLI to protect itself against the loss of key employees due to death and to offset the Bank's future obligations to its employees under
its retirement and benefit plans. During 2007, 2006 and 2005, the Bank purchased $0, $3.5 million and $0 of BOLI, respectively. The cash surrender value of these life insurance policies was
$24.2 million and $23.1 million at December 31, 2007 and 2006, respectively. In late 2006, the Bank conducted a tax-free exchange of a portion of its BOLI to other
life insurance carriers. This exchange, as well as the additional BOLI purchased in 2006, benefited the Bank as income from BOLI increased in 2007 to $1.0 million, up from $785,000 in 2006 and
$691,000 in 2005.

Deposits and Borrowings

The Bank continues to concentrate its time and efforts towards its deposit-gathering network. The Bank's total deposits decreased on a net basis by
$1.6 million, or 0.2%, during 2007, remaining constant at $1.0 billion for 2007 and 2006 respectively. In 2007, savings accounts increased by $40.1 million, or 11.3%. CD balances
decreased $7.6 million, or 2.0% in 2007. However, this decrease in CDs also reflects a

52

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$10.0 million
reduction in the Bank's brokered CD balances from the prior year-end leaving a $20.0 million balance at December 31, 2007. Additionally, demand deposit
accounts were down $27.6 million, or 13.8%, while NOW and money market accounts were down $5.5 million, or 7.8%, and $937,000, or 13.4%, respectively. In the fourth quarter of 2007, the
Bank did not experience a seasonal increase in demand deposit accounts that had occurred during the past few years.

In
2007, the Bank was able to achieve double-digit percentage increases in its largest core deposit category (savings accounts). As market interest rates moderately declined in the
fourth quarter of 2007, the Bank experienced a slight shift in its higher-yielding products, with balances moving from CDs to savings accounts. As a result, core deposit accounts as percentage of
total deposits increased to 63.1% at December 31, 2007 as compared to 62.4% at December 31, 2006.

By
comparison, total deposits increased $35.5 million, or 3.6%, during 2006 and can be summarized as follows: demand deposit accounts increased $15.2 million, or 8.2%, NOW
and money market accounts decreased $24.0 million, or 23.6%, savings accounts increased $15.6 million, or 4.6%, and CDs increased $28.7 million, or 8.1%, during 2006.

The
following table sets forth certain information regarding deposits:

|                                |                                 | December 31, |        
|------------------------------- | ------------------------------- | ------------ | -------
|
|
|
|NOW accounts                    |                                 | $            | 65,191 
|Money market accounts           |                                 |              | 6,054  
|Savings accounts                |                                 |              | 396,838
|Certificate of deposit accounts |                                 |              | 374,063
|                                |                                 |              |        
|                                | Total interest bearing deposits |              |        
|Noninterest bearing accounts    |                                 |              | 172,634
|                                |                                 |              |        
|                                | Total deposits                  |              | $      
|                                |                                 |              |        

At December 31, 2007, CDs with balances greater than $100,000 aggregated $116.7 million, compared to $144.3 million and
$98.0 million at December 31, 2006 and 2005, respectively.

Total
borrowings, excluding subordinated deferrable interest debentures, decreased $239,000, or 0.1%, during 2007, to $318.3 million, from $318.5 million at
December 31, 2006. The Company had $326.2 million of borrowings outstanding at the end of 2005. Over the past two years, the Bank's
customers have increased their utilization of the Bank's cash management product suite, while the Bank's FHLB borrowings remained constant with the prior year-end levels. In the first
quarter of 2007, the Bank decreased the amount of its wholesale repurchase agreements by $10.0 million. The Bank may utilize wholesale repurchase agreement funding or brokered CDs in the future
if spreads are favorable compared to FHLB borrowings.

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

Subordinated Deferrable Interest Debentures

In September 2007, the Company redeemed $5.2 million of subordinated deferrable interest debentures, which were held by BRI Statutory Trust II. As of
December 31, 2007, 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

53

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preferred
securities. The regulatory capital generated from issuing the trust preferred securities helped support the Company's continued asset growth.

Liquidity and Capital Resources

Liquidity

Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as
the ability to respond to the needs of depositors and borrowers, as well as to earnings enhancement opportunities, in a changing marketplace.

The
primary source of funds for the payment of dividends and expenses by the Company is dividends paid to it by the Bank. Bank regulatory authorities generally restrict the amounts
available for payment of dividends if the effect thereof would cause the capital of the Bank to be reduced below applicable capital requirements. These restrictions indirectly affect the Company's
ability to pay dividends. The primary sources of liquidity for the Bank consist of deposit inflows, loan repayments, borrowed funds, maturing investment securities and sales of securities from the
available for sale portfolio. Management believes that these sources are sufficient to fund the Bank's lending and investment activities.

Management
is responsible for establishing and monitoring liquidity targets as well as strategies and tactics to meet these targets. In general, the Company maintains a high degree of
flexibility with a liquidity target of 10% to 30% of total assets. At December 31, 2007, overnight investments, investment securities and mortgage-backed securities available for sale amounted
to $352.3 million, or 23.8% of total assets. This compares to $381.2 million, or 25.8% of total assets, at December 31, 2006. The Bank is a member of the FHLB and, as such, has
access to both short- and long-term borrowings. In addition, the Bank maintains a line of credit at the FHLB as well as a line of credit with a correspondent bank. There have been no
adverse trends in the Company's liquidity or capital reserves. Management believes that the Company has adequate liquidity to meet its commitments.

54

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Commitments and Contingent Liabilities

The following table sets forth the contractual obligations of the Company:

|                              |                                                  | Payments due or commitment expiringby period
|----------------------------- | ------------------------------------------------ | ---------------------------------------------
|
|
|Contractual cash obligations: |                                                  |                                              
|                              | FHLB term borrowings                             |                                              
|                              | Subordinated deferrable interest debentures      |                                              
|                              | Lease obligations                                |                                              
|                              | Other:                                           |                                              
|                              |                                                  | Treasury, Tax and Loan payments              
|                              |                                                  | Retail repurchase agreements                 
|                              |                                                  | Wholesale repurchase agreements              
|                              |                                                  |                                              
|                              |                                                  |                                              
|                              |                                                  |                                              
|Other commitments:            |                                                  |                                              
|                              | Commitments to originate or purchase loans       |                                              
|                              | Unused lines of credit and other commitments     |                                              
|                              | Letters of credit and standby letters of credit  |                                              
|                              | Forward commitments to originate leases for sale |                                              
|                              | Forward commitments to sell leases               |                                              
|                              | Supplemental retirement benefits                 |                                              
|                              |                                                  |                                              
|                              |                                                  |                                              
|                              |                                                  |                                              

In
connection with the Macrolease acquisition, the Company has an obligation to issue up to 18,082 shares of common stock in 2008 based upon Macrolease achieving certain performance
targets and 24,409 shares of its common stock over the next three years contingent upon Macrolease reaching specified performance criteria.

Capital Resources

Total shareholders' equity of the Company at December 31, 2007 was $113.1 million, as compared to $112.1 million at December 31, 2006.
This difference of $1.0 million was primarily attributable to net income of $9.0 million, net unrealized gains on securities increasing $2.9 million, stock option activity (stock
option exercises, share-based compensation and related tax benefits) of $2.2 million, share repurchases of $10.2 million and dividends paid of $2.9 million.

Additionally,
the Company has maintained a stock repurchase program authorized by the Company's board of directors, which has enabled the Company to proactively manage its capital
position. The program, which was initially approved on April 18, 2006, authorized the Company to repurchase up to 245,000 shares of its common stock from time to time through open market or
privately negotiated purchases. On November 26, 2007, the Company expanded the stock repurchase program to 345,000 shares and also adopted a written purchase plan pursuant to
Rule 10b5-1 of the Exchange Act. Under the program, the Company repurchased 305,200 shares at a total cost of $10.2 million during 2007; no shares were repurchased during
2006. Also see Part II, Item 5Market for the Company's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities, included on page 23 of
this annual report.

55

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All
FDIC-insured institutions must meet specified minimal capital requirements. These regulations require banks to maintain a minimum leverage capital ratio. At
December 31, 2007, the Bank's Tier I Leverage Ratio stood at 7.72%. In addition, the FDIC has adopted capital guidelines based upon ratios of a bank's capital to total assets adjusted
for risk. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and
off-balance sheet items to broad risk categories. These regulations require banks to maintain minimum capital levels for capital adequacy purposes and higher capital levels to be
considered "well capitalized." According to these standards, the Bank had a Tier I risk-weighted capital ratio of 10.87% and a total risk-weighted capital ratio of
12.09% at December 31, 2007.

The
FRB has also issued capital guidelines for bank holding companies. These guidelines require the Company to maintain minimum capital levels for capital adequacy purposes. 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. At
December 31, 2007, the Company's Tier I Leverage Ratio was 7.87%, its Tier I Risk-Based Capital Ratio was 11.06% and its Total Risk-Based Capital Ratio was
12.28%.

As
of December 31, 2007, the Company and the Bank met all applicable minimum capital requirements and were considered "well capitalized" by both the FRB and the FDIC.

At
December 31, 2007, the Company had $13.0 million of trust preferred securities outstanding; the proceeds of which the Company has utilized as Tier I capital to
help support the Company's growth. If trust preferred securities are not available as a source of future Tier I capital, the Company may use other forms of additional capital
(e.g., common or preferred equity) to support its growth, which, because of less favorable tax treatment, may be a somewhat more expensive source of capital than trust preferred securities. See
also Note 13Company-Obligated Mandatorily Redeemable Capital Securities and Subordinated Deferrable Interest Debentures in the accompanying notes to consolidated financial
statements included on page F-29 in this report for further information.

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes thereto, included elsewhere herein, have been prepared in accordance with U.S. GAAP, which requires
the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike
many industrial companies, substantially all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's
performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation.

Recent Accounting Developments

See Note 2Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included on
page F-8 in this report for details of recent accounting developments and their expected impact on the Company's financial statements.

56

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ITEM 7A.    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Asset and Liability Management

The principal objective of the Company's asset and liability management process is to maximize profit potential while minimizing the vulnerability of its
operations to changes in interest rates by managing the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturity or repricing periods. The asset and
liability management process is dependent on numerous assumptions, many of which require significant judgments by the Company. The Company's actions in this regard are taken under the guidance of the
Bank's Asset/Liability Committee ("ALCO") that is comprised of members of senior management. The ALCO generally meets monthly and is actively involved in formulating the economic assumptions that the
Company uses in its financial planning and budgeting process and establishes policies which control and monitor the sources, uses and pricing of funds.

The
ALCO manages the Company's interest rate risk position using both income simulation and interest rate sensitivity "gap" analysis. Income simulation is the primary tool for measuring
the interest rate risk inherent in the Company's balance sheet at a given point in time by showing the effect on net interest income, over a 24-month period, of interest rate ramps of up
to 200 bps. These simulations take into account repricing, maturity and prepayment characteristics of individual products. The ALCO reviews simulation results to determine whether the exposure to
income resulting from changes in market interest rates remains within established tolerance levels over both a 12-month and 24-month horizon, and develops appropriate
strategies to
manage this exposure. The Company's guidelines for interest rate risk specify that if interest rates were to shift up or down 200 bps over both a 12-month and 24-month period,
estimated net interest income should decline by no more than 10.0%. As of December 31, 2007, net interest income simulation indicated that the Company's exposure to changing interest rates was
within these tolerances. The ALCO reviews the methodology utilized for calculating interest rate risk exposure and may periodically adopt modifications to this methodology.

The
following table presents the estimated impact of interest rate ramps on estimated net interest income over a 24-month period beginning January 1, 2008:

Estimated impact on net interest incomeDollar change

Percent change(Dollars in thousands)Initial Twelve Month Period:Up 200 basis point ramp

$
(694
)
-1.62
%Down 200 basis point ramp


(319
)
-0.75
%Subsequent Twelve Month Period:Up 200 basis point ramp

$
(1,714
)
-4.00
%Down 200 basis point ramp


(3,710
)
-8.66
%


The
Company also uses interest rate sensitivity "gap" analysis to provide a more general overview of its interest rate risk profile. The interest rate sensitivity gap is defined as the
difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. At
December 31, 2007, the Company's cumulative one-year gap was a positive $17 million, or 1.1% of total assets, compared to a negative $114 million, or 7.9% of total
assets at the end of 2006.

The
following table presents the repricing schedule for interest-earning assets and interest-bearing liabilities at December 31, 2007. To the extent applicable, amounts of assets
and liabilities that mature or reprice within a particular period were determined in accordance with their contractual terms. Investment

57

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securities
are allocated based upon expected call dates. Loans and MBSs have been allocated based upon expected amortization and prepayment rates based on historical performance and market
expectations. Savings, NOW and money market deposit accounts, which have no contractual term and are subject to immediate repricing, are anticipated to behave more like core accounts and therefore are
presented as spread evenly over the first three years. Nonetheless, this presentation does not reflect lags that may occur in the actual repricing of these deposits.

|                                                                                      |                                             | Within Three Months                            |         | Over Three to Six months |         | Over Six to Twelve months |         | Over One Year to Five Years |          | Over Five Years |         | Total  
|------------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------- | ------- | ------------------------ | ------- | ------------------------- | ------- | --------------------------- | -------- | --------------- | ------- | -------
|
|Interest-earning assets:                                                              |                                             |                                                |         |                          |         |                           |         |                             |          |                 |         |        
|                                                                                      | Overnight investments                       |                                                | $       | 17,097                   |         | $                         |        |                             | $        |                |         | $      
|                                                                                      | Investment securities                       |                                                |         | 25,777                   |         |                           | 19,000  |                             |          | 19,436          |         |        
|                                                                                      | Mortgage-backed securities                  |                                                |         | 12,077                   |         |                           | 11,726  |                             |          | 30,158          |         |        
|                                                                                      | FHLB Stock                                  |                                                |         | 15,671                   |         |                           |        |                             |          |                |         |        
|                                                                                      | Commercial loans and leases                 |                                                |         | 177,138                  |         |                           | 42,961  |                             |          | 73,920          |         |        
|                                                                                      | Residential mortgage loans                  |                                                |         | 25,791                   |         |                           | 18,196  |                             |          | 47,292          |         |        
|                                                                                      | Consumer and other loans                    |                                                |         | 69,360                   |         |                           | 6,336   |                             |          | 12,238          |         |        
|                                                                                      |                                             |                                                |         |                          |         |                           |         |                             |          |                 |         |        
|                                                                                      |                                             | Total interest-earning assets                  |         |                          | 342,911 |                           |         | 98,219                      |          |                 | 183,044 |        
|                                                                                      |                                             |                                                |         |                          |         |                           |         |                             |          |                 |         |        
|Interest-bearing liabilities:                                                         |                                             |                                                |         |                          |         |                           |         |                             |          |                 |         |        
|                                                                                      | NOW accounts                                |                                                |         | 5,433                    |         |                           | 5,433   |                             |          | 10,865          |         |        
|                                                                                      | Money market accounts                       |                                                |         | 504                      |         |                           | 504     |                             |          | 1,009           |         |        
|                                                                                      | Savings accounts                            |                                                |         | 33,145                   |         |                           | 33,145  |                             |          | 66,289          |         |        
|                                                                                      | Certificate of deposit accounts             |                                                |         | 103,180                  |         |                           | 153,466 |                             |          | 91,287          |         |        
|                                                                                      | Overnight & short-term borrowings           |                                                |         | 66,795                   |         |                           |        |                             |          |                |         |        
|                                                                                      | FHLB and other borrowings                   |                                                |         | 6,753                    |         |                           | 17,019  |                             |          | 2,193           |         |        
|                                                                                      | Subordinated deferrable interest debentures |                                                |         | 5,155                    |         |                           | 5,155   |                             |          |                |         |        
|                                                                                      |                                             |                                                |         |                          |         |                           |         |                             |          |                 |         |        
|                                                                                      |                                             | Total interest-bearing liabilities             |         |                          | 220,965 |                           |         | 214,722                     |          |                 | 171,643 |        
|                                                                                      |                                             |                                                |         |                          |         |                           |         |                             |          |                 |         |        
|                                                                                      |                                             | Net interest sensitivity gap during the period |         | $                        | 121,946 |                           | $       | (116,503                    | )        | $               | 11,401  |        
|                                                                                      |                                             |                                                |         |                          |         |                           |         |                             |          |                 |         |        
|Cumulative gap12/31/07                                                               |                                             | $                                              | 121,946 |                          | $       | 5,443                     |         | $                           | 16,844   |                 | $       | 143,935
|Cumulative gap12/31/06                                                               |                                             | $                                              | 38,199  |                          | $       | (25,006                   | )       | $                           | (114,089 | )               | $       | 111,818
|Interest-sensitive assets as a percent of Interest-sensitive liabilities (cumulative) |                                             |                                                | 155.19  | %                        |         | 101.25                    | %       |                             | 102.77   | %               |         | 113.64 
|Cumulative gap as a percent of total assets                                           |                                             |                                                | 8.26    | %                        |         | 0.37                      | %       |                             | 1.14     | %               |         | 9.74   

The preceding table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the
repricing of various assets and liabilities is discretionary and is subject to competitive and other factors. As a result, assets and liabilities indicated as repricing within the same period may, in
fact, reprice at different times and at different rate levels.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The index to financial statements is included on page 63 of this annual report.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING OR FINANCIAL DISCLOSURE

There were no changes in, or disagreements with, accountants on accounting or financial disclosure as defined by Item 304 of
Regulation S-K.

