Edgar Filing: ENTERPRISE BANCORP INC /MA/

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2011

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33912

Enterprise Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Massachusetts		04-3308902
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

222 Merrimack Street, Lowell, Massachusetts		01852
(Address of principal executive offices)		(Zip code)

(978) 459-9000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) x Yes o No

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

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 2, 2011 Common Stock - Par Value $0.01: 9,445,490 shares outstanding.

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ENTERPRISE BANCORP, INC.

INDEX

		Page Number

	Cover Page	1

	Index	2

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets – September 30, 2011 and December 31, 2010	3

	Consolidated Statements of Income -Three and nine months ended September 30, 2011 and 2010	4

	Consolidated Statement of Changes in Stockholders’ Equity - Nine months ended September 30, 2011	5

	Consolidated Statements of Cash Flows - Nine months ended September 30, 2011 and 2010	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4	Controls and Procedures	52

PART II - OTHER INFORMATION

Item 1	Legal Proceedings	52

Item 1A	Risk Factors	52

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3	Defaults Upon Senior Securities	52

Item 4	[Removed and Reserved]	52

Item 5	Other Information	52

Item 6	Exhibits	53

	Signature page	54

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ENTERPRISE BANCORP, INC.

Consolidated Balance Sheets

	September 30,		December 31,
(Dollars in thousands)	2011		2010
	(unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks	$	33,763	$	30,541
Short-term investments	48,419		24,465
Total cash and cash equivalents	82,182		55,006

Investment securities at fair value	128,922		142,060
Federal Home Loan Bank Stock	4,740		4,740
Loans, less allowance for loan losses of $22,569 at September 30, 2011 and $19,415 at December 31, 2010 respectively	1,206,989		1,123,931
Premises and equipment	25,893		24,924
Accrued interest receivable	5,418		5,532
Deferred income taxes, net	12,129		11,039
Bank-owned life insurance	14,801		14,397
Prepaid income taxes	377		379
Prepaid expenses and other assets	9,693		9,657
Goodwill	5,656		5,656
Total assets	$	1,496,800	$	1,397,321

Liabilities and Stockholders’ Equity

Liabilities
Deposits	$	1,345,488	$	1,244,071
Borrowed funds	4,494		15,541
Junior subordinated debentures	10,825		10,825
Accrued expenses and other liabilities	11,080		9,297
Accrued interest payable	366		914
Total liabilities	1,372,253		1,280,648

Commitments and Contingencies

Stockholders’ Equity
Preferred stock, $0.01 par value per share; 1,000,000 shares authorized; no shares issued	—		—

Common stock $0.01 par value per share; 20,000,000 shares authorized; 9,444,428, and 9,290,465 shares issued and outstanding at September 30, 2011 and December 31, 2010	94		93
Additional paid-in-capital	44,577		42,590
Retained earnings	77,133		72,000
Accumulated other comprehensive income	2,743		1,990

Total stockholders’ equity	124,547		116,673

Total liabilities and stockholders’ equity	$	1,496,800	$	1,397,321

See the accompanying notes to the unaudited consolidated financial statements.

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ENTERPRISE BANCORP, INC.

Consolidated Statements of Income

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2011		2010		2011		2010

Interest and dividend income:
Loans	$	16,078	$	15,334	$	46,915	$	45,457
Investment securities	827		996		2,693		3,143
Short-term investments	8		23		35		43
Total interest and dividend income	16,913		16,353		49,643		48,643

Interest expense:
Deposits	1,858		2,125		5,676		6,680
Borrowed funds	22		37		66		144
Junior subordinated debentures	294		294		883		883
Total interest expense	2,174		2,456		6,625		7,707

Net interest income	14,739		13,897		43,018		40,936

Provision for loan losses	1,840		1,275		3,954		3,187

Net interest income after provision for loan losses	12,899		12,622		39,064		37,749

Non-interest income:
Investment advisory fees	919		880		2,844		2,613
Deposit service fees	1,157		1,040		3,313		3,046
Income on bank-owned life insurance	162		170		484		492
Other than temporary impairment on investment securities	—		—		—		(8		)
Net gains on sales of investment securities	486		—		747		777
Gains on sales of loans	119		208		403		392
Other income	397		362		1,275		1,296
Total non-interest income	3,240		2,660		9,066		8,608

Non-interest expense:
Salaries and employee benefits	7,177		6,703		21,275		19,825
Occupancy and equipment expenses	1,346		1,302		4,147		3,941
Technology and telecommunications expenses	959		839		2,893		2,761
Advertising and public relations expenses	471		477		1,717		1,758
Deposit insurance premiums	276		469		1,049		1,378
Audit, legal and other professional fees	331		280		1,003		875
Supplies and postage expenses	212		194		636		591
Investment advisory and custodial expenses	97		107		327		353
Other operating expenses	1,009		837		3,125		2,631
Total non-interest expense	11,878		11,208		36,172		34,113

Income before income taxes	4,261		4,074		11,958		12,244
Provision for income taxes	1,324		1,345		3,872		4,026

Net income	$	2,937	$	2,729	$	8,086	$	8,218

Basic earnings per share	$	0.31	$	0.30	$	0.86	$	0.89
Diluted earnings per share	$	0.31	$	0.30	$	0.86	$	0.89
Basic weighted average common shares outstanding	9,429,360		9,246,601		9,383,678		9,197,269
Diluted weighted average common shares outstanding	9,463,664		9,250,665		9,435,506		9,201,468

See the accompanying notes to the unaudited consolidated financial statements.

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ENTERPRISE BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

Nine months ended September 30, 2011

(Dollars in thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings			Comprehensive Income		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at December 31, 2010	$	93	$	42,590	$	72,000				$	1,990	$	116,673

Comprehensive income
Net income					8,086			$	8,086			8,086
Other comprehensive income, net								753		753		753
Total comprehensive income								$	8,839
Tax benefit from exercise of stock options			4									4
Common stock dividend paid ($0.315 per share)					(2,953		)					(2,953		)
Common stock issued under dividend reinvestment plan	—		942									942
Stock-based compensation	1		802									803
Stock options exercised	—		239									239
Balance at September 30, 2011	$	94	$	44,577	$	77,133				$	2,743	$	124,547

See the accompanying notes to the unaudited consolidated financial statements.

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ENTERPRISE BANCORP, INC.

Consolidated Statements of Cash Flows

(Unaudited)

		Nine months ended September 30,
(Dollars in thousands)		2011			2010
Cash flows from operating activities:
Net income		$	8,086		$	8,218
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,954			3,187
Depreciation and amortization		3,081			2,826
Amortization of intangible assets		—			76
Stock-based compensation expense		796			664
Mortgage loans originated for sale		(19,338		)	(31,673		)
Proceeds from mortgage loans sold		22,549			28,878
Gains on sales of loans		(403		)	(392		)
Gains on sales of OREO		—			(120		)
Net gains on sales of investment securities		(747		)	(777		)
Other-than-temporary-impairment on investment securities		—			8
Income on bank-owned life insurance, net of costs		(404		)	(422		)
Changes in:
Accrued interest receivable		114			(159		)
Prepaid expenses and other assets		423			(1,569		)
Deferred income taxes		(1,524		)	—
Accrued expenses and other liabilities		327			3,468
Accrued interest payable		(548		)	(655		)
Net cash provided by operating activities		16,366			11,558
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale		10,935			5,330
Proceeds from maturities, calls and pay-downs of investment securities		39,000			38,435
Purchase of investment securities		(33,611		)	(41,286		)
Net increase in loans		(90,645		)	(32,331		)
Additions to premises and equipment, net		(3,796		)	(4,097		)
Proceeds from OREO sales and payments		325			1,556
Net cash used in investing activities		(77,792		)	(32,393		)
Cash flows from financing activities:
Net increase in deposits		101,417			120,556
Net decrease in borrowed funds		(11,047		)	(9,854		)
Cash dividends paid		(2,953		)	(2,755		)
Proceeds from issuance of common stock		942			902
Proceeds from the exercise of common stock options		239			—
Tax benefit from the exercise of common stock option		4			—
Net cash provided by financing activities		88,602			108,849

Net increase in cash and cash equivalents		27,176			88,014
Cash and cash equivalents at beginning of period		55,006			32,610
Cash and cash equivalents at end of period		$	82,182		$	120,624

Supplemental financial data:
Cash Paid For:	Interest	$	7,173		$	8,362
	Income taxes	5,391			5,105
Supplemental schedule of non-cash investing activity:
Purchase of investment securities not yet settled		1,463			—
Transfer from loans to other real estate owned		825			1,350

See accompanying notes to the unaudited consolidated financial statements.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

(1) Organization of Holding Company

The consolidated interim financial statements of Enterprise Bancorp, Inc. (the “Company” or “Enterprise”) include the accounts of the Company and its wholly owned subsidiary Enterprise Bank and Trust Company (the “Bank”). The Bank is a Massachusetts trust company organized in 1989. Substantially all of the Company’s operations are conducted through the Bank.

The Bank has five wholly owned subsidiaries. The Bank’s subsidiaries include Enterprise Insurance Services, LLC and Enterprise Investment Services, LLC, organized for the purposes of engaging in insurance sales activities and offering non-deposit investment products and services, respectively. In addition, the Bank has three subsidiary security corporations (Enterprise Security Corporation, Enterprise Security Corporation II, and Enterprise Security Corporation III), which hold various types of qualifying securities. The security corporations are limited to conducting securities investment activities that the Bank itself would be allowed to conduct under applicable laws.

Through the Bank and its subsidiaries, the Company offers a range of commercial and consumer loan products, deposit and cash management products, investment advisory and management, trust and insurance services. The services offered through the Bank and subsidiaries are managed as one strategic unit and represent the Company’s only reportable operating segment.

The Federal Deposit Insurance Corporation (the “FDIC”) and the Massachusetts Commissioner of Banks (the “Commissioner”) have regulatory authority over the Bank. The Bank is also subject to certain regulatory requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and, with respect to its New Hampshire branch operations, the New Hampshire Banking Department. The business and operations of the Company are subject to the regulatory oversight of the Federal Reserve Board. The Commissioner also retains supervisory jurisdiction over the Company.

(2) Basis of Presentation

The accompanying unaudited consolidated financial statements and these notes should be read in conjunction with the Company’s December 31, 2010 audited consolidated financial statements and notes thereto contained in the Company’s 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2011. Interim results are not necessarily indicative of results to be expected for the entire year.

The Company has not changed its significant accounting and reporting policies from those disclosed in its 2010 Annual Report on Form 10-K.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.

Certain previous year amounts in the footnotes to the consolidated financial statements have been reclassified to conform to the current year’s presentation.

(3) Critical Accounting Estimates

In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period then ended. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates should the assumptions and estimates used change over time due to changes in circumstances. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements and results of operations in future periods.

As discussed in the Company’s 2010 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, impairment review of investment securities and the impairment review of goodwill. Refer to note 1 to the Company’s

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

consolidated financial statements included in the Company’s 2010 Annual Report on Form 10-K for significant accounting policies.

(4) Reporting Comprehensive Income

Comprehensive income is defined as all changes to equity except investments by and distributions to stockholders. Net income is one component of comprehensive income, with other components referred to in the aggregate as other comprehensive income. The Company’s only other comprehensive income component is the net unrealized holding gains or losses on investments available for sale, net of deferred income taxes.

The following table summarizes the components of other comprehensive income for the nine month periods ended September 30, 2011 and 2010.

(Dollars in thousands)	2011			2010

Gross unrealized holding gains on investments arising during the period	$	1,933		$	3,421
Income tax expense	(697		)	(1,235		)
Net unrealized holding gains, net of tax	1,236			2,186

Less: Reclassification adjustment for impairment included in net income:
Other than temporary impairment loss arising during the period	—			(8		)
Income tax benefit	—			3
Reclassification adjustment for impairment realized, net of tax	—			(5		)

Less: Reclassification adjustment for net gains included in net income
Net realized gains on sales of securities during the period	747			777
Income tax expense	(264		)	(271		)
Reclassification adjustment for gains realized, net of tax	483			506

Other comprehensive income, net of reclassifications	$	753		$	1,685

(5) Earnings per share

Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.

The table below presents the increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation and the effect of those shares on earnings, for the periods indicated:

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Basic weighted average common shares outstanding	9,429,360		9,246,601		9,383,678		9,197,269
Dilutive shares	34,304		4,064		51,828		4,199
Diluted weighted average common shares outstanding	9,463,664		9,250,665		9,435,506		9,201,468

Basic earnings per share	$	0.31	$	0.30	$	0.86	$	0.89
Effect of dilutive shares	—		—		—		—
Diluted earnings per share	$	0.31	$	0.30	$	0.86	$	0.89

For the nine months ended September 30, 2011, there was an additional 133,535 average stock options outstanding, which were excluded from the year-to-date calculation of diluted earnings per share due to the exercise price of these options exceeding the

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

average market price of the Company’s common stock for the period. These options, which were not dilutive at that date, may potentially dilute earnings per share in the future.

(6) Investments

The amortized cost and carrying values of investment securities at the dates specified are summarized as follows:

	September 30, 2011
(Dollars in thousands)	Amortized cost		Unrealized gains		Unrealized losses		Carrying Amount
Federal agency obligations (1)	$	37,541	$	186	$	—	$	37,727
Federal agency mortgage backed securities (MBS) (1)	35,852		1,577		—		37,429
Municipal securities	45,603		2,428		—		48,031
Total fixed income securities	118,996		4,191		—		123,187
Equity investments	5,645		584		494		5,735
Total available for sale securities, at fair value	$	124,641	$	4,775	$	494	$	128,922

	December 31, 2010
(Dollars in thousands)	Amortized cost		Unrealized gains		Unrealized losses		Carrying Amount
Federal agency obligations(1)	$	41,149	$	55	$	264	$	40,940
MBS(1)	41,581		1,056		112		42,525
Non-agency collateralized mortgage obligation (CMO)	2,386		53		—		2,439
Municipal securities	50,576		1,109		96		51,589
Total fixed income securities	135,692		2,273		472		137,493
Equity investments	3,273		1,300		6		4,567
Total available for sale securities, at fair value	$	138,965	$	3,573	$	478	$	142,060

(1) These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae (FNMA), Freddie Mac (FHLMC), Ginnie Mae (GNMA), Federal Farm Credit Bank (FFCB), or one of several Federal Home Loan Banks (FHLBs). All agency MBS/CMO investments owned by the Company are backed by residential mortgages.

Included in the carrying amount of federal agency MBS category were CMOs totaling $23.0 million and $26.0 million at September 30, 2011 and December 31, 2010, respectively.

See Note 13, “Fair Value Measurements” below for further information regarding the Company’s fair value measurements for available-for-sale securities.

The contractual maturity distribution as of September 30, 2011, of the fixed income securities is set forth in the table below:


	Within One Year				After One, But Within Five Years				After Five, But within Ten Years				After Ten Years
	Amortized Cost		Carrying Amount		Amortized Cost		Carrying Amount		Amortized Cost		Carry Amount		Amortized Cost		Carry Amount
Federal agency obligations	$	—	$	—	$	37,541	$	37,727	$	—	$	—	$	—	$	—
MBS	—		—		181		181		15,001		15,549		20,670		21,699
Municipal securities	4,696		4,754		10,633		11,003		16,711		17,707		13,563		14,567
Total Fixed Income	$	4,696	$	4,754	$	48,355	$	48,911	$	31,712	$	33,256	$	34,233	$	36,266

Scheduled contractual maturities may not reflect the actual maturities of the investments. MBS/CMO’s are shown at their final maturity. However, due to prepayments and amortization the actual MBS/CMO cash flows may be faster than presented above. Similarly, included in the carrying value of municipal and federal agency obligations categories are $47.1 million in securities which can be “called” before maturity. Actual maturity of these callable securities could be shorter if market interest rates decline further. Management considers these factors when evaluating the net interest margin in the Company’s asset-liability management program.

