UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1937

Commission File No. 001-16101

BANCORP RHODE ISLAND, INC.

(Exact name of Registrant as specified in its charter)

Rhode Island		05-0509802
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

ONE TURKS HEAD PLACE, PROVIDENCE, RI 02903
(Address of principal executive offices)

(401) 456-5000

Not Applicable

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

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

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

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

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

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of August 3, 2009:

Common Stock — Par Value $0.01		4,599,494 shares
(class)		(outstanding)

 

 

Bancorp Rhode Island, Inc.
Quarterly Report on Form 10-Q

Table of Contents

Description		Page Number
Cover Page			1
Table of Contents			2
Part I — Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets			3
Consolidated Statements of Operations			4
Consolidated Statements of Changes in Shareholders’ Equity			5
Consolidated Statements of Cash Flows			6
Condensed Notes to Consolidated Financial Statements			7-21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22-43
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			45
Part II — Other Information
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Submission of Matters to a Vote of Security Holders			46
Item 5. Other Information			46
Item 6. Exhibits			47
Signature Page			48
Exhibit 10.5(b)
Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Special Note Regarding Forward Looking Statements

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

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

BANCORP RHODE ISLAND, INC.

		June 30,				December 31,
		2009				2008
		(In thousands)
ASSETS:
Cash and due from banks		$	21,740			$	54,344
Overnight investments			775				1,113
Total cash and cash equivalents			22,515				55,457
Available for sale securities (amortized cost of $376,528 and $325,767, respectively)			376,026				326,406
Stock in Federal Home Loan Bank of Boston			15,671				15,671
Loans and leases receivable:
Commercial loans and leases			711,639				658,422
Residential mortgage loans			191,271				212,665
Consumer and other loans			214,745				206,655
Total loans and leases receivable			1,117,655				1,077,742
Allowance for loan and lease losses			(16,905	)			(14,664	)
Net loans and leases receivable			1,100,750				1,063,078
Premises and equipment, net			12,511				12,641
Goodwill, net			12,051				12,019
Accrued interest receivable			5,071				5,240
Investment in bank-owned life insurance			29,358				28,765
Prepaid expenses and other assets			10,529				9,697
Total assets		$	1,584,482			$	1,528,974
LIABILITIES:
Deposits:
Demand deposit accounts		$	205,092			$	176,495
NOW accounts			65,847				56,703
Money market accounts			29,179				4,445
Savings accounts			381,716				381,106
Certificate of deposit accounts			402,839				423,443
Total deposits			1,084,673				1,042,192
Overnight and short-term borrowings			40,801				57,676
Wholesale repurchase agreements			10,000				10,000
Federal Home Loan Bank of Boston borrowings			272,040				238,936
Subordinated deferrable interest debentures			13,403				13,403
Other liabilities			14,376				17,162
Total liabilities			1,435,293				1,379,369
SHAREHOLDERS’ EQUITY:
Preferred stock, par value $0.01 per share, authorized 1,000,000 shares, liquidation preference $1,000 per share:
Issued and outstanding: Issued: 30,000 and 30,000 shares, respectively			28,718				28,595
Common stock, par value $0.01 per share, authorized 11,000,000 shares:
Issued: 4,964,244 shares and 4,926,920 shares, respectively			50				49
Additional paid-in capital			73,873				73,323
Treasury stock, at cost (364,750 and 352,250 shares, respectively)			(12,309	)			(12,055	)
Retained earnings			59,183				59,278
Accumulated other comprehensive (loss) income, net			(326	)			415
Total shareholders’ equity			149,189				149,605
Total liabilities and shareholders’ equity		$	1,584,482			$	1,528,974

