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Enterprise may also utilize brokered term and overnight deposits from a number of available sources, as an alternative to borrowed funds to support asset growth in excess of internally generated deposits. Brokered CD terms generally range from one to twelve months. The Company may accept overnight brokered money market deposits, up to a predetermined, amount through a daily net settlement from the DDM network.

Investment Services

The Company provides a range of investment advisory and management services delivered via two channels, “Enterprise Investment Advisors” and “Enterprise Financial Services.”

Investment advisory and management services are provided under the label “Enterprise Investment Advisors” to individuals, family groups, commercial businesses, trusts, foundations, non-profit organizations, endowments and retirement plans under the label “Enterprise Investment Advisors.”  Investment services are delivered via two channels, brokerage services and investment management.  Brokerage services are offered through a third party arrangement with Commonwealth Financial Network, a licensed securities brokerage firm, with products designed primarily for the individual investor.plans.  Investment management includes customized investment management and trust services offered to high net worth individuals, institutions and businesses.service.

The CompanyEnterprise Investment Advisors utilizes an open-architecture, “manager of managers” approach to client investment management.  The philosophy is to identify and hire high performing independent investment management firms on behalf of our clients.  Since 2008, the Company has partnered with Fortigent LLC,Advisors,LLP, an investment research and due diligence firm, with over $20 billion in advisory assets under management, to strengthen strategic development, improve manager access and selection and provide performance monitoring capabilities.  Fortigent performs detailed research and due diligence reviews and provides an objective analysis of each independent management firm based on historic returns, management, longevity, investment style, risk profile, and other criteria, and maintains ongoing oversight and monitoring of their performance.  This due diligence is intended to enable the Company to customize investment portfolios to meet each customer’s financial objectives and deliver superior long-term performance.

Complementing our open-architecture “manager of managers” approach, Enterprise Investment Advisors also offeroffers the flexibility of an individually managed portfolio, for clients who prefer customized asset management, which includes our Large Cap Core Equity Strategy, a proprietary blend of value and growth stocks.  Our secondary sources of research for our individually managed portfolios include Northern Trust, Goldman Sachs, Credit Suisse and Standard and Poors.

Enterprise Financial Services’ brokerage and management services are offered through a third party arrangement with Commonwealth Financial Network, a licensed securities brokerage firm, with products designed primarily for the individual investor.

Insurance Services

Enterprise Insurance Services, LLC, engages in insurance sales activities through a third party arrangement with HUB International New England, LLC (“HUB”), which is a full service insurance agency, with offices in Massachusetts and New Hampshire, and is part of HUB International Limited, which operates throughout the United States and Canada. Enterprise Insurance Services provides, through HUB, a full array of insurance products including property and casualty, employee benefits and risk-management solutions tailored to serve the specific insurance needs of businesses in a range of industries operating in the Company’s market area.

On-line Banking and TreasuryCash Management Services

Major on-line banking capabilities include the following: internal transfers; loan payments; bill payments; placement of stop payments; balance inquiry;inquiries; access to images of checks paid; and access to prior period account statements.  In addition, business banking customers may take advantage of online cash management services such asincluding remote deposit capture, serviceACH credit and the ability to initiate on-line electronic fundsdebit origination, credit card processing, wholesale and retail lockbox, escrow management, NSF check recovery, coin and currency processing, controlled disbursement, check reconciliation, check fraud prevention, wire transfers, including ACH originations, electronic federalcorporate credit cards, FDIC covered automated overnight investments and state tax paymentscertificates of deposits, money market demand deposit accounts and wire transfers.certificates of deposit. Retail customers have the additional ability to open personal deposit and CD accounts.accounts and submit mortgage loan applications online.

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On-line banking customers may connect to their Enterprise Bank accounts securely via personal computer or any internet-enabled phone, PDA or mobile device.  Mobile banking retail customers have the ability to check current account balances, view recent transactions and transfer funds between accounts; commercial customers can additionally conduct ACH transactions and wire transfers through mobile banking.

On-line and mobile banking utilize multiple layers of authentication, including personal identification numbers, and one-time passwords that change with every login.

Investment Activities

The investment portfolio activity is an integral part of the overall asset-liability management program of the Company.  The investment function provides readily available funds to support loan growth, as well as to meet withdrawals and maturities of deposits, and attempts to provide maximum return consistent with liquidity constraints and general prudence, including diversification and safety of investments.

The securities in which the Company may invest are limited by regulation.  In addition, an internal investment policy restricts fixed income investments to high quality securities within the following categories: U.S. treasury securities, federal agency obligations

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(obligations (obligations issued by government sponsored enterprises that are not backed by the full faith and credit of the United States government), mortgage-backed securities (“MBS’s”), including collateralized mortgage obligations (“CMO’s”), and municipal securities (“Municipals”). The Company has not purchased sub-prime mortgage-backed securities or capital stock of FNMA or FHLMC.  The Company is required to purchase Federal Home Loan Bank of Boston (“FHLB”) stock in association with the Bank’s outstanding advances from the FHLB; this stock is classified as a restricted investment and carried at cost.  The Company may also invest in certificates of deposit and, within prescribed regulatory limits, in both publicly traded and unlisted equity securities, registered mutual funds and unregistered funds, including private hedge funds, venture capital and private equity funds and “funds of funds” that may in turn invest in any of the foregoing.  The Company’s internal investment policy also limits the categories within the investment portfolio and sets target sector ranges as a percentage of the total portfolio. The effect of changes in interest rates, principal payments and market values are considered when purchasing securities.

The short-term investments classified as cash equivalents may be comprised of short-term U.S. Agency Discount Notes, money market mutual funds and overnight or short-term federal funds sold.  Short-term investments not carried as cash equivalents are classified as “other short-term investments.”

As of the balance sheet dates reflected in this annual report all of the investment securities within the portfolio (with the exception of restricted FHLB stock) were classified as available for sale and carried at fair value. Management regularly reviews the portfolio for securities with unrealized losses that are other than temporarily impaired (“OTTI”). This assessment includes: evaluating the level and duration of the loss on individual securities; evaluating the credit quality of fixed income issuers; determining if any individual securities or mutual or other funds exhibit fundamental deterioration; and estimating whether it is unlikely that the individual security or fund will completely recover its unrealized loss within a reasonable period of time, or in the case of fixed income securities prior to maturity. In addition, Management determines if it does not intend to, and it is more likely than not that it will not be required to, sell those investments prior to a market price recovery or maturity.  If a decline in the market value of an equity security is considered other than temporary, the cost basis of the individual security is written down to market value with a charge to earnings. In the case of fixed income securities which the Company does not intend to sell and it is more likely than not that the Company will not be required to sell prior to a market price recovery or maturity, the noncredit portion of the impairment may be recognized in accumulated other comprehensive income with only the credit portion of the impairment charged to earnings.

Investment transaction summaries, portfolio allocations and projected cash flows are prepared quarterly and presented to the Asset-Liability Committee of the Company’s Board of Directors (“ALCO”) on a periodic basis.  ALCO is comprised of six outside directors and three executive officers who are also directors of the Company, with

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various management liaisons. In addition, several directors who are not on the committee rotate in to the committee on a regular basis. ALCO regularly reviews the composition and key risk characteristics of the Company’s investment portfolio, including effective duration, cash flow, market value at risk and asset class concentration.  Credit risk inherent in the portfolio is closely monitored by management and presented at least annually to ALCO.  ALCO also approves the Company’s ongoing investment strategy and management updates the committee at each meeting.

See also “Risk Factors” contained in Item 1A, for further discussion on a variety of risks and uncertainties that may affect the Company’s investment portfolio.

Other Sources of Funds

As discussed above deposit gathering has been the principal source of funds.  Asset growth in excess of deposits may be funded through the investment portfolio cash flow, or the following sources.

Borrowed Funds

Total borrowing capacity includes borrowing arrangements at the FHLB and the Federal Reserve Bank of Boston (“FRB”) discount window,Discount Window, through federal funds purchaseborrowing arrangements with correspondent banks and repurchase agreements with customers.

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Membership in the FHLB provides borrowing capacity based on qualifying collateral balances pre-pledged to the FHLB, including certain residential loans, home equity lines, commercial loans and U.S. Government and Agency securities.  Borrowings from the FHLB have to date been utilized to fund short-term liquidity needs.needs or specific lending projects under the FHLB’s community development programs. This facility is an integral component of the Company’s asset-liability management program.

In order to provide additional contingent liquidity and a competitive funding source, short-termThe FRB Discount Window borrowing capacity has also been established with the FRB Discount Windowis based on the pledge of qualifying collateral balances to the FRB.  At December 31, 2009,2010, the collateral pledged for this FRB facility was comprised primarily of certain municipal securities from the investment portfolio. Additional types of collateral are available to increase borrowing capacity with the FRB if necessary.

Pre-established overnight borrowing arrangements with large regional correspondent banks provide additional overnight and short-term borrowing capacity for the Company.

The Company also borrows funds from customers (generally commercial and municipal customers) by entering into agreements to sell and repurchase investment securities from the Company’s portfolio, with terms that may range from one week to six months. These repurchase agreements represent a cost competitive funding source.  Interest rates paid on these repurchase agreements are based on market conditions and the Company’s need for additional funds at the time of the transaction.

Pre-established federal funds purchase arrangements with large regional correspondent banks provide additional overnight and short-term borrowing capacity for the Company.

See also “Risk Factors” contained in Item 1A, for further discussion on a variety of risks and uncertainties that may affect the Company’s ability to obtain funding and sustain liquidity.

Junior Subordinated Debentures

In March 2000 the Company organized Enterprise (MA) Capital Trust I (the “Trust”), a statutory business trust created under the laws of Delaware, in order to issue $10.5 million of 10.875% trust preferred securities that mature in 2030 and are callable beginning in 2010, at a premium if called between 2010 and 2020. The proceeds from the sale of the trust preferred securities were used by the Trust, along with the Company’s $325 thousand capital contribution, to acquire $10.8 million in aggregate principal amount of the Company’s 10.875% Junior Subordinated Debentures that mature in 2030 and are callable beginning in 2010.  The Company contributed $10.3 million of proceeds from the sale of these securities to the Bank in 2000.

Pursuant to the Accounting Standards Codification (“ASC”) Topic 810 “Consolidation of Variable Interest Entities”, issued by the Financial Accounting Standards Board (originally issued as Financial Interpretation No. 46R) in December 2003, the Company carries the $10.8 million of Junior Subordinated Debentures on the Company’s financial

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statements as a liability, with related interest expense, and the $10.5 million of trust preferred securities issued by the Trust, and the related non-interest expense, are excluded from the Company’s financial statements.

Capital Resources

Capital planning by the Company and the Bank considers current needs and anticipated future growth.  The primary sources of capital have been the original capitalization of the Bank of $15.5 million from the sale of common stock in 1988 and 1989, the issuance of $10.5 million of trust preferred securities in 2000 by the Trust, net proceeds of $8.8 million from the 2009 offering discussed below, retention of earnings less dividends paid since the Bank commenced operations, proceeds from the exercise of employee stock options and proceeds from purchases of shares pursuant to the Company’s dividend reinvestment plan.

On September 10, 2009, the Company filed a shelf registration of rights and common stock with the Securities and Exchange Commission for the flexibility to raise, over a three year period, up to $25 million in capital, in order to increase capital to ensure the Company is positioned to take advantage of growth and market share opportunities.  In the fourth quarter of 2009, the Company successfully completed a combined Shareholder

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Subscription Rights Offering and Supplemental Community Offering under the shelf registration, raising $8.9 million in new capital ($8.8 million net of offering expenses).  The Company contributed the net proceeds from these offerings to the Bank.