58

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ITEM 9A.    CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Exchange Act of 1934, the Company carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by this report.

There
have been no significant changes in the Company's internal control over financial reporting during the Company's most recent fiscal quarter that have materially affected, or are
reasonably likely to affect, the Company's internal control over financial reporting. The Company's management discusses with and discloses these matters to the Audit Committee of the Board of
Directors and the Company's independent registered public accounting firm.

ITEM 9B.    OTHER INFORMATION

There is no other information to report.

59

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information concerning directors required by this item, including the Audit Committee and the Audit Committee financial expert, is incorporated herein by
reference to the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Definitive Proxy Statement for the 2008 Annual Meeting
of Shareholders to be filed with the SEC.

The
following table sets forth the executive officers of the Company as of the date hereof.

Name

Age

PositionMerrill W. Sherman

59

President and Chief Executive OfficerLinda H. Simmons

48

Chief Financial Officer and TreasurerJames V. DeRentis

46

Vice President and Assistant SecretaryMark J. Meiklejohn

44

Vice PresidentWilliam C. DeWitt

43

Senior Vice PresidentDirector of Marketing and Corporate Communications of the Bank


Merrill W. Sherman.Ms. Sherman has served as President and Chief Executive Officer of the Company and Bank since
their formation. Ms. Sherman is also a director of The Providence Journal Company, a BELO Corp. subsidiary.

Linda H. Simmons.Ms. Simmons has served as Chief Financial Officer and Treasurer of the Company and Bank since July
2005 and served as the Bank's Executive Vice PresidentFinance and Treasurer from September 2004 to July 2005. From 1995 until joining the Bank, Ms. Simmons was with Fleet Financial
Corp.'s Treasury Group where she held various positions with responsibilities in the asset/liability management area.

James V. DeRentis.Mr. DeRentis has served as Vice President of the Company since December 2005 and the Bank's Chief
Business Officer since October 2005. Mr. DeRentis previously served as the Bank's Executive Vice PresidentRetail Banking from October 2001 through September 2005. Immediately
prior, Mr. DeRentis served as the Bank's Senior Vice PresidentRetail Banking from December 1998 through October 2001.

Mark J. Meiklejohn.Mr. Meiklejohn has served as Vice President of the Company since February 2008 and Executive Vice
President and Chief Lending Officer of the Bank since November 2007. Mr. Meiklejohn joined the Bank as Senior Vice President and Corporate Banking Director of the Bank in January 2006. Prior to
joining the Bank, Mr. Meiklejohn was a Senior Vice President for Middle Market Lending at Citizens Bank in Providence, Rhode Island, where he was employed since 1999.

William C. DeWitt.Mr. DeWitt has served as Senior Vice PresidentDirector of Marketing and Corporate
Communications of the Bank since September 2006. Prior to joining the Bank, Mr. DeWitt was Senior Vice PresidentDirector of Advertising, Merchandising and Creative Services for
Citizens Financial Group in Westwood, Massachusetts, where he was employed since 2001.

Code of Ethics and Governance Principles

The Company has adopted a Code of Ethics which applies to all directors, officers and employees of the Company and the Bank, including the Chief Executive Officer
("CEO"), Chief Financial Officer ("CFO"), Controller and Chief Auditor, as supplemented by a Code of Ethical Conduct for Executive Officers and Senior Financial Officers, which meets the requirements
of a "code of ethics" as defined in Item 406 of Regulation S-K. The Company's Board of Directors has also adopted Corporate Governance Guidelines and Principles ("the
Guidelines"), which along with the charters of Board committees provide the framework for the governance of the Company. The Company will provide a copy of the Codes, the

60

---



Guidelines
and/or committee charters to shareholders, without charge, upon request directed to the Investor Relations Contact listed on the Company's website, http://www.bankri.com, under "Investor Relations." The
Company has posted the Codes, the Guidelines and the committee charters on the Company's website
under "Investor Relations/Governance Documents." The Company intends to disclose any amendment to, or waiver of, a provision of the Codes for the CEO, CFO, Controller or persons performing similar
functions by posting such information on its website and filing a Form 8-K as required by the rules of the Nasdaq Global Select MarketSM.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the sections entitled "Compensation of Directors", "Compensation Discussion and
Analysis", "Compensation Committee Report" and "Executive Compensation" in the Company's Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the SEC.

The
information set forth under the heading "Compensation Committee Report" in the Company's Definitive Proxy Statement is furnished and shall not be deemed as filed for purposes of
Section 18 of the Exchange Act and is not deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the Sections entitled "Common Stock Ownership of Certain Beneficial Owners and
Management" in the Company's Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the SEC.

Equity Compensation Plan Information

The following table sets forth information about the Company's equity compensation plans as of December 31, 2007:

|Plan category                                              |  | Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights |     | Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights |       | Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------- | ----- | -------------------------------------------------------------------------------------------- | -------
|Equity Compensation Plans Approved by Security Holders     |  | 449,860                                                                                     | (1) | $                                                                           | 27.61 |                                                                                              | 167,803
|Equity Compensation Plans Not Approved by Security Holders |  | 0                                                                                           |     |                                                                             | N/A   |                                                                                              | 0      
|                                                           |  |                                                                                             |     |                                                                             |       |                                                                                              |        
|Total                                                      |  | 449,860                                                                                     |     | $                                                                           | 27.61 |                                                                                              | 167,803
|                                                           |  |                                                                                             |     |                                                                             |       |                                                                                              |        

---

61

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Additional
information regarding these equity compensation plans is contained in Note 15 to the Company's Consolidated Financial Statements included in this annual report.

ITEM 13.    CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the sections entitled "Transactions with Management" and "Election of Directors" in
the Company's Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the SEC.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the Section entitled "Independent Accountant Fees and Services" in the Company's
Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the SEC.

62

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a)    (1)    Financial Statements

The
following consolidated financial statements appear in response to Item 8 of this report commencing on the page numbers specified below:



|Management's Report on Internal Control Over Financial Reporting                                                |  | F-1
|--------------------------------------------------------------------------------------------------------------- |  | ---
|Reports of Independent Registered Public Accounting Firm                                                        |  | F-2
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                                    |  | F-4
|Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005                      |  | F-5
|Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2007, 2006 and 2005 |  | F-6
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005                      |  | F-7
|Notes to Consolidated Financial Statements                                                                      |  | F-8

(2)    Financial Statement Schedules

All
schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.

(3)    Exhibits

|Exhibit No. |  | Description                                                                                 
|----------- |  | --------------------------------------------------------------------------------------------
|3.1         |  | Articles of Incorporation of the Company, as amended(1)                                     
|3.2         |  | By-laws of the Company, as amended                                                          
|10.1        |  | Amended and Restated Employment Agreement of Merrill W. Sherman dated February 20, 2007(2) 
|10.2        |  | Amended and Restated Employment Agreement of Linda H. Simmons dated February 20, 2007(2)   
|10.3        |  | Amended and Restated Employment Agreement of James V. DeRentis dated February 20, 2007(2)  
|10.4        |  | Amended and Restated 1996 Incentive and Nonqualified Stock Option Plan(3)                  
|10.5        |  | Amended and Restated Non-Employee Director Stock Plan(4)                                   
|10.5(a)     |  | Amendment to Amended and Restated Non-Employee Director Stock Plan(5)                      
|10.5(b)     |  | Second Amendment to Amended and Restated Non-Employee Director Stock Plan(6)               
|10.6        |  | Bank Rhode Island Amended and Restated Supplemental Executive Retirement Plan              
|10.7        |  | Bank Rhode Island Nonqualified Deferred Compensation Plan, as amended by Amendment No. 1(1)
|10.7(a)     |  | Amendment No. 2 to Bank Rhode Island Nonqualified Deferred Compensation Plan(7)            
|10.7(b)     |  | Amendment No. 3 to Bank Rhode Island Nonqualified Deferred Compensation Plan               

63

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|10.7(c) |  | Amendment No. 4 to Bank Rhode Island Nonqualified Deferred Compensation Plan                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|10.8(a) |  | Executive Incentive Bonus Plan(8)                                                                                                               
|10.8(b) |  | Executive Incentive Compensation Plan (2008 and thereafter)(9)                                                                                  
|10.9    |  | Change of Control Severance Agreement by and between Bank Rhode Island and Mark J. Meiklejohn dated as of February 14, 2006                     
|10.10   |  | Change of Control Severance Agreement by and between Bank Rhode Island and William C. DeWitt dated as of October 18, 2006                       
|10.11   |  | Form of Bank Rhode Island Split Dollar Agreement(10)                                                                                            
|10.12   |  | 2002 Equity Incentive Plan(11)                                                                                                                  
|11      |  | Computation of earnings per share(12)                                                                                                            
|21      |  | List of Subsidiaries                                                                                                                             
|23      |  | Consent of KPMG LLP, as independent registered public accountants for the Company                                                                
|31.1    |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|31.2    |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|32.1    |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2    |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

64

---



65

---





BANCORP RHODE ISLAND, INC.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  | BANCORP RHODE ISLAND, INC.
|-------------------- |  | --------------------------
|Date: March 10, 2008 |  | By:                       

Each
person whose signature appears below constitutes and appoints each of Merrill W. Sherman or Linda H. Simmons, or either of them, each acting alone, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities in
connection with the annual report on Form 10-K of Bancorp Rhode Island, Inc. for the year ended December 31, 2007, to sign any and all amendments to the
Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.

|/s/MERRILL W. SHERMANMerrill W. Sherman,
President, Chief Executive Officer
and Director (Principal Executive Officer)
Date: March 10, 2008 |  | /s/LINDA H. SIMMONSLinda H. Simmons,
Chief Financial Officer and
Treasurer (Principal Financial Officer)
Date: March 10, 2008 |  | /s/MICHAEL J. HEBERTMichael J. Hebert,
Controller (Principal Accounting Officer)
Date: March 10, 2008
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------
|/s/KAREN ADAMSKaren Adams, Director
Date: March 10, 2008                                                                                    |  | /s/ERNEST J. CHORNYEI, JR.Ernest J. Chornyei, Jr., Director
Date: March 10, 2008                                              |  | /s/BOGDAN NOWAKBogdan Nowak, Director
Date: March 10, 2008                                           
|/s/ANTHONY F. ANDRADEAnthony F. Andrade, Director
Date: March 10, 2008                                                                      |  | /s/MEREDITH A. CURRENMeredith A. Curren, Director
Date: March 10, 2008                                                        |  | /s/CHERYL W. SNEADCheryl W. Snead, Director
Date: March 10, 2008                                     
|/s/JOHN R. BERGERJohn R. Berger, Director
Date: March 10, 2008                                                                              |  | /s/MARK R. FEINSTEINMark R. Feinstein, Director
Date: March 10, 2008                                                          |  | /s/PABLO RODRIGUEZPablo Rodriguez, Director
Date: March 10, 2008                                     
|/s/RICHARD L. BREADYRichard L. Bready, Director
Date: March 10, 2008                                                                        |  | /s/EDWARD J. MACKEdward J. Mack, Director
Date: March 10, 2008                                                                |  | /s/JOHN A. YENAJohn A. Yena, Director
Date: March 10, 2008                                           
|/s/MALCOLM G. CHACEMalcolm G. Chace, Director and
Chairman of the Board
Date: March 10, 2008                                                |  | /s/MICHAEL E. MCMAHONMichael E. McMahon, Director
Date: March 10, 2008                                                        |  |                                                                                                      

66

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BANCORP RHODE ISLAND, INC.

Management's Report on Internal Control
Over Financial Reporting

The management of Bancorp Rhode Island, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial
reporting. The Company's internal control over financial reporting was designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair
presentation of published financial statements.

All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.

The
Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework. Based on our assessment we believe that, as of
December 31, 2007, the Company's internal control over financial reporting is effective based on those criteria.

The
Company's Independent Registered Public Accounting Firm has issued an audit report on the effectiveness of the Company's internal control over financial reporting. This report
appears on page F-2 of this annual report.

|Merrill W. Sherman
President and
Chief Executive Officer |  | Linda H. Simmons
Chief Financial Officer and
Treasurer
|-------------------------------------------------------- |  | ------------------------------------------------------

F-1

---



BANCORP RHODE ISLAND, INC.

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
Bancorp Rhode Island, Inc.:

We
have audited Bancorp Rhode Island, Inc.'s (the "Company") internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commissions (COSO). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of
the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commissions (COSO).

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries
as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2007, and our report dated March 10, 2008 expressed an unqualified opinion on those consolidated financial statements.

GRAPHIC

Providence,
Rhode Island
March 10, 2008

F-2

---



BANCORP RHODE ISLAND, INC.

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
Bancorp Rhode Island, Inc.:

We
have audited the accompanying consolidated balance sheets of Bancorp Rhode Island, Inc. and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bancorp Rhode Island, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bancorp Rhode Island, Inc. and subsidiaries' internal
control over financial reporting as of December 31, 2007, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2008 expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.

GRAPHIC

Providence,
Rhode Island
March 10, 2008

F-3

---





BANCORP RHODE ISLAND, INC.        Consolidated Balance Sheets

|                                     |                                                                  | December 31,                                                 |                                           
|------------------------------------ | ---------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------
|
|
|Assets                               |                                                                  |                                                              |                                           
|Assets:                              |                                                                  |                                                              |                                           
|                                     | Cash and due from banks                                          |                                                              | $                                         
|                                     | Overnight investments                                            |                                                              |                                           
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Total cash and cash equivalents           
|                                     | Investment securities available for sale (amortized cost of      |                                                              |                                           
|                                     |                                                                  | $77,193 and $104,266, respectively)                          |                                           
|                                     | Mortgage-backed securities available for sale (amortized cost of |                                                              |                                           
|                                     |                                                                  | $258,094 and $244,258, respectively)                         |                                           
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Total available for sale securities       
|                                     | Stock in the Federal Home Loan Bank of Boston                    |                                                              |                                           
|                                     | Loans and leases receivable:                                     |                                                              |                                           
|                                     |                                                                  | Commercial loans and leases                                  |                                           
|                                     |                                                                  | Residential mortgage loans                                   |                                           
|                                     |                                                                  | Consumer and other loans                                     |                                           
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Total loans and leases receivable         
|                                     | Allowance for loan and lease losses                              |                                                              |                                           
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Net loans and leases receivable           
|                                     | Premises and equipment, net                                      |                                                              |                                           
|                                     | Goodwill, net                                                    |                                                              |                                           
|                                     | Accrued interest receivable                                      |                                                              |                                           
|                                     | Investment in bank-owned life insurance                          |                                                              |                                           
|                                     | Prepaid expenses and other assets                                |                                                              |                                           
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Total assets                              
|                                     |                                                                  |                                                              |                                           
|Liabilities and Shareholders' Equity |                                                                  |                                                              |                                           
|Liabilities:                         |                                                                  |                                                              |                                           
|                                     | Deposits:                                                        |                                                              |                                           
|                                     |                                                                  | Demand deposit accounts                                      |                                           
|                                     |                                                                  | NOW accounts                                                 |                                           
|                                     |                                                                  | Money market accounts                                        |                                           
|                                     |                                                                  | Savings accounts                                             |                                           
|                                     |                                                                  | Certificate of deposit accounts                              |                                           
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Total deposits                            
|                                     | Overnight and short-term borrowings                              |                                                              |                                           
|                                     | Wholesale repurchase agreements                                  |                                                              |                                           
|                                     | Federal Home Loan Bank of Boston borrowings                      |                                                              |                                           
|                                     | Subordinated deferrable interest debentures                      |                                                              |                                           
|                                     | Other liabilities                                                |                                                              |                                           
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Total liabilities                         
|                                     |                                                                  |                                                              |                                           
|Shareholders' equity:                |                                                                  |                                                              |                                           
|                                     | Preferred stock, par value $0.01 per share, authorized           |                                                              |                                           
|                                     |                                                                  | 1,000,000 shares: Issued and outstanding: none               |                                           
|                                     | Common stock, par value $0.01 per share, authorized 11,000,000   |                                                              |                                           
|                                     |                                                                  | shares: Issued: 4,867,121 and 4,792,380 shares, respectively |                                           
|                                     | Additional paid-in capital                                       |                                                              |                                           
|                                     | Treasury Stock, at cost (305,200 shares at December 31, 2007)    |                                                              |                                           
|                                     | Retained earnings                                                |                                                              |                                           
|                                     | Accumulated other comprehensive loss, net                        |                                                              |                                           
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Total shareholders' equity                
|                                     |                                                                  |                                                              |                                           
|                                     |                                                                  |                                                              | Total liabilities and shareholders' equity
|                                     |                                                                  |                                                              |                                           

See accompanying notes to consolidated financial statements.