Net unrealized appreciation and depreciation on investments available for sale, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

The net unrealized gain or loss in the Company’s fixed income portfolio fluctuates as market interest rates rise and fall. Due to the fixed rate nature of this portfolio, as market rates fall the value of the portfolio rises, and as market rates rise, the value of the portfolio declines. The unrealized gains or losses on fixed income investments will also decline as the securities approach maturity. Unrealized gains or losses will be recognized in the statements of income if the securities are sold. However, if an unrealized loss on the fixed income portfolio is deemed to be other than temporary, the credit loss portion is charged to earnings and the noncredit portion is recognized in accumulated other comprehensive income. At September 30, 2011, the Company did not have any unrealized losses on the fixed income portfolio.

The net unrealized gain or loss on equity securities will fluctuate based on changes in the market value of the funds and individual securities held in the portfolio. Unrealized gains or losses will be recognized in the statements of income if the securities are sold. However, if an unrealized loss on an equity security is deemed to be other than temporary prior to a sale, the loss is charged to earnings.

At September 30, 2011, the equity portfolio consisted primarily of investments in a diversified group of mutual funds, with a small portion of the portfolio (approximately 16%) invested in funds or individual common stock of entities in the financial services industry. At September 30, 2011, the Company had seventeen investments in equity mutual funds or individual stocks having combined unrealized losses of $494 thousand which were short term in nature. Management regularly reviews the portfolio for securities with unrealized losses that are other than temporarily impaired. Management’s assessment includes evaluating if any equity security or fund exhibits fundamental deterioration and whether it is unlikely that the security or fund will completely recover its unrealized loss within a reasonable time period. In determining the amount of the other than temporary impairment charge, management considers the severity of the declines and the uncertainty of recovery in the short-term for these equities. Based upon this review, the Company did not consider those equity funds to be other-than-temporarily impaired at September 30, 2011.

During the nine months ended September 30, 2011, the Company did not record any fair value impairment charges on equity investments; during that period, the Company sold $388 thousand of previously impaired equity funds and recognized book gains of $207 thousand. In addition, the Company sold $9.8 million in other investment securities, primarily municipal securities, and recognized book gains of $540 thousand.

During the nine months ended September 30, 2010, the Company recorded fair value impairment charges of $8 thousand, on a previously impaired equity investment; also during that period, the Company sold $1.6 million of previously impaired equity funds and recognized book gains of $752 thousand, in addition to gains of $25 thousand on other investment securities over the period.

From time to time the Company may pledge securities from its investment portfolio as collateral for various municipal deposit accounts and repurchase agreements. The fair value of securities pledged as collateral for these purposes was $42.8 million at September 30, 2011. In addition, securities designated as qualified collateral for FHLB borrowing capacity amounted to $27.2 million at September 30, 2011. Securities designated as qualified collateral for borrowing from the Federal Reserve Bank of Boston (the “FRB”) through its discount window amounted to $42.6 million at September 30, 2011.

(7) Restricted Investments

As a member of the Federal Home Loan Bank of Boston (“FHLB”), the Company is required to purchase certain levels of FHLB capital stock in association with the Company’s borrowing relationship from the FHLB. This stock is classified as a restricted investment and carried at cost, which management believes approximates fair value. FHLB stock represents the only restricted investment held by the Company.

In February 2009, the FHLB began implementing a number of measures in order to strengthen its financial position and to increase its capital levels, including the indefinite suspension of its quarterly dividends and a moratorium on the repurchase of excess capital stock from member banks, among other programs. However, in the first quarter of 2011, the FHLB announced the reinstitution of quarterly dividends on capital stock balances based on improved profitability and capital levels. The FHLB 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. The FHLB continues to take steps to protect members’ capital and improve its profitability, including amendments to its capital plan and a joint capital enhancement agreement with the other eleven FHLBs, and a continuation of the moratorium on excess capital stock repurchases. 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 September 30, 2011, the Company’s investment in FHLB capital stock amounted to $4.7 million. Based on management’s review of this investment, FHLB stock was not other than temporarily impaired as of September 30, 2011.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

(8) Loans

Major classifications of loans and loans held for sale at the periods indicated, are as follows:

(Dollars in thousands)	September 30, 2011			December 31, 2010
Real estate:
Commercial real estate	$	634,229		$	595,075
Commercial construction	120,753			111,681
Residential mortgages	89,900			86,560
Residential construction	2,429			2,874
Loans held for sale	3,600			6,408
Total real estate	850,911			802,598

Commercial and industrial	305,015			274,829
Home equity	71,547			63,108
Consumer	3,541			4,228
Gross loans	1,231,014			1,144,763

Deferred loan origination fees, net	(1,456		)	(1,417		)
Total loans	1,229,558			1,143,346
Allowance for loan losses	(22,569		)	(19,415		)
Net loans and loans held for sale	$	1,206,989		$	1,123,931

Loan Categories

Commercial loans:

Commercial real estate loans include loans secured by both owner-use and non-owner occupied real estate. These loans are typically secured by a variety of commercial and industrial property types including apartment buildings, office or mixed-use facilities, strip shopping centers, or other commercial property and are generally guaranteed by the principals of the borrower. Commercial real estate loans generally have repayment periods of approximately fifteen to twenty-five years. Variable interest rate commercial real estate loans have a variety of adjustment terms and indices, and are generally fixed for the first one to five years before periodic rate adjustments begin.

Commercial and industrial loans include seasonal revolving lines of credit, working capital loans, equipment financing (including equipment leases), and term loans. Also included in commercial and industrial loans are loans partially guaranteed by the Small Business Administration (SBA), loans under various programs issued in conjunction with the Massachusetts Development Finance Agency and other agencies. Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower. Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods of one to three years. Commercial and industrial loans have average repayment periods of one to seven years.

Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrowers. Construction lenders work to cultivate long-term relationships with established developers. The Company limits the amount of financing provided to any single developer for the construction of properties built on a speculative basis. Funds for construction projects are disbursed as pre-specified stages of construction are completed. Regular site inspections are performed, either by experienced construction lenders on staff or by independent outside inspection companies, at each construction phase, prior to advancing additional funds. Commercial construction loans generally are variable rate loans and lines with interest rates that are periodically adjusted and generally have terms of one to three years.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

From time to time, the Company participates with other banks in the financing of certain commercial projects. In some cases, the Company may act as the lead lender, originating and servicing the loans, but participating out a portion of the funding to other banks. In other cases, the Company may participate in loans originated by other institutions. In each case, the participating bank funds a percentage of the loan commitment and takes on the related risk. In each case in which the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks. The balances participated out to other institutions are not carried as assets on the Company’s financial statements. Loans originated by other banks in which the Company is the participating institution are carried in the loan portfolio at the Company’s pro rata share of ownership. The Company performs an independent credit analysis of each commitment and a review of the participating institution prior to participation in the loan. Loans originated by other banks in which the Company is the participating institution amounted to $35.4 million at September 30, 2011 and $32.7 million at December 31, 2010.

Standby letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. If the letter of credit is drawn upon, a loan is created for the customer, generally a commercial loan, with the same criteria associated with similar commercial loans.

Other loans:

Enterprise originates conventional mortgage loans on one-to-four family residential properties. These properties may serve as the borrower’s primary residence, or be vacation homes or investment properties. Loan to value limits vary, generally from 80% for adjustable rate and multi-family, owner occupied properties, up to 97% for fixed rate loans on single family, owner occupied properties, with mortgage insurance coverage required for loan-to-value ratios greater than 80% based on program parameters. In addition, financing is provided for the construction of owner occupied primary residences. Residential mortgage loans may have terms of up to 30 years at either fixed or adjustable rates of interest. Fixed and adjustable rate residential mortgage loans are generally originated using secondary market underwriting and documentation standards.

Depending on the current interest rate environment, management projections of future interest rates and the overall asset-liability management program of the Company, management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market, or hold some or all of this residential loan production for the Company’s portfolio. Mortgage loans are generally not pooled for sale, but instead sold on an individual basis. The Company may retain or sell the servicing when selling the loans. All loans sold are currently sold without recourse, subject to an early payment default period covering the first four payments for certain loan sales.

Home equity loans are originated for one-to-four family residential properties with maximum original loan to value ratios generally up to 80% of the assessed or appraised value of the property securing the loan. Home equity loan payments consist of monthly principal and interest based on amortization ranging from three to fifteen years. The rates may also be fixed for three to fifteen years.

The Company originates home equity lines of credit for one-to-four family residential properties with maximum original loan to value ratios generally up to 80% of the appraised value of the property securing the loan. Home equity lines generally have interest rates that adjust monthly based on changes in the Prime Rate as published in the Wall Street Journal, although minimum rates may be applicable. Some home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity lines for the first ten years of the lines are interest only payments. Generally at the end of ten years, the line is frozen to future advances, and principal plus interest payments are collected over a fifteen-year amortization schedule.

Consumer loans primarily consist of secured or unsecured personal loans and overdraft protection lines on checking accounts extended to individual customers.

Loans serviced for others

At September 30, 2011 and December 31, 2010, the Company was servicing residential mortgage loans owned by investors amounting to $26.0 million and $27.2 million, respectively. Additionally, the Company was servicing commercial loans participated out to various other institutions amounting to $38.0 million and $36.6 million at September 30, 2011 and December 31, 2010, respectively.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

Loans Serving as Collateral

Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity are summarized below:

	September 30, 2011		December 31, 2010
Commercial real estate	$	212,999	$	227,926
Residential mortgages	64,755		63,166
Home equity	19,665		24,417
Total loans pledged to FHLB	$	297,419	$	315,509

(9) Allowance for Loan Loss

Credit Quality Indicators

Adversely Classified Loans

The Company’s loan risk rating system classifies loans depending on risk of loss characteristics. The classifications range from “substantially risk free” for the highest quality loans and loans that are secured by cash collateral, to the more severe adverse classifications of “substandard”, “doubtful” and “loss” based on criteria established under banking regulations.

Loans classified as substandard include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These loans are inadequately protected by the sound net worth and paying capacity of the borrower; repayment has become increasingly reliant on collateral liquidation or reliance on guaranties; credit weaknesses are well-defined; borrower cash flow is insufficient to meet required debt service specified in loan terms and to meet other obligations, such as trade debt and tax payments.

Loans classified as doubtful have all the weaknesses inherent in a substandard rated loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until more exact status may be determined.

Loans classified as loss are generally considered uncollectible at present, although long term recovery of part or all of loan proceeds may be possible. These “loss” loans would require a specific loss reserve or charge-off.

Adversely classified loans may be accruing or in non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof. Loans which are evaluated to be of weaker credit quality are reviewed on a more frequent basis by management.

The following table presents the credit risk profile by internally assigned risk rating category at the periods indicated.

	September 30, 2011
	Adversely Classified						Not Adversely
(Dollars in thousands)	Substandard		Doubtful		Loss		Classified		Gross Loans
Cmml real estate	$	23,244	$	—	$	—	$	610,985	$	634,229
Cmml and industrial	7,908		105		—		297,002		305,015
Cmml construction	5,101		—		—		115,652		120,753
Residential	1,459		—		—		90,870		92,329
Home Equity	213		—		—		71,334		71,547
Consumer	5		3		—		3,533		3,541
Loans held for sale	—		—		—		3,600		3,600

Total gross loans	$	37,930	$	108	$	—	$	1,192,976	$	1,231,014

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

	December 31, 2010
	Adversely Classified						Not Adversely
(Dollars in thousands)	Substandard		Doubtful		Loss		Classified		Gross Loans
Cmml real estate	$	12,885	$	250	$	—	$	581,940	$	595,075
Cmml and industrial	6,765		47		—		268,017		274,829
Cmml construction	2,890		—		—		108,791		111,681
Residential	2,132		—		—		87,302		89,434
Home Equity	207		—		—		62,901		63,108
Consumer	18		4		—		4,206		4,228
Loans held for sale	—		—		—		6,408		6,408

Total gross loans	$	24,897	$	301	$	—	$	1,119,565	$	1,144,763

The increase in adversely classified loans as of September 30, 2011, as compared to December 2010, was primarily due to the downgrade of twelve commercial real estate relationships totaling approximately $11.4 million and two construction relationships of approximately $3.0 million, partially offset by paydowns and credit upgrades during the period. Management continues to closely monitor these adversely classified relationships.

Past Due and Non-Accrual Loans

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when a loan becomes contractually past due, with respect to interest or principal, by 90 days, or when reasonable doubt exists as to the full and timely collection of interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when payments are brought current and have remained current for a period of 180 days and when, in the judgment of management, the collectability of both principal and interest is reasonably assured. Interest payments received on loans in a non-accrual status are generally applied to principal.

The following table presents an age analysis of past due loans as of September 30, 2011.

(Dollars in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due (non- accrual)		Total Past Due Loans		Current Loans		Gross Loans
Cmml real estate	$	2,314	$	987	$	13,291	$	16,592	$	617,637	$	634,229
Cmml and industrial	1,100		733		9,254		11,087		293,928		305,015
Cmml construction	472		—		2,107		2,579		118,174		120,753
Residential	420		822		997		2,239		90,090		92,329
Home Equity	147		72		141		360		71,187		71,547
Consumer	50		19		6		75		3,466		3,541
Loans held for sale	—		—		—		—		3,600		3,600

Total gross loans	$	4,503	$	2,633	$	25,796	$	32,932	$	1,198,082	$	1,231,014

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

The following table presents an age analysis of past due loans as of December 31, 2010.

(Dollars in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due (non- accrual)		Total Past Due Loans		Current Loans		Gross Loans
Cmml real estate	$	4,363	$	2,002	$	8,065	$	14,430	$	580,645	$	595,075
Cmml and industrial	816		317		7,573		8,706		266,123		274,829
Cmml construction	247		—		2,890		3,137		108,544		111,681
Residential	622		—		1,667		2,289		87,145		89,434
Home Equity	40		—		135		175		62,933		63,108
Consumer	24		5		11		40		4,188		4,228
Loans held for sale	—		—		—		—		6,408		6,408

Total gross loans	$	6,112	$	2,324	$	20,341	$	28,777	$	1,115,986	$	1,144,763

As of September 30, 2011, loans 30 — 59 days past due declined compared to December 31, 2010, due primarily to several commercial real estate loans which were 31 days overdue at December 31, 2010 that were subsequently brought current. Total non-accrual loans amounted to $25.8 million at September 30, 2011 and $20.3 million at December 31, 2010. Non-accrual loans which were not adversely classified amounted to $2.7 million at September 30, 2011 and $2.4 million at December 31, 2010. These balances primarily represented the guaranteed portions of non-performing Small Business Administration loans.

The ratio of non-accrual loans to total loans amounted to 2.10%, 1.78% and 1.64% at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.

The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment. Despite prudent loan underwriting, adverse changes within the Company’s market area or further deterioration in the local, regional or national economic conditions could negatively impact the Company’s level of non-performing assets in the future.

At September 30, 2011, additional funding commitments for loans on non-accrual status totaled $158 thousand. The Company’s obligation to fulfill the additional funding commitments on non-accrual loans is generally contingent on the borrower’s compliance with the terms of the credit agreement, or if the borrower is not in compliance additional funding commitments may be made at the Company’s discretion.

The majority of the non-accrual loan balances were also carried as impaired loans during the periods, and are discussed further below.

Impaired Loans

Impaired loans are individually significant loans for which management considers it probable that not all amounts due (principal and interest) in accordance with original contractual terms will be collected. The majority of impaired loans are included within the non-accrual balances; however, not every loan in non-accrual status has been designated as impaired. Impaired loans include loans that have been modified in a troubled debt restructuring (or “TDR”, see below). Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms.

