General
The Company's principal subsidiary, Bank Rhode Island, is a commercial bank chartered as a financial institution in the State of Rhode Island. The Bank pursues a community banking mission and is principally engaged in providing banking products and services to businesses and individuals in Rhode Island and nearby areas of Massachusetts. The Bank offers its customers a wide range of business, commercial real estate, consumer and residential loans and leases, deposit products, nondeposit investment products, cash management, private banking and other banking products and services designed to meet the financial needs of individuals and small- to mid-sized businesses. The Bank also offers both commercial and consumer online banking products and maintains a web site at http://www.bankri.com . The Bank competes with a variety of traditional and nontraditional financial service providers both within and outside of Rhode Island. The Company and Bank are subject to the regulations of certain federal and state agencies and undergo periodic examinations by certain of those regulatory authorities. The Bank's deposits are insured by the FDIC, subject to regulatory limits. The Bank is also a member of the Federal Home Loan Bank of Boston ("FHLB"). The Company's common stock is traded on the Nasdaq Global Select MarketSM under the symbol "BARI." The Company's financial reports can be accessed through its website within 24 hours of filing with the SEC. Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets or net income, are considered critical accounting policies. The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. As discussed in the Company's 2008 Annual Report on Form 10-K, management has identified the accounting for the allowance for loan and lease losses, review of goodwill for impairment, valuation of available for sale securities and income taxes as the Company's most critical accounting policies. There have been no significant changes in the methods or assumptions used in accounting policies that require material estimates or assumptions.
Overview
The primary drivers of the Company's operating income are net interest income, which is strongly affected by the net yield on interest-earning assets and liabilities ("net interest margin"), and the quality of the Company's assets. The Company's net interest income represents the difference between interest income and its cost of funds. Interest income depends on the amount of interest-earning assets outstanding during the year and the interest rates earned thereon. Cost of funds is a function of the average amount of deposits and borrowed money outstanding during the year and the interest rates paid thereon. The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin generally exceeds the net interest spread as a portion of interest-earning assets is 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 under "Rate/Volume Analysis" on page 35. Information as to the components of interest income and interest expense and average rates is provided under "Average Balances, Yields and Costs" on page 34. Because the Company's assets are not identical in duration and in repricing dates to its liabilities, the spread between the two is vulnerable to changes in market interest rates as well as the overall shape of the yield curve. These vulnerabilities are inherent to the business of banking and are commonly referred to as "interest rate risk." How to measure interest rate risk and, once measured, how much risk to take are based on numerous assumptions and other subjective judgments. See also discussion under "Interest Rate Risk" on page 44.

The quality of the Company's assets also influences its earnings. Loans and leases that are not paid on a timely basis and exhibit other weaknesses can result in the loss of principal and/or interest income. Additionally, the Company must make timely provisions to the allowance for loan and lease losses based on estimates of probable losses inherent in the loan and lease portfolio; these additions, which are charged against earnings, are necessarily greater when greater probable losses are expected. Further, the Company incurs expenses as a result of resolving troubled assets. All of these reflect the "credit risk" that the Company takes on in the ordinary course of business and is further discussed under "Financial Condition - Asset Quality" on pages 28 and 29. 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 deposits." This strategy is based on the Company's belief that it can distinguish itself from its larger competitors, and indeed attract customers from them, through a higher level of service and through its ability to set policies and procedures, as well as make decisions locally. The loan and deposit products referenced also tend to be geared more toward customers who are relationship oriented than those who are seeking stand-alone or single transaction products. The Company believes that its service-oriented approach enables it to compete successfully for relationship-oriented customers. Additionally, the Company is predominantly an urban franchise with a high concentration of businesses, which makes deployment of funds in the commercial lending area practicable. Commercial loans are attractive to the Company, among other reasons, because of their higher yields. Similarly, core deposits are attractive to the Company because of their generally lower interest cost and potential for fee income.
The deposit market in Rhode Island is highly concentrated. The State's three largest banks have an aggregate market share of approximately 87% (based upon June 2008 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 as well as web-based advertising and promotions.
The Company also seeks to leverage business opportunities presented by its customer base, franchise footprint and resources. In 2005, the Bank completed the acquisition of an equipment leasing company located in Long Island, New York ("Macrolease") and formed a private banking division. The Bank is using the Macrolease platform to increase the Bank's loan and lease portfolio, as well as to generate additional income by originating equipment leases for third parties. For the six months ended June 30, 2009, approximately 83% of the Company's 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. The future operating results of the Company will depend upon on the ability to maintain its net interest margin, while minimizing its exposure to credit risk, along with increasing sources of noninterest income, while controlling the growth of noninterest or operating expenses.