Management believes that current capital is adequate to support ongoing operations and that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 20092010 and 2008,2009, both the Company and the Bank qualified as “well capitalized” under applicable regulations of the Board of Governors of the Federal Reserve BoardSystem (the “Federal Reserve Board”) and FDIC regulations.the FDIC.

See “Capital Requirements” below under the heading “Supervision and Regulation” for information regarding the Company’s and the Bank’s regulatory capital requirements.

Patents, Trademarks, etc.

The Company holds a number of registered service marks related to product names and corporate branding.  The Company holds no patents, registered trademarks, licenses (other than licenses required to be obtained from appropriate banking regulatory agencies), franchises or concessions which are material to its business.

Employees

At December 31, 2009,2010, the Company employed 321333 full-time equivalent employees, including 136 officers.  None of the employees are presently represented by a union or covered by a collective bargaining agreement.  Management believes its employee relations to beare excellent.

Company Website

Enterprise Bank currently uses outside vendors to design, support and host its internet website.  The underlying structure of the site allows for the ongoing maintenance of the information to be performed by authorized Company personnel.  The site provides information on the Company and its products and services. Users have the ability to open various deposit accounts (checking, saving, CD) as well as the ability to submit mortgage loan applications online. The site also provides the access point to a variety of specified banking services and to various financial management tools.  In addition, the site includes the following major capabilities: career opportunities; an ATM/Branch Locator/Map; and investor and corporate information, which includes a corporate governance page.  The Company’s corporate governance page includes the corporate governance guidelines, code of business conduct and ethics, and whistleblower protection policy, as well as the charters of the Board of Directors’, Audit, Compensation and Personnel, and Corporate Governance/Nominating committees.

In the Investor Relations section of the site, under the SEC Filings tab, the Company makes available copies of the Company’s annual report on Form 10-K, quarterly reports

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on Form 10-Q and current reports on Form 8-K. Additionally, the site includes all registration statements that the Company has been required to file in connection with the issuance of its shares. The Company similarly makes available all insider stock ownership and transaction reports filed with the SEC by executive officers, directors and any 10% stockholders under Section 16 of the Securities Exchange Act of 1934 (Forms 3, 4 and 5). Access to all of these reports is made available free of charge and is essentially simultaneous with the SEC’s posting of these reports on its EDGAR system through the SEC website (www.SEC.gov). The Company’s internet web address is:is EnterpriseBanking.com.

Competition

Enterprise faces strong competition to generate loans, and to attract deposits, insurance business and investment advisory assets.  National and larger regional banks have a local presence in the Company’s market area.  LargerThese established larger banks, as well as recent larger entrants into the local market area, have certain competitive advantages, including the ability to make larger loans to a single borrower than is possible for the Company.  TheCompany and greater financial resources of larger banks also allow them to offer a broad range of automated banking services, to maintain numerous branch offices and to mount extensive advertising and promotional campaigns.resources.  Numerous local savings banks, commercial banks,

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cooperative banks and credit unions have one or more offices in the Company’s market area.  The expanded commercial lending capabilities of credit unions and the shift to commercial lending by traditional savings banks means that both of these types of traditionally consumer-orientated institutions now compete for the Company’s targeted commercial customers.  In addition, the non-taxable status of credit unions allowsprovides them with certain cost and pricing advantages as compared to taxable institutions.  Competition for loans, investment advisory assets, insurance business and deposits also comes from other businesses that provide financial services, including consumer finance companies, mortgage brokers and lenders, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors, and internet based banks.banks and other non-bank delivery channels.  Management actively seeks to strengthen its competitive position by capitalizing on the market opportunities and the continued pursuit of strategic growth within existing and neighboring geographic markets.

Management continually examines the Company’s product lines and technologies in order to maintain a highly competitive mix of offerings and delivery channels, and to target products to customer needs. Advances in, and the increased use of, technology, such as internet and mobile banking, electronic transaction processing and information security, are expected to have a significant impact on the future competitive landscape confronting financial institutions.

See also “Supervision and Regulation” below, and Item 1A, “Risk Factors”, and “Opportunities and Risks” included in the section entitled “Overview”, which is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for further discussion on how new laws and regulations and other factors may affect the Company’s competitive position, growth and/or profitability.

Supervision and Regulation

General

To

Set forth below is a description of the extent thatsignificant elements of the information in this report underlaws and regulations applicable to the heading “Supervision and Regulation” describes statutory or regulatory provisions, itCompany.  The description is qualified in its entirety by reference to the particular statutoryfull text of the statutes, regulations and policies that are described. Moreover, these statutes, regulations and policies are continually under review by the U.S. Congress and state legislatures and federal and state regulatory agencies.  A change in statutes, regulations or regulatory provision so described.  Any changes inpolicies applicable lawsto the Company or regulations mayits principal subsidiary, the Bank, could have a material effect on the business and prospects of the Company.

Bank holding companies and banks are subject to extensive government regulation through federal and state statutes and related regulations, which are subject to changes that can significantly affect the way in which financial service organizations conductour business.

RegulationRegulatory Agencies

As a registered bank holding company, the Company is subject to the supervision and regulation of the bankingFederal Reserve Board and, financial services industries has undergone significant developments overacting under delegated authority, the past several years, someFederal Reserve Bank of which have eased legal and regulatory restrictions while others have increased regulatory requirements.  Such developments onBoston (the “FRBB”) pursuant to the federal level have included the following:  increasing anti-money laundering and customer identification requirements; enhancing internal controls over financial reporting, corporate accountability and improving the quality of investor information; imposing requirements as to fraud and identity theft prevention, vendor management data breach response programs; providing consumers with greater access to and control over personal credit data; providing more comprehensive residential mortgage loan disclosures and automating the nation’s check-processing system, among other legal and regulatory developments.

Legislative initiatives at the state level in Massachusetts have also further addressed data security requirements for protecting consumer financial information and residential mortgage lending and foreclosure requirements.

The recent economic crisis has also resulted in significant new federal legislation and administrative initiatives intended to stabilize the U.S. banking system and residential real estate market and stimulate the economy.  Federal legislation has included the Emergency Economic StabilizationBank Holding Company Act of 2008 (“EESA”1956, as amended (the “Bank Holding Company Act”), under which the U.S. Treasury has injected capital directly into U.S. banks through its Troubled Asset Recovery Program (“TARP”), and the American Recovery and Reinvestment Act of 2009 (“ARRA”), under which Congress has approved various spending and tax measures, while also imposing significant new executive compensation restrictions and corporate governance standards on institutions that have either received TARP funding or receive such funding in the future.  Administrative initiatives have included President Obama’s Financial Stability Plan, which is comprised of several components, including additional capital assistance to banks, a potential public-private vehicle for purchasing “toxic assets” from financial institutions, various consumer, business and community lending initiatives, and affordable.

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an institution must have total assets of less than $10.0 billion.  An institution with total assets of less than $1.0 billion may apply for funding of up to 5% of its total risk-weighted assets and an institution with totals assets of between $1.0 billion and less than $10.0 billion may apply for funding of up to 3% of its total risk-weighted assets.  The U.S. Treasury must consult with the institution’s primary federal banking regulator and any applicable state banking regulator in determining whether to approve an application for funding under the SBLF program.  Institutions on the FDIC’s problem bank list as of, or within 90 days prior to, the date of application, are ineligible to participate in the program.

Any investment by the U.S. Treasury under the SBLF program must generally be repaid within 10 years.  The rate at which dividends are payable to Treasury will vary between 1% and 5%, starting on the date of Treasury’s capital investment and continuing for the first nine full calendar quarters following such initial investment date, depending upon the amount of increase in the institution’s qualified small business lending, measured at the time of the initial investment and on a quarterly basis thereafter against a baseline lending amount calculated as the institution’s average qualified small business lending for the four calendar quarters ended on June 30, 2010.  At the start of the tenth calendar quarter following the initial date of investment, the dividend rate will be fixed at between 1% and 5%, depending upon the amount of increase in the institution’s qualified small business lending as measured at such time, unless the institution has not achieved any increase in its qualified small business lending at such time, in which case the dividend rate will be fixed at 7%.  Regardless of an institution’s increase in qualified small business lending, the dividend rate will increase to a fixed rate of 9% on the date that is 4½ years following the initial investment date and will remain at such rate until such time as the institution redeems Treasury’s investment.

Participation in the SBLF program is separate from Treasury’s existing Capital Purchase Program, which was established under its Troubled Asset Relief Program (“TARP”), and does not include the restrictions on executive compensation or the requirement to issue additional warrants that are part of the funding requirements under TARP.  The Company received initial approval to receive TARP funds, however after careful consideration the Board of Directors concluded that declining this government funding was in the best interest of the Company and its shareholders.

Applications to Treasury for participation in the SBLF program, along with an institution’s plan for increasing small business lending, which must be submitted to its primary federal banking regulator, are due by March 31, 2011.

The Company has not yet determined whether it will submit an application for participation in the SBLF program or, if it does submit an application that is approved, whether it will participate in the program and accept Treasury funding.  If the Company submits an application that is approved and it decides to participate in the program and accept Treasury funding, there is no assurance that the Bank will increase its qualified small business lending to levels sufficient to qualify for reduced dividend rates.

Bank Holding Company Regulation

As a registered bank holding company, the Company is required to furnish to the FRB annual and quarterly reports of its operations and may also be required to furnish such additional information and reports as the Federal Reserve Board or the FRB may require.

Under the Bank Holding Company Act, the Company must obtain the prior approval of the Federal Reserve Board or, acting under delegated authority, the FRB before (1) acquiring direct or indirect ownership or control of any class of voting securities of any bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control more than 5% of the class; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company.  The Company’s acquisition of or merger with another bank holding company or acquisition of another bank would also require the prior approval of the Massachusetts Board of Bank Incorporation.

Under the Bank Holding Company Act, any company must obtain approval of the Federal Reserve Board or, acting under delegated authority, the appropriate Federal Reserve Bank prior to acquiring control of the Company or the Bank.  For purposes of the Bank Holding Company Act, “control” is defined as ownership of 25% or more of any class of

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voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank.

The Change in Bank Control Act of 1978, as amended (the “Change in Bank Control Act”) and the related regulations of the Federal Reserve Board require any person or groups of persons acting in concert (except for companies required to make application under the Bank Holding Company Act), to file a written notice with the Federal Reserve Board or, acting under delegated authority, the appropriate Federal Reserve Bank, before the person or group acquires control of the Company.  The Change in Bank Control Act defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank.  A rebuttable presumption of control arises under the Change in Bank Control Act where a person or group controls 10% or more of a class of the voting stock of a company or insured bank which is a reporting company under the Securities Exchange Act of 1934, as amended, such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.  Under the Change in Bank Control Act and applicable Massachusetts law, any person or group of persons acting in concert would also be required to file a written notice with the FDIC and the Commissioner before acquiring any such direct or indirect control of the Bank.

The Bank Holding Company Act requires prior approval byalso limits the Federal Reserve Boardinvestments and activities of the acquisition by the Companybank holding companies.  In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of substantially all the assets or more than five percent5% of the voting stockshares of any bank.a company that is not a bank or a bank holding company or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, and various non-bank activities that are deemed to be closely related to banking.  The activities of the Company are subject to these legal and regulatory limitations under the Bank Holding Company Act also authorizesand the implementing regulations of the Federal Reserve Board to determine (by order or by regulation) what activities are so closely related to banking as to be a proper incident of banking, and thus, whether the Company, either directly or indirectly through non-bank subsidiaries, can engage in such activities.  The Bank Holding Company Act prohibits the Company and the Bank from engaging in certain tie-in arrangements in connection with any extension of credit, sale of property or furnishing of services.  There are also restrictions on extensions of credit and other transactions between the Bank, on the one hand, and the Company, or other affiliates of the Bank, on the other hand.Board.