Impaired loans exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, loans that are measured at fair value and leases, unless the loan is amended in a TDR. Impaired loans are individually evaluated for credit loss and a specific reserve is assigned for the amount of the estimated credit loss. Refer to heading “Allowance for probable loan losses methodology” contained in Note 3 “Loans and Allowance For Loan Losses”, to the Company’s consolidated financial statements contained in the Company’s 2010 Annual Report on Form 10-K for further discussion of management’s methodology used to estimate specific reserves for impaired loans.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

Total impaired loans amounted to $38.6 million and $49.8 million, at September 30, 2011 and December 31, 2010, respectively. Total accruing impaired loans amounted to $13.4 million and $30.7 million at September 30, 2011 and December 31, 2010, respectively, while non—accrual impaired loans amounted to $25.2 million and $19.1 million as of September 30, 2011 and December 31, 2010, respectively. During the current year, an accruing commercial real estate relationship of approximately $13.2 million was upgraded and removed from impaired/TDR status, due to the borrower’s improved financial condition and sustained performance over time. In addition, the decrease was impacted by paydowns and, in particular, the full payoff of one $3.3 million commercial real estate impaired/TDR relationship during the first quarter of 2011.

The following table sets forth the recorded investment in impaired loans and the related specific allowance allocated as of September 30, 2011.

(Dollars in thousands)	Unpaid contractual principal balance		Total recorded investment in impaired loans		Recorded investment with no allowance		Recorded investment with allowance		Related allowance

Cmml real estate	$	25,207	$	23,862	$	13,551	$	10,311	$	1,163
Cmml and industrial	11,789		10,311		5,281		5,030		2,130
Cmml construction	3,879		3,747		1,543		2,204		652
Residential	706		676		288		388		175
Home Equity	—		—		—		—		—
Consumer	17		17		—		17		17
Total	$	41,598	$	38,613	$	20,663	$	17,950	$	4,137

The following table presents the average recorded investment in impaired loans and the related interest recognized during the periods indicated.

	Three months ended September 30, 2011				Nine months ended September 30, 2011
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized

Cmml real estate	$	22,991	$	130	$	28,407	$	574
Cmml and industrial	9,837		18		9,668		47
Cmml construction	3,755		20		4,055		64
Residential	661		1		602		2
Home Equity	—		—		—		1
Consumer	19		1		19		2
Total	$	37,263	$	170	$	42,751	$	690

The following table sets forth the recorded investment in impaired loans and the related specific allowance allocated as of December 31, 2010.

(Dollars in thousands)	Unpaid contractual principal balance		Total recorded investment in impaired loans		Recorded investment with no allowance		Recorded investment with allowance		Related allowance

Cmml real estate	$	37,331	$	36,031	$	25,405	$	10,626	$	853
Cmml and industrial	9,942		8,780		4,824		3,956		1,284
Cmml construction	4,419		4,364		2,135		2,229		414
Residential	646		630		283		347		121
Home Equity	—		—		—		—		—
Consumer	19		19		—		19		19
Total	$	52,357	$	49,824	$	32,647	$	17,177	$	2,691

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

Troubled Debt Restructures

Loans are designated as a TDR when a concession is made on a credit as a result of financial difficulties of the borrower. Typically, such concessions consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, or a deferment or reduction of payments, principal or interest, which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination.

Restructured loans are included in the impaired loan category and as such, these loans are individually evaluated and a specific reserve is assigned for the amount of the estimated credit loss. Refer to heading “Allowance for probable loan losses methodology” contained in Note 3 “Loans and Allowance For Loan Losses”, to the Company’s consolidated financial statements contained in the Company’s 2010 Annual Report on Form 10-K for further discussion of management’s methodology used to estimate specific reserves for impaired loans.

Total TDR loans, included in the impaired loan figures above as of September 30, 2011 and December 31, 2010 were $27.3 million and $41.6 million, respectively.

TDR loans on accrual status amounted to $12.6 million and $30.2 million at September 30, 2011 and December 31, 2010, respectively. The decrease in accruing TDR loans is primarily due to the upgrade of the accruing commercial real estate relationship referred to above under “impaired loans.” TDR loans included in non-performing loans amounted to $14.7 million and $11.4 million at September 30, 2011 and December 31, 2010, respectively.

The following tables present certain information regarding loan modifications classified as troubled debt restructures during the periods presented.

Troubled debt restructure agreements entered into during the three months ended September 30, 2011.

(Dollars in thousands)	Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment

Cmml real estate	6	$	1,854	$	1,841
Cmml and industrial	4	121		118
Cmml construction	1	1,438		1,377
Residential	1	138		136
Home Equity	—	—		—
Consumer	—	—		—
Total	12	$	3,551	3,472

Troubled debt restructures that defaulted during the three months ended September 30, 2011.

(Dollars in thousands)	Number of TDR’s that defaulted	Post-modification outstanding recorded investment as of September 30, 2011

Cmml real estate	1	$	582
Cmml and industrial	3	73
Cmml construction	1	1,377
Residential	1	136
Home Equity	—	—
Consumer	—	—
Total	6	$	2,168

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

Troubled debt restructure agreements entered into during the nine months ended September 30, 2011.

(Dollars in thousands)	Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment

Cmml real estate	11	$	3,205	$	3,192
Cmml and industrial	14	1,251		1,228
Cmml construction	2	1,603		1,543
Residential	1	138		136
Home Equity	—	—		—
Consumer	—	—		—
Total	28	$	6,197	$	6,099

2011 Troubled debt restructuring that subsequently defaulted during the nine months ended September 30, 2011.

(Dollars in thousands)	Number of TDR’s that defaulted	Post-modification outstanding recorded investment as of September 30, 2011

Cmml real estate	2	$	778
Cmml and industrial	8	521
Cmml construction	1	1,378
Residential	1	136
Home Equity
Consumer
Total	12	$	2,813

There were no charge-offs associated with TDRs noted in the table above. At September 30, 2011, specific reserves allocated to the 2011 TDRs amounted to $280 thousand, and interest payments received on non-accruing 2011 TDR loans which was applied to principal and not recognized as interest income amounted to $114 thousand.

Allowance for probable loan losses methodology

On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated credit losses. 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. 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.

There have been no material changes in the Company’s underwriting practices, credit risk management system, or to the allowance assessment methodology used to estimate loan loss exposure as reported in the Company’s Annual Report on Form 10-K for the prior year. Refer to heading “Allowance for probable loan losses methodology” contained in Note 3 “Loans and Allowance For Loan Losses”, to the Company’s consolidated financial statements contained in the Company’s 2010 Annual Report on Form 10-K for further discussion of management’s methodology used to estimate the loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

Allowance for Loan Loss activity

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.

Changes in the allowance for loan losses for the nine months ended September 30, are summarized as follows:

(Dollars in thousands)	2011		2010

Balance at beginning of year	$	19,415	$	18,218
Provision charged to operations	3,954		3,187
Loan recoveries	228		49
Less: Loans charged-off	1,028		2,469
Balance at end of year	$	22,569	$	18,985

Changes in the allowance for loan losses by segment for the three months ended September 30, 2011, are presented below:

(Dollars in thousands)	Cmml Real Estate		Cmml and Industrial		Cmml Constr			Resid. Mortgage		Home Equity		Consumer		Total
Beginning Balance, 6/30/11	$	10,473	$	6,041	$	3,194		$	948	$	557	$	97	$	21,310
Provision	839		972		(49		)	25		50		3		1,840
Recoveries	28		59		—			—		—		3		90
Less: Charge offs	504		150		—			—		—		17		671
Ending Balance, 09/30/11	$	10,836	$	6,922	$	3,145		$	973	$	607	$	86	$	22,569

Changes in the allowance for loan losses by segment for the nine months ended September 30, 2011, are presented below:

(Dollars in thousands)	Cmml Real Estate		Cmml and Industrial		Cmml Constr		Resid. Mortgage		Home Equity		Consumer			Total
Beginning Balance, 12/31/10	$	9,769	$	5,489	$	2,609	$	923	$	512	$	113		$	19,415
Provision	1,529		1,753		532		52		95		(7		)	3,954
Recoveries	76		137		4		2		—		9			228
Less: Charge offs	538		457		—		4		—		29			1,028
Ending Balance, 09/30/11	$	10,836	$	6,922	$	3,145	$	973	$	607	$	86		$	22,569

Ending allowance balance allotted to:
Loans individually evaluated for impairment	$	1,163	$	2,130	$	652	$	175	$	—	$	17		$	4,137
Loans collectively evaluated for impairment	9,673		4,792		2,493		798		607		69			$	18,432

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

The balances of loans as of September 30, 2011 by segment and evaluation method are summarized as follows:

(Dollars in thousands)	Loans individually evaluated for impairment		Loans collectively evaluated for impairment			Total Loans

Cmml real estate	$	23,862	$	610,367		$	634,229
Cmml and industrial	10,311		294,704			305,015
Cmml construction	3,747		117,006			120,753
Residential	676		91,653			92,329
Home Equity	—		71,547			71,547
Consumer	17		3,524			3,541
Loans held for sale	—		3,600			3,600
Deferred Fees	—		(1,456		)	(1,456		)
Total loans	$	38,613	$	1,190,945		$	1,229,558

The balances of loans as of December 31, 2010 by segment and evaluation method are summarized as follows:

(Dollars in thousands)	Loans individually evaluated for impairment		Loans collectively evaluated for impairment			Total Loans

Cmml real estate	$	36,031	$	559,044		$	595,075
Cmml and industrial	8,780		266,049			274,829
Cmml construction	4,364		107,317			111,681
Residential	630		88,804			89,434
Home Equity	—		63,108			63,108
Consumer	19		4,209			4,228
Loans held for sale	—		6,408			6,408
Deferred Fees	—		(1,417		)	(1,417		)
Total loans	$	49,824	$	1,093,522		$	1,143,346

(10) Stock-Based Compensation

The Company currently has three individual stock incentive plans. The Company has not changed the general terms and conditions of these plans from those disclosed in the Company’s 2010 Annual Report on Form 10-K.

The Company’s stock-based compensation expense includes restricted stock awards and stock option awards to officers, other employees and directors, and stock compensation in lieu of cash fees to directors. Total stock-based compensation expense was $249 thousand and $796 thousand for the three and nine months ended September 30, 2011, respectively, compared to $223 thousand and $664 thousand for the three and nine months ended September 30, 2010, respectively.

Stock Option Awards

The Company recognized stock-based compensation expense related to stock option awards of $63 thousand and $172 thousand for the three and nine months ended September 30, 2011, respectively, compared to $57 thousand and $182 thousand for the three and nine months ended September 30, 2010.

In the third quarter of 2011, 1,000 stock options awards were granted. There were none granted in the third quarter of 2010. There were a total of 83,075 and 63,775 stock option awards granted to employees in nine months ended September 30, 2011 and 2010, respectively. These options generally become exercisable at the rate of 25% per year on or about the anniversary date of the original grant. The 2011 awards allow for accelerated vesting of unvested options upon the date of retirement, if during the normal vesting period. The 2010 awards provide for accelerated vesting of the entire grant for those who are age 62 on the grant date or

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

upon attaining age 62 during the normal vesting period. Vested options are only exercisable while the employee remains employed with the Bank and for a limited period thereafter, and these options expire seven years from the date of grant.

The Company utilizes the Black-Scholes option valuation model in order to determine the per share grant date fair value of option grants. The table below provides a summary of the options granted, fair value, the fair value as a percentage of the market value of the stock at the date of grant and the average assumptions used in the model for the options granted in the nine months ended September 30, 2011 and 2010.

	2011			2010

Options granted	83,075			63,775
Average assumptions used in the model:
Expected volatility	45		%	43		%
Expected dividend yield	2.91		%	2.98		%
Expected life in years	5.5			5.5
Risk-free interest rate	2.17		%	2.66		%
Market price on date of grant	$	14.88		$	12.51
Per share weighted average fair value	$	5.28		$	4.35
Percentage of market value at grant date	35		%	35		%

Refer to note 9 “Stock Based Compensation Plans” in the Company’s 2010 Annual Report on Form 10-K for a further description of the assumptions used in the valuation model.

Restricted Stock Awards

Stock-based compensation expense recognized in association with restricted stock awards amounted to $156 thousand and $497 thousand for the three and nine months ended September 30, 2011, respectively, compared to $143 thousand and $381 thousand for the three and nine months ended September 30, 2010, respectively.

During the first quarter of 2011, the Company granted 63,765 shares of common stock in the form of restricted stock awards comprised of 53,475 shares awarded to employees, generally vesting over four years, 3,500 shares awarded to an executive officer vesting immediately, and 6,790 shares awarded to directors vesting over two years. The grant date fair value of the restricted stock awarded was $14.85 per share, which reflected the market value of the common stock on the grant date. During the third quarter of 2011, the Company granted 1,000 shares of restricted stock that vest over four years and had a grant date fair value of $17.00 per share, which reflected the market value of the common stock on the grant date. The unvested 2011 awards generally vest, in each case, in equal portions beginning on or about the first anniversary date of the award.

During the first quarter of 2010, the Company granted 77,963 shares of common stock in the form of restricted stock awards comprised of 70,475 shares awarded to employees, vesting over four years, and 7,488 shares awarded to directors vesting over two years. The grant date fair value of the restricted stock awarded was $12.51 per share, which reflects the market value of the common stock on the grant date. The 2010 awards generally vest, in each case, in equal portions beginning on or about the first anniversary date of the award.

The restricted stock awards allow for the receipt of dividends, and the voting of all shares, whether or not vested, throughout the vesting periods.

If a grantee’s employment or other service relationship, such as service as a director, is terminated for any reason, then any shares of restricted stock or stock options granted that have not vested as of the time of such termination must be forfeited, unless the Compensation Committee or the Board of Directors, as the case may be, waives such forfeiture requirement, or in the case of the 2011 awards, the employee meets certain retirement criteria.

Stock in Lieu of Directors’ Fees

In addition to restricted stock awards discussed above, the members of the Company’s Board of Directors may opt to receive newly issued shares of the Company’s common stock in lieu of cash compensation for attendance at Board and Board Committee meetings. Stock-based compensation expense related to Directors’ election to receive shares of common stock in lieu of cash fees for attendance at Board and Board committee meetings amounted to $30 thousand and $127 thousand for the three and nine months ended September 30, 2011, respectively, compared to $23 thousand and $101 thousand for the three and nine months

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

ended September 30, 2010. In January 2011, 12,046 shares of common stock were issued to directors in lieu of cash fees related to the 2010 annual directors’ stock-based compensation expense of $134 thousand.

(11) Supplemental Retirement Plan and Other Postretirement Benefit Obligations

Supplemental Retirement Plan (SERPs)

The Company has salary continuation agreements with two of its executive officers, and one former executive officer, who currently works on a part time basis. These salary continuation agreements provide for a predetermined fixed-cash supplemental retirement benefit, the amount subject to vesting requirements, to be provided for a period of 20 years after the individual reaches a defined “retirement age.” Each officer has attained their individually defined retirement age and all participants are fully vested under the plan.

The following table illustrates the net periodic benefit cost for the SERPs for the periods indicated:

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2011		2010		2011		2010
Service Cost	$	—	$	—	$	—	$	55
Interest Cost	43		46		128		138
Net periodic benefit cost	$	43	$	46	$	128	$	193

Benefits paid amounted to $69 thousand and $207 thousand for the three and nine months ended September 30, 2011, respectively, compared to $69 thousand and $183 thousand for the three and nine months ended September 30, 2010, respectively. The Company anticipates accruing an additional $43 thousand to the plan during the remainder of 2011.

Bank Owned Life Insurance

The Company has purchased bank-owned life insurance (“BOLI”) on certain senior and executive officers. The cash surrender value carried on the balance sheet at September 30, 2011 and December 31, 2010 amounted to $14.8 million and $14.4 million, respectively. There are no associated surrender charges under the outstanding policies.

Supplemental Life Insurance

For certain senior and executive officers on whom the Company owns BOLI, the Company has provided supplemental life insurance which provides a death benefit to the officer’s designated beneficiaries.

The following table illustrates the net periodic post retirement benefit cost for the supplemental life insurance plans for the periods indicated:

	Three months ended September 30,					Nine months ended September 30,
(Dollars in thousands)	2011		2010			2011			2010
Service Cost	$	4	$	(11	)	$	11		$	(32	)
Interest Cost	18		18			54			52
Actuarial Gain/Loss	—		—			(19		)	—
Net periodic post retirement benefit cost	$	22	$	7		$	46		$	20

(12) Accounting for Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities will be adjusted accordingly through the provision for income taxes.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

The Company’s policy is to classify interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgment changes regarding an uncertain tax position.