Financial Condition - Executive Summary
Selected balance sheet data is presented in the table below as of the dates indicated:

                                           June 30,         March 31,        December 31,        September 30,        June 30,
(In thousands)                               2009             2009               2008                2008               2008

Total assets                              $ 1,584,482      $ 1,548,863      $    1,528,974      $     1,489,980      $ 1,490,054
Loans and leases receivable                 1,117,655        1,105,298           1,077,742            1,060,739        1,060,304
Available for sale securities                 376,026          356,681             326,406              333,431          333,812
Goodwill                                       12,051           12,051              12,019               12,019           12,019
Core deposits (1)                             681,834          636,240             618,749              615,085          662,888
Certificates of deposit                       402,839          419,621             423,443              407,069          377,626
Borrowings                                    336,244          320,517             320,015              338,862          321,628
Common shareholders' equity                   120,471          122,306             121,010              114,226          113,094
Book value per common share                     26.18            26.57               26.45                24.97            24.75
Tangible book value per common share            23.56            23.95               23.82                22.34            22.12
Tangible common equity ratio (2) (3)             6.90 %           7.17 %              7.18 %               6.92 %           6.84 %
Core deposits to total deposits(1)               62.9 %           60.3 %              59.4 %               60.2 %           63.7 %

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

(2) Calculated by dividing Common Stockholders' Equity less Goodwill by Total Assets less Goodwill.

(3) Non-GAAP performance measure.

Total assets increased by $55.5 million since December 31, 2008. Total loans and leases increased by $39.9 million during the first six months of 2009, with increases in commercial loans and leases of $53.2 million, or 8.1%, and consumer and other loans of $8.1 million, or 3.9%, respectively. The residential mortgage loan portfolio decreased by $21.4 million, or 10.1%. Available for sale securities increased $49.6 million, or 15.2%, since year-end. The Bank's core deposits increased by $63.1 million, or 10.2%, since year-end. Within this increase, demand deposit accounts increased by $28.6 million, or 16.2%, money market accounts increased by $24.7 million, or 556.4%, NOW accounts increased by $9.1 million, or 16.1%, and savings accounts increased by $610,000, or 0.2%. Certificate of deposit accounts decreased by $20.6 million, or 4.9%, and borrowings increased by $16.2 million, or 5.1%, since year-end. Shareholders' equity as a percentage of total assets was 9.4% at June 30, 2009 and 9.8% at December 31, 2008.
The Company's financial position at June 30, 2009 as compared to June 30, 2008 reflects net growth of $57.4 million in total loans and leases. This increase reflects the continuing conversion of the balance sheet to a more commercial profile with increases in commercial loans and leases of $80.9 million, or 12.8%. Consumer loans increased $9.0 million, or 4.4%, from the prior year quarter-end. The residential mortgage portfolio declined $32.5 million, or 14.5%, from June 30, 2008. Also, available for sale securities at June 30, 2009 increased by $42.2 million, or 12.6%, from the same period in 2008. Core deposits have increased $18.9 million, or 2.9%, since the prior year quarter-end, with growth centered in money market accounts of $24.0 million, demand deposit accounts of $15.0 million and NOW accounts of $5.9 million. These increases were offset by a decrease in savings accounts of $26.0 million. Certificate of deposit accounts and borrowings have increased by $25.2 million and $14.6 million, respectively, since June 30, 2008.

