Legacy Bancorp, Inc. - FORM 10-K

Attached files

file	filename
EX-21.0 - EX-21.0 - Legacy Bancorp, Inc.	b84121exv21w0.htm
EX-14.0 - EX-14.0 - Legacy Bancorp, Inc.	b84121exv14w0.htm
EX-32 - EX-32 - Legacy Bancorp, Inc.	b84121exv32.htm
EX-31.1 - EX-31.1 - Legacy Bancorp, Inc.	b84121exv31w1.htm
EX-31.2 - EX-31.2 - Legacy Bancorp, Inc.	b84121exv31w2.htm
EX-23.0 - EX-23.0 - Legacy Bancorp, Inc.	b84121exv23w0.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010


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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER : 000-51525

LEGACY BANCORP, INC.

(Exact name of registrant as specified in its charter)


Delaware		20-3135053
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

99 NORTH STREET
PITTSFIELD, MASSACHUSETTS 01201
(Address of principal executive offices) (Zip Code)

(413) 443-4421
(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:


Title of each class		Name of each exchange on which registered

Common Stock ($0.01 par value per share)		NASDAQ Stock Market, LLC

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes o No þ.

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 229.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files). Yes o No o.

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ.

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


Large accelerated filer o		Accelerated Filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Based upon the closing price of the registrant’s common stock as of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $59,382,599.

The number of shares of Common Stock outstanding as of March 10, 2011 was 8,631,732.

Documents Incorporated By Reference: Portions of Form 10-K/A, which will be filed within 120 days of the end of the Registrant’s fiscal year, is incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS


	Page
Part I
Item 1. Business		2
Item 1a. Risk Factors		32
Item 1b. Unresolved Staff Comments		37
Item 2. Properties		38
Item 3. Legal proceedings		39
Item 4. (Removed and reserved)		39
Part II
Item 5. Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities		39
Item 6. Selected financial data		41
Item 7. Management’s discussion and analysis of financial condition and results of operations		42
Item 7a. Quantitative and qualitative disclosures about market risk		53
Item 8. Financial statements and supplementary data		59
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure		121
Item 9a. Controls and procedures		121
Item 9b. Other information		122
Part III
Item 10. Directors, executive officers and corporate governance		122
Item 11. Executive compensation		122
Item 12. Security ownership of certain beneficial owners and management and related stockholder matters		122
Item 13. Certain relationships and related transactions, and director independence		123
Item 14. Principal accountant fees and services		123
Part IV
Item 15. Exhibits and financial statement schedules		124
Signatures		124
EX-14.0
EX-21.0
EX-23.0
EX-31.1
EX-31.2
EX-32

Part I

Item 1. Business

Recent Developments: On December 21, 2010, Legacy Bancorp, Inc. (“Legacy” or the “Company”) and Berkshire Hills Bancorp, Inc. (“Berkshire”) jointly announced the execution of a definitive agreement whereby Berkshire will acquire Legacy in a 90% stock and 10% cash transaction. As a result of the merger, Legacy’s shareholders will become shareholders of Berkshire and will receive 0.56385 shares of Berkshire common stock plus $1.30 cash for each share of Legacy common stock they own. On the date of the announcement, the merger was valued at $13.00 per share of Legacy common stock based on the $20.75 average closing price of Berkshire’s common stock for the ten day period ending December 15, 2010. The transaction is expected to be completed during the third quarter of 2011, subject to the approval of regulators and shareholders of both companies. Berkshire’s common stock is listed on the NASDAQ Global Select Market under the trading symbol “BHLB”. On March 11, 2011, the closing sales price of a share of Berkshire common stock was $21.83.

Forward-Looking Statements: This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Legacy Bancorp, Inc. and Legacy Banks (the “Bank”). These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Legacy Bancorp’s and Legacy Banks’ ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the effect of a dramatically slowing economy on our lending portfolio and investments, the impact of the U.S. government’s economic stimulus program and its various financial institution rescue plans, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, and changes in relevant accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General: The Bank is a full-service, community-oriented financial institution offering products and services to individuals, families and businesses through nineteen branch offices located in western Massachusetts and eastern New York State. Predecessors to the Bank have been serving the area’s financial needs since 1835. Legacy Banks’ business consists primarily of making loans to its customers, including residential mortgages, commercial real estate loans, commercial loans and consumer loans, and investing in a variety of investment and mortgage-backed securities. Legacy Banks funds these lending and investment activities with deposits from the general public, funds generated from operations and select borrowings. Legacy Banks also provides insurance and investment products and services, investment portfolio management, debit and credit card products and online banking.

Market Area and Competition: The Bank offers a variety of financial products and services designed to meet the needs of the communities served. The primary deposit-gathering area is concentrated in western Massachusetts and eastern New York State. Legacy Banks is one of the largest banks in Berkshire County, Massachusetts in deposits and mortgage recordings. It is headquartered in Pittsfield, Massachusetts, located 120 miles west of Boston, Massachusetts and 30 miles east of Albany, New York. The Massachusetts and

New York counties in which the Bank currently operates include a mixture of rural, suburban and urban markets.

In the past few years a major goal of the Company’s business strategy was to expand geographically into areas contiguous to its existing markets, including into the State of New York, and to increase its loan volume in all areas. One step in this strategy was achieved in 2007 when the Bank purchased five branch offices located in Eastern New York, assuming approximately $76.6 million of deposit liabilities. This expansion into Eastern New York continued as the Bank opened denovo branch office locations in downtown Albany, New York in 2008, and in Latham, New York in 2009. The geographical expansion continued in March 2009 with the acquisition of a full-service branch office in Haydenville, Massachusetts.

The Company faces substantial competition in its efforts to originate loans and attract deposits and other fee-based business. Achieving meaningful growth is very challenging given the number of competitors and the overall growth level in the population in all market areas. The major risks associated with the competitive environment in Berkshire County is that it is relatively small and over-banked, which results in limited asset and funding diversification. The Bank faces direct competition from a significant number of financial institutions within its branch office footprint, many with a state-wide, regional or national presence. It also competes with several smaller community banks through competitive pricing coupled with superior service and expertise in both commercial and retail banking, using these same attributes in its expanded commercial lending in New York and acquired branches.

Lending Activities

The following table summarizes the composition of Legacy Banks’ loan portfolio (not including loans held for sale) as of the dates indicated:


	At December 31,
	2010						2009						2008
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in Thousands)
Mortgage loans on real estate:
Residential	$	276,765			45.02	%	$	285,618			43.12	%	$	344,235			49.15	%
Commercial		225,027			36.61			263,910			39.85			246,374			35.18
Home equity		74,328			12.09			69,625			10.51			63,138			9.01

		576,120			93.72			619,153			93.48			653,747			93.34


Other loans:
Commercial		28,123			4.57			31,373			4.74			34,242			4.89
Consumer and other		10,518			1.71			11,791			1.78			12,386			1.77

		38,641			6.28			43,164			6.52			46,628			6.66


Total loans		614,761			100.00	%		662,317			100.00	%		700,375			100.00	%


Other Items:
Net deferred loan costs		1,351						1,400						1,531
Allowance for loan losses		(9,010	)					(11,089	)					(6,642	)


Total Loans, net	$	607,102					$	652,628					$	695,264


	At December 31,
	2007						2006
	Amount			Percent			Amount			Percent
	(Dollars in Thousands)
Mortgage loans on real estate:
Residential	$	349,772			53.17	%	$	325,407			55.85	%
Commercial		212,191			32.26			170,971			29.35
Home equity		56,752			8.63			56,856			9.76

		618,715			94.06			553,234			94.96


Other loans:
Commercial		27,664			4.20			22,903			3.93
Consumer and other		11,421			1.74			6,451			1.11

		39,085			5.94			29,354			5.04


Total loans		657,800			100.00	%		582,588			100.00	%


Other Items:
Net deferred loan costs		1,397						891
Allowance for loan losses		(5,568	)					(4,677	)


Total Loans, net	$	653,629					$	578,802

General: Legacy Banks’ gross loan portfolio aggregated $614.8 million at December 31, 2010, representing 67.0% of the Company’s total assets at that date. In its lending activities the Bank originates residential real estate loans secured by one-to-four-family residences, commercial real estate loans, residential and commercial construction loans, commercial loans, home equity lines-of-credit, fixed rate home equity loans and other personal consumer loans. While Legacy Banks makes loans throughout Massachusetts and Eastern New York, most of its lending activities are concentrated in its market area. Loans originated totaled $150.6 million in 2010 as compared to $161.8 million in 2009. Residential mortgage loans sold into the secondary market, on a servicing-retained basis, totaled $42.4 million and $61.9 million during 2010 and 2009, respectively.

Loans originated by the Bank are subject to federal and state laws and regulations. Interest rates charged by the Bank on its loans are influenced by the demand for such loans, the amount and cost of funding available for lending purposes, current asset/liability management objectives and the interest rates offered by competitors. The merger agreement with Berkshire Hills Bancorp, Inc may restrict the Bank’s lending until the merger occurs without the consent of Berkshire. Please refer to Item 1a Risk Factors — Proposed Merger with Berkshire Hills Bancorp, Inc. for further information.

Residential Real Estate Loans: Legacy offers fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $3.0 million. As of December 31, 2010, this portfolio totaled $276.8 million, or 45.0% of the total gross loan portfolio on that date, and had an average yield of 5.11%. Residential mortgage loan originations totaled $104.3 million and $95.4 million for 2010 and 2009, respectively. Residential real estate loans include $4.0 million and $4.1 million of residential construction loans as of December 31, 2010 and 2009, respectively.

The decision to originate loans for portfolio or for sale into the secondary market is made by the Bank’s Asset/Liability Management Committee, and is based on the market rates for such loans and the Bank’s interest rate risk and liquidity profile. Current practice is to sell almost all newly originated fixed-rate 15 and 30 year monthly payment loans, while 10 year fixed-rate and 30 year fixed rate bi-weekly loans are generally held in the Bank’s portfolio. At December 31, 2010, 10, 15, 25 and 30 year fixed rate monthly payment loans held in the Bank’s portfolio totaled $175.5 million, or 63.4% of total residential real estate mortgage loans at that date, and these loans had an average yield of 5.38%. Legacy Banks services loans sold to Fannie Mae and

generally earns a fee equal to 0.25% of the loan amounts outstanding for providing these services. The total of loans serviced for others as of December 31, 2010 is $105.8 million.

At December 31, 2010, adjustable-rate mortgage (ARM) loans totaled $101.3 million or 36.6% of total residential loans outstanding at that date, with an average yield of 4.64%. ARMs are offered for terms of up to 30 years with initial interest rates that are fixed for 1, 3, 5, 7 or 10 years. After the initial fixed-rate period, the interest rates on the loans are generally reset based on the relevant U.S. Treasury CMT (Constant Maturity Treasury) Index plus add-on margins of varying amounts, for periods of 1 year. Interest rate adjustments on such loans are typically limited to a range from 2.0% to 5.0% during any adjustment period and 5.0% to 6.0% over the life of the loan. Periodic adjustments in the interest rate charged on ARM loans help to reduce the Banks’ exposure to changes in interest rates. However, ARM loans generally possess an element of credit risk not inherent in fixed-rate mortgage loans, in that borrowers are potentially exposed to increases in debt service requirements over the life of the loan in the event market interest rates rise. Higher payments may increase the risk of default, though this risk has not had a materially adverse effect on the Bank to date.

For residential mortgage loan originations to be held in portfolio, Legacy lends up to a maximum loan-to-value ratio of 100% for first-time home buyers and 95% for other buyers on mortgage loans secured by owner-occupied property, with the general condition that private mortgage insurance is required for loans with a loan-to-value ratio in excess of 80%. Title insurance, hazard insurance and, if applicable, flood insurance are required for all properties securing real estate loans made by the Bank. A licensed appraiser appraises all properties securing residential first mortgage purchase loans.

In an effort to provide financing for low and moderate-income first-time home buyers, the Bank originates and services residential mortgage loans with private mortgage insurance provided by the Mortgage Insurance Fund (MIF) of the Massachusetts Housing Finance Agency, or Mass Housing. The program provides mortgage payment protection as an enhancement to mortgage insurance coverage. This no-cost benefit, known as ‘MI Plus,’ provides up to six monthly principal and interest payments in the event of a borrower’s job loss.

Commercial Real Estate Loans: The Bank originated $20.3 million and $45.4 million of commercial real estate loans in 2010 and 2009, respectively, and had $225.0 million of commercial real estate loans, with an average yield of 6.33%, in its portfolio as of December 31, 2010. This loan segment has grown from 15.2% of the total loan portfolio at December 31, 2001 to 36.7% as of December 31, 2010. Commercial real estate loans include $13.6 million and $18.7 million of commercial construction loans as of December 31, 2010 and 2009, respectively.

Legacy Banks generally originates commercial real estate loans for terms of up to 10 years with amortization schedules of up to 25 years, typically with interest rates that adjust over periods of one to seven years based on various rate indices. Commercial real estate loans are generally secured by multi-family income properties, small office buildings, retail facilities, warehouses, industrial properties and owner-occupied properties used for business.

Since 2002 the Bank has had a national commercial real estate lending program which originated loans throughout the United States, allowing for greater portfolio diversity. In 2010 Legacy decided to discontinue originating loans within this program while allowing the existing loan portfolio to amortize and pay down. During 2010, the Bank sold $16.2 million of the out-of market portion of this portfolio, further reducing the Bank’s balance of these loans.

In its evaluation of a commercial real estate loan application, Legacy considers the net operating income of the borrower’s business, the borrower’s expertise, credit history, and the profitability and value of the underlying property. In addition, for loans secured by rental properties, the Bank will also consider the terms of the leases

and the quality of the tenants. Legacy requires that the properties securing these loans have strong debt service coverage ratios.

Commercial real estate loans generally have larger balances and involve a greater degree of risk than residential mortgage loans. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral value of the commercial real estate securing the loan. Economic events and changes in government regulations could have an adverse impact on the cash flows generated by properties securing the Banks’ commercial real estate loans and on the value of such properties. As of December 31, 2010 Legacy Banks had $32.7 million in commercial real estate loans concentrated in the hospitality industry, representing 12.9% of the total commercial real estate loan portfolio.

Home Equity Lines-of-Credit and Loans: Legacy Banks offers home equity lines-of-credit and home equity term loans. The Bank originated $12.0 million and $8.8 million of home equity lines-of-credit and loans during 2010 and 2009 respectively, and at December 31, 2010 had $74.3 million of home equity lines-of-credit and loans outstanding, representing 12.1% of the loan portfolio, with an average yield of 3.04% at that date.

Home equity lines-of-credit are secured by first or second mortgages on one-to-four family owner occupied properties, and are available to be drawn upon for 10 years, at the end of which time they become term loans amortized over 10 years. Interest rates on home equity lines normally adjust based on the prime rate of interest as published by the Wall Street Journal. The undrawn portion of home equity lines-of-credit totaled $68.1 million at December 31, 2010.

Commercial Loans: Legacy Banks originates secured and unsecured commercial and industrial loans to business customers for the purpose of financing equipment purchases, working capital, expansion and other general business purposes. Legacy Banks originated $13.0 million and $10.9 million in commercial loans during 2010 and 2009, respectively, and as of December 31, 2010 had $28.1 million in commercial loans in its portfolio, representing 4.6% of such portfolio, with an average yield of 4.75%. The Bank intends to place greater emphasis on growing this segment of the loan portfolio.

Legacy Banks’ commercial loans are generally collateralized by equipment, accounts receivable and inventory, and are generally supported by personal guarantees. The Bank offers both term and revolving commercial loans. The former have either fixed or adjustable-rates of interest and generally fully amortize over a term of between three and seven years. Revolving loans are renewable annually, with floating interest rates that are generally indexed to the Wall Street Journal prime rate of interest. When making commercial loans, the Bank considers the financial statements of the borrower, the borrower’s payment history with respect to both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the borrower operates and the value of the collateral. Legacy Banks’ commercial loans are not concentrated in any one industry. The repayment of commercial loans is often dependent on the successful operation of the business and may be affected by adverse changes in the economy and other external factors affecting the business. Collateral securing such loans may fluctuate in value and for that reason, may be difficult to appraise or liquidate.

Consumer and Other Loans: Legacy Banks offers a variety of consumer and other loans, including auto loans and loans secured by passbook savings or certificate accounts. The Bank originated or purchased $1.1 million and $2.1 million of consumer and other loans during 2010 and 2009, respectively, and at December 31, 2010 had $10.5 million of consumer and other loans outstanding, representing 1.7% of the loan portfolio at that date, with an average yield of 8.30%.

Loan Origination and Underwriting: Loan originations come from a variety of sources. The primary sources of originations are our salaried and commissioned loan personnel, advertising and referrals from customers

and local real estate brokers. The Bank occasionally purchases participation interests in commercial real estate loans from other banks. Legacy underwrites such residential and commercial purchased loans using its own underwriting criteria.

The Bank issues loan commitments to prospective borrowers conditioned on the occurrence of certain events. Commitments are made in writing on specified terms and conditions and are generally honored for up to 60 days from approval. At December 31, 2010, the Bank had loan and other financial commitments totaling $118.3 million. For information about Legacy’s loan commitments outstanding as of December 31, 2010, see Item 7: “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Quantitative and Qualitative Disclosures About Risk Management—Loan Commitments”.

Legacy charges origination fees, or points, and collects fees to cover the costs of appraisals and credit reports on most residential mortgage loans originated. Legacy Banks also collects late charges on real estate loans, and origination fees and prepayment penalties on commercial mortgage loans. For information regarding Legacy Banks’ recognition of loan fees and costs, please refer to Note 1 to the Consolidated Financial Statements of Legacy Bancorp, Inc. and Subsidiaries.

The following table sets forth certain information concerning Legacy Banks’ loan originations, purchases and sales activity for the year indicated:


	For the Years Ended December 31,
	2010			2009			2008		2007		2006
	(Dollars in Thousands)
Loans at beginning of year	$	662,317		$	700,375		$	657,800	$	582,588	$	551,359


Originations:
Mortgage loans on real estate:
Residential		104,272			95,427			73,660		75,047		55,223
Commercial		20,318			45,408			69,618		69,375		50,239
Home Equity		11,962			8,827			18,820		28,928		28,997

		136,552			149,662			162,098		173,350		134,459

Other Loans:
Commercial Business		12,952			10,914			17,365		18,932		17,330
Consumer and other		1,097			1,193			1,496		3,037		2,183
		14,049			12,107			18,861		21,969		19,513

Total loans originated		150,601			161,769			180,959		195,319		153,972


Loans purchased		—			910			2,421		4,042		3,106

Deduct:
Principal loan repayments and prepayments		124,204			133,223			112,810		105,761		114,281
Loan sales		61,310			66,949			27,416		18,170		11,405
Charge-offs		12,643			565			579		218		163

Total deductions		198,157			200,737			140,805		124,149		125,849


Net increase (decrease) in loans		(47,556	)		(38,058	)		42,575		75,212		31,229


Loans at end of year	$	614,761		$	662,317		$	700,375	$	657,800	$	582,588

Residential mortgage loans less than the Federal National Mortgage Association (Fannie Mae) limit to be held in portfolio require the approval of a residential loan underwriter. Residential mortgage loans greater than the Fannie Mae limit but less than $1.0 million require the approval of either the CEO, President, Senior Vice President of Operations, or Vice President of Risk Management. Residential mortgage loans greater than $1.0 million but less than $3.0 million require the approval of the Loan Committee. Residential mortgage loans greater than $3.0 million but less than the Bank’s legal lending limit require the approval of the Credit/ALCO Committee of the board of directors of the Bank.

Commercial real estate and commercial loans are underwritten by commercial credit analysts. Commercial loans up to $1.0 million may be approved by the CEO, President, Senior Vice President of Commercial Real Estate Lending, Senior Vice President of Operations and Vice President of Risk Management. The Loan Committee may approve loans of up to $6.0 million, while loans over these limits require the approval of the Credit/ALCO Committee of the board of directors of the Bank.

Consumer loans are underwritten by consumer loan underwriters who have approval authorities ranging from $25,000 to $100,000 for these loans. Senior loan committee officers may approve consumer loans of up to $200,000 while the loan committee may approve loans of up to $3.0 million. All consumer loans in excess of these limits require the approval of the Credit/ALCO Committee of the board of directors of the Bank.

Pursuant to its loan policy, the Bank generally will not make loans aggregating more than 10% of its retained earnings and capital stock accounts, or $9.2 million as of December 31, 2010, to one borrower (or related entity). Exceptions to this limit require the approval of the Credit/ALCO Committee of the board of directors of the Bank prior to loan origination. Legacy Banks’ internal lending limit is lower than the Massachusetts legal lending limit, which is 20.0% of a bank’s retained earnings and capital stock accounts, or $18.3 million, as of December 31, 2010.

Legacy Banks has established a risk rating system for its commercial real estate and commercial loans. This system evaluates a number of factors useful in indicating the risk of default and risk of loss associated with a loan. These ratings are performed by commercial credit analysts who do not have responsibility for loan originations. See “Loan Quality—Classification of Assets and Loan Review”.

Maturity and Sensitivity of Loan Portfolio: The following table shows contractual final maturities of selected loan categories at December 31, 2010. The contractual maturities do not reflect premiums, discounts and deferred costs, and do not reflect prepayments:


	Contractual Maturity
	Due Less Than		Due After One		Due After
	One Year		To Five Years		Five Years		Total
	(Dollars in Thousands)
Commercial Real Estate Loans	$	43,766	$	127,848	$	39,817	$	211,431
Commercial Construction loans		4,173		6,175		3,248		13,596

Sub-total: Total Commercial Real Estate Loans	$	47,939	$	134,023	$	43,065	$	225,027


Residential Construction Loans		—		—		4,023		4,023

Total	$	47,939	$	134,023	$	47,088	$	229,050

Of the $181.1 million total of loans above which mature in more than one year, $88.3 million are fixed-rate and $92.8 million are adjustable rate.

Loan Quality

General: One of the Legacy’s most important operating objectives is to maintain a high level of asset quality by making only loans and investments that it would be comfortable holding long-term on our balance sheet. Management uses a number of strategies in furtherance of this goal including maintaining sound credit standards in loan originations, monitoring the loan portfolio through internal and third-party loan reviews, and employing active collection and workout processes for delinquent or problem loans.

Delinquent Loans: Management performs a monthly review of all delinquent loans. The actions taken with respect to delinquencies vary depending upon the nature of the delinquent loans and the period of delinquency. Generally, the Bank’s requirement is that a delinquency notice be mailed no later than the 10 ^thor 16 ^thday, depending on loan type, after the payment due date. A late charge is assessed on loans where the scheduled payment remains unpaid after a 10 or 15 day grace period. After mailing delinquency notices, Legacy Banks’ loan collection personnel call the borrower to ascertain the reasons for delinquency and the prospects for repayment. On loans secured by one- to four-family owner-occupied property, Legacy Banks initially attempts to work out a payment schedule with the borrower in order to avoid foreclosure. Any such loan restructurings must be approved by the level of officer authority required for a new loan of that amount. If these actions do not result in a satisfactory resolution, Legacy Banks refers the loan to legal counsel and counsel initiates foreclosure proceedings. For commercial real estate, construction and commercial loans, collection procedures may vary depending on individual circumstances.

Other Real Estate Owned: Legacy Banks classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as other real estate owned (“OREO”) in its consolidated financial statements. When property is placed into OREO, it is recorded at the fair value less estimated costs to sell at the date of foreclosure or acceptance of deed in lieu of foreclosure. At the time of transfer to OREO, any excess of carrying value over fair value is charged to the allowance for loan losses. Management inspects all OREO property periodically. Holding costs and declines in fair value result in charges to expense after the property is acquired. At December 31, 2010, Legacy Banks had four properties valued at approximately $2.2 million classified as OREO. At December 31, 2009, Legacy Banks had two properties valued at approximately $1.2 million classified as OREO.

Classification of Assets and Loan Review: Legacy Banks uses an internal rating system to monitor and evaluate the credit risk inherent in its loan portfolio. At the time a loan is approved, all commercial real estate and commercial loans are assigned a risk rating based on all of the factors considered in originating the loan. The initial risk rating is recommended by the credit analyst charged with underwriting the loan, and subsequently approved by the relevant loan approval authority. Current financial information is sought for all commercial real estate and commercial borrowing relationships, and is evaluated on at least an annual basis to determine whether the risk rating classification is appropriate. This determination as to the classification of assets and the amount of the loss allowances established are subject to review by regulatory agencies, which can order the establishment of additional loss allowances. See “Loan Quality—Allowance for Loan Losses” and Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Allowance for Loan Losses”.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting principal and interest payments when due. Impaired loans with payments past due at or greater than 90 days are generally maintained on a non-accrual basis. Impairment is measured on a loan by loan basis for commercial loans and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement. At December 31, 2010, loans which have been determined to be impaired, which include all non-accrual loans and troubled debt restructurings, totaled $16.8 million with a corresponding specific reserve allowance of approximately $1.1 million. Legacy Banks engages an independent third party to conduct a semi- annual review of its commercial mortgage and commercial loan portfolios. These loan reviews provide a credit evaluation of selected individual loans to determine whether the risk ratings assigned are appropriate. Independent loan review findings are presented directly to the Audit Committee of the board of directors of the Bank.

Non-Performing Loans: The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At December 31, 2010 the Bank had fourteen loans totaling $4.5 million considered to be troubled debt restructurings (a loan for which a portion of interest or principal has been forgiven or the loan is modified at an interest rate less than current market rates). Of this amount, approximately $2.5 million is included as part of the $12.7 million of non-performing loans as of December 31, 2010. At December 31, 2009 Legacy Banks had had seven loans totaling $10.8 million considered to be troubled debt restructurings.

If the non-accrual loans had been current, including the non-accrual troubled debt restructurings, the gross interest income which would have been recorded for the year ended December 31, 2010 is equal to approximately $832,000. Interest income of approximately $319,000 was recorded in net income for the year ended December 31, 2010 on these loans. Interest income recognized on a cash basis was $142,000.


	At December 31,
	2010			2009			2008			2007			2006
	(Dollars in Thousands)
Non-accrual loans:
Residential mortgage	$	4,176		$	4,822		$	1,190		$	499		$	483
Commercial mortgage		8,128			13,942			5,777			539			179
Commercial		315			743			410			386			132
Home equity, consumer and other		125			71			172			108			85


Total non-accrual loans		12,744			19,578			7,549			1,532			879

Loans greater than 90 days delinquent and still accruing:

Residential mortgage		—			—			—			—			—
Commercial mortgage		—			—			—			—			—
Commercial		—			—			—			—			—
Home equity, consumer and other		—			—			—			—			—

Total loans 90 days delinquent and still accruing		—			—			—			—			—


Total non-performing loans	$	12,744		$	19,578		$	7,549		$	1,532		$	879


Other real estate owned	$	2,216		$	1,195		$	—		$	185		$	—


Total non-performing assets	$	14,960		$	20,773		$	7,549		$	1,717		$	879


Troubled debt restructurings included in NPAs	$	2,451		$	5,905		$	—		$	—		$	—
Troubled debt restructurings not included in NPAs		2,098			4,887			—			—			943


Total troubled debt restructurings	$	4,549		$	10,792		$	—		$	—		$	943

Ratios:
Non-performing loans to total loans		2.07	%		2.96	%		1.08	%		0.23	%		0.15	%
Non-performing assets to total assets		1.63	%		2.20	%		0.80	%		0.17	%		0.11	%

Non-performing loans increased in 2009 as the deterioration in general economic conditions resulted in significant challenges for several individual and commercial borrowers. The decrease in non-performing loans in 2010 is the result of the Bank’s loan workout efforts as well as the charge-off of certain loans. Loans are placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal, or when a loan becomes 90 days past due. Restructured loans represent performing loans for which concessions were granted due to a borrower’s financial condition. Such concessions may include reductions of interest rates to below-market terms and/or extension of repayment terms.

Allowance for Loan Losses. In originating loans, Legacy Banks recognizes that losses will be experienced on loans and that the risk of loss will vary with many elements, including the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan over the term of the loan. The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio, and as such, this allowance represents management’s best estimate of the probable known and inherent credit losses in the loan portfolio as of the date of the financial statements.

The Board and management take the following into consideration when determining the adequacy of the allowance for loan losses for each loan category or sub-category: (i) changes in the trend of the volume and severity of past due and classified loans, and trends in the volume of non-accrual loans, troubled debt restructurings and other loan modifications, (ii) changes in the trend of loan charge-offs and recoveries, (iii) changes in the nature, volume or terms of the loan portfolios, (iv) changes in lending policies or procedures, including the Banks’ loan review system, underwriting standards and collection, charge-off and recovery practices, and the degree of oversight by the Board, (v) changes in the experience, ability, and depth of lending management and staff, (vi) changes in national and local economic and business conditions and developments,

including the condition of various industry and market segments, (vii) the existence and effect of any concentrations of credit and changes in the level of such concentrations, and (viii) the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the portfolios. The allowance for loan losses is evaluated on a regular basis by management and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated, general and unallocated components. The allocated component relates to loans classified as impaired, for which an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of the loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, as outlined above.

While Legacy Banks believes that it has established adequate allowances for losses on loans, adjustments to the allowance may be necessary if future conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Bank’s regulators periodically review the allowance for loan losses. These regulatory agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination, thereby negatively affecting Legacy’s financial condition and earnings.