The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at September 30, 2011. The Company’s tax years beginning after December 31, 2005 are open to federal and state income tax examinations.

(13) Fair Value Measurements

The Financial Accounting Standard Board (“FASB”) defines the fair value of an asset or liability to be the price which a seller would receive in an orderly transaction between market participants (an exit price) and also establishes a fair value hierarchy segregating fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed on the basis of the best information available under the circumstances.

The following tables summarize significant assets and liabilities carried at fair value at the dates specified:

	September 30, 2011		Fair Value Measurements using:
(Dollars in thousands)	Fair Value		(level 1)		(level 2)		(level 3)
Assets measured on a recurring basis:
Fixed income securities	$	123,187	$	—	$	123,187	$	—
Equity securities	5,735		5,735		—		—
FHLB Stock	4,740		—		—		4,740

Assets measured on a non-recurring basis:
Impaired loans	13,813		—		—		13,813
Other real estate owned	1,325		—		—		1,325

	December 31, 2010		Fair Value Measurements using:
(Dollars in thousands)	Fair Value		(level 1)		(level 2)		(level 3)
Assets measured on a recurring basis:
Fixed income securities	$	137,493	$	—	$	137,493	$	—
Equity securities	4,567		4,567		—		—
FHLB Stock	4,740		—		—		4,740

Assets measured on a non-recurring basis:
Impaired loans	13,969		—		—		13,969
Other real estate owned	825		—		—		825

During the nine months ended September 30, 2011, the Company did not have cause to transfer any assets between the fair value measurement levels.

Investment securities that are considered “available for sale” are carried at fair value. The fixed income category above includes, federal agency obligations, federal agency MBS, non-agency CMO, and municipal securities, as held at those dates. The Company utilizes third-party pricing vendors to provide valuations on its fixed income securities. Fair values provided by the vendors were generally determined based upon pricing matrices utilizing observable market data inputs for similar or benchmark securities in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association’s standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Therefore, management regards the inputs and methods used by third party pricing vendors to be “Level 2 inputs and methods” as defined in the “fair value hierarchy.”

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

The Company’s equity portfolio fair value is measured based on quoted market prices for the shares, therefore these securities are categorized as Level 1 within the fair value hierarchy.

Net unrealized appreciation and depreciation on investments available for sale, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income.

The Bank is required to purchase FHLB stock at par value in association with advances from the FHLB; this stock is classified as a restricted investment and carried at cost which management believes approximates fair value, therefore these securities are categorized as Level 3 measures. See the discussion regarding FHLB stock in Note 7, “Restricted Investments,” above, for further information regarding the Company’s fair value assessment of FHLB capital stock.

Impaired loan balances in the table above represent those collateral dependent impaired commercial loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral (appraised value less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in appraisals, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans are categorized as Level 3 within the fair value hierarchy. A specific allowance is assigned to the collateral dependent impaired loan for the amount of management’s estimated credit loss. The specific allowances assigned to the collateral dependent impaired loans at September 30, 2011 amounted to $3.2 million compared to $2.2 million at December 31, 2010, a net increase of $989 thousand.

Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as Other Real Estate Owned (“OREO”). When property is acquired, it is generally recorded at the lesser of the loan’s remaining principal balance, net of unamortized deferred fees, or the estimated fair value of the property acquired, less estimated costs to sell. The estimated fair value is based on market appraisals and the Company’s internal analysis. Certain inputs used in appraisals are not always observable, and therefore, OREO may be categorized as Level 3 within the fair value hierarchy. The carrying values of OREO at September 30, 2011 and December 31, 2010 consisted of three and two properties, respectively.

Other Guarantees and Commitments

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The fair value of these commitments was estimated to be the fees charged to enter into similar agreements, and accordingly these fair value measures are deemed to be FASB Level 2 measurements. In accordance with the FASB, the estimated fair values of these commitments are carried on the balance sheet as a liability and amortized to income over the life of the letters of credit, which are typically one year. The estimated fair value of these commitments carried on the balance sheet was $30 thousand and $40 thousand at September 30, 2011 and December 31, 2010, respectively, and were deemed immaterial.

Interest rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The Company estimates the fair value of these derivatives using the difference between the guaranteed interest rate in the commitment and the current market interest rate. To reduce the net interest rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest rate lock commitment is quoted on the origination of the loan. The commitments to sell loans are also considered derivative instruments, with estimated fair values based on changes in current market rates. These commitments represent the Company’s only derivative instruments and are accounted for in accordance with FASB guidance. The fair values of the Company’s derivative instruments are deemed to be FASB Level 2 measurements. At September 30, 2011 and December 31, 2010, the estimated fair value of the Company’s derivative instruments was considered to be immaterial.

Estimated Fair Values of Assets and Liabilities

In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the balance sheet, the Company is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet. In cases where quoted fair values are not available, fair values are based upon estimates using various valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:

The respective carrying values of certain financial instruments approximated their fair value, as they were short-term in nature or payable on demand. These include cash and due from banks, total short-term investments, accrued interest receivable, repurchase agreements, accrued interest payable and non-certificate deposit accounts.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

Investments: Fair values for investments were based on quoted market prices, where available, as provided by third-party accounting and pricing vendors. If quoted market prices were not available, fair values provided by the vendors were based on quoted market prices of comparable instruments in active markets and/or based on a matrix pricing methodology. See the discussion regarding fair value of investment securities above for further information regarding the Company’s fair value measurements of investments.

The carrying amount of FHLB stock reported approximates fair value. See the discussion regarding FHLB stock in Note 7, “Restricted Investments,” above, for further information regarding the Company’s fair value assessment of FHLB capital stock.

Loans: The fair value of loans was determined using discounted cash flow analysis, using interest rates currently being offered by the Company. The incremental credit risk for non-accrual loans was considered in the determination of the fair value of the loans. This method of estimating fair value does not incorporate the exit price concept of fair value.

Commitments: The fair values of the unused portion of lines of credit and letters of credit were estimated to be the fees currently charged to enter into similar agreements. Commitments to originate non-mortgage loans were short-term and were at current market rates and estimated to have no significant change in fair value.

Financial liabilities: The fair values of certificates of deposit and borrowings were estimated using discounted cash flow analysis using rates offered by the Bank, or advance rates offered by the FHLB on September 30, 2011 and December 31, 2010 for similar instruments. The fair value of junior subordinated debentures was estimated using discounted cash flow analysis using a market rate of interest at September 30, 2011 and December 31, 2010.

Limitations: The estimates of fair value of financial instruments were based on information available at September 30, 2011 and December 31, 2010 and are not indicative of the fair market value of those instruments as of the date of this report. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

Because no active market exists for a portion of the Company’s financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates were based on existing on- and off-balance sheet financial instruments without an attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including premises and equipment and foreclosed real estate.

In addition, the tax ramifications related to the realization of the unrealized appreciation and depreciation can have a significant effect on fair value estimates and have not been considered in any of the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

The carrying values and estimated fair values of the Company’s financial instruments at the dates indicated are summarized as follows:

	September 30, 2011				December 31, 2010
(Dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial assets:
Cash and cash equivalents	$	82,182	$	82,182	$	55,006	$	55,006
Investment securities	128,922		128,922		142,060		142,060
Federal Home Loan Bank Stock	4,740		4,740		4,740		4,740
Loans, net	1,206,989		1,198,205		1,123,931		1,117,031
Accrued interest receivable	5,418		5,418		5,532		5,532
Financial liabilities:
Non-interest demand deposits	277,886		277,886		231,121		231,121
Interest bearing checking, savings, money market accounts (1)	792,425		792,425		736,443		736,443
Certificates of deposit (1)	275,177		275,874		276,507		277,109
Borrowed funds	4,494		4,555		15,541		15,623
Junior subordinated debentures	10,825		10,825		10,825		10,825
Accrued interest payable	366		366		914		914

(1)-Includes brokered deposit balances

(14) Recent Accounting Pronouncements

In April 2011, the Financial Accountings Standard Board (“FASB”) issued Accounting Standards Update (“ASU’) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” an amendment to the Troubled Debt Restructuring topic (Topic 310) of the ASC. This amendment offers additional guidance and clarification to help creditors determine if the two criteria for classifying a restructure as a trouble debt restructuring have been met. Additionally, the ASU No 2011-02 requires retrospective disclosures by portfolio segment of qualitative and quantitative information regarding troubled debt restructures occurring on or after the beginning of the annual period of adoption. The effective date of ASU No. 2011-02, was the first interim or annual period beginning after June 15, 2011. The adoption of ASU No. 2011-02 in July 2011 did not have a material impact on the Company’s financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs.” This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRSs.”). The amendments in this Update explain how to measure fair value. They do not require additional fair value measurements and are not intended to result in a change in the application of current fair value measurements requirements. The amendments in this Update are effective during interim and annual periods beginning after December 15, 2011. The adoption of ASU No. 2011-04, in January 2012, is not expected to have a material impact on the Company’s financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under ASU No. 2011-05, a company has the option to present the total of comprehensive income, and details of each of its components (net income and other comprehensive income) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update are effective during interim and annual periods beginning after December 15, 2011. As ASU No. 2011-05 only deals with presentation requirements, its adoption in January 2012, is not expected to have any impact on the Company’s financial position.

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ENTERPRISE BANCORP, INC.

Notes to the Unaudited Consolidated Financial Statements

In October 2011, the FASB decided that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred until the Board can consider stakeholders’ concerns about how they are applied. Therefore, those requirements will not be effective for public entities for fiscal years and interim periods within those years beginning after December 15, 2011. The Board’s decisions do not affect the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles — Goodwill and other (Topic 350): Testing Goodwill for Impairment.” The Update simplifies how a company tests goodwill for impairment. The ASU allows both public and nonpublic companies an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, a company no longer would be required to calculate the fair value of a reporting unit unless the company determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance also includes examples of the types of events and circumstances to consider in conducting the qualitative assessment. The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of ASU No. 2011-08, in January 2012, is not expected to have a material impact on the Company’s financial statements.

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis should be read in conjunction with the Company’s (also referred to herein as “Enterprise”, “us”, “we” or “our”) consolidated financial statements and notes thereto contained in this report and the Company’s 2010 Annual Report on Form 10-K.

Special Note Regarding Forward-Looking Statements

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning plans, objectives, future events or performance and assumptions and other statements that are other than statements of historical fact. Forward-looking statements may be identified by reference to a future period or periods or by use of forward-looking terminology such as “anticipates”, “believes”, “expects”, “intends”, “may”, “plans”, “pursue”, “views” and similar terms or expressions. Various statements contained in Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 3 — “Quantitative and Qualitative Disclosures About Market Risk,” including, but not limited to, statements related to management’s views on the banking environment and the economy, competition and market expansion opportunities, the interest rate environment, credit risk and the level of future non-performing assets and charge-offs, potential asset and deposit growth, future non-interest expenditures and non-interest income growth, and borrowing capacity are forward-looking statements. The Company cautions readers that such forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties that may adversely affect the Company’s future results. The following important factors, among others, could cause the Company’s results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein: (i) changes in interest rates could negatively impact net interest income; (ii) changes in the business cycle and downturns in the local, regional or national economies, including deterioration in the local real estate market, could negatively impact credit and/or asset quality and result in credit losses and increases in the Company’s allowance for loan losses; (iii) changes in consumer spending could negatively impact the Company’s credit quality and financial results; (iv) increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services could adversely affect the Company’s competitive position within its market area and reduce demand for the Company’s products and services; (v) deterioration of securities markets could adversely affect the value or credit quality of the Company’s assets and the availability of funding sources necessary to meet the Company’s liquidity needs; (vi) changes in technology could adversely impact the Company’s operations and increase technology-related expenditures; (vii) increases in employee compensation and benefit expenses could adversely affect the Company’s financial results; (viii) changes in laws and regulations that apply to the Company’s business and operations, including without limitation the implementation by the federal regulatory agencies of the various requirements contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), could increase the Company’s regulatory compliance costs and adversely affect the Company’s business environment, operations and financial results; (ix) changes in accounting standards, policies and practices, as may be adopted or established by the regulatory agencies, the FASB or the Public Company Accounting Oversight Board could negatively impact the Company’s financial results; and (x) some or all of the risks and uncertainties described in Item 1A of the Company’s 2010 Annual Report on Form 10-K could be realized, which could have a material adverse effect on the Company’s business, financial condition and results of operation. Therefore, the Company cautions readers not to place undue reliance on any such forward-looking information and statements.

Overview

Net income amounted to $2.9 million for the quarter ended September 30, 2011, compared to $2.7 million for the quarter ended September 30, 2010, an increase of 8%. Net income for the nine months ended September 30, 2011 amounted to $8.1 million compared to $8.2 million for the comparable 2010 period, a decrease of 2%. Diluted earnings per share were $0.31 and $0.86 for the three and nine months ended September 30, 2011, respectively, compared to $0.30 and $0.89 for the same respective periods in 2010, an increase of 3% for the quarter, and a decrease of 3% for the year-to-date period.

Deposits, excluding brokered deposits, have grown $101.5 million, or 8%, since December 31, 2010. While many banks continue to experience declining loan portfolios, our loan balances grew $86.2 million, or 8%, since December 31, 2010. On an annualized basis, deposits and loans have grown 11% and 10%, respectively, since December 31, 2010.

Third quarter net income growth reflects our success in growing our business lines. We believe that our continued and steady growth is a result of our ability to successfully serve our growing markets. In 2011, our focus remains on growing all of our business lines, including quality lending, deposits, investment assets managed and insurance services through continued organic growth and strategic expansion, as we seek to take advantage of market opportunities that continue to be presented to strong community banks. We remain committed to making investments in our branch

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network, technology, and most importantly, in our employees, customers and communities, in order to position the Bank for long-term growth.

Composition of Earnings

The Company’s growth contributed to increases in net interest income and the level of operating expenses, in both the quarter and year-to-date periods ended September 30, 2011. Increases in the loan loss provision and non-interest revenue, primarily gains on security sales in the quarter, also impacted net income in both the third quarter and year-to-date periods.

The 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). Net interest income expressed as a percentage of average interest earning assets is referred to as net interest 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 3, “Quantitative and Qualitative Disclosures About Market Risk,” of this Form 10-Q.

Net interest income for the quarter ended September 30, 2011 amounted to $14.7 million, an increase of $842 thousand, or 6%, compared to the September 2010 quarter. Net interest income amounted to $43.0 million for the nine months ended September 30, 2011, an increase of $2.1 million, or 5%, compared to the same period in the prior year. The increase in net interest income over the comparable 2010 periods was due primarily to loan growth, partially offset by a decrease in net interest margin. Average loan balances for the three and nine months ended September 30, 2011, were $91.7 million and $69.6 million, respectively, above the comparable periods in 2010. Tax equivalent net interest margin was 4.33% for the quarter ended September 30, 2011, compared to 4.40% for the quarter ended September 30, 2010. Year-to-date net interest margins were 4.36% and 4.44% for the nine months ended September 30, 2011 and 2010, respectively. The year-to-date 2011 margin has been impacted by higher average balances in lower yielding short-term investments in 2011 compared to 2010, primarily from deposit growth in excess of loan growth.

The provision for loan losses amounted to $1.8 million for the three months ended September 30, 2011 compared to $1.3 million for the same period in 2010. For the nine months ended September 30, 2011 and 2010, the provision for loan losses amounted to $4.0 million and $3.2 million, respectively. The provisions made to the allowance for loan losses are a function of growth and trends in asset quality, taking into consideration the level of loan growth, adversely classified and specific reserves for impaired loans, the level of non-performing loans and net charge-offs. The level of loan growth during the first nine months of 2011 was $86.2 million compared to $31.7 million during the same period in 2010. The balance of the allowance for loan losses allocated to impaired loans amounted to $4.1 million at September 30, 2011, compared to $2.7 million at September 30, 2010. Total non-performing assets as a percentage of total assets were 1.81% at September 30, 2011, compared to 1.36% at September 30, 2010. For the year-to-date period ended September 30, 2011, the Company recorded net charge-offs of $800 thousand, compared to net charge-offs of $2.4 million for the comparable period ended September 30, 2010. Annualized net charge-offs as a percentage of average loans for the nine months ended September 30, 2011 amounted to 0.09% compared to 0.29% in 2010. Management continues to closely monitor the non-performing assets, charge-offs and necessary allowance levels, including specific reserves, and believes that current loan quality statistics are a function of the ongoing effects of the recent economic environment. The allowance for loan losses to total loans ratio was 1.84% at September 30, 2011, compared to 1.70% at both December 31, 2010 and September 30, 2010.