A bank holding company may also elect to become a “financial holding company”, by which a qualified parent holding company of a banking institution may engage, directly or through its non-bank subsidiaries, in any activity that is financial in nature or incidental to such financial activity or in any other activity that is complimentary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.  A bank holding company will be able to successfully elect to be regulated as a financial holding company if all of its depository institution subsidiaries meet certain prescribed standards pertaining to management, capital adequacy and compliance with the Federal Community Reinvestment Act.Act of 1977, as amended (the “Community Reinvestment Act”).  Financial holding companies remain subject to regulation and oversight by the Federal Reserve Board.  The Company believes that the Bank, which is the Company’s sole depository institution subsidiary, presently satisfies all of the requirements that must be met to enable the Company to successfully elect to become a financial holding company.  However, the Company has no current intention of seeking to become a financial holding company.  Such a course of action may become necessary or appropriate at some time in the future depending upon the Company’s strategic plan.

·Capital Requirements

Under the Federal Reserve Board’s “source of strength” doctrine, a bank holding company is required to act as a source of financial and managerial strength to any subsidiary bank.  The holding company is expected to commit resources to support a subsidiary bank, including at times when the holding company may not be in a financial position to provide such support.  A bank holding company’s failure to meet its source-of-strength obligations may constitute an unsafe and unsound practice or a violation of the Company

The Federal Reserve Board also has adopted capital adequacy guidelines that generally requirethe power to order a bank holding companiescompany to maintain minimum total capital equalterminate any activity or investment, or to 8%terminate its ownership or control of total risk-weighted assets, with at least one-halfany subsidiary, when it has reasonable cause to believe that the continuation of that amount (or 4%such activity or investment or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of total risk-weighted assets) consisting of core or Tier 1 capital. Total capital for the Company consists of Tier 1 capital and supplementary or Tier 2 capital.  Tier 1 capital for the Company begins with common stockholders’ equity and is reduced by certain intangible assets.  In addition, trust preferred securities may compose up to 25%any subsidiary bank of the Company’s Tier 1 capitalbank holding company.

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TableThe federal banking agencies have adopted risk-based capital guidelines for bank holding companies and banks that are expected to provide a measure of Contents

Depository institutions,capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, such as the Bank, are also subject to the prompt corrective action framework forloans, and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements.  Under these capital adequacy established by the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”).  Under FDICIA, the federalguidelines, banking regulatorsorganizations are required to take prompt supervisory and regulatory actions against undercapitalized depository institutions.  FDICIA establishes five capital categories: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized.”  A “well capitalized” institution has a total capital to total risk-weighted assets ratio of at least 10%, a Tier 1 capital to total risk-weighted assets ratio of at least 6%, a leverage ratio of at least 5% and is not subject to any written order, agreement or directive; an “adequately capitalized” institution has a total capital to total risk-weighted assets ratio of at least 8%, a Tier 1 capital to total risk-weighted assets ratio of at least 4%, and a leverage ratio of at least 4% (3% percent if given the highest regulatory rating and not experiencing significant growth), but does not qualify as “well capitalized.”  An “undercapitalized” institution fails to meet one of the threemaintain certain minimum capital requirements.  A “significantly undercapitalized” institution has aratios, which are obtained by dividing its qualifying capital by its total capital to total risk-weighted assets ratio of less than 6%, or a Tier 1 capital to total risk-weighted assets ratio of less than 3%, or a leverage ratio of less than 3%.  A “critically undercapitalized” institution has a ratio of tangible equity to assets of 2%, or less.

Under certain circumstances, a “well capitalized”, “adequately capitalized” or “undercapitalized” institution may be required to comply with supervisory actions as if the institution were in the next lowest category.

Failure to meet applicable minimum capital requirements, including a depository institution being classified as less than “adequately capitalized” within FDICIA’s prompt corrective action framework, may subject a bank holding company or its subsidiary depository institution(s) to various enforcement actions, including substantial restrictions on operations and activities, dividend limitations, issuance of a directive to increase capital and, for a depository institution, termination of deposit insurance and the appointment of a conservator or receiver.

FDIC Deposit Insurance Assessment

The Company’s deposit accounts are insured by the FDIC’s Deposit Insurance Fund (the “DIF”) up to the maximum amount provided by law.  The Company’s deposit insurance expenses amounted to $2.2 million, $720 thousand, and $104 thousand in 2009, 2008 and 2007, respectively.

As a result of a dramatic increase nationwide in bank failures in 2008 and 2009, the DIF reserve ratio (DIF reserves as a percent of estimated insured deposits) declined substantially, and beginning in late 2008 the FDIC took several steps to restore their reserves, as required by law.  The FDIC increased its annual assessment rate uniformly by 7 basis points for all insured institutions for the first quarter of 2009 only.  In addition, the FDIC modified the risk-based assessment system beginning April 1, 2009 to require riskier institutions to pay a larger share of premiums.  The modified system also increased the annual base assessment rates for all insured institutions by approximately 2 to 35 basis points uniformly, depending on risk category and several possible adjustments that could increase or decrease the institution’s base rate.

As an additional measure to restore the DIF’s reserve ratio, the FDIC imposed an emergency 20 basis point special assessment on all insured depository institutions as of June 30, 2009.  The FDIC subsequently required all insured institutions to make an additional prepayment, on December 30, 2009, of estimated insurance assessments for 2010, 2011 and 2012, under an FDIC prescribed estimation formula, which included an annual deposit growth rate of 5% and an additional uniform three-basis point increase in the assessment rate schedule effective January 1, 2011.  If the prepaid assessment is exhausted prior to the fourth quarter of 2012, institutions would be required to make additional quarterly payments to cover actual assessments.  Any prepaid assessment not exhausted will be returned to the institution.

Under the Deposit Insurance Reform Act of 2005, eligible insured depository institutions, such as the Bank, shared in a one-time FDIC assessment credit pool of approximately $4.7 billion.  This one-time credit was applied against the institutions’ 2007 deposit

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insurance assessment.  In the case of the Company, the one-time credit of approximately $333 thousand offset approximately 94% of the Bank’s deposit insurance assessment for 2007.

In addition to general increases in the FDIC’s assessment rates, the Company’s insurance costs increased in 2009 due to its participation in the FDIC’s Transaction Account Guarantee Program (the “TAGP”) as described further below.

The FDIC retains the ability to impose additional special assessments or implement future changes to the assessment rate or payment schedules.

Participation in Temporary Liquidity Guarantee Program and Transaction Account Guarantee Program

On October 14, 2008, the U.S. Treasury and the FDIC jointly announced two new temporary programs (which were subsequently renewed and extended in 2009) to strengthen confidence and encourage liquidity in the nation’s banking system.  The Company began participating in these two temporary programs on November 13, 2008.

Under the Temporary Liquidity Guarantee Program (the “TLGP”) that concluded on October 31, 2009, certain newly issued senior unsecured debt of banks, thrifts and certain holding companies could be issued with the protection of an FDIC guarantee for a fee paid by the issuer. In October 2009, the FDIC, established a limited six month emergency guarantee program under which those institutions can seek approval from the FDIC to issue FDIC guaranteed debt (issued between October 31, 2009 through April 30, 2010), with a minimum fee of 300 basis points. As of December 31, 2009, the Company had not issued, and does not anticipate issuing, any debt guaranteed under the TLGP.

In addition, under the TAGP the FDIC provides depository institutions that have opted to participate with full insurance coverage for non-interest bearing deposit transaction accounts, regardless of the dollar amount, through June 30, 2010.  The FDIC has made exceptions for certain interest bearing transaction accounts and funds swept into non-interest bearing savings accounts to also be covered under the TAGP. Participating institutions are charged a surcharge of 10 — 25 basis points on those non-interest bearing account balances over the existing insurance limit of $250 thousand.  The cost of participating in this program is included in the “deposit insurance premiums” line on the Company’s condensed consolidated statement of income.

The Treasury’s Capital Purchase Program and Capital Assistance Program

In October 2008, the U.S. Treasury implemented a Capital Purchase Program (“CPP”) under the TARP provisions contained in EESA, which made capital available directly to qualifying publicly held banking institutions. The Capital Assistance Program (“CAP”) component of President Obama’s 2009 Financial Stability Plan provides an opportunity for additional capital to banks, whether or not they participated in the CPP, on terms revised from those included in the original CPP.  After careful consideration, the Board of Directors concluded that it would not be in the best interests of the Company and its shareholders to obtain government capital funding under either of these programs.

Proposed Small Business Lending Fund

Most recently, in February 2010, President Obama has proposed a small business lending program, in which $30.0 billion in funds previously allocated to TARP would be made available to banks with less than $10.0 billion in assets for the purpose of facilitating increased lending to small businesses.  Under the proposed program, qualifying banks would be eligible to receive up to 3.0% or 5.0% of their risk-weighted assets (3.0% for banks between $1.0 and $10.0 billion inrisk-adjusted assets and 5.0% for banks with less than $1.0 billion in assets).  The dividend rate on the capital received would start at 5.0% and reduce to as low as 1.0% depending upon the recipient institution’s ability to demonstrate increased levels of small business lending.  The new program would not be associated with TARP and, consequently, would not have the executive compensation limits and other restrictions associated with the previous TARP capital programs.  The Company will review this proposaloff-balance sheet items.  In

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and January 1, 2019.  The Basel Committee also announced that a countercyclical buffer of 0% to 2.5% of common equity or other fully loss-absorbing capital will be implemented according to national circumstances as an extension of the conservation buffer.

The long-term impact, if any, of the Basel III capital standards on smaller, domestic banking organizations, such as the Company and when Congress actsthe Bank, remains unclear at this time, although the Dodd-Frank Act does require the federal banking agencies to incorporate counter-cyclical components into their capital adequacy rules.

Prompt Corrective Action

The federal banking agencies have issued regulations pursuant to the FDIA defining five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.  A bank that may otherwise meet the minimum requirements to be classified as well-capitalized, adequately capitalized, or undercapitalized may be treated instead as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.  Under the prompt corrective action regulations, a bank that is deemed to be undercapitalized or in a lesser capital category will be required to submit to its primary federal banking regulator a capital restoration plan and to comply with the plan.  Any bank holding company that controls a subsidiary bank that has been required to submit a capital restoration plan will be required to provide assurances of compliance by the bank with the capital restoration plan, subject to limitations on the bank holding company’s aggregate liability in connection with providing such required assurances.  Failure to restore capital under a capital restoration plan can result in the bank being placed into receivership if it becomes critically undercapitalized.  A bank subject to prompt corrective action also may affect its parent holding company in other ways.  These include possible restrictions or prohibitions on dividends or subordinated debt payments to the parent holding company by the bank, as well as limitations on other transactions between the bank and the parent holding company.  In addition, the Federal Reserve Board may impose restrictions on the ability of the bank holding company itself to pay dividends, or require divestiture of holding company affiliates that pose a significant risk to the subsidiary bank, or require divestiture of the undercapitalized subsidiary bank.  At each successive lower capital category, an insured bank may be subject to increased operating restrictions by its primary federal banking regulator.

Deposit Insurance

The FDIC insures the deposits of federally insured banks, such as the Bank, and thrifts, up to prescribed statutory limits for each depositor, through the DIF and safeguards the safety and soundness of the banking and thrift industries.  The Dodd-Frank Act permanently raised the standard maximum deposit insurance amount to $250,000.  On November 9, 2010, the FDIC Board of Directors also issued a final rule to implement a requirement under the Dodd-Frank Act that provides temporary unlimited deposit insurance coverage for non-interest bearing accounts and IOLTA’s from December 31, 2010, through December 31, 2012.  This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to each depositor under the FDIC’s general deposit insurance rules.