The following table sets forth activity in the Bank’s allowance for loan losses for the periods indicated:


	At or for the Years Ended December 31,
	2010			2009			2008			2007			2006
				(Dollars in Thousands)
Balance at beginning of period	$	11,089		$	6,642		$	5,568		$	4,677		$	4,220

Charge-offs:
Mortgage loans on real estate		(11,778	)		(82	)		(121	)		—			(50	)
Other loans:
Commercial		(761	)		(265	)		(198	)		(104	)		(19	)
Consumer and other		(104	)		(218	)		(260	)		(114	)		(94	)

Total other loans		(865	)		(483	)		(458	)		(218	)		(113	)


Total charge-offs		(12,643	)		(565	)		(579	)		(218	)		(163	)

Recoveries:
Mortgage loans on real estate		39			1			89			—			10
Other loans:
Commercial		12			48			15			15			316
Consumer and other		45			80			84			43			61

Total other loans		57			128			99			58			377


Total recoveries		96			129			188			58			387


Net recoveries (charge-offs)		(12,547	)		(436	)		(391	)		(160	)		224

Provision for loan losses		10,468			4,883			1,465			1,051			233


Balance at end of period	$	9,010		$	11,089		$	6,642		$	5,568		$	4,677

Ratios:
Net recoveries (charge-offs) to average loans outstanding		(1.93	%)		(0.06	%)		(0.06	%)		(0.03	%)		0.04	%
Allowance for loan losses to non-performing loans at end of period		70.70	%		56.64	%		87.99	%		363.45	%		532.08	%
Allowance for loan losses to total loans at end of period		1.47	%		1.67	%		0.95	%		0.85	%		0.80	%

The allowance for loan losses to total loans increased from 0.80% as of December 31, 2006 to 1.47% as of December 31, 2010 primarily due to the increase over the years in the ratio of commercial loans to total loans, as commercial loans are generally reserved for at a higher rate than residential loans. Additionally, specific reserves related to certain loans caused the annual provision expense to increase in 2009 and 2010. The Company also increased the reserve ratio for most loan portfolio categories in 2010 given current economic conditions. The amount of the additions to the allowance charged to operating expense for each of the above years is a reflection of various factors analyzed by management, including the amount of loan growth in each year as well as the type of loan growth. Additionally, the amount of charge-offs and recoveries in a given year will impact the amount of provision expense.

The following tables set forth the Bank’s percent of allowance by loan category and the percent of the loans to total loans in each of the categories listed at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories:


	At December 31,
	2010							2009							2008
												Percent
												of Loans							Percent of
			Loan		Percent of							in Each					Loan		Loans in
	Allowance		Balances		Loans in Each			Allowance		Loan		Category			Allowance		Balances		Each
	for Loan		by		Category to			for Loan		Balances by		to Total			for Loan		by		Category to
	Losses		Category		Total Loans			Losses		Category		Loans			Losses		Category		Total Loans
	(Dollars in Thousands)
Mortgage loans on real estate:
Residential	$	2,358	$	276,765		45.02	%	$	1,112	$	285,618		43.12	%	$	980	$	344,235		49.15	%
Commercial		5,285		225,027		36.61			8,852		263,910		39.85			4,550		246,374		35.18
Home equity		446		74,328		12.09			359		69,625		10.51			286		63,138		9.01

		8,089		576,120		93.72			10,323		619,153		93.48			5,816		653,747		93.34

Other loans:
Commercial		667		28,123		4.57			579		31,373		4.74			632		34,242		4.89
Consumer and other		254		10,518		1.71			187		11,791		1.78			194		12,386		1.77

		921		38,641		6.28			766		43,164		6.52			826		46,628		6.66

Total	$	9,010	$	614,761		100.00	%	$	11,089	$	662,317		100.00	%	$	6,642	$	700,375		100.00	%


	At December 31,
	2007							2006
					Percent of							Percent of
			Loan		Loans in					Loan		Loans in
			Balances		Each			Allowance		Balances		Each
	Allowance for		by		Category to			for Loan		by		Category to
	Loan Losses		Category		Total Loans			Losses		Category		Total Loans
	(Dollars in Thousands)
Mortgage loans on real estate:
Residential	$	946	$	349,772		53.17	%	$	892	$	325,407		55.85	%
Commercial		3,688		212,191		32.26			3,015		170,971		29.35
Home equity		245		56,752		8.63			249		56,856		9.76

		4,879		618,715		94.06			4,156		553,234		94.96

Other loans:
Commercial		507		27,664		4.20			426		22,903		3.93
Consumer and other		182		11,421		1.74			95		6,451		1.11

		689		39,085		5.94			521		29,354		5.04

Total	$	5,568	$	657,800		100.00	%	$	4,677	$	582,588		100.00	%

Investment Activities

General. Our investment policy is established and reviewed at least annually by the board of directors of the Bank. The Chief Executive Officer, President and Chief Financial Officer of the Bank, as authorized by the board, implement this policy based on the established guidelines within the written policy. The primary objective of the investment portfolio is to achieve a competitive rate of return without incurring undue interest rate and credit risk, to complement the Bank’s lending activities, to provide and maintain liquidity, and to assist in managing the interest rate sensitivity of its balance sheet. Individual investment decisions are made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with the Bank’s asset/liability management objectives. Certain investment securities are held by Legacy Bancorp, which follows the same investment guidelines as the Bank. The information about investments herein under “Business — Investment Activities” includes the investment securities of Legacy Bancorp.

The Company is required to designate its securities as held to maturity, available for sale or trading, depending on its intent with regard to the investments at the time of purchase. At December 31, 2010, $185.7 million, or 99.95%, of the portfolio was classified as available for sale, and $97,000, or 0.05%, of the portfolio was classified as held to maturity. At December 31, 2010, the net unrealized loss on securities classified as available for sale was $112,000. Legacy Banks does not currently maintain a trading portfolio of securities.

During 2010, the securities and other investments portfolio increased by $17.6 million or 9.5%, from a fair value of $184.7 million at December 31, 2009 to a fair value of $202.3 million at December 31, 2010 as a result of cash flows created by a net decrease in loans as well as an increase in deposits. Increases during the year were concentrated primarily in bonds issued by government-sponsored enterprises, including mortgage-backed securities (MBSs). These increases were somewhat offset by a decrease in municipal-backed bonds as the Company elected to significantly reduce its holdings in this portfolio. During the year ended December 31, 2010, the Company recognized total other-than-temporary impairment of $3.9 million on our portfolio of securities and other investments. For a discussion of other-than—temporary impairment, please refer to “Critical Accounting Policies — Other-Than-Temporary Impairment” within Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. As of December 31, 2010 the investment portfolio consisted of the following:

Government Sponsored Enterprises (GSE). At December 31, 2010, Legacy Banks’ GSE portfolio totaled $131.6 million, or 65.1% of the total portfolio on that date. These bonds are issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Bank (“FHLB”) or other GSE. Legacy invests in GSE securities with the purpose of both receiving a competitive rate of return and liquidity as these securities generally can be sold in a readily available market.

Municipal Bonds. At December 31, 2010, the Bank’s Municipal Bond portfolio totaled $3.1 million, or 1.6% of the total portfolio on that date. This portfolio decreased $14.7 million, or 82.4%, from a December 31, 2009 amount of $17.9 million as the Bank elected to reduce its holdings in this segment of the market in order to reduce potential balance sheet risk.

Corporate Bonds and Other Obligations. At December 31, 2010, Legacy’s portfolio of corporate bonds and other obligations totaled $402,000, or 0.2%, of the portfolio at that date. This portfolio decreased $949,000 from a December 31, 2009 amount of $1.4 million.

Mortgage-Backed Securities (MBS). Legacy invests in mortgage-backed securities with the purpose of receiving a competitive rate of return with a steady cash flow used for reinvestment and liquidity. At December 31, 2010, the Company’s portfolio of mortgage-backed securities totaled $49.6 million, or 24.5% of

the portfolio on that date, and consisted of pass-through securities totaling $43.9 million and collateralized mortgage obligations totaling $5.7 million. Within the overall total, $43.0 million was directly insured and guaranteed by the Government National Mortgage Association (“Ginnie Mae”) while $6.6 million was issued or backed by Freddie Mac or Fannie Mae. As of December 31, 2010, the Company did not have any private-label MBSs.

Marketable Equity Securities. At December 31, 2010, Legacy Banks’ portfolio of marketable equity securities totaled $956,000, or 0.5%, of the portfolio at that date, and consisted entirely of common and preferred stock of various corporations. Legacy Banks’ investment policy requires stocks within this portfolio to be diversified into several different business segments, actively traded and of high quality. At December 31, 2010, three marketable equity securities have unrealized losses with aggregate depreciation of 13.2% from the Bank’s cost basis. Although some issuers may have shown declines in earnings as a result of the weakened economy, management has evaluated the near-term prospects of the issuers in relation to the severity and duration of the depreciation of value and has analyzed the issuer’s financial condition and financial performance as well as industry analysts’ reports. Based on that evaluation as well as the Bank’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, Legacy does not consider these investments to be other-than-temporarily impaired at December 31, 2010. Further problems in the current economic environment, however, could result in further deterioration of market values for these securities.

Other Equity Securities and Investments. At December 31, 2010, the Bank’s portfolio of restricted equity securities and other investments totaled $16.5 million, or 8.2%, of the portfolio at that date. These securities consisted primarily of stock in the Federal Home Loan Bank of Boston (“FHLBB”) totaling $10.9 million, which must be held as a condition of membership in the Federal Home Loan Bank System and as a condition to the Bank’s borrowing under the FHLBB advance program. Other investments also include a $1.7 million investment in Savings Bank Life Insurance of Massachusetts as well as smaller investments in the Community Investment Fund, Depositors Insurance Fund and other investments. The remaining $3.8 million consisted of interests in certain commercial real estate investment funds. At December 31, 2010 the Bank had potential additional capital calls of approximately $4.3 million related to these fund investments. For further discussion of the fund investments, please refer to Footnote 21, “Fair Value of Assets and Liabilities — Assets Measured at Fair Value on a Non-Recurring Basis — Other investments” within Item 8: “Financial statements and supplementary data”.

The following table sets forth certain information regarding the amortized cost and market values of Legacy’s investment securities at the dates indicated:


	At December 31, 2010				At December 31, 2009				At December 31, 2008
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
					(Dollars in Thousands)
Securities available for sale:
Government-sponsored enterprises (GSE)	$	132,221	$	131,624	$	80,393	$	79,976	$	36,459	$	36,832
Municipal bonds		3,145		3,145		17,521		17,875		15,876		15,632
Corporate bonds and other obligations		401		402		1,321		1,351		363		363
GSE residential mortgage-backed		6,370		6,594		29,591		30,503		42,710		43,458
U.S. Government guaranteed residential mortgage-backed		42,775		42,967		33,625		33,636		8,969		9,032
Private issue mortgage-backed securities		—		—		—		—		28,588		21,496

Total debt securities		184,912		184,732		162,451		163,341		132,965		126,813


Marketable equity securities		888		956		3,239		4,085		6,314		5,544


Total securities available for sale		185,800		185,688		165,690		167,426		139,279		132,357


Securities held to maturity:
Other bonds and obligations		97		97		97		97		97		97


Restricted equity securities and other investments:
Federal Home Loan Bank of Boston stock		10,932		10,932		10,932		10,932		10,932		10,932
Savings Bank Life Insurance		1,709		1,709		1,709		1,709		1,709		1,709
Real estate partnerships		3,815		3,815		4,397		4,397		7,360		7,360
Other investments		90		90		155		155		184		184


Total restricted equity securities and other investments		16,546		16,546		17,193		17,193		20,185		20,185


Total securities	$	202,443	$	202,331	$	182,980	$	184,716	$	159,561	$	152,639

The table below sets forth certain information regarding the amortized cost, weighted average yields and contractual maturities of Legacy’s debt securities portfolio at December 31, 2010. Yields on tax-exempt bonds have not been calculated on a tax equivalent basis. In the case of mortgage-backed securities, the table shows the securities by their contractual maturities, however there are scheduled principal payments for these securities and there will also be unscheduled prepayments prior to their contractual maturity:


						More than One year					More than five years
	One Year or Less					through Five years					through Ten years					More than Ten years					Total Securities
			Weighted					Weighted					Weighted					Weighted					Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
	(Dollars in Thousands)
Securities available for sale (AFS):
Government-sponsored enterprises	$	5,233		1.32	%	$	103,146		1.24	%		13,043		2.00	%	$	10,799		1.56	%	$	132,221		1.35	%
Municipal Bonds		—		—			—		—			660		4.03	%		2,485		4.06	%		3,145		4.06	%
Corporate bonds and other obligations		401		4.13	%		—		—			—		—			—		—			401		4.13	%

Subtotal		5,634					103,146					13,703					13,284					135,767

GSE Mortgage-backed securities		—					—					536		4.00	%		5,834		5.52	%		6,370		5.39	%
GNMA		—					—					—					42,775		4.88	%		42,775		4.88	%

Total AFS debt securities		5,634					103,146					14,239					61,893					184,912

Securities held to maturity (HTM):
Corporate bonds and other obligations		—					82		3.00	%		—					15		3.00	%		97		3.00	%

Total HTM debt securities		—					82					—					15					97


Total debt securities	$	5,634				$	103,228				$	14,239				$	61,908				$	185,009

Sources of Funds

General. Deposits are the primary source of Legacy Banks’ funds for lending and other investment purposes. In addition to deposits, the Bank obtains funds from the amortization and prepayment of loans and mortgage-

backed securities, the sale or maturity of investment securities, advances from the FHLBB, and cash flows generated by operations.

Deposits. Consumer and commercial deposits are gathered primarily from Legacy Banks’ primary market area through the offering of a broad selection of deposit products including checking, regular savings, money market deposits and time deposits, including certificate of deposit accounts and individual retirement accounts. The FDIC insures deposits up to certain limits and the Depositors Insurance Fund, or DIF, fully insures amounts in excess of such limits.

The maturities of the Bank’s certificate of deposit accounts range from one month to five years. In addition, the Bank offers a variety of commercial business products to small businesses operating within its primary market area. The Bank will on occasion negotiate interest rates to attract jumbo certificates of deposit. The Bank also generates certificates of deposit through the use of brokers and internet-based network deposits. Brokered deposits and network deposits totaled $12.5 million and $29.1 million, respectively at December 31, 2010.

Legacy Banks relies primarily on competitive pricing of its deposit products, customer service and long-standing relationships with customers to attract and retain deposits. Market interest rates, rates offered by financial service competitors, the availability of other investment alternatives, and general economic conditions significantly affect the Bank’s ability to attract and retain deposits.

The following tables set forth certain information relative to the composition of Legacy’s average deposit accounts and the weighted average interest rate on each category of deposits:


	Years Ended December 31,
	2010								2009								2008
	Average					Weighted			Average					Weighted			Average					Weighted
	Balance		Percent			Average Rate			Balance		Percent			Average Rate			Balance		Percent			Average Rate
	(Dollars in Thousands)
Deposit type:
Demand	$	71,231		10.7	%		—	%	$	67,155		10.6	%		—	%	$	60,444		10.2	%		—	%
NOW deposits		45,647		6.9			0.29			43,527		6.9			0.40			41,378		7.0			0.53
Money market deposits		66,007		9.9			0.66			65,602		10.3			1.04			58,052		9.8			2.36
Regular savings		52,076		7.9			0.24			50,724		8.0			0.33			49,936		8.5			0.41
Relationship Savings		137,742		20.7			0.80			123,297		19.5			1.29			121,990		20.6			2.10

Total transaction accounts		372,703		56.1			0.48			350,305		55.3			0.75			331,800		56.1			1.30
Certificates of deposit		291,520		43.9			2.45			282,730		44.7			2.99			259,439		43.9			3.88

Total deposits	$	664,223		100.0	%		1.35	%	$	633,035		100.0	%		1.76	%	$	591,239		100.0	%		2.44	%

The following table sets forth the time deposits of the Bank classified by interest rate as of the dates indicated:


	At December 31,
	2010		2009		2008
	(Dollars in thousands)
Interest Rate
Less than 2%	$	137,365	$	81,282	$	25,591
2.00%-2.99%		88,589		83,503		85,226
3.00%-3.99%		56,794		91,122		106,784
4.00%-4.99%		12,587		27,943		40,304
5.00%-5.99%		2,372		5,462		11,936

Total	$	297,707	$	289,312	$	269,841

The following table sets forth the amount and maturities of time deposits at December 31, 2010:


	Year ending December 31,								After December 31,
	2011		2012		2013		2014		2014		Total
	(Dollars in thousands)
Interest Rate
Less than 2%	$	104,532	$	25,115	$	7,697	$	21	$	—	$	137,365
2.00%-2.99%		10,637		2,252		39,913		20,624		15,163		88,589
3.00%-3.99%		14,851		7,097		19,463		7,984		7,399		56,794
4.00%-4.99%		8,221		2,978		1,062		326		—		12,587
5.00%-5.99%		2,044		328		—		—		—		2,372

Total	$	140,285	$	37,770	$	68,135	$	28,955	$	22,562	$	297,707

As of December 31, 2010, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $135.3 million. The following table sets forth the maturity of those certificates:


	At December 31, 2010
	(In Thousands)
Three months or less	$	12,070
Over three months through six months		14,561
Over six months through one year		18,395
Over one year to three years		58,255
Over three years		32,018

Total	$	135,299

Borrowings. Legacy Banks utilizes advances from the FHLBB primarily in connection with the funding of growth in its assets. FHLBB advances are secured primarily by certain of the Bank’s mortgage loans, certain investment securities and by the Bank’s holding of FHLBB stock. As of December 31, 2010, the Bank had outstanding $105.4 million in FHLBB advances, and had the ability to borrow up to a total of $112.1 million additional based on available collateral. The following table sets forth certain information concerning balances and interest rates on the Bank’s FHLBB advances at the dates and for the periods indicated:


	At or For the Years Ended December 31,
	2010			2009			2008
	(Dollars in Thousands)
Balance at end of period	$	105,388		$	160,352		$	197,898
Average balance during year	$	148,001		$	177,261		$	186,170
Maximum outstanding at any month end	$	156,352		$	194,831		$	211,531
Weighted average interest rate at end of year		3.86	%		3.81	%		4.07	%
Weighted average interest rate during year		3.78	%		4.07	%		4.27	%

Of the $105.4 million in advances outstanding at December 31, 2010, $82.5 million, bearing a weighted-average interest rate of 3.90%, are callable by the FHLBB at its option and in its sole discretion. In the event the FHLBB calls these advances, the Bank will evaluate its liquidity and interest rate sensitivity position at that time and determine whether to replace the called advances with new borrowings.

Personnel. As of December 31, 2010, the Bank had approximately 173 full-time equivalent employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be excellent.

Segment Reporting: Generally, financial information is to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. Management evaluates the Company’s performance and allocates resources based on a single segment concept. Accordingly, there are no separately identified material operating segments for which discrete financial information is available. The Company does not derive revenues from, or have assets located in foreign countries, nor does it derive revenues from any single customer that represents 10% or more of its total revenues. Therefore, all of the Company’s operations are considered by management to be aggregated in one reportable operating segment.

Subsidiary Activities and Portfolio Management Services

Legacy has two wholly-owned subsidiaries, LB Funding Corporation and Legacy Banks. The Company conducts its principal business activities through Legacy Banks. The Bank, in turn, has four operating subsidiaries, Legacy Insurance Services of the Berkshires, Legacy Securities Corporation, Renaissance Investment Group, LLC and CSB Service Corporation.

LB Funding Corporation. LB Funding Corporation is wholly owned by Legacy Bancorp, Inc. and was established in 2005 to lend funds to Legacy Banks Employee Stock Ownership Plan (“ESOP”) to purchase shares of Legacy Bancorp, Inc. common stock in the open market subsequent to the initial public offering. The company is incorporated in Massachusetts.

Legacy Insurance Services of the Berkshires. Legacy Insurance Services of the Berkshires (“LISB”) is a Delaware limited liability company and is wholly-owned by the Bank. LISB is an insurance agency that specializes in providing our clients with non-deposit insurance and investment products. LISB has been in operation since September 2001, however, the Bank has been associated with and selling Savings Bank Life Insurance (SBLI) since 1910.

Legacy Securities Corporation. Legacy Securities Corporation (“LSC”) is a Massachusetts securities corporation and a wholly owned subsidiary of the Bank. LSC is an investment company that engages in buying, selling and holding securities on its own behalf. At December 31, 2010, LSC had total assets of approximately $70.3 million consisting primarily of GSE obligations and mortgage backed securities. As a Massachusetts securities corporation, LSC has a lower state income tax rate compared to other corporations.

CSB Service Corporation. CSB Service Corporation is a Massachusetts company and is wholly-owned by the Bank. CSB Service Corp. is a company utilized by Legacy Banks to hold real estate taken in foreclosure, and has been in operation since December 1975.

Renaissance Investment Group. Legacy Banks offers portfolio management services through its wealth management subsidiary known as Renaissance Investment Group, LLC (“Renaissance”) which was acquired by the Bank in April 2010. The Bank formerly offered wealth management services through its Legacy Portfolio Management (“LPM”) division and transferred certain accounts to Renaissance in 2010. At December 31, 2010, Renaissance had total assets under management and administration of $237.1 million and LPM had assets under management and administration of $64.3 million.

Regulation and Supervision

General: As a savings and loan holding company, Legacy Bancorp is required to file reports with, and otherwise comply with the rules and regulations of, the Office of Thrift Supervision (OTS). As a savings bank chartered by the Commonwealth of Massachusetts, Legacy Banks is subject to extensive regulation, examination and supervision by the Massachusetts Commissioner of Banks, as its primary regulator, and the Federal Deposit Insurance Corporation (FDIC), as the deposit insurer and primary federal regulator. Legacy Banks is a member of the Federal Home Loan Bank (FHLB) system and, with respect to deposit insurance, of the Bank Insurance Fund managed by the FDIC. The Bank must file reports with the Commissioner of Banks and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The Commissioner of Banks and/or the FDIC conduct periodic examinations to test Legacy Banks’ safety and soundness and compliance with various regulatory requirements. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on Legacy Banks and Legacy Bancorp and is qualified in its entirety by reference to the actual laws and regulations.

Certain federal banking laws have been amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which was signed into law by President Obama on July 21, 2010 (the “Dodd-Frank Act”). See “—Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” below. One of the changes that is most significant to Legacy Bancorp is the abolition of the OTS, historically our primary federal holding company regulator. On or about July 21, 2011, the OTS will cease to exist, and its functions will be transferred to the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve) and the FDIC. On the effective date of the transfer of the OTS’s functions (the “OTS Transfer Date”), the Federal Reserve will become the primary federal supervisor and regulator of Legacy Bancorp, succeeding to all powers, authorities, rights, and duties that were vested in the OTS with respect to savings and loan holding companies. This includes, among other powers, the authority to issue rules with respect to affiliate transactions, insider lending, and unlawful tying arrangements. In the following discussion of the regulation and supervision of Legacy Bancorp as a savings and loan holding company, references to the OTS should be read to mean the Federal Reserve once the OTS Transfer Date occurs. The FDIC will continue to be the primary federal regulator of Legacy Banks after the OTS Transfer Date. Not later than the OTS Transfer Date, the Federal Reserve, OCC and FDIC will publish a list of OTS regulations that the three agencies will adopt and continue to enforce. The Dodd-Frank Act provides that all orders, resolutions, determinations, agreements, regulations, interpretations, guidelines, procedures, and advisory materials that have been issued by the OTS or by a court, which are in effect on the day before the transfer date, will continue in effect according to their terms and be enforceable by or against the Federal Reserve, in the case of savings and loan holding companies such as Legacy Bancorp.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

The Dodd-Frank Act will significantly change the current bank regulatory structure, and is expected to have a substantial impact on our business operations as its provisions take effect. It requires various federal agencies to adopt and implement a broad range of new rules and regulations, the details of which are primarily within the discretion of the agencies. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. A summary of certain provisions of the Dodd-Frank Act is set forth below, along with information set forth in applicable sections of this “Regulation and Supervision” section.

•

Increased Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than current regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

	•		Deposit Insurance. The Dodd-Frank Act permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor, and extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Effective July 21, 2011, the Dodd-Frank Act eliminates the federal statutory prohibition against the payment of interest on business checking accounts.

	•		Holding Company Capital Levels. The Dodd-Frank Act requires bank regulators to establish minimum capital levels for holding companies that are at least of the same nature as those applicable to financial institutions. All trust preferred securities (TruPs), issued by bank or thrift holding companies after May 19, 2010 will be counted as Tier 2 capital (with an exception for certain small bank holding companies).

	•		Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. Current banking law limits a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

	•		Transactions with Affiliates and Insiders. Effective July 21, 2011, the Dodd-Frank Act expands the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act will apply Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. The Dodd-Frank Act will additionally prohibit an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.

	•		Compensation Practices. The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm. On February 7, 2011, the FDIC approved a joint proposed rulemaking to implement this requirement. The proposed rule prohibits incentive-based compensation arrangements that encourage officers, employees or directors to expose the institution to inappropriate risks by providing excessive compensation or that encourage inappropriate risk-taking that could lead to a material financial loss. The proposed rule would also require financial institutions to maintain policies and procedures to ensure compliance with these requirements and to provide an annual report to their appropriate Federal regulators disclosing the structure of their incentive-based compensation arrangements.

	•		Consumer Financial Protection Bureau. The Dodd-Frank Act establishes the Consumer Financial Protection Bureau (CFPB) as an independent bureau within the Federal Reserve. The Dodd-Frank Act grants the CFPB broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB will have examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions

will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Massachusetts Banking Laws and Supervision

Massachusetts savings banks are regulated and supervised by the Massachusetts Commissioner of Banks. The Massachusetts Commissioner of Banks is required to regularly examine each state-chartered bank. The approval of the Massachusetts Commissioner of Banks is required to establish or close branches, to merge with another bank, to form a holding company, to issue stock or to undertake many other activities. Any Massachusetts bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be sanctioned. The Massachusetts Commissioner of Banks may suspend or remove directors or officers of a bank who have violated the law, conducted a bank’s business in a manner that is unsafe, unsound or contrary to the depositors’ interests, or been negligent in the performance of their duties. In addition, the Massachusetts Commissioner of Banks has the authority to appoint a receiver or conservator if it is determined that the bank is conducting its business in an unsafe or unauthorized manner, and under certain other circumstances.

All Massachusetts-chartered savings banks are required to be members of the Depositors Insurance Fund, a private deposit insurer, which insures all deposits in member banks in excess of FDIC deposit insurance limits. Member banks are required to pay the assessments of the fund.

The powers that Massachusetts-chartered savings banks can exercise under these laws are summarized as follows:

Lending Activities: A Massachusetts-chartered savings bank may make a wide variety of mortgage loans including fixed-rate loans, adjustable-rate loans, variable-rate loans, participation loans, graduated payment loans, construction and development loans, condominium and co-operative loans, second mortgage loans and other types of loans that may be made in accordance with applicable regulations. Commercial loans may be made to corporations and other commercial enterprises with or without security. Consumer and personal loans may also be made with or without security. Loans to individual borrowers generally must be limited to 20% of the total of a bank’s capital accounts.

Insurance Sales: Massachusetts banks may engage in insurance sales activities if the Massachusetts Commissioner of Banks has approved a plan of operation for insurance activities and the bank obtains a license from the Massachusetts Division of Insurance. A bank may be licensed directly or indirectly through an affiliate or a subsidiary corporation established for this purpose. Legacy Banks has a subsidiary, Legacy Insurance Services of the Berkshires, which is licensed to sell insurance products.

Investment Activities: In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered savings banks may in addition invest an amount equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in the Commonwealth which

have pledged to the Massachusetts Commissioner of Banks that such monies will be used for further development within the Commonwealth. At the present time, Legacy Banks does have authority to invest in equity securities.

Dividends: A Massachusetts stock bank may declare from net profits cash dividends not more frequently than quarterly and non-cash dividends at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal and state taxes. The Bank would obtain the approval of the Massachusetts Commissioner of Banks if it were to declare a cash dividend from net profits.

Protection of Personal Information: Massachusetts has adopted regulatory requirements intended to protect personal information. The requirements, which became effective March 1, 2010, are similar to existing federal laws such as the Gramm-Leach-Bliley Act, discussed below under “—Federal Regulations—Privacy Regulations”, that require organizations to establish written information security programs to prevent identity theft. However, unlike federal regulations, the Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information sent over wireless or public networks or stored on portable devices.

Parity Regulation: A Massachusetts bank may engage in any activity or offer any product or service if the activity, product or service is engaged in or offered in accordance with regulations promulgated by the Massachusetts Commissioner of Banks and has been authorized for national banks, federal thrifts or state banks in a state other than Massachusetts; provided that the activity is permissible under applicable federal and Massachusetts law and subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that had previously been granted the power. See “—Investment Activities” below.

Federal Regulations

Capital Requirements. Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Legacy Banks, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be, in general, a strong banking organization rated composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other institutions, the minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items.

The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to four risk-weighted categories ranging from 0.0% to 100.0%, with higher levels of capital being required for the categories perceived as representing greater risk.

State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or

supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital. Banks that engage in specified levels of trading activities are subject to adjustments in their risk based capital calculation to ensure the maintenance of sufficient capital to support market risk. The Dodd-Frank Act contains certain provisions that will affect the capital requirements applicable to Legacy Banks. See “—Dodd-Frank Wall Street Reform and Consumer Protection Act” above.

The Federal Deposit Insurance Corporation Improvement Act (the “FDICIA”) required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.

Dividends: The Company’s payment of dividends is subject to certain legal and regulatory restrictions. The Company’s primary federal regulator may also impose additional restrictions on the payment of dividends.

Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. Most recently, the agencies have established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

Investment Activities. All state-chartered FDIC insured banks, including savings banks, are generally limited in their investment activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. For example, state chartered banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange or the Nasdaq Global Market and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is 100.0% of Tier 1 capital, as specified by the FDIC’s regulations, or the maximum amount permitted by Massachusetts law, whichever is less. Any such grandfathered authority may be terminated upon the FDIC’s determination that such investments pose a safety and soundness risk. In addition, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the Bank Insurance Fund. The FDIC has adopted revisions to its regulations governing the procedures for institutions seeking approval to engage in such activities or investments. In addition, a nonmember bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.

The Dodd-Frank Act amends the Bank Holding Company Act of 1956 to prohibit, with certain exceptions, a banking entity from engaging in proprietary trading or sponsoring, acquiring, or retaining any equity,

partnership, or other ownership interest in a hedge fund or a private equity fund. The amendments limit the Bank’s ability to engage in proprietary trading which may in turn limit the Bank’s ability to make certain investments in debt securities or other securities that were previously permissible. In general, the amendments take effect on the earlier of 12 months after the date federal agencies issue rules to implement the new law or July 21, 2012, and banking entities will be required to confirm their activities to the new requirements not later than two years after the date on which the amendments take effect, unless such period is extended by the Federal Reserve.

Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the Interstate Banking Act, permits adequately capitalized bank holding companies to acquire banks in any state subject to specified concentration limits and other conditions. The Interstate Banking Act also authorizes the interstate merger of banks. As a result of our acquisition of five New York state branch offices in December 2007, we may conduct at our New York branch offices any activity that is authorized under Massachusetts law that is permissible for either New York savings banks (subject to applicable federal restrictions) or a New York branch of an out-of-state national bank. The New York State Superintendent of Banks may exercise certain regulatory authority over the Bank’s New York branch offices. Under the Dodd-Frank Act, national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and generally a leverage ratio of 4.0% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or generally a leverage ratio of less than 4.0%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. As noted above, the Dodd-Frank Act requires the federal banking agencies to establish minimum leverage and risk-based capital requirements for banks and bank holding companies which may result in an increase in the capital requirements applicable to Legacy Banks.

As of December 31, 2010, Legacy Banks was classified as a “well capitalized” institution.

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

Transaction with Affiliates and Regulation W of the Federal Reserve Regulations. Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act and Regulation W (i) limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act. As noted above, the Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, effective on July 21, 2011.

“Financial subsidiaries” of banks are treated as affiliates for purposes of Sections 23A and 23B of the Federal Reserve Act. However, (i) the 10.0% capital limit on transactions between the bank and such financial subsidiary as an affiliate is not applicable, and (ii) the investment by the bank in the financial subsidiary does not include retained earnings in the financial subsidiary. Certain anti-evasion provisions have been included that relate to the relationship between any financial subsidiary of a bank and sister companies of the bank: (1) any purchase of, or investment in, the securities of a financial subsidiary by any affiliate of the parent bank is considered a purchase or investment by the bank; or (2) if the Federal Reserve Board determines that such treatment is necessary, any loan made by an affiliate of the parent bank to the financial subsidiary is to be considered a loan made by the parent bank. Section 23A of the Federal Reserve Act was further amended by the Dodd-Frank Act to make the 10% capital limit applicable to transactions between a bank and its financial subsidiary, and repeals the retained earnings exclusion. Those amendments will become effective one year after the OTS Transfer Date under the Dodd-Frank Act.

In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than 10.0% stockholder of a financial institution, and certain affiliated interests of these, may not exceed, together with all other outstanding loans to such person and affiliated interests, the financial institution’s loans to one borrower limit, generally equal to 15.0% of the institution’s unimpaired capital and surplus. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers. The Dodd-Frank Act also further restricts loans to insiders and expands the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions.

Enforcement. The FDIC has extensive enforcement authority over insured state savings banks, including Legacy Banks. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC has authority under federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an

insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution’s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.

Insurance of Deposit Accounts. The FDIC insures deposit accounts in Legacy Banks generally up to a maximum of $250,000 per depositor. Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the Federal Deposit Insurance Corporation is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. In 2009, the Federal Deposit Insurance Corporation imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, which was payable on September 30, 2009. In addition, the Federal Deposit Insurance Corporation increased its quarterly assessment rates and amended the method by which rates are calculated. Beginning in the second quarter of 2010, institutions were assigned an initial base assessment rate ranging from 12 to 45 basis points of deposits depending on risk category. The initial base assessment was then adjusted based upon the level of unsecured debt, secured liabilities, and brokered deposits to establish a total base assessment rate ranging from seven to 77.5 basis points.

On November 12, 2009, the Federal Deposit Insurance Corporation approved a final rule requiring insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. Estimated assessments for the fourth quarter of 2009 and for all of 2010 are based upon the assessment rate in effect on September 30, 2010, with three basis points added for the 2011 and 2012 assessment rates. In addition, a 5% annual growth in the assessment base is assumed. Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future. Any unused prepayments will be returned to the institution on June 30, 2013. On December 30, 2009, the Bank prepaid $3.7 million in estimated assessment fees for years 2010 through 2012. Because the prepaid assessments represent the prepayment of future expense, they do not affect our regulatory capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.

The Dodd-Frank Act requires the FDIC to increase the minimum reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminate the maximum reserve ratio. Additionally, the Dodd-Frank Act eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The FDIC has not yet adopted a restoration plan reflecting the new statutory requirements.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. The Bank does not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are

due to mature in 2017 through 2019. For the quarter ended December 31, 2010, the annualized FICO assessment was equal to 1.02 basis points for each $100 in domestic deposits maintained at an institution.

Privacy Regulations. Pursuant to the Gramm-Leach-Bliley Financial Modernization Act of 1999, FDIC regulations generally require that Legacy Banks disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Legacy Banks currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations. The privacy provisions of the Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”) as amended and as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Legacy Banks’ latest FDIC CRA rating was “Satisfactory”.

Massachusetts has its own statutory counterpart to the CRA that is also applicable to Legacy Banks. The Massachusetts version is generally similar to the CRA but uses a five-tiered descriptive rating system. Massachusetts law requires the Massachusetts Commissioner of Banks to take into account, among other things, a bank’s record of performance under Massachusetts law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. Legacy Banks’ most recent rating under Massachusetts law was “High Satisfactory”.

Consumer Protection and Fair Lending Regulations. Massachusetts savings banks are subject to a variety of federal and Massachusetts statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations.

The USA PATRIOT Act. Legacy Banks is subject to the USA PATRIOT Act, which gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.

Federal Reserve System

The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $45.8 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0%; and the amounts greater than $45.8 million require a 10.0% reserve (which may be adjusted by the Federal Reserve Board between 8.0% and 14.0%). The first $8.5 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Legacy Banks is in compliance with these requirements.

Federal Home Loan Bank System

The Bank is a member of the FHLB system, which consists of 12 regional Federal Home Loan Banks. The FHLB provides a central credit facility primarily for member institutions. Legacy Banks, as a member of the FHLB of Boston, is required to acquire and hold shares of capital stock in the FHLB of Boston. Legacy Banks was in compliance with this requirement with an investment in FHLB of Boston stock at December 31, 2010 of $10.9 million.

The FHLB is required to provide funds for certain purposes including contributing funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLB pay to their members and result in the FHLB imposing a higher rate of interest on advances to their members. For the years ended 2008, 2007, and 2006 cash dividends from the FHLB of Boston to Legacy Banks amounted to approximately $412,000, $572,000, and $498,000, respectively. As a result of economic conditions and the reduced levels of capital, the FHLB announced at the end of 2008 that they were suspending the payment of any future dividends until such time as their financial condition improves. The Bank, therefore, did not receive any cash dividends in 2009 and 2010. In February 2010, the FHLB Boston announced the resumption of a dividend beginning in the first quarter of 2011, as well as the expectation to pay additional modest dividends in 2011. However, there can be no assurance of any future dividends. Further, there can be no assurance that the impact of recent or future legislation on the FHLB will not also cause a decrease in the value of the FHLB stock held by the Bank.

Holding Company Regulation

General: Federal law allows a state savings bank that qualifies as a “Qualified Thrift Lender”, discussed below, to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of federal law. Such election allows its holding company to be regulated as a savings and loan holding company by the OTS rather than as a bank holding company by the Federal Reserve Board. Legacy Banks made such election and the Company is a non-diversified unitary savings and loan holding company within the meaning of federal law. As such, the Company is registered with the OTS and has adhered to the OTS’s regulations and reporting requirements. In addition, the OTS may examine and supervise the Company and the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. Additionally, Legacy Banks is required to notify the OTS at least 30 days before declaring any dividend to the Company. By regulation, the OTS may restrict or prohibit the Bank from paying dividends. As noted above, the Dodd-Frank Act will abolish the OTS on the OTS Transfer Date and the Federal Reserve will become the primary supervisor and regulator of the Company. The Dodd-Frank Act did not affect the Company’s status as a non-diversified unitary savings and loan holding company under the Homeowners Loan Act.

The Gramm-Leach-Bliley Act of 1999 (the “Act”) expanded the authority of bank holding companies to affiliate with other financial services companies such as insurance companies and investment banking companies. The Act, however, provided that unitary savings and loan holding companies, such as the Company, may only engage in activities permitted to a financial holding company under the legislation and those permitted for a multiple savings and loan holding company. Upon any non-supervisory acquisition by the Company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company. Federal law limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, provided the prior approval of the OTS is obtained, to other activities authorized by OTS regulation and to those permitted for financial holding companies. Multiple savings and loan holding companies are generally prohibited from acquiring or retaining more than 5% of a non-subsidiary company engaged in activities other than those permitted by federal law.

Federal law prohibits a savings and loan holding company from, directly or indirectly, acquiring more than 5% of the voting stock of another savings association or savings and loan holding company or from acquiring such an institution or company by merger, consolidation or purchase of its assets, without prior written approval of the OTS. In evaluating applications by holding companies to acquire savings associations, the OTS considers the financial and managerial resources and future prospects of the Company and the institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

To be regulated as a savings and loan holding company by the OTS (rather than as a bank holding company by the Federal Reserve Board), the Bank must qualify as a Qualified Thrift Lender. To qualify as a Qualified Thrift Lender, the Bank must maintain compliance with the test for a “domestic building and loan association,” as defined in the Internal Revenue Code, or with a Qualified Thrift Lender Test. Under the Qualified Thrift Lender Test, a savings institution is required to maintain at least 65% of its “portfolio assets” (total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles, including goodwill; and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least 9 months out of each 12 month period. As of December 31, 2010, Legacy Banks maintained 78% of its portfolio assets in qualified thrift investments.

Acquisition of the Company: Under the Federal Change in Bank Control Act, a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company. Under certain circumstances, a change in control may occur, and prior notice is required, upon the acquisition of 10% or more of the Company’s outstanding voting stock, unless the OTS has found that the acquisition will not result in a change of control of the Company. Under the Change in Bank Control Act, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

Massachusetts Holding Company Regulation: In addition to the federal holding company regulations, a bank holding company organized or doing business in Massachusetts must comply with any regulation under the Massachusetts law. The term “bank holding company”, for the purposes of Massachusetts law, is defined generally to include any company which, directly or indirectly, owns, controls or holds with power to vote more than 25% of the voting stock of each of two or more banking institutions, including commercial banks and state co-operative banks, savings banks and savings and loan associations and national banks, federal savings banks and federal savings and loan associations. In general, a holding company controlling, directly or indirectly, only one banking institution will not be deemed to be a bank holding company for the purposes of Massachusetts law. Under Massachusetts law, the prior approval of the Board of Bank Incorporation is

required before the following: any company may become a bank holding company; any bank holding company acquires direct or indirect ownership or control of more than 5% of the voting stock of, or all or substantially all of the assets of, a banking institution; or any bank holding company merges with another bank holding company. Although the Company is not a bank holding company for purposes of Massachusetts law, any future acquisition of ownership, control, or the power to vote 25% or more of the voting stock of another banking institution or bank holding company would cause it to become such.

Federal Securities Laws: The Company’s common stock is registered with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

Taxation

Federal taxes: In general the Company and Legacy Banks report their income on a calendar year basis using the accrual method of accounting. The federal income tax laws apply to the Company and Legacy Banks in the same manner as to other corporations with some exceptions, including particularly Legacy Bank’s reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to Legacy Banks or the Company. Legacy Bank’s federal income tax returns have been either audited or closed under the statute of limitations through tax year 2005.

Bad Debt Reserves: For fiscal years beginning before December 31, 1995, thrift institutions which qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986, as amended, were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for non-qualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $5.4 million of the Bank’s accumulated bad debt reserves will not be recaptured into taxable income unless the Bank makes a “nondividend distribution” to the Company as described below.

Distributions: If the Bank makes “nondividend distributions” to the Company, they will be considered to have been made from the Bank’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the those reserves and then from the Bank’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those aggregate reserves, will be included in the Bank’s taxable income. Nondividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank’s current or accumulated earnings and profits will not be included in the Bank’s taxable income. The amount of additional taxable income triggered by a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if the Bank makes a nondividend distribution to the Company, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

Massachusetts Taxation: The Massachusetts excise tax rate for savings banks for 2010 is currently 10.0% of federal taxable income, adjusted for certain items. Legislation reduced the rate to 9.0% on a phase-in basis in the years 2010-2012. Taxable income includes gross income as defined under the Internal Revenue Code,

plus interest from bonds, notes and evidences of indebtedness of any state, including Massachusetts, less deductions, but not the credits, allowable under the provisions of the Internal Revenue Code, except no deduction is allowed for bonus depreciation or for taxes paid to the state which are based on income. Carryforwards and carrybacks of net operating losses are not allowed.

A financial institution or business corporation is generally entitled to special tax treatment as a “securities corporation,” provided that: (a) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and not as a broker; and (b) it has applied for, and received, classification as a “securities corporation” by the Commissioner of the Massachusetts Department of Revenue. A securities corporation that is also a bank holding company under the Code must pay a tax equal to 0.33% of its gross income. A securities corporation that is not a bank holding company under the Code must pay a tax equal to 1.32% of its gross income. Legacy Bancorp, Inc., as well as one of the Bank’s subsidiaries, Legacy Securities Corporation Inc., are considered securities corporations for Massachusetts excise tax purposes.

New York Taxation: Legacy Banks is subject to state income tax based on our physical presence within the state from its branch offices. The Bank reports New York apportioned income on a calendar year basis to New York State. New York State franchise tax on corporations is imposed in an amount equal to the greater of (a) 7.1% of “entire net income” allocable to New York State, (b) 3% of “alternative entire net income” allocable to New York State, (c) 0.01% of the average value of assets allocable to New York State, or (d) nominal minimum tax. Entire net income is based on Federal taxable income, subject to certain modifications.

Delaware Taxation: As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.

Available Information: The Company’s website is http://www.LegacyBanks.com. The Company makes available free of charge through its website, its annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any amendments to those reports led or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to the SEC. The reference to our website does not constitute incorporation by reference of the information contained in the website and should not be considered part of this document.

Item 1a. Risk Factors

The following risk factors are relevant to our future results and financial success, and should be read with care.

Risks Related to the Merger

Proposed Merger with Berkshire Hills Bancorp, Inc.

On December 21, 2010, the Company entered into an Agreement and Plan of Merger with Berkshire Hills Bancorp, Inc. (“Berkshire”), pursuant to which Legacy Bancorp will merge with and into Berkshire, with Berkshire as the surviving corporation. Completion of the merger is subject to closing conditions including, but not limited to, various regulatory approvals and the approval of the shareholders of the Company and Berkshire. The Company currently expects that the merger will be completed during the third quarter of 2011. It is possible, however, that factors outside of our control could require the parties to complete the merger at a later time, or not to complete the merger at all. Delay or failure to consummate the merger could have a negative impact on the price of our common stock.

Our shareholders will receive a fixed ratio of 0.56385 shares of Berkshire common stock plus $1.30 cash for each share of Legacy common stock regardless of any changes in the market value of Legacy common stock or Berkshire common stock before the completion of the merger.

Upon completion of the merger, each share of Legacy common stock will be converted into the right to receive 0.56385 shares of Berkshire common stock plus $1.30 cash. There will be no adjustment to the exchange ratio (except for adjustments to reflect the effect of any stock split, reverse stock split, stock dividend, recapitalization, reclassification or other similar transaction with respect to Legacy common stock), and we do not have a right to terminate the merger agreement based upon changes in the market price of Berkshire common stock, subject to the limited exception described below. Accordingly, the dollar value of Berkshire common stock that our shareholders will receive upon completion of the merger will depend upon the market value of Berkshire common stock at the time of completion of the merger, which may be lower or higher than the closing price of Berkshire common stock on the last full trading day preceding public announcement that Berkshire and Legacy entered into the merger agreement, the last full trading day prior to the date of proxy statement delivered to our shareholders or the date of the shareholder meeting. The market values of Berkshire common stock and Legacy common stock have varied since Berkshire and Legacy entered into the merger agreement and will continue to vary in the future due to changes in the business, operations or prospects of Berkshire and Legacy, market assessments of the merger, regulatory considerations, market and economic considerations, and other factors, most of which are beyond our control.

If, on the date on which all regulatory approvals for the merger have been received, the market price for Berkshire common stock is less than $16.70 and since the date of the merger agreement the percentage decrease in the market price of the Berkshire common stock is more than 20% greater than any percentage decrease in the average market price of a prescribed index, Legacy may elect to terminate the merger agreement. If Legacy provides notice of its intent to terminate, Berkshire will have the option of paying additional consideration, as specified in the merger agreement, in order to proceed with the merger.

We will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on us and consequently on Berkshire. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated, and could cause customers and others that deal with us to seek to change existing business relationships with us. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles with Berkshire. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Berkshire, Berkshire’s business following the merger could be harmed. In addition, the merger agreement restricts us from making certain acquisitions and taking other specified actions until the merger occurs without the consent of Berkshire. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger.

The merger agreement prohibits us from pursuing alternatives to the merger following shareholder approval.

The merger agreement contains provisions that limit our ability to discuss competing third-party proposals to acquire all or substantially all of the Company, including a prohibition on any such discussions following the shareholders’ approval of the merger. These provisions, which include a termination fee of up to approximately $4.3 million payable under certain circumstances, may discourage a potential competing acquirer that might have an interest in acquiring all or substantially all of the Company from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share market price than that proposed in the merger, or might result in a potential competing acquirer proposing to pay a lower per share price to acquire the Company than it might otherwise have proposed to pay.

Regulatory approvals may not be received, may take longer than expected or impose conditions that are not presently anticipated.

Before the merger may be completed, certain approvals or consents must be obtained from the various bank regulatory and other authorities in the United States and the Commonwealth of Massachusetts. There can be no assurance as to whether the federal or state regulatory approval will be received or the timing of the approvals.

Berkshire is not obligated to complete the merger if the regulatory approvals received in connection with the completion of the merger include any conditions or restrictions that would constitute a “Material Adverse Effect” as defined in the merger agreement. While we do not currently expect that any such conditions or restrictions would be imposed, other than a divestiture of a portion of our deposits, loans and branch offices, there can be no assurance that they will not be, and such conditions or restrictions could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of Berkshire following the merger, any of which might have a Material Adverse Effect on Berkshire following the merger. The merger agreement specifically provides that a divesture of less than $200 million of deposit liabilities, whether from us, Berkshire or a combination of the two, together with related branch premises and such loans as one of more bank regulators may require in connection with such divestiture, will not constitute a Material Adverse Effect.

Risks Related to Our Business

The economic and financial market downturn has had and may continue to have an adverse effect our business and financial results.

The United States economy entered a recession in the fourth quarter of 2007. Throughout 2008 and 2009 and into 2010, economic conditions continued to worsen. Unemployment remains at very high levels and is not expected to improve in the near future. Our lending business is tied, in large part, to the housing market. The continuing housing slump has resulted in reduced demand for the construction of new housing, declines in home prices, and could ultimately result in increased delinquencies on our residential, commercial and construction mortgage loans. Further, the ongoing concern about the stability of the financial markets in general has caused many lenders to reduce or cease providing funding to borrowers. These conditions may also cause a further reduction in loan demand, and increases in our non-performing assets, net charge-offs and provisions for loan losses. Negative developments in the financial services industry and the domestic and international credit markets may significantly affect the markets in which we do business, the market for and value of our loans and investments, and our ongoing operations, costs and profitability. Moreover, declines in the stock market in general, or stock values of financial institutions and their holding companies specifically, could adversely affect our stock performance.

We could record future losses on our securities portfolio.

During the years ended December 31, 2010 and 2009, we recognized total other-than-temporary impairment of $3.9 million and $7.2 million, respectively, on our portfolio of securities and other investments. We considered all of this impairment to be credit-related and, therefore, in accordance with applicable accounting standards, we recorded all of the impairment as losses through a reduction of non-interest income. A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that a further unrealized loss that exists with respect to our securities portfolio constitutes additional impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, a failure by an issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an

improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers deteriorates and there remains limited liquidity for these securities.

If our investment in the Federal Home Loan Bank of Boston is classified as other-than-temporarily impaired or as permanently impaired, our earnings and stockholders’ equity would decrease.

We own common stock of the FHLBB and hold this stock to qualify for membership in the FHLB system and to be eligible to borrow funds under the FHLBB’s advance program. The aggregate cost and fair value of our FHLBB common stock as of December 31, 2010 was $10.9 million based on its par value. There is no market for our FHLBB common stock. Reports published since the recession began in 2007 indicate that certain member banks of the Federal Home Loan Bank System may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels. In an extreme situation, it is possible that the capitalization of a FHLB, including the FHLBB, could be substantially diminished. Consequently, we believe that there is a risk that our investment in FHLBB common stock could be impaired at some time in the future. If this occurs, it would cause our earnings and stockholders’ equity to decrease by the after-tax amount of the impairment charge.

Economic conditions may adversely affect our liquidity.

In the past two years, significant declines in the values of mortgage-backed securities and derivative securities issued by financial institutions, government sponsored entities, and major commercial and investment banks has led to decreased confidence in financial markets among borrowers, lenders, and depositors, as well as disruption and extreme volatility in the capital and credit markets and the failure of some entities in the financial sector. As a result, many lenders and institutional investors have reduced or ceased to provide funding to borrowers. Continued turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.

We cannot predict whether the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act or any of the new regulations contemplated by the Act will adversely affect our financial condition or operating results.

In July 2010, Congress enacted and the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”). The Act is one of the most sweeping laws affecting the banking and financial services industries ever enacted in the United States and includes several provisions that will affect how banks will be regulated in the future. Title I of the Act requires the federal banking agencies to establish new, and likely higher, minimum leverage and risk-based capital requirements. Title X of the Act establishes the Bureau of Consumer Financial Protection as an independent bureau in the Federal Reserve System to regulate the offering of consumer financial products and services, and makes it harder for courts and the Comptroller of the Currency to determine that state laws protecting consumers in financial matters are preempted by federal laws that apply to national banks. Title XIV of the Act imposes new requirements on banks and other mortgage lenders. Other provisions of the Act will restrict debit card transaction fees and sales of residential mortgage loans to institutions that package and securitize the loans. Additionally, the Act requires various federal agencies to adopt implementing regulations over the course of the next several months.

Additionally, the Dodd-Frank Act eliminated the Office of Thrift Supervision, our current primary federal regulator. On or about July 21, 2011, the OTS will cease to exist as a separate entity and will be merged and become a division of the Office of the Comptroller of the Currency (OCC). On the effective date of the OTS

merger, the OCC will assume the OTS’ role as regulator and supervisor of Legacy Banks, and the Federal Reserve will become the primary supervisor and regulator of Legacy Bancorp. In addition, compliance with new regulations and being supervised by one or more new regulatory agencies could increase our expenses. It is impossible to predict whether the Act or any of the new regulations contemplated by the Act will adversely affect our financial condition or operating results.

Our commercial real estate and commercial loans expose us to increased credit risks, and these risks will increase if we succeed in increasing these types of loans.

In general, commercial real estate loans and commercial loans generate higher returns, but also pose greater credit risks, than do owner-occupied residential mortgage loans. As our various commercial loan portfolios increase, the corresponding risks and potential for losses from these loans will also increase.

We make both secured and some short-term unsecured commercial loans. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses. Secured commercial loans are generally collateralized by equipment, leases, inventory and accounts receivable. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed.

Our continuing concentration of loans in our primary market areas may increase our risk.

Our success depends primarily on the general economic conditions in the counties in which we conduct business. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in Berkshire County, in western Massachusetts, as well as in eastern New York. The local economic conditions in our market areas have a significant impact on our loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would affect these local economic conditions and could adversely affect our financial condition and results of operations. Additionally, because we have a significant amount of commercial real estate loans, decreases in tenant occupancy may also have a negative effect on the ability of many of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

The concentration within our investment portfolio may increase our risk.

Within the investment portfolio, the Company has a significant amount of debt securities, including mortgage-backed securities, issued by companies in the financial services sector. Given the current market conditions, this sector has an enhanced level of credit risk.

Changes in market interest rates could adversely affect our financial condition and results of operations.

Our profitability, like that of most financial institutions, depends to a large extent upon our net interest income, which is the difference, or spread, between our gross interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our results of operations and financial condition depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements, including our adjustable-rate mortgage loans, which represent a large portion of our residential loan portfolio. Changes in interest rates could have a material adverse effect on our business, financial condition, results of operations and cash flows. Because, as a general matter, our interest-bearing liabilities re-price or mature more quickly than our interest-earning assets, an increase in interest rates generally would

result in a decrease in our interest rate spread and net interest income. See “Item 7a: Quantitative and Qualitative Disclosures About Risk Management.”

We are also subject to reinvestment risk relating to interest rate movements. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are not able to reinvest funds from such prepayments at rates that are comparable to the rates on the prepaid loans or securities. On the other hand, increases in interest rates on adjustable-rate mortgage loans result in larger mortgage payments due from borrowers, which could potentially increase our level of loan delinquencies and defaults.

Strong competition within our market area may limit our growth and profitability.

We face significant competition both in attracting deposits and in the origination of loans. Savings banks, credit unions, savings and loan associations and commercial banks operating in our primary market area have historically provided most of our competition for deposits. In addition, and particularly in times of high interest rates, we face additional and significant competition for funds from money-market mutual funds and issuers of corporate and government securities. Competition for the origination of real estate and other loans comes from other thrift institutions, commercial banks, insurance companies, finance companies, other institutional lenders and mortgage companies. Many of our competitors have substantially greater financial and other resources than us. Moreover, we may face increased competition in the origination of loans if competing thrift institutions convert to stock form, because such converting thrifts would likely seek to invest their new capital into loans. Finally, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than savings banks and as a result, they may enjoy a competitive advantage over us. This advantage places significant competitive pressure on the prices of our loans and deposits.

We operate in a highly regulated environment and may be adversely affected by changes in law and regulations.

We are subject to extensive regulation, supervision and examination as outlined in the “Regulation And Supervision” section of this report. Any change in the laws or regulations applicable to us, or in banking regulators’ supervisory policies or examination procedures, whether by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board, the Office of Thrift Supervision, other state or federal regulators, the United States Congress or the Massachusetts legislature could have a materially adverse effect on our business, financial condition, results of operations and cash flows.

Item 1b. Unresolved Staff Comments

None

Item 2. Properties

Legacy Banks conducts its business through its main office located in Pittsfield, Massachusetts and eighteen other full-service branch offices located in Western Massachusetts and Eastern New York. The following table sets forth information about our offices as of December 31, 2010:

Year Opened

Lease

Year Opened

Lease

Or Acquired

Expires

Or Acquired

Expires

Owned:

Main Office:

99 North Street

2000

Pittsfield, MA 01201

Branch Offices:

76 Park Street

1997

409 Stockbridge Road

2007

Lee, MA 01238

Great Barrington, MA 01230

25 Main Street

1958

Route 30 & Mill Lane

2007

Lenox, MA 01240

Middleburgh, NY 12122

2 Holmes Road

1978

4 Elliott Place

2007

Lenox, MA 01240

East Durham, NY 12423

30 East Otis Road

1997

184 Broadway

2007

Otis, MA 01253

Whitehall, NY 12887

734 Williams Street (Land leased)

1997

Route 296

2007

Pittsfield, MA 01201

Windham, NY 12496

331 State Road

2007

142 Main Street

2009

North Adams, MA 01247

Haydenville, MA 01039

Leased:

609 Merrill Road

1971

2023 (1)

480 West Housatonic Street

2005

2015 (1)

Pittsfield, MA 01201

700 Main Street

1975

2019 (1)

Route 32, Bryant’s Market

2007

2013

Great Barrington, MA 01230

Greenville, NY 12083

39 North Pearl Street

2008

2018 (2)

545 Troy-Schenectady Road

2009

2019

Albany, NY 12207

Latham, NY 12110

ATM Location Only:

Lee Outlet Village

1995

2011

Lee, MA 01238


(1)		Legacy Banks has an option to renew for one additional 5 year terms

(2)		Legacy Banks has an option to renew for two additional 5 year terms

Item 3. Legal Proceedings

We are not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Management believes that those routine legal proceedings involve, in the aggregate, amounts that are immaterial to our financial condition and results of operations.

Item 4. (Removed and Reserved)

Part II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities

The Company’s common stock is traded on the NASDAQ Global Market, LLC under the symbol “LEGC.” As of March 11, 2011, the Company had approximately 928 registered holders of record. The following table sets forth, for the quarters indicated, the daily high and low sales price for the common stock and the dividends declared. The closing price of the Company’s common stock on March 11, 2011 was $13.32. The Company is subject to the requirements of Delaware law, which generally limits dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital or, if there is no excess, to its net profits for the current and/or immediately preceding two fiscal years.