Financial Condition - Detailed Analysis
Investments
Total investments consist of available for sale securities, stock in the FHLB and overnight investments. Total investments comprised $392.5 million, or 24.8% of total assets at June 30, 2009, compared to $343.2 million, or 22.4% of total assets at December 31, 2008, representing an increase of $49.3 million, or 14.4%. Available for sale securities are recorded at fair value. At June 30, 2009, the fair value of available for sale securities was $376.0 million and carried a total of $502,000 of net unrealized loss at the end of the quarter, compared to $639,000 of net unrealized gain at December 31, 2008.
The investment portfolio provides the Company a source of short-term liquidity and acts as a counterbalance to loan and deposit flows. During the first six months of 2009, the Company purchased $138.7 million of available for sale securities compared to $91.0 million during the same period in 2008. Maturities, calls and principal repayments totaled $86.3 million for the three months ended June 30, 2009 compared to $75.3 million for the same period in 2008. Additionally, in the first six months of 2009, the Company sold $1.9 million of mortgage-backed securities generating gains of $61,000 compared to $242,000 for the same period in 2008.
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.
As of June 30, 2009, the Company's securities in an unrealized loss position were deemed to be not other-than-temporarily impaired after considering the aforementioned factors. The Company does not have the intent to sell the securities with unrealized losses until recovery or maturity and believes it is more likely than not that it will not be required to sell the securities before recovery and that it will recover the amortized cost basis of the securities.

Loans and Leases
Total loans and leases increased by $39.9 million since December 31, 2008 and stood at $1.12 billion at June 30, 2009. As a percentage of total assets, loans and leases remained consistent at 70.5% at June 30, 2009 and December 31, 2008. 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. Total loans and leases as of June 30, 2009 are comprised of three broad categories: commercial loans and leases that aggregate $711.6 million, or 63.7% of the portfolio; residential mortgages that aggregate $191.3 million, or 17.1% of the portfolio; and consumer and other loans that aggregate $214.7 million, or 19.2% of the portfolio. Commercial loans and leases - The commercial loan and lease portfolio (consisting of commercial real estate, commercial and industrial, equipment leases, multi-family real estate, construction and small business loans) increased $53.2 million, or 8.1%, during the first six months of 2009. The primary drivers of this growth occurred in the commercial real estate and commercial and industrial 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 $24.0 million, or 14.6%, while owner-occupied commercial real estate loans decreased by $12.0 million, or 6.8%, since year-end.
The Bank's commercial real estate ("CRE") group originates nonowner-occupied commercial real estate, multi-family residential real estate and construction loans. These real estate secured commercial loans are offered as both fixed and adjustable-rate products. Since December 31, 2008, CRE loans have increased $30.5 million, or 14.6%, on a net basis.
The Bank purchases equipment leases from originators outside of the Bank. The U.S. Government or its agencies are the principal lessees on these purchased leases. These "government" leases generally have maturities of five years or less and are not dependent on residual collateral values. At June 30, 2009, $6.1 million of purchased government leases were included in the commercial loan and lease portfolio.
With the Macrolease platform, the Bank originates and purchases equipment loans and leases for its own portfolio, as well as originates loans and leases for third parties as a source of noninterest income. At June 30, 2009, Macrolease-generated loans and leases totaled $100.4 million and comprised 14.1% of the commercial loan and lease portfolio.
At June 30, 2009, small business loans (business lending relationships of approximately $500,000 or less) were $53.7 million, or 7.5% of the portfolio, compared to $50.5 million, or 7.7% of the portfolio at December 31, 2008. 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 U.S. Small Business Administration ("SBA") Preferred Lender Program in both Rhode Island and Massachusetts. The Bank was No. 1 SBA lender in Rhode Island as of June 30, 2009 in both number of loans and dollar amount of loans. SBA guaranteed loans are found throughout the portfolios managed by the Bank's various lending groups.
The Company believes it is well positioned for continued commercial growth. The Bank places particular emphasis on the generation of small- to medium-sized commercial relationships (those with $10.0 million or less in total loan commitments).
Residential mortgage loans - 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. During the second quarter of 2009, the Bank added two mortgage originators to improve business generation, increasing the department to a team of three. Periodically, the Bank purchases residential mortgage loans from third-party originators. During the six months of 2009, residential mortgage loans decreased $21.4 million, or 10.1%. During this period, the Bank originated $2.7 million of mortgages for the portfolio. Comparatively, during the first six months of 2008, the Bank originated $740,000 of mortgages for the portfolio. No mortgages were purchased for the portfolio during the first six months of 2009 or 2008. The Bank may purchase residential mortgage loans with high credit quality to utilize available cash flow if and when opportunities arise.