F-4

---





BANCORP RHODE ISLAND, INC.        Consolidated Statements of Operations

|                              |                                                  | Year Ended December 31,    
|----------------------------- | ------------------------------------------------ | ---------------------------
|
|
|Interest and dividend income: |                                                  |                            
|                              | Loans and leases                                 |                            
|                              | Mortgage-backed securities                       |                            
|                              | Investment securities                            |                            
|                              | Overnight investments                            |                            
|                              | Federal Home Loan Bank of Boston stock dividends |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|Interest expense:             |                                                  |                            
|                              | Deposits                                         |                            
|                              | Overnight and short-term borrowings              |                            
|                              | Wholesale repurchase agreements                  |                            
|                              | Federal Home Loan Bank of Boston borrowings      |                            
|                              | Subordinated deferrable interest debentures      |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              | Provision for loan and lease losses              |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|Noninterest income:           |                                                  |                            
|                              | Service charges on deposit accounts              |                            
|                              | Net gains on lease sales and commissions on      |                            
|                              |                                                  | loans originated for others
|                              | Income from bank-owned life insurance            |                            
|                              | Loan related fees                                |                            
|                              | Commissions on nondeposit investment products    |                            
|                              | Net gain (loss) on available for sale securities |                            
|                              | Other income                                     |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|Noninterest expense:          |                                                  |                            
|                              | Salaries and employee benefits                   |                            
|                              | Occupancy                                        |                            
|                              | Data processing                                  |                            
|                              | Professional services                            |                            
|                              | Marketing                                        |                            
|                              | Equipment                                        |                            
|                              | Loan servicing                                   |                            
|                              | Loan workout and other real estate owned         |                            
|                              | Other expenses                                   |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              | Income tax expense                               |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              |                                                  |                            
|                              | Weighted average shares outstandingbasic        |                            
|                              | Weighted average shares outstandingdiluted      |                            
|Per share data:               |                                                  |                            
|                              | Basic earnings per common share                  |                            
|                              | Diluted earnings per common share                |                            
|                              | Cash dividends declared per common share         |                            

See accompanying notes to consolidated financial statements.

F-5

---





BANCORP RHODE ISLAND, INC.        Consolidated Statements of Changes in Shareholders' Equity        For Years Ended December 31, 2007, 2006 and 2005

|                             |                                   | Preferred
Stock                   |                                | Common
Stock |   | Additional
Paid-in
Capital |   | Treasury
Stock |        | Retained
Earnings |     | Accumulated
Other
Comprehensive
Income/
(Loss) |         | Total |       
|---------------------------- | --------------------------------- | --------------------------------- | ------------------------------ | ------------ | - | -------------------------- | - | -------------- | ------ | ----------------- | --- | ---------------------------------------------- | ------- | ----- | ------
|
|Balance at December 31, 2004 |                                   | $                                 |                               |              | $ | 40                         |   | $              | 42,852 |                   | $   |                                               |         | $     | 35,373
|                             | Net income                        |                                   |                                |             |   |                            |  |                |        |                  |     |                                                |        |       |       
|                             | Other comprehensive income:       |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | Unrealized holding losses on      |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   | securities available for sale, |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   | net of taxes of $2,027         |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | Reclassification adjustment,      |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   | net of taxes of $63            |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             | Comprehensive income              |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             | Proceeds from stock offering, net |                                   |                                |             |   |                            | 7 |                |        | 21,450            |     |                                                |        |       |       
|                             | Acquisition of Macrolease         |                                   |                                |             |   |                            |  |                |        | 250               |     |                                                |        |       |       
|                             | Exercise of stock options         |                                   |                                |             |   |                            |  |                |        | 825               |     |                                                |        |       |       
|                             | Share-based compensation          |                                   |                                |             |   |                            |  |                |        | 49                |     |                                                |        |       |       
|                             | Tax benefit from exercise of      |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | stock options                     |                                |              |  |                            |   |               |        |                   | 309 |                                                |         |      |       
|                             |                                   | Common stock issued for incentive |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | stock award, net                  |                                |              |  |                            |   |               |        |                   | 33  |                                                |         |      |       
|                             | Dividends on common stock         |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | ($0.60 per common share)          |                                |              |  |                            |   |               |        |                   |    |                                                |         |      |       
|                             |                                   |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|Balance at December 31, 2005 |                                   |                                   |                               |              |   | 47                         |   |                | 65,768 |                   |     |                                               |         |       | 42,241
|                             | Net income                        |                                   |                                |             |   |                            |  |                |        |                  |     |                                                |        |       |       
|                             | Other comprehensive income:       |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | Unrealized holding losses on      |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   | securities available for sale, |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   | net of taxes of $122           |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | Reclassification adjustment,      |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   | net of taxes of $(301)         |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             | Comprehensive income              |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             | Exercise of stock options         |                                   |                                |             |   |                            | 1 |                |        | 1,662             |     |                                                |        |       |       
|                             | Acquisition of Macrolease         |                                   |                                |             |   |                            |  |                |        | 83                |     |                                                |        |       |       
|                             | Share-based compensation          |                                   |                                |             |   |                            |  |                |        | 186               |     |                                                |        |       |       
|                             | Tax benefit from exercise of      |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |        |       |       
|                             |                                   | stock options                     |                                |              |  |                            |   |               |        |                   | 261 |                                                |         |      |       
|                             | Dividends on common stock         |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | ($0.60 per common share)          |                                |              |  |                            |   |               |        |                   |    |                                                |         |      |       
|                             |                                   |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|Balance at December 31, 2006 |                                   |                                   |                               |              |   | 48                         |   |                | 67,960 |                   |     |                                               |         |       | 47,091
|                             | Net income                        |                                   |                                |              |   |                            |  |                |        |                  |     |                                                |        |       |       
|                             | Other comprehensive income:       |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | Unrealized holding gains on       |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   | securities available for sale, |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   | net of taxes of $(1,586)       |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             | Comprehensive income              |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             | Exercise of stock options         |                                   |                                |             |   |                            | 1 |                |        | 1,366             |     |                                                |        |       |       
|                             | Stock repurchase                  |                                   |                                |             |   |                            |  |                |        |                  |     |                                                | (10,189 | )     |       
|                             | Share-based compensation          |                                   |                                |             |   |                            |  |                |        | 299               |     |                                                |        |       |       
|                             | Tax benefit from exercise of      |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | stock options                     |                                |              |  |                            |   |               |        |                   | 498 |                                                |         |      |       
|                             | Dividends on common stock         |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|                             |                                   | ($0.62 per common share)          |                                |              |  |                            |   |               |        |                   |    |                                                |         |      |       
|                             |                                   |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       
|Balance at December 31, 2007 |                                   | $                                 |                               |              | $ | 49                         |   | $              | 70,123 |                   | $   | (10,189                                        | )       | $     | 53,194
|                             |                                   |                                   |                                |              |   |                            |   |                |        |                   |     |                                                |         |       |       

See accompanying notes to consolidated financial statements.

F-6

---





BANCORP RHODE ISLAND, INC.        Consolidated Statements of Cash Flows

|                                                     |                                                                | Year Ended December 31,                                        |                                                           
|---------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------------------------
|
|
|Cash flows from operating activities:                |                                                                |                                                                |                                                           
|                                                     | Net income                                                     |                                                                | $                                                         
|                                                     | Adjustment to reconcile net income to net cash                 |                                                                |                                                           
|                                                     |                                                                | provided by operating activities:                              |                                                           
|                                                     |                                                                |                                                                | Depreciation, amortization and accretion, net             
|                                                     |                                                                |                                                                | Provision for loan and lease losses                       
|                                                     |                                                                |                                                                | Net gains on lease sales                                  
|                                                     |                                                                |                                                                | Net (gain) / loss on sale of available for sale securities
|                                                     |                                                                |                                                                | Net loss on sales of premises and equipment               
|                                                     |                                                                |                                                                | Proceeds from sales of leases                             
|                                                     |                                                                |                                                                | Leases originated for sale                                
|                                                     |                                                                |                                                                | Income from bank-owned life insurance                     
|                                                     |                                                                |                                                                | Share-based compensation expense                          
|                                                     |                                                                |                                                                | Tax benefit from exercise of stock options                
|                                                     |                                                                |                                                                | (Increase) decrease in accrued interest receivable        
|                                                     |                                                                |                                                                | (Increase) in prepaid expenses and other assets           
|                                                     |                                                                |                                                                | Increase in other liabilities                             
|                                                     |                                                                |                                                                | Other, net                                                
|                                                     |                                                                |                                                                |                                                           
|                                                     |                                                                |                                                                |                                                           
|                                                     |                                                                |                                                                |                                                           
|Cash flows from investing activities:                |                                                                |                                                                |                                                           
|                                                     | Investment securities available for sale:                      |                                                                |                                                           
|                                                     |                                                                | Purchases                                                      |                                                           
|                                                     |                                                                | Maturities and principal repayments                            |                                                           
|                                                     |                                                                | Proceeds from sales                                            |                                                           
|                                                     | Mortgage-backed securities available for sale:                 |                                                                |                                                           
|                                                     |                                                                | Purchases                                                      |                                                           
|                                                     |                                                                | Maturities and principal repayments                            |                                                           
|                                                     |                                                                | Proceeds from sales                                            |                                                           
|                                                     | Net (increase) decrease in loans and leases                    |                                                                |                                                           
|                                                     | Purchase of loans and leases, including purchased interest     |                                                                |                                                           
|                                                     | Purchase of Federal Home Loan Bank of Boston stock             |                                                                |                                                           
|                                                     | Capital expenditures for premises and equipment                |                                                                |                                                           
|                                                     | Proceeds from sale of premises and equipment                   |                                                                |                                                           
|                                                     | Proceeds from disposition of other real estate owned           |                                                                |                                                           
|                                                     | Purchase of bank-owned life insurance                          |                                                                |                                                           
|                                                     |                                                                |                                                                |                                                           
|                                                     |                                                                |                                                                |                                                           
|                                                     |                                                                |                                                                |                                                           
|Cash flows from financing activities:                |                                                                |                                                                |                                                           
|                                                     | Net (decrease) increase in deposits                            |                                                                |                                                           
|                                                     | Net increase (decrease) in overnight and short-term borrowings |                                                                |                                                           
|                                                     | Proceeds from long-term borrowings                             |                                                                |                                                           
|                                                     | Repayment of long-term borrowings                              |                                                                |                                                           
|                                                     | Proceeds from issuance of common stock                         |                                                                |                                                           
|                                                     | Tax benefit from exercise of stock options                     |                                                                |                                                           
|                                                     | Purchases of treasury stock                                    |                                                                |                                                           
|                                                     | Dividends on common stock                                      |                                                                |                                                           
|                                                     |                                                                |                                                                |                                                           
|                                                     |                                                                |                                                                |                                                           
|                                                     |                                                                |                                                                |                                                           
|Net increase (decrease) in cash and cash equivalents |                                                                |                                                                | (24,202                                                   
|Cash and cash equivalents at beginning of year       |                                                                |                                                                | 61,764                                                    
|                                                     |                                                                |                                                                |                                                           
|Cash and cash equivalents at end of year             |                                                                | $                                                              | 37,562                                                    
|                                                     |                                                                |                                                                |                                                           
|Supplementary disclosures:                           |                                                                |                                                                |                                                           
|                                                     | Cash paid for interest                                         |                                                                | $                                                         
|                                                     | Cash paid for income taxes                                     |                                                                |                                                           
|                                                     | Non-cash transactions:                                         |                                                                |                                                           
|                                                     |                                                                | Change in accumulated other comprehensive income, net of taxes |                                                           
|                                                     |                                                                | Macrolease acquisition                                         |                                                           

See accompanying notes to consolidated financial statements.

F-7

---





BANCORP RHODE ISLAND, INC.        Notes to Consolidated Financial Statements

(1) Organization

Bancorp Rhode Island, Inc. (the "Company"), a Rhode Island corporation, is the holding company for Bank Rhode Island (the "Bank"). The Company has no
significant assets other than the common stock of the Bank. For this reason, substantially all of the discussion in these Consolidated Financial Statements and accompanying Notes 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 Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The Bank is also a member of the Federal Home Loan
Bank of Boston ("FHLB").

(2) Summary of Significant Accounting Policies

Basis of PresentationThe accounting and reporting policies of the Company conform to U.S. generally
accepted accounting principles and to prevailing practices within the banking industry. The Company has one reportable operating segment. The following is a summary of the significant accounting and
reporting policies used by management in preparing and presenting the consolidated financial statements.

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

Principles of ConsolidationAt December 31, 2007 and 2006, the consolidated financial statements include the accounts
of Bancorp Rhode Island, Inc., and its wholly-owned subsidiary, Bank Rhode Island, along with the Bank's wholly-owned subsidiaries, BRI Investment Corp. (a Rhode Island passive investment
company), BRI Realty Corp. (a Rhode Island real estate holding company), Acorn Insurance Agency, Inc. (a licensed insurance agency) and Macrolease Corporation (an equipment leasing company).
All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash EquivalentsFor purposes of the consolidated statements of cash flows, the Company considers cash, due from
banks, and overnight investments to be cash equivalents. Cash flows relating to deposits are presented net in the statements of cash flows.

SecuritiesDebt securities are classified as available for sale, held to maturity or trading. Securities are classified as
held to maturity and carried at amortized cost only if the Company has a positive intent and the ability to hold these securities 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

F-8

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

purpose
of selling in the near term. 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, 2007 and 2006, all of the Company's investment and
mortgage-backed securities were classified as available for sale.

Declines
in the fair values of securities below their cost that are deemed to be other-than-temporary are reflected in earnings in the period that management
concludes that other-than-temporary impairment occurs. The Company uses various indicators in determining whether a security is other-than-temporarily
impaired, including for debt securities, when it is probable that the contractual interest and principal will not be collected.

Interest
income from debt securities is recorded on the accrual basis. Premiums and discounts on securities are amortized or accreted into income by the level yield method. Such
amortization and accretion is recorded as an adjustment to interest income. FHLB stock is carried at cost. Dividend income from FHLB stock is recorded on the ex-dividend date. Gains and
losses on the sale of securities are recognized at the time of sale on a specific identification basis.

Loans and Leases ReceivableLoans are stated at the principal amount outstanding, net of unamortized premiums and discounts
and net of deferred loan fees and/or costs, which are amortized as an adjustment to yield over the life of the related loans. When loans and leases are paid-off, the unamortized portion of
premiums, discounts or net fees is recognized into income. Interest income is accrued on a level yield basis over the life of the loan. Estimated residual values for leased equipment were not material
at December 31, 2007 and 2006.

Leases
which meet the appropriate criteria specified in Statement of Financial Accounting Standard ("SFAS") 13, "Accounting for Leases",
are classified as direct finance leases. Direct finance leases are recorded upon acceptance of the equipment by the customer. Unearned lease income represents the
excess of the gross lease investment over the cost of the leased equipment, which is recognized over the lease term at a constant rate of return on the net investment in the lease.