See accompanying notes to unaudited consolidated financial statements

BANCORP RHODE ISLAND, INC.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(In thousands, except per share data)
Interest and dividend income:
Overnight investments		$	—			$	58			$	9			$	255
Mortgage-backed securities			3,360				3,455				6,763				6,687
Investment securities			536				759				987				1,460
Federal Home Loan Bank of Boston stock dividends			—				156				—				393
Loans and leases			14,896				15,553				29,593				31,718
Total interest and dividend income			18,792				19,981				37,352				40,513
Interest expense:
Deposits			4,224				5,331				8,718				12,023
Overnight and short-term borrowings			21				213				48				644
Wholesale repurchase agreements			134				133				267				268
Federal Home Loan Bank of Boston borrowings			2,650				2,650				5,275				5,370
Subordinated deferrable interest debentures			190				226				389				476
Total interest expense			7,219				8,553				14,697				18,781
Net interest income			11,573				11,428				22,655				21,732
Provision for loan and lease losses			2,600				970				4,210				1,255
Net interest income after provision for loan and lease losses			8,973				10,458				18,445				20,477
Noninterest income:
Service charges on deposit accounts			1,367				1,448				2,577				2,883
Income from bank-owned life insurance			304				262				593				517
Loan related fees			229				144				628				307
Commissions on nondeposit investment products			111				245				267				455
Net gains on lease sales and commissions on loans originated for others			19				100				48				319
Gain on sale of available for sale securities			—				—				61				242
Other income			184				293				397				672
Total noninterest income			2,214				2,492				4,571				5,395
Noninterest expense:
Salaries and employee benefits			4,926				5,000				10,079				10,139
FDIC insurance			1,176				162				1,563				262
Occupancy			832				864				1,788				1,729
Data processing			670				708				1,290				1,427
Professional services			646				854				1,344				1,489
Marketing			332				369				647				733
Equipment			242				266				483				574
Loan servicing			189				151				348				318
Loan workout and other real estate owned			149				80				277				236
Other expenses			983				1,158				1,949				2,165
Total noninterest expense			10,145				9,612				19,768				19,072
Income before income taxes			1,042				3,338				3,248				6,800
Income tax expense			302				1,097				1,045				2,233
Net income			740				2,241				2,203				4,567
Preferred stock dividends			(375	)			—				(750	)			—
Accretion of preferred shares discount			(62	)			—				(123	)			—
Net income applicable to common shares		$	303			$	2,241			$	1,330			$	4,567
Per share data:
Basic earnings per common share		$	0.07			$	0.49			$	0.29			$	1.00
Diluted earnings per common share		$	0.07			$	0.48			$	0.29			$	0.98
Cash dividends declared per common share		$	0.17			$	0.16			$	0.34			$	0.32
Weighted average common shares outstanding — basic			4,602				4,563				4,596				4,560
Weighted average common shares outstanding — diluted			4,620				4,634				4,615				4,636

See accompanying notes to unaudited consolidated financial statements

BANCORP RHODE ISLAND, INC.