	For the Year Ended December 31, 2010
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
High	$	13.14	$	8.91	$	9.73	$	9.98
Low	$	7.49	$	7.55	$	8.24	$	9.01
Dividend Declared	$	0.05	$	0.05	$	0.05	$	0.05


	For the Year Ended December 31, 2009
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
High	$	11.07	$	13.46	$	12.10	$	11.21
Low	$	9.40	$	10.50	$	9.29	$	7.90
Dividend Declared	$	0.05	$	0.05	$	0.05	$	0.05

Repurchase of Our Equity Securities: In March 2009 the Company announced that its Board of Directors authorized a stock repurchase program (the “Stock Repurchase Program”) for the purchase of up to 439,095 shares of the Company’s common stock or approximately 5% of its outstanding common stock. Purchases under this Stock Repurchase Program in the fourth quarter of 2010 were as follows:


							(d) Maximum Number
							or Approximate
					(c) Total Number of		Dollar Value of
					Shares Purchased as		Shares that May Yet
					Part of Publicly		Be Purchased Under
	(a) Total Number of		(b) Average Price		announced Plans or		the Plans or
Period	Shares Purchased		Paid per Share		Programs		Programs
October 1 — 31		10,400	$	7.91		10,400		270,445
November 1 — 30		2,600	$	7.61		2,600		267,845
December 1 — 31		—		—		—		267,845

Stock Repurchase Overview: Legacy purchased 412,344 shares of Company stock at an average price of $16.15 per share in the first quarter of 2007 in order to fund the restricted stock portion of the 2006 Equity Incentive Plan (EIP) approved by shareholders in November 2006. Additionally the Company purchased 515,430 shares at an average price of $14.62 during the second and third quarters of 2007 as part of a stock repurchase program announced in April and completed in August 2007. The Company also purchased 486,366 shares at an average price of $13.95 during the third and fourth quarters of 2007 as part of a stock repurchase program announced in August and completed in December 2007. The Company purchased 462,048 shares in 2008 at an average price of $13.24 as part of the stock repurchase program announced in December 2007. Through the end of 2010 the Company has purchased 171,250 shares at an average price of $9.27 as part of the stock repurchase program announced in March 2009. Information regarding securities authorized for issuance under equity compensation plans appears in Part III, Item 12 (d) of this report.

Stock Performance Graph: The following graph shows a comparison of shareholder return on the Company’s common stock, with the returns of both a broad-market index and a peer group index for the period October 26, 2005 (the date of the Company’s initial public offering) through December 31, 2010. The broad-market index chosen was the S&P 500 Market Index, and the peer group index chosen was the SNL Thrift Index. The index level for all series was set to $100 on 10/25/05, with a starting price for LEGC of $10 per share (price through initial public offering).

Comparison Of Cumulative Return Among Legacy Bancorp,
Peer Group Index and Broad Market Index


	10/25/05		12/31/05		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
Legacy Bancorp		100.00		133.50		158.50		132.60		106.80		98.60		131.40
S&P 500 Market Index		100.00		104.32		118.53		122.72		75.49		93.19		105.11
SNL Thrifts		100.00		107.63		121.80		70.45		43.54		39.08		39.43

There can be no assurance that the Company’s common stock or the indices included above will continue in the future with the same or similar trend depicted in the graph. The Company will not make or endorse any predictions as to future stock performance.

Item 6. Selected Financial Data

The following summary data is based in part on the consolidated financial statements and accompanying notes, and other schedules appearing elsewhere in this Form 10-K. Historical data is also based in part on, and should be read in conjunction with, prior filings with the SEC.


	At or For the Years Ended December 31,
	2010			2009			2008			2007		2006
	(Dollars in thousands, except per share data)
Selected Financial Data:
Total assets	$	916,877		$	946,265		$	944,657		$	924,541	$	808,318
Loans, net ⁽¹⁾		610,941			653,334			695,264			654,024		578,802
Securities and other investments:		202,331			184,716			152,639			152,054		176,132
Deposits		685,245			651,378			608,088			610,447		518,248
Federal Home Loan Bank advances		105,388			160,352			197,898			167,382		127,438
Repurchase agreements		5,329			6,386			5,238			4,055		5,575
Total stockholders’ equity		111,559			121,367			124,142			133,092		149,997
Nonperforming loans		12,744			19,578			7,549			1,532		879

Selected Operating Data:
Total interest and dividend income		40,964			45,818			50,327			49,357		43,915
Total interest expense		14,558			18,348			22,465			25,511		20,339

Net interest income		26,406			27,470			27,862			23,846		23,576
Provision for loan losses		10,468			4,883			1,465			1,051		233

Net interest income after provision for loan losses		15,938			22,587			26,397			22,795		23,343
Non-interest income:
Service charges and fees		5,108			4,006			4,541			4,496		4,044
Gain (loss) on sales or impairment of securities, net		(1,846	)		(10,267	)		(3,194	)		510		(1,736	)
Gain on sale of loans		607			860			255			270		210
FHLB prepayment restructuring charge		(1,481	)		—			—			—		—
Gain on curtailment and termination of defined benefit plan		—			—			—			—		605
Other		805			788			805			610		329

Total non-interest income (loss)		3,193			(4,613	)		2,407			5,886		3,452
Total non-interest expense		31,043			28,832			26,584			27,187		21,336

Income (loss) before income taxes		(11,912	)		(10,858	)		2,220			1,494		5,459
Provision for income taxes		(4,016	)		(3,060	)		776			249		2,653

Net income (loss)		(7,896	)		(7,798	)		1,444			1,245		2,806


Earnings (loss) per share	$	(0.99	)	$	(0.98	)	$	0.18		$	0.14	$	0.29

Dividends per share	$	0.20		$	0.20		$	0.20		$	0.16	$	0.12


	At or For the Years Ended December 31,
	2010			2009			2008			2007			2006
Selected Financial Ratios and Other Data:
Performance Ratios:
Return (loss) on average assets ⁽²⁾		(0.84)	%		(0.82)	%		0.16	%		0.15	%		0.36	%
Return (loss) on average equity ⁽³⁾		(6.48	)		(6.20	)		1.11			0.88			1.92
Interest rate spread ⁽⁴⁾		2.79			2.78			2.80			2.26			2.39
Net interest margin ⁽⁵⁾		3.05			3.13			3.27			3.01			3.15
Efficiency ratio ⁽⁶⁾		96.10			84.9			77.5			93.0			74.2
Non-interest expense to average assets		3.29			3.04			2.89			3.23			2.70
Average interest-bearing assets to interest-bearing liabilities		115.86			116.87			117.89			123.37			127.61
Dividend payout ratio		n/a			n/a			111.61			113.82			40.88

Regulatory Capital Ratios ⁽⁷⁾:
Equity to total assets		12.2	%		12.8	%		13.1	%		14.4	%		18.6	%
Average equity to average assets		12.9			13.3			14.1			16.9			18.5
Total capital (bank only) to risk-weighted assets		12.0			12.3			13.0			13.9			18.9

Asset Quality Ratios:
Nonperforming assets to total assets		1.63	%		2.20	%		0.80	%		0.17	%		0.11	%
Nonperforming loans to total loans		2.07			2.96			1.08			0.23			0.15
Allowance for loan losses to nonperforming loans		70.70			56.64			87.99			363.45			532.08
Allowance for loan losses to total loans		1.47			1.67			0.95			0.85			0.80

Share Data:
Book value per share — end of year	$	12.92		$	13.89		$	14.14		$	14.40		$	14.55
Tangible book value per share — end of year		11.17			12.48			12.74			13.01			14.25
Market price at year end		13.14			9.86			10.68			13.26			15.85


(1)		Includes loans held for sale.

(2)		Net income (loss) divided by average total assets.

(3)		Net income (loss) divided by average total equity.

(4)		Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average

		cost of interest-bearing liabilities.

(5)		Net interest margin represents net interest income as a percentage of average interest-earning assets for the year.

(6)		The efficiency ratio represents non-interest expense for the year less expenses related to the amortization of intangibles divided by the sum of net interest income (before loan loss provision) plus non-interest income (excluding net gains or losses on the sale or impairment of securities).

(7)		All capital ratios are as of the end of the year.

Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operation

General: Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report.

Dividend: On March 9, 2011 the Company announced that its Board of Directors had declared a cash dividend of $0.05 per common share. The dividend will be paid on or about April 1, 2011 to stockholders of record as of March 20, 2011.

Stock-based Compensation:

2006 Equity Incentive Plan: In accordance with the Company’s 2006 Equity Incentive Plan, approved by shareholders on November 1, 2006, the Company’s Compensation Committee awarded 892,200 stock options with an exercise price of $16.03 per share and 346,500 shares of restricted stock with a grant date fair value of $16.03 per share to directors and certain employees on November 29, 2006. Additionally, the Compensation

Committee awarded 22,500 stock options with an exercise price of $12.91 per share and 1,000 shares of restricted stock with a grant date fair value of $12.91 per share to certain employees on December 14, 2007. On March 4, 2008 the Compensation Committee awarded 63,860 stock options with an exercise price of $14.16 per share and 2,000 shares of restricted stock with a grant date fair value of $14.16 per share to certain employees. Additionally the Compensation Committee awarded 20,050 shares of restricted stock with a grant date fair value of $9.68 per share to certain directors and employees on December 9, 2009. Lastly, the Compensation Committee awarded 20,000 stock options with an exercise price of $7.77 per share and 10,000 shares of restricted stock with a grant date fair value of $7.77 per share to certain employees on October 26, 2010.

The 2006 Equity Incentive Plan provides for total awards of 1,030,860 stock options and 412,344 shares of restricted stock, and there are 320,150 stock options and 51,774 shares of restricted stock available for future awards as of December 31, 2010. The shares of common stock underlying any awards that are forfeited, cancelled, reacquired by Legacy Bancorp or otherwise terminated (other than by exercise or expiration) will be added back to the shares of common stock with respect to which new awards may be granted under the plan.

All stock options awarded to date are for a term of ten years and will vest over a period of five years. Upon a change in control (as defined in the plan) or the death or disability of the individual to whom options or shares were awarded, all options and restricted shares awarded immediately vest. Of the options awarded, 381,300 were incentive stock options and 617,260 were non-statutory options. Of the 998,560 options granted to date, 710,710 remain outstanding and 287,850 have been forfeited. Of the 710,710 options outstanding, 402,104 have vested as of December 31, 2010 while an additional 138,142 vested on January 1, 2011. For the year ended December 31, 2010, the Company recognized compensation cost on stock options of approximately $280,000. The Company is employing an accelerated method of expense recognition for options, whereby compensation cost is measured on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards. The following table presents the fair value and related assumptions using the Black-Scholes Option Pricing Model for stock options granted:


	Options Granted in			Options Granted in			Options Granted in
	December 2007			March 2008			October 2010
Fair Value	$	2.85		$	2.90		$	1.92
Risk-free interest rate		3.88	%		3.02	%		1.98	%
Expected dividend yield		1.24	%		1.13	%		2.57	%
Expected volatility		15.90	%		16.44	%		30.81	%
Expected life	6.5 years			6.5 years			6.5 years

All of the restricted share awards granted vest over a five year period. Of the 379,550 shares awarded to date, 209,100 have vested, 151,470 are unvested and 18,980 have been forfeited. An additional 67,310 share awards vested on January 1, 2011. For restricted stock awards related to the 2006 Equity Inventive Plan, the cost recognized during the year ended December 31, 2010 amounted to approximately $878,000.

2010 CEO Inducement Plan: In 2010 the Company granted non-qualified options for 25,000 of common stock as part of a Chief Executive Officer (CEO) Inducement Plan as contemplated by the Employment Agreement between the Bank’s CEO and the Company and Bank. The exercise price of each option is equal to the market price of the Company’s stock on the date of grant and the maximum term of each option is 10 years. The vesting period is approximately five years from the date of grant, with vesting at 20% per year.

Under the CEO Inducement Plan, Company also granted time-based stock awards to its new Bank CEO for 10,000 shares of common stock. The stock awards vest at 20% per year on the anniversary date of the grant. The fair market value of the stock allocations, based on the market price at the date of grant, is recorded as unearned compensation. Unearned compensation is amortized using the straight-line method over the applicable vesting period.

Additionally the Company also granted performance-based stock awards to its new Bank CEO for up to 40,000 shares of common stock. The stock awards vest pending the Company’s financial performance as compared to a pre-established list of peer banks. Compensation expense related to these awards is amortized using the straight-line method over the applicable vesting period.

Growth Strategy and Challenges: Long term growth is an essential element in our business plan. Lending is the major driver of revenue and we are committed to supporting our loan growth. We recognize that loan and deposit growth are interdependent, and over the long term both must grow consistently. One of our biggest challenges is to grow our customer base and to grow the depth and breadth of our customer relationships. We address this challenge by maintaining our focus on anticipating, understanding and assisting our customers in achieving their financial goals.

Our deposit pricing strategy is twofold. First, our relationship savings product is important to our deposit mix. It requires customers to maintain a checking account as part of the relationship, the goal being to create multiple relationships with our customers to aid both profitability and customer retention. The relationship savings product is structured and priced like a money market deposit or fund, except that it does not offer check writing. Relationship savings deposits amounted to $142.1 million as of December 31, 2010. Our experience with money market type deposit accounts has been that they become a long term, stable funding source at reasonable cost. The second component in our pricing strategy is to continuously offer a selection of special certificates of deposit with competitive interest rates.

Another challenge is being able to maintain sufficient asset size or scale to provide the marketing, technology, service and other support functions so that we will continue to be relevant and competitive. It is for these reasons that management emphasizes and monitors growth in terms of customers, customer households, customer relationships, assets, revenue per employee, and efficiency. We also know that to successfully grow, our employees must be extremely well trained and experienced. We regularly monitor training hours per employee, employee turnover and employee (and customer) satisfaction surveys. Periodically, we also engage a mystery shopping firm that sends representatives into each of our locations to experience and witness what the customer experiences and then provide us with constructive feedback.

Critical Accounting Policies

The Company has established various accounting policies, which govern the application of generally accepted accounting principles in the preparation of the financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. Refer to Footnote 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies”. We consider the following to be critical accounting policies:

Allowance for Loan Losses: The determination of the allowance for loan losses is considered critical due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential

for changes in the economic environment that could result in material changes in the amount of the allowance for loan losses considered necessary. The allowance is evaluated on a regular basis by management and is based on a periodic review of the collectability of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. For a full discussion of the allowance for loan losses, please refer to “Business of Legacy Bancorp and Subsidiaries—Asset Quality”.

Income Taxes: Legacy Bancorp 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 consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance related to deferred tax assets is established when, in management’s judgment, it is more likely than not that all or a portion of such deferred tax assets will not be realized.

As of December 31, 2005 a valuation allowance was established against deferred tax assets related to the uncertain utilization of the charitable contribution carryforward created primarily by the donation to The Legacy Banks Foundation as part of the conversion. The contribution carryforward expired in 2010, and the allowance related to this item was reversed as of December 31, 2010.

Deferred tax assets applicable to capital loss carryforwards of approximately $4.6 million are recoverable only to the extent that capital gains can be realized during the carryforward period. Of the total capital loss carryforward, $47,000 and $4.5 million expire in 2013 and 2014, respectively. The judgments applied by management consider the likelihood that capital gain income will be realized within the carryforward period in light of our tax planning strategies and changes in market conditions. As of December 31, 2010 a valuation allowance was established against deferred tax assets related to the uncertain utilization of the capital loss carryforward. This capital loss carryforward fully expires in 2014, and the allowance amounted to $1.7 million as of December 31, 2010.

Other-Than-Temporary Impairment: Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity, with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).

OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes.

The Company investment in both the stock from the Federal Home Loan Bank (FHLB) as well as certain real estate funds is also evaluated for OTTI on a periodic basis. The fair value of FHLB stock is based upon the redemption value of the stock which equates to its carrying value. The value of the Bank’s investment in certain real estate funds is based on an analysis of the financial statements of the funds and underlying real estate projects.

Goodwill: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. The Company recorded goodwill in connection with the purchase of a financial institution in 1997. Additionally, the Company recorded goodwill in connection with the purchase of branch offices in 2007 located in Eastern New York State, and in March 2009 located in Haydenville, Massachusetts. Most recently, in the second quarter of 2010, the Company recorded goodwill in connection with the acquisition of Renaissance. The total book value of goodwill is approximately $11.6 million and $9.7 million as of December 31, 2010 and 2009, respectively.

The fair value of goodwill is analyzed at least annually and this analysis utilizes three separate methodologies. First, a market approach is used which incorporates a review of comparable market transactions for peer companies, relying on recent merger and acquisition data from these comparable transactions to estimate the price multiple at which the Company would be acquired in a hypothetical market transaction. The second approach used is the asset approach, or replacement cost approach which entails stating the recorded assets and liabilities of the Company on a fair market value basis, and the value of the Company’s equity is determined as the difference between the total fair value amounts for assets and liabilities. The third approach utilized is the income approach which constructed a discounted cash flow model from financial projections. The concluded fair value is calculating by weighting the values obtained based on the relevance of the methodology based on the facts and circumstances for the Company on the valuation date. The greatest weight, 50%, is placed on the market approach given the amount of data obtainable on comparable transactions. A 30% weight is applied to the asset approach due to the precision of the fair value estimates provided. Lastly, a 20% weight is applied to the income approach/discounted cash flow model due to the inherent uncertainty in forecasting future performance, and the appropriate market discount rate. Impairment, if any, identified under this analysis is recognized in the period identified. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels. The Company performs an annual impairment test as of June 30. The impairment testing as of June 30, 2010 and 2009 indicated that no impairment charge was required as of those dates. The analysis indicated that the estimated fair value of the Company’s equity exceeded its carrying value by 13.8% and 14.4% as of June 30, 2010 and 2009, respectively.

Fair Values of Assets and Liabilities: The Company groups its assets and liabilities that are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

For a full discussion of the Company’s methods in determining fair value, see footnote No. 21 — Fair Value of Assets and Liabilities within Item 8: Financial Statements And Supporting Data.

This discussion has highlighted those accounting policies that management considers to be critical; however all accounting policies are important, and therefore you are encouraged to review each of the policies included in Note 1 to the consolidated financial statements to gain a better understanding of how our financial performance is measured and reported.

Comparison of Financial Condition at December 31, 2010 and December 31, 2009

Total Assets: Total assets decreased by $29.4 million, or 3.1%, from $946.3 million at December 31, 2009 to $916.9 million at December 31, 2010. An increase in available for sale securities was offset by decreases in cash and cash equivalents as well as net loans, as described below.

Cash and Short-term Investments: Overall, cash and short-term investments decreased by $13.1 million, or 32.5%. Cash and correspondent bank balances increased $905,000, or 8.0%, while short-term investments, comprised of federal funds sold, FHLB overnight deposits and short-term money market balances decreased $14.0 million, or 48.4%, from $28.9 million at December 31, 2009 to $14.9 million at December 31, 2010. Quarter end cash and short-term investments can be influenced by the receipt of certain large balance money market funds which generally occurs on the final day of each calendar quarter.

Securities: The total investment portfolio aggregated $202.3 million at December 31, 2010, an increase of $17.6 million, or 9.5%, from $184.7 million at December 31, 2009. Please refer to the “Investment Activities” section included in Item 1 for a detailed discussion of the securities portfolio.

Net Loans: Net loans, excluding loans held for sale, as of December 31, 2010 were $607.1 million, a decrease of $45.5 million, or 7.0%, from a net loan balance of $652.6 million as of December 31, 2009. Although there was an overall decrease during 2010, the Bank did have loan growth in home equity loans, which grew by $4.7 million in 2010. Please refer to the “Lending Activities” section included in Item 1 for a detailed discussion of the loan portfolio.

Deposits: Deposits increased by $33.9 million, or 5.2%, to $685.2 million at December 31, 2010 from $651.4 million at December 31, 2009. Although most deposit types have experienced growth in 2010, deposits increased primarily in certificates of deposit (CDs) which increased $8.4 million, or 2.9%, and in relationship savings deposits, which increased $16.8 million, or 13.4%. CDs represent 43.4% of overall deposits at the end of 2010, down slightly as compared to the end of 2009. Please refer to the “Sources of Funds” section included in Item 1 for a detailed discussion of the Bank’s deposits.

Borrowed Funds: The Company relies on borrowings from the Federal Home Loan Bank of Boston (FHLBB) as an additional funding source as liquidity needs dictate. The balance of these borrowings will fluctuate depending on the Bank’s ability to grow deposits as well as the amount of loan demand in the market. Advances from the FHLBB decreased by $55.0 million, or 34.3%, to $105.4 million at December 31, 2010 from a balance of $160.4 million at December 31, 2009 as a result of regular maturities throughout 2010 as well as the prepayment of approximately $34.7 million of advances during the fourth quarter of 2010. Please refer to the “Sources of Funds” section included in Item 1 for a detailed discussion of the Bank’s borrowings.

Stockholders’ Equity: In 2010, stockholders’ equity decreased $9.8 million, or 8.1%, from $121.4 million at December 31, 2009 to $111.6 million at December 31, 2010. The decrease in equity is due to the net loss of $7.9 million, the declaration of a dividend of $0.05 per share during each quarter of 2010, the repurchase of 104,000 shares of common stock as part of the Stock Repurchase Plan announced in March 2010, and a decrease in the amount of unrealized gain on available-for-sale investment securities, offset somewhat by the amortization of unearned compensation.

Operating Results Overview

Legacy Bancorp, Inc. reported a net loss of $4.5 million, or $0.57 per diluted share for the quarter ended December 31, 2010, as compared to a net loss of $3.8 million, or $0.48 per diluted share in the fourth quarter of 2009. The Company reported a net loss of $7.9 million, or $0.99 per diluted share for the year ended December 31, 2010 as compared to a net loss of $7.8 million, or $0.98 per diluted share, in 2009. The full year change in net loss includes a decrease in the loss on the sale of securities and charges on investments deemed to be other-than-temporarily impaired (OTTI), offset by an increase in the provision for loan losses and operating expenses and a decrease in net interest margin. The 2010 fourth quarter and full year loss also include a charge of $1.5 million on the prepayment of approximately $34.7 million of advances from the FHLB. The book value per share and tangible book value per share were $12.92 and $11.17, respectively, at December 31, 2010.

Net Interest Income: Legacy Bancorp’s results of operations are dependent largely on net interest income, which is the difference between the income earned on its loan and investment portfolios and interest expense incurred on its deposits and borrowed funds. Our net interest margin was 3.05% and 3.13% for the years ended December 31, 2010 and 2009, respectively. The overall interest rate environment and changes in interest rates have a direct impact on net interest income. We utilize a rigorous asset and liability management process to manage interest rate risk. We monitor the interest rate environment and set interest rates on our deposit and loan products to effectively manage interest rate risk. To this end, we are aided by a quarterly review of critical assumptions, modeling projections, back testing of the model’s previous projections against actual results, analysis of changes, opportunities and risks associated with changes in market interest rates, and liquidity analysis. For a more detailed description of our asset and liability management process, see Item 7a: Quantitative and Qualitative Disclosures About Market Risk—Management of Market Risk”.

Non-Interest Expense: Legacy Bancorp’s non-interest expense consists primarily of compensation and employee benefits, office occupancy, technology, marketing, deposit insurance, general administrative expenses and income tax expense. We use the efficiency ratio (non-interest expense for the period minus expenses related to the amortization of intangible assets divided by the sum of net interest income before the loan loss provision, plus non-interest income, not including gains or losses on the sale or impairment of securities) and the expense ratio (non-interest expense to total average assets) as the primary measurements to monitor and control non-interest expense. For the year ended December 31, 2010, the efficiency and expense ratios were 96.1% and 3.29%, respectively. For the year ended December 31, 2009, the efficiency and expense ratios were 84.9% and 3.04%, respectively. The deterioration in the efficiency ratio was primarily a result of the decrease in net interest margin coupled with an increase in operating expenses.

Net income: Return on average assets (ROAA) is a primary measurement of net income relative to peer banks. In 2010 and 2009, ROAA was significantly impacted by losses relating to sales and writedowns of certain investment securities as well as a significant increase in the provision for loan losses. For the years ended December 31, 2010 and 2009 the ROAA was (0.84)% and (0.82)%, respectively. In addition to net interest income and non-interest expense, results of operations are also affected by fee income from banking and non-banking operations, provisions for loan losses, gains (losses) on sales of loans and securities available for sale, loan servicing income and other miscellaneous income.

Comparison of Operating Results for the Years Ended December 31, 2010 and 2009

Analysis of Net Interest Income: Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense. Legacy does not accrue interest on loans on non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields.


	Year Ended December 31, 2010							Year Ended December 31, 2009							Year Ended December 31, 2008
	Average							Average							Average
	Outstanding							Outstanding							Outstanding
	Balance		Interest		Yield/ Rate			Balance		Interest		Yield/ Rate			Balance		Interest		Yield/ Rate
								(Dollars in thousands)
Interest-earning assets:
Loans — net (1)	$	641,498	$	36,014		5.61	%	$	675,661	$	38,849		5.75	%	$	676,222	$	41,944		6.20	%
Investment securities		209,559		4,927		2.35	%		181,642		6,958		3.83	%		164,242		8,141		4.96	%
Short-term investments		13,959		23		0.16	%		19,165		11		0.06	%		11,265		242		2.15	%

Total interest-earning assets		865,016		40,964		4.74	%		876,468		45,818		5.23	%		851,729		50,327		5.91	%
Non-interest-earning assets		79,219							73,378							67,973

Total assets	$	944,235						$	949,846						$	919,702

Interest-bearing liabilities:
Savings deposits	$	52,076	$	125		0.24	%	$	50,724	$	170		0.34	%	$	49,936		203		0.41	%
Relationship savings		137,742		1,108		0.80	%		123,297		1,595		1.29	%		121,990		2,557		2.10	%
Money market		66,007		433		0.66	%		65,602		684		1.04	%		58,052		1,371		2.36	%
NOW accounts		45,647		131		0.29	%		43,527		173		0.40	%		41,378		218		0.53	%
Certificates of deposits		291,520		7,131		2.45	%		282,730		8,449		2.99	%		259,439		10,072		3.88	%

Total interest-bearing deposits		592,992		8,928		1.51	%		565,880		11,071		1.96	%		530,795		14,421		2.72	%
Borrowed funds		153,591		5,630		3.67	%		184,081		7,277		3.95	%		191,708		8,044		4.20	%

Total interest-bearing liabilities		746,583		14,558		1.95	%		749,961		18,348		2.45	%		722,503		22,465		3.11	%
Non-interest-bearing liabilities		75,848							74,007							67,643

Total liabilities		822,431							823,968							790,146
Equity		121,804							125,878							129,556

Total liabilities and equity	$	944,235						$	949,846						$	919,702


Net interest income			$	26,406						$	27,470						$	27,862


Net interest rate spread (2)						2.79	%						2.78	%						2.80	%
Net interest-earning assets (3)	$	118,433						$	126,507						$	129,226


Net interest margin (4)						3.05	%						3.13	%						3.27	%
Average interest-earning assets to interest-bearing liabilities						115.86	%						116.87	%						117.89	%


(1)		Includes loans held for sale.

(2)		Net interest rate spread represents the difference between the yield on total average interest-earning assets and the cost of total average interest-bearing liabilities

(3)		Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4)		Net interest margin represents net interest income divided by average total interest-earning assets.

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of the Bank’s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances).


	Year Ended December 31,									Year Ended December 31,
	2010 vs. 2009									2009 vs. 2008
	Increase						Total			Increase						Total
	(Decrease) Due to						Increase			(Decrease) Due to						Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans — net	$	(1,913	)	$	(922	)	$	(2,835	)	$	(35	)	$	(3,060	)	$	(3,095	)
Investment securities		1,341			(3,372	)		(2,031	)		1,028			(2,211	)		(1,183	)
Short-term investments		(2	)		14			12			604			(835	)		(231	)


Total interest-earning assets		(574	)		(4,280	)		(4,854	)		1,597			(6,106	)		(4,509	)


Interest-bearing liabilities:
Savings deposits		5			(50	)		(45	)		3			(36	)		(33	)
Relationship savings		217			(704	)		(487	)		27			(989	)		(962	)
Money market		4			(255	)		(251	)		208			(895	)		(687	)
NOW accounts		8			(50	)		(42	)		12			(57	)		(45	)
Certificates of deposits		274			(1,592	)		(1,318	)		1,044			(2,667	)		(1,623	)


Total deposits		508			(2,651	)		(2,143	)		1,294			(4,644	)		(3,350	)
Borrowed funds		(1,154	)		(493	)		(1,647	)		(307	)		(460	)		(767	)


Total interest-bearing liabilities		(646	)		(3,144	)		(3,790	)		987			(5,104	)		(4,117	)


Change in net interest income	$	72		$	(1,136	)	$	(1,064	)	$	610		$	(1,002	)	$	(392	)

Net Loss: Net loss for the year ended December 31, 2010 was $7.9 million, a decrease of $98,000 from a net loss of $7.8 million in the prior year. The decrease is primarily a result of an increase in the provision for loan loss expense and operating expenses, offset by a decrease in the loss on the net sales or writedowns of investment securities, as described below. The 2010 loss also includes a charge of $1.5 million related to the prepayment of approximately $34.7 million of advances from the FHLB.