Loan
and lease origination fees, net of certain direct origination costs, and premiums and discounts on loans purchased are recognized in interest income over the lives of the loans
using a method approximating the interest method.

The
Company also originates leases for sale in the secondary market. Accordingly, these leases are classified as held for sale and are carried at the lower of cost or fair value,
determined on an aggregate basis. These leases are sold on a non-recourse basis, with gains or losses recognized upon the sale of leases determined on a specific identification basis.
Leases held for sale totaled $3.3 million at December 31, 2007 and are included within commercial loans and leases in the consolidated balance sheets. There were no leases held for sale
at December 31, 2006. The Company had commitments to fund leases held for sale and commitments to sell leases at December 31, 2007 and 2006, which are considered derivative instruments
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The fair values of these derivative instruments were
insignificant at December 31, 2007 and 2006.

Loans
on which the accrual of interest has been discontinued are designated nonaccrual loans. Accrual of interest income is discontinued when concern exists as to the collectibility of
principal or interest, or typically when a loan becomes over 90 days delinquent. Additionally, when a loan is placed on nonaccrual status, all interest previously accrued but not collected is
reversed against current period

F-9

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

income.
Loans are removed from nonaccrual when they become less than 90 days past due and when concern no longer exists as to the collectibility of principal or interest. Interest collected on
nonaccruing loans is either applied against principal or reported as income according to management's judgment as to the collectibility of principal.

Impaired
loans are loans for which it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreements. Impairment is
measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. When foreclosure is probable,
impairment is measured based on the fair value of the collateral less estimated selling costs. In addition, the Bank classifies a loan as an in-substance foreclosure when the Bank is in
possession of the collateral prior to actually foreclosing.

Allowance for Credit LossesThe allowance for loan and lease losses and reserve for unfunded lending commitments, collectively
referred to as the allowance for credit losses, are established for credit losses inherent in the loan and lease portfolio and inherent in the unfunded lending commitments through a charge to
earnings. The allowance for credit losses is maintained at a level management considers appropriate to provide for the current inherent risk of loss based upon an
evaluation of known and inherent risks in the loan and lease portfolio, as well as the unfunded lending commitments.

When
management believes that the collectibility of a loan or lease's principal balance, or portions thereof, is unlikely, the principal amount is charged against the allowance for loan
and lease losses. Recoveries on loans and leases that have been previously charged off are credited to the allowance for loan and lease losses as received. Increases to the allowance for loan and
leases are made by charges to provision for loan and lease losses.

In
addition to the allowance for loan and lease losses, management also estimates probable losses related to unfunded lending commitments. In the third quarter of 2006, the Company
reclassified the reserve for unfunded lending commitments from the allowance for loan and lease losses to other liabilities for all periods presented. Additions to the reserve for unfunded lending
commitments are made by charges to other expenses.

Management's
methodology to estimate loss exposure inherent in the portfolio includes an analysis of individual loans or leases deemed to be impaired, reserve allocations for various
loan and lease types based on payment status or loss experience and an unallocated allowance that is maintained based on management's assessment of many factors including, but not limited to, the
growth, composition and quality of the loan and lease portfolio, historical loss experience, industry loss experience and general economic conditions. Management employs a similar process with respect
to unfunded lending commitments. While management evaluates currently available information in establishing the allowance for loan and lease losses and the reserve for unfunded lending commitments,
future adjustments to the allowance for credit losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. The factors supporting the allowance for
loan and lease losses and the reserve for unfunded lending commitments do not diminish the fact that the entire allowance for loan and lease losses and the reserve for unfunded lending commitments are
available to absorb losses in the loan portfolio and related commitment portfolio, respectively. The Company's primary concern is the appropriateness of the total allowance for loan and lease losses
and reserve for unfunded lending commitments. Management performs a comprehensive review of the allowance for loan and lease losses and the reserve for unfunded lending commitments on a quarterly
basis.

F-10

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

In
addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institution's allowance for credit losses. Such agencies may
require the financial institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Other Real Estate OwnedOther Real Estate Owned ("OREO") consists of property acquired through foreclosure, real estate
acquired through acceptance of a deed in lieu of foreclosure and loans determined to be substantively repossessed. Real estate loans that are substantively repossessed include only those loans for
which the Company has taken possession of the collateral, but has not completed legal foreclosure proceedings.

OREO,
including real estate substantively repossessed, is stated at the lower of cost or fair value, minus estimated costs to sell, at the date of acquisition or classification to OREO
status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the
allowance for loan losses. A valuation allowance is maintained for known specific and potential market declines and for estimated selling expenses. Increases to the valuation allowance, expenses
associated with ownership of these properties, and gains and losses from their sale, are reflected in operations as incurred. Realized gains and losses upon disposal are recognized as adjustments to
noninterest income or noninterest expense.

Premises and EquipmentLand is carried at cost. Premises and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed primarily by the straight-line method over the estimated useful lives of the assets, or the terms of the leases if shorter.

Impairment of Long-Lived Assets except GoodwillThe Company reviews long-lived assets, including
premises and equipment and other intangible assets for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision
or that the carrying amount of the long-lived asset may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if impairment exists. If impairment is
determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less any
costs of disposal.

GoodwillGoodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill
is not amortized over an estimated life, but rather is tested at least annually for impairment. In the event that the Company was to determine that its goodwill was impaired, an impairment writedown
would be charged against earnings.

Bank-Owned Life InsuranceBank-owned life insurance ("BOLI") represents life insurance on the lives of
certain current and former employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. The Bank utilizes BOLI as tax-efficient financing for the
Bank's benefit obligations to its employees, including the Bank's obligations under its Supplemental Executive Retirement Plans. Since the Bank is the primary beneficiary of the insurance policies,
increases in the cash value of the policies, as well as insurance proceeds received, are recorded in noninterest income, and are not subject to income taxes. BOLI is recorded at the cash value of the
policies, less any applicable cash surrender charges, and is reflected as an asset in the accompanying consolidated balance sheets. The Bank reviews the financial
strength of the insurance carriers prior to the purchase of BOLI to ensure minimum credit ratings of at least investment grade. The financial strength of the carriers is reviewed at least annually and
BOLI with any individual carrier is limited to 10% of capital plus reserves.

F-11

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

Securities Sold Under Agreements to RepurchaseThe Bank enters into sales of securities under agreements to repurchase, with
both the Bank's commercial customers ("retail repurchase agreements") and financial institutions ("wholesale repurchase agreements"). These agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the consolidated balance sheets. Securities pledged as collateral under agreements to repurchase are reflected as assets in the accompanying
consolidated balance sheets.

Employee BenefitsThe Bank maintains a Section 401(k) savings plan for employees of the Bank and its subsidiaries.
Under the plan, the Bank makes a matching contribution of the amount contributed by each participating employee, up to 4% of the employee's yearly salary, subject to Internal Revenue Service ("IRS")
limits. The Bank's contributions are charged against current operations in the year made.

Share-Based CompensationAt December 31, 2007, the Company maintained stock option plans as described more fully in
Note 15. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") 123-R, "Share-Based
Payment", which is a revision to SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123-R
focuses primarily on accounting for share-based payments made to employees. Under SFAS 123-R, the grant date fair value of share-based awards (primarily stock options for the
Company) is recognized as an expense in the income statement, whereas under SFAS 123, the Company accounted for share-based awards under the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").

The
Company adopted SFAS 123-R under the modified prospective adoption method. Under that method of adoption, the provisions of SFAS 123-R are
generally only applied to share-based awards granted subsequent to adoption and any unvested prior grants. Under SFAS 123-R, share-based awards requiring future service are
recognized as compensation expense over the relevant service period or through the eligible retirement date if sooner. Share-based awards that do not require future service ("vested awards") are
expensed immediately. SFAS 123-R also requires the Company to estimate expected forfeitures in determining compensation expense. Additionally, compensation expense for share-based
awards granted to retirement-eligible employees is recognized immediately.

In
December 2005, the Executive and Compensation Committees of the Company's Board of Directors accelerated the vesting of all 89,586 unvested stock options. No other changes were made
to the terms and conditions of the options. The Company recorded expenses of $49,000 in connection with the accelerated vesting. At the time of the vesting acceleration, approximately 79% of the
expenses anticipated to be recorded over the next three years related to stock options that had no intrinsic value, as the stock options were "out-of-the-money."
Additionally, 73% of the unvested options with a positive intrinsic value, or "in-the-money", were scheduled to fully vest by April 30, 2006. As a result of this
accelerated vesting, the Company will not be required to recognize anticipated non-cash compensation expense relating to stock options of approximately $370,000 in 2006, $260,000 in 2007
and $70,000 in 2008.

Under
SFAS 123, the Company did not recognize compensation expense for stock options issued prior to January 2006 because the stock options had no intrinsic value at grant date,
as the exercise price equaled the market value of the Company's common stock on the grant date. The Company did recognize compensation expense related to restricted stock compensation during 2005. The
relevant service period for this restricted stock award concluded in December 2005.

F-12

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

As
indicated above, at the time of adoption of SFAS 123-R on January 1, 2006, all stock options granted to employees and directors were fully vested and
exercisable. As a result, the transition impact of adopting SFAS 123-R was not material to the Company's results of operations for the year ended December 31, 2006.

If
the Company had recognized compensation expense for stock options over the relevant service period, generally 3 to 4 years under the fair value method proscribed by
SFAS 123, net income would have decreased in 2005, resulting in pro forma net income and earnings per common share ("EPS") as summarized below:

Year Ended
December 31, 2005Net income (in thousands):As reported

$
9,569Compensation cost, net of taxes


(855
)Pro forma

$
8,714Earnings per common share:Basic:As reported

$
2.14Compensation cost, net of taxes


(0.19
)Pro forma

$
1.95Diluted:As reported

$
2.04Compensation cost, net of taxes


(0.18
)Pro forma

$
1.86


The
compensation cost, net of taxes, for the year ended 2005 reflects the Company's acceleration of the vesting of all outstanding options as of December 30, 2005.

Income TaxesThe Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets
and liabilities are established for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expenses during the period
that includes the enactment date. Income tax-related interest and penalties are classified as a component of income tax expense.

Effective
January 1, 2007, the Company adopted Financial Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income
Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109, "Accounting for Income
Taxes." The adoption of FIN 48 did not have a material impact on the Company's financial statements.

F-13

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

The
evaluation of a tax position in accordance with FIN 48 is a two-step process. First, the Company determines whether it is more likely than not that a tax position
will be sustained upon examination based on the technical merits of the position. Second, a tax position that meets the more likely than not threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more likely than not recognition threshold are recognized in the first subsequent reporting period in which the threshold is met. Previously recognized tax
positions that no longer meet the more likely than not recognition threshold are derecognized in the first subsequent reporting period in which the threshold is no longer met.

Revenue RecognitionNoninterest income is recognized on the accrual basis of accounting.

Comprehensive IncomeComprehensive income is defined as all changes to equity except investments by and distributions to
shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as "other comprehensive income."

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

Segment ReportingAn operating segment is defined as a component of a business for which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company's primary business is banking, which provided
substantially all of its total revenues and pre-tax income in 2007, 2006 and 2005. Accordingly, disaggregated segment information is not presented in the notes to the financial statements.

GuaranteesStandby letters of credit, excluding commercial letters of credit and other lines of credit, are considered
guarantees of the Bank. The Bank enters into a standby letter of credit to guarantee performance of a customer to a third party. The credit risk involved is represented by the contractual amounts of
those instruments. Under the standby letters of credit, the Bank is required to make payments to the beneficiary of the standby letters of credit upon request by the beneficiary so long as all
performance criteria have been met. Most guarantees extend up to one year.

Pledged
collateral including cash, accounts receivable, inventory, property, plant, equipment and real estate supported all standby letters of credit outstanding at December 31,
2007 and 2006. The collateral obtained is determined based on management's credit evaluation of the customer. Should the Bank be
required to make payments to the beneficiary of a letter of credit, repayment to the Bank is required. When cash collateral is present, the recourse provisions of the agreements allow the Bank to
collect the cash used to collateralize the agreement. If any other business assets are used as collateral and cash is not available, the Bank creates a loan for the customer with the same criteria as
its other lending activities. The standby letters of credit and the fair value of customer guarantees and cash collateral supporting the standby letters of credit are not reflected on the balance
sheet.

ReclassificationsCertain amounts in the prior years' financial statements may have been reclassified to conform with the
current year's presentation.

F-14

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

Recent Accounting DevelopmentsIn February 2006, the FASB issued SFAS 155, "Accounting for
Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140", which permits, but does not require, fair value accounting for hybrid financial
instruments that contain an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 155 also eliminated the temporary exemption for interests in securitized financial assets provided for by SFAS 133, Derivatives Implementation
Group ("DIG") Issue D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." However, in January 2007, the FASB
issued interpretive guidance in SFAS 133, DIG Issue B40, "Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial
Assets", in which the FASB concluded that a securitized interest in prepayable financial assets was not subject to the bifurcation requirements of SFAS 155 provided that
the securitized interest met both the following criteria: (1) the right to accelerate the settlement of the securitized interest cannot be controlled by the investor; and (2) the
securitized interest itself does not contain an embedded derivative for which bifurcation would be required other than an embedded derivative that results solely from the embedded call options in the
underlying financial assets. The guidance in DIG Issue B40 is effective upon the adoption of SFAS 155. SFAS 155 is effective for all financial instruments acquired or issued after
December 31, 2006, as well as to those hybrid financial instruments that had been previously bifurcated under SFAS 133. As of December 31, 2007 and 2006, the Company did not have
any hybrid financial instruments which were previously bifurcated under SFAS 133. Additionally, the guidance provided for in DIG Issue B40 is expected to allow the Company to continue to
purchase mortgage-backed securities without applying the bifurcation requirements of SFAS 155. The adoption of SFAS 155 on January 1, 2007 did not have a material effect on the
Company's consolidated financial statements.

In
March 2006, the FASB issued SFAS 156, "Accounting for Servicing of Financial Assets", an amendment of SFAS 140. This
standard requires servicing assets and servicing liabilities be initially measured at fair value along with any derivative instruments used to mitigate inherent risks. The adoption of SFAS 156
on January 1, 2007 did not have a material impact on the Company's consolidated financial statements.

In
March 2006, the FASB Emerging Issues Task Force ("EITF") issued interpretive guidance in Issue 06-4 ("EITF 06-4"), in which agreements by
companies to share a portion of the proceeds of life insurance policies with an employee during the postretirement period is a postretirement benefit arrangement that must be accounted for under
SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under EITF 06-4, the EITF also concluded
the purchase of a split-dollar life insurance policy does not constitute a settlement of the postretirement benefit as defined in SFAS 106. Thus, companies will be required to record a
liability upon adoption of EITF 06-4, which is effective for periods beginning after December 15, 2007. The Company does not anticipate the adoption of
EITF 06-4 will materially impact its consolidated financial statements upon adoption on January 1, 2008.

In
September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurements." SFAS 157 provides guidance
for measuring assets and liabilities at fair value. This standard is applicable whenever other standards require or permit assets and liabilities to be measured at fair value, but does not expand upon
the use of fair value in any new circumstances. SFAS 157 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to
unobservable data and requires fair value measurements to be disclosed by level within the hierarchy. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The
Company does not anticipate the

F-15

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

adoption
of SFAS 157 will materially impact its consolidated financial statements upon adoption on January 1, 2008.

In
February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159
provides companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that will help investors and other users of financial
statements to understand more easily the effect on earnings of the company's choice to use fair value. It also requires companies to display the fair value of those assets and liabilities for which
the company has chosen to use fair value on the face of the balance sheet. The Company does not anticipate the adoption of SFAS 159 will materially impact its consolidated financial statements
upon adoption on January 1, 2008.

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

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

(3) Business Combinations

On March 1, 1996, the Bank acquired certain assets and assumed certain liabilities from Fleet Financial Group, Inc. and other 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
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

F-16

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(3) Business Combinations (Continued)

generated
$1.0 million of goodwill. In connection with this acquisition, the Company has issued 9,040 shares of its common stock. The Company will also issue 18,082 shares of its common stock
in 2008, based upon Macrolease reaching specified performance criteria ("target"). In addition, 24,409 shares of the Company's common stock may be issued over the next 3 years contingent upon
Macrolease reaching target.