The amount of FDIC assessments paid by each insured depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.  Since 2008, there have been higher levels of bank failures, which have dramatically increased resolution costs of the FDIC and depleted the DIF.  In order to maintain a strong funding position and restore reserve ratios of the DIF, the FDIC has increased assessment rates of insured depository institutions and may continue to do so in the future.  On November 12, 2009, the FDIC adopted a requirement for institutions to prepay in 2009 their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.

The Bank is generally unable to control the amount of premiums that it is required to determine whetherpay for FDIC insurance.  If there are additional bank or financial institution failures or if the FDIC otherwise determines, the Bank may be required to pay even higher FDIC premiums than the recently increased levels.  These announced increases and any future

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increases in FDIC insurance premiums may have a material and adverse affect on the Company’s earnings.  In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the federal government established to recapitalize the predecessor to the DIF.  The FICO assessment rates, which are determined quarterly, averaged 0.0026% of insured deposits in fiscal 2010.  These assessments will continue until the FICO bonds mature in 2017.

The FDIC implemented two temporary programs under the Temporary Liquidity Guaranty Program (“TLGP”), which was adopted in October 2008 to strengthen public confidence and encourage liquidity in the nation’s banking system: the Transaction Account Guarantee Program (“TAGP”) (to provide deposit insurance for the full amount of most non-interest bearing transaction accounts through December 31, 2010) and the Debt Guarantee Program (to guarantee certain unsecured debt of financial institutions and their holding companies through the earlier of the maturity date of the debt or June 30, 2012).  The Bank was a participant in the TAGP, which expired on December 31, 2010, and continues to provide temporary unlimited deposit insurance coverage for non-interest bearing accounts and IOLTA’s pursuant to the Dodd-Frank Act requirement referred to above.  The Bank also applied for, and was approved for participation in the programDebt Guarantee Program, which expired on October 31, 2009, although neither the Company nor the Bank issued any guaranteed debt at any time under the program.

The FDIC has redefined its deposit insurance premium assessment base to be an institution’s average consolidated total assets minus average tangible equity as required by the Dodd-Frank Act and revised deposit insurance assessment rate schedules in light of the changes to the assessment base.  The revised rate schedule and other revisions to the assessment rules, which were adopted by the FDIC Board of Directors on February 7, 2011, will become effective April 1, 2011 and will be used to calculate the June 30, 2011 insurance premium assessments.

The Bank anticipates that its deposit insurance expense will decrease as a result of the changes to the Bank’s deposit insurance premium assessment base implemented by the FDIC pursuant to the Dodd-Frank Act.

Restrictions on Dividends and Other Capital Distributions

The Company’s ability to pay dividends on its shares depends primarily on dividends it receives from the Bank.  Both Massachusetts and federal law limit the payment of dividends by the Company and the Bank.  Under Massachusetts law, the Company is generally prohibited from paying a dividend or making any other distribution if, after making such distribution, it would be appropriate.unable to pay its debts as they become due in the usual course of business, or if its total assets would be less than the sum of its total liabilities plus the amount that would be needed if it were dissolved at the time of the distribution, to satisfy any preferential rights on dissolution of holders of preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is made.  The Federal Reserve Board also has further authority to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices.  The Federal Reserve Board has issued a policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.  It is also the Federal Reserve Board’s policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries.

Under FDIC regulations and applicable Massachusetts law, the dollar amount of dividends and any other capital distributions that the Bank may make depends upon its capital position and recent net income.  Generally, so long as the Bank remains adequately capitalized, it may make capital distributions during any calendar year equal to up to 100% of net income for the year to date plus retained net income for the two preceding years.  However, if the Bank’s capital becomes impaired or the FDIC or Commissioner otherwise determines that the Bank is in need of more than normal supervision, the Bank may be prohibited or otherwise limited from paying any dividends or making any other capital distributions.

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Operations and Consumer Compliance Laws

The Bank must comply with numerous federal anti-money laundering and consumer protection statutes and implement regulations, including but not limited to the Truth in Savings Act, Electronic Funds Transfer Act, Expedited Funds Availability Act, the USA PATRIOT Act of 2001, the Bank Secrecy Act, the Community Reinvestment Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the National Flood Insurance Act and various other federal and state privacy protection laws.  Failure to comply in any material respect with any of these laws could subject the Bank to lawsuits and could also result in administrative penalties, including fines and reimbursements.  The Company and the Bank are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition.  These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services.  Failure to comply in any material respect with any of these laws and regulations could subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.

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Item 1A.Risk Factors

An investment in the Company’s common stock is subject to a variety of risks and uncertainties.  The material risks and uncertainties that management believes affect the Company are described below.  These risks and uncertainties are not listed in any particular order of priority and are not necessarily the only ones facing the Company.  Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business and results of operations.

This report is qualified in its entirety by these risk factors.  If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected.  If this were to happen, the value of the Company’s common stock could decline significantly, and shareholders could lose some or all of their investment.

The Company’s Profitability Depends Significantly on Economic Conditions in the Company’s Primary Market Areas

The Company’s success depends principally on the general economic conditions of the primary market areas in which the Company operates.  The local economic conditions in these areas have a significant impact on the demand for the Company’s products and services as well as the ability of the Company’s customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources.

The global economic crisis showed signs of stabilizing beginning in the second half of 2009, with partial recovery in many national financial markets; however the country is still experiencing high levels of unemployment, weakened residential and commercial real estate markets, and historically low interest rates.  Although the current U.S.recent recession hasthat ended in Mid-2009 did not impactedimpact the New England region as severely as many other regions of the country and the effect on the local economy has lagged the rest of the country, any long-term continuation of these national and global trends, or deterioration of the recovery progress, as well as any possible subsequent effects of these trends, could further weaken the regional economy and have long-term adverse consequences on local industries, employment levels, foreclosure rates and commercial real estate values which could negatively impact the Company’s financial condition, capital position, liquidity, and performance in a variety of ways.  Potential adverse effects on the Company could include: continued downward pressure on its net interest margin; deterioration in its asset quality; a decline in the underlying values of commercial real estate collateral; an increased level of loan delinquencies; an increase in the level of its allowance for loan losses; a decline in the value of its investment portfolio; unanticipated charges against capital; restrictions on funding sources, may become restricted thereby impactingwhich could adversely impact the Company’s ability to meet cash needs; and a decline in the market price of the Company’s common stock.

In addition to the consequences of the current economic recession,environment, any significant and sustained decline in general economic conditions caused by acts of terrorism, an outbreak of hostilities or other international or domestic occurrences, market interest rate changes, or other factors, could also impact local economic conditions and, in turn, have a material adverse effect on the Company’s financial condition and results of operations.

The Company is Subject to Lending Risk

There are inherent risks associated with the Company’s lending activities.  These risks include, among other things, the impact of changes in the economic conditions in the market areas in which the Company operates and changes in interest rates.  Weakening of economic conditions within the Company’s market area or increases in interest rates could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans.

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The Company’s loan portfolio consists primarily of commercial real estate, commercial and industrial, and construction loans.  These types of loans are generally viewed as having more risk of default than owner-occupied residential real estate loans or consumer loans, and are also of typically larger balances. The underlying commercial real estate values, the actual costs necessary to complete a construction project, or customer cash flow and payment expectations on such loans can be more easily influenced by adverse conditions in the related industries, the real estate market or in the economy in general. Any significant deterioration in the credit quality of the commercial loan portfolio or underlying collateral values could have a material adverse effect on the Company’s financial condition and results of operations.

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The Company sells residential mortgage loans in the secondary mortgage market.  Potential changes to this market resulting from any possible government restrictions on, or restructuring of, FNMA and FHLMC or from any new regulations in this area could impact the Company’s ability to generate and/or sell these loans.

See the discussions contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the headings “Loans” and “Credit Risk/Asset Quality” included in the section entitled “Financial Condition”, for further information regarding the Company’s commercial loan portfolio and credit risk.

The Company May Need to Increase the Allowance for Loan Losses

The Company maintains an allowance for loan losses, which is established through a provision for loan losses charged to earnings, that represents management’s estimate of probable losses inherent within the existing portfolio of loans.  The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that differ from those of the Company’s management.  Any increases in the allowance for loan losses will result in a decrease in net income and, depending upon the magnitude of the changes, could have a material adverse effect on the Company’s financial condition and results of operations.

See the discussions contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Allowance for Loan Losses”, which is contained in the “Critical Accounting Estimates” section and under the headings “Credit Risk/Asset Quality” and “Allowance for Loan Losses”, included in the section entitled “Financial Condition”, for further information regarding the process by which the Company determines the appropriate level of its allowance for loan losses.

The Company’s Investment Portfolio Could Incur Losses

There are inherent risks associated with the Company’s investment activities.  These risks include the impact of changes in interest rates, weakness in the real estate or other industries, adverse changes in regional or national economic conditions, and general turbulence in domestic and foreign financial markets, among other things.  These conditions could adversely impact the fair market value and the ultimate collectability of the Company’s investments.

Management regularly reviews the portfolio for securities with unrealized losses that are other than temporarily impaired. In addition to fair market value impairment, carrying values may be adversely impacted due to a fundamental deterioration of the individual municipality or government agency whose debt obligations the Company owns or of the individual company or fund in which the Company has invested. At December 31, 2009, approximately 91% of the Company’s investment portfolio, or $126 million, was invested in obligations issued by federal government agencies, including Fannie Mae and Freddie Mac, or municipal government entities, while 7%, or $9.7 million, was invested in equity securities, including $4.7 million in FHLB stock.

If an investment’s value is deemed other than temporarily impaired, then the Company is required to write down the carrying value of the investment which may involve a charge to earnings.  The determination of the level of other-than-temporary impairment (“OTTI”) involves a high degree of judgment and requires the Company to make significant estimates of current market risks and future trends, all of which may undergo material changes.  Any OTTI

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charges, depending upon the magnitude of the charges, could have a material adverse effect on the Company’s financial condition and results of operations.

As a member of the FHLB, the Company is required to purchase certain levels of FHLB capital stock in association with the Bank’s borrowing relationship from the FHLB.  TheIn recent years, the FHLB is currently operating with retained earnings below its target level.  The FHLB has instituted a plan to increase retained earnings which includes suspendinghad suspended its quarterly dividend and placed a moratorium on the repurchase of excess capital stock from member banks, among other programs. At December 31, 2009,programs, to increase its capital levels.  However, in February 2011, the Company’s investment in FHLB reported improved profitability and capital levels, and announced a fourth quarter dividend on capital stock amountedbalances to $4.7 million. Ifbe paid March 2, 2011.  The FHLB also noted that the board of directors anticipates continuing to declare modest cash dividends through 2011, but cautioned that negative events such as further credit losses, a decline in income or regulatory disapproval could lead them to reconsider this plan.  Although recent financial results of the FHLB have improved, if further deterioration in the FHLB financial condition or capital levels occurs, the Company’s investment in FHLB capital stock may become other than temporarily impaired to some degree.  At December 31, 2010, the Company’s investment in FHLB capital stock amounted to $4.7 million.  Additionally,

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if as a result of deterioration in its financial condition the FHLB restricts its lending activities, the Company may need to seekutilize alternative funding sources to meet its liquidity needs. See also the discussion contained in this Item 1A under the heading “Sources of External Funding May Become Restricted and Impact the Company’s Liquidity.”