Net Interest Income: The tables above set forth the components of the Company’s net interest income, yields on interest earning assets and interest bearing liabilities, and the effect on net interest income arising from changes in volume and rate. Net interest income decreased from $27.5 million in 2009 to $26.4 million in 2010. The decrease of $1.1 million, or 3.9%, is due mainly to a decrease in the Company’s net interest margin from 3.13% in 2009 to 3.05% in 2010.

Interest Income: Interest and dividend income decreased $4.9 million, or 10.6%, to $41.0 million for the year ended December 31, 2010 from $45.8 million for the year ended December 31, 2009. Changes in the interest rate environment contributed to a decrease in the average yield on loans from 5.75% for the year ended December 31, 2009 to 5.61% for the same period in 2010, while the overall yield on interest earning assets decreased from 5.23% to 4.74% for the 2009 and 2010 periods, respectively. These changes in overall yields had the effect of decreasing interest income by $4.3 million. Interest income was also adversely impacted by an overall decrease in average interest-earning assets of $11.5 million, resulting in a decrease to interest income of $574,000. Net loans decreased on average by $34.2 million between the two periods, due mainly to

charge-offs and payoff of certain commercial loans. The decrease in average net loans was offset by an increase in the average balances of investment securities of $27.9 million.

Interest Expense: Changes in interest rates helped lower interest expense for the year ended December 31, 2010 by $3.8 million or 20.7% to $14.6 million compared to interest expense of $18.3 million for the year ended December 31, 2009. The effect of a $3.4 million decrease in average interest-bearing liabilities was a decrease in interest expense by $646,000, while a decrease of 45 basis points in the average rates paid on interest-bearing liabilities decreased interest expense by $3.1 million.

Provision for Loan Losses: The Bank records a provision for loan losses as a charge to its earnings when necessary in order to maintain the allowance for loan losses at a level sufficient to absorb losses inherent in the loan portfolio. Refer to Item 1: “Business — Loan Quality” for additional information about the Bank’s methodology for establishing its allowance for loan losses. The Bank recorded $10.5 million and $4.9 million in loan loss provisions during the years ended December 31, 2010 and 2009, respectively, representing an increase of $5.6 million. This increase in 2010 was a reflection of the change in loan mix for the period as well as higher specific reserves established against certain loans in 2010. Additionally, as part of a continuous review and analysis of current market and economic conditions by management, the Company adjusted the reserve ratio applied to certain loan categories in 2010. At December 31, 2010, the allowance for loan losses totaled $9.0 million, or 1.47% of the loan portfolio, compared to $11.1 million, or 1.67%, of total loans at December 31, 2009.

Non-interest Income: Non-interest income for the year ended December 31, 2010 improved $7.8 million to $3.2 million as compared to a net charge of $4.6 million in 2009. The primary cause of the increase was a decrease in the amount of net losses on the sales of securities or the writedown of certain investments deemed to be other-than-temporarily-impaired (OTTI). In 2010, the Company incurred $3.9 million of OTTI charges through earnings on certain bonds, equities and limited partnership investments as compared to OTTI charges of $7.2 million in 2009. Similarly, the Company recorded a net gain of $2.0 million on the sale of investments in 2010 as compared to a net loss of $3.0 million in 2009. Additionally, in the fourth quarter of 2010 the Bank incurred a charge of $1.5 million on the prepayment of $34.7 million of advances from the FHLB. Portfolio management fees increased $961,000, or 95.4%, in 2010 as a result of Legacy’s acquisition of Renaissance in the second quarter of 2010. Legacy also had increases in customer fees and insurance and other fees, partially offset by a decrease on the gain on sale of mortgages.

Non-interest Expense: Non-interest expenses for the year ended December 31, 2010 increased by $2.2 million, or 7.7% as compared to the same period of 2009. Salaries and benefits were impacted by severance and other management restructuring expenses of approximately $494,000 in 2010. Full year increases in data processing expenses were partially offset by decreases in FDIC deposit insurance, occupancy and advertising expense. The increase in professional fees in 2010 is primarily the result of the Company incurring $473,000 related to the merger transaction with Berkshire Hills Bancorp, Inc. announced in December 2010. The increase in other general and administration expenses was primarily due to higher expenses related to OREO and other commercial real estate workout expenses of $972,000 for 2010 as compared to $163,000 in 2009. Other general and administrative expenses in 2010 also include $107,000 in amortization of intangibles acquired as part of the Company’s acquisition of substantially all of the assets of Renaissance.

Income Taxes: The income tax benefit amounted to $4.0 million for the year ended December 31, 2010, an increase of $956,000 as compared to a benefit of $3.1 million for the year ended December 31, 2009. The Company’s 2010 combined federal and state effective tax rate was 33.7% as compared to 28.2% for 2009. The Company’s 2010 effective income tax benefit associated with the net operating loss was partially offset by an increase of $516,000 in the deferred tax asset valuation reserve associated with the Company’s charitable contribution and capital loss carryforwards. The 2010 effective rate was also impacted by the

reduction of income from municipal securities as the bank significantly reduced its holding of this product throughout the year.

Comparison of Operating Results for the Years Ended December 31, 2009 and December 31, 2008

Net Loss: Net loss for the year ended December 31, 2009 was $7.8 million, a decrease of $9.2 million from net income of $1.4 million in the prior year. The decrease is primarily a result of an increase in the loss on the net sales or writedowns of investment securities, an increase in the provision for loan loss expense and an increase in the Federal Deposit Insurance Corporation (FDIC) deposit insurance expense as described below.

Net Interest Income: The tables above set forth the components of the Company’s net interest income, yields on interest earning assets and interest bearing liabilities, and the effect on net interest income arising from changes in volume and rate. Net interest income decreased from $27.9 million in 2008 to $27.5 million in 2009. The decrease of $392,000, or 1.4%, is due mainly to a decrease in the Company’s net interest margin from 3.27% in 2008 to 3.13% in 2009.

Interest Income: Interest and dividend income decreased $4.5 million, or 9.0%, to $45.8 million for the year ended December 31, 2009 from $50.3 million for the year ended December 31, 2008. Changes in the interest rate environment contributed to a decrease in the average yield on loans from 6.20% for the year ended December 31, 2008 to 5.75% for the same period in 2009, while the overall yield on interest earning assets decreased from 5.91% to 5.23% for the 2008 and 2009 periods, respectively. These changes in overall yields had the effect of decreasing interest income by $6.1 million. This decrease was partially offset by a $24.7 million increase in average interest-earning assets, which had the effect of increasing interest income by $1.6 million. Net loans decreased on average by $561,000 between the two periods which was offset by an increase in the average balances of investment securities of $17.4 million.

Interest Expense: Changes in interest rates also helped lower interest expense for the year ended December 31, 2009 by $4.1 million or 18.3% to $18.3 million compared to interest expense of $22.5 million for the year ended December 31, 2008. The effect of an increase in interest-bearing liabilities, which grew by an average of $27.5 million in 2009, was to increase interest expense by $987,000, while a decrease of 66 basis points in the average rates paid on interest-bearing liabilities decreased interest expense by $5.1 million.

Provision for Loan Losses: The Bank records a provision for loan losses as a charge to its earnings when necessary in order to maintain the allowance for loan losses at a level sufficient to absorb losses inherent in the loan portfolio. Refer to Item 1: “Business — Loan Quality” for additional information about the Bank’s methodology for establishing its allowance for loan losses. The Bank recorded $4.9 million and $1.5 million in loan loss provisions during the years ended December 31, 2009 and 2008, respectively, representing an increase of $3.4 million. This increase in 2009 was a reflection of the change in loan mix for the period, a continuous review and analysis of current market and economic conditions by management, as well as higher specific reserves established against certain loans in 2009. At December 31, 2009, the allowance for loan losses totaled $11.1 million, or 1.67% of the loan portfolio, compared to $6.6 million, or 0.95%, of total loans at December 31, 2008.

Non-interest Income: Non-interest income for the year ended December 31, 2009 decreased $7.0 million to a net charge of $4.6 million as compared to income of $2.4 million in 2008. The primary cause of the decrease was an increase in the amount of net losses on the sales of securities or the writedown of certain investments deemed to be other-than-temporarily-impaired (OTTI). In 2009, the Company incurred $7.2 million of OTTI charges through earnings on certain bonds, equities and limited partnership investments as compared to OTTI charges of $3.6 million in 2008. Additionally, in the fourth quarter of 2009 the Bank incurred a net loss on the sale of securities in the amount of $3.3 million, with most of this loss coming from the disposal of the Bank’s

remaining portfolio of private-label mortgage backed securities. In 2009, the Bank also had decreases in fees from customers and insurance and investment products, offset by an increase in the gain on sale of mortgages.

Non-interest Expense: Non-interest expenses for the year ended December 31, 2009 increased by $2.2 million, or 8.5% as compared to the same period of 2008. New full-service denovo branches opened in July 2008 in Albany, New York and in January 2009 in Latham, New York, as well as the Haydenville branch office acquired in the first quarter of 2009 contributed to increases in occupancy and equipment, data processing, advertising and other general and administrative expenses. Additionally, changes in the deposit insurance assessment formula by the FDIC resulted in an expense of $1.5 million in 2009 as compared to $193,000 in 2008. The 2009 expense includes a special assessment of $423,000 during the second quarter.

Income Taxes: The income tax benefit amounted to $3.1 million for the year ended December 31, 2009, a decrease of $3.8 million as compared to $776,000 of tax expense for the year ended December 31, 2008. The Company’s 2009 combined federal and state effective tax rate was 28.2% as compared to 35.0% for 2008. The Company’s 2009 effective income tax benefit associated with the net operating loss was partially offset in the fourth quarter by an increase of $1.4 million in the deferred tax asset valuation reserve associated with the Company’s charitable contribution and capital loss carryforwards.

Item 7A: Quantitative and Qualitative Disclosures about Market Risk

Management recognizes that taking and managing risk is fundamental to the business of banking. Through the development, implementation and monitoring of its policies with respect to risk management, the Bank strives to measure, evaluate and control the risks it faces. Management understands that an effective risk management system is critical to the safety and soundness of the Bank. Chief among the risks faced by Legacy Banks are credit risk, market risk including interest rate risk, liquidity risk, operational (transaction) risk and compliance risk.

Within management, the responsibility for risk management rests with the Risk Management department and the senior officers responsible for lending, retail banking and human resources. The Risk Management department continually reviews the status of our risk management efforts, including reviews of internal and external audit findings, loan review findings, and the activities of the Asset/Liability Committee with respect to monitoring interest rate and liquidity risk. The Committee tracks any open items requiring corrective action with the goal of ensuring that each is addressed on a timely basis. The Vice President Risk Management reports all findings of the Risk Management department directly to the Audit Committee of the Bank.

Management of Credit Risk: Legacy Banks considers credit risk to be the most significant risk it faces, in that it has the greatest potential to affect the financial condition and operating results of Legacy Banks. Credit risk is managed through a combination of policies established by the board of directors of the Bank, the monitoring of compliance with these policies, and the periodic evaluation of loans in the portfolio, including those with problem characteristics. In general, the Bank’s policies establish maximums on the amount of credit that may be granted to a single borrower (including affiliates), the aggregate amount of loans outstanding by type in relation to total assets and capital, and loan concentrations. Collateral and debt service coverage ratios, approval limits and other underwriting criteria are also specified. Policies also exist with respect to performing periodic credit reviews, the rating of loans, when loans should be placed on non-performing status and factors that should be considered in establishing the Bank’s allowance for loan losses.

Management of Market Risk: Market risk is the risk of loss due to adverse changes in market prices and rates, and typically encompasses exposures such as sensitivity to changes in market interest rates, foreign currency exchange rates, and commodity prices. The Bank has no exposure to foreign currency exchange or commodity price movements. Because net interest income is the Bank’s primary source of revenue, interest rate risk is a significant market risk to which the Bank is exposed.

Interest rate risk is the exposure of the Bank’s net interest income to adverse movements in interest rates. Net interest income is affected by changes in interest rates as well as by fluctuations in the level and duration of the Bank’s assets and liabilities. Over and above the influence that interest rates have on net interest income, changes in rates may also affect the volume of lending activity, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the flow and mix of deposits, and the market value of the Bank’s assets and liabilities.

Exposure to interest rate risk is managed by the Bank through periodic evaluations of the current interest rate risk inherent in its rate-sensitive assets and liabilities, primarily deposits, borrowings, loans and securities, coupled with determinations of the level of risk considered appropriate given the Bank’s capital and liquidity requirements, business strategy and performance objectives. Through such management, the Bank seeks to manage the vulnerability of its net interest income to changes in interest rates.

Strategies used by the Bank to manage the potential volatility of its earnings may include:

	•		Emphasizing the origination and retention of adjustable-rate mortgage loans, variable rate commercial loans and variable rate home equity lines-of-credit;

	•		Investing in securities with relatively short maturities and/or expected average lives;

	•		Classifying nearly all of the investment portfolio as “available for sale” in order to provide for flexibility in liquidity management; and

	•		Lengthening liabilities such as certificates of deposits and FHLB borrowings when appropriate.

Legacy Banks’ Asset/Liability Committee (ALCO), comprised of several members of senior management, is responsible for managing interest rate risk. On a quarterly basis, the ALCO reviews with the ALCO/Credit Committee of the board of directors its analysis of the Bank’s exposure to interest rate risk, the effect subsequent changes in interest rates could have on the Bank’s future net interest income, its strategies and other activities, and the effect of those strategies on the Bank’s operating results. The ALCO is also actively involved in the Bank’s planning and budgeting process as well as in determining pricing strategies for deposits and loans.

ALCO’s primary method for measuring and evaluating interest rate risk is income simulation analysis. This analysis considers the maturity and interest rate repricing characteristics of interest-bearing assets and liabilities, as well as the relative sensitivities of these balance sheet components over a range of interest rate scenarios. Interest rate scenarios tested include parallel and flattening/steepening rate changes over a one year period, and static (or flat) rates, as well as interest rate “shock” scenarios (instantaneous increases to market rates). The simulation analysis is used to measure the exposure of net interest income to changes in interest rates over specified time horizon, usually one and two year periods. The simulations also show the net interest income volatility for up to five years.

The table below sets forth, as of December 31, 2010, the estimated changes in the Bank’s net interest income that would result from the designated twelve-month changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit run-off, and should not be relied upon as indicative of actual results.


	Percentage Change In
	Estimated Net Interest
	Income Over 12 Months As
	Compared to Flat Rates
500 basis point flattening increase in rates		(4.2	%)
200 basis point parallel increase in rates		(2.8	%)
Flat interest rates		—
100 basis point parallel decrease in rates		0.5	%

As indicated in the table above, the result of a 200 basis point parallel increase in interest rates is estimated to decrease net interest income by 2.8% over a 12-month horizon, when compared to the flat rate scenario. For a 500 basis point “flattening” increase in the level of interest rates (shorter term rates increasing at a greater level than longer term rates), net interest income is estimated to decrease by 4.2% over a 12-month horizon, when compared against the flat rate scenario. Inherent in these estimates is the assumption that certain transaction and savings account deposit rates would not increase while certain money market and relationship savings accounts would increase by 80 — 83 basis points for each 100 basis point increase in market interest rates. These assumptions are based on the Bank’s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates.

The estimated change in net interest income from the flat rate scenario for a 100 basis point parallel decline in the level of interest rates is an increase of 0.5%, which assumes little, if any, decrease in savings and interest-bearing checking rates, and an average decrease of approximately 55 basis points (subject to certain rate “floors”) in money market and relationship savings rates, respectively, for each 100 basis point decrease in market interest rates. Given the level of market interest rates as of the end of 2010, the Bank did not measure the impact of a 200 basis point decline. Effectively, in the declining interest rate scenario, the rates on certain interest-earning assets and interest-bearing liabilities would decrease at relatively the same rate. This simulation also incorporates the assumption that shorter-term FHLBB borrowings at December 31, 2010 are replaced mainly with borrowings with maturities averaging 1.5 years.

There are inherent shortcomings in income simulation, given the number and variety of assumptions that must be made in performing the analysis. The assumptions relied upon in making these calculations of interest rate sensitivity include the level of market interest rates, the shape of the yield curve, the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates, the degree to which non-maturity deposits (e.g. checking) react to changes in market rates, the expected prepayment rates on loans and mortgage-backed securities, the degree to which early withdrawals occur on certificates of deposit and the volume of other deposit flows. As such, although the analysis shown above provides an indication of the Bank’s sensitivity to interest rate changes at a point in time, these estimates are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Bank’s net interest income and will differ from actual results.

In its management of interest rate risk, the Bank also relies on the analysis of its interest rate “gap,” which is the measure of the mismatch between the amount of Legacy’s interest-earning assets and interest-bearing liabilities that mature or reprice within specified timeframes. An asset-sensitive position (positive gap) exists when there are more rate-sensitive assets than rate-sensitive liabilities maturing or repricing within a particular time horizon, and generally signifies a favorable effect on net interest income during periods of rising interest rates and a negative effect during periods of falling interest rates. Conversely, a liability-sensitive position (negative gap) would generally indicate a negative effect on net interest income during periods of rising rates and a positive effect during periods of falling rates. Certain factors may serve to limit the usefulness of the

measurement of the interest rate gap. For example, interest rates on certain assets and liabilities are discretionary and may change in advance of, or may lag behind, changes in market rates. The gap analysis does not give effect to changes Legacy may undertake to mitigate interest rate risk. Certain assets, such as adjustable-rate loans, have features that may restrict the magnitude of changes in interest rates both on a short-term basis and over the life of the assets. Further, in the event of changes in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the gap analysis. Lastly, should interest rates increase, the ability of borrowers to service their debt may decrease.

Liquidity Risk Management: Liquidity risk, or the risk to earnings and capital arising from an organization’s inability to meet its obligations without incurring unacceptable losses, is managed by the Bank’s Chief Financial Officer, who monitors on a daily basis the adequacy of the Bank’s liquidity position. Oversight is provided by the Asset/Liability Committee, which reviews the Bank’s liquidity on a periodic basis, and by the board of directors of the Bank, which reviews the adequacy of our liquidity resources on a quarterly basis.

Our primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided by operations. While scheduled payments from amortization of loans and mortgage-backed securities and maturing loans and investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We maintain excess funds in cash and short-term interest-bearing assets that provide additional liquidity. At December 31, 2010, cash and due from banks, short-term investments and debt securities maturing within one year totaled $32.7 million or 3.6% of total assets.

We also rely on outside borrowings from the FHLB as an additional funding source. Over the past several years the Bank has expanded its use of FHLB borrowings to fund growth in the loan portfolio and to assist in the management of its interest rate risk. FHLB borrowings outstanding totaled $105.4 million as of December 31, 2010. On that date, we had the ability to borrow an additional $112.1 million from the FHLB of Boston, $5 million of which is in the form of an Ideal Way line of credit. Please refer Note 11 to the consolidated financial statements in Item 8 for a detailed discussion of FHLB Advances

The Bank intends to grow its overall loan assets. The cash flow required to fund those potential increases in loans will likely be provided primarily by increases in deposits. To the extent that cash flow provided by our deposit-gathering efforts does not completely fund increases in assets, we will likely borrow funds from the FHLB of Boston to provide the necessary cash flow. The capital necessary to support future growth in assets is anticipated to be provided by our capital resources in hand, augmented over time by increases from net income, net of dividends paid, if any.

Management of Other Risks: Two additional risk areas that receive significant attention by management and the board are operational risk and compliance risk. Operational risk is the risk to earnings and capital arising from control deficiencies, problems with information systems, fraud, error or unforeseen catastrophes. Compliance risk is the risk arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and procedures or ethical standards. Compliance risk can expose us to fines, civil money penalties, payment of damages and the voiding of contracts.

The Bank addresses such risks through the establishment of comprehensive policies and procedures with respect to internal control, the management and operation of its information and communication systems, disaster recovery, and compliance with laws, regulations and banking “best practice.” Monitoring of the effectiveness of such policies and procedures is performed through a combination of the Bank’s internal audit program, through periodic internal and third-party compliance reviews, and through the ongoing attention of its managers charged with supervising compliance and operational control. Oversight of these activities is provided by the Risk Management department and the Audit Committee of the board of directors of the Bank.

Off-Balance Sheet Arrangements

Other than loan commitments, the Bank does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations: The following tables present information indicating various contractual obligations and commitments of the Bank as of December 31, 2010 and the respective maturity dates:


	December 31, 2010
					More than One Year		More than Three Years
	Total		One Year or Less		through Three Years		through Five Years		Over Five Years
	(Dollars in thousands)
Federal Home Loan Bank of Boston advances	$	105,388	$	—	$	35,000	$	32,200	$	38,188
Securities sold under agreements to repurchase		5,329		5,329		—		—		—
Operating Leases		2,683		343		669		571		1,100


Total contractual obligations	$	113,400	$	5,672	$	35,669	$	32,771	$	39,288

Loan Commitments : Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses. The following table presents certain information about Legacy Banks’ loan commitments outstanding as of December 31, 2010:


	December 31, 2010
					More than One Year		More than Three Years
	Total		One Year or Less		through Three Years		Through Five Years		Over Five years
	(Dollars in thousands)
Commitments to grant loans ⁽¹⁾	$	18,328	$	18,328	$	—	$	—	$	—
Commercial loan lines-of-credit		17,826		17,826		—		—		—
Unused portion of home equity loans ⁽²⁾		68,108		2,750		10,672		14,535		40,151
Unused portion of construction loans ⁽³⁾		1,351		1,351		—		—		—
Unused portion of overdraft lines-of-credit⁽⁴⁾		4,456		—		—		—		4,456
Unused portion of personal lines-of-credit⁽⁵⁾		709		—		—		—		709
Standby letters of credit⁽⁶⁾		3,213		3,213		—		—		—
Other commitments and contingencies⁽⁷⁾		4,287		—		4,287		—		—


Total loan and other commitments	$	118,278	$	43,468	$	14,959	$	14,535	$	45,316


(1)		Commitments for loans are extended to customers for up to 60 days after which they expire.

(2)		Unused portions of home equity loans are available to the borrower for up to 10 years.

(3)		Unused portions of residential construction loans are available to the borrower for up to one year. Commercial construction loans maturities may be longer than one year.

(4)		Unused portion of checking overdraft lines-of-credit are available to customers in “good standing” indefinitely.

(5)		Unused portion of personal lines-of-credit are available to customers in “good standing” indefinitely.

(6)		Standby letters of credit are generally available for less than one year.

(7)		Other commitments relate primarily to potential additional capital calls the Company is committed to contribute as part of its investment in certain real estate limited partnerships.

Impact of Inflation and Changing Prices

The financial statements, accompanying notes, and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Most of our assets and liabilities are monetary in nature, and therefore the impact of interest rates has a greater impact on its performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Impact of Recent Accounting Pronouncements

Please refer to the note on Recent Accounting Pronouncements in Note 1 to the consolidated financial statements in Item 8 for a detailed discussion of recent accounting pronouncements.

Item 8: Financial Statements And Supplemental Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm		60

Consolidated Balance Sheets as of December 31, 2010 and 2009		62

Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008		63

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008		64

Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008		65 – 66

Notes to Consolidated Financial Statements		67 – 120

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Legacy Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Legacy Bancorp, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. We also have audited Legacy Bancorp, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Legacy Bancorp, Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Legacy Bancorp, Inc. and subsidiaries as of December 31, 2010 and 2009, and the

results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Legacy Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ Wolf & Company

Boston, Massachusetts
March 16, 2011

LEGACY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)


	December 31,
	2010			2009
ASSETS

Cash and due from banks	$	12,186		$	11,281
Short-term investments		14,906			28,874

Cash and cash equivalents		27,092			40,155
Securities — Available for sale		185,688			167,426
Securities — Held to maturity		97			97
Restricted equity securities and other investments — at cost		16,546			17,193
Loans held for sale		3,839			706
Loans, net of allowance for loan losses of $9,010 in 2010 and $11,089 in 2009		607,102			652,628
Premises and equipment, net		19,142			19,568
Accrued interest receivable		2,631			3,306
Goodwill, net		11,558			9,730
Mortgage servicing rights		737			514
Other intangible assets		2,888			2,140
Net deferred tax asset		12,684			10,202
Bank-owned life insurance		17,047			16,263
Foreclosed assets		2,216			1,195
Other assets		7,610			5,142

	$	916,877		$	946,265


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	75,116		$	75,232
Interest-bearing		610,129			576,146

Total deposits		685,245			651,378
Securities sold under agreements to repurchase		5,329			6,386
Federal Home Loan Bank advances		105,388			160,352
Mortgagors’ escrow accounts		1,211			1,058
Accrued expenses and other liabilities		8,145			5,724

Total liabilities		805,318			824,898

Commitments and contingencies

Stockholders’ Equity:
Preferred Stock ($.01 par value, 10,000,000 shares authorized, none issued or outstanding)		—			—
Common Stock ($.01 par value, 40,000,000 shares authorized and 10,308,600 issued at December 31, 2010 and December 31, 2009; 8,631,732 outstanding at December 31, 2010 and 8,631,732 outstanding at December 31, 2009)		103			103
Additional paid-in-capital		103,168			102,788
Unearned Compensation — ESOP		(6,956	)		(7,322	)
Unearned Compensation — Equity Incentive Plans		(1,053	)		(2,078	)
Retained earnings		39,114			48,998
Accumulated other comprehensive income (loss)		(233	)		711
Treasury stock, at cost (1,676,868 shares at December 31, 2010 and 1,573,888 shares at December 31, 2009)		(22,584	)		(21,833	)

Total stockholders’ equity		111,559			121,367

	$	916,877		$	946,265

See accompanying notes to consolidated financial statements

LEGACY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)


	Years Ended December 31,
	2010			2009			2008
Interest and dividend income:
Loans	$	36,014		$	38,849		$	41,944
Securities:
Taxable		4,378			6,201			6,964
Tax-Exempt		442			656			526
Dividends		107			101			651
Short-term investments		23			11			242

Total interest and dividend income		40,964			45,818			50,327

Interest expense:
Deposits		8,928			11,071			14,421
Federal Home Loan Bank advances		5,600			7,210			7,945
Other borrowed funds		30			67			99

Total interest expense		14,558			18,348			22,465

Net interest income		26,406			27,470			27,862
Provision for loan losses		10,468			4,883			1,465

Net interest income after provision for loan losses		15,938			22,587			26,397


Non-interest income:
Total other-than-temporary impairment losses on equity securities		(42	)		(703	)		(3,020	)
Total other-than-temporary impairment losses on debt securities		—			(4,983	)		(530	)
Total other-than-temporary impairment losses on other investments		(3,828	)		(3,813	)
Portion of impairment losses on debt securities recognized in other comprehensive income/loss		—			2,264			—

Net impairment losses recognized in earnings		(3,870	)		(7,235	)		(3,550	)
Customer service fees		2,967			2,870			3,202
Portfolio management fees		1,968			1,007			1,141
Income from bank-owned life insurance		689			710			714
Insurance, annuities and mutual fund fees		173			129			198
Net gain (loss) on sales of available-for-sale securities		2,024			(3,032	)		356
Net gain on sales of loans		607			860			255
Prepayment penalty on FHLB advances		(1,481	)		—			—
Miscellaneous		116			78			91

Total non-interest income (loss)		3,193			(4,613	)		2,407

Non-interest expenses:
Salaries and employee benefits		14,797			13,754			14,027
Occupancy and equipment		3,912			3,921			3,625
Data processing		2,934			2,659			2,627
Professional fees		1,924			1,083			842
Advertising		1,047			1,405			1,121
Deposit insurance		1,109			1,491			214
Foreclosed assets, net		886			163			83
Other general and administrative		4,434			4,356			4,045

Total non-interest expenses		31,043			28,832			26,584

Income (loss) before income taxes		(11,912	)		(10,858	)		2,220
Provision (benefit) for income taxes		(4,016	)		(3,060	)		776

Net income (loss)	$	(7,896	)	$	(7,798	)	$	1,444

Earnings (loss) per share
Basic	$	(0.99	)	$	(0.98	)	$	0.18
Diluted	$	(0.99	)	$	(0.98	)	$	0.18
Weighted average shares outstanding
Basic		7,990,167			7,977,363			8,058,594
Diluted		7,990,167			7,977,363			8,082,498

See accompanying notes to consolidated financial statements

LEGACY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(Dollars in thousands, except per share amounts)


												Unearned						Accumulated
						Additional			Unearned			Compensation -						Other						Total
	Common Stock					Paid-in			Compensation -			Equity			Retained			Comprehensive			Treasury			Stockholders’
	Shares			Amount		Capital			ESOP			Incentive Plan			Earnings			Income (Loss)			Stock			Equity
Balance at December 31, 2007		9,240,960		$	103	$	101,720		$	(8,787	)	$	(3,525	)	$	58,709		$	270		$	(15,398	)	$	133,092

Comprehensive income (loss):
Net income (loss)		—			—		—			—			—			1,444			—			—			1,444
Net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects		—			—		—			—			—			—			(5,079	)		—			(5,079	)
Amortization of benefit plan gains/losses and prior service costs		—			—		—			—			—			—			87			—			87

Total comprehensive loss																									(3,548	)

Cash dividends declared ($0.20 per share)		—			—		—			—			—			(1,612	)		—			—			(1,612	)
Common stock repurchased - 5% Stock Repurchase Program announced December 2007		(462,048	)		—		—			—			—			—			—			(6,117	)		(6,117	)
Stock option expense		—			—		784			—			—			—			—			—			784
Restricted stock expense		—			—		—			—			840			—			—			—			840
Restricted stock granted		3,000			—		—			—			(42	)		(7	)		—			49			—
Release of ESOP stock		—			—		(29	)		732			—			—			—			—			703