(4) Restrictions on Cash and Due from Banks

The Bank is required to maintain average reserve balances in a noninterest bearing account with the Federal Reserve Bank based upon a percentage of certain
deposits. As of December 31, 2007 and 2006, the average daily amount required to be held was $1.0 million.

(5) Investment Securities Available for Sale

The Company categorizes obligations issued by the Federal Home Loan Bank, Federal Home Loan Mortgage Corporation and Federal National Mortgage Association as U.S.
Agency obligations. A summary of investment securities available for sale follows:

UnrealizedAmortized
Cost

Fair
ValueGains

Losses(In thousands)At December 31, 2007:U.S. Agency obligations

$
68,185

$
90

$
(100
)
$
68,175Corporate debt securities


6,028


2


(174
)

5,856Trust preferred securities


2,980





(25
)

2,955Total

$
77,193

$
92

$
(299
)
$
76,986At December 31, 2006:U.S. Agency obligations

$
85,992

$
1

$
(704
)
$
85,289Corporate debt securities


12,122


7


(105
)

12,024Trust preferred securities


6,152


49


(89
)

6,112Total

$
104,266

$
57

$
(898
)
$
103,425


F-17

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(5) Investment Securities Available for Sale (Continued)

The
following table sets forth certain information regarding temporarily impaired investment securities:

|                      |                            | Less than One Year |   | One Year or Longer |        | Total |    
|--------------------- | -------------------------- | ------------------ | - | ------------------ | ------ | ----- | ---
|
|
|At December 31, 2007: |                            |                    |   |                    |        |       |    
|                      | US Agency obligations      |                    | $ |                   |        | $     |   
|                      | Corporate debt securities  |                    |   |                   |        |       |   
|                      | Trust preferred securities |                    |   | 974                |        |       | (13
|                      |                            |                    |   |                    |        |       |    
|                      |                            | Total              |   | $                  | 974    |       | $  
|                      |                            |                    |   |                    |        |       |    
|At December 31, 2006: |                            |                    |   |                    |        |       |    
|                      | US Agency obligations      |                    | $ | 29,927             |        | $     | (63
|                      | Corporate debt securities  |                    |   | 3,995              |        |       | (9 
|                      | Trust preferred securities |                    |   |                   |        |       |   
|                      |                            |                    |   |                    |        |       |    
|                      |                            | Total              |   | $                  | 33,922 |       | $  
|                      |                            |                    |   |                    |        |       |    

The
above securities were deemed to be not other-than-temporarily impaired after considering that substantially all of the above securities were rated "investment
grade" with unrealized losses primarily caused by market interest rate changes. In addition, the Company has the intent and ability to hold all securities with unrealized losses until recovery or
maturity.

In
making these other-than-temporary impairment determinations, management considers, among other things, the length of time and extent to which the fair value
has been less than cost and the credit worthiness and near-term prospects of the issuer. Also, management considers capital adequacy, interest rate risk, liquidity and business plans in
assessing the intent and ability to hold all securities with unrealized losses until recovery or maturity.

F-18

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(5) Investment Securities Available for Sale (Continued)

The following table sets forth the contractual maturities of investment securities available for sale and the weighted average yields of such securities:

|                      |                            | Within One Year |   | After One, But
Within Five Years |        | After Five, But
Within Ten Years |        | After Ten Years |     
|--------------------- | -------------------------- | --------------- | - | -------------------------------- | ------ | -------------------------------- | ------ | --------------- | ----
|
|
|At December 31, 2007: |                            |                 |   |                                  |        |                                  |        |                 |     
|                      | U.S. Agency obligations    |                 | $ | 22,429                           |        | $                                | 22,386 |                 | 4.45
|                      | Corporate debt securities  |                 |   | 4,008                            |        |                                  | 3,954  |                 | 4.97
|                      | Trust preferred securities |                 |   |                                 |        |                                  |       |                 | 0.00
|                      |                            |                 |   |                                  |        |                                  |        |                 |     
|                      |                            | Total           |   | $                                | 26,437 |                                  | $      | 26,340          |     
|                      |                            |                 |   |                                  |        |                                  |        |                 |     
|At December 31, 2006: |                            |                 |   |                                  |        |                                  |        |                 |     
|                      | U.S. Agency obligations    |                 | $ | 9,998                            |        | $                                | 9,959  |                 | 2.90
|                      | Corporate debt securities  |                 |   | 6,037                            |        |                                  | 6,034  |                 | 5.33
|                      | Trust preferred securities |                 |   |                                 |        |                                  |       |                 | 0.00
|                      |                            |                 |   |                                  |        |                                  |        |                 |     
|                      |                            | Total           |   | $                                | 16,035 |                                  | $      | 15,993          |     
|                      |                            |                 |   |                                  |        |                                  |        |                 |     

The weighted average remaining life of investment securities available for sale at December 31, 2007 and 2006 was 3.1 years and
2.9 years, respectively. Included in the weighted average remaining life calculation at December 31, 2007 and 2006, were $51.0 million and $77.1 million, respectively, of
securities that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life.

The
following table presents the sale of investment securities available for sale and the resulting gains and losses from such sales:

Year Ended December 31,2007

2006

2005(In thousands)Amortized cost of investment securities sold

$


$
61,834

$
Gains (losses) realized on sales of investment securities


254


(852
)

Net proceeds from sales of investment securities

$
254

$
60,982

$



F-19

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(6) Mortgage-Backed Securities Available for Sale

A summary of mortgage-backed securities available for sale by issuer follows:

|                      |                                          |       |   | Unrealized |         |  
|--------------------- | ---------------------------------------- | ----- | - | ---------- | ------- | -
|
|
|
|At December 31, 2007: |                                          |       |   |            |         |  
|                      | Federal National Mortgage Association    |       | $ | 126,700    |         | $
|                      | Collateralized Mortgage Obligations      |       |   | 74,371     |         |  
|                      | Federal Home Loan Mortgage Corporation   |       |   | 44,621     |         |  
|                      | Government National Mortgage Association |       |   | 12,402     |         |  
|                      |                                          |       |   |            |         |  
|                      |                                          | Total |   | $          | 258,094 |  
|                      |                                          |       |   |            |         |  
|At December 31, 2006: |                                          |       |   |            |         |  
|                      | Federal National Mortgage Association    |       | $ | 109,480    |         | $
|                      | Collateralized Mortgage Obligations      |       |   | 86,935     |         |  
|                      | Federal Home Loan Mortgage Corporation   |       |   | 30,411     |         |  
|                      | Government National Mortgage Association |       |   | 17,432     |         |  
|                      |                                          |       |   |            |         |  
|                      |                                          | Total |   | $          | 244,258 |  
|                      |                                          |       |   |            |         |  

The following table sets forth certain information regarding temporarily impaired investment securities:

|                      |                                          | Less than One Year |       | One Year or Longer |   | Total  |     
|--------------------- | ---------------------------------------- | ------------------ | ----- | ------------------ | - | ------ | ----
|
|
|At December 31, 2007: |                                          |                    |       |                    |   |        |     
|                      | Collateralized Mortgage Obligations      |                    | $     | 8,857              |   | $      | (169
|                      | Federal National Mortgage Association    |                    |       | 3,099              |   |        | (9  
|                      | Federal Home Loan Mortgage Corporation   |                    |       | 295                |   |        | (2  
|                      | Government National Mortgage Association |                    |       | 1,218              |   |        | (2  
|                      |                                          |                    |       |                    |   |        |     
|                      |                                          |                    | Total |                    | $ | 13,469 |     
|                      |                                          |                    |       |                    |   |        |     
|At December 31, 2006: |                                          |                    |       |                    |   |        |     
|                      | Collateralized Mortgage Obligations      |                    | $     | 23,752             |   | $      | (62 
|                      | Federal National Mortgage Association    |                    |       | 25,041             |   |        | (96 
|                      | Federal Home Loan Mortgage Corporation   |                    |       | 299                |   |        | (1  
|                      | Government National Mortgage Association |                    |       | 4,655              |   |        | (16 
|                      |                                          |                    |       |                    |   |        |     
|                      |                                          |                    | Total |                    | $ | 53,747 |     
|                      |                                          |                    |       |                    |   |        |     

The above securities were deemed to be not other-than-temporarily impaired after considering that all of the above
securities were rated "investment grade" with unrealized losses caused by market interest rate changes. In addition, the Company is able and intends to hold all securities with unrealized losses until
recovery or maturity.

F-20

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(6) Mortgage-Backed Securities Available for Sale (Continued)

In
making these other-than-temporary impairment determinations, management considers, among other things, the length of time and extent to which the fair value
has been less than cost and the credit worthiness and near-term prospects of the issuer. Also, management considers capital adequacy, interest rate risk, liquidity and business plans in
assessing the intent and ability to hold all securities with unrealized losses until recovery or maturity.

The
following table sets forth the maturities of mortgage-backed securities available for sale and the weighted average yields of such securities:

|                      |                                          | After Five, But Within Ten Years |   | After Ten Years |       
|--------------------- | ---------------------------------------- | -------------------------------- | - | --------------- | ------
|
|
|At December 31, 2007: |                                          |                                  |   |                 |       
|                      | Federal National Mortgage Association    |                                  | $ | 13,256          |       
|                      | Collateralized Mortgage Obligations      |                                  |   | 4,809           |       
|                      | Federal Home Loan Mortgage Corporation   |                                  |   |                |       
|                      | Government National Mortgage Association |                                  |   |                |       
|                      |                                          |                                  |   |                 |       
|                      |                                          | Total                            |   | $               | 18,065
|                      |                                          |                                  |   |                 |       
|At December 31, 2006: |                                          |                                  |   |                 |       
|                      | Federal National Mortgage Association    |                                  | $ | 15,515          |       
|                      | Collateralized Mortgage Obligations      |                                  |   | 2,680           |       
|                      | Federal Home Loan Mortgage Corporation   |                                  |   |                |       
|                      | Government National Mortgage Association |                                  |   |                |       
|                      |                                          |                                  |   |                 |       
|                      |                                          | Total                            |   | $               | 18,195
|                      |                                          |                                  |   |                 |       

Maturities on mortgage-backed securities are based on contractual maturities and do not take into consideration scheduled amortization or
prepayments. Actual maturities will differ from contractual maturities due to scheduled amortization and prepayments. The weighted average remaining contractual term of mortgage-backed securities
available for sale at December 31, 2007 and 2006 was 19.0 years and 20.0 years, respectively.

The
following table presents the sale of mortgage-backed securities available for sale and the resulting gains and losses from such sales:

Year Ended December 31,2007

2006

2005(In thousands)Amortized cost of mortgage-backed securities sold

$


$
452

$
13,573Gain/(Loss) realized on sales of mortgage-backed securities





(7
)

181Net proceeds from sales of mortgage-backed securities

$


$
445

$
13,754


F-21

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(7) Loans and Leases Receivable

The following is a summary of loans and leases receivable:

December 31,2007

2006(In thousands)Commercial loans and leases:Commercial real estateowner occupied

$
157,431

$
140,812Commercial and industrial


131,927


106,017Commercial real estatenonowner occupied


102,990


102,390Small business


45,778


41,785Multi-family


42,536


34,294Construction


38,832


37,237Leases and other(1)


58,702


62,979Subtotal


578,196


525,514Unearned lease income(1)


(5,742
)

(6,651
)Net deferred loan origination costs


1,214


927Total commercial loans and leases


573,668


519,790Residential mortgage loans:One- to four-family adjustable rate


155,087


165,140One- to four-family fixed rate


92,485


96,880Subtotal


247,572


262,020Premium on loans acquired


1,198


1,979Net deferred loan origination fees


(42
)

(54
)Total residential mortgage loans


248,728


263,945Consumer and other loans:Home equityterm loans


149,192


152,484Home equitylines of credit


62,357


64,208Unsecured and other


2,774


2,359Subtotal


214,323


219,051Net deferred loan origination costs


1,413


1,506Total consumer and other loans


215,736


220,557Total loans and leases receivable

$
1,038,132

$
1,004,292


---



The
Bank's commercial and consumer lending activities are conducted principally in the State of Rhode Island and, to a lesser extent, in nearby areas of Massachusetts.
The Bank's equipment lease financing subsidiary, Macrolease, is based in Long Island, NY, with borrowers located throughout the United States. The Bank originates commercial real estate loans,
commercial and industrial loans, multi-family residential loans, equipment leases, residential mortgage loans and consumer loans (principally home equity loans and lines of credit) for its portfolio.

The
Bank purchases one- to four-family residential mortgage loans and commercial leases from third party originators. These loans and leases may have been
originated from areas outside of New England.

F-22

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(7) Loans and Leases Receivable (Continued)

Most
loans made by the Bank are secured by borrowers' personal or business assets. The Bank considers a concentration of credit to a particular industry to exist when the aggregate credit exposure to
a borrower or group of borrowers in that industry exceeds 25% of the Bank's capital plus reserves. At December 31, 2007, no concentrations of credit to a particular industry existed as defined
by these parameters. The ability of the Bank's residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the area
they reside.

Commercial
borrowers' ability to repay is generally dependent upon the general health of the economy and in cases of real estate loans, the real estate sector in particular. Accordingly,
the ultimate collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changing conditions in the Rhode Island economy in particular, and the New England and Northeast and
national economies, in general.

The
Bank's lending limit to any single borrowing relationship is limited by law to approximately $20.4 million. At December 31, 2007, the Bank had no outstanding
commitments to any single borrowing relationship that were in excess of $12.0 million.

At
December 31, 2007, the risk elements contained within the loan portfolio were centered in $4.0 million of nonaccrual loans. There were $3.7 million of loans past
due 60 to 89 days at December 31, 2007. At December 31, 2007, the Bank had no commitments to lend additional funds to borrowers whose loans were on nonaccrual. This compares to
$1.4 million of nonaccrual loans and $476,000 of loans past due 60 to 89 days as of December 31, 2006. There were $3.0 million of impaired loans with $486,000 of specific
impairment reserves at December 31, 2007, while included in nonaccrual loans as of December 31, 2005 were impaired loans of $141,000 with specific reserves of $71,000. There were no
impaired loans at December 31, 2006 and thus no specific impairment reserves. The average balance of impaired loans was $1.4 million during 2007, $1.0 million during 2006 and
$741,000 during 2005.

The
reduction in interest income associated with nonaccrual loans was as follows:

Year Ended December 31,2007

2006

2005(In thousands)Income in accordance with original terms

$
348

$
99

$
36Income recognized


(192
)

(49
)

(13
)Foregone interest income

$
156

$
50

$
23


F-23

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(7) Loans and Leases Receivable (Continued)

Loans
outstanding to executive officers and directors of the Company, including their immediate families and affiliated companies ("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. These loans comply with the provisions of Regulation O under the Federal Reserve Act and,
accordingly, are permissible under Section 402 of the Sarbanes-Oxley Act of 2002. An analysis of the activity of these loans is as follows:

Year Ended December 31,2007

2006(In thousands)Balance at beginning of year

$
5,414

$
5,561Additions


2,661


525Repayments


(500
)

(672
)Balance at end of year

$
7,575

$
5,414


(8) Allowance for Credit Losses

An analysis of the activity in the allowance for credit losses is as follows:

Year Ended December 31,2007

2006

2005(In thousands)Allowance for Loan and Lease LossesBalance at beginning of year

$
12,377

$
11,665

$
11,454Provision for loan and lease losses


700


1,202


1,423Loans charged-off


(528
)

(519
)

(1,274
)Recoveries of loans previously charged-off


70


29


62Balance at end of year


12,619


12,377


11,665Reserve for Unfunded Lending Commitments(1)Balance at beginning of year


567


503


452Provision for unfunded lending commitments


29


64


51Balance at end of year


596


567


503Allowance for Credit LossesBalance at end of year

$
13,215

$
12,944

$
12,168




F-24

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)



(9) Premises and Equipment

Premises and equipment consisted of the following:

December 31,2007

2006(In thousands)Land

$
1,849

$
1,412Office buildings and improvements


5,532


2,931Leasehold improvements


7,586


9,996Data processing equipment and software


6,491


6,726Furniture, fixtures and other equipment


6,169


5,808Subtotal


27,627


26,873Less accumulated depreciation and amortization


(13,906
)

(13,137
)Total premises and equipment

$
13,721

$
13,736


The
Company utilizes a useful life of 40 years for buildings and 15 years for building improvements. Leasehold improvements are amortized over their respective lease terms.
Data processing equipment and software's useful life varies but is primarily three years. Furniture, fixtures and other equipment's useful life varies but is primarily five years. Depreciation expense
totaled $2.0 million, $2.2 million and $2.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Rent
expense for the years ended December 31, 2007, 2006 and 2005 was $1.5 million, $1.5 million and $1.3 million, respectively. In October 2007, the Bank
transferred its rights to develop a planned branch site to a third party via a noncancellable sublease agreement. The Bank's rent expense for the year ended December 31, 2007 is net of sublease
rentals of $21,000.