See the discussions contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Impairment Review of Securities”, which is contained in the “Critical Accounting Estimates” section, and under the heading “Investment Securities”, included in the section entitled “Financial Condition”, for further information regarding the process by which the Company determines the level of other-than-temporary impairment.

The Company is Subject to Interest Rate Risk

The Company’s earnings and cash flows are largely dependent upon its net interest income, meaning the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities.  Interest rates are highly sensitive to many factors that are beyond the Company’s control, including monetary policy of the federal government, inflation and deflation, volatility of financial and credit markets, and competition.  If the interest rates paid on interest-bearing liabilities increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected.  Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on interest-bearing liabilities.

See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, for further discussions related to the Company’s management of interest rate risk.

Sources of External Funding Could Become Restricted and Impact the Company’s Liquidity

The Company’s external funding sources include borrowing capacity in the brokered CD market,deposit markets, at the FHLB and FRB, and through federal fund purchaseother borrowing arrangements with correspondent banks, as well as accessing the public equity market through an offering of the Company’s stock. The Company has in the past also issued junior subordinated debenturesraised capital through a “pooled”the issuance of trust preferred offering,securities, which was a common means of raising capital previously used by many community banks priorlarge and small banking organizations, but which is no longer available due to the “freeze up” of the publicchanges in both capital markets that preceded the recent global economic crisis.and regulatory capital requirements.  If, as a result of general economic conditions or other events, these sources of external funding withdrawbecome restricted or are eliminated (as has occurred in the case of the pooled trust preferred market) or limit the Company’s external funding capacity,securities) the Company may not be able to raise adequate funds or may incur substantially higher funding cost or operating restrictions in order to raise the necessary funds elsewhere.funds. Any such increase in funding cost or restrictions could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial condition.

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Increased Reliance on Borrowings and Brokered CD’sDeposits as Sources of Funds Could Adversely Affect the Company’s Profitability

The Company has traditionally funded asset growth principally through deposits and borrowings.  As a general matter, deposits are typically a lower cost source of funds than external wholesale funding (brokered CD’s or borrowings)deposits and borrowed funds), because interest rates paid for deposits are typically less than interest rates charged for wholesale funding (notwithstanding the recent declines in overnight borrowing rates).  If, as a result of competitive pressures, market interest rates, general economic conditions or other events, the balance of the Company’s deposits decreases relative to the Company’s overall banking operations, the Company may have to rely more heavily on wholesale funding in the future.  Any such increased reliance on wholesale funding could have a negative impact on the Company’s net interest income and, consequently, on its results of operations and financial condition.

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See the discussions contained in the section entitled “Other Sources of Funds” contained in Item 1, “Business”, and in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Liquidity”, which is included in the section entitled “Financial Condition”, for further information regarding the Company’s sources of contingent liquidity.

The Use of Independent Investment Research Firms Expose the Company to Additional Risk

The Company relies on outside investment research and due diligence information, thatwhich is provided by several professional independent investment research firms, in selecting both independent management firms and individual securities for the Company’s investment advisory clients.   These firms are subject to a variety of riskrisks and uncertainties, including significant exposures to changes in financial market conditions, including the impact of changes in interest rates, adverse changes in regional or national economic conditions, and general turbulence in domestic and foreign financial markets, among other things, which could adversely impact the fair market value of customer portfolios.  Additionally, these firms are subject to risk associated with poor investment decisions, turnover in key personnel, internal and external securities fraud, information security or data breach, and financial losses, among others, any of whichothers.  Any risk that affects these independent firms could in turn expose the Company itself to various risks.  The risks to the Company include but are not limited to, the loss of customer business, damage to the Company’s reputation, exposure of the Company to civil litigation and possible financial liability, and a reduction in fee income, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s Capital Levels Could Fall Below Regulatory Minimums

The Company and the Bank are both subject to the capital adequacy guidelines of the FRBFederal Reserve Board and FDIC, respectively.  Failure to meet applicable minimum capital ratio requirements may subject the Company and/or the Bank to various enforcement actions.  If the Company experiences rapid asset growth, or ifCompany’s capital levels decline due to: possible future net operating losses; impairment charges against tangible or intangible assets; adjustments to retained earnings due to changes in accounting rules; among other things, and if the Company is unable to raise additional capital to offset theses charges,that decline, then its capital ratios may fall below regulatory capital adequacy levels.  The Company’s capital level could decline due to it experiencing rapid asset growth, or due to other factors, such as, by way of example only, possible future net operating losses, impairment charges against tangible or intangible assets, or adjustments to retained earnings due to changes in accounting rules.

See the sectionsections entitled “Supervision and Regulation” and “Capital Resources” contained in Item 1, “Business”, for additional information regarding regulatory capital requirementrequirements for the Company and the Bank.

The Company is Subject to Extensive Government Regulation and Supervision

The Company is subject to extensive federal and state regulation and supervision.  Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the interests of shareholders.  These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things.  Federal and state statutes and related regulations, including tax policy and corporate governance rules, can significantly affect the way in which bank holding companies, and public companies in general, conduct business.  Changes to federal or state statutes, regulations or regulatory and tax policies, including changes in interpretation or implementation of existing statutes, regulations or policies, or new laws, regulation or regulationaccounting rules aimed at addressing the perceived causes of the recent financial crisis, could affect the Company in substantial and unpredictable ways, including subjecting the Company to additional operating, governance and compliance costs, increasing the Company’s deposit insurance premiums, limiting the types of financial services and products the Company may offer and/or increasing competition from other non-bank providers of financial services.

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See the section entitled “Supervision and Regulation” contained in Item 1, “Business”, for additional information regarding the supervisory and regulatory issues facing the Company.

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The Company Operates in a Competitive Industry and Market Area

The Company faces substantial competition in all areas of its operations from a variety of different competitors, several of which are larger and have more financial resources than the Company.  Competitors within the Company’s market area include not only national, regional, and other community banks, but also various types of other non-bank financial institutions, including credit unions, consumer finance companies, mortgage brokers and lenders, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors, internet based banks, and other financial intermediaries.intermediaries and non-bank electronic delivery channels.

See the section entitled “Competition” contained in Item 1, “Business”, for additional information regarding the competitive issues facing the Company.

Failure to Keep Pace With Technological Change Could Affect the Company’s Profitability

The banking industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services.  The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.  ManySeveral of the Company’s competitors have substantially greater resources to invest in technological improvements.  Failure to successfully keep pace with technological changechanges affecting the banking industry could have a material adverse effect on the Company’s business and, in turn, the Company’s financial condition and results of operations.

The Company’s Information Systems Could Experience an Interruption or Breach in Security

The Company relies heavily on communications and information systems to conduct its business.  The occurrence of any failures, interruptions or security breaches of the Company’s communication or information systems could disrupt the Company’s ability to conduct business and process transactions,transactions.  Additionally, any failure or breach of customers’ home, business or mobile information system could also impact the integrity of the Company’s information systems.  Any breakdown in information system integrity could result in a loss of customer business, expose customers’ personal information to unauthorized parties, damage the Company’s reputation, subject the Company to additional regulatory scrutiny, and expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

See the discussion under the heading “Opportunities and Risks” included in the section entitled “Overview”, which is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for further information regarding the Company’s information security and technology practices.

Interruption of Service or Breach in Security at Independent Service Providers Could Adversely Affect the Company’s Business

The Company relies on independent firms to provide key services necessary to conducting its business.  These services include, but are not limited to: electronic funds delivery networks; check clearing houses; electronic banking services; investment advisory, management and custodial services; correspondent banking services; information security assessments; and loan underwriting and review services.  The occurrence of any failures, interruptions or security breaches of the independent firms’ systems or in their delivery of services, could result in a loss of customer business, expose customers’ personal information to unauthorized parties, damage the Company’s reputation and expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

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The Company’s Controls and Procedures Could Fail or Be Circumvented by Theft, Fraud or Robbery

Management regularly reviews and updates the Company’s internal controls over financial reporting, disclosure controls and procedures, corporate governance policies and procedures and security controls, including information and physical security, to

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prevent and detect theft, and fraud.fraud or robbery.  Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could result in loss of assets, regulatory actions against the Company, financial loss, damage the Company’s reputation, cause a loss of customer business, and expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s business, results of operations and financial condition.

See the discussion under the heading “Opportunities and Risks” included in the section entitled “Overview”, which is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for further information regarding the Company’s operational risk management.

The Company’sCompany May Experience a Prolonged Interruption in Ability to Conduct Business

The Company relies heavily on its personnel, facilities and information systems to conduct its business.  A material loss of people, core operating facilities or access to information systems could result in an interruption in customer services and ability to conduct transactions, loss of customer business and damage the reputation of the Company, any of which may have a material adverse effect on the Company’s financial condition and results of operations.

See the discussion under the heading “Opportunities and Risks” included in the section entitled “Overview”, which is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for further information regarding the Company’s Business Continuity Plan.

The Company May Not be Able to Attract and Retain Key Personnel

The Company’s success depends, in large part, on its ability to attract and retain key personnel.  Competition for the best people in most activities engaged in by the Company can be intense and the Company may not be able to hire or retain the key personnel that it depends upon for success.  The unexpected loss of key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Slower than Expected Growth in New Branches and Products Could Adversely Affect the Company’s Profitability

The Company has placed a strategic emphasis on expanding the Bank’s branch network.network and market share.  Executing this strategy carries risks of slower than anticipated growth in new branches or new geographic market areas.  New branches and new products and services require a significant investment of both financial and personnel resources.  Lower than expected loan and deposit growth in new branches and/or lower than expected fee or other income generated from new branches could decrease anticipated revenues and net income generated by such investments. In addition, new branches require the approval of various regulatory agencies, which may or may not approve the Company’s application for a branch. Opening new branches in existing markets or new market areas could also divert resources from current core operations and thereby further adversely affect the Company’s growth and profitability.

Damage to the Company’s Reputation Could Affect the Company’s Profitability and Shareholders’ Value

The Company is dependent on its reputation within its market area, as a trusted and responsible financial company, for all aspects of its business with customers, employees, vendors, third-party service provides, and others, with whom the Company conducts business or potential future business.  Any negative publicity, whether real or perceived, disseminated by word of mouth, by the general media, by electronic or social networking means, or by other methods, regarding, among other things, the Company’s current or potential business practices or activities, an inability to meet obligations, employees, management or directors’ ethical standards or actions, or about the banking industry in general, could harm the Company’s reputation.   Any damage to the Company’s reputation could affect its ability to retain and develop the business relationship necessary to conduct business which in turn could negatively impact the

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Company’s financial condition, results of operation and the market price of the Company’s common stock.

Growth Strategies Involving Acquisitions Could Adversely Affect the Company’s Profitability

The Company may in the future explore growth opportunities through acquisition of other banks, financial services companies or lines of business.  Any future acquisition could adversely affect the Company’s profitability based on management’s ability to successfully complete the acquisition and integration of the acquired business.

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The Trading Volume in the Company’s Common Stock is Less Than That of Larger Companies

Although the Company’s common stock is listed for trading on the NASDAQ Global Market, the trading volume in the Company’s common stock is substantially less than that of larger companies.  Given the lower trading volume of the Company’s common stock, significant purchases or sales of the Company’s common stock, or the expectation of such purchases or sales, could cause significant swings up or down in the Company’s stock price.

The Market Price of the Company’s Common Stock Could be Affected by General Industry Issues

The banking industry may be more affected than other industries by certain economic, credit, regulatory or information security issues.  Although the Company itself may or may not be directly impacted by such issues, the Company’s stock price may swing up or down due to the influence, both real and perceived, of these issues, among others, on the banking industry in general.