Non-interest income for the three months ended September 30, 2011 amounted to $3.2 million, an increase of $580 thousand, or 22%, compared to the third quarter of 2010. This increase was primarily due to an increase in the gain on security sales and increases in deposit fees, partially offset by a decrease in net gains on loans sales. Non-interest income for the nine months ended September 30, 2011 amounted to $9.1 million, an increase of $458 thousand, or 5%, compared to the 2010 year-to-date period. This increase primarily resulted from increases in investment advisory fees and deposit fee income.

Non-interest expense for the three months ended September 30, 2011, amounted to $11.9 million, an increase of $670 thousand, or 6%, compared to the same period in the prior year. For the nine months ended September 30, 2011, non-interest expense amounted to $36.2 million, an increase of $2.1 million, or 6%, compared to the same period in the prior year. Increases in both the quarter and year-to-date expenses resulted primarily from increases in compensation-related expenses, occupancy, technology and audit, legal and other professional expenses, partially offset by a reduction in FDIC insurance expenses, resulting from changes made by the FDIC (effective April 1, 2011) in their deposit insurance assessment. Increases in Other Operating Expenses of $172 thousand and $494 thousand for the quarter and year-to-date periods, respectively, included foreclosed real estate and workout and delinquent loan expense increases of $147 thousand and $251 thousand for the quarter and year-to-date periods, respectively.

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Sources and Uses of Funds

The Company’s primary sources of funds are deposits, brokered deposits, FHLB borrowings, current earnings and proceeds from the sales, maturities and pay-downs on loans and investment securities. 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 $1.5 billion at September 30, 2011, an increase of $99.5 million, or 7% since December 31, 2010. The Company’s core asset strategy is to grow loans, primarily high quality commercial loans. Total loans increased $86.2 million, or 8%, since December 31, 2010 and amounted to $1.23 billion, or 82% of total assets, at September 30, 2011. Total commercial loans amounted to $1.1 billion, or 86% of gross loans, which was consistent with the composition at December 31, 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. Total investments decreased $13.1 million since December 31, 2010 and amounted to $128.9 million at September 30, 2011, representing 9% of total assets, which was comparable to the ratio of 10% at December 31, 2010.

Short-term investments increased $24.0 million since December 31, 2010 as a result of deposit growth in excess of loan funding and a decrease in investments 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 savings accounts and certificates of deposit), wholesale funding (brokered deposits and borrowed funds), and investment portfolio cash flow.

At September 30, 2011, deposits, excluding brokered deposits, amounted to $1.35 billion, representing $101.5 million, or 8%, in growth over December 31, 2010 balances. At September 30, 2011, savings and money market account balances increased $52.3 million, or 9%, while checking account balances increased $50.5 million, or 12%, compared to balances at December 31, 2010. The deposit growth is attributed to expansion and sales efforts, as well as, customers seeking a competitive, but secure alternative to the larger regional and national banks, mutual funds and lower yielding investment alternatives.

Wholesale funding amounted to $4.5 million at September 30, 2011, compared to $15.6 million at December 31, 2010. At September 30, 2011, wholesale funding was comprised of $4.5 million in FHLB term borrowings. At December 31, 2010, wholesale funding included $82 thousand in brokered deposits and borrowed funds of $15.5 million, of which $10 million were overnight borrowings and $4.8 million were in FHLB term borrowings.

Opportunities and Risks

The Company faces strong competition from multiple sources within its market area for its target customers, which consists of growing and established local businesses, professionals, non-profits and high net worth individuals. National and larger regional banks have a local presence in the Company’s market area. These 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, and greater financial resources. Numerous local savings banks, commercial banks, cooperative banks and credit unions also compete in the Company’s market area. The expanded commercial lending capabilities of credit unions and the shift to commercial lending by traditional savings banks allow them to compete for the Company’s commercial customers. In addition, the non-taxable status of credit unions allows them certain advantages as compared to taxable institutions such as Enterprise. Competition for loans, investment advisory assets, deposits and insurance services also comes from other businesses that provide financial services, including consumer finance companies, mortgage brokers, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors, non-bank electronic delivery channels and internet based banks.

While the current economic environment continues to present significant challenges for all companies, management also believes that it has created opportunities for growth and customer acquisition. Notwithstanding the competition discussed above, management believes that customers continue to migrate from larger, national and regional banks to local, stable community banks, choosing to do 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 Company’s product offerings, its customer service culture, and its investments in the communities we serve, as

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key elements in positioning Enterprise to take advantage of the market opportunities created by the current challenging banking landscape and recent industry consolidation within the local market.

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. We believe that the Company has built a reputation within its market area based on consistently superior customer service and supporting the local communities, differentiating itself through its people, who act as trusted advisors to clients, 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 the latest technology, delivered by experienced local banking professionals, who possess strong technical skills, an 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.

The Company seeks to increase deposit share, in both existing and new markets, through continuous reviews of deposit product offerings and delivery options targeted to customer needs, with targeted marketing strategies, together with carefully planned expansion into neighboring markets and new branch development. In the past year and a half, the Company has increased its branch network with the opening of the Hudson, New Hampshire office, relocated the Derry, New Hampshire branch to a larger facility, and made strategic investments in renovations and improvements to existing branch locations. In addition, the Company recently obtained the necessary regulatory approvals to establish a branch in the Town of Pelham, New Hampshire, and expects that this office, our 19th branch location, will be open for business in early 2012.

Management believes that Enterprise is also well equipped to capitalize on market potential to grow both the commercial and residential loan portfolios through strong business development efforts, while utilizing a disciplined and consistent lending approach and credit review practices, which have served to provide quality asset growth over varying economic cycles during the Company’s twenty-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, supported by a highly qualified and experienced commercial credit review function.

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. The current industry consolidation also provides management the opportunity to acquire key banking professionals that compliment the Enterprise sales and service culture and can bring with them experience and market knowledge. 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 lagging regional effects, possible deterioration, or possible long-term consequences of the current weak economic environment could further weaken the local New England economy, and have adverse repercussions on local industries leading to increased unemployment and foreclosures, further deterioration of local commercial real estate values, or other unforeseen 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 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 2 under the headings “Credit Risk/Asset Quality” and “Allowance for Loan Losses.”

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 renewed volatility in the financial markets, tightening of credit markets, and any possible subsequent effects of the recent economic recession, which could possibly result in the recognition of additional other-than-temporary-impairment (“OTTI”) charges in the future.

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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 3, “Quantitative and Qualitative Disclosures About Market Risk,” below.

Liquidity management is the coordination of activities so that cash needs are anticipated and met, readily and efficiently. Liquidity management is reviewed further below in this Item 2 under the heading “Liquidity.”

Federal banking agencies require the Company and the Bank to meet minimum capital requirements. At September 30, 2011, the Company was categorized as “well capitalized”; however future unanticipated charges against capital could impact that regulatory capital designation. Moreover, the revisions to international capital standards contained in the so-called Basel III accords could eventually result in enhanced capital requirements for all U.S. banking organizations, including community banks, such as Enterprise Bank. For information regarding the capital requirements applicable to the Company and the Bank and their respective capital levels at September 30, 2011, see the section entitled “Capital Resources” contained in this Item 2 below.

In addition, any further changes in government regulation or oversight, including the implementation by the federal regulatory agencies of the various requirements contained in the 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 or potential loss of revenue due to the impact of an enhanced regulatory structure on the banking industry. Although several significant aspects of the Dodd-Frank Act expressly apply only to larger, “systemically significant” institutions, other parts of the legislation apply either directly, or potentially indirectly, to activities of community banks, such as Enterprise. 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 are responsible for ultimately implementing over 240 new regulations over a period of years 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.

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, third-party vendor management 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 personal information and continually monitor and safeguard 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 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. Management 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. The Company has 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 operational risk and the failure to deliver a particular product or service; non-compliance with applicable laws and regulations; exposure of non-public personal information; vendor business decisions that are inconsistent with the Company’s strategic goals; or damage to the Company’s reputation; among others. 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 a relationship 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’s operations 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: 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

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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 will be met as the assumptions 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 reputation, its future results of operations and financial condition are addressed in Item 1A, “Risk Factors”, included in the Company’s 2010 Annual Report on Form 10-K. This Opportunities and Risks discussion should be read in conjunction with Item 1A of the 2010 Annual Report.

Financial Condition

Total assets increased $99.5 million, or 7%, since December 31, 2010, to $1.5 billion at September 30, 2011. The balance sheet composition and changes since December are discussed below.

Short-term investments

As of September 30, 2011, short-term investments amounted to $48.4 million, or 3% of total assets, an increase of $24 million compared to December 31, 2010. Short-term investments are carried as cash equivalents and consist of overnight and term federal funds sold and money market mutual funds. The balance of these investments will fluctuate depending on the timing of deposit, borrowing and loan inflows and outflows, investment purchases and maturities, calls and sales proceeds and the immediate liquidity needs of the Company. The increase in short term investments has resulted primarily from the increase in deposit growth in excess of loan funding during the period and a decrease in investments.

Investments

At September 30, 2011, the carrying value of the investment portfolio amounted to $128.9 million, a decline of $13.1 million, or 9%, compared to December 31, 2010. The following table summarizes investments at the dates indicated:

(Dollars in thousands)	September 30, 2011		December 31, 2010		September 30, 2010

Federal agency obligations (1)	$	37,727	$	40,940	$	31,300
Federal agency mortgage backed securities (MBS) (1)	37,429		42,525		36,265
Non-agency collateralized mortgage obligations (CMOs)	—		2,439		2,799
Municipal securities	48,031		51,589		54,910
Total fixed income securities	$	123,187	$	137,493	$	125,274

Equity investments	5,735		4,567		4,055
Total available for sale securities at fair value	$	128,922	$	142,060	$	129,329

Included in the federal agency MBS categories above were CMOs totaling $23.0 million, $26.0 million, and $23.0 million at September 30, 2011, December 31, 2010, and September, 2010, respectively.

During the nine months ended September 30, 2011, the total principal pay downs, calls and maturities on fixed income securities amounted to $39.0 million. In addition, during the period, the Company sold approximately $10.2 million in investment securities realizing gains on sales of $747 thousand, primarily from municipal security sales. These portfolio cash inflows were used to purchase $33.6 million in securities.

Net unrealized gains amounted to $4.3 million at September 30, 2011 compared to $3.1 million at December 31, 2010 and $5.9 million at September 30, 2010. The level of net unrealized gains in the fixed income portfolio at September 30, 2011, primarily resulted from the low interest rate environment. See Note 6, “Investment Securities,” and Note 13, “Fair

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Value Measurements,” to the Company’s unaudited consolidated financial statements contained in Item 1 above for further information regarding the Company’s unrealized gain and losses on debt and equity securities, including information about investments in an unrealized loss position for which an other-than-temporary impairment has or has not been recognized and the Company’s fair value measurements for available-for-sale securities.

Federal Home Loan Bank Stock

The Company is required to purchase stock of the FHLB in association with advances from the FHLB; this stock is classified as a restricted investment and carried at cost, which management believes approximates fair value. The carrying amount of FHLB stock was $4.7 million at September 30, 2011, December 31, 2010 and September 30, 2010. See Note 7, “Restricted Investments,” to the Company’s unaudited consolidated financial statements contained in Item 1 above for further information regarding the Company’s investment in FHLB.

Loans

Total loans represented 82% of total assets at both September 30, 2011 and December 31, 2010, respectively. Total loans increased $86.2 million, or 8%, compared to December 31, 2010, and $115.0 million, or 10%, since September 30, 2010. The Company attributes the increase in loans to its seasoned lending team, its sales and service culture and geographic market expansion. The Company has continued to selectively develop relationships with strong, credit-worthy customers. The mix of loans within the portfolio remained relatively unchanged with commercial loans amounting to approximately 86% of gross loans, reflecting a continued focus on commercial loan development.

The following table sets forth the loan balances by certain loan categories at the dates indicated and the percentage of each category to gross loans.

	September 30, 2011					December 31, 2010					September 30, 2010
(Dollars in thousands)	Amount			Percent		Amount			Percent		Amount			Percent

Commercial real estate	$	634,229		51.5	%	$	595,075		52.0	%	$	574,493		51.5	%
Commercial and industrial	305,015			24.8	%	274,829			24.0	%	270,074			24.2	%
Commercial construction	120,753			9.8	%	111,681			9.7	%	107,689			9.6	%
Total commercial loans	1,059,997			86.1	%	981,585			85.7	%	952,256			85.3	%

Residential mortgages	89,900			7.3	%	86,560			7.6	%	89,259			8.0	%
Residential construction	2,429			0.2	%	2,874			0.2	%	3,379			0.3	%
Home equity	71,547			5.8	%	63,108			5.5	%	63,684			5.7	%
Consumer	3,541			0.3	%	4,228			0.4	%	3,736			0.4	%
Loans held for sale	3,600			0.3	%	6,408			0.6	%	3,565			0.3	%
Gross loans	1,231,014			100.0	%	1,144,763			100.0	%	1,115,879			100.0	%
Deferred fees, net	(1,456		)			(1,417		)			(1,301		)
Total loans	1,229,558					1,143,346					1,114,578

Allowance for loan losses	(22,569		)			(19,415		)			(18,985		)
Net loans	$	1,206,989				$	1,123,931				$	1,095,593

Commercial real estate loans increased $39.2 million, or 7%, as of September 30, 2011, compared to December 31, 2010, and 10% compared to September 30, 2010. Commercial real estate loans are typically secured by apartment buildings, office or mixed-use facilities, strip shopping centers or other commercial or industrial property.

Commercial and industrial loans increased by $30.2 million, or 11%, since December 31, 2010, and increased 13% as compared to September 30, 2010. These loans include seasonal revolving lines of credit, working capital loans, equipment financing (including equipment leases), and term loans. Also included in commercial and industrial loans are loans under various U.S. Small Business Administration programs.

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Commercial construction loans increased by $9.1 million, or 8%, since December 31, 2010, and 12% compared to September 30, 2010. The increase over prior periods is a result of select new construction opportunities in the market place under development by qualified and financially strong builders. Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property and loans for the purchase and improvement of raw land.

Residential mortgages, residential construction, home equity mortgages and consumer loans combined represented approximately 14% of the total loan portfolio at September 30, 2011 and December 31, 2010. These loans increased by $10.6 million, or 7%, since December 31, 2010 and by $7.4 million, or 5%, since September 30, 2010. The increase was primarily within the home equity portfolio.

During the nine months ended September 30, 2011, the Company originated $19.3 million in residential loans designated for sale, compared to $31.7 million for the same period in the prior year. During the 2011 period, loans sold amounted to $22.1 million compared to $28.5 million in the 2010 period. These loan sales generated gains on sales of $403 thousand and $392 thousand for the 2011 and 2010 periods, respectively.

At September 30, 2011, commercial loan balances participated out to various banks amounted to $38.0 million, compared to $36.6 million at December 31, 2010, and $36.8 million at September 30, 2010. These balances participated out to other institutions are not carried as assets on the Company’s financial statements. Loans originated by other banks in which the Company is the participating institution are carried at the pro-rata share of ownership and amounted to $35.4 million, $32.7 million and $32.0 million at September 30, 2011, December 30, 2010, and September 30, 2010, respectively. In each case, the participating bank funds a percentage of the loan commitment and takes on the related risk. In each case in which the Company participates in a loan, the rights and obligations of each participating bank is divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks.

