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EX-21 - EX-21 - CENTURY BANCORP INCb83976exv21.htm
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EX-32.2 - EX-32.2 - CENTURY BANCORP INCb83976exv32w2.htm
EX-23.1 - EX-23.1 - CENTURY BANCORP INCb83976exv23w1.htm
EX-32.1 - EX-32.1 - CENTURY BANCORP INCb83976exv32w1.htm
EX-31.1 - EX-31.1 - CENTURY BANCORP INCb83976exv31w1.htm
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
 
     
(Mark One)    
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 0-15752
CENTURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
     
COMMONWEALTH OF MASSACHUSETTS
  04-2498617
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification number)
     
400 MYSTIC AVENUE, MEDFORD, MA
  02155
(Address of principal executive offices)
  (Zip Code)
 
 
Registrant’s telephone number including area code:
(781) 391-4000
Securities registered pursuant to Section 12(b) of the Act:
 
     
Class A Common Stock, $1.00 par value
  Nasdaq Global Market
(Title of class)
  (Name of Exchange)
 
Indicate by check mark whether 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 whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  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 and 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
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 Act).  Yes o     No þ
 
State the aggregate market value of the registrant’s voting and nonvoting stock held by nonaffiliates, computed using the closing price as reported on Nasdaq as of June 30, 2010 was $78,476,968.
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of February 28, 2011:
 
Class A Common Stock, $1.00 par value 3,539,217 Shares
Class B Common Stock, $1.00 par value 2,001,380 Shares
 
DOCUMENTS INCORPORATED BY REFERENCE
 
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
 
(1) Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2010 are incorporated into Part II, Items 5-8 of this Form 10-K.
 


 

 
CENTURY BANCORP INC.
 
FORM 10-K
 
TABLE OF CONTENTS
 
                 
        Page
 
      BUSINESS     1-5  
      RISK FACTORS     5-6  
      UNRESOLVED STAFF COMMENTS     6  
      PROPERTIES     6  
      LEGAL PROCEEDINGS     7  
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     7  
 
PART II
      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     8-9  
      SELECTED FINANCIAL DATA     9  
      MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION     9  
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     9  
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     9  
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     10  
      CONTROLS AND PROCEDURES     10  
      OTHER INFORMATION     10  
 
PART III
      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     84-89  
      EXECUTIVE COMPENSATION     89-99  
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     100-101  
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     101  
      PRINCIPAL ACCOUNTANT FEES AND SERVICES     101-102  
 
PART IV
      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     102-103  
SIGNATURES     104  
 EX-21
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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PART I
 
ITEM 1.   BUSINESS
 
The Company
 
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At December 31, 2010, the Company had total assets of $2.4 billion. Currently, the Company operates 23 banking offices in 17 cities and towns in Massachusetts, ranging from Braintree in the south to Beverly in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.
 
The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and the interest paid on deposits and borrowings. The results of operations are also affected by the level of income/fees from loans and deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.
 
The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, nonprofit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans, and consumer loans and accepts savings, time and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lockbox collection services, cash management services and account reconciliation services, and it actively promotes the marketing of these services to the municipal market. Also, the Company provides full-service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a full-service securities brokerage business.
 
The Company is also a provider of financial services, including cash management, transaction processing and short-term financing, to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with 178 (51%) of the 351 cities and towns in Massachusetts.
 
During August 2009, the Company entered into a lease agreement to open a branch located at Coolidge Corner in Brookline, Massachusetts. The branch opened on April 27, 2010.
 
During July 2010, the Company entered into a lease agreement to open a branch located at Newton Centre in Newton, Massachusetts. The branch is scheduled to open during the first half of 2011.
 
During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch is scheduled to open during the fourth quarter of 2011.
 
Availability of Company Filings
 
Under the Securities Exchange Act of 1934, Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The Company electronically files with the SEC its periodic and current reports, as well as other filings it makes with the SEC from time to time. The SEC maintains an Internet site that contains reports and other information regarding issuers, including the Company, that file electronically with the SEC, at www.sec.gov, in which all forms filed electronically may be accessed. Additionally, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and additional shareholder information are available free of charge on the Company’s website: www.century-bank.com.


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Employees
 
As of December 31, 2010, the Company had 299 full-time and 81 part-time employees. The Company’s employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good.
 
Financial Services Modernization
 
On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act (“Gramm-Leach”) which significantly altered banking laws in the United States. Gramm Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm Leach, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies were repealed. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking.
 
In order to engage in these financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a “financial holding company” by demonstrating that each of its bank subsidiaries is “well capitalized,” “well managed,” and has at least a “satisfactory” rating under the Community Reinvestment Act of 1977 (the “CRA”). The Company has not elected to become a financial holding company under Gramm-Leach.
 
These financial activities authorized by Gramm-Leach may also be engaged in by a “financial subsidiary” of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and any bank affiliates) to be “well capitalized” and “well managed;” the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if the bank is one of the 100 largest banks, it must meet certain financial rating or other comparable requirements. The Company does not currently conduct activities through a financial subsidiary.
 
Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the SEC will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers’ nonpublic, personal information.
 
Holding Company Regulation
 
The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”), and is registered as such with the Board of Governors of the Federal Reserve Bank (the “FRB”), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (i) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth.
 
The Holding Company Act prohibits a bank holding company, with certain exceptions, from (i) acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any company which is not a


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bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks, or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto.
 
The Company and its subsidiaries are examined by federal and state regulators. The FRB has responsibility for holding company activities and performed a review of the Company and its subsidiaries as of September 2010.
 
Federal Deposit Insurance Corporation Improvement Act of 1991
 
On December 19, 1991, the FDIC Improvement Act of 1991 (the “1991 Act”) was enacted. This legislation provides for, among other things: enhanced federal supervision of depository institutions, including greater authority for the appointment of a conservator or receiver for undercapitalized institutions; the establishment of risk-based deposit insurance premiums; a requirement that the federal banking agencies amend their risk-based capital requirements to include components for interest-rate risk, concentration of credit risk, and the risk of nontraditional activities; expanded authority for cross-industry mergers and acquisitions; mandated consumer protection disclosures with respect to deposit accounts; and imposed restrictions on the activities