																						Accumulated
																						Other
																						Compre-
										Additional												hensive
		Preferred				Common				Paid-in				Treasury				Retained				Income
Six months ended June 30,		Stock				Stock				Capital				Stock				Earnings				(Loss)				Total
		(In thousands, except per share data)
2008
Balance at December 31, 2007		$	—			$	49			$	70,123			$	(10,189	)		$	53,194			$	(69	)		$	113,108
Net income			—				—				—				—				4,567				—				4,567
Other comprehensive income:
Unrealized holding losses on securities available for sale, net of taxes of $1,401																							(2,604	)			(2,604	)
Reclassification adjustment, net of taxes of $85																							(157	)			(157	)
Total comprehensive income																											1,806
Exercise of stock options			—				—				476				—				—				—				476
Macrolease acquisition											656				—				—				—				656
Treasury stock acquisitions			—				—				—				(1,866	)			—				—				(1,866	)
Share-based compensation			—				—				174				—				—				—				174
Tax benefit from exercise of stock options			—				—				187				—				—				—				187
Dividends on common stock ($0.16 per common share)			—				—				—				—				(1,447	)			—				(1,447	)
Balance at June 30, 2008		$	—			$	49			$	71,616			$	(12,055	)		$	56,314			$	(2,830	)		$	113,094
2009
Balance at December 31, 2008		$	28,595			$	49			$	73,323			$	(12,055	)		$	59,278			$	415			$	149,605
Cumulative effect of a change in accounting principle, net of taxes of ($77)			—				—				—				—				137				(137	)			—
Net income			—				—				—				—				2,203				—				2,203
Other comprehensive income:
Unrealized holding losses on securities available for sale, net of taxes of $303																							(564	)			(564	)
Reclassification adjustment for net gains included in net income, net of taxes of $21																							(40	)			(40	)
Total comprehensive income																											1,599
Exercise of stock options			—				1				413				—				—				—				414
Macrolease acquisition			—				—				78				—				—				—				78
Treasury stock acquisitions			—				—				—				(254	)			—				—				(254	)
Share-based compensation			—				—				(19	)			—				—				—				(19	)
Tax benefit from exercise of stock options			—				—				78				—				—				—				78
Preferred stock discount amortization			123				—				—				—				(123	)			—				—
Dividends on preferred stock ($25.00 per preferred share)			—				—				—				—				(750	)			—				(750	)
Dividends on common stock ( $0.34 per common share)			—				—				—				—				(1,562	)			—				(1,562	)
Balance at June 30, 2009		$	28,718			$	50			$	73,873			$	(12,309	)		$	59,183			$	(326	)		$	149,189

See accompanying notes to unaudited consolidated financial statements

BANCORP RHODE ISLAND, INC.

		Six Months Ended
		June 30,
		2009				2008
		(In thousands)
Cash flows from operating activities:
Net income		$	2,203			$	4,567
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation, amortization and accretion, net			(2,878	)			(1,275	)
Provision for loan and lease losses			4,210				1,255
Income from bank-owned life insurance			(593	)			(517	)
Share-based compensation expense			(19	)			174
Net gains on lease sales			(24	)			(254	)
Gain on sale of available for sale securities			(61	)			(242	)
Gain on sale of other real estate owned			(32	)			—
Proceeds from sales of leases			759				8,825
Leases originated for sale			(579	)			(5,304	)
Decrease in accrued interest receivable			169				930
(Increase) decrease in prepaid expenses and other assets			(328	)			145
Decrease in other liabilities			(2,882	)			(2,325	)
Net cash (used in) provided by operating activities			(55	)			5,979
Cash flows from investing activities:
Available for sale securities:
Purchases			(138,662	)			(91,033	)
Maturities and principal repayments			86,252				75,310
Proceeds from sales			1,880				13,097
Net increase in loans and leases			(39,249	)			(24,131	)
Capital expenditures for premises and equipment			(615	)			(269	)
Proceeds from sale of premises and equipment			—				36
Proceeds from sale of other real estate owned			729				—
Net cash used in investing activities			(89,665	)			(26,990	)
Cash flows from financing activities:
Net increase in deposits			42,481				25,734
Net decrease in overnight and short-term borrowings			(16,875	)			(16,301	)
Proceeds from long-term borrowings			49,805				30,000
Repayment of long-term borrowings			(16,701	)			(23,774	)
Exercise of stock options			160				226
Treasury stock acquisitions			—				(1,616	)
Tax benefit from exercise of stock options			78				187
Dividends on preferred stock			(608	)			—
Dividends on common stock			(1,562	)			(1,447	)
Net cash provided by financing activities			56,778				13,009
Net decrease in cash and cash equivalents			(32,942	)			(8,002	)
Cash and cash equivalents at beginning of period			55,457				37,562
Cash and cash equivalents at end of period		$	22,515			$	29,560
Supplementary Disclosures:
Cash paid for interest		$	15,180			$	20,678
Cash paid for income taxes			2,159				2,350
Non-cash investing and financing transactions:
Change in accumulated other comprehensive income, net of taxes			(604	)			(2,761	)
Cumulative effect of a change in accounting principle, net of taxes			137				—
Accrual of cumulative preferred dividends payable			142				—
Contingent share payments related to Macrolease acquisition			78				656
Transfer of loans to other real estate owned			756				—
Transfer of loans to other assets (non-real estate foreclosed assets)			122				—
Treasury stock acquisitions from shares tendered in stock option exercises			254				250

See accompanying notes to unaudited consolidated financial statements

BANCORP RHODE ISLAND, INC.