Credit Risk/Asset Quality

The Company manages its loan portfolio to avoid concentration by industry and loan size to minimize its credit risk exposure. In addition, the Company does not have a “sub-prime” mortgage program. However, inherent in the lending process is the risk of loss due to customer non-payment, or “credit risk.” The Company’s commercial lending focus may entail significant additional risks compared to long term financing on existing, owner-occupied residential real estate. 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. As such, an extended downturn in the national or local economy or real estate markets, among other factors, could have a material impact on the borrowers’ ability to repay outstanding loans and on the value of the collateral securing these loans. While the Company endeavors to minimize this risk through the risk management function, management recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions.

The credit risk management function focuses on a wide variety of factors, including, among others, current and expected economic conditions, the real estate market, the financial condition of borrowers, the ability of borrowers to adapt to changing conditions or circumstances affecting their business and the continuity of borrowers’ management teams. Early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors these factors, among others, through ongoing credit reviews by the Credit Department, an external loan review service, reviews by members of senior management and the Loan Committee of the Board of Directors. This review includes the assessment of internal credit quality indicators such as the risk classification of loans, adversely classified loans, past due and non-accrual loans, impaired and restructured loans, and the level of foreclosure activity. See Note 8 “Loans” and Note 9 “Allowance for Loan Losses” to the Company’s unaudited consolidated financial statements, contained in Item 1 above, for further information regarding the loan portfolio and these credit qualities indicators.

Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as Other Real Estate Owned (“OREO”). When property is acquired, it is generally recorded at the lesser of the loan’s remaining principal balance, net of any unamortized deferred fees, or the estimated fair value of the property acquired, less estimated costs to sell. Any loan balance in excess of the estimated realizable fair value on the date of transfer is charged to the allowance for loan losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value are charged to non-interest expense.

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At September 30, 2011, the Company had adversely classified loans (loans carrying “substandard”, “doubtful” or “loss” classifications) amounting to $38.0 million, compared to $25.2 million at December 31, 2010. There were no loans classified as “Loss” at September 30, 2011 or December 31, 2010. The increase in adversely classified loans as of September 30, 2011, as compared to December 2010, was primarily due to the downgrade of twelve commercial real estate relationships totaling approximately $11.4 million and two construction relationships of approximately $3.0 million, partially offset by paydowns and credit upgrades during the period. Management continues to closely monitor these adversely classified relationships.

Adversely classified loans which were performing but possessed potential weaknesses and, as a result, could ultimately become non-performing loans amounted to $14.9 million and $7.2 million, at September 30, 2011 and December 31, 2010, respectively. The remaining balances of adversely classified loans were non-accrual loans, amounting to $23.1 million and $18.0 million at September 30, 2011 and December 31, 2010, respectively. Non-accrual loans which were not adversely classified amounted to $2.7 million and $2.4 million at September 30, 2011 and December 31, 2010, respectively, and primarily represented the guaranteed portions of non-performing Small Business Administration loans.

Non-performing assets are comprised of non-accrual loans, deposit account overdrafts that are more than 90 days past due and OREO. The designation of a loan or other asset as non-performing does not necessarily indicate that loan principal and interest will ultimately be uncollectible. However, management recognizes the greater risk characteristics of these assets and therefore considers the potential risk of loss on assets included in this category in evaluating the adequacy of the allowance for loan losses. Despite prudent loan underwriting, adverse changes within the Company’s market area, or deterioration in local, regional or national economic conditions, could negatively impact the Company’s level of non-performing assets in the future.

The following table sets forth information regarding non-performing assets, restructured loans and delinquent loans 60-89 days past due as to interest or principal, held by the Company at the dates indicated:

(Dollars in thousands)	September 30, 2011			December 31, 2010			September 30, 2010

Commercial real estate	$	13,291		$	8,065		$	8,845
Commercial and industrial	9,254			7,573			6,742
Commercial construction	2,107			2,890			1,043
Residential	997			1,667			1,474
Home Equity	141			135			135
Consumer	6			10			4
Total non-accrual loans	25,796			20,340			18,243
Overdrafts > 90 days past due	—			1			34
Total non-performing loans	25,796			20,341			18,277
Other real estate owned (“OREO”)	1,325			825			1,000
Total non-performing assets	$	27,121		$	21,166		$	19,277

Total Loans	$	1,229,558		$	1,143,346		$	1,114,578
Accruing restructured loans not included above	12,629			30,225			24,746
Delinquent loans 60 — 89 day past due	2,633			2,324			1,870

Non-performing loans to total loans	2.10		%	1.78		%	1.64		%
Non-performing assets to total assets	1.81		%	1.51		%	1.36		%
Loans 60-89 days past due to total loans	0.21		%	0.20		%	0.17		%
Adversely classified loans to total loans	3.09		%	2.20		%	2.01		%

Allowance for loan losses	$	22,569		$	19,415		$	18,985
Allowance for loan losses: Non-performing loans	87.49		%	95.45		%	103.87		%
Allowance for loan losses: Total loans	1.84		%	1.70		%	1.70		%

Non-performing statistics have trended upward since 2009, as would be expected given the historically low level of these statistics in years preceding 2009, and are consistent with the regional economic environment and its lagging impact on

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the local commercial markets. Management does not consider the increase to be indicative of significant deterioration in the credit quality of the general loan portfolio at September 30, 2011, as indicated by the following factors: the reasonable ratio of non-performing loans to total loans given the size and mix of the Company’s loan portfolio; the minimal level of OREO; and the low levels of loans 60-89 days delinquent.

The $5.5 million net increase in total non-performing loans, and the resulting increase in the ratio of non-performing loans as a percentage of total loans outstanding since December 31, 2010, was primarily due to net additions within the non-performing commercial real estate ($5.2 million) and commercial and industrial ($1.7 million) categories, partially offset by reductions in the non-performing residential portfolio ($670 thousand) and commercial construction ($783 thousand). The majority of the non-accrual loans were also carried as impaired loans during the periods, and is discussed further below.

Total impaired loans amounted to $38.6 million and $49.8 million at September 30, 2011 and December 31, 2010, respectively. Total accruing impaired loans amounted to $13.4 million and $30.7 million at September 30, 2011 and December 31, 2010, respectively, while non—accrual impaired loans amounted to $25.2 million and $19.1 million as of September 30, 2011 and December 31, 2010, respectively. During the second quarter of 2011, an accruing commercial real estate relationship of approximately $13.2 million was upgraded and removed from impaired/TDR status due to the borrower’s improved financial condition and sustained performance over time. In addition, the decrease was impacted by paydowns and, in particularly, the full payoff of one $3.3 million commercial real estate TDR relationship during the first quarter of 2011.

Based on management’s assessment at September 30, 2011, impaired loans totaling $20.6 million required no specific reserves and impaired loans totaling $18.0 million required specific reserve allocations of $4.1 million. At December 31, 2010, impaired loans totaling $32.6 million required no specific reserves and impaired loans totaling $17.2 million required specific reserve allocations of $2.7 million. Management closely monitors these relationships for collateral or credit deterioration.

Total TDR loans, included in the impaired loan figures above as of September 30, 2011 and December 31, 2010 were $27.3 million and $41.6 million, respectively. The decline is primarily due to the impaired loan activity discussed above. TDR loans on accrual status amounted to $12.6 million and $30.2 million at September 30, 2011 and December 31, 2010, respectively. Restructured loans included in non-performing loans amounted to $14.7 million and $11.4 million at September 30, 2011 and December 31, 2010, respectively. The Company continues to work with commercial relationships and enters into loan modifications to the extent deemed to be necessary or appropriate to ensure the best mutual outcome given the current economic environment.

The carrying value of OREO at September 30, 2011 was $1.3 million and consisted of three properties; two properties were added and one property was sold during the 2011 period; there were no gains or losses on this OREO sale. The carry value of OREO at December 31, 2010 and September 30, 2010 was $825 thousand and $1.0 million respectively. During the nine months ended September 30, 2010, six properties were sold and the Company realized gains on these sales of $120 thousand.

Allowance for Loan Losses

On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated credit losses. The allowance for loan losses is an estimate of probable credit risk inherent in the loan portfolio as of the specified balance sheet dates. 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.

In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio including individual assessment of larger and high risk credits, delinquency trends and the level of non-performing loans, net charge-offs, the growth and composition of the loan portfolio, expansion in geographic market area, the strength of the local and national economy, and comparison to industry peers, among other factors. Except for loans specifically identified as impaired, as discussed above, the estimate is a two-tiered approach that allocates loan loss reserves to “adversely classified” loans by credit rating and to non-classified loans by credit type. The general loss allocations take into account the historic loss experience as well as the quantitative and qualitative factors identified above. 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.

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Management closely monitors the credit quality of individual delinquent and non-performing relationships, industry concentrations, the local and regional real estate market and current economic conditions. The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment. Despite prudent loan underwriting, adverse changes within the Company’s market area, or further deterioration in the local, regional or national economic conditions could negatively impact the Company’s level of non-performing assets in the future.

The allowance for loan losses to total loans ratio was 1.84% at September 30, 2011 compared to 1.70% at December 31, 2010. The allowance for loan loss ratio increased primarily as a result of the increase in specific reserves on impaired loans and other changes discussed above under “Credit Risk/Asset Quality. Based on the foregoing, as well as management’s judgment as to the existing credit risks inherent in the loan portfolio, the Company’s allowance for loan losses is deemed adequate to absorb probable losses from specifically known and other credit risks associated with the portfolio as of September 30, 2011.

The following tables summarize the activity in the allowance for loan losses for the periods indicated:

	Nine months ended September 30,
(Dollars in thousands)	2011			2010

Balance at beginning of year	$	19,415		$	18,218

Charged-off loans:
Commercial real estate	538			619
Commercial and industrial	457			536
Commercial construction	—			1,245
Residential	4			25
Home equity	—			—
Consumer	29			44
Total Charged off	1,028			2,469

Recoveries on charged-off loans:
Commercial real estate	76			1
Commercial and industrial	137			34
Commercial construction	4			—
Residential	2			—
Home equity	—			—
Consumer	9			14
Total recoveries	228			49

Net loans charged-off	(800		)	(2,420		)

Provision charged to operations	3,954			3,187
Ending Balance	$	22,569		$	18,985

Annualized net loans charged-off: Average loans outstanding	0.09		%	0.29		%

The allowance reflects management’s estimate of loan loss reserves necessary to support the level of credit risk inherent in the portfolio during the period. Refer to “Credit Risk/Asset Quality” and “Allowance for Loan Losses” contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s 2010 Annual Report on Form 10-K for additional information regarding the Company’s credit risk management process and allowance for loan losses.

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. In order to restore the DIF reserves, the FDIC required all insured institutions to make a one-time prepayment, on December 30, 2009, of estimated insurance assessments for 2010, 2011 and 2012. At September 30, 2011, the Company carried the remaining balance of its prepaid assessment totaling approximately $3.2 million as a prepaid asset on its balance sheet.

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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 its deposit insurance assessment rate schedule in light of this change to the assessment base. The revised rate schedule and other revisions to the assessment rules became effective on April 1, 2011 and have resulted in a decrease in the Company’s insurance expense.

Deposits

Total deposits increased $101.4 million, or 8%, compared to December 31, 2010, and increased $80 million, or 6%, since September 30, 2010.

The following table sets forth the deposit balances by certain categories at the dates indicated and the percentage of each category to total deposits.

	September 30, 2011				December 31, 2010				September 30, 2010
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent

Non-interest bearing demand deposits	$	277,886	20.6	%	$	231,121	18.6	%	$	222,608	17.6	%
Interest bearing checking	178,799		13.3	%	175,056		14.1	%	194,292		15.3	%
Total checking	456,685		33.9	%	406,177		32.7	%	416,900		32.9	%

Savings	147,704		11.0	%	132,313		10.6	%	150,914		11.9	%
Money markets	465,922		34.6	%	428,992		34.5	%	421,992		33.4	%
Total savings/money markets	613,626		45.6	%	561,305		45.1	%	572,906		45.3	%

Certificates of deposit	275,177		20.5	%	276,507		22.2	%	271,884		21.5	%
Total non-brokered deposits	1,345,488		100	%	1,243,989		100.0	%	1,261,690		99.7	%
Brokered Deposits(1)	—		0.0	%	82		0.0	%	3,814		0.3	%
Total deposits	$	1,345,488	100.0	%	$	1,244,071	100.0	%	$	1,265,504	100.0	%

(1) Brokered deposits include time deposits originated through the Certificate of Deposit Account Registry (“CDAR”) nationwide network, and money market deposits originated through the “Demand Deposit Marketplace”.

Excluding brokered deposits, deposit balances increased $101.5 million, or 8%, since December 31, 2010 and $83.8 million, or 7% since September 30, 2010. Savings and money market account balances increased $52.3 million, or 9%, while checking account balances increased $50.5 million, or 12%, since December 31, 2010. The deposit growth is attributed to expansion and sales efforts as well as customers seeking a competitive, but secure alternative to the larger regional and national banks, mutual funds and lower yielding investment alternatives. This deposit growth has provided the Company with the ability to continue to grow loans and reduce wholesale funding balances.

From time to time, management utilizes both brokered deposits and borrowed funds (as discussed below) as cost effective alternative wholesale funding sources for continued loan growth.

Borrowed Funds

Borrowed funds, consists of securities sold under agreements to repurchase (“repurchase agreements”), FHLB borrowings and other borrowings. The Company’s primary borrowing source is the FHLB, but the Company may choose to borrow from other established business partners. “Other borrowings” represents overnight advances from the FRB or borrowings from correspondent banks.

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The following table sets forth the borrowed funds by categories at the dates indicated and the percentage of each category to total borrowed funds.

	September 30, 2011				December 31, 2010				September 30, 2010
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent

FHLB borrowings	$	4,494	100.0	%	$	4,779	30.8	%	$	14,260	94.9	%
Other borrowings	—		—		10,000		64.3	%	—		—
Repurchase Agreements	—		—		762		4.9	%	762		5.1	%
Total borrowed funds	$	4,494	100.0	%	$	15,541	100.0	%	$	15,022	100.0	%

Borrowed funds decreased $11 million since December 31, 2010. Outstanding FHLB borrowing balances at September 30, 2011 represented term advances, linked to outstanding commercial loans, under various community investment programs of the FHLB. The other borrowings balance at December 31, 2010 consisted of overnight borrowings. Since September 30, 2010, the balance of total borrowed funds has decreased $10.5 million due primarily to the deposit growth in excess of loan growth over the period.

At September 30, 2011, the Bank had the capacity to borrow additional funds from the FHLB of up to approximately $179.0 million and capacity to borrow from the FRB of approximately $40.3 million.

The Company also had $10.8 million of junior subordinated debentures at September 30, 2011, December 31, 2010 and September 30, 2010, respectively, in addition to the borrowed funds noted above.

Liquidity

Liquidity is the ability to meet cash needs arising from, among other things, fluctuations in loans, investments, deposits and borrowings. Liquidity management is the coordination of activities so that cash needs are anticipated and met readily and efficiently. The Company’s liquidity policies are set and monitored by the Company’s Asset-Liability Committee of the Board of Directors. The Company’s asset-liability objectives are to engage in sound balance sheet management strategies, maintain liquidity, provide and enhance access to a diverse and stable source of funds, provide competitively priced and attractive products to customers and conduct funding at a low cost relative to current market conditions. Funds gathered are used to support current commitments, to fund earning asset growth, and to take advantage of selected leverage opportunities.

The Company’s liquidity is maintained by projecting cash needs, balancing maturing assets with maturing liabilities, monitoring various liquidity ratios, monitoring deposit flows, maintaining cash flow within the investment portfolio, and maintaining wholesale funding resources. The Company’s wholesale funding sources primarily include borrowing capacity in the brokered deposit markets, at the FHLB, through the FRB Discount Window, and through fed fund purchase arrangements with correspondent banks.

Management believes that the Company has adequate liquidity to meet its obligations. The Company currently funds earning assets primarily with deposits, brokered deposits, FHLB borrowings, and earnings. The Company has in the past also issued junior subordinated debentures and offered shares of the Company’s common stock for sale to the general public, as with the December 2009 offerings.