In
connection with the acquisition of branches from Fleet Financial Group, Inc. and related entities, the Bank assumed the liability for lease payments on seven banking offices
previously occupied by Shawmut Bank Connecticut, N.A. The Bank has renegotiated some of these leases and has also entered into agreements to lease additional space.

Under
the terms of these noncancellable operating leases, the Bank is currently obligated to minimum annual rents as follows:

Minimum
Lease
Payments(In thousands)2008

$
1,3502009


1,0022010


6402011


6522012


657Thereafter


6,295$
10,596


F-25

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(9) Premises and Equipment (Continued)

Minimum
payments have not been reduced by minimum sublease rentals of $3.7 million due in the future under a noncancellable sublease.

(10) Deposits

Certificate of deposit accounts had the following schedule of maturities:

December 31,2007

2006(In thousands)1 year or less remaining

$
349,527

$
358,041More than 1 year to 2 years remaining


18,095


10,206More than 2 years to 3 years remaining


4,183


7,965More than 3 years to 4 years remaining


1,171


4,196More than 4 years remaining


1,087


1,299Total

$
374,063

$
381,707


At
December 31, 2007, certificate of deposit accounts included $20.0 million obtained through brokers, compared to $30.0 million at December 31, 2006. At
December 31, 2007 and 2006, certificate of deposit accounts with balances of $100,000 or more aggregated $116.7 million and $144.3 million, respectively.

(11) Short-Term Borrowings and Repurchase Agreements

Overnight and short-term borrowings and repurchase agreements consisted of the following:

December 31,2007

2006(In thousands)Treasury tax and loan notes

$
4,385

$
1,915FHLB Ideal Way advances





Retail repurchase agreements


62,410


54,426Wholesale repurchase agreements


10,000


20,000Total

$
76,795

$
76,341


The
Bank utilizes the Note Option for remitting Treasury Tax and Loan payments to the Federal Reserve Bank. Under this option the U.S. Treasury invests in obligations of the Bank, as
evidenced by open-ended interest-bearing notes. These notes are collateralized by U.S. Agency securities owned by the

F-26

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(11) Short-Term Borrowings and Repurchase Agreements (Continued)

Bank.
Treasury tax and loan notes are included as a component of overnight and short-term borrowings on the consolidated balance sheets. Information concerning these treasury tax and loan
notes is as follows:

Year Ended December 31,2007

2006(Dollars in thousands)Outstanding at end of year

$
4,385

$
1,915Outstanding collateralized by securities with:Par value


5,000


5,000Market value


5,001


4,966Average outstanding for the year


1,061


776Maximum outstanding at any month end


4,852


1,915Weighted average rate at end of year


3.18
%

4.26
%Weighted average rate paid for the year


4.76
%

4.77
%


The
Bank has a short-term line of credit with the FHLB. All borrowings from the FHLB are secured by the Bank's stock in the FHLB and a blanket lien on "qualified collateral"
defined principally as 90% of the fair value of U.S. Government and Agency obligations and 75% of the carrying value of certain residential mortgage loans. Unused borrowing capacity under this line
was $25.0 million at December 31, 2007, 2006 and 2005.

Information
concerning this short-term line of credit is as follows:

Year Ended December 31,2007

2006(Dollars in thousands)Outstanding at end of year

$


$
Maturity date


NA


NAAverage outstanding for the year

$
65

$
616Maximum outstanding at any month end





3,718Weighted average rate at end of year


NA


NAWeighted average rate paid for the year


5.56
%

5.48
%


The
Bank utilizes retail repurchase agreements in connection with a cash management product that the Bank offers its commercial customers and wholesale repurchase agreements with
financial institutions. Sales of repurchase agreements are treated as financings. The obligations to repurchase the identical securities that were sold are reflected as liabilities and the securities
remain in the asset accounts. All of these agreements are collateralized by U.S. Agency securities owned by the Bank. The securities
underlying the agreements were held by the Bank in a special custody account and remained under the Bank's control.

F-27

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(11) Short-Term Borrowings and Repurchase Agreements (Continued)

Information
concerning retail repurchase agreements is as follows:

Year Ended December 31,2007

2006(Dollars in thousands)Outstanding at end of year

$
62,410

$
54,426Maturity date


1/2/08


1/2/07Outstanding collateralized by securities with:Par value

$
96,521

$
103,605Market value


96,353


101,807Average outstanding for the year


55,533


42,963Maximum outstanding at any month end


68,195


54,426Weighted average rate at end of year


4.03
%

5.13
%Weighted average rate paid for the year


4.79
%

4.78
%


Information
concerning wholesale repurchase agreements is as follows:

Year Ended December 31,2007

2006(Dollars in thousands)Outstanding at end of year

$
10,000

$20,000Maturity date


6/2011

11/2010 and
6/2011Outstanding collateralized by securities with:Par value

$
10,506

$21,085Market value


10,486

20,895Average outstanding for the year


11,425

20,000Maximum outstanding at any month end


20,000

20,000Weighted average rate at end of year


5.32
%
4.84
%Weighted average rate paid for the year


5.27
%
4.35
%


Additionally,
at December 31, 2007, the Bank had a $3.0 million line of credit with a correspondent bank to facilitate the issuance of letters of credit by the Bank and the
conducting of foreign exchange
transactions for the Bank's customers. Since inception, there have been no outstanding balances under this line of credit.

F-28

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(12) Federal Home Loan Bank of Boston Borrowings

FHLB borrowings are comprised of the following:

|                        |       | December 31, 2007 |         | December 31, 2006 |  
|----------------------- | ----- | ----------------- | ------- | ----------------- | -
|
|
|Within 1 year           |       | $                 | 23,037  |                   | $
|Over 1 year to 2 years  |       |                   | 13      |                   |  
|Over 2 years to 3 years |       |                   | 28,844  |                   |  
|Over 3 years to 5 years |       |                   | 69,000  |                   |  
|Over 5 years            |       |                   | 120,611 |                   |  
|                        |       |                   |         |                   |  
|                        | Total |                   | $       | 241,505           |  
|                        |       |                   |         |                   |  

---

All
borrowings from the FHLB are secured by the Bank's stock in the FHLB and a blanket lien on "qualified collateral" defined principally as 90% of the fair value of U.S. Government and
Agency obligations and 75% of the carrying value of certain residential mortgage loans. Unused term borrowing capacity with the FHLB at December 31, 2007 and 2006 was $29.2 million and
$40.9 million, respectively. As one requirement of its borrowings, the Bank is required to invest in the common stock of the FHLB in an amount at least equal to five percent of its outstanding
borrowings from the FHLB. As and when such stock is redeemed, the Bank would receive from the FHLB an amount equal to the par value of the stock. As of December 31, 2007 and 2006, the Bank's
FHLB stock holdings, recorded at cost, were $15.7 million and $16.5 million, respectively.

(13) Company-Obligated Mandatorily Redeemable Capital Securities and Subordinated Deferrable Interest Debentures

On January 23, 2001, the Company sponsored the creation of BRI Statutory Trust I (the "Trust I"), a Connecticut statutory trust. The Company is the owner
of all of the common securities of Trust I. On February 22, 2001, Trust I issued $3.0 million of its 10.20% Company-Obligated Mandatorily Redeemable Capital Securities ("Capital
Securities") through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Company's $93,000 capital contribution for Trust I's common securities (which is
included in prepaid expenses and other assets), were used to acquire $3.1 million of the Company's 10.20% Subordinated Deferrable Interest Debentures ("Junior Subordinated Notes") due
February 22, 2031, and constitute the primary asset of Trust I. The Company has, through the Declaration of Trust, the Guarantee Agreement, the Notes and the related Indenture, taken together,
fully irrevocably and unconditionally guaranteed all of Trust I's obligations under the Capital Securities, to the extent Trust I has funds available therefor.

On
June 4, 2002, the Company sponsored the creation of BRI Statutory Trust II (the "Trust II"), a Connecticut statutory trust. The Company was the owner of all of the common
securities of Trust II. On

F-29

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(13) Company-Obligated Mandatorily Redeemable Capital Securities and Subordinated Deferrable Interest Debentures (Continued)

June 26,
2002, Trust II issued $5.0 million of its floating rate (quarterly reset to 3 month LIBOR plus 3.45%) Capital Securities through a pooled trust preferred securities
offering. The proceeds from this issuance, along with the Company's $155,000 capital contribution for Trust II's common securities, were used to acquire $5.2 million of the Company's floating
rate (quarterly reset to 3 month LIBOR plus 3.45%) Junior Subordinated Notes due June 26, 2032, and constituted the primary asset of Trust II. The Company had, through the Declaration of
Trust, the Guarantee Agreement, the Notes and the related Indenture, taken together, fully irrevocably and unconditionally guaranteed all of Trust II's obligations under the Capital Securities, to the
extent Trust II had funds available. On September 26, 2007, the Company redeemed all $5.0 million of the floating rate Capital Securities issued by Trust II. This redemption resulted in
the Company recording a write-off of an additional $137,000 of previously unamortized debt issuance costs as additional pretax interest expense. Thereafter, Trust II was liquidated.

On
June 5, 2003, the Company sponsored the creation of BRI Statutory Trust III (the "Trust III"), a Connecticut statutory trust. The Company is the owner of all of the common
securities of Trust III. On June 26, 2003, Trust III issued $5.0 million of its 5.55% (quarterly reset to 3 month LIBOR plus 3.10% beginning June 26, 2008) Capital
Securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Company's $155,000 capital contribution for Trust III's common securities (which is
included in prepaid expenses and other assets), were used to acquire $5.2 million of the Company's 5.55% (quarterly reset to 3 month LIBOR plus 3.10% beginning June 26, 2008)
Junior Subordinated Notes due June 26, 2033, and constitute the primary asset of Trust III. The Company has, through the Declaration of Trust, the Guarantee Agreement, the Notes and the related
Indenture, taken together, fully irrevocably and unconditionally guaranteed all of Trust III's obligations under the Capital Securities, to the extent Trust III has funds available therefor.

On
February 24, 2004, the Company sponsored the creation of BRI Statutory Trust IV (the "Trust IV"), a Connecticut statutory trust. The Company is the owner of all of the common
securities of Trust IV. On March 17, 2004, Trust IV issued $5.0 million of its floating rate (quarterly reset to 3 month LIBOR plus 2.79%) Capital Securities through a pooled
trust preferred securities offering. At December 31, 2007, the rate of the Capital Securities was 7.78%. The proceeds from this issuance, along with the Company's $155,000 capital contribution
for Trust IV's common securities (which is included in prepaid expenses and other assets), were used to acquire $5.2 million of the Company's floating rate (quarterly reset to 3 month
LIBOR plus 2.79%) Junior Subordinated Notes due March 17, 2034, and constitute the primary asset of Trust IV. The Company has, through the Declaration of Trust, the Guarantee Agreement, the
Notes and the related Indenture, taken together, fully irrevocably and unconditionally guaranteed all of Trust IV's obligations under the Capital Securities, to the extent Trust IV has funds available
therefor.

As
of December 31, 2007, the Company's investments in its statutory trust subsidiaries aggregated $493,000 and are included within prepaid expenses and other assets.

F-30

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(14) Income Taxes

The components of income tax expense are as follows:

Year Ended December 31,2007

2006

2005(In thousands)Current expense:Federal

$
3,784

$
5,056

$
4,763State


20


51


92Total current expense


3,804


5,107


4,855Deferred benefit:Federal


455


(1,531
)

(15
)State








Total deferred expense (benefit)


455


(1,531
)

(15
)Total income tax expense

$
4,259

$
3,576

$
4,840


The
difference between the statutory federal income tax rate and the effective federal income tax rate is as follows:

Year Ended December 31,2007

2006

2005Statutory federal income tax rate

35.0
%
35.0
%
35.0
%Increase resulting from:State income tax, net of federal tax benefit

0.1

0.3

0.4Bank-owned life insurance

(2.7
)
(2.4
)
(1.7
)Other, net

(0.4
)
(1.2
)
(0.1
)Effective combined federal and state income tax rate

32.0
%
31.7
%
33.6
%


F-31

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(14) Income Taxes (Continued)

The
significant components of gross deferred tax assets and gross deferred tax liabilities are as follows:

December 31,2007

2006(In thousands)Gross deferred tax assets:Allowance for loan and lease losses

$
4,417

$
4,348Depreciation


1,213


1,299Accrued retirement


964


785Securities available for sale


37


1,623Loss on sale of investments





273Other


559


579Total gross deferred tax assets


7,190


8,907Gross deferred tax liabilities:Goodwill


(2,880
)

(2,556
)Net deferred tax asset

$
4,310

$
6,351


The
net balance of deferred tax assets and liabilities is included in prepaid expenses and other assets. It is management's belief that it is more likely than not that the reversal of
deferred tax liabilities and results of future operations will generate sufficient taxable income to realize the deferred tax assets. In addition, the Company's net deferred tax asset is supported by
recoverable income taxes. Therefore, no valuation allowance was deemed necessary at December 31, 2007 or 2006. It should be noted, however, that factors beyond management's control, such as the
general state of the economy and real estate values, can affect future levels of taxable income and that no assurance can be given that sufficient taxable income will be generated to fully absorb
gross deductible temporary differences.

The
Company had no unrecognized tax benefits at both January 1, 2007 and December 31, 2007. Additionally, there are no unrecognized tax benefits that, if recognized, would
affect the Company's effective tax rate. As of both January 1, 2007 and December 31, 2007, the Company did not have any accrued income tax-related interest and penalties.

The
Company's federal income tax returns are open and subject to examination from the 2004 tax return year and forward. The Company's state income tax returns are generally open from the
2004 and later tax return years based on individual state statute of limitations.

(15) Employee and Director Benefits

Employee 401(k) PlanThe Bank maintains a 401(k) Plan (the "Plan") which qualifies as a tax exempt
plan and trust under Sections 401 and 501 of the Internal Revenue Code. Generally, Bank employees who are at least twenty-one (21) years of age are eligible to participate in
the Plan. Expenses associated with the Plan were $475,000, $450,000 and $388,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

Nonqualified Deferred Compensation PlanThe Bank also maintains a Nonqualified Deferred Compensation Plan (the "Nonqualified
Plan") under which certain participants may contribute the amounts they are precluded from contributing to the Bank's 401(k) Plan because of the qualified plan

F-32

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(15) Employee and Director Benefits (Continued)

limitations,
and additional compensation deferrals that may be advantageous for personal income tax or other planning reasons. Expenses associated with the Nonqualified Plan were $36,000, $40,000 and
$43,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Accrued liabilities associated with the Nonqualified Plan were $681,000 and $644,000 for December 31, 2007 and
2006, respectively.

Supplemental Executive Retirement PlansThe Bank maintains Supplemental Executive Retirement Plans (the "SERPs") for certain
of its senior executives under which participants designated by the Board of Directors are entitled to an annual retirement benefit. Expenses associated with the
SERPs were $524,000, $436,000 and $578,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Accrued liabilities associated with the SERPs were $2.8 million and
$2.2 million for December 31, 2007 and 2006, respectively.

Restricted Stock AgreementDuring 2001, the Company entered into a Restricted Stock Agreement with its CEO, pursuant to which
she was awarded 7,700 shares of restricted stock, subject to achievement of certain performance goals spanning a three year period, which were achieved. The restricted shares vested 50% on
January 1, 2005 and 50% on January 1, 2006. The restricted shares were subject to forfeiture in the event of termination of the CEO's employment prior to the applicable vesting dates for
cause by the Company or without good reason by the executive. In addition, the Company made a "gross-up" payment sufficient to pay any taxes of the CEO (including those on the
"gross-up" payment) arising as a result of the vesting of the restricted stock. The relevant service period for this restricted stock concluded in December 2005. Expenses associated with
the Restricted Stock Agreement were $97,000 for the year ended December 31, 2005.