(1) Basis of Presentation

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

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. These estimates and assumptions are based on management’s estimates and judgment and are evaluated on an ongoing basis using historical experiences and other factors, including the current economic environment. Estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets and declines in consumer spending have combined to increase the uncertainty inherent in management’s estimates and assumptions. As future events cannot be determined with precision, actual results could differ significantly from management’s estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan and lease losses, evaluation of investments for other-than-temporary impairment, review of goodwill for impairment and income taxes.

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

The unaudited interim consolidated financial statements of the Company conform to U.S. generally accepted accounting principles and prevailing practices within the banking industry and include all necessary adjustments (consisting of only normal recurring adjustments) that, in the opinion of management, are required for a fair presentation of the results and financial condition of the Company. Prior period amounts are reclassified whenever necessary to conform to the current year classifications. The Company made a reclassification adjustment at December 31, 2008 from additional paid-in capital to preferred stock to reflect the liquidation value of shares of $30.0 million, less the discount in preferred stock of $1.4 million in connection with the Company’s participation in the U.S. Treasury’s Capital Purchase Program. The result of the reclassification was an increase of $28.6 million to preferred stock with a corresponding decrease to additional paid-in capital. This reclassification did not have an effect on previously reported net income or total shareholders’ equity.

The Company considers events or transactions that occur after the balance sheet date but before the consolidated financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through August 7, 2009, the date of the issuance of these consolidated financial statements.

The unaudited interim results of consolidated operations are not necessarily indicative of the results for any future interim period or for the entire year. These interim consolidated financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the annual consolidated financial statements and accompanying notes included in the Company’s 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

(2) Earnings Per Share

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

(3) Recently Adopted Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations (Revised 2007).” SFAS No. 141(R) 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 No. 141(R) 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 No. 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS No. 141(R) 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 No. 141. Under SFAS No. 141(R), 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 adoption of SFAS No. 141(R) on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary. The adoption of SFAS No. 160 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. See Note 6 — Derivatives.

In June 2008, the FASB issued Staff Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted In Share-Based Payment Transactions Are Participating Securities.” FSP No. EITF 03-6-1 concludes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and must be included in the computation of basic earnings per share using the two-class method. The Company grants restricted stock which includes nonforfeitable rights to dividends. Accordingly, unvested restricted stock awards are considered participating securities and were included in the earnings per share calculation. The adoption of this FSP on January 1, 2009 did not have a material impact on earnings per share or any impact on financial position or results of operations.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP deals with the initial recognition and measurement of an asset acquired or a liability assumed in a business combination that arises from a contingency provided the asset or liability’s fair value on the date of acquisition can be determined. This FSP is effective for assets and liabilities from contingencies in business combinations that occur following the start of the first fiscal year that begins on or after December 15, 2008. The adoption of this FSP on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP No. 157-4 provides guidelines for a broad interpretation of when to apply market-based fair value measurements. The FSP reaffirms management’s need to use judgment to determine when a market that once was active has become inactive and in determining fair values in markets that are no longer active. The adoption of this FSP on April 1, 2009 impacted the method by which the Company determines fair value of its financial assets. Additionally, the adoption of this FSP expanded the disclosures relating to available for sale securities in the notes to the Company’s consolidated financial statements. See Note 7 — Fair Value of Financial Instruments.