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Capital Resources

The Company believes its current capital is adequate to support ongoing operations. As of September 30, 2011, both the Company and the Bank qualify as “well capitalized” under applicable regulations of the Federal Reserve Board and the FDIC. To be categorized as well capitalized, the Company and the Bank must maintain minimum total, Tier 1 and, in the case of the Bank, leverage capital ratios as set forth in the table below.

The Company’s actual capital amounts and ratios are presented as of September 30, 2011 in the table below. The Bank’s capital amounts and ratios do not differ materially from the amounts and ratios presented for the Company.

	Actual				Minimum Capital for Capital Adequacy Purposes				Minimum Capital To Be Well Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

Total Capital (to risk weighted assets)	$	142,365	11.14	%	$	102,219	8.00	%	$	127,774	10.00	%

Tier 1 Capital (to risk weighted assets)	$	126,272	9.88	%	$	51,109	4.00	%	$	76,664	6.00	%

Tier 1 Capital (to average assets)	$	126,272	8.67	%	$	58,261	4.00	%	$	72,826	5.00	%*

* This requirement does not apply to the Company and is reflected in the table merely for informational purposes with respect to the Bank. For the Bank to qualify as “well capitalized”, it must also maintain a leverage capital ratio (Tier 1 capital to average assets) of at least 5%.

The Company maintains a dividend reinvestment plan (the “DRP”). The DRP enables stockholders, at their discretion, to elect to reinvest dividends paid on their shares of the Company’s common stock by purchasing additional shares of common stock from the Company at a purchase price equal to fair market value. Shareholders utilized the DRP to invest $942 thousand of the $3.0 million in cash dividends paid through September 30, 2011, into 61,427 shares of the Company’s common stock.

As previously announced on October 18, 2011, the Company declared a quarterly dividend of $0.105 per share to be paid on December 1, 2011 to shareholders of record as of November 10, 2011. The quarterly dividend represents a 5.0% increase over the 2010 dividend rate.

Investment assets under management

The Company provides a wide range of investment advisory and management services, including brokerage, trust, and investment management (together, “investment advisory services”). The market values of these components are affected by fluctuations in the financial markets.

Also included in the investment assets under management total are customers’ commercial sweep arrangements that are invested in third party money market mutual funds.

The following table sets forth the fair market value of investment assets under management by certain categories at the dates indicated.

(Dollars in thousands)	September 30, 2011		December 31, 2010		September 30, 2010

Investment advisory and management services	$	364,205	$	378,798	$	360,424
Brokerage and management services	100,929		105,869		100,292
Total investment advisory assets	465,134		484,667		460,716

Commercial sweep accounts	5,456		8,411		13,489
Investment assets under management	$	470,590	$	493,078	$	474,205

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Investment advisory assets decreased $19.5 million, or 4%, since December 31, 2010 and are primarily flat since September 30, 2010. The decrease is attributable primarily to the effects of declines in the equity markets on investment account balances. Commercial sweep account balances have declined as customers migrated to higher yielding investments products including our on balance sheet sweep accounts.

Total assets under management, which includes total assets, investment assets under management, and loans serviced for others amounted to $2.03 billion at September 30, 2011, $1.95 billion at December 31, 2010, and $1.96 billion at September 30, 2010.

Accounting Policies/Critical Accounting Estimates

In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles; management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ should the assumptions and estimates used change over time due to changes in circumstances. The Company has not changed its significant accounting and reporting policies from those disclosed in its 2010 Annual Report on Form 10-K.

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Results of Operations

Three Months Ended September 30, 2011 vs. Three Months Ended September 30, 2010

Unless otherwise indicated, the reported results are for the three months ended September 30, 2011 with the “comparable period”, and “prior period” being the three months ended September 30, 2010. Average yields are presented on a tax equivalent basis.

The Company’s third quarter 2011 net income amounted to $2.9 million compared to $2.7 million for the same period in 2010, an increase of 8%. Diluted earnings per common share were $0.31 and $0.30 for the three months ended September 30, 2011 and September 30, 2010, respectively, and increase of 3%.

The Company’s growth contributed to both increased net interest income and an increase in the level of operating expenses for the three months ended September 30, 2011 compared to the prior period. Net income also included increases in non-interest income, partially offset by an increase in the provision for loan losses.

Net Interest Income

The Company’s net interest income for the quarter ended September 30, 2011 amounted to $14.7 million, compared to $13.9 million in the September 2010 quarter, an increase of $842 thousand, or 6%. The increase in net interest income over the comparable period was due primarily to loan growth, partially offset by a decrease in net interest margin.

Net Interest Margin

The Company’s tax equivalent net interest margin (“margin”) decreased to 4.33% for the three months ended September 30, 2011, compared to 4.40% in the comparable 2010 period. The 2011 quarter to date margin was impacted by the lower interest rate environment, primarily its effects on the investment portfolio.

Rate / Volume Analysis

The following table sets forth the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) volume (change in average portfolio balance multiplied by prior period average rate); (2) interest rate (change in average interest rate multiplied by prior period average balance); and (3) rate and volume (the remaining difference).

				Increase (decrease) due to
(Dollars in thousands)	Net Change			Volume			Rate			Rate/ Volume
Interest Income
Loans	$	744		$	1,254		$	(432	)	$	(78	)
Investments (1)	(184		)	60			(267		)	23
Total interest earnings assets	560			1,314			(699		)	(55		)

Interest Expense
Int chkg, savings and money market (2)	(98		)	94			(184		)	(8		)
Certificates of deposit	(169		)	19			(183		)	(5		)
Borrowed funds	(15		)	(26		)	39			(28		)
Junior subordinated debentures	—			—			—			—
Total interest-bearing deposits, borrowed funds and debentures	(282		)	87			(328		)	(41		)

Change in net interest income	$	842		$	1,227		$	(371	)	$	(14	)

(1) Investments include investment securities, FHLB stock and short-term investments.

(2) Interest checking, savings and money market includes interest expense on brokered money market accounts.

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The following table presents the Company’s average balance sheet, net interest income and average rates for the three months ended September 30, 2011 and 2010.

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

	Three Months Ended September 30, 2011						Three Months Ended September 30, 2010
(Dollars in thousands)	Average Balance		Interest		Average Yield(1)		Average Balance		Interest		Average Yield(1)

Assets:
Loans (2)	$	1,207,488	$	16,078	5.34	%	$	1,115,812	$	15,334	5.50	%
Investments (3)	178,204		835		2.32	%	170,043		1,019		2.95	%
Total interest earnings assets	1,385,692		16,913		4.95	%	1,285,855		16,353		5.16	%

Other assets	82,623						76,765

Total assets	$	1,468,315					$	1,362,620

Liabilities and stockholders’ equity:
Int chkg, savings and money market	$	783,410	1,025		0.52	%	$	724,020	1,123		0.61	%
Certificates of deposit	273,792		833		1.21	%	268,730		1,002		1.48	%
Borrowed funds	4,689		22		1.81	%	17,684		37		0.83	%
Junior subordinated debentures	10,825		294		10.88	%	10,825		294		10.88	%
Total interest-bearing funding	1,072,716		2,174		0.80	%	1,021,259		2,456		0.95	%

Net interest rate spread					4.15	%					4.21	%

Demand deposits	262,247		—		—		215,876		—		—
Total deposits, borrowed funds and debentures	1,334,963		2,174		0.65	%	1,237,135		2,456		0.79	%

Other liabilities	10,036						10,791
Total liabilities	1,344,999						1,247,926

Stockholders’ equity	123,316						114,694

Total liabilities and stockholders’ equity	$	1,468,315					$	1,362,620

Net interest income			$	14,739					$	13,897

Net interest margin (tax equivalent)					4.33	%					4.40	%

(1) Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, which was not included in the interest amount above, was $359 thousand for both periods ended September 30, 2011 and September 30, 2010 respectively.

(2) Average loans include non-accrual loans and are net of average deferred loan fees.

(3) Average investment balances are presented at average amortized cost and include investment securities, FHLB stock and short-term investments.

Interest Income

For the third quarter of 2011, total interest income amounted to $16.9 million, an increase of $560 thousand, or 3%, compared to the prior period. The increase resulted primarily from an increase of $99.8 million, or 8%, in the average balance of interest earning assets for the quarter ended September 30, 2011 compared to the third quarter of 2010, primarily in loans, partially offset by a 21 basis point decline in the yield on interest earning assets due primarily to the lower interest rate environment during the period.

Interest income on loans, which accounts for the majority of interest income, amounted to $16.1 million for the quarter ended September 30, 2011, an increase of $744 thousand, or 5%, over the comparable period, due primarily to loan growth, partially offset by a decline in loan yields. The average loan balances increased $91.7 million, or 8%, for the three months ended September 30, 2011 compared to the same period in 2010, while the average yield on loans declined 16 basis points compared to the prior period and amounted to 5.34% for the three months ended September 30, 2011.

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Total investment income, which represents the remainder of interest income, amounted to $835 thousand for the three months ended September 30, 2011, a decrease of $184 thousand, or 18%, compared to the prior period. The decrease resulted primarily from the impact of a 63 basis point decrease in the average yield on investment securities as investments that were sold, matured, or were called had higher yields than investment purchases during the period, partially offset by an increase of $8.2 million, or 5%, in the average balance of investments (primarily lower yielding fed funds sold) for the third quarter of 2011 compared to the third quarter of 2010.

Interest Expense

For the three months ended September 30, 2011, total interest expense amounted to $2.2 million, a decrease of $282 thousand, or 11%, compared to the prior period. The decrease resulted primarily from a 14 basis point decrease in the average cost of funding, due primarily to the reduction in deposit market interest rates over the period. This decrease was partially offset by the expense associated with the $51.5 million, or 5%, increase in the average balance of interest bearing funding sources for the third quarter of 2011 compared to the third quarter of 2010. This deposit growth has provided the Company with the ability to reduce wholesale funding balances.

Interest expense on interest checking, savings and money market accounts amounted to $1.0 million for the quarter ended September 30, 2011, a decrease of $98 thousand, or 9%, compared to the same quarter in the prior period. The decrease primarily resulted from a decrease of 9 basis points in the average cost of these accounts to 0.52%, partially offset by an increase in average balances $59.4 million, or 8%, for the three months ended September 30, 2011 compared to three months ended September 30, 2010. Average balance increases were noted primarily in money market accounts. Included in average interest checking, savings and money market balances were $2.6 million in average brokered money markets for the three months ended September 30, 2010. There were no brokered money market accounts at the 2011 period.

Interest expense on non-brokered CDs decreased $169 thousand, or 17%, compared to the prior period and amounted to $833 thousand for the three months ended September 30, 2011. The decrease was primarily due to a decline in market rates over the comparable period. The average cost of non-brokered CDs decreased 27 basis points, to 1.21%, for the three months ended September 30, 2011, and average balances of these CDs increased $5.1 million, or 2%, compared to the quarter ended September 30, 2010. The Company did not have any brokered CDs in the third quarter of 2011 or 2010.

Interest expense on borrowed funds, consisting primarily of FHLB borrowings and repurchase agreements, amounted to $22 thousand for the third quarter of 2011, a decrease of $15 thousand, or 41%, over the same period last year. The decrease was primarily attributed to the reduction in average balances of approximately $13.0 million, or 73%, for the quarter ended September 30, 2011 compared to the same period in 2010. The average interest rates paid on these borrowed funds increased as the $13 million reduction in borrowed funds was primarily in lower costing shorter term investments.

The interest expense and average rate on junior subordinated debentures remained the same at $294 thousand and 10.88% for both the three months ended September 30, 2011 and September 30, 2010.

The average balance of non-interest bearing demand deposits, for the three months ended September 30, 2011, increased $46.4 million, or 21%, as compared to the same period in 2010. Non-interest bearing demand deposits are an important component of the Company’s core funding strategy. This non-interest bearing funding source represented 20% and 18% of total average deposit balances for the three months ended September 30, 2011 and 2010, respectively.

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Provision for Loan Loss

The provision for loan losses amounted to $1.8 million for three months ended September 30, 2011 an increase of $565 thousand compared to the same period last year. The provisions made to the allowance for loan losses are a function of growth and trends in asset quality, taking into consideration the level of loan growth, adversely classified and specific reserves for impaired loans, the level of non-performing loans and net charge-offs. For further discussion regarding the provision for loan losses and management’s assessment of the adequacy of the allowance for loan losses see “Financial Condition —Credit Risk/Asset Quality” and “Allowance for Loan Losses” in this Item 2 above and “Risk Elements/Asset Quality” and “Allowance for Loan Losses” in the Financial Condition section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2010 Annual Report on Form 10-K.

There have been no material changes to the Company’s underwriting practices or to the allowance for loan loss methodology used to estimate loan loss exposure as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The provision for loan losses is a significant factor in the Company’s operating results.

Non-Interest Income

Non-interest income for the three months ended September 30, 2011 amounted to $3.2 million, an increase of $580 thousand, or 22%, as compared to the three months ended September 30, 2010. The significant changes are discussed below.

Deposit service fees increased $117 thousand, or 11%, compared to the same quarter in the prior period, primarily in checking, overdraft and electronic transaction fees.

Net gains on security sales increased $486 thousand compared to the three month period ended September 30, 2010, resulting from $7.8 million in securities’ sales, primarily municipals, during the quarter.

Net gain on loan sales decreased $89 thousand, or 43%, for the three months ended September 30, 2011 when compared to the same period in 2010 primarily due to a lower volume of residential loan sales in the third quarter of 2011.

Non-Interest Expense

Non-interest expense for the three months ended September 30, 2011 amounted to $11.9 million, an increase of $670 thousand, or 6%, compared to the same period in 2010. The significant changes are discussed below.

Salaries and employee benefits increased $474 thousand, or 7%. The increase is primarily due to the personnel costs necessary to support the Company’s strategic growth initiatives, including annual salary adjustments since the prior period.

Technology expenses increased $120 thousand, or 14%, primarily due to growth and expansion costs to support the Company’s strategic initiatives. The Company continually invests in technology initiatives to provide our customers with new product features, in addition to investments to maintain data security and improve overall efficiency.

For the three months ended September 30, 2011, deposit insurance premiums decreased $193 thousand, or 41%, resulting from changes made by the FDIC (effective April 1, 2011) in their deposit insurance assessment methodology in order to put more of the insurance fund burden on higher risk institutions.

Other operating expenses increased $172 thousand, or 21%, compared to the 2010 quarter due primarily to expenses related to foreclosed real estate, workout and delinquent loans and branch security.

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Results of Operations

Nine Months Ended September 30, 2011 vs. Nine Months Ended September 30, 2010

Unless otherwise indicated, the reported results are for the nine months ended September 30, 2011 with the “comparable period”, “prior year” and “prior period” being the nine months ended September 30, 2010. Average yields are presented on a tax equivalent basis.

The Company’s year-to-date 2011 net income amounted to $8.1 million compared to $8.2 million for the same period in 2010, a decrease of $132 thousand, or 2%. Diluted earnings per common share were $0.86 for the nine months ended September 30, 2011 compared to $0.89 for the comparable 2010 period, a decrease of 3%.

The Company’s growth contributed to both increased net interest income and an increase in the level of operating expenses for the nine months ended September 30, 2011 compared to the prior period. Net income also included increases in non-interest income and an increase in the provision for loan losses.

Net Interest Income

The Company’s net interest income for the first nine months of 2011 was $43.0 million compared to $40.9 million for the nine months ended September 30, 2010, an increase of $2.1 million, or 5%. The increase in net interest income over the comparable year period was due primarily to loan growth, partially offset by a decrease in net interest margin.

Net Interest Margin

The Company’s margin was 4.36% for the nine months ended September 30, 2011, compared to 4.44% in the comparable 2010 period. The 2011 year-to-date margin was impacted by the lower interest rate environment, primarily its effects on the investment portfolio, and also deposits in excess of loan growth which were held in low yielding fed funds.

Rate / Volume Analysis

The following table sets forth the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) volume (change in average portfolio balance multiplied by prior period average rate); (2) interest rate (change in average interest rate multiplied by prior period average balance); and (3) rate and volume (the remaining difference).