Balance at December 31, 2008		8,781,912		$	103	$	102,475		$	(8,055	)	$	(2,727	)	$	58,534		$	(4,722	)	$	(21,466	)	$	124,142

Comprehensive income (loss):
Net income (loss)		—			—		—			—			—			(7,798	)		—			—			(7,798	)
Net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects		—			—		—			—			—			—			5,296			—			5,296
Amortization of benefit plan gains/losses and prior service costs		—			—		—			—			—			—			137			—			137

Total comprehensive loss																									(2,365	)

Cash dividends declared ($0.20 per share)		—			—		—			—			—			(1,603	)		—			—			(1,603	)
Common stock repurchased - 5% Stock Repurchase Program announced March 2009		(67,250	)		—		—			—			—			—			—			(696	)		(696	)
Stock option expense		—			—		474			—			—			—			—			—			474
Restricted stock expense		—			—		—			—			843			—			—			—			843
Restricted stock granted		20,050			—		—			—			(194	)		(135	)		—			329			—
Release of ESOP stock		—			—		(161	)		733			—			—			—			—			572

Balance at December 31, 2009		8,734,712		$	103	$	102,788		$	(7,322	)	$	(2,078	)	$	48,998		$	711		$	(21,833	)	$	121,367

Comprehensive income (loss):
Net income (loss)		—			—		—			—			—			(7,896	)		—			—			(7,896	)
Net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects		—			—		—			—			—			—			(1,135	)		—			(1,135	)
Amortization of benefit plan gains/losses and prior service costs		—			—		—			—			—			—			191			—			191

Total comprehensive loss																									(8,840	)


Cash dividends declared ($0.20 per share)		—			—		—			—			—			(1,605	)		—			—			(1,605	)
Common stock repurchased - 5% Stock Repurchase Program announced March 2009		(104,000	)		—		—			—			—			—			—			(892	)		(892	)
Stock option expense		—			—		300			—			—			—			—			—			300
Restricted stock expense		—			—		80			—			892			—			—			—			972
Restricted stock granted		20,000			—		—			—			(171	)		(157	)		—			328			—
Forfeiture of restricted stock		(18,980	)										304			(117	)					(187	)
Release of ESOP stock		—			—		—			366			—			(109	)		—			—			257

Balance at December 31, 2010		8,631,732		$	103	$	103,168		$	(6,956	)	$	(1,053	)	$	39,114		$	(233	)	$	(22,584	)	$	111,559

See accompanying notes to consolidated financial statements

LEGACY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


	Years Ended December 31,
	2010			2009			2008
Cash flows from operating activities:
Net income (loss)	$	(7,896	)	$	(7,798	)	$	1,444
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		10,468			4,883			1,465
Net amortization of securities		914			721			(53	)
Amortization of intangible assets		580			700			653
Depreciation and amortization expense		1,581			1,615			1,482
Loss on sales/impairment of securities, net		1,846			10,267			3,194
Loss on sales/writedowns of foreclosed real estate, net		275			80			—
Gain on sales of loans, net		(607	)		(860	)		(255	)
Loans originated for sale		(63,836	)		(66,795	)		(10,345	)
Proceeds from sales of loans		61,310			66,949			23,730
Share-based compensation expense		1,272			1,317			1,624
Deferred tax benefit		(1,902	)		(3,637	)		(1,237	)
Employee Stock Ownership Plan expense		257			572			703
Net change in:
Bank-owned life insurance		(784	)		(712	)		(763	)
Accrued interest receivable		675			327			(229	)
Other assets		(2,468	)		(3,716	)		(1,235	)
Accrued expenses and other liabilities		990			(2,320	)		(110	)

Net cash provided by operating activities		2,675			1,593			20,068

Cash flows from investing activities:
Activity in available-for-sale securities:
Sales		74,880			56,650			56,456
Maturities, prepayments and calls		149,792			71,920			43,166
Purchases		(243,716	)		(162,155	)		(108,919	)
Purchase of Federal Home Loan Bank stock		—			—			(210	)
Purchase of other investments		(3,182	)		(895	)		(2,587	)
Maturities, prepayments and calls of other investments		2			74			25
Loan originations and purchases, net of principal payments		31,980			36,478			(55,835	)
Additions to premises and equipment		(1,155	)		(939	)		(2,386	)
Net cash paid for acquisition		(1,623	)		—			—
Net cash received in branch acquisition		—			9,031			—
Proceeds from sales of foreclosed assets		1,782			—			—

Net cash provided (used) by investing activities		8,760			10,164			(70,290	)

(continued)

See accompanying notes to consolidated financial statements.

LEGACY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Dollars in thousands)


	Years Ended December 31,
	2010			2009			2008
Cash flows from financing activities:
Net increase in deposits		33,867			33,457			(2,359	)
Net (decrease) increase in securities sold under agreements to repurchase		(1,057	)		1,148			1,183
Repayment of Federal Home Loan Bank advances		(84,395	)		(50,644	)		(871,460	)
Proceeds from Federal Home Loan Bank advances		29,431			13,098			901,976
Net increase in mortgagors’ escrow accounts		153			43			(19	)
Repurchase of common stock		(892	)		(696	)		(6,117	)
Payment of dividends on common stock		(1,605	)		(1,603	)		(1,612	)

Net cash provided (used) by financing activities		(24,498	)		(5,197	)		21,592


Net change in cash and cash equivalents		(13,063	)		6,560			(28,630	)

Cash and cash equivalents at beginning of period		40,155			33,595			62,225


Cash and cash equivalents at end of period	$	27,092		$	40,155		$	33,595


Supplemental cash flow information:
Interest paid on deposits	$	8,971		$	11,209		$	14,453
Interest paid on Federal Home Loan Bank advances		5,718			7,427			7,933
Interest paid on other borrowed funds		30			67			99
Income taxes paid		325			1,870			1,375
Non-cash activities:
Real estate acquired through foreclosure		2,216			1,275			—
Transfers from loans to loans held for sale		16,500			—			12,735

See accompanying notes to consolidated financial statements.

LEGACY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

		*Basis of presentation*

		The consolidated financial statements include the accounts of Legacy Bancorp, Inc. (“Company” or “Legacy”), and its wholly-owned subsidiaries, Legacy Banks (“Bank”) and LB Funding Corp. The accounts of Legacy Banks include all of its wholly-owned subsidiaries, Legacy Securities Corporation, Legacy Insurance Services of the Berkshires, Renaissance Investment Group, LLC and CSB Service Corporation. All significant intercompany balances and transactions have been eliminated in consolidation

		*Merger agreement*

		On December 21, 2010, the Company and Berkshire Hills Bancorp, Inc. (“Berkshire”) jointly announced the execution of a definitive agreement whereby Berkshire will acquire Legacy in a 90% stock and 10% cash transaction. As a result of the merger, Legacy’s shareholders will become shareholders of Berkshire and will receive 0.56385 shares of Berkshire common stock plus $1.30 cash for each share of Legacy common stock they own. The transaction is expected to be completed during the second quarter of 2011, subject to the approval of regulators and shareholders of both companies.

		*Business*

		The Company provides a variety of financial services to individuals and businesses through its full service offices in western Massachusetts and eastern New York. Its primary deposit products are savings, checking and term certificate accounts and its primary lending products are consumer, residential and commercial mortgage loans. The Company also provides investment management services and insurance services through the Bank’s subsidiaries, Renaissance and Legacy Insurance Services.

		*Use of estimates*

		In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of goodwill, other-than-temporary impairment of securities and other investments and the valuation of deferred tax assets.

		*Acquisitions*

		On March 13, 2009, the Bank acquired a community banking branch office from The Bank of Western Massachusetts. In this acquisition, Legacy assumed approximately $9.8 million in deposits for a purchase premium of approximately $393,000. The purchase price allocation resulted in approximately $285,000 of core deposit intangibles, $43,000 of goodwill and $470,000 of property and equipment.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Acquisitions (concluded)*

		On April 30, 2010, the Bank acquired substantially all of the assets of the Renaissance Investment Group, LLC, a wealth management company located in Pittsfield, Massachusetts. The purchase price included an estimated contingent portion which is based upon forecasted gross revenue through September 30, 2011. This estimated contingent component may increase or decrease based upon actual gross revenue recorded over that period. The purchase price allocation resulted in approximately $1.6 million of customer list and other intangibles, $1.8 million of goodwill and $5,000 of property and equipment. The goodwill and customer list intangible is expected to be deducted for tax purposes over a period of 15 years.

		*Significant group concentrations of credit risk*

		Most of the Company’s activities are with customers located within the Northeast region of the United States; specifically Western Massachusetts and Eastern New York. Note 4 discusses the types of securities that the Company invests in. Note 5 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer.

		*Operating segments*

		Accounting Standards Codification (“ASC”) 280, Segment Reporting, establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographical areas, and major customers. Generally, financial information is to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. Management evaluates the Company’s performance and allocates resources based on a single segment concept.

		Accordingly, there are no separately identified material operating segments for which discrete financial information is available. The Company does not derive revenues from, or have assets located in foreign countries, nor does it derive revenues from any single customer that represents 10% or more of its total revenues.

		*Cash and cash equivalents*

		For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, interest-bearing deposits in banks and short-term investments with maturities of ninety days or less at date of purchase.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Fair value hierarchy*

		The Company groups its assets that are measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.

			Level 1 — Valuation is based on quoted prices in active markets for identical assets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

			Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.

			Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

		Transfers between levels are recognized at the end of the reporting period, if applicable.

		*Securities*

		Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and reported at amortized cost, less principal payments received. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

		Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

		Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity, with a decline in fair value below the amortized cost of the investment, to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Securities (concluded)*

		OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes.

		*Federal Home Loan Bank stock and other investments*

		The Bank, as a member of the FHLB system, is required to maintain an investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB may declare dividends on the stock. The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of December 31, 2010, no impairment has been recognized.

		The Bank also has an investment in Savings Bank Life Insurance Company of Massachusetts (“SBLI”) stock. This stock is reported at cost which was the fair value at acquisition as determined by an appraisal performed by independent investment consultants retained by SBLI.

		Certain other equity investments that do not have readily determinable fair values are carried at cost. The investments are reviewed for impairment at least annually or sooner if events or changes occur which indicate that the carrying value may not be recoverable.

		*Loans held for sale*

		Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

		*Loans*

		The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by residential and commercial real estate mortgage loans in western Massachusetts. The ability of the Company’s debtors to honor their loans is affected by the local economy and the local real estate market.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Loans (concluded)*

		The Company’s loan portfolio includes residential real estate, home equity, commercial real estate, commercial, and consumer loans. Residential real estate includes 1-4 family owner occupied loans and land notes; commercial real estate includes commercial construction; and consumer includes manufactured housing, secured and unsecured loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination costs, net of certain direct origination fees, and loan purchase premiums, are deferred and recognized as an adjustment of the related loan yield using the interest method.

		The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process of collection. Unsecured consumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

		All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

		*Allowance for loan losses*

		The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below.

		General component: The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, land notes, commercial real estate, home equity loans, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. While there were no changes in the Company’s general policies or methodology pertaining to the general component of the allowance for loan losses during 2010, certain general reserve ratios

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Allowance for loan losses (continued)*

		were increased during 2010 mainly to reflect the greater risks and uncertainties resulting from the current economy.

		The qualitative factors for the general component of the allowance for loan losses are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

			Residential real estate — For residential mortgage loans to be held in portfolio, Legacy Banks lends up to a maximum loan-to-value ratio of 100% for first-time home buyers and 95% for other buyers on mortgage loans secured by owner-occupied property, with the general condition that private mortgage insurance is required for loans with a loan-to-value ratio in excess of 80%. A licensed appraiser appraises all properties securing residential first mortgage purchase loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Land loans are also included in residential real estate.

			Commercial real estate — Loans in this segment are primarily income-producing properties throughout the Company’s market area, with a segment located out of market generated through the Company’s former national commercial real estate lending program which was discontinued in 2010. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management periodically obtains the borrower’s updated financial information and continually monitors the cash flows of these loans. Commercial construction loans are included in the commercial real estate segment and are considered to have higher risks due to their ultimate repayment being sensitive to interest rate changes, demand and supply of alternative real estate, the availability of long-term financing, and changes in general economic conditions. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates, and financial analyses of the developers and property owners.

			Home equity loans — Loans in this segment primarily include home equity lines-of-credit and loans that are secured by first or second mortgages on one-to-four family owner occupied properties, and are available to be drawn upon for 10 years, at the end of which time they become term loans amortized over 10 years. Interest rates on home equity lines normally adjust based on the prime rate of interest as published by the Wall Street Journal.

			Commercial loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for loan losses (concluded)

Consumer and other loans — Certain loans in this segment are unsecured and repayment is dependent on the credit quality of the individual borrower. This segment includes manufactured housing loans.

		Allocated component: The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company generally does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

		A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

		The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.

		Unallocated Component: An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

		The Company also maintains a reserve for unfunded credit commitments to provide for the risk of loss inherent in these arrangements. This reserve is determined using a methodology similar to the analysis of the allowance for loan losses, taking into consideration probabilities of future funding requirements. This reserve for unfunded commitments is included in other liabilities and amounted to $269 and $326 at December 31, 2010 and 2009, respectively.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Foreclosed assets*

		Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations, changes in the valuation allowance and any direct writedowns are included in net expenses from other real estate owned.

		*Premises and equipment*

		Land is carried at cost. Buildings, improvements and equipment are carried at cost, less accumulated depreciation and amortization computed primarily on the straight-line method over the shorter of the lease term or estimated useful lives of the assets. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.

		*Servicing*

		The Company services mortgage loans for others. Servicing assets are recognized as separate assets at fair value when rights are acquired through purchase or through sale of financial assets. The Company uses a simplified valuation model derived from estimates of the present value of the future cash flows to value these assets at an amount equal to 0.75% of the loans sold and serviced. Capitalized servicing rights are reported in other intangible assets and are amortized into non-interest income. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics such as interest rate and terms. Impairment, if any, is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in loan servicing fee income.

		*Transfers of Financial Assets*

		Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.

		Effective January 1, 2010, the Company adopted accounting guidance pertaining to transfers of financial assets. During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder can have the right to pledge or exchange the entire loan.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Goodwill and other intangible assets*

		Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. The fair value of goodwill is analyzed at least annually and this analysis utilizes three separate methodologies. First, a market approach is used which incorporates a review of comparable market transactions for peer companies, relying on recent merger and acquisition data from these comparable transactions to estimate the price multiple at which the Company would be acquired in a hypothetical market transaction. The second approach used is the asset approach, or replacement cost approach which entails stating the recorded assets and liabilities of the Company on a fair market value basis, and the value of the Company’s equity is determined as the difference between the total fair value amounts for assets and liabilities. The third approach utilized is the income approach which constructs a discounted cash flow model from financial projections. The concluded fair value is calculated by weighting the values obtained based on the relevance of the methodology based on the facts and circumstances for the Company on the valuation date. The greatest weight, 50%, is placed on the market approach given the amount of data obtainable on comparable transactions. A 30% weight is applied to the asset approach due to the precision of the fair value estimates provided. Lastly, a 20% weight is applied to the income approach/discounted cash flow model due to the inherent uncertainty in forecasting future performance, and the appropriate market discount rate. Impairment, if any, identified under this analysis is recognized in the period identified. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels.

		Identified intangible assets that have a designated finite life are amortized over their useful lives and are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

		*Bank-owned life insurance*

		Bank-owned life insurance policies are reflected on the consolidated balance sheet at cash surrender value. Changes in cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated statement of operations and are not subject to income taxes.

		*Income taxes*

		Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Income taxes (concluded)*

		The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended December 31, 2010, 2009 and 2008. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. The Company does not have any uncertain tax positions at December 31, 2010 and 2009 which require accrual or disclosure.

		Income tax benefits related to stock compensation that is in excess of grant-date fair value, less any proceeds on exercise, are recognized as an increase to additional paid-in capital upon vesting or exercising and delivery of the stock. Any income tax effects related to stock compensation that are less than grant-date fair value, less any proceeds on exercise, would be recognized as a reduction of additional paid in capital to the extent of previously recognized income tax benefits and then through income tax expense for the remaining amount.

		*Postretirement benefits other than pensions*

		The Company sponsors a master healthcare, dental and life insurance plan for a small group of current retirees. The cost of providing retiree healthcare and other postretirement benefits is recognized over the period the employee renders service to the Company.

		*Employee stock ownership plan*

		Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the period. The Company recognizes compensation expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheet. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital. On July 26, 2010, the Company announced that the Board of Directors of the Company and the Bank had voted to terminate the ESOP effective August 1, 2010. Please refer to Note 15 for more information related to the ESOP.

		*Share-based compensation plans*

		The Company measures and recognizes compensation costs relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued. Share-based compensation is recognized over the period the employee is required to provide services for the award. Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted periodically based on actual forfeiture experience. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Advertising costs*

		Advertising costs are charged to earnings when incurred.

		*Portfolio management assets*

		Portfolio management assets held in fiduciary or agent capacity are not included in the accompanying consolidated balance sheets because they are not assets of the Company.

		*Treasury stock*

		Common stock shares repurchased are recorded as treasury stock at cost.

		*Earnings per common share*

		Basic earnings per share is determined by dividing net income by the weighted-average number of net outstanding common shares for the period. The net outstanding common shares equals the gross number of common shares issued less the average unallocated shares of the ESOP, the average number of treasury shares and the average number of unvested shares related to restricted stock awards. Diluted earnings per share is determined by dividing net income by the average number of net outstanding common shares computed as if all potential common shares have been issued by the Company. Potential common shares to be issued would include those related to outstanding options and unvested stock awards determined using the treasury stock method.

		Earnings per common share have been computed based upon the following:


	Year Ended December 31,
	2010			2009			2008
Net income (loss) applicable to common stock	$	(7,896	)	$	(7,798	)	$	1,444

Average number of shares issued		10,308,600			10,308,600			10,308,600
Less: average unallocated ESOP shares		(532,433	)		(583,872	)		(638,908	)
Less: average treasury shares		(1,632,537	)		(1,547,362	)		(1,342,802	)
Less: average unvested restricted stock awards		(153,463	)		(200,003	)		(268,296	)


Average number of basic shares outstanding		7,990,167			7,977,363			8,058,594

Plus: dilutive unvested restricted stock awards		—			—			23,551
Plus: diluted stock option shares		—			—			353


Average number of diluted shares outstanding		7,990,167			7,977,363			8,082,498


Basic earnings (loss) per share	$	(0.99	)	$	(0.98	)	$	0.18
Diluted earnings (loss) per share	$	(0.99	)	$	(0.98	)	$	0.18

Anti-dilutive shares not included in the computation of dilutive EPS:
Stock options		735,170			803,480			804,280
Unvested restricted shares		161,470			218,790			—

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Comprehensive income (loss)*

		Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the stockholders equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income (loss).

		The components of other comprehensive income (loss) and related tax effects are as follows:


	Years Ended December 31,
	2010			2009			2008
Securities

Net unrealized holding gains (losses) on available- for- sale securities	$	134		$	2,204		$	(11,537	)
Reclassification adjustment for (gains) losses on available- for- sale securities		(2,024	)		3,032			(356	)
Reclassification adjustment for OTTI losses on available- for- sale securities		42			5,686			3,550
Non-credit portion of OTTI on losses on available- for- sale securities		—			(2,264	)		—

		(1,848	)		8,658			(8,343	)
Tax effect		713			(3,362	)		3,264

Net-of-tax amount		(1,135	)		5,296			(5,079	)


Directors’ Fee Plan

Gains (losses) arising during the period		176			68			(42	)
Amortization of benefit plan gains/losses and prior service costs		148			164			189
Tax effect		(133	)		(95	)		(60	)

Net-of-tax amount		191			137			87

	$	(944	)	$	5,433		$	(4,992	)

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Comprehensive income (loss) (concluded)*

		The components of accumulated other comprehensive income (loss) and related tax effects are as follows:


	December 31,
	2010			2009
Securities

Net unrealized holding gains (losses) on available for sale securities	$	(112	)	$	1,736

Tax effects		48			(664	)

Net-of-tax amount		(64	)		1,072


Directors’ Fee Plan
Unrecognized net actuarial loss and prior service costs		(285	)		(611	)

Tax effect		116			250

Net-of-tax amount		(169	)		(361	)

	$	(233	)	$	711

Included in accumulated other comprehensive loss at December 31, 2010, is prior service cost of $145 expected to be recognized as components of net periodic pension costs for the year ending December 31, 2011.

		*Recent accounting pronouncements*

		In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-16, Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets. This ASU makes several significant amendments to ASC Topic 860 including the removal of the concept of a qualifying special-purpose entity. The new guidance also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. The new authoritative accounting guidance became effective for fiscal years beginning after November 15, 2009. The Company adopted the new guidance under ASU No. 2009-16 on January 1, 2010. The adoption did not have a material impact on the Company’s consolidated financial statements. The Company has provided the disclosures required as of December 31, 2010 in Note 5.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Recent accounting pronouncements (continued)*

		In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements. This ASU requires new disclosures and clarifies existing disclosures regarding recurring and nonrecurring fair value measurements to provide increased transparency to users of the financial statements. The new disclosures and clarification of existing disclosures are effective for interim and annual periods beginning after December 15, 2009, except for the disclosures pertaining to the roll forward of activity for Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Management adopted this statement, except for the roll forward of activity for Level 3 fair value measurements, as of January 1, 2010 and this adoption did not have a material impact on the consolidated financial statements.

		In April 2010, the FASB issued ASU No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset—a consensus of the FASB Emerging Issues Task Force. This ASU provides guidance on the accounting for loan modifications when the loan is part of a pool of loans accounted for as a single asset such as acquired loans that have evidence of credit deterioration upon acquisition that are accounted for under the guidance in ASC 310-30. This ASU addresses diversity in practice on whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring or remain in the pool after modification. This ASU clarifies that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if the expected cash flows for the pool change. The amendments in this update do not require any additional disclosures and are effective for modifications of loans accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.

		In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s loan portfolio (2) how that risk is analyzed and assessed in arriving at the allowance for loan and lease losses and (3) the changes and reasons for those changes in the allowance for loan and lease losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company has provided the disclosures required as of December 31, 2010 in Note 5.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

		*Recent accounting pronouncements (concluded)*

		In January 2011, the FASB issued ASU No. 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2010-20. The amendments in this ASU temporarily delay the effective date of disclosures about troubled debt restructurings as required by ASU No. 2010-20 for public entities in order to allow FASB to complete deliberations on what constitutes troubled debt restructuring. At that point, the effective date for such disclosures and guidance for determining what constitutes troubled debt restructurings will be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company does not believe the adoption of this ASU will have a material impact on the consolidated financial statements.

2. RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

The Bank is required to maintain average balances on hand or with the Federal Reserve Bank of Boston. At December 31, 2010 and 2009 these reserve balances amounted to $1,000.

3. SHORT-TERM INVESTMENTS

Short-term investments consist of the following:


	December 31,
	2010		2009
Federal funds sold	$	11,884	$	21,119
FHLB overnight deposits		2,884		7,755
Money market funds		138		—

	$	14,906	$	28,874

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

4. SECURITIES

Securities and other investments consist of the following:


	December 31,
	2010		2009
Securities available for sale, at fair value	$	185,688	$	167,426
Securities held to maturity, at amortized cost		97		97
Restricted equity securities and other investments:
Federal Home Loan Bank of Boston stock		10,932		10,932
Savings Bank Life Insurance Company of Massachusetts stock		1,709		1,709
Real estate partnerships		3,815		4,397
Other investments		90		155

Total restricted equity securities and other investments		16,546		17,193


Total securities and other investments	$	202,331	$	184,716

The amortized cost and estimated fair value of marketable securities, with gross unrealized gains and losses, follows:


	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities Available for Sale
Debt securities:
Government-sponsored enterprises (GSE)	$	132,221	$	244	$	(841	)	$	131,624
Municipal		3,145		36		(36	)		3,145
Corporate and other		401		1		—			402
GSE residential mortgage-backed		6,370		225		(1	)		6,594
U.S. Government guaranteed residential mortgage-backed		42,775		522		(330	)		42,967

Total debt securities		184,912		1,028		(1,208	)		184,732
Marketable equity securities		888		114		(46	)		956

Total securities available for sale	$	185,800	$	1,142	$	(1,254	)	$	185,688

Securities Held to Maturity
Other bonds and obligations	$	97	$	—	$	—		$	97

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

4. SECURITIES (continued)


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities Available for Sale
Debt securities:
Government-sponsored enterprises (GSE)	$	80,393	$	138	$	(555	)	$	79,976
Municipal		17,521		398		(44	)		17,875
Corporate and other		1,321		30		—			1,351
GSE residential mortgage-backed		29,591		983		(71	)		30,503
U.S. Government guaranteed residential mortgage-backed		33,625		248		(237	)		33,636

Total debt securities		162,451		1,797		(907	)		163,341

Marketable equity securities		3,239		889		(43	)		4,085


Total securities available for sale	$	165,690	$	2,686	$	(950	)	$	167,426


Securities Held to Maturity
Other bonds and obligations	$	97	$	—	$	—		$	97

The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2010 are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Within 1 year	$	5,634	$	5,662	$	—	$	—
Over 1 year to 5 years		103,145		102,769		82		82
Over 5 years to 10 years		13,703		13,644		—		—
Over 10 years		13,285		13,096		15		15


Total bonds and obligations		135,767		135,171		97		97

Mortgage-backed		49,145		49,561		—		—


Total debt securities	$	184,912	$	184,732	$	97	$	97

For the years ended December 31, 2010, 2009 and 2008, proceeds from the sale and call of securities available for sale amounted to $78,012, $103,765 and $74,169 respectively. Gross gains of $2,364, $2,019 and $947, respectively, and gross losses of $354, $5,068 and $653, respectively, were realized on sales. Gross gains on called securities were $67, $29 and $62 in 2010, 2009 and 2008, respectively and gross losses on called securities in 2010 and 2009 were $53 and $12, respectively. The tax (provision) benefits applicable to these net realized gains and losses amounts to $682, $(632) and $131 respectively.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

4. SECURITIES (continued)

At December 31, 2010 and 2009, the Company has pledged securities with an amortized cost of $6,919 and $10,898 respectively, and a fair value of $6,966 and $10,914 respectively, primarily as collateral for repurchase agreements. At December 31, 2010 and 2009, the Company also has pledged securities with an amortized cost of $2,801 and $16,845, respectively, and a fair value of $2,805 and $17,199, respectively, to the Federal Reserve Bank as collateral for its borrowing line. Additionally, certain securities are pledged as collateral to the Federal Home Loan Bank of Boston as described in Note 11.

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	Less Than Twelve Months				Over Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
December 31, 2010:
Debt securities:
Government-sponsored enterprises (GSE)	$	841	$	73,475	$	—	$	—
Municipal		36		1,577		—		—
GSE residential mortgage-backed		—		—		1		131
U.S. Government guaranteed residential mortgage-backed		330		17,235		—		—

Total debt securities		1,207		92,287		1		131

Marketable equity securities		46		302		—		—

Total temporarily impaired securities	$	1,253	$	92,589	$	1	$	131

December 31, 2009:
Debt securities:
Government-sponsored enterprises (GSE)	$	555	$	46,751	$	—	$	—
Municipal		2		818		42		2,472
GSE residential mortgage-backed		38		2,983		33		1,779
U.S. Government guaranteed residential mortgage-backed		237		19,171		—		—

Total debt securities		832		69,723		75		4,251

Marketable equity securities		35		472		8		226

Total temporarily impaired securities	$	867	$	70,195	$	83	$	4,477

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

4. SECURITIES (concluded)

At December 31, 2010, temporarily impaired debt and mortgage-backed securities have unrealized losses with aggregate depreciation of 1.3% from the Company’s amortized cost basis. The unrealized losses were primarily caused by interest rate increases. These investments are guaranteed by the U.S. Government, an agency thereof or by the issuing municipal government. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2010.

At December 31, 2010, three marketable equity securities have unrealized losses with aggregate depreciation of 13.2% from the Company’s cost basis. Although some issuers may have shown declines in earnings as a result of the weakened economy, the Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the depreciation of value and has analyzed the issuer’s financial condition and financial performance as well as industry analysts’ reports. Based on that evaluation as well as the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2010.

During 2010, the Company recorded other-than-temporary impairment charges related to certain marketable equity securities in the amount of $42. Additionally, the Company recorded other-than-temporary impairment charges of $3.8 million on certain investments in commercial real estate funds. These funds were adjusted to estimated fair value based on an analysis of the financial statements of the funds and underlying real estate projects, as well as an analysis of the market for these types of investments. For further information on the fair value of these investments please refer to Note 21, Fair Value of Assets.

During 2009, the Company recorded other-than-temporary impairment charges related to certain debt and marketable equity securities in the amount of $2.7 million and $703, respectively. The non-credit portion of impairment losses on debt securities, which had been recognized in other comprehensive loss, was recognized in earnings during the year ended December 31, 2009 due to the sales of these securities. Additionally, the Company recorded other-than-temporary impairment charges of $3.8 million on certain investments in commercial real estate funds. These investments were adjusted to estimated fair value based on an analysis of the financial statements of the funds and underlying real estate projects. For further information on the fair value of these investments please refer to Note 21, Fair Value of Assets.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

5. LOANS

A summary of the balances of loans follows:


	December 31,
	2010			2009
Mortgage loans on real estate:
Residential	$	266,166		$	273,469
Land Notes		10,599			12,149
Home equity		74,328			69,625
Commercial		211,431			245,213
Commercial contruction		13,596			18,697

		576,120			619,153

Other loans:
Commercial		28,123			31,373
Consumer and other		10,518			11,791

		38,641			43,164

Total loans		614,761			662,317

Net deferred loan costs		1,351			1,400
Allowance for loan losses		(9,010	)		(11,089	)


Loans, net	$	607,102		$	652,628

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At December 31, 2010 and 2009, the Company was servicing loans for participants aggregating $11,675 and 11,818, respectively.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

5. LOANS (continued)

In 2010 the Company sold $16.2 million of its commercial real estate portfolio considered to be out-of market. The sale resulted in a charge of $1.6 million which was recognized through the provision for loan losses.