Employee Stock PlansThe Company maintains a 1996 Incentive and Nonqualified Stock Option Plan and a 2002 Equity Incentive
Plan (collectively the "Employee Stock Plans") under which it may grant awards of its common stock to officers and key employees. The 1996 Incentive and Nonqualified Stock Option Plan has no remaining
shares available for issuance as it expired in March 2006. At December 31, 2007, the total remaining shares available for issuance under the 2002 Equity Incentive Plan is 156,303. The 2002
Equity Incentive Plan also provides for automatic incremental increases each year in the number of shares authorized for issuance under such plan on the date of the annual shareholders meeting equal
to the least of (i) 2% of total issued and outstanding common stock on the date of the shareholders meeting, (ii) 75,000 shares and (iii) such lesser number as determined by the
Board of Directors of the Company. The Employee Stock Plans, which are shareholder approved, allow grants of options, restricted stock, stock appreciation rights ("SARs"), performance shares or units
and other stock-based awards. Under the Employee Stock Plans, the Company has awarded stock options, which have been granted at an exercise price equal to the market value of the stock on the date of
the grant with vesting terms of three to five years. Unless exercised, options granted under the Employee Stock Plans have a contractual terms ranging between 7 and 10 years. Certain stock
option awards provide for accelerated vesting if there is a change in control (as defined in the Employee Stock Plans).

F-33

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(15) Employee and Director Benefits (Continued)

The
fair value of each employee stock option award has been estimated on the grant date using the Black-Scholes option-pricing model utilizing the following pricing assumptions,
summarized on a weighted-average basis in the table below:

Year Ended December 31,2007

2006

2005Expected term


5 years


7 years


7 yearsExpected volatility


19
%

23
%

25
%Risk-free interest rate


4.14
%

4.73
%

3.90
%Dividend yield


1.60
%

1.71
%

1.70
%Fair value of options granted

$
8.21

$
10.01

$
9.27


The
activity related to these employee stock options is summarized below:

|Employee Stock Options         |                    | Options
Outstanding |         | Weighted
Average
Exercise
Price |       | Aggregate
Intrinsic Value |   | Weighted
Average
Contractual
Term (in years)
|------------------------------ | ------------------ | ------------------- | ------- | ------------------------------- | ----- | ------------------------- | - | --------------------------------------------
|Outstanding, December 31, 2004 |                    | 445,305             |         | $                               | 19.21 |                           |   |                                             
|                               | Granted            |                     | 68,000  |                                 | $     | 37.05                     |   |                                             
|                               | Exercised          |                     | (73,374 | )                               | $     | 18.29                     |   |                                             
|                               | Forfeited/Canceled |                     | (10,951 | )                               | $     | 33.18                     |   |                                             
|                               |                    |                     |         |                                 |       |                           |   |                                             
|Outstanding, December 31, 2005 |                    | 428,980             |         | $                               | 21.27 |                           |   |                                             
|                               | Granted            |                     | 60,850  |                                 | $     | 35.18                     |   |                                             
|                               | Exercised          |                     | (74,059 | )                               | $     | 18.57                     |   |                                             
|                               | Forfeited/Canceled |                     | (12,750 | )                               | $     | 33.26                     |   |                                             
|                               |                    |                     |         |                                 |       |                           |   |                                             
|Outstanding, December 31, 2006 |                    | 403,021             |         | $                               | 24.57 |                           |   |                                             
|                               | Granted            |                     | 71,050  |                                 | $     | 39.26                     |   |                                             
|                               | Exercised          |                     | (49,011 | )                               | $     | 18.89                     |   |                                             
|                               | Forfeited/Canceled |                     | (12,200 | )                               | $     | 39.17                     |   |                                             
|                               |                    |                     |         |                                 |       |                           |   |                                             
|Outstanding, December 31, 2007 |                    | 412,860             |         | $                               | 27.34 |                           | $ | 2,806,000                                   
|                               |                    |                     |         |                                 |       |                           |   |                                             
|Exercisable, December 31, 2007 |                    | 306,392             |         | $                               | 23.82 |                           | $ | 3,161,000                                   
|                               |                    |                     |         |                                 |       |                           |   |                                             

The
total intrinsic value of options by employees exercised during 2007, 2006 and 2005 was $1.1 million, $1.3 million and $1.6 million, respectively.

F-34

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(15) Employee and Director Benefits (Continued)

The
options outstanding as of December 31, 2007 are set forth below:

Exercise Price

Options
Outstanding

Weighted
Average
Exercise
Price

Weighted
Average
Contractual
Term (in years)$10.00$19.99

129,130

$
12.99

2.120.0029.99

50,850

$
23.09

5.030.0039.99

197,680

$
34.93

7.240.0049.99

35,200

$
43.56

6.4Outstanding, December 31, 2007

412,860

$
27.34

5.3


In
April 2007, the Company granted its executive officers restricted stock as a component of their annual share based compensation award. The Company granted 2,745 shares, which vest in
three annual installments, at a market price of $43.45. The awards provide for accelerated vesting if there is a change in control. During 2007, 515 shares of these restricted shares were forfeited.

The
following table summarizes share-based compensation and the related tax benefit for the periods indicated:

Year Ended December 31,2007

2006

2005(in thousands)Share-based compensation

$
212

$
97

$
146Tax benefit related to share-based compensation(1)


322


244


309




As
of December 31, 2007, there was $883,000 of total unrecognized compensation cost related to nonvested employee compensation arrangements. This cost is expected to be recognized
over a weighted average period of 3.8 years.

Director Stock PlanThe Company established a Non-Employee Director Stock Plan (the "Director Stock Plan") under
which it may grant up to 90,000 options to acquire its Common Stock to non-employee directors. At December 31, 2007, the total remaining shares available for issuance under the
Director Stock Plan is 11,500. Each non-employee director elected at the 1998 shareholders meeting received an option for 1,500 shares and each new non-employee director
elected subsequently receives an option for 1,000 shares. Non-employee directors also receive an annual option grant for 500 shares as of the date of each annual meeting of shareholders.
Options are granted at an exercise price equal to the market value of the stock on the date of the grant and vest six months after the grant date. Options granted under the Director Stock Plan have a
10-year contractual term, subject to earlier of expiration on the second anniversary of a director's termination of service.

F-35

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(15) Employee and Director Benefits (Continued)

The
fair value of each non-employee director stock option award has been estimated on the grant date using the Black-Scholes option-pricing model utilizing the following
pricing assumptions, summarized on a weighted-average basis in the table below:

Year Ended December 31,2007

2006

2005Expected term


7 years


8 years


7 yearsExpected volatility


20
%

28
%

25
%Risk-free interest rate


4.58
%

5.05
%

3.83
%Dividend yield


1.51
%

1.66
%

1.58
%Fair value of options granted

$
10.70

$
12.73

$
10.89


The
activity related to these director stock options is summarized below:

|Director Stock Options         |           | Options
Outstanding |         | Weighted
Average
Exercise
Price |       | Aggregate
Intrinsic Value |   | Weighted
Average
Contractual
Term (in years)
|------------------------------ | --------- | ------------------- | ------- | ------------------------------- | ----- | ------------------------- | - | --------------------------------------------
|Outstanding, December 31, 2004 |           | 42,500              |         | $                               | 20.22 |                           |   |                                             
|                               | Granted   |                     | 7,000   |                                 | $     | 38.07                     |   |                                             
|                               | Exercised |                     |        |                                 |       |                          |   |                                             
|                               | Forfeited |                     |        |                                 |       |                          |   |                                             
|                               |           |                     |         |                                 |       |                           |   |                                             
|Outstanding, December 31, 2005 |           | 49,500              |         | $                               | 22.75 |                           |   |                                             
|                               | Granted   |                     | 8,000   |                                 | $     | 36.19                     |   |                                             
|                               | Exercised |                     | (4,000  | )                               | $     | 30.15                     |   |                                             
|                               | Forfeited |                     | (500    | )                               | $     | 35.24                     |   |                                             
|                               |           |                     |         |                                 |       |                           |   |                                             
|Outstanding, December 31, 2006 |           | 53,000              |         | $                               | 24.09 |                           |   |                                             
|                               | Granted   |                     | 7,500   |                                 | $     | 39.62                     |   |                                             
|                               | Exercised |                     | (23,500 | )                               | $     | 18.77                     |   |                                             
|                               | Forfeited |                     |        |                                 |       |                          |   |                                             
|                               |           |                     |         |                                 |       |                           |   |                                             
|Outstanding, December 31, 2007 |           | 37,000              |         | $                               | 30.62 |                           | $ | 130,110                                     
|                               |           |                     |         |                                 |       |                           |   |                                             
|Exercisable, December 31, 2007 |           | 37,000              |         | $                               | 30.62 |                           | $ | 130,110                                     
|                               |           |                     |         |                                 |       |                           |   |                                             

The
total intrinsic value of options exercised by directors during 2007, 2006 and 2005 was $577,000, $49,000 and $0, respectively.

F-36

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(15) Employee and Director Benefits (Continued)

The
director options outstanding as of December 31, 2007 are set forth below:

Exercise Price

Options
Outstanding

Weighted
Average
Exercise
Price

Weighted
Average
Contractual
Term (in years)$10.00$19.99

7,500

$
15.28

2.020.0029.99

6,000

$
24.13

5.130.0039.99

22,500

$
36.93

7.640.0049.99

1,000

$
42.85

8.8Outstanding, December 31, 2007

37,000

$
30.62

6.1


The
following table summarizes share-based compensation and the related tax benefit for the periods indicated:

Year Ended December 31,2007

2006

2005(in thousands)Share-based compensation

$
87

$
89

$
Tax benefit related to share-based compensation(1)


231


17







As
of December 31, 2007, there was no unrecognized compensation cost related to nonvested director compensation arrangements.

Change of Control AgreementsThe Bank has entered into Employment Agreements with its President and Chief Executive Officer,
Chief Financial Officer and Chief Business Officer. The Employment Agreements generally provide for the continued payment of specified compensation and benefits for the remainder of the term of the
agreement upon termination without cause. The agreements also provide that if the executive is terminated (or in the case of the Chief Executive Officer, resigns) in conjunction with a Change in
Control, they are entitled to a severance payment, which is equal to 2.99 times base salary plus target bonus for the President and Chief Executive Officer and 2.00 times base salary plus target bonus
for the Chief Financial Officer and Chief Business Officer. For payments under the Employment Agreements following a Change in Control that are subject to the "golden parachute" excise tax, the
Company will make a "gross-up" payment sufficient to ensure that the net after-tax amount retained by the executive (taking into account all taxes, including those on the
"gross-up" payment) is the same as if such excise tax had not applied. The Company has also entered into Change of Control Severance Agreements with certain other members of senior
management of up to 1.00 times base salary or 1.00 times base salary plus current bonus.

F-37

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(16) Other Expenses

Major components of other expenses are as follows:

Year Ended December 31,2007

2006

2005(In thousands)Postage and mailing

$
579

$
603

$
566Forms and supplies


489


560


583Telephone


459


538


584Director fees


381


434


346Credit card and interchange fees


279


266


289Charitable contributions


279


231


246Insurance


233


227


207Correspondent bank fees


168


155


154Recruiting


95


63


130Other


1,751


1,992


1,522Total

$
4,713

$
5,069

$
4,627


In
December 2006, the Company recorded insurance recovery proceeds of $803,000 relating to a loss the Company incurred in the first quarter of 2006 of $868,000. These amounts are
recorded net within other expenses in the table above and on the Consolidated Statement of Operations for the year ended December 31, 2006.

(17) Commitments and Contingent Liabilities

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to originate loans and letters of credit, as well as commitments to originate and commitments to sell leases. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.

The
Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument commitments to extend credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

F-38

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(17) Commitments and Contingent Liabilities (Continued)

Financial
instruments with off-balance sheet risk are summarized as follows:

|                                                                               |                               | December 31,                                         
|------------------------------------------------------------------------------ | ----------------------------- | -----------------------------------------------------
|
|
|Financial instruments whose contract amounts represent credit risk:            |                               |                                                      
|                                                                               | Commitments to extend credit: |                                                      
|                                                                               |                               | Commitments to originate or purchase loans and leases
|                                                                               |                               | Unused lines of credit and other commitments         
|                                                                               |                               | Letters of credit and standby letters of credit      
|Financial instruments whose notional amounts exceed the amount of credit risk: |                               |                                                      
|                                                                               | Forward loan commitments:     |                                                      
|                                                                               |                               | Commitments to originate leases to be sold           
|                                                                               |                               | Commitments to sell leases                           

Commitments
to originate loans and unused lines of credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain commitments may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower.

Letters
of credit are conditional commitments issued by the Bank to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. At December 31, 2007 and 2006, the maximum potential amount of future payments under letters of credit was
$2.7 million and $3.2 million,
respectively. At December 31, 2007 and 2006, cash collateral supported $1.2 million and $1.1 million, respectively, of the outstanding standby letters of credit. The fair value of
the guarantees of the standby letters of credit was $20,000 and $24,000, respectively, and is not reflected on the consolidated balance sheets.

Commitments
to originate and commitments to sell leases are derivative financial instruments. Accordingly, the fair value of these commitments is recognized in other assets on the
consolidated balance sheets and the changes in fair value of such commitments are recorded in current earnings in the consolidated income statements. The carrying values of such commitments as of
December 31, 2007 and 2006 and the respective changes in fair values for the years then ended were insignificant.

(18) Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by using available quoted market
information or other appropriate valuation methodologies. The aggregate fair value amounts presented are in accordance with SFAS 107 guidelines but do not represent the underlying value of the
Bank taken as a whole.

The
fair value estimates provided are made at a specific point in time, based on relevant market information and the characteristics of the financial instrument. The estimates do not
provide for any premiums or discounts that could result from concentrations of ownership of a financial instrument.

F-39

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(18) Fair Value of Financial Instruments (Continued)

Because
no active market exists for some of the Bank's financial instruments, certain fair value estimates are based on subjective judgments regarding current economic conditions, risk characteristics
of the financial instruments, future expected loss experience, prepayment assumptions and other factors. The resulting estimates involve uncertainties and therefore cannot be determined with
precision. Changes made to any of the underlying assumptions could significantly affect the estimates.

The
book values and estimated fair values for the Company's financial instruments are as follows:

|             |                                                                          | December 31, 2007               |                             | December 31, 2006
|------------ | ------------------------------------------------------------------------ | ------------------------------- | --------------------------- | -----------------
|
|
|Assets:      |                                                                          |                                 |                             |                  
|             | Cash and due from banks                                                  |                                 | $                           | 20,465           
|             | Overnight investments                                                    |                                 |                             | 17,097           
|             | Investment securities                                                    |                                 |                             | 76,986           
|             | Mortgage-backed securities                                               |                                 |                             | 258,195          
|             | Stock in the FHLB                                                        |                                 |                             | 15,671           
|             | Loans and leases receivable, net of allowance for loan and lease losses: |                                 |                             |                  
|             |                                                                          |                                 | Commercial loans and leases |                  
|             |                                                                          |                                 | Residential mortgage loans  |                  
|             |                                                                          |                                 | Consumer and other loans    |                  
|             | Accrued interest receivable                                              |                                 |                             | 6,557            
|Liabilities: |                                                                          |                                 |                             |                  
|             | Deposits:                                                                |                                 |                             |                  
|             |                                                                          | Demand deposit accounts         |                             | $                
|             |                                                                          | NOW accounts                    |                             |                  
|             |                                                                          | Money market accounts           |                             |                  
|             |                                                                          | Savings accounts                |                             |                  
|             |                                                                          | Certificate of deposit accounts |                             |                  
|             | Overnight and short-term borrowings                                      |                                 |                             | 66,795           
|             | Wholesale repurchase agreements                                          |                                 |                             | 10,000           
|             | FHLB borrowings                                                          |                                 |                             | 241,505          
|             | Subordinated deferrable interest                                         |                                 |                             |                  
|             |                                                                          | debentures                      |                             |                  
|             | Accrued interest payable                                                 |                                 |                             | 4,411            

Cash and due from banksThe carrying values reported in the balance sheet for cash and due from banks approximate the fair
values because of the short maturity of these instruments.