				Increase (decrease) due to
(Dollars in thousands)	Net Change			Volume			Rate			Rate/ Volume
Interest Income
Loans	$	1,458		$	2,894		$	(1,064	)	$	(372	)
Investments (1)	(458		)	130			(301		)	(287		)
Total interest earnings assets	1,000			3,024			(1,365		)	(659		)

Interest Expense
Int chkg, savings and money market (2)	(316		)	361			(626		)	(51		)

Certificates of deposit	(671		)	36			(696		)	(11		)
Brokered certificates of deposit	(17		)	—			—			(17		)
Total Certificates of Deposit	(688		)	36			(696		)	(28		)

Borrowed funds	(78		)	(120		)	255			(213		)
Junior subordinated debentures	—			—			—			—
Total interest-bearing deposits, borrowed funds and debentures	(1,082		)	277			(1,067		)	(292		)

Change in net interest income	$	2,082		$	2,747		$	(298	)	$	(367	)

(1) Investments include investment securities, FHLB stock and short-term investments.

(2) Interest checking, savings and money market includes interest expense on brokered money market accounts.

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The following table presents the Company’s average balance sheet, net interest income and average rates for the nine months ended September 30, 2011 and 2010.

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

	Nine Months Ended September 30, 2011						Nine Months Ended September 30, 2010
(Dollars in thousands)	Average Balance		Interest		Average Yield(1)		Average Balance		Interest		Average Yield(1)

Assets:
Loans (2)	$	1,172,217	$	46,915	5.40	%	$	1,102,604	$	45,457	5.55	%
Investments (3)	178,623		2,728		2.51	%	162,652		3,186		3.25	%
Total interest earnings assets	1,350,840		49,643		5.02	%	1,265,256		48,643		5.25	%

Other assets	81,022						75,495

Total assets	$	1,431,862					$	1,340,751

Liabilities and stockholders’ equity:
Int chkg, savings and money market	$	771,760	3,085		0.53	%	$	697,943	3,401		0.65	%
Certificates of deposit	276,582		2,591		1.25	%	273,555		3,262		1.59	%
Brokered Certificates of deposit	—		—		—		2,831		17		0.80	%
Borrowed funds	5,474		66		1.60	%	31,925		144		0.60	%
Junior subordinated debentures	10,825		883		10.88	%	10,825		883		10.88	%
Total interest-bearing funding	1,064,641		6,625		0.83	%	1,017,079		7,707		1.01	%

Net interest rate spread					4.19	%					4.24	%

Demand deposits	236,839		—		—		201,825		—		—
Total deposits, borrowed funds and debentures	1,301,480		6,625		0.68	%	1,218,904		7,707		0.85	%

Other liabilities	9,795						10,081
Total liabilities	1,311,275						1,228,985

Stockholders’ equity	120,587						111,766

Total liabilities and stockholders’ equity	$	1,431,862					$	1,340,751

Net interest income			$	43,018					$	40,936

Net interest margin (tax equivalent)					4.36	%					4.44	%

(1) Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, which was not included in the interest amount above, was $1.1 million and $1.1 million for the periods ended September 30, 2011 and September 30, 2010 respectively.

(2) Average loans include non-accrual loans and are net of average deferred loan fees.

(3) Average investment balances are presented at average amortized cost and include investment securities, FHLB stock and short-term investments.

Interest Income

Total interest income amounted to $49.6 million for the nine months ended September 30, 2011, an increase of $1.0 million, or 2%, compared to the prior period. The increase resulted primarily from an increase of $85.6 million, or 7%, in the average balance of interest earning assets, partially offset by a 23 basis point decline in the yield on interest earning assets due to higher balances held in lower yielding short-term investments and the lower interest rate environment during the period.

Interest income on loans, which accounts for the majority of interest income, amounted to $46.9 million, an increase of $1.5 million, or 3%, over the comparable period, due primarily to loan growth, partially offset by a decline in loan yields. The average loan balances increased $69.6 million, or 6%, compared to the prior period, while the average yield on loans declined 15 basis points over the same period and amounted to 5.40% for the nine months ended September 30, 2011.

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Total investment income, which represents the remainder of interest income, amounted to $2.7 million for the nine months ended September 30, 2011, a decrease of $458 thousand, or 14%, compared to the prior period. The decrease resulted primarily from the impact of a 74 basis point decrease in the average yield on investment securities, as investments that were sold, matured, or were called had higher yields than investment purchases during the period. In addition, a higher percentage of average investment balances were held in lower yielding fed funds which contributed to the decrease in yield. This decrease in interest income was partially offset by a $16.0 million, or 10%, increase in the average balances of investments over the comparable period.

Interest Expense

For the nine months ended September 30, 2011, total interest expense amounted to $6.6 million, a decrease of $1.1 million, or 14%, compared to the prior period. The decrease resulted primarily from a 17 basis point decrease in the average cost of funding due to the reduction in deposit market interest rates over the period. This decrease was partially offset by the expense associated with the $47.6 million, or 5%, increase in the average balance of interest bearing funding sources. This deposit growth has provided the Company with the ability to continue to grow loans and reduce wholesale funding balances.

Interest expense on interest checking, savings and money market accounts amounted to $3.1 million for the nine months ended September 30, 2011, a decrease of $316 thousand, or 9%, over the same period in the prior year, resulting primarily from a decrease in the average cost of these accounts, partially offset by an increase in average balances. The average cost of these accounts decreased 12 basis points to 0.53%, while the average balances increased $73.8 million, or 11%, compared to the prior period. Average balance increases were noted primarily in money market accounts. Included in average interest checking, savings and money market balances were average brokered money markets balances of $20 thousand and $1.1 million for the periods ended September 30, 2011 and 2010 respectively.

Interest expense on total CDs (brokered and non-brokered) decreased $688 thousand, or 21%, compared to the prior period and amounted to $2.6 million for the nine months ended September 30, 2011. The decrease primarily resulted from a decline of 34 basis points in the average cost of CDs, while average balances of CDs were relatively flat compared to the prior period. The Company did not have any brokered CD balances in the nine months ended September 30, 2011, while in the same period in 2010, the averaged brokered CD balances were $2.8 million.

Interest expense on borrowed funds, consisting primarily of FHLB borrowings and repurchase agreements, amounted to $66 thousand, a decrease of $78 thousand, or 54%, compared to the same period last year. The decrease was primarily attributed to the reduction in average balances of FHLB advances of approximately $26.5 million, or 83%, compared to the prior period. The average cost of these borrowed funds increased as the $26.5 million reduction in borrowed funds was in lower costing shorter term investments.

The interest expense and average rate on junior subordinated debentures remained the same at $883 thousand and 10.88% for both the nine months ended September 30, 2011 and September 30, 2010.

The average balance of non-interest bearing demand deposits, for the nine months ended September 30, 2011, increased $35.0 million, or 17%, as compared to the same period in 2010. Non-interest bearing demand deposits are an important component of the Company’s core funding strategy. This non-interest bearing funding represented 18% and 17% of total average deposit balances for the nine months ended September 30, 2011 and 2010, respectively.

Provision for Loan Loss

The provision for loan losses increased $767 thousand compared to the same period last year and amounted to $4.0 million for the nine months ended September 30, 2011. The provisions made to the allowance for loan losses are a function of growth and trends in asset quality, taking into consideration the level of loan growth, adversely classified and specific reserves for impaired loans, the level of non-performing loans and net charge-offs. For further discussion regarding the provision for loan losses and management’s assessment of the adequacy of the allowance for loan losses see “Financial Condition —Credit Risk/Asset Quality” and “Allowance for Loan Losses” in this Item 2 above and “Risk Elements/Asset Quality” and “Allowance for Loan Losses” in the Financial Condition section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2010 Annual Report on Form 10-K.

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Non-Interest Income

Non-interest income for the nine months ended September 30, 2011 amounted to $9.1 million, an increase of $458 thousand, or 5%, as compared to the nine months ended September 30, 2010. The significant changes are discussed below.

Investment advisory income increased $231 thousand, or 9%, for the year to date period ended September 30, 2011 over the same period in the prior year. The increase in investment advisory income primarily relates to net asset growth, both from market appreciation and new business, achieved since the end of the comparable period in 2010.

Deposit service fees increased $267 thousand, or 9%, for the nine months ended September 30, 2011 as compared to the same period last year primarily in electronic transaction and overdraft fees.

Other income decreased $21 thousand, or 2%, primarily as a result of net gains on OREO sales in 2010, partially offset by an increase in rental income.

Non-Interest Expense

Non-interest expense for the nine months ended September 30, 2011 amounted to $36.2 million, an increase of $2.1 million, or 6%, compared to the same period in 2010. The significant changes are discussed below.

Salaries and employee benefits increased $1.5 million, or 7%. The increase was primarily due to the personnel and benefit costs necessary to support the Company’s strategic growth initiatives including annual salary adjustments since the prior period.

Occupancy and equipment expenses increased $206 thousand, or 5%, primarily due to growth and expansion costs to support the Company’s strategic initiatives and expenses associated with the unusually high cost of snow removal in the first quarter of 2011.

Technology expenses increased $132 thousand, or 5%, over the comparable period in 2010, primarily due to growth and expansion costs to support the Company’s strategic initiatives. The Company continually invests in technology initiatives to provide our customers with new product features, in addition to investments to maintain data security and improve overall efficiency.

For the nine months ended September 30, 2011, deposit insurance premiums decreased $329 thousand, or 24%, resulting from changes made by the FDIC (effective April 1, 2011) in their deposit insurance assessment methodology in order to put more of the insurance fund burden on higher risk institutions.

Advertising and public relations expenses decreased $41 thousand, or 2%, compared to the prior period. The decrease was primarily due to the Bank’s community recognition event, which was held in the Spring of 2010 and is next planned to be held in November 2011, partially offset by higher community outreach costs in the first quarter of 2011.

Audit, legal, and other professional fees increased $128 thousand, or 15%, primarily due to an increase in consulting services.

Other operating expenses increased $494 thousand, or 19%, compared to the first nine months of 2010 due primarily to expenses related to foreclosed real estate, workout and delinquent loans, and branch security.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2011 and 2010 was $3.9 million and $4.0 million respectively. The effective tax rate for the nine months ended September 30, 2011 and 2010 was 32.4% and 32.9%, respectively.

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Item 3 — Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risk is interest rate risk. Oversight of interest rate risk management is centered on the Company’s Asset-Liability Committee (the “committee”). The committee is comprised of six outside directors of the Company and three executive officers of the Company, who are also members of the Board of Directors. In addition, several directors who are not on the committee rotate in on a regular basis. Annually, the committee reviews and approves the Company’s asset-liability management policy, which provides management with guidelines for controlling interest rate risk, as measured through net interest income sensitivity to changes in interest rates, within certain tolerance levels. The committee also establishes and monitors guidelines for the Company’s liquidity and capital ratios.

The Company’s asset-liability management strategies and guidelines are reviewed on a periodic basis by management and presented and discussed with the committee on at least a quarterly basis. These strategies and guidelines are revised based on changes in interest rate levels, general economic conditions, competition in the marketplace, the current interest rate risk position of the Company, anticipated growth and other factors.

One of the principal factors in maintaining planned levels of net interest income is the ability to design effective strategies to manage the impact of interest rate changes on future net interest income. Quarterly, management completes a net interest income sensitivity analysis, which is presented to the committee. This analysis includes a simulation of the Company’s net interest income under various interest rate scenarios. Variations in the interest rate environment affect numerous factors, including prepayment speeds, reinvestment rates, maturities of investments (due to call provisions), and interest rates on various asset and liability accounts.

The Company can be subject to net interest margin (“margin”) compression depending on the economic environment and the shape of the yield curve. Under the Company’s current balance sheet position, the Company’s margin generally performs slightly better over time in a rising rate environment, while it generally decreases in a declining rate environment and when the yield curve is flattening or inverted.

Under a flattening yield curve scenario, margin compression occurs as the spread between the cost of funding and the yield on interest earning assets narrows. Under this scenario the degree of margin compression is highly dependent on the Company’s ability to fund asset growth through lower cost deposits. However, if the curve is flattening, while short-term rates are rising, the adverse impact on margin may be somewhat delayed, as increases in the Prime Rate will initially result in the Company’s asset yields re-pricing more quickly than funding costs.

Under an inverted yield curve situation, shorter-term rates exceed longer-term rates, and the impact on margin is similar but more adverse than the flat curve scenario. Again, however, the extent of the impact on margin is highly dependent on the Company’s balance sheet mix.

In a declining rate environment, margin compression will eventually occur as the yield on interest earning assets decreases more rapidly than decreases in funding costs. The primary causes would be the impact of interest rate decreases (including decreases in the Prime Rate) on adjustable rate loans and the fact that decreases in deposit rates may be limited or lag decreases in the Prime Rate. The Company experienced margin compression due to the effects of a declining rate environment into early 2009 as the Federal Reserve Board reduced its Fed Funds Target Rate late in the fourth quarter of 2008 to a range of 0.0% to 0.25%. The Fed Funds Target Rate and the Prime Rate have remained unchanged since 2008.

The Company’s margin improved during the latter half of 2009 and in 2010, as cost of funds continued to decline due to the extended duration of the low rate environment, while the yield on certain assets tied to the Prime Rate had already repriced downward in 2008 and early 2009. Net interest margin remained somewhat stable in 2011 as the cost of funds is approaching a floor.

There have been no material changes in the results of the Company’s net interest income sensitivity analysis as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. At September 30, 2011, management continues to consider the Company’s primary interest rate risk exposure to be margin compression that may result from changes in interest rates and/or changes in the mix of the Company’s balance sheet components. Specifically, these components include fixed versus variable rate loans and investments on the asset side, and higher cost deposits and borrowings versus lower cost deposits on the liability side.

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Item 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures and internal controls designed to ensure that the information required to be disclosed in reports that it files or submits to the United States Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

The Company carried out an evaluation as of the end of the period covered by this report under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2011.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that has occurred during the Company’s most recent fiscal quarter (i.e., the three months ended September 30, 2011) that has materially affected, or is reasonably likely to materially affect, such internal controls.

PART II OTHER INFORMATION

Item 1 - Legal Proceedings

There are no material pending legal proceedings to which the Company or its subsidiaries are a party or to which any of its property is subject, other than ordinary routine litigation incidental to the business of the Company. Management does not believe resolution of any present litigation will have a material adverse effect on the consolidated financial condition or results of operations of the Company.

Item 1A — Risk Factors

Management believes that there have been no material changes in the Company’s risk factors as reported in the Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

The Company has not sold any equity securities that were not registered under the Securities Act of 1933, as amended, during the three months ended September 30, 2011. 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 three months ended September 30, 2011.

Item 3 - Defaults upon Senior Securities

Not Applicable

Item 4 [Removed and Reserved]

Item 5 - Other Information

Not Applicable

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Item 6 - Exhibits

EXHIBIT INDEX

Exhibit No.		and Description
3.1		Restated Articles of Organization of the Company, incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2007 and filed with the SEC on March 14, 2008.

3.2		Amended and Restated Bylaws of the Company, as amended as of March 15, 2010, incorporated by reference to Exhibit 3.2 to the Company’s Form 10-Q for the quarter ended March 31, 2010, and filed with the SEC on May 10, 2010.

31.1*		Certification of Principal Executive Officer under Securities Exchange Act Rule 13a-14(a)
31.2*		Certification of Principal Financial Officer under Securities Exchange Act Rule 13a-14(a)
32*		Certification of Principal Executive Officer and Principal Financial Officer under 18 U.S.C. § 1350 Furnished Pursuant to Securities Exchange Act Rule 13a-14(b)

101		The following materials from Enterprise Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Changes in Equity for the nine months ended September 30, 2011, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and (v) Notes to Unaudited Consolidated Financial Statements. (Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purpose of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Exchange Act and otherwise are not subjected to liability under these sections.)

*Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ENTERPRISE BANCORP, INC.


DATE: November 9, 2011	By:	/s/ James A. Marcotte
		James A. Marcotte
		Executive Vice President,
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)