In April 2009, the FASB issued FSP No. 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” to amend the other-than-temporary impairment criteria associated with marketable debt securities and beneficial interests in securitized financial assets. This FSP requires that an entity evaluate for and record an other-than-temporary impairment when it concludes that it does not intend to sell an impaired security and does not believe it likely that it will be required to sell the security before recovery of the amortized cost basis. Once an entity has determined that an other-than-temporary impairment has occurred, it is required to record the credit loss component of the difference between the security’s amortized cost basis and the estimated fair value in earnings, whereas the remaining difference is to be recognized as a component of other comprehensive income and amortized over the remaining life of the security. The FSP also requires some additional disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. The adoption of this FSP on April 1, 2009 expanded the disclosures relating to available for sale securities in the notes to the Company’s consolidated financial statements. Additionally, the adoption of this FSP resulted in the reversal of a previously recognized other-than-temporary impairment through the Company’s retained earnings and accumulated other comprehensive income. See Note 5 — Available for Sale Securities.

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” The FSP No. 107-1 and APB 28-1 increases the frequency of fair value disclosures to a quarterly instead of annual basis. The guidance relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value. The adoption of this FSP expanded the disclosures relating to fair value of financial instruments in the notes to the Company’s consolidated financial statements. See Note 7 — Fair Value of Financial Instruments.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 provides authoritative accounting literature for events that occur subsequent to the balance sheet date of a company’s financial statements. The guidance that SFAS No. 165 provides is largely similar to current guidance in auditing literature, but directs responsibility at management for accounting and disclosure of subsequent events. The adoption of SFAS No. 165 on June 30, 2009 did not have a material impact on the Company’s consolidated financial statements. See Note 9 — Subsequent Events.

(4) Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” SFAS No. 166 eliminates the concept of a “qualifying special-purpose entity” (“QSPE”) from SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” creates more stringent conditions for reporting a transfer of a portion of financial assets as a sale, clarifies other sale-accounting criteria and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS No. 166 also requires enhanced interim and year-end disclosures about a transferor’s continuing involvement with transfers of financial assets accounted for as sales, the risks inherent in the transferred financial assets that have been retained and the nature and financial effect of restrictions on the transferor’s assets that continue to be reported in the balance sheet. SFAS No. 166 is effective for fiscal years and interim reporting periods within those fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS No. 166 may have on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 addresses the effects of eliminating the QSPE concept from SFAS No. 140, changes the approach to determining the primary beneficiary of a variable interest entity (“VIE”) and requires companies to more frequently assess whether a VIE must be consolidated. SFAS No. 167 also requires enhanced interim and year-end disclosures about the significant judgments and assumptions considered in determining whether a VIE must be consolidated, the nature of restrictions on a consolidated VIE’s assets, the risks associated with a company’s involvement with a VIE and how that involvement effects the company’s financial position, financial performance and cash flows. SFAS No. 167 is effective for fiscal years and interim reporting periods within those fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS No. 167 may have on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162.” With the issuance of SFAS No. 168, the FASB Accounting Standards Codification will become the single source of authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the SEC. SFAS No. 168 is effective for financial statements issued for interim or annual periods ending after September 15, 2009. The adoption of SFAS No. 168 will have a material impact on the manner in which the Company references accounting and reporting standards.

(5) Available for Sale Securities

The Company categorizes available for sale securities by major category. Major categories are determined by the nature and risks of the securities and consider, among other things, the issuing entity, type of investment and underlying collateral. The Company categorizes securities issued by the Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Federal Farm Credit Banks Funding Corporation as government sponsored enterprise (“GSE”) securities.