The Company purchased $5,123 of loans during the year ended December 31, 2009. These loans are evaluated in the allowance for loan loss using the same methodology as loans originated by the Company.

An analysis of the allowance for loan losses follows:


	Years Ended December 31,
	2010			2009			2008
Balance at beginning of year	$	11,089		$	6,642		$	5,568
Provision for loan losses		10,468			4,883			1,465
Recoveries		96			129			188
Loans charged-off		(12,643	)		(565	)		(579	)


Balance at end of year	$	9,010		$	11,089		$	6,642

Further information pertaining to the allowance for loan losses, by segment, at December 31, 2010 follows:


	Residential
	Residential Mortgage		Land Notes		Commercial Mortgages		Home Equity		Commercial Business		Consumer and Other		Total
Amount of allowance for loan losses for loans deemed to be impaired	$	75	$	422	$	496	$	—	$	69	$	—	$	1,062

Amount of allowance for loan losses for loans not deemed to be impaired		1,276		585		4,789		446		598		254		7,948

Loans deemed to be impaired as of December 31, 2010		3,445		778		11,938		120		545		5		16,831

Loans not deemed to be impaired as of December 31, 2010		262,721		9,821		213,089		74,208		27,578		10,513		597,930

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

5. LOANS (continued)

Past due and non-accrual loans

The following is a summary of past due and non-accrual loans, by class, at December 31, 2010:


	December 31,2010
					Greater				Past Due 90 Days or
	30-59 Days		60-89 Days		Than 90		Total Past		More and Still		Loans on
	Past Due		Past Due		Days		Due		Accuring		Non-Accrual
Mortgage loans on real estate
Residential	$	1,400	$	799	$	3,445	$	5,644	$	—	$	3,445
Land notes		139		89		422		650		—		422
Home equity		178		14		120		312		—		120
Commercial		—		125		7,247		7,372		—		7,247
Commercial construction		—		—		1,190		1,190		—		1,190
Other Loans
Commercial		415		166		315		896		—		315
Consumer and other		290		1		5		296		—		5

	$	2,422	$	1,194	$	12,744	$	16,360	$	—	$	12,744

Impaired loans

The following is a summary of impaired loans, by class, at December 31, 2010:


	December 31,2010
			Unpaid Principal
	Recorded Investment		Balance		Related Allowance
Impaired loans without a valuation allowance:
Residential real estate	$	2,912	$	2,963	$	—
Land notes		356		356		—
Home equity		120		120		—
Commercial real estate		7,324		10,235		—
Commercial construction		1,190		5,636
Commercial		433		690		—
Consumer and other		5		5		—

Total		12,340		20,005		—

Impaired loans with a valuation allowance:
Residential real estate		533		533		75
Land notes		422		422		422
Home equity		—		—		—
Commercial real estate		3,424		3,424		496
Commercial construction		—		—		—
Commercial		112		112		69

Total		4,491		4,491		1,062

Total impaired loans	$	16,831	$	24,496	$	1,062

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

5. LOANS (continued)

Impaired loans (concluded)


	December 31,2009
Impaired loans with no valuation allowance	$	10,081
Impaired loans with a valuation allowance		22,202


Total impaired loans	$	32,283


Valuation allowance allocated to impaired loans	$	4,928

The following is a summary of information pertaining to impaired and non-accrual loans:


	Years Ended December 31,
	2010		2009		2008
Average investment in impaired loans	$	26,390	$	19,057	$	7,808

Interest income recognized on impaired loans on a cash basis	$	1,098	$	107	$	—

Interest income recognized on impaired loans still accruing	$	1,117	$	871	$	—

Non-accrual loans	$	12,744	$	19,578	$	7,549

There were no loans past-due ninety days or more and still accruing at December 31, 2010, 2009 and 2008. The Company generally does not advance additional funds in connection with impaired loans. However, in 2009 the Company did advance an additional $185 to one loan considered impaired as part of a forbearance agreement with the borrower to allow the project to be more marketable.

Credit quality information

The Company utilizes a seven grade internal loan rating system for commercial real estate, home equity and commercial loans as follows:

Loans rated 1-3A: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management. If not corrected or mitigated, the weakness may expose the bank to an increased risk of loss.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

5. LOANS (continued)

Credit quality information (concluded)

Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 6: Loans in this category are considered “doubtful.” Weaknesses in these credits or relationships are so significant that the bank has identified a probable loss of principal. Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. These credits must be placed on non-accrual if not already classified as such.

Loans rated 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted. Weaknesses in these credits are so severe collection of any amount is unlikely and the loan shall no longer be carried as an asset on the banks books. These loans are charged to the Allowance for Loan and Lease Loss.

On at least an annual basis, the Bank formally reviews the ratings on all commercial real estate and commercial loans. Semi-annually, the Bank engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following table presents the Company’s loans by risk rating at December 31, 2010.


	Commercial Real Estate		Commercial
Loans rated 1- 3A	$	177,985	$	20,474
Loans rated 4		17,900		1,988
Loans rated 5		29,142		5,603
Loans rated 6		—		58
Loans rated 7		—		—

	$	225,027	$	28,123

6. SERVICING

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The unpaid principal balances of mortgage loans serviced for others were $105,787, $77,269 and $24,046 at December 31, 2010, 2009 and 2008, respectively. The Company utilized an independent consultant to determine the fair value of servicing rights as of December 31, 2010. The fair value calculation uses a discount rate of 8.25% and published prepayment data for mortgage loans stratified by the term and rate of the loan pools. Servicing fee income amounted to $135, $42, and $17 for the years ended December 31, 2010, 2009 and 2008, respectively.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

6. SERVICING (concluded)

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount. Changes in the valuation allowance are reported in loan servicing fee income. As of December 31, 2010, 2009 and 2008, the Company has not established a valuation allowance related to servicing assets.

The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:


	Years Ended December 31,
	2010			2009			2008
Mortgage servicing rights:
Balance at beginning of year	$	514		$	138		$	24
Additions		319			464			128
Amortization		(96	)		(88	)		(14	)


Mortgage servicing assets, net	$	737		$	514		$	138


Fair value of mortgage servicing assets	$	981		$	514		$	138

7. PREMISES AND EQUIPMENT

A summary of the cost and accumulated depreciation and amortization of premises and equipment is as follows:


	December 31,						Estimated
	2010			2009			Useful Lives
Premises:
Land	$	1,520		$	1,520
Buildings and improvements		21,219			21,180		5 — 39 Years
Furniture and equipment		9,881			9,303		3 — 10 Years
Construction in process		—			250

		32,620			32,253
Accumulated depreciation and amortization		(13,478	)		(12,685	)

	$	19,142		$	19,568

Depreciation and amortization expense for the years ended December 31, 2010, 2009 and 2008 amounted to $1,581, $1,615 and $1,482, respectively. Construction in process as of December 31, 2009 represented costs incurred in connection with leasehold improvements to a branch location in Pittsfield, Massachusetts which were completed in February 2010.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The Company recorded goodwill in connection with the purchase of a financial institution in 1997. The Company also recorded goodwill in connection with the purchase of five branch offices located in Eastern New York State in 2007, as well as the purchase of a single branch office located in Haydenville, Massachusetts in 2009. In 2010 the Company recorded goodwill in connection with the purchase of substantially all the assets of Renaissance Investment Group. The Company performs annual impairment testing as of June 30. The impairment testing as of June 30, 2010 and 2009 indicated that no impairment charge was required as of those dates and no events have occurred through December 31, 2010 that would require the reevaluation of impairment. The activity in the balance for goodwill during the year is as follows:


	Year Ended December 31,
	2010		2009
Balance at beginning of the year	$	9,730	$	9,687
Acquired goodwill		1,828		43


Balance at end of year	$	11,558	$	9,730

Other intangible assets

Other intangible assets include core deposit intangible assets arising from the acquisition of branch offices in 2007 and 2009. These assets were initially measured at fair value and are being amortized on a straight line method over the estimated useful lives, which were determined to be 5 years. Other intangible assets also include a customer list intangible asset arising from the acquisition of Renaissance in 2010. This asset was initially measured at fair value and is being amortized on a straight line method over its estimated useful life of 11 years. Amortization expense is reported in other general and administrative expenses in the consolidated statement of operations.


	December 31,
	2010			2009
Gross carrying value		5,083			3,532
Accumulated amortization		(2,195	)		(1,392	)

		2,888			2,140

Estimated future amortization expense is as follows:


Year Ending December 31,
2011		847
2012		800
2013		198
2014		150
2015		141
Thereafter		752

	$	2,888

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

9. DEPOSITS

A summary of deposit balances, by type, is as follows:


	December 31,
	2010		2009
Demand	$	75,116	$	75,232
Regular savings		53,504		49,883
Relationship savings		142,110		125,328
Money market deposits		68,611		63,077
NOW deposits		48,197		48,546

Total non-certificate accounts		387,538		362,066


Term certificates less than $100,000		162,408		174,284
Term certificates of $100,000 or more		135,299		115,028

Total certificate accounts		297,707		289,312


Total deposits	$	685,245	$	651,378

A summary of certificate accounts by maturity is as follows:


Maturing During
the Year Ending	Amount
December 31,	2010		2009
2010	$	—	$	190,370
2011		140,285		46,558
2012		37,770		13,771
2013		68,135		30,258
2014		28,955		8,253
2015		22,486		27
Therafter		76		75


	$	297,707	$	289,312

At December 31, 2010 and 2009, brokered certificates of deposit in the amount of $12,506 and $18,625, respectively, with a weighted average rate of 3.03% and 3.59%, respectively, are included in certificates of deposits.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase (“repurchase agreements”) are funds borrowed from customers on an overnight basis that are collateralized by securities. At December 31, 2010 and 2009 securities sold under agreements to repurchase amounted to $5,329 and $6,386 respectively, mature on a daily basis and are secured by U.S. Government securities with a fair value of $6,966 and $10,158 respectively. The weighted average interest rate on these agreements was 1.02% and 1.08% respectively. The obligations to repurchase the securities sold are reflected as a liability in the consolidated balance sheets. The dollar amount of the securities underlying the agreements remains in the asset accounts. The securities pledged are registered in the Company’s name; however, the securities are held by the designated trustee of the broker. Upon maturity of the agreements, the identical securities pledged as collateral are returned to the Company.

11. FEDERAL HOME LOAN BANK ADVANCES

A summary of outstanding advances from the Federal Home Loan Bank of Boston, by maturity, is as follows at December 31, 2010 and 2009:


Maturing During					Weighted Average
the Year Ending	Amount				Interest Rate
December 31,	2010		2009		2010			2009
2010	$	—	$	20,250		—	%		4.52	%
2011		—		7,500		—			3.46
2012		20,000		27,000		4.24			4.02
2013		15,000		32,700		3.77			3.45
2014		22,700		25,200		4.02			3.96
2015		9,500		9,500		3.05			3.05
Thereafter		38,188		38,202		3.78			3.78

	$	105,388	$	160,352		3.86	%		3.81	%

All advances are fixed-rate as of December 31, 2010 and 2009. Certain advances have early call provisions through 2018. The amount of callable advances by maturity date as of December 31, 2010 is as follows:


2012	$	20,000
2013		2,000
2014		13,000
2015		9,500
Thereafter		38,000

	$	82,500

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

11. FEDERAL HOME LOAN BANK ADVANCES (concluded)

The Company also has an Ideal Way line of credit at the Federal Home Loan Bank in an amount up to $5,000. There were no advances under this line of credit as of December 31, 2010 or 2009. All borrowings from the Federal Home Loan Bank of Boston are secured by a blanket lien on certain qualified collateral, defined principally as 75% of the carrying value of certain first mortgage loans on owner-occupied residential property, 50% of the carrying value of certain non-owner occupied first mortgage loans and home equity loans, and 90% of the market value of U.S. Government-sponsored enterprise obligations.

12. INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions is as follows:


	Years Ended December 31,
	2010			2009			2008
Current tax provision (benefit):
Federal	$	(2,390	)	$	507		$	1,709
State		276			70			304

		(2,114	)		577			2,013

Deferred tax benefit:
Federal		(351	)		(4,249	)		(1,154	)
State		(201	)		(797	)		(208	)

		(552	)		(5,046	)		(1,362	)
Change in valuation reserve		(1,350	)		1,409			125

		(1,902	)		(3,637	)		(1,237	)


Total provision (benefit)	$	(4,016	)	$	(3,060	)	$	776

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

12. INCOME TAXES (continued)

		The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:


	Years Ended December 31,
	2010			2009			2008
Statutory tax rate		34.0	%		34.0	%		34.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit		(0.4	)		4.4			2.9
Bank owned life insurance		2.0			2.2			(10.9	)
Dividends received deduction		0.2			0.2			(2.6	)
Additions to valuation reserve, net of expiration of contribution carryover		(4.4	)		(13.0	)		5.6
Tax-exempt income		1.0			1.6			(6.4	)
Stock based compensation plan		(1.6	)		(1.7	)		7.8
Other, net		2.9			0.5			4.6


Effective tax rates		33.7	%		28.2	%		35.0	%

The components of the net deferred tax asset are as follows:


	December 31,
	2010			2009
Deferred tax assets:
Federal	$	13,119		$	12,615
State		2,834			2,584

		15,953			15,199
Valuation reserve		(1,713	)		(3,063	)

		14,240			12,136

Deferred tax liabilities:
Federal		(1,205	)		(1,549	)
State		(351	)		(385	)

		(1,556	)		(1,934	)

Net deferred tax asset	$	12,684		$	10,202

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

12. INCOME TAXES (continued)

		The tax effects of each type of item that gives rise to deferred tax assets (liabilities) are as follows:


	December 31,
	2010			2009
Net unrealized loss (gain) on securities available for sale	$	49		$	(664	)
Depreciation and amortization		64			64
Deferred income		(545	)		(559	)
Allowance for loan losses		3,598			4,429
Employee benefit plans		3,353			3,100
Capital loss carryforward		1,560			1,851
Charitable contribution carryforward		—			1,866
Net operating loss carryforward		1,822			—
Projected benefit obligation — Directors fee plan		117			250
Impairment losses		4,054			2,829
Other		325			99
Valuation reserve		(1,713	)		(3,063	)

Net deferred tax asset	$	12,684		$	10,202

A summary of the change in the valuation reserve for deferred tax assets is as follows:


	December 31,
	2010			2009		2008
Balance at beginning of year	$	3,063		$	1,654	$	1,529
Reserve for charitable contribution carryforward		(1,855	)		201		125
Reserve for capital loss carryforward		505			1,208		—


Balance at end of year	$	1,713		$	3,063	$	1,654

A federal income tax reserve was established in the fourth quarter of 2005 to reflect the uncertainty of fully utilizing a five-year charitable contribution carryforward of approximately $7,200. This reserve was increased by $201 and $125 in 2009 and 2008, respectively, to reflect greater uncertainty of full utilization. At December 31, 2010, the reserve was reduced to $0 and the asset was charged-off to reflect the expiration of the contribution carryforward period. The carryforward was created as a result of the contribution of 763,600 shares of the Company’s common stock to the Legacy Banks Foundation as part of the mutual to stock conversion in 2005.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

12. INCOME TAXES (concluded)

A federal income tax reserve of $1,208 was established in the fourth quarter of 2009 to reflect the uncertainty of fully utilizing a five-year capital loss carryforward of approximately $5,400. This reserve was increased by $505 in 2010 to reflect greater uncertainty of full utilization. The carryforward was created primarily by the sale of the Company’s remaining portfolio of private-label mortgage-backed securities during 2009.

The federal income tax reserve for loan losses at the Company’s base year is $5,416. If any portion of the reserve is used for purposes other than to absorb loan losses, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the Company intends to use the reserve only to absorb loan losses, a deferred tax liability of $2,161 has not been provided.

The Company’s income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2007 through 2009. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2007 are open.

13. COMMITMENTS AND CONTINGENCIES

		In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying consolidated financial statements.

		*Loan and other financial commitments*

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated balance sheets.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

13. COMMITMENTS AND CONTINGENCIES (continued)

		*Loan and other financial commitments (concluded)*

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. A summary of financial instruments outstanding whose contract amounts represent credit risk is as follows at December 31, 2010 and 2009:


	December 31,
	2010		2009
Commitments to grant loans	$	18,328	$	20,996
Unused funds on commercial lines-of-credit		17,826		20,707
Unadvanced funds on home equity lines-of-credit		68,108		64,110
Unadvanced funds on construction loans		1,351		12,600
Commercial real estate partnership capital commitments		4,287		6,514
Standby letters-of-credit and other commitments		8,378		9,330

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines-of-credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. Funds disbursed for mortgage loans, construction loans and home equity lines-of-credit are collateralized by real estate. Commercial lines-of-credit are generally secured by business assets.

Standby letters-of-credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters-of-credit are primarily issued to support borrowing arrangements. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. Other commitments relate primarily to potential additional capital calls the Company is committed to contribute as part of its investment in certain limited partnerships.

ASC 460-10-05, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires a guarantor to recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in issuing the guarantee. The Company considers standby letters of credit to be guarantees under ASC 460-10-05. The amount of the liability related to guarantees at December 31, 2010 and 2009 was not material.

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

13.		COMMITMENTS AND CONTINGENCIES (concluded)

		*Operating lease commitments*

Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2010, pertaining to banking premises and equipment, future minimum rent commitments are as follows:


Years Ending
December 31,	Amount
2011	$	343
2012		340
2013		329
2014		321
2015		250
Thereafter		1,100

	$	2,683

		Total rent expense for the years ended December 31, 2010, 2009 and 2008 amounted to $433, $409 and $388, respectively.

		*Legal claims*

		Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

		*Employment and change of control agreements*

		The Company and the Bank have entered into employment agreements with two executive officers. The employment agreements provide for an annual base salary, subject to increase, and certain other benefits and guarantee customary corporate indemnification and insurance coverage under a standard directors’ and officers’ insurance policy. The initial term of the agreement for the Company’s Chief Executive Officer (CEO) is three years and the term automatically extends annually on each anniversary date of the agreement for a successive term of three years, unless notice not to renew is given by either party. The initial term of the agreement for the Company’s President is three years. Commencing on the first anniversary of the agreement, the term of the President’s agreement is reduced to 24 months. These agreements also provide salary and bonus payment, and medical and dental benefit continuation in the event of termination of employment under certain circumstances, including a change-of-control (as defined in each agreement) of the Company or the Bank.

		The Company and the Bank have has also entered into change-of-control agreements with certain other senior executives of the Bank. These agreements provide assurances to these executives regarding the continued payment of salary, bonus and benefits for a period of time in the event of a change in control of the Company or the Bank.

The proposed merger agreement between Legacy Bancorp, Inc. and Berkshire Hills Bancorp, Inc., as disclosed in the Company’s current report on Form 8-K filed on December 22, 2010, will result in a change of control.

100

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

14. MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimal capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Prompt corrective action provisions are not applicable to savings and loan holding companies. The Company will provide notification to its primary regulator in connection with any dividend declaration and did so in connection with the dividend declared on March 9, 2011.

Qualitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as defined). As of December 31, 2010 and 2009, the Bank met the capital adequacy requirements.

As of December 31, 2010 and 2009, Legacy Banks met the condition to be classified as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risked-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The capital ratios and requirements for the Bank follow:

101

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

14. MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded)


											Minimum To Be Well
						Minimum					Capitalized Under
						Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2010:

Total capital to risk weighted assets	$	72,341		12.0	%	$	48,249		8.0	%	$	60,311		10.0	%
Tier 1 capital to risk weighted assets		64,754		10.7			24,124		4.0			36,187		6.0
Tier 1 capital to average assets		64,754		7.2			36,155		4.0			45,194		5.0

December 31, 2009:

Total capital to risk weighted assets	$	81,484		12.3	%	$	52,824		8.0	%	$	66,030		10.0	%
Tier 1 capital to risk weighted assets		72,811		11.0			26,412		4.0			39,618		6.0
Tier 1 capital to average assets		72,811		8.0			36,232		4.0			45,290		5.0

A reconciliation of the Company’s year-end total stockholders’ equity to the Bank’s regulatory capital is as follows:


	12/31/2010			12/31/2009
Total stockholders’ equity per consolidated financial statements	$	111,559		$	121,367

Adjustments for Bank Tier 1 capital:
Holding company equity adjustment		(19,846	)		(28,982	)
Net unrealized (gains) losses on available- for- sale securities		47			(1,063	)
Unrecognized net actuarial loss and prior service costs		169			361
Net unrealized losses on equity securities		—			—
Disallowed deferred tax assets		(12,729	)		(6,951	)
Disallowed goodwill and intangible assets and other adjustments		(14,446	)		(11,921	)

Total Bank Tier 1 capital		64,754			72,811

Adjustments for total capital:
Allowed unrealized gains on equity securities		27			380
Includable allowances for loan and commitment losses		7,560			8,293

Total Bank capital per regulatory reporting	$	72,341		$	81,484

The principal source of revenue for the Holding Company is dividends received from the Bank as well as interest from short-term investment securities. The Bank cannot pay any dividends that would cause it to have insufficient capital under regulatory guidelines.

102

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

15. EMPLOYEE BENEFIT PLANS

		*Defined contribution plan*

		The Company has a 401(k) plan whereby each employee reaching the age of 21 and having completed three months of service, beginning with such employee’s date of hire, automatically becomes a participant in the plan. The plan provides for voluntary contributions by participating employees up to 75% of their compensation, subject to certain limitations. The Company matches up to 100% of the first 5% contributed by the employee after 1 year of service. Participants become fully vested in the Company paid portion after five years of service. Total defined contribution plan expense for the years ended December 31, 2010, 2009 and 2008 amounted to $371, $375, and $353 respectively.

		*Supplemental executive plans*

The Bank adopted a Supplemental Executive Retirement Plan (SERP) in 2004 for the benefit of the Company’s Chief Executive Officer (CEO) and Chief Operating Officer (COO) which provides for monthly benefits upon retirement, subject to certain limitations as set forth in the Plan. The present value of these future benefits is accrued over the executives’ required service periods. On January 1, 2008 the COO retired and became fully vested in his SERP. The Company and the COO entered into a Separation Agreement and General Release dated as of November 5, 2007 pursuant to which the COO received cash severance equal to $138 on January 1, 2008 and a lump sum payout related to his SERP agreement equal to $951 in 2008. For the year ended December 31, 2010, the Company recorded a net benefit of $124 while the expense for the years ended December 31, 2009, and 2008 amounted to $138 and $419, respectively.

As part of its investment in Bank-Owned Life Insurance (BOLI), the Bank has agreements in place with 26 current employees and directors by which the employee’s named beneficiary will receive a portion of the proceeds from the policy in the event of the death of the employee. The named beneficiary will receive $100 if the employee dies while still employed by the Bank. Upon retirement from the Bank, the post-retirement benefit to the named beneficiary decreases to $5 until the employee’s 85th birthday, at which time the benefit is discontinued. This benefit is also discontinued if employment with the Bank is terminated for cause. The Bank has fully accrued the estimated liability related to these policies as of December 31, 2010.

103

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

15. EMPLOYEE BENEFIT PLANS (continued)

		*Employee Stock Ownership plan*

As part of the mutual to stock conversion in 2005, the Bank established an Employee Stock Ownership (“ESOP”) Plan. The plan awards shares of the Company’s common stock to eligible employees primarily based on their compensation. The Company contributed funds to a subsidiary to enable it to grant a 15-year loan to the ESOP to enable it to purchase shares of the Company’s common stock in the open market following completion of the offering. The ESOP completed its open market purchases of 824,688, shares or 8% of the 10,308,600 shares outstanding on that date. This plan is a tax-qualified retirement plan for the benefit of all eligible Company employees.

On July 26, 2010, the Company announced that the Board of Directors of the Company and the Bank had voted to terminate the ESOP Plan effective August 1, 2010. The Bank has filed a request for a favorable determination letter with the Internal Revenue Service on the tax-qualified status of the Plan on termination. On and after termination of the Plan, no further contributions will be made on the outstanding Plan loan. Contributions made in 2010 released 27,038 additional shares from the unallocated stock fund. In connection with the termination of the Plan and upon receipt of the favorable determination letter from the Internal Revenue Service, it is anticipated that the Plan Trustee will transfer approximately 522,755 shares to LB Funding Corp., a wholly-owned subsidiary of the Company, to satisfy the Plan loan which has an outstanding principle balance of $7.7 million as of December 31, 2010. Upon such transfer, the 522,755 shares would be treated as treasury stock. If the shares in the unallocated stock fund are insufficient to repay the outstanding loan in full, the Company intends to forgive the remaining balance, subject to Internal Revenue Service approval.

104

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

15. EMPLOYEE BENEFIT PLANS (continued)

Employee Stock Ownership plan (concluded)

Shares held by the ESOP include the following:


	December 31,
	2010		2009

Allocated		258,398		245,167
Unallocated		522,755		549,793

		781,153		794,960

Cash dividends paid on allocated shares are distributed to participants and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP. The fair value of unallocated shares was approximately $6.9 million and $5.3 million at December 31, 2010 and 2009, respectively. Unallocated ESOP shares are not considered outstanding for calculating net income per common share. Unearned compensation attributable to such shares is reflected as a reduction in stockholders’ equity in the balance sheet. As ESOP shares are earned by participants, the Company recognizes compensation expense equal to the fair value of the earned ESOP shares. Total compensation expense recognized in connection with the ESOP for the years ended December 31, 2010, 2009 and 2008 was $257, $572,and $703, respectively.

Director fee continuation plan

The Company has established an unfunded director fee continuation plan which provides certain benefits to all eligible non-employee members of the boards of directors of the Company and Bank upon retirement. Information pertaining to the activity in the plan follows:


	December 31,
	2010			2009
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	1,803		$	1,719
Interest cost		99			99
Service cost		98			92
Actuarial gain		(178	)		(68	)
Benefits paid		(76	)		(39	)


Benefit obligation accrued at end of year		1,746			1,803


Accumulated benefit obligation	$	1,668		$	1,697

105

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

15. EMPLOYEE BENEFIT PLANS (concluded)

Director fee continuation plan (concluded)

The assumptions used to determine the benefit obligation are as follows:


	December 31,
	2010			2009
Discount rate		5.50	%		5.50	%
Rates of fee increase		5.00	%		5.00	%

The components of net periodic cost are as follows:


	Years Ended December 31,
	2010		2009		2008
Service Cost	$	98	$	92	$	85
Interest Cost		99		99		92
Amortization of prior service cost		145		145		145
Actuarial loss		3		19		44

	$	345	$	355	$	366

The assumptions used to determine net periodic cost are as follows:


	Years Ended December 31,
	2010			2009			2008
Discount rate		5.50	%		5.75	%		6.00	%
Rates of fee increase		5.00	%		5.00	%		5.00	%

16. POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS

The Company has provided certain health and dental care and life insurance benefits for certain retired employees. The components of net periodic postretirement costs follows:


	Years Ended December 31,
	2010			2009			2008
Interest cost on projected benefits	$	38		$	38		$	39
Recognized net actuarial loss		12			7			5
Net amortization of transition obligation and prior service cost		(1	)		(1	)		(1	)


	$	49		$	44		$	43

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LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

16. POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS (concluded)

		The following table sets forth the components of the accrued postretirement benefit obligation recognized in the Company’s consolidated balance sheets:


	December 31,
	2010			2009
Change in benefit obligation:
Benefit obligation at beginning of year	$	699		$	661
Interest cost		38			38
Actuarial gain		28			66
Benefits paid		(71	)		(66	)


Benefit obligation at end of year	$	694		$	699

The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was an average of 5% at December 31, 2010, 2009 and 2008. The assumed discount rate used in determining the accumulated postretirement benefit obligation was an average of 5.50% at December 31, 2010, 5.75% at December 31, 2009 and 6.00% at December 31, 2007, respectively. The health care cost trend rate assumption has an effect on the amount reported; as an example a 1% increase in health care costs would have the following effects:


	1% decrease			1% increase
Effect on total of service and interest cost components for 2010	$	(2	)	$	3
Effect on the postretirement benefit obligation as of December 31, 2010		(39	)		43

Subsequent to December 31, 2010, the Company terminated all postretirement health and life insurance benefits to all eligible retirees. The termination will result in the reversal of all remaining accrued costs, net of any termination and settlement costs, in the first quarter of 2011.