The Carrying Value of the Company’s Goodwill Could Become Impaired

In accordance with generally accepted accounting principles, the Company does not amortize goodwill and instead, at least annually, evaluates whether the carrying value of goodwill has become impaired. Impairment of the goodwill may occur when the estimated fair value of the Company is less than its recorded book value (i.e., the net book value of its recorded assets and liabilities). This may occur, for example, when the estimated fair value of the Company declines due to changes in the assumptions and inputs used in management’s estimate of fair value.  A determination that goodwill has become impaired results in an immediate write-down of goodwill to its determined value with a resulting charge to operations.  If the estimated fair value of the Company declines due to changes in the assumptions and input used in management’s estimate of the fair value, the carrying value of the Company’s goodwill may become impaired.  Any write down of goodwill will result in a decrease in net income and, depending upon the magnitude of the charge, could have a material adverse effect on the Company’s financial condition and results of operations.

See the discussions contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Impairment Review of Goodwill and Other Intangible Assets”Goodwill”, which is contained in the “Critical Accounting Estimates” section, for further information regarding the process by which the Company determines whether  an impairment of goodwill has occurred.

Shareholder Dilution Could Occur if Additional Stock is Issued in the Future

If the Company’s Board of Directors should determine in the future that there is a need to obtain additional capital through the issuance of additional shares of the Company’s common stock or securities convertible into shares of common stock, such issuances could result in dilution to existing shareholders’ ownership interest. Similarly, if the Board of Directors decides to grant additional restricted stock shares or options for the purchase of shares of common stock, the issuance of such additional restricted stock shares and/or the issuance of additional shares upon the exercise of such options may expose shareholders to dilution.

The Company’s Articles Of Organization, By-Laws and Shareholders Rights Plan as Well as Certain Banking and Corporate Laws Could Have an Anti-Takeover Effect

Provisions of the Company’s articles of organization and by-laws, its shareholders rights plan and certain federal and state banking laws and state corporate laws, including regulatory approval requirements for any acquisition of control of the Company, could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial to the Company’s shareholders.  The

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companies such as the Bank may pay dividends only out of “net profits” and only to the extent that such payments will not impair the Bank’s capital stock.  Any dividend payment that would

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exceed the total of the Bank’s net profits for the current year plus its retained net profits of the preceding two years would require the Commissioner’s approval. FDICIAApplicable provisions of the FDIA also prohibits a bank from paying any dividends on its capital stock if the bank is in default on the payment of any assessment to the FDIC or if the payment of dividends would otherwise cause the bank to become undercapitalized.  These restrictions on the ability of the Bank to pay dividends to the Company may restrict the ability of the Company to pay dividends to the holders of its common stock.

The statutory term “net profits” essentially equates with the accounting term “net income” and is defined under the Massachusetts banking statutes to mean the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from such total all current operating expenses, actual losses, accrued dividends on any preferred stock and all federal and state taxes.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information as of December 31, 20092010 with respect to the Company’s Amended and Restated 1998 Stock Incentive Plan (the “1998 Plan”), 2003 Stock Incentive Plan, as amended, and 2009 Stock Incentive Plan which together constitute all of the Company’s existing equity compensation plans that have been previously approved by the Company’s stockholders.  The 1998 Plan is closed to future grants, although several awards previously granted under this plan remain outstanding and may be exercised in the future.  The Company does not have any existing equity compensation plans, including any existing individual equity compensation arrangements, which have not been previously approved by the Company’s stockholders.

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Performance Graph

The following graph compares the cumulative total return (which assumes the reinvestment of all dividends) on the Company’s common stock with the cumulative total return reflected by a broad based equity market index and an appropriate published industry index.  This graph shows the changes over the five-year period ended on December 31, 20092010 in the value of $100 invested in (i) the Company’s common stock, (ii) the Standard & Poors 500 Index, (iii) the NASDAQ Bank Index, and (iv)(iii) the SNL Bank $1B to $5B index.  Effective this year, the Company is adopting the SNL Bank $1 billion to $5 billion index as a replacement for the NASDAQ Bank Index.  The Company believes the SNL Bank $1 billion to $5 billion index provides a more appropriate comparison for assessing its relative performance.  The NASDAQ Bank Index includes solely financial institutions listed on the NASDAQ stock market of all asset sizes, which diminishes its appropriateness as a comparison index.  Comparatively, the SNL Bank $1 billion to $5 billion index includes all major exchange (NYSE, NYSE Amex & NASDAQ) banks with $1 billion to $5 billion in assets which is more comparable to the Company.

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Prior to February 14, 2005 (when the Company’s shares began trading on the NASDAQ National Market, now NASDAQ Global Market), there was no active trading market for the Company’s common stock, although shares were traded periodically on a privately negotiated basis. For purposes of the graph, the value of the stock at December 31, 2004 is based upon the annual valuation analysis of the Company’s common stock that was formerly undertaken in the years prior to the Company’s listing on the NASDAQ National Market pursuant to the Company’s administration of its dividend reinvestment plan.

Sales of Unregistered Securities and Repurchases of Shares

The Company has not sold any equity securities that were not registered under the Securities Act of 1933, as amended, during the year ended December 31, 2009.2010.  Neither the Company nor any “affiliated purchaser” (as defined in the SEC’s Rule 10b-18(a)(3)) has repurchased any of the Company’s outstanding shares, nor caused any such shares to be repurchased on its behalf, during the fiscal quarter ended December 31, 2009.2010.

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Item 6. Selected Financial Data

On June 30, 2006, the Company issued 3,842,015 shares in a two-for-one stock split paid in the form of a stock dividend. All share and per share amounts have been retroactively adjusted to reflect the stock dividend for all periods presented.

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Critical Accounting Estimates

The Company’s significant accounting policies are described in note 1, “Summary of Significant Accounting Policies”, to the consolidated financial statements contained in Item 8.  In applying these accounting policies, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized.  Certain of the critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company’s reported financial performance should the assumptions and estimates used change over time due to

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changes in circumstances. The three most significant areas in which management applies critical assumptions and estimates include the areas described further below.

Allowance for Loan Losses

The allowance for loan losses is an estimate of credit risk inherent in the loan portfolio as of the specified balance sheet dates.  The allowance for loan losses is established through a provision for loan losses, a direct charge to earnings.  Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely.  Recoveries on loans previously charged off are credited to the allowance.  The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated losses from specifically known and other credit risks associated with the portfolio. Arriving at an appropriate level of allowance for loan losses involves a high degree of management judgment.

The Company uses a systematic methodology to measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology makes use of specific reserves for loans individually evaluated and deemed impaired and general reserves for larger groups of homogeneous loans which rely on a combination of qualitative and quantitative factors that could have an impact on the credit quality of the portfolio.

Management believes that the allowance for loan losses is adequate to absorb probable losses from specifically known and other credit risks associated with the loan portfolio as of the balance sheet dates reflected in this annual report.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

Management’s assessment of the adequacy of the allowance for loan losses is contained under the headings “Credit Risk/Asset Quality” and “Allowance for Loan Losses”, which are contained in the “Financial Condition” section of this Item 7.

Impairment Review of Investment Securities

There are inherent risks associated with the Company’s investment activities which could adversely impact the fair market value and the ultimate collectability of the Company’s investments.  The determination of other-than-temporary impairment involves a high degree of judgment and requires management to make significant estimates of current market risks and future trends. Management’s assessment includes: evaluating the level and duration of the loss on individual securities; evaluating the credit quality of fixed income issuers; determining if any individual security or mutual or other fund exhibits fundamental deterioration; and estimating whether it is unlikely that the individual security or fund will completely recover its unrealized loss within a reasonable period of time, or in the case of fixed income securities prior to maturity.  While management uses available information to measure other-than-temporary impairment at the balance sheet date, future write-downs may be necessary based on extended duration of current unrealized losses, changing market conditions, or circumstances surrounding individual issuers and funds.

Should an investment be deemed “other than temporarily impaired”, the Company is required to write-down the carrying value of the investment. Such write-down(s) may have a material adverse effect on the Company’s financial condition and results of operations.  Other than temporary impairment on equity securities are recognized through

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a charge to earnings. Other than temporary impairment on fixed income securities are assessed in order to determine the impairment attributed to underlying credit quality of the issuer and the portion of noncredit impairment. When there are credit losses on a fixed income security that management does not intend to sell and it is more likely than not that the Company will not be required to sell prior to a marketplace recovery or maturity, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the security’s amortized cost basis and its fair value would be included in other comprehensive income. Once written-down a security may not be written-up in excess of its new cost basis to reflect future increases in fair value.

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Based on ongoingthis impairment reviews of the investment portfolio,review, management recorded OTTI charges to earnings on certain equity securities amounting to $797 thousand and $3.7 million in 2009 and 2008, respectively.  Management determined that the remaining unrealized lossesthere were no securities carried in the Company’s investment securities portfolio (consisting of unrealized losses of $421 thousand on the fixed income portfolio) were not other than temporary in nature at December 31, 2009.  The Company’s equity portfolio, which incurred the OTTI charges in 2009 and 2008, had unrealized appreciation of $1.5 million at December 31, 2009.2010 that were deemed other than temporarily impaired.

Management’s assessment of impairment of the unrealized losses in the investment portfolio is contained under the heading “Investment Securities”, which is contained in the “Financial Condition” section of this Item 7.

Impairment Review of Goodwill and Core Deposit Intangible Assets

In accordance with generally accepted accounting principles, the Company does not amortize goodwill and instead, at least annually, evaluates whether the carrying value of goodwill has become impaired. Impairment of the goodwill may occur when the estimated fair value of the Company is less than its recorded book value. A determination that goodwill has become impaired results in an immediate write-down of goodwill to its determined value with a resulting charge to operations.

The annual impairment test is a two-step process used to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The assessment is performed at the operating unit level.  In the case of the Company, the services offered through the Bank and subsidiaries are managed as one strategic unit and represent the Company’s only reportable operating segment. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit with its carrying amount, or the book value of the reporting unit, including goodwill.  If the estimated fair value of the reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the second step of the impairment test is unnecessary.  Management’s assessment of the fair value of the Company takes into consideration the Company’s market capitalization, stock trading volume, price-multiples valuations of comparable companies and control premiums in transactions involving comparable companies.  The value of a control premium to use in the marketplace will depend on a number of factors including the target bank stock’s liquidity, where the stock is currently trading, the perceived attractiveness of the entity and economic conditions.  Management evaluates each of these factors as they relate to the Company and subjectively determines a comparable assumed control premium.

The second step, if necessary, measures the amount of goodwill impairment loss to be recognized.  The reporting unit must determine fair values for all assets and liabilities, excluding goodwill.  The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill.  If the carrying amount of the goodwill exceeds the newly calculated implied fair value of that goodwill, an impairment loss is recognized in the amount required to write down the goodwill to the implied fair value.

The Company’s consolidated financial statements also include core deposit intangible assets, which are amortized to expense over their estimated useful life of ten years and reviewed for impairment on an ongoing basis or whenever events or changes in business circumstances warrant a review of the carrying value.  If impairment is determined to exist, the related write-down of the intangible asset’s carrying value is charged to operations.

Based on thesethis impairment reviewsreview, management determined that the Company’s goodwill and core deposit intangible assets werewas not impaired at December 31, 2009.2010.

Overview

Enterprise reported solid financial results and continued growth for the year ended December 31, 2010.  We continue to expand the branch network and invest in our infrastructure, communities and employees, in an effort to seize current market opportunities and position Enterprise for continued long-term growth. Enterprise continued to increase its geographic footprint by recently opening a new branch office in Hudson, New Hampshire, which represents the Company’s third Southern New Hampshire

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location. Management believes that the current banking environment providescontinues to provide many opportunities for strong community banks, likeincluding Enterprise Bank, strong market and growth opportunity, as customers continue to migrate from larger, national banks to local community banks, choosing to do their banking business with local banking professionals.professional bankers.