A summary of available for sale securities by major categories follows:

		Amortized				Unrealized								Fair
		Cost (1)				Gains				Losses				Value
		(In thousands)
At June 30, 2009:
U.S. Treasury obligations		$	10,000			$	—			$	—			$	10,000
GSE obligations			71,982				230				(216	)			71,996
Trust preferred collateralized debt obligations			2,935				—				(2,269	)			666
Collateralized mortgage obligations			54,548				633				(3,683	)			51,498
GSE mortgage-backed securities			237,063				5,514				(711	)			241,866
Total		$	376,528			$	6,377			$	(6,879	)		$	376,026
At December 31, 2008:
U.S. Treasury obligations		$	9,990			$	—			$	(2	)		$	9,988
GSE obligations			47,131				256				—				47,387
Corporate debt securities			2,001				—				(14	)			1,987
Trust preferred collateralized debt obligations			2,735				—				(1,255	)			1,480
Collateralized mortgage obligations			62,909				256				(2,415	)			60,750
GSE mortgage-backed securities			201,001				4,289				(476	)			204,814
Total		$	325,767			$	4,801			$	(4,162	)		$	326,406

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

		Less than One Year								One Year or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
At June 30, 2009:
GSE obligations			27,254				(216	)			—				—				27,254				(216	)
Trust preferred collateralized debt obligations			345				(642	)			321				(1,627	)			666				(2,269	)
Collateralized mortgage obligations			12,349				(52	)			16,081				(3,631	)			28,430				(3,683	)
GSE mortgage-backed securities			42,991				(706	)			673				(5	)			43,664				(711	)
Total		$	82,939			$	(1,616	)		$	17,075			$	(5,263	)		$	100,014			$	(6,879	)
At December 31, 2008:
U.S. Treasury obligations		$	9,988			$	(2	)		$	—			$	—			$	9,988			$	(2	)
Corporate debt securities			1,987				(14	)			—				—				1,987				(14	)
Trust preferred collateralized debt obligations			—				—				1,480				(1,255	)			1,480				(1,255	)
Collateralized mortgage obligations			30,771				(1,385	)			10,343				(1,030	)			41,114				(2,415	)
GSE mortgage-backed securities			33,016				(350	)			2,662				(126	)			35,678				(476	)
Total		$	75,762			$	(1,751	)		$	14,485			$	(2,411	)		$	90,247			$	(4,162	)

The following table sets for the maturities of available for sale securities:

										After One, But								After Five, But
		Within One Year								Within Five Years								Within Ten Years								After Ten Years
		Amortized				Fair				Amortized				Fair				Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value				Cost				Value				Cost				Value
		(In thousands)
At June 30, 2009:
U.S. Treasury obligations		$	10,000			$	10,000			$	—			$	—			$	—			$	—			$	—			$	—
GSE obligations			—				—				71,982				71,996				—				—				—				—
Trust preferred collateralized debt obligations			—				—				—				—				—				—				2,935				666
Collateralized mortgage obligations			—				—				—				—				18,451				18,589				36,097				32,909
GSE mortgage-backed securities			—				—				—				—				23,620				24,534				213,443				217,332
Total		$	10,000			$	10,000			$	71,982			$	71,996			$	42,071			$	43,123			$	252,475			$	250,907
At December 31, 2008:
U.S. Treasury obligations		$	9,990			$	9,988			$	—			$	—			$	—			$	—			$	—			$	—
GSE obligations			5,000				5,013				42,131				42,374				—				—				—				—
Corporate debt securities			2,001				1,987				—				—				—				—				—				—
Trust preferred collateralized debt obligations			—				—				—				—				—				—				2,735				1,480
Collateralized mortgage obligations			—				—				—				—				20,867				20,408				42,042				40,343
GSE mortgage-backed securities			—				—				—				—				25,764				26,604				175,237				178,209
Total		$	16,991			$	16,988			$	42,131			$	42,374			$	46,631			$	47,012			$	220,014			$	220,032

At June 30, 2009 and December 31, 2008, respectively, $252.5 million and $272.9 million of available for sale securities were pledged as collateral for repurchase agreements, municipal deposits, Treasury Tax and Loan payments, swap agreements, Federal Home Loan Bank of Boston (“FHLB”) borrowings and future Federal Reserve “discount window” borrowings.