Overnight investmentsThe carrying values reported in the balance sheet for federal funds sold and overnight investments
approximate the fair values because of the short maturity of these instruments.

Investment and mortgage-backed securitiesThe fair values presented for investment and mortgage-backed securities are based on
quoted market prices, where available. If quoted market prices are not

F-40

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(18) Fair Value of Financial Instruments (Continued)

available,
fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analyses.

Stock in the Federal Home Loan Bank of BostonThe fair value of stock in the FHLB equals the carrying value reported in the
balance sheet. This stock is redeemable at full par value only by the FHLB.

Loans and leases receivableFair value estimates are based on loans and leases with similar financial characteristics. Loans
and leases have been segregated by homogenous groups into residential mortgage, commercial, and consumer and other loans. Fair values are estimated by discounting contractual cash flows, adjusted for
prepayment estimates, using discount rates approximately equal to current market rates on loans with similar characteristics and maturities. The incremental credit risk for nonperforming loans has
been considered in the determination of the fair value of loans.

DepositsThe fair values reported for demand deposit, NOW, money market, and savings accounts are equal to their respective
book values reported on the balance sheet. The fair values disclosed are, by definition, equal to the amount payable on demand at the reporting date. The fair values reported for certificate of
deposit accounts are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on certificate of deposit accounts with
similar remaining maturities.

Overnight and short-term borrowingsThe carrying values reported in the balance sheet for overnight and
short-term borrowings approximate the fair values because of the short maturity of these instruments.

Wholesale repurchase agreementsThe fair values reported for wholesale repurchase agreements are based on the discounted value
of contractual cash flows. The discount rates used are representative of approximate rates currently offered on borrowings with similar remaining maturities.

Federal Home Loan Bank of Boston borrowingsThe fair values reported for FHLB borrowings are based on the discounted value of
contractual cash flows. The discount rates used are representative of approximate rates currently offered on borrowings with similar remaining maturities.

Subordinated deferrable interest debenturesThe fair values reported for Subordinated deferrable interest debentures are based
on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on instruments with similar terms and remaining maturities.

Accrued interest receivable and payableThe carrying values for accrued interest receivable and payable approximate fair
values because of the short-term nature of these financial instruments.

Financial instruments with off-balance sheet riskSince the Bank's commitments to originate or purchase loans, and
for unused lines and outstanding letters of credit, are primarily at market interest rates, there is no significant fair value adjustment.

(19) Shareholders' Equity

Capital guidelines issued by the Federal Reserve Board ("FRB") require the Company to maintain minimum capital levels for capital adequacy purposes. Tier I
capital is defined as common equity and retained earnings, less certain intangibles. The risk-based capital guidelines include both a definition of capital and a framework for calculating
risk-weighted assets by assigning assets and off-balance-sheet items to one of four risk categories, each with an appropriate weight. The risk-based capital rules
are designed to

F-41

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BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(19) Shareholders' Equity (Continued)

make
regulatory capital more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets. The Bank is also subject to FDIC regulations regarding capital requirements. These regulations require banks to maintain minimum capital levels for capital adequacy purposes and
higher capital levels to be considered "well capitalized."

As
of December 31, 2007 and 2006, the Company and the Bank met all applicable minimum capital requirements and were considered "well capitalized" by both the FRB and the FDIC.
There have been no events or conditions since the end of the year that management believes would cause a change in either the Company's or the Bank's categorization. The Company's and the Bank's
actual and required capital amounts and ratios are as follows:

|                      |                             | Actual                                   |  | For Capital
Adequacy Purposes |         | To Be Considered
"Well Capitalized" |      
|--------------------- | --------------------------- | ---------------------------------------- |  | ----------------------------- | ------- | ----------------------------------- | -----
|
|
|At December 31, 2007: |                             |                                          |  |                               |         |                                     |      
|                      | Bancorp Rhode Island, Inc.: |                                          |  |                               |         |                                     |      
|                      |                             | Tier I capital (to average assets)       |  | $                             | 114,403 |                                     | 7.87 
|                      |                             | Tier I capital (to risk-weighted assets) |  |                               | 114,403 |                                     | 11.06
|                      |                             | Total capital (to risk-weighted assets)  |  |                               | 127,022 |                                     | 12.28
|                      | Bank Rhode Island:          |                                          |  |                               |         |                                     |      
|                      |                             | Tier I capital (to average assets)       |  | $                             | 112,323 |                                     | 7.72 
|                      |                             | Tier I capital (to risk-weighted assets) |  |                               | 112,323 |                                     | 10.87
|                      |                             | Total capital (to risk-weighted assets)  |  |                               | 124,942 |                                     | 12.09
|At December 31, 2006: |                             |                                          |  |                               |         |                                     |      
|                      | Bancorp Rhode Island, Inc.: |                                          |  |                               |         |                                     |      
|                      |                             | Tier I capital (to average assets)       |  | $                             | 121,782 |                                     | 8.37 
|                      |                             | Tier I capital (to risk-weighted assets) |  |                               | 121,782 |                                     | 12.05
|                      |                             | Total capital (to risk-weighted assets)  |  |                               | 134,159 |                                     | 13.27
|                      | Bank Rhode Island:          |                                          |  |                               |         |                                     |      
|                      |                             | Tier I capital (to average assets)       |  | $                             | 104,213 |                                     | 7.18 
|                      |                             | Tier I capital (to risk-weighted assets) |  |                               | 104,213 |                                     | 10.32
|                      |                             | Total capital (to risk-weighted assets)  |  |                               | 116,590 |                                     | 11.54

The
trust preferred securities issued by the Company are included in its Tier 1 capital. On March 1, 2005, the FRB issued a final rule that would retain trust preferred
securities in Tier 1 capital of bank holding companies, but with stricter quantitative limits and clearer standards. Under the proposal, after a five-year transition period that
would end on March 31, 2009, the aggregate amount of trust preferred securities would be limited to 25% of Tier 1 capital elements, net of goodwill. The Company has evaluated the
potential impact of such a change on its Tier 1 capital ratio and has concluded that the regulatory capital treatment of the trust preferred securities in the Company's total capital ratio
would be unchanged.

F-42

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BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(19) Shareholders' Equity (Continued)

Stock Repurchase ProgramThe Company has maintained a stock repurchase program authorized by the
Company's board of directors, which has enabled the Company to proactively manage its capital position. The program, which was initially approved on April 18, 2006, authorized the Company to
repurchase up to 245,000 shares of its common stock from time to time through open market or privately negotiated purchases. On November 26, 2007, the Company expanded the stock repurchase
program to 345,000 shares and also adopted a written purchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Under the program, the Company
repurchased 305,200 shares at a total cost of $10.2 million during 2007; no shares were repurchased during 2006.

(20) Earnings Per Share

The following table is a reconciliation of basic EPS and diluted EPS:

|                         |              | Year Ended December 31,            
|------------------------ | ------------ | -----------------------------------
|
|Basic EPS Computation:   |              |                                    
|                         | Numerator:   |                                    
|                         |              | Net income (in thousands)          
|                         |              |                                    
|                         | Denominator: |                                    
|                         |              | Weighted average shares outstanding
|                         |              |                                    
|Basic EPS                |              | $                                  
|                         |              |                                    
|Diluted EPS Computation: |              |                                    
|                         | Numerator:   |                                    
|                         |              | Net income (in thousands)          
|                         |              |                                    
|                         | Denominator: |                                    
|                         |              | Common shares outstanding          
|                         |              | Stock options                      
|                         |              | Contingent shares                  
|                         |              | Restricted stock                   
|                         |              |                                    
|                         |              |                                    
|                         |              |                                    
|Diluted EPS              |              | $                                  
|                         |              |                                    

(21) Regulation and Litigation

The Company and the Bank are subject to extensive regulation and examination by the FRB, the Rhode Island Division of Banking and the FDIC, which insures the
Bank's deposits to the maximum extent permitted by law. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the
Bank generally have been promulgated to protect depositors and not for the purpose of protecting shareholders. Among other things, bank regulatory authorities have the right to restrict the payment of
dividends by banks and bank holding companies to shareholders.

F-43

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BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(21) Regulation and Litigation (Continued)

The
Company is involved in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, final disposition of these lawsuits will not have a
material adverse effect on the consolidated financial condition or results of operations of the Company.

(22) Parent Company Statements

The following are condensed financial statements for Bancorp Rhode Island, Inc. (the "Parent Company"):

Balance Sheets

|                                     |                                                                                                                                                                | December 31,                               |  
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -
|
|
|Assets                               |                                                                                                                                                                |                                            |  
|Assets:                              |                                                                                                                                                                |                                            |  
|                                     | Cash and due from banks                                                                                                                                        |                                            | $
|                                     | Overnight investments                                                                                                                                          |                                            |  
|                                     | Investment in subsidiaries                                                                                                                                     |                                            |  
|                                     | Prepaid expenses and other assets                                                                                                                              |                                            |  
|                                     |                                                                                                                                                                |                                            |  
|                                     |                                                                                                                                                                | Total assets                               |  
|                                     |                                                                                                                                                                |                                            |  
|Liabilities and Shareholders' Equity |                                                                                                                                                                |                                            |  
|Liabilities:                         |                                                                                                                                                                |                                            |  
|                                     | Subordinated deferrable interest debentures                                                                                                                    |                                            | $
|                                     | Other liabilities                                                                                                                                              |                                            |  
|                                     |                                                                                                                                                                |                                            |  
|                                     |                                                                                                                                                                | Total liabilities                          |  
|                                     |                                                                                                                                                                |                                            |  
|Shareholders' equity:                |                                                                                                                                                                |                                            |  
|                                     | Preferred stock: par value $0.01 per share, authorized 1,000,000 shares. Issued and outstanding: none                                                          |                                            |  
|                                     | Common stock: par value $0.01 per share, authorized 11,000,000 shares. Issued: 4,867,121 shares at December 31, 2007 and 4,792,380 shares in December 31, 2006 |                                            |  
|                                     | Additional paid-in capital                                                                                                                                     |                                            |  
|                                     | Treasury stock, at cost (305,200 shares at December 31, 2007)                                                                                                  |                                            |  
|                                     | Retained earnings                                                                                                                                              |                                            |  
|                                     | Accumulated other comprehensive loss, net                                                                                                                      |                                            |  
|                                     |                                                                                                                                                                |                                            |  
|                                     |                                                                                                                                                                | Total shareholders' equity                 |  
|                                     |                                                                                                                                                                |                                            |  
|                                     |                                                                                                                                                                | Total liabilities and shareholders' equity |  
|                                     |                                                                                                                                                                |                                            |  

F-44

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BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(22) Parent Company Statements (Continued)

Statements of Operations

|          |                                                  | Year Ended December 31,                                               |  
|--------- | ------------------------------------------------ | --------------------------------------------------------------------- | -
|
|
|Income:   |                                                  |                                                                       |  
|          | Dividends received from subsidiaries             |                                                                       | $
|          | Interest on overnight investments                |                                                                       |  
|          |                                                  |                                                                       |  
|          |                                                  | Total income                                                          |  
|          |                                                  |                                                                       |  
|Expenses: |                                                  |                                                                       |  
|          | Subordinated deferrable interest debentures      |                                                                       |  
|          | Professional services and other expenses         |                                                                       |  
|          | Directors' fees                                  |                                                                       |  
|          | Compensation expense                             |                                                                       |  
|          |                                                  |                                                                       |  
|          |                                                  | Total expenses                                                        |  
|          |                                                  |                                                                       |  
|          |                                                  | Income (loss) before income taxes                                     |  
|          |                                                  |                                                                       |  
|          | Income tax benefit                               |                                                                       |  
|          |                                                  |                                                                       |  
|          |                                                  | Income (loss) before equity in undistributed earnings of subsidiaries |  
|          | Equity in undistributed earnings of subsidiaries |                                                                       |  
|          |                                                  |                                                                       |  
|          |                                                  | Net income                                                            |  
|          |                                                  |                                                                       |  

F-45

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(22) Parent Company Statements (Continued)

Statements of Cash Flow

|                                                   |                                                                                  | Year Ended December 31,                            |                                                 
|-------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------
|
|
|Cash flows from operating activities:              |                                                                                  |                                                    |                                                 
|                                                   | Net income                                                                       |                                                    | $                                               
|                                                   | Adjustment to reconcile net income to net cash provided by operating activities: |                                                    |                                                 
|                                                   |                                                                                  |                                                    | Equity in undistributed earnings of subsidiaries
|                                                   |                                                                                  |                                                    | Share-based compensation expense                
|                                                   |                                                                                  |                                                    | Tax benefit from stock option exercises         
|                                                   |                                                                                  |                                                    | (Increase) decrease in other assets             
|                                                   |                                                                                  |                                                    | Increase (decrease) in other liabilities        
|                                                   |                                                                                  |                                                    | Other, net                                      
|                                                   |                                                                                  |                                                    |                                                 
|                                                   |                                                                                  |                                                    |                                                 
|                                                   |                                                                                  |                                                    |                                                 
|Cash flows from financing activities:              |                                                                                  |                                                    |                                                 
|                                                   | Investment in subsidiaries                                                       |                                                    |                                                 
|                                                   | Repayment of subordinated deferrable interest debentures                         |                                                    |                                                 
|                                                   | Proceeds from issuance of common stock                                           |                                                    |                                                 
|                                                   | Payment to repurchase common stock                                               |                                                    |                                                 
|                                                   | Tax benefit from stock option exercises                                          |                                                    |                                                 
|                                                   | Dividends on common stock                                                        |                                                    |                                                 
|                                                   |                                                                                  |                                                    |                                                 
|                                                   |                                                                                  |                                                    |                                                 
|                                                   |                                                                                  |                                                    |                                                 
|Net increase (decrease) in cash and due from banks |                                                                                  |                                                    | (15,391                                         
|Cash and cash equivalents at beginning of year     |                                                                                  |                                                    | 17,120                                          
|                                                   |                                                                                  |                                                    |                                                 
|Cash and cash equivalents at end of year           |                                                                                  | $                                                  | 1,729                                           
|                                                   |                                                                                  |                                                    |                                                 
|Supplementary disclosures:                         |                                                                                  |                                                    |                                                 
|                                                   | Cash paid (received) for income taxes                                            |                                                    | $                                               
|                                                   | Non-cash transactions:                                                           |                                                    |                                                 
|                                                   |                                                                                  | Change in other comprehensive income, net of taxes |                                                 

The
Parent Company's Statements of Changes in Shareholders' Equity is identical to the Consolidated Statements of Changes in Shareholders' Equity and therefore is not presented here.

F-46

---



BANCORP RHODE ISLAND, INC.

Notes to Consolidated Financial Statements (Continued)

(23) Quarterly Results of Operations (unaudited)

|                                    |                                                               | 2007 Quarter Ended
|----------------------------------- | ------------------------------------------------------------- | ------------------
|
|
|Interest and dividend income        |                                                               | $                 
|Interest expense                    |                                                               |                   
|                                    |                                                               |                   
|                                    | Net interest income                                           |                   
|Provision for loan and lease losses |                                                               |                   
|                                    |                                                               |                   
|                                    | Net interest income after provision for loan and lease losses |                   
|Noninterest income                  |                                                               |                   
|Noninterest expense                 |                                                               |                   
|                                    |                                                               |                   
|                                    | Income before taxes                                           |                   
|Income taxes                        |                                                               |                   
|                                    |                                                               |                   
|                                    | Net income                                                    |                   
|                                    |                                                               |                   
|Basic EPS                           |                                                               | $                 
|Diluted EPS                         |                                                               | $                 

|
|

|                                    |                                                               | 2006 Quarter Ended
|----------------------------------- | ------------------------------------------------------------- | ------------------
|
|
|Interest and dividend income        |                                                               | $                 
|Interest expense                    |                                                               |                   
|                                    |                                                               |                   
|                                    | Net interest income                                           |                   
|Provision for loan and lease losses |                                                               |                   
|                                    |                                                               |                   
|                                    | Net interest income after provision for loan and lease losses |                   
|Noninterest income                  |                                                               |                   
|Noninterest expense                 |                                                               |                   
|                                    |                                                               |                   
|                                    | Income before taxes                                           |                   
|Income taxes                        |                                                               |                   
|                                    |                                                               |                   
|                                    | Net income                                                    |                   
|                                    |                                                               |                   
|Basic EPS                           |                                                               | $                 
|Diluted EPS                         |                                                               | $                 

F-47

---