107

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

17. EQUITY INCENTIVE PLAN

		*Stock options*

Under the Company’s 2006 Equity Incentive Plan, approved by the Company’s shareholders on November 1, 2006, the Company may grant options to its directors, officers and employees for up to 1,030,860 shares of common stock. Both incentive stock options and non-qualified stock options may be granted under the 2006 Plan. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is 10 years. The vesting period is approximately five years from the date of grant, with vesting at 20% per year. Vesting is accelerated upon a change of control (see Note 13). The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	For Options Granted in
	Years Ended December 31,
	2010			2008			2007
Fair value	$	1.92		$	2.90		$	2.85
Expected dividends		2.57	%		1.13	%		1.24	%
Expected term (years)		6.50			6.50			6.50
Expected volatility		30.81	%		16.44	%		15.90	%
Risk-free interest rate		1.98	%		3.02	%		3.88	%

The expected volatility is based on historical volatility through the date of grant. The risk-free interest rate for periods within the contractual life of the awards is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term of 6.5 years is based on the simplified method calculation allowed for “plain-vanilla” share options. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

A summary of options under the 2006 Plan as of December 31, 2010, and changes during the year then ended, is presented below:


						Weighted Average
				Weighted Average		Remaining		Aggregate
				Exercise Price Per		Contractual Term		Intrinsic
	Shares			Share		(in years)		Value
Outstanding at January 1, 2010		803,480		$	15.80		7.1
Granted		20,000			7.77		9.8
Forfeited		(112,770	)		15.64

Outstanding at December 31, 2010		710,710		$	15.60		6.2	$	111

Exercisable at December 31, 2010		402,104		$	15.89		6.1	$	2

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LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

17. EQUITY INCENTIVE PLAN (concluded)

		*Stock options (concluded)*

		Share-based compensation expense applicable to the Plan was $280, $474 and $784 for the years ended December 31, 2010, 2009 and 2008, respectively. The recognized tax benefit related to this expense for these years was approximately $66, $111 and $191, respectively. As of December 31, 2010, unrecognized stock-based compensation expense related to nonvested options amounted to $409. This amount is expected to be recognized over a weighted average period of 1.2 years.

		*Stock awards*

Under the Company’s 2006 Equity Incentive Plan approved by the Company’s shareholders on November 1, 2006, the Company may grant stock awards to its directors, officers and employees for up to 412,344 shares of common stock. The stock awards vest at 20% per year. Vesting is accelerated upon a change of control (see Note 13). The fair market value of the stock allocations, based on the market price at the date of grant, is recorded as unearned compensation. Unearned compensation is amortized using the straight-line method over the applicable vesting period. The Company recorded compensation cost related to stock awards of approximately $878, $843 and $840 for the years ended December 31, 2010, 2009 and 2008, respectively, and the recognized tax benefit related to this expense was approximately $350, $337 and $335, respectively.

A summary of the Company’s nonvested stock awards is presented below for the year ended December 31, 2010:


				Weighted-
				Average
				Grant-Date
Nonvested Shares	Shares			Fair Value
Balance at beginning of year		218,790		$	15.25
Granted		10,000			7.77
Vested		(69,900	)		16.01
Forfeited		(7,420	)		16.03


Balance at end of year		151,470		$	14.37

As of December 31, 2010, there was approximately $973 of total unrecognized compensation cost related to nonvested stock awards granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.3 years.

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LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

18. CEO INDUCEMENT PLAN

		*Stock options*

In 2010 the Company granted non-qualified options for 25,000 of common stock as part of its Chief Executive Officer (CEO) Inducement Plan as contemplated by the Employment Agreement between the CEO of the Bank and the Company and Bank. The exercise price of each option is equal to the market price of the Company’s stock on the date of grant and the maximum term of each option is 10 years. The vesting period is approximately five years from the date of grant, with vesting at 20% per year. Vesting is accelerated upon a change of control (see Note 13). The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	For Options Granted
	In Years Ended
	December 31, 2010
Fair value	$	2.54
Expected dividends		2.16	%
Expected term (years)		6.50
Expected volatility		30.32	%
Risk-free interest rate		2.90	%

The Company is employing an accelerated method of expense recognition for options, whereby compensation cost is measured on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards. A summary of options under the Plan as of December 31, 2010, and changes during the year then ended, is presented below:


					Weighted Average
			Weighted Average		Remaining
			Exercise Price Per		Contractual Term		Aggregate Intrinsic
	Shares		Share		(in years)		Value
Outstanding at January 1, 2010		—	$	—		—	$	—
Granted		10,000		9.24		10.0
Forfeited or expired		—		—

Outstanding at December 31, 2010		10,000	$	9.24		9.4	$	98

Exercisable at December 31, 2010		—	$	—		—	$	—

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LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

18. CEO INDUCEMENT PLAN (concluded)

		*Stock options (concluded)*

		Share-based compensation expense applicable to the Plan was $20 for the year ended December 31, 2010. The recognized tax benefit related to this expense for these years was approximately $8. As of December 31, 2010, unrecognized stock-based compensation expense related to nonvested options amounted to $44. This amount is expected to be recognized over a weighted average period of 1.9 years.

		*Stock awards*

Under the CEO Inducement Plan, the Company granted time-based stock awards to its new Bank CEO for 10,000 shares of common stock. The stock awards vest at 20% per year on the anniversary date of the grant. Vesting is accelerated upon a change of control (see Note 13). The fair market value of the stock allocations, based on the market price at the date of grant, is recorded as unearned compensation. Unearned compensation is amortized using the straight-line method over the applicable vesting period. The Company recorded compensation cost under this plan related to stock awards of approximately $12 for the year ended December 31, 2010 and the recognized tax benefit related to this expense was approximately $5.

A summary of the status of the Company’s stock nonvested awards under this plan is presented below for the year ended December 31, 2010:


			Weighted-
			Average
			Grant-Date
Nonvested Shares	Shares		Fair Value
Balance at beginning of year		—	$	—
Granted		10,000		9.31
Vested		—		—
Forfeited		—		—


Balance at end of year		10,000	$	9.31

As of December 31, 2010, there was approximately $80 of total unrecognized compensation cost related to nonvested time-based stock awards granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Under the Plan, the Company also granted performance-based stock awards to its new CEO for up to 40,000 shares of common stock. The stock awards vest pending the Company’s financial performance as compared to a pre-established group of peer banks. Compensation expense related to these awards is amortized using the straight-line method over the applicable vesting period. The Company recorded compensation cost under this plan related to stock awards of approximately $80 for the year ended December 31, 2010 and the recognized tax benefit related to this expense was approximately $32.

111

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

19. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company has granted loans to directors and executive officers and their affiliates. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. All loans to directors and executive officers of the Company and their affiliates are performing in accordance with the contractual terms of the loans as of December 31, 2010 and 2009.

An analysis of activity of such loans on an individual basis to directors and executive officers of the Company and their affiliates is as follows:


	Years Ended December 31,
	2010			2009
Balance at beginning of year	$	3,668		$	2,807
Additions/change in status		(192	)		1,778
Repayments		(130	)		(917	)


Balance at end of year	$	3,346		$	3,668

20. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any time is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10 percent of the Bank’s capital stock and surplus on a secured basis. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. The Bank would obtain the approval of the Massachusetts Commissioner of Banks if it were to declare a cash dividend from net profits to the Company.

At December 31, 2010, the Bank’s retained earnings available for the payment of dividends was approximately $44,816. Accordingly, $46,897 of the Company’s equity in the net assets of the Bank was restricted at December 31, 2010. Funds available for loans or advances by the Bank to the Company amounted to approximately $4,482.

The Company’s payment of dividends is subject to certain legal and regulatory restrictions. The Company’s primary federal regulator may also impose additional restrictions on the payment of dividends. The Company will provide notification to its primary regulator in connection with any dividend declaration and did so in connection with the dividend declared on March 9, 2011.

112

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

21. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

			Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

			Interest-bearing deposits in banks — The carrying amounts of interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current market rates for similar types of deposits.

			Securities available for sale — The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities. Securities measured at fair value in Level 2 are based on unadjusted independent market-based prices received from a third-party pricing service who utilizes pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. These securities include debt and mortgage-backed securities issued by government-sponsored enterprises including Federal Home Loan Mortgage Corporation (FHLMC) Federal National Mortgage Association (FNMA) and Government National Mortgage Association (GNMA) bonds, municipal bonds and corporate and other securities. The Company does not have any available-for-sale securities measured at fair value in Level 3 as of December 31, 2010 or 2009.

			Federal Home Loan Bank stock — The fair value is based upon the redemption value of the stock which equates to its carrying value.

113

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

21. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

Determination of Fair Value (continued)

			Restricted equity securities and other investments — The carrying value of restricted equity securities represents redemption value and, therefore, approximates fair value. The fair value of other non-marketable equity securities is estimated based on consideration of credit exposure. Investments measured at fair value in level 3 include the Bank’s investment in certain real estate partnerships, the values of which are based on an analysis of the financial statements of the partnerships and underlying real estate projects, and adjusted by management to recognize unobservable inputs for specific characteristics of the investments, including, but not limited to, the investments’ liquidity and marketability, the Bank’s ownership percentage, and the nature and type of underlying investments within the funds.

			Loans receivable — For values for certain mortgage loans (e.g., one-to-four family residential) are based on quoted market prices of similar loans sold in conjunction with securitization transactions adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans and consumer loans) are estimated using discounted cash flow analyses using market interest rates currently being offered for loans and similar terms to borrowers of similar credit quality. Non-performing loans are assumed to be carried at current fair value.

			Deposit liabilities — The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of certificates of deposit (CD) originated by the company are valued using a replacement cost funds approach and are discounted to a 12 district FHLB average curve. Fair values for brokered time deposits are also valued using a replacement cost of funds approach and are discounted to the brokered CD curve.

			Short-term borrowings — For short-term borrowings maturing within ninety days, carrying values approximate fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

			Long-term borrowings — The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

			Accrued interest — The carrying amounts of accrued interest approximate fair value.

114

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

21. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

Assets Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below:


	December 31, 2010
	Level 1		Level 2		Level 3		Fair Value
Assets
Debt Securities:
Government-sponsored enterprises		—		131,624		—		131,624
Municipal bonds		—		3,145		—		3,145
Corporate bonds and other obligations		—		402		—		402
GSE residential mortgage-backed		—		6,594		—		6,594
U.S. Government guaranteed residential mortagage-backed		—		42,967		—		42,967
Common stock		956		—		—		956

Securities available for sale		956		184,732		—		185,688

Total assets		956		184,732		—		185,688


	December 31, 2009
	Level 1		Level 2		Level 3		Fair Value
Assets
Debt Securities:
Government-sponsored enterprises	$	—	$	79,976	$	—	$	79,976
Municipal bonds		—		17,875		—		17,875
Corporate bonds and other obligations		—		1,351		—		1,351
GSE residential mortgage-backed		—		30,503		—		30,503
U.S. Government guaranteed residential mortagage-backed		—		33,636		—		33,636
Common stock		4,085		—		—		4,085


Securities available for sale		4,085		163,341		—		167,426

Total assets	$	4,085	$	163,341	$	—	$	167,426

Assets Measured at Fair Value on a Non-Recurring Basis

The Company may also be required, from time to time, to measure certain other assets on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of December 31, 2010 and 2009. The loss represents the amount of write-down recorded during 2010 and 2009 on the assets at December 31, 2010 and 2009, respectively.

115

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

21. FAIR VALUE OF ASSETS AND LIABILITIES (continued)

		*Assets Measured at Fair Value on a Non-Recurring Basis*


							Year Ended
							December 31, 2010
	December 31, 2010						Total
	Level 1		Level 2		Level 3		Loss
Assets
Impaired loans	$	—	$	—	$	10,819	$	(6,654	)
Other investments		—		—		3,815		(3,828	)
Foreclosed assets		—		—		2,216		(275	)


Total assets	$	—	$	—	$	16,850	$	(10,757	)


							Year Ended
							December 31, 2009
	December 31, 2009						Total
	Level 1		Level 2		Level 3		Loss
Assets
Impaired loans	$	—	$	—	$	18,230	$	(3,972	)
Other investments		—		—		4,397		(3,813	)
Foreclosed assets		—		—		1,195		(80	)


Total assets	$	—	$	—	$	23,822	$	(7,865	)

Impaired loans: Certain impaired loans held for investment were written down to the fair value, less costs to sell, of the underlying collateral securing these loans of $10.8 million, resulting in a loss of $6.7 million for the year ended December 31, 2010, which was recognized in earnings through the provision for loan losses. The fair value of the collateral used by the Company represents that amount expected to be received from the sale of the property as determined by an independent, licensed or certified appraiser in accordance with Uniform Standards of Professional Appraisal Practice, using observable market data and discounted as considered necessary by management based on the date of valuation and new information deemed relevant to the valuation.

Other investments: The Bank maintains an equity investment in several commercial real estate funds. These funds invest in various types of commercial real estate throughout the country with the intent of generating an above-average rate of return. In 2010 these equity investments were deemed impaired and adjusted to fair value based on an analysis of the fund’s financial statements and underlying real estate projects. The values provided by the fund’s financial statements were adjusted by management to recognize unobservable inputs for specific characteristics of the investments, including, but not limited to, the investments’ liquidity and marketability, the Bank’s ownership percentage, and the nature and type of underlying investments within the funds. This adjustment is highly judgmental and resulted in a loss of $3.8 million for the year ended December 31, 2010 which was recognized through OTTI charges.

These investments are not redeemable, but are transferrable. The funds have limited remaining lives ranging from two to seven years (2012 — 2017) over which the underlying assets are expected to be liquidated by the funds management. Further information related to the funds as of December 31, 2010 is as follows:

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LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

21. FAIR VALUE OF ASSETS AND LIABILITIES (concluded)

		*Summary of Fair Value of Financial Instruments*


	Fund A			Fund B			Fund C			Fund D			Total
Anticipated final fund liquidation and distribution		2012			2014			2012			2017

Estimated fair value	$	—			1,077			756			1,982		$	3,815

Potential unfunded capital calls	$	955			949			1,678			705		$	4,287

Ownership % of fund		1.30	%		0.79	%		1.88	%		4.08	%

Foreclosed assets: Certain properties in foreclosed assets were adjusted to fair value less costs to sell through either the provision for loan losses or other expenses as a loss on other real estate owned. The fair value of foreclosed assets is that amount expected to be received from the sale of the property as determined by an independent, licensed or certified appraiser in accordance with Uniform Standards of Professional Appraisal Practice, using observable market data. If necessary, these appraised values were adjusted by management to recognize unobservable inputs for specific characteristics of the properties.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.


	December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	27,092	$	27,092	$	40,155	$	40,155
Securities available for sale		185,688		185,688		167,426		167,426
Securities held to maturity		97		97		97		97
Federal Home Loan Bank of
Boston stock		10,932		10,932		10,932		10,932
Savings Bank Life Insurance stock		1,709		1,709		1,709		1,709
Other investments		3,905		3,905		4,552		4,552
Loans and loans held for sale		610,941		626,967		653,334		656,978
Accrued interest receivable		2,631		2,631		3,306		3,306

Financial liabilities:
Deposits		685,245		691,501		651,378		656,038
Repurchase agreements		5,329		5,329		6,386		6,386
FHLB advances		105,388		112,882		160,352		167,331
Mortgagors’ escrow accounts		1,211		1,211		1,058		1,058

117

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

22. PARENT COMPANY-ONLY CONDENSED FINANCIAL STATEMENTS

The condensed year end financial statement information pertaining only to the parent, Legacy Bancorp, Inc., is as follows:

BALANCE SHEETS


	December 31,
	2010		2009
Cash and cash equilavents	$	498	$	3,148
Securities at fair value		12,063		18,258
Investment in common stock of Legacy Banks		91,713		92,384
Investment in common stock of LB Funding Corp.		6,609		7,006
Accrued interest receivable		41		117
Other assets		2,022		1,797

Total Assets	$	112,946	$	122,710

Deferred tax liability	$	1,234	$	1,239
Accrued expenses and other liabilties		153		104
Stockholder’s equity		111,559		121,367

Total Liabilities and Stockholders’ Equity	$	112,946	$	122,710

CONDENSED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2010			2009			2008
Income:
Interest on securities	$	436		$	888		$	1,019
Interest on cash and short-term investments		—			2			96
Gain (loss) on sales of securities		109			(1,603	)		41

Total Income		545			(713	)		1,156
Operating expenses		988			1,052			1,022

Income (loss) before income taxes and equity in undistributed net income of subsidiaries		(443	)		(1,765	)		134
Income tax provision (benefit)		(151	)		(66	)		50

Income (loss) before equity in income (loss) of subsidiaries		(292	)		(1,699	)		84
Equity in undistributed income (loss) of Legacy Banks		(7,761	)		(6,432	)		1,005
Equity in undistributed income of LB Funding		157			333			355

Net income (loss)	$	(7,896	)	$	(7,798	)	$	1,444

118

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

22. PARENT COMPANY-ONLY CONDENSED FINANCIAL STATEMENTS (Concluded)

CONDENSED STATEMENT OF CASH FLOWS


	Years Ended December 31,
	2010			2009			2008
Cash flows from operating activities:
Net income (loss)	$	(7,896	)	$	(7,798	)	$	1,444
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net amortization (accretion) of securities		57			34			(67	)
(Gain) loss on sales of securities, net		(109	)		1,603			(41	)
Equity in undistributed (income) loss of Legacy Banks		7,761			6,432			(1,005	)
Equity in undistributed income of LB Funding Corp.		(157	)		(333	)		(355	)
Share-based compensation expense		1,272			1,317			1,624
Deferred tax provision (benefit)		5			(611	)		1,093
Net change in:
Accrued interest receivable		76			8			94
Other assets		(218	)		(579	)		(514	)
Accrued expenses and other liabilities		45			1,137			56


Net cash provided by operating activities:		836			1,210			2,329


Cash flows from investing activities:
Activities in available-for-sale securities:
Sales		7,746			8,466			12,028
Maturities, prepayments and calls		20,136			12,195			16,854
Purchases		(21,675	)		(22,067	)		(23,226	)
Equity investment in Legacy Banks		(7,750	)		—			—


Net cash provided (used) by investing activities:		(1,543	)		(1,406	)		5,656

Cash flows from financing activities:

Payment of dividends on common stock		(1,605	)		(1,603	)		(1,612	)
Payment of loan from LB Funding		554			1,109			1,109
Repurchase of common stock		(892	)		(696	)		(6,117	)
Other, net		—			—			—


Net cash used by financing activities:		(1,943	)		(1,190	)		(6,620	)


Net change in cash and cash equivalents		(2,650	)		(1,386	)		1,365
Cash and cash equivalents at beginning of year		3,148			4,534			3,169

Cash and cash equivalents at end of year	$	498		$	3,148		$	4,534

119

LEGACY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in Thousands)

23. QUARTERLY DATA (UNAUDITED)

Quarterly results of operations for the years ended December 31, 2010 and 2009 are as follows:


	2010												2009
	Fourth			Third			Second			First			Fourth			Third			Second			First
	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter
Interest and dividend income	$	9,675		$	10,198		$	10,437		$	10,654		$	10,930		$	11,364		$	11,587		$	11,937
Interest expense		3,375			3,596			3,688			3,898			4,275			4,420			4,675			4,978


Net interest income		6,300			6,602			6,749			6,756			6,655			6,944			6,912			6,959
Provision for loan losses		2,118			2,174			3,756			2,421			2,548			101			1,506			728
Non-interest income		(2,470	)		1,982			2,631			1,049			(2,313	)		(2,204	)		198			(294	)
Non-interest expenses		8,469			7,635			7,765			7,173			7,135			6,970			7,650			7,077
Provision (benefit) for income taxes		(2,260	)		(446	)		(765	)		(545	)		(1,526	)		(633	)		(553	)		(348	)


Net income (loss)	$	(4,497	)	$	(779	)	$	(1,376	)	$	(1,244	)	$	(3,815	)	$	(1,698	)	$	(1,493	)	$	(792	)


Basic earnings (loss) per share	$	(0.57	)	$	(0.10	)	$	(0.17	)	$	(0.15	)	$	(0.48	)	$	(0.21	)	$	(0.19	)	$	(0.10	)
Diluted earnings (loss) per share	$	(0.57	)	$	(0.10	)	$	(0.17	)	$	(0.15	)	$	(0.48	)	$	(0.21	)	$	(0.19	)	$	(0.10	)

Results for all four quarters of 2010 were impacted by significant provisions for loan losses. The fourth quarter of 2010 was also negatively impacted by charges related to the write down of value of certain investments deemed to be other-than-temporarily impaired as well as a charge on the prepayment of approximately $34.7 million of advances from the Federal Home Loan Bank. Furthermore, the Company incurred additional tax expense in 2010 as a result of the establishment of deferred tax valuation reserve against the amount of capital loss carryforwards.

Results for the fourth quarter of 2009 were significantly impacted by charges related to the writedown of value of certain investments deemed to be other-than-temporarily impaired, as well as higher provisions for loan losses and FDIC insurance expense. All quarters of 2009 were also impacted by the opening of a new branch office in Latham, NY in January and the acquisition of a full service branch location in Haydenville, MA in March. The fourth quarter of 2009 was also impacted by the loss on the sale of the remaining portfolio of non-agency mortgage-backed securities. Furthermore, the Company incurred additional tax expense in the fourth quarter of 2009 as a result of a reevaluation of the realizability of the deferred tax benefit resulting from the contribution of 763,600 shares of common stock to The Legacy Banks Foundation (the “Foundation”) in 2005, and the establishment of deferred tax valuation reserve against the amount of capital loss carryforwards.

Quarterly data may not sum to annual data due to rounding.

120

Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

None.

Item 9a. Controls And Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, utilizing the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2010 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

121

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their report dated March 16, 2011. This report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.

Item 9b. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning the executive officers and directors of the Company, the Company’s audit committee and the audit committee financial input will be included in a Form 10-K/A, which will be filed within 120 days of the end of our fiscal year ended December 31, 2010 and is incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. For information regarding the Company’s Code of Conduct, see “Exhibit 14 — Code of Ethics”.

Item 11. Executive Compensation

Information required by this item will be included in a Form 10-K/A, which will be filed within 120 days of the end of our fiscal year ended December 31, 2010 and is incorporated herein by reference.

Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters

	(a)		Security Ownership of Certain Beneficial Owners

			Information required by this item will be included in a Form 10-K/A, which will be filed within 120 days of the end of our fiscal year ended December 31, 2010 and is incorporated herein by reference.

	(b)		Security Ownership of Management

			Information required by this item will be included in a Form 10-K/A, which will be filed within 120 days of the end of our fiscal year ended December 31, 2010 and is incorporated herein by reference.

122

	(c)		Changes in Control

			On December 21, 2010, the Company and Berkshire Hills Bancorp, Inc. (“Berkshire”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Company will merge with and into Berkshire, with Berkshire as the surviving corporation (the “Merger”). The Merger Agreement is on file with the Securities and Exchange Commission as an exhibit to the Current Report on Form 8-K filed by the Company on December 22, 2010.

	(d)		Equity Incentive Plan Information

			The following table sets forth information, as of December 31, 2010, about Company common stock that may be issued upon exercise of options under stock-based benefit plans maintained by the Company.

Number of securities

remaining available for

Weighted-average

future issuance under

Number of securities to

exercise price of

equity compensation

be issued upon exercise

outstanding

plans (excluding

of outstanding options,

options, warrants

securities reflected in the

Plan category

warrants and rights

and rights

first column)

Equity compensation plans approved by security holders

710,710

15.60

320,150

Equity compensation plans not approved by security holders

25,000

9.24

—

Total

735,710

15.39

320,150

Item 13. Certain Relationships And Related Transactions, and Director Independence

The information required by this item will be included in a Form 10-K/A, which will be filed within 120 days of the end of our fiscal year ended December 31, 2010 and is incorporated herein by reference.

Item 14. Principal Accountant Fees And Services

123

PART IV

Item 15. Exhibits And Financial Statement Schedules

Financial statements are filed as part of this Annual Report on Form 10-K. See Pert II, Item 8. “Financial Statements and Supplemental Data”

SIGNATURES

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



Date: March 16, 2011	/s/ J. Williar Dunlaevy
	J. Williar Dunlaevy
	Chief Executive Officer and Chairman of the Board

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


	LEGACY BANCORP, INC.
Date: March 16, 2011	/s/ J. Williar Dunlaevy
	J. Williar Dunlaevy
	Chief Executive Officer and Chairman of the Board (Principal Executive Officer)


Date: March 16, 2011	/s/ Paul H. Bruce
	Paul H. Bruce
	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)


Date: March 16, 2011	/s/ Patrick J. Sullivan
	Patrick J. Sullivan
	President


Date: March 16, 2011	/s/ Eugene A. Dellea
	Eugene A,. Dellea
	Director


Date: March 16, 2011	/s/ David L. Klausmeyer
	David L. Klausmeyer
	Director


Date: March 16, 2011	/s/ Barton D. Raser
	Barton D. Raser
	Director


Date: March 16, 2011	/s/ Anne W. Pasko
	Anne W. Pasko
	Director


Date: March 16, 2011	/s/ Robert B. Trask
	Robert B. Trask
	Director


Date: March 16, 2011	/s/ Dorothy B. Winsor
	Dorothy B. Winsor
	Director

124

INDEX TO EXHIBITS


2.1		Amended and Restated Plan of Conversion (1)

3.1		Certificate of Incorporation of Legacy Bancorp, Inc.(1)

3.2		Bylaws of Legacy Bancorp, Inc. (as amended)(1)

10.1		Legacy Banks ESOP Trust Agreement(2)

10.2		ESOP Plan Document(2)

10.3		ESOP Loan Documents(2)

10.4.1		Employment Agreement between Legacy Banks and J. Williar Dunlaevy(2)

10.4.2		Employment Agreement between Legacy Banks and Michael A. Christopher(2)

10.4.3		Employment Agreement between Legacy Banks and Steven F. Pierce(2)

10.4.4		Employment Agreement between Legacy Banks and Stephen M. Conley(2)

10.4.5		Employment Agreement between Legacy Banks and Richard M. Sullivan(2)

10.5.1		Employment Agreement between Legacy Bancorp, Inc. and J. Williar Dunlaevy(2)

10.5.2		Employment Agreement between Legacy Bancorp, Inc. and Michael A. Christopher(2)

10.5.3		Employment Agreement between Legacy Bancorp, Inc. and Steven F. Pierce(2)

10.5.4		Employment Agreement between Legacy Bancorp, Inc. and Stephen M. Conley(2)

10.5.5		Employment Agreement between Legacy Bancorp, Inc. and Richard M. Sullivan(2)

10.5.6		Separation Agreement and General Release dated as of November 5, 2007 between Legacy Bancorp, Inc., Legacy Banks and Michael A. Christopher (4)

10.5.7		Separation Agreement and General Release dated as of December 21, 2007 between Legacy Bancorp, Inc., Legacy Banks and Stephen M. Conley (5)

10.5.8		Consulting Agreement dated as of November 5, 2007 between Legacy Bancorp, Inc., Legacy Banks and Michael A. Christopher (4)

10.5.9		Purchase Agreement by and between First Niagara Bank and Legacy Banks dated as of July 25, 2007 (6)

10.5.10		Change In Control Agreement between Legacy Bancorp, Inc. and Paul H. Bruce (7)

10.5.11		Change In Control Agreement between Legacy Bancorp, Inc. and Kimberly A. Mathews (7)

10.5.12		Purchase Agreement by and between The Bank of Western Massachusetts and Legacy Banks dated as of December 15, 2008 (8)

10.5.13		Amended and Restated Employment Agreement effective as of November 20, 2008 by and between Legacy Bancorp, Inc., Legacy Banks and J. Williar Dunlaevy (9)

10.5.14		Amended and Restated Employment Agreement effective as of November 20, 2008 by and between Legacy Bancorp, Inc., Legacy Banks and Steven F. Pierce (9)

10.5.15		Amended and Restated Employment Agreement effective as of November 20, 2008 by and between Legacy Bancorp, Inc., Legacy Banks and Richard M. Sullivan (9)

10.5.16		Amended and Restated Supplemental Executive Retirement Agreement effective as of November 20, 2008 by and between Legacy Bancorp, Inc., Legacy Banks and J. Williar Dunlaevy (9)

10.5.17		Employment Agreement effective as of April 1, 2010 by and between Legacy Bancorp, Inc., Legacy Banks and Patrick J. Sullivan (10)

10.5.18		Separation Agreement and General Release dated as of May 11, 2010 between Legacy Bancorp, Inc., Legacy Banks and Steven F. Pierce (11)

10.5.19		Change In Control Agreement between Legacy Bancorp, Inc. and Richard M. Sullivan (12)

10.5.20		Definitive Merger Agreement between Legacy Bancorp, Inc. and Berkshire Hills Bancorp (13)

125


11.0		Statement re: Computation of Per Share Earnings is incorporated herein by reference to Part II, Item 8, “Financial Statements and Supplementary Data”

14.0		Code of Ethics

21.0		List of all subsidiaries of the Registrant

23.0		Consent of Independent Registered Public Accounting Firm

31.1		Certification pursuant to Rule 13a-14(a)/15d-14(a) of J. Williar Dunlaevy

31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a) of Paul H. Bruce

32		Certification pursuant to 18 U.S.C. Section 1350


(1)		Incorporated by reference from the Registrants Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005 filed October 27, 2005.

(2)		Incorporated by reference from the Registration Statement on Form S-1 (No. 333-126481) filed July 8, 2005, as amended.

(3)		Incorporated by reference from the Registrant’s Definitive Proxy Statement on Form DEF 14A filed September 28, 2006

(4)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 5, 2007.

(5)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed December 21, 2007.

(6)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed July 25, 2007.

(7)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed October 30, 2008.

(8)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed December 16, 2008.

(9)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 25, 2008.

(10)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed March 4, 2010.

(11)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed May 11, 2010.

(12)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 1, 2010.

(13)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed December 22, 2010.

126

Legacy Bancorp, Inc. - FORM 10-K - March 16, 2011

Attached files

Legacy Bancorp, Inc. Reports