The Company performs regular analysis on the available for sale securities portfolio to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FSP No. FAS 115-2 and FAS 124-2. In making these other-than-temporary determinations, management considers, among other factors, the length of time and extent to which the fair value has been less than amortized cost, projected future cash flows, credit subordination and the creditworthiness, capital adequacy and near-term prospects of the issuers. Management also considers the Company’s capital adequacy, interest rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will be required to sell the securities before recovery. If the Company determines that a decline in fair value is other-than-temporary, the credit portion of the impairment write-down is recognized in current earnings and the noncredit portion is recognized in accumulated other comprehensive income.

In performing the analysis for the two collateralized debt obligations (“CDOs”) held by the Company, which are backed by pools of trust preferred securities, future cash flow scenarios for each security were estimated based on varying levels of severity for assumptions of future delinquencies, recoveries and prepayments. These estimated cash flow scenarios were used to determine whether the Company expects to recover the amortized cost basis of the securities. Projected credit losses were compared to the current level of credit enhancement to assess whether the security is expected to incur losses in any future period and therefore become other-than-temporarily impaired. Management expects that the Company will recover the amortized cost basis of the securities and that it is more likely than not that the Company will not be required to sell the securities before recovery. In addition, management does not have the intent to sell the securities before recovery and, thus, no other-than-temporary impairment exists at June 30, 2009.

Pursuant to the guidance in FSP No. FAS 115-2 and FAS 124-2, management reevaluated the other-than-temporary impairment that was previously recognized at September 30, 2008. Management determined that it did not meet the criteria for other-than-temporary impairment as defined by FSP No. FAS 115-2 and FAS 124-2 because the amortized cost basis of the security is expected to be recovered, management has no intent to sell the security before recovery and it is more likely than not that the Company will not be required to sell the security before recovery. As a result, an adjustment of $137,000, representing the previously recognized other-than-temporary impairment charge, net of accretion recognized on impairment and tax effects, has been applied to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income.

The decline in fair value of the remaining available for sale securities in an unrealized loss position is due to a substantial widening of interest rate spreads across market sectors related to the continued illiquidity and uncertainty of the securities markets. Management believes that it will recover the amortized cost basis of the securities and that it is more likely than not that it will not be required to sell the securities before recovery. Additionally, management has no intent to sell the securities before recovery. As such, management has determined that the securities are not other-than-temporarily impaired as of June 30, 2009. If market conditions for securities worsen or the creditworthiness of the underlying issuers deteriorates, it is possible that the Company may recognize other-than-temporary impairments in future periods.

(6) Derivatives

As required by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, all derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. Derivatives used to hedge the exposure to changes in fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected cash flows or other types of forecasted transactions are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the derivative are recognized in earnings together with the changes in the fair value of the related hedged item. The net amount, if any, representing hedge ineffectiveness, is reflected in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized directly in earnings. For derivatives not designated as hedges, changes in fair value are recognized in earnings, in noninterest income. The Company may use interest rate contracts (swaps, caps and floors) as part of interest rate risk management strategy. Interest rate swap, cap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Company did not have derivative fair value or derivative cash flow hedges at June 30, 2009 or December 31, 2008.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2009 and December 31, 2008:

		Asset Derivatives										Liability Derivatives
				As of				As of						As of				As of
		Balance		June 30,				December				Balance		June 30,				December
		Sheet		2009				31, 2008				Sheet		2009				31, 2008
(In thousands)		Location		Fair Value								Location		Fair Value
Derivatives not designated as hedging instruments under SFAS No. 133
Interest rate products		Other assets		$	358			$	482			Other liabilities		$	301			$	431
Total derivatives not designated as hedging instruments under SFAS No. 133				$	358			$	482					$	301			$	431

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers for a fee. The Company executes interest rate swaps with commercial banking customers to aid them in managing their interest rate risk. The interest rate swap contracts allow the commercial banking customers to convert floating rate loan payments to fixed rate loan payments. The Company concurrently enters into mirroring swaps with a third party financial institution, effectively minimizing its net risk exposure resulting from such transactions. The third party financial institution exchanges the customer’s fixed rate loan payments for floating rate loan payments.