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Loans outstanding increased $134.2Net income amounted to $10.6 million, or 14%, since December 31, 2008 and totaled $1.08 billion at December 31, 2009.   Deposits, excluding brokered deposits, increased $244.5 million, or 28%, since December 31, 2008 and totaled $1.12 billion at December 31, 2009.  Net income was $7.9 million$1.15 on a diluted earnings per share basis, for the year ended December 31, 2009, an2010, compared to $7.9 million, or $0.96, respectively, for the year ended December 31, 2009.  The 34% increase of 43%in net income for the year ended December 31, 2010, when compared to the prior year.year, was primarily attributed to growth in loans, deposits and investment assets under management, and an increase in the net interest margin.

Deposits, excluding brokered deposits, increased $127.0 million, or 11%, since December 31, 2009 and totaled $1.24 billion at December 31, 2010.

During a period when many banks have experienced declining loan portfolios, loans outstanding increased $60.5 million, or 6%, since December 31, 2009 and totaled $1.14 billion at December 31, 2010.

Composition of Earnings

Net income amounted to $7.9 million, or $0.96 on a diluted earnings per share basis, for the year ended December 31, 2009, compared to $5.5 million, or $0.69, respectively, for the year ended December 31, 2008.  The 43% increase in net income for the year ended December 31, 2009, when compared to 2008, was due primarily to an increase in net interest income and non-interest income, partially offset by increases in FDIC insurance premiums and other non-interest expenses, as well as an increase in the provision for loan losses.

Enterprise’sThe Company’s earnings are largely dependent on its net interest income, which is the difference between interest earned on loans and investments and the cost of funding (primarily deposits and borrowings).  Tax equivalent net interest income expressed as a percentage of average interest earning assets is referred to as net interest margin (“margin”).  The re-pricing frequency of the Company’s assets and liabilities are not identical, and therefore subject the Company to the risk of adverse changes in interest rates. This is often referred to as “interest rate risk” and is reviewed in more detail in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of this Form 10-K.

For the year ended December 31, 2009,2010, net interest income amounted to $48.4$55.0 million, compared to $42.2$48.4 million for 2008,2009, an increase of $6.3$6.5 million, or 15%13%.  Net interest income for the quarter ended December 31, 20092010 amounted to $13.1$14.0 million, compared to $11.2 million in the December 2008 quarter, an increase of $1.9 million,$904 thousand, or 17%. The7%, compared to the December 2009 quarter.  These increases in net interest income over the comparable prior-year2009 periods were due primarily to strong loan growth. Average loan balances increased $92.2 million for the year-over-year and quarter-over-quarter periodsyear ended December 31, 2010 compared to 2009.  For the three months ended December 31, 2010, average loan balances increased $135.9$60.6 million and $142.5 million, respectively, compared to the same periodsthree months in 2008.

Net2009.  Additionally, net interest margin was 4.41% for the year ended December 31, 2010, compared to 4.28% for the year ended December 31, 2009, compared to 4.23% for2009.  Reflecting the year ended December 31, 2008.  Quarterly net interest margin was 4.42%current industry trends of decreasing margins affecting many banks, for the three months ended December 31, 2009,2010, net interest margin decreased to 4.31%, as compared to 4.32%4.40% for the quarter ended September 30, 2009, 4.19%2010 and 4.42% for the quarter ended June 30, 2009 and 4.24% for the December 31, 2008 quarter.  Due to the lower market interest rates compared to 2008, earning assets and funding sources continued to reprice downward during 2009, reducing both the yield on earning assets and the Company’s cost of funding.  However, during the second half of 2009 the pace of asset repricing (primarily loans) slowed, while funding costs continued to decline at a faster rate due to an easing of competitive deposit rate pressure, contributing to the increase in margin in the third and fourth quarters.2009.

The provision for loan losses amounted to $5.1 million and $4.8 million for the year ended December 31, 2010 and 2009, amounted to $4.8 million compared to $2.5 millionrespectively.  The provision for loan losses during any period is a function of the level of loan growth and trends in 2008. The increase over the prior year was due to increases inasset quality, taking into consideration net charge-offs, and the level of non-performing and adversely classified loans, as well as loan growth.and reserves for specific impaired loans.  Loan growth in 2010 amounted to $60.5 million compared to $134.2 million for the same period in 2009. For the year ended December 31, 2009,2010, the Company recorded net charge-offs of $1.9$3.9 million, compared to net charge-offs of $781 thousand$1.9 million for the yearcomparable period ended December 31, 2008.2009.  Net charge-offs for the year amounted to 0.19% of average total loans while the ratio ofwere 0.36% at December 31, 2010 compared to 0.19% in 2009. Total non-performing assets to total assets waswere 1.51% at December 31, 2010, compared to 1.66% at December 31, 2009.  The level ofManagement continues to closely monitor the non-performing assets, charge-offs and non-performing assets for 2009, whichnecessary allowance levels, and believes that current loan quality statistics are a function of the current economic environment and reflect more normalized levels compared to the historic lows of recent years, are a function of the current economic environment and remain favorable comparedfrom 2000 to peer levels. Total loans increased $134.2 million, or 14%, since December 31, 2008.2007.  The allowance for loan losses to total loans ratio was 1.70% at December 31, 2010, compared to 1.68% at December 31, 2009, compared to 1.61% at December 31, 2008.2009.

Non-interest income for the year ended December 31, 2009,2010 amounted to $10.3$11.6 million, an increase of $1.3 million, or 13%, compared to $6.1 millionthe year ended 2009.  The increase in the prior year.  This increasecurrent year primarily resulted from the level of other than temporaryincreases in investment advisory fees and deposit service fees and minimal impairment charges which decreased $2.9 millionon investment securities in 20092010 as compared to 2008, and2009, partially offset by a decrease in net gains on sales of investment securities which increased $1.2 million in the twelve months of 2009 compared to 2008.  Excluding these investment items, non-interest income for the year end December 31, 2009 increased $94 thousand compared to the prior year. This increase was due to gains realized on the sales of loans, which increased $479 thousand, due to the increase in volume of residential loan production, partially offset by a decrease in investment advisory income of $356 thousand, which wassecurities.

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due to the decline in the average values of assets under management resulting primarily from the general decline in the stock market in 2008 and the first quarter of 2009.

Non-interest expense for the year ended December 31, 2009,2010, amounted to $42.7$45.7 million, an increase of 13%$3.0 million, or 7%, compared to $37.9 million for the year ended December 31, 2008. Thesame period in the prior year. This increase in non-interest expense was related primarily to the Company’s strategic growth including new branches opened, and increases in FDIC deposit insurance assessments. Strategic growth initiatives, resultedresulting in increases in the areas of compensation-related costs, occupancy and equipment, technology and telecommunications, andadvertising expenses.  Also impacting non-interest expense in 2010 was a $500 thousand fair value adjustment to other expenses.  Forreal estate owned (OREO), partially offset by a reduction in deposit insurance costs in 2010 due to the special assessment in 2009.

The effective tax rate for the year ended December 31, 2009, deposit insurance premiums increased $1.4 million2010 was 32.3% compared to 28.8% in the same period2009 period.  The increase in 2008,the effective tax rate was primarily due to changes, which applied to all insured banks,the diminished impact of non-taxable income from certain tax-exempt assets on higher levels of earnings in the FDIC insurance assessment rates and a special June 30, 2009 assessment intended to replenish the FDIC’s deposit insurance reserves.2010.

Sources and Uses of Funds

The Company’s primary sources of funds are deposits, brokered CD’s,deposits, FHLB borrowings, current earnings and proceeds from the sales, maturities and paydowns on loans and investment securities. Additionally, in the fourth quarter of 2009 the Company raised $8.9 million ($8.8 million, net of costs)through a combined shareholder subscription rights and supplemental community stock offering. These funds are used to originate loans, purchase investment securities, conduct operations, expand the branch network, and pay dividends to shareholders.

Total assets amounted to $1.30$1.40 billion at December 31, 2009,2010, an increase of 10%7% since December 31, 2008.2009. The core asset strategy is to grow loans, primarily high quality commercial loans.  Total loans increased 14%6% since December 31, 20082009 and amounted to $1.08$1.14 billion, or 83%82% of total assets. Commercial loans amounted to $924.4$981.6 million, or 85%86% of gross loans at December 31, 2009.2010.  Management closely monitors the credit quality of individual delinquent and non-performing credit relationships, portfolio mix and industry concentrations, the local and regional real estate markets and current economic conditions.  Non-performing statistics have increased from the 2008 period, as would be expected during the recently ended recession and current economic recession.environment. Management does not consider the increase to be indicative of significant deterioration in the overall credit quality of the general loan portfolio at December 31, 2009.2010.

The investment portfolio is the other key component of earning assets and is primarily used to invest excess funds, provide liquidity and to manage the Company’s asset-liability position. The carrying value of total investments amounted to $139.1$146.8 million at December 31, 2009,2010, or 11% of total assets.  The carrying value of the portfolio has decreased 13%increased 6% since December 31, 20082009 due primarily to purchase activity, partially offset by principal paydowns, calls, maturities and sales partially offset by purchase activity during the period.

Management’s preferred strategy for funding asset growth is to grow low cost deposits (comprised of demand deposit accounts, interest and business checking accounts and traditional savings accounts).  Asset growth in excess of low cost deposits is typically funded through higher cost deposits (comprised of money market accounts, commercial tiered rate or “investment savings” accounts and certificates of deposit), customer repurchase agreements, wholesale funding (brokered CDsdeposits and FHLB borrowings)borrowed funds), and investment portfolio cash flow.

At December 31, 2009,2010, total deposits, excluding brokered CDs,deposits, amounted to $1.12$1.24 billion, representing $244.5$127 million, or 28%11%, growth over December 31, 20082009 balances. The growth was in all deposit categories; with low cost deposit balances increasing 15% andAt December 31, 2010, higher cost transactional depositsavings and money market account balances increasing 78%increased $91.6 million, or 20%, primarily in the money market accounts, while non-brokered CDschecking account balances increased 6% since$28.0 million, or 7%, compared to balances at December 31, 2008.2009.  The deposit growth which primarily occurred in the first six months of 2009, is attributed to expansion and sales efforts to attract relationship customers seeking a competitive, but secure, alternative to the larger regional and national banks, and mutual funds as well as the migration of off-balance sheet sweep accounts to on-balance sheet accounts.and lower yielding investment alternatives.   Total deposits, including brokered CDs,deposits (of $82 thousand), amounted to $1.14$1.24 billion at December 31, 2009,2010, representing an increase of $197$99.1 million, or 21%9% since December 31, 2008.2009.

Wholesale funding amounted to $51.4$15.6 million at December 31, 2009,2010, compared to $195.2$52.8 million at December 31, 2008.2009.  At December 31, 2009,2010, wholesale funding included $27.9

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millionthe $82 thousand in brokered CDs,deposits, decrease of $27.8 million since December 31, 2009, and borrowed funds amounting to $15.5 million, a decrease of $47.5$9.3 million, or 63%38%, since December 31, 2008, and FHLB borrowings amounting to $23.5 million, a decrease of $96.4 million, or 80%, since December 31, 2008.2009.  The declines in wholesale funding were achieved due to the strong deposit growth during the period.