Consumer loans - The consumer loan portfolio increased $8.1 million, or 3.9%, during the first six months of 2009 as originations and advances of $33.4 million exceeded repayments of $25.3 million. The increase in growth through June 30, 2009 was reflective of the Company's home equity loan promotions during the first six months of the year. The Company continues to offer consumer lending as it believes that these amortizing fixed rate products, along with floating rate lines of credit, possess attractive cash flow characteristics.
The following is a summary of loans and leases receivable:

                                                   June 30,        December 31,
                                                     2009              2008
                                                          (In thousands)
     Commercial loans and leases:
     Commercial real estate - owner occupied      $   163,461     $      175,472
     Commercial and industrial                        188,570            164,569
     Commercial real estate - nonowner occupied       159,576            133,782
     Small business                                    53,660             50,464
     Multi-family                                      58,596             53,159
     Construction                                      21,573             22,300
     Leases and other (a)                              72,587             63,799

     Subtotal                                         718,023            663,545
     Unearned lease income                             (8,702 )           (6,980 )
     Net deferred loan origination costs                2,318              1,857

     Total commercial loans and leases                711,639            658,422


     Residential mortgage loans:
     One- to four-family adjustable rate              117,911            126,689
     One- to four-family fixed rate                    72,836             85,057

     Subtotal                                         190,747            211,746
     Premium on loans acquired                            551                953
     Net deferred loan origination fees                   (27 )              (34 )

     Total residential mortgage loans                 191,271            212,665


     Consumer loans:
     Home equity - term loans                         129,422            127,142
     Home equity - lines of credit                     82,579             76,038
     Unsecured and other                                1,594              2,216

     Subtotal                                         213,595            205,396
     Net deferred loan origination costs                1,150              1,259

     Total consumer loans                             214,745            206,655

     Total loans and leases receivable            $ 1,117,655     $    1,077,742

(a) Included within commercial loans and leases were leases held for sale of $156,000 at December 31, 2008. There were no leases held for sale at June 30, 2009.

Deposits
Total deposits increased by $42.5 million, or 4.1%, during the first six months
of 2009, from $1.04 billion, or 68.2% of total assets at December 31, 2008 to
$1.08 billion, or 68.5% of total assets at June 30, 2009.
    The following table sets forth certain information regarding deposits:



                                                        June 30, 2009                                December 31, 2008
                                                           Percent        Weighted                        Percent        Weighted
                                                              of          Average                            of          Average
                                            Amount          Total           Rate           Amount          Total           Rate
                                                                               (In thousands)

NOW accounts                              $    65,847           6.1 %          0.09 %    $    56,703           5.5 %          0.10 %
Money market accounts                          29,179           2.7 %          1.28 %          4,445           0.4 %          0.39 %
Savings accounts                              381,716          35.2 %          0.82 %        381,106          36.6 %          1.46 %
Certificate of deposit accounts               402,839          37.1 %          2.80 %        423,443          40.6 %          3.29 %

Total interest bearing deposits               879,581          81.1 %          1.69 %        865,697          83.1 %          2.26 %
Noninterest bearing accounts                  205,092          18.9 %          0.00 %        176,495          16.9 %          0.00 %

Total deposits                            $ 1,084,673         100.0 %          1.37 %    $ 1,042,192         100.0 %          1.89 %

During the first six months of 2009, competition for deposits remained strong in the Company's market areas. Demand deposit accounts and money market accounts grew $28.6 million and $24.7 million, respectively, over the past six months. NOW accounts grew to $65.8 million, an increase of $9.1 million from $56.7 million at December 31, 2008. These increases offset the decline of certificate of deposit accounts ("CDs") of $20.6 million. At June 30, 2009, brokered CDs were $20.0 million, or 1.8% of total deposits, compared to $30.0 million, or 2.9% at year-end. The Bank may continue to utilize brokered . . .