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements of SFAS No. 133, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2009, the Company had ten interest rate swaps with an aggregate notional amount of $36.0 million related to this program. During the three and six months ended June 30, 2009, the Company recognized net gains of $69,000 and $6,000, respectively, related to changes in the fair value of these swaps. The Company did not have interest rate swap contracts at June 30, 2008.

The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements for the three months ended June 30, 2009 and 2008:

				Amount of Gain or (Loss) Recognized in
Derivatives Not Designated as		Location of Gain or (Loss)		Income on Derivative(1)
Hedging Instruments Under SFAS		Recognized in Income on		Three Months Ended June 30,
No. 133		Derivative		2009				2008
				(In thousands)
Interest Rate Products		Loan related fees		$	69			$	—
Total				$	69			$	—

The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements for the six months ended June 30, 2009 and 2008:

				Amount of Gain or (Loss) Recognized in
Derivatives Not Designated as		Location of Gain or (Loss)		Income on Derivative(1)
Hedging Instruments Under SFAS		Recognized in Income on		Six Months Ended June 30,
No. 133		Derivative		2009				2008
				(In thousands)
Interest Rate Products		Loan related fees		$	322			$	—
Total				$	322			$	—

By using derivative financial instruments, the Company exposes itself to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy and by limiting the amount of exposure to each counterparty. At June 30, 2009, the Company does not expect future nonperformance by counterparties.

Certain of the derivative agreements contain provisions that require the Company to post collateral if the derivative exposure exceeds a threshold amount. As of June 30, 2009, the Company has posted collateral of $500,000 in the normal course of business.

The Company has agreements with certain of its derivative counterparties that contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness or if the Company fails to maintain its status as a well-capitalized institution. As of June 30, 2009, the Company had no derivative agreements in a net liability position, excluding fair value adjustments for credit risk.

(7) Fair Value of Financial Instruments

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides guidance for measuring assets and liabilities at fair value. In February 2008, the FASB issued FSP No. SFAS No. 157-2, “Effective Date of FASB Statement No. 157.” This FSP delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The adoption of FSP No. SFAS No. 157-2 on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact and willing to transact.

SFAS No. 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. SFAS No. 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

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

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

The following tables summarize the financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2009 and December 31, 2008, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

						Fair Value Measurements at June 30, 2009 Using
						Quoted Prices in				Significant				Significant
						Active Markets				Other				Other
						for Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(In thousands)		Total				(Level 1)				(Level 2)				(Level 3)
U.S. Treasury obligations		$	10,000			$	—			$	10,000			$	—
GSE obligations			71,996				—				71,996				—
Trust preferred CDOs			666				—				—				666
Collateralized mortgage obligations			51,498				—				51,498				—
GSE mortgage-backed securities			241,866				—				241,866				—
Total available for sale securities			376,026				—				375,360				666
Interest rate swap assets			358				—				358				—
Interest rate swap liabilities			301				—				301				—

						Fair Value Measurements at December 31, 2008 Using
						Quoted Prices in				Significant				Significant
						Active Markets				Other				Other
						for Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(In thousands)		Total				(Level 1)				(Level 2)				(Level 3)
U.S. Treasury obligations		$	9,988			$	—			$	9,988			$	—
GSE obligations			47,387				—				47,387				—
Corporate debt securities			1,987				—				1,987				—
Trust preferred CDOs			1,480				—				—				1,480
Collateralized mortgage obligations			60,750				—				60,750				—
GSE mortgage-backed securities			204,814				—				204,814				—
Total available for sale securities			326,406				—				324,926				1,480
Interest rate swap assets			482				—				482				—
Interest rate swap liabilities			431				—				431				—