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Opportunities and Risks

The Company’s market area will continue to be marked by competition from multiple sources, including the expanded commercial lending capabilities of credit unions, the shift to commercial lending by traditional savings banks, the continuing presence of large regional and national commercial banks, the products offered by non-bank financial services competitors and increased competition for investment advisory assets and deposit resources within this market area.  While the current economic environment presentscontinues to present significant challenges for all financial services companies, management also believes that it has created opportunityopportunities for growth and customer acquisition asby well-positioned community banks.  Notwithstanding the competition discussed above under the heading competition, management believes that customers seek outcontinue to migrate from larger, national banks to local, stable community banks, with whichchoosing to do their banking business.

business with local professional bankers who can offer them the flexibility, responsiveness and personalized service that a community bank such as Enterprise provides.  Management views the currentCompany’s product offerings, its customer service culture, and its investments in the communities we serve, as key elements in positioning Enterprise to take advantage of these market activity as providing an opportunistic timeopportunities to grow deposits. deposits, loans, investment assets under management, and insurance services with a focus on the needs of growing and established local businesses, professionals, non-profits and high net worth individuals.

The Company seeks to position itself to increase marketdeposit share, in both existing and new markets, with continualcontinuous review of deposit product offerings targeted to customer needs, with focused and focuseddynamic marketing strategies, and with carefully planned expansion into neighboring markets and new branch development.   OverIn the past twenty monthstwo years, the Company has increased its branch network by two locations, and in January 2011 opened twoan additional new full service branch location, in Hudson, NH, expanding its existing presence in Middlesex and Essex Counties of Massachusetts and in Southern New Hampshire.  During this time, the Company has also made significant investments in renovations to its established branches and operations centers, and relocated both the Salem and Derry NH branches to larger newly built facilities in Massachusetts,response to strong growth in addition to the temporary Derry, New Hampshire office, withthose markets.  The Company also recently completed construction of the permanent Derry facility underway, and expecteda secondary data center to be completed by late spring 2010.provide backup processing capabilities.

Management also believes that Enterprise is also well positionedequipped to capitalize on this market opportunity andpotential to grow both the commercial and residential loan portfolios, by utilizing thea disciplined and consistent lending approach and conservative credit review practices, and strong customer service standards thatwhich have served to provide quality asset growth over varying economic cycles during the Company’s twenty-onetwenty-two year history.  The Company has a skilled lending sales force with a broad breadth of business knowledge and depth of lending experience to draw upon.

The Company’s ability to achieve its long-term growth and market share objectives will depend upon the Company’s continued success in differentiating itself in the market place.  The Company has built a reputation within its market area based on customer service and supporting the local communities, differentiating itself through its people, who act as trusted advisors to clients, possess strong technical skills, deliver a superior level of customer service, and uphold the Company’s core values, including significant community involvement, which has led to a strong network with local business and community leaders.  Management believes the Enterprise business model of providing a full range of diversified financial products, services and technology, delivered through consistent, responsive and superior personalized customer service by experienced local banking professionals, with in-depth knowledge of our markets and a trusted reputation within the community, creates opportunities for the Company to be the leading provider of banking and investment management services in its growing market area.   Management believes that Enterprise is uniquely positioned, both financially and strategically, to take full advantage of the opportunities created by the current challenging banking landscape and recent industry consolidation within the local market.

Management continues to undertake significant strategic initiatives, including investments in employee training and development, marketing and public relations, technology and electronic product delivery, branch expansion and ongoing updates and renovations of existing branches and operations facilities.  While management recognizes that such investments increase expenses in the short-term, it believes that such initiatives are an investment in the long-term growth and earnings of the Company and are reflective of the opportunities in the current marketplace for community banks such as Enterprise.

Notwithstanding the market opportunities that management believes the current economic environment has created, any long-term continuationconsequences of the nationwide or regional recession that ended in Mid-2009, or possible lagging effects, could further weaken the local New England economy, and have long-term adverse consequencesrepercussions on local industries leading to increased unemployment and foreclosures, further deterioration of local commercial real

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estate values, or other unforeseen complications,consequences, which could have a severe negative impact on the Company’s financial condition, capital position, liquidity, and performance.  In addition, the loan portfolio consists primarily of commercial real estate, commercial and industrial, and construction loans.  These types of loans are typically larger and are generally viewed as having more risk of default than owner occupied residential real estate loans or consumer loans. The underlying commercial real estate values, customer cash flow and payment expectations and, in the case of commercial construction loans, the actual costs necessary to complete a construction project, can be more easily influenced by adverse conditions in the local or national economy, the real estate market, or the related industries. Any significant deterioration in the commercial loan portfolio or underlying collateral values due to a continuation or worsening of the current economic environment could have a material adverse effect on the Company’s financial condition and results of operations.

The value of the investment portfolio as a whole, or individual securities held, including bonds issued by government agencies or municipalities and restricted FHLB capital stock, could be negatively impacted by any continued volatility in the financial markets, tightening of credit markets, and any possible subsequent effects of the current economicrecently ended recession, which could possibly result in the recognition of additional other-than-temporary-impairment (“OTTI”)OTTI charges in the future.

AnyIn addition, any further changes in government regulation or oversight, including responses to the recent financial crisis,recently enacted Dodd-Frank Act, could affect the Company in substantial and unpredictable ways, including, but not limited to, subjecting the Company to additional operating, governance and compliance costs.  As discussed above, changescosts or potential loss of revenue due to new regulations and their impact on the banking industry. This sweeping federal legislation covers a wide variety of topics, some of which relate directly to activities of community banks, such as Enterprise, while others of which are directed at larger, “systemically significant” institutions.  The full extent of the regulatory impact resulting from the Dodd-Frank Act will not be known for some time, as the various federal regulatory agencies will be required to draft and implement over 240 new regulations and the Government Accounting Office and other federal agencies are required to complete nearly 70 additional studies regarding various financial services industry issues that were raised during the legislative process.

Changes, prior to the enactment of the Dodd-Frank Act, in the FDIC’s deposit insurance rates applicable to all insured banks and the Company’s participation in the FDIC’s TAGPTransaction Account Guaranty Program have already increased the Company’s ongoing FDIC-relateddeposit insurance related costs in recent periods.  Although the Company anticipated that the recently revised deposit insurance guidelines required under the Dodd-Frank Act will initially reduce the Bank’s deposit insurance cost, the long-term effects that the new legislation and the FDIC’s ability to

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impose additional future special assessmentsefforts to restore the DIF could further increasewill have on these costs.costs remains unclear at this time.

In addition to investmentsSee the section entitled “Competition” contained in growth and branch expansion, management continues to undertake many significant strategic initiatives, including investments in employee training and  development, marketing and public relations, technology, facilities improvement and ongoing updates and renovations of existing branches.  While management recognizes that such investments increase expenses inItem 1, “Business”, for additional information regarding the short-term, it believes that such initiatives are an investment in the long-term growth and earnings ofcompetitive landscape facing the Company and are reflective of the opportunities in the current marketplace for community banks such as Enterprise.

Management believes that Enterprise is well positioned, both financially and strategically, to capitalize on opportunities created by the current challenging banking landscape.  The Company will continue to face significant risks in seeking to achieve its long-term growth and market share objectives, which will depend upon the Company’s continued success in differentiating itself from competitors, developing strong relationships with business and community leaders, and providing a full range of diversified financial products and services delivered through consistent, responsive and superior personalized customer service.   Management believes the Enterprise business model, strong service and technology cultures, active community involvement, its focus on relationship-banking, experienced banking professionals, in-depth knowledge of our markets and trusted reputation within the community, creates opportunities for the Company to be the leading provider of banking and investment management services in its growing market area.Bank.

Additional significant challenges facing the Company continue to be the effective management of interest rate and credit risk, liquidity management, capital adequacy and operational risk.

The re-pricing frequency of interest earning assets and liabilities are not identical, and therefore subject the Company to the risk of adverse changes in interest rates. This is often referred to as “interest rate risk” and is reviewed in more detail under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

The risk of loss due to customers’ non-payment of loans or lines of credit is called “credit risk.”  Credit risk management is reviewed below in this Item 7 under the headings “Credit Risk/Asset Quality” and “Allowance for Loan Losses.”

Liquidity management is the coordination of activities so that cash needs are anticipated and met, readily and efficiently.  Liquidity management is reviewed under this Item 7 under the heading “Liquidity.”

Federal banking agencies require the Company and the Bank to meet minimum capital requirements. At December 31, 2009,2010, both the Company wasand the Bank were categorized as “well capitalized”; however future unanticipated charges against capital could impact thatthose regulatory capital designation.designations.  Moreover, recently announced revisions to

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international capital standards could eventually result in enhanced capital requirements for all U.S. banking organizations, including community banks, such as Enterprise Bank.

For additional information regarding the capital levels and capital requirements applicable to the Company and the Bank and their respective capital levels at December 31, 2009,2010, see the sections entitled “Capital Resources” and “Capital Requirements” contained in Item 1 “Business” and note 8, “Stockholders’ Equity”, to the consolidated financial statements contained in Item 8.

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. Operational risk management is also a key component of the Company’s risk management process, particularly as it relates to technology administration, information security, and business continuity.

Management utilizes a combination of third party information security assessments, key technologies and ongoing internal evaluations in order to protect non-public customer information and continually monitormonitors and safeguardsafeguards information on its operating systems and those of third party service providers.  The Company contracts with outside parties to perform a broad scope of both internal and external information security assessments on the Company’s systems on a regular basis. These third parties conduct penetration testing and vulnerability scans to test the network

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configuration and security controls, and assess internal practices aimed at protecting the Company’s operating systems.  In addition, an outside service provider monitors usage patterns and identifies unusual activity on bank issued debit/ATM cards.  The Company also utilizes firewall technology and a combination of software and third-party monitoring to detect intrusion, protect against unauthorized access and continuously scan for computer viruses on the Company’s information systems.

The Company may enter into third-party relationships by outsourcing certain operational functions or by using third parties to provide certain products and services to the Bank’s customers.   The Company is responsible for ensuring that activities conducted through third-party relationships are conducted in a safe and sound manner and in accordance with applicable laws and regulations, just as if the activity was performed by the Company itself.  Management has instituted a third-party vendor management program in order to identify and control the risks arising from conducting activities through third party relationships.  These risks may include, among other things, operational risk and the failure to deliver a particular product or service, non-compliance with applicable laws and regulations, loss of non-public personal information, vendor business decisions that are inconsistent with the Company’s strategic goals, or damage to the Company’s reputation.  The Company’s risk-based, third-party vendor management program is designed to provide a mechanism to enable management to determine what risk, if any, a particular vendor exposes the Company to, and to mitigate that risk by properly performing initial and ongoing due diligence when selecting or maintaining relationships with significant third-party providers.

The Company’s Business Continuity Plan consists of the information and procedures required to enable rapid recovery from an occurrence that would disable the Company for an extended period.  The plan addresses issues and concerns regarding the loss of personnel, loss of information and/or loss of access to information under various scenarios including:including the following: the inability of staff or customers to travel to or to access bank offices; the serious threat of widespread public health or safety concerns; and the physical destruction or damage of facilities, infrastructure or systems. The plan, which is reviewed annually, establishes responsibility for assessing a disruption of business, contains alternative strategies for the continuance of critical business functions during an emergency situation, assigns responsibility for restoring services, and sets priorities by which critical services will be restored. The recent construction of a secondary off-site data center eliminated the need to outsource this function and provides the Company more control and auxiliary network processing capabilities. Any contingency plan, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the plan arewill be met as the assumptionassumptions used change over time or due to changes in circumstances and events.

In addition to the risks discussed above numerous other factors that could adversely affect the Company’s future results of operations and financial condition are addressed in Item 1A, “Risk Factors.”  This Opportunities and Risk discussion should be read in conjunction with Item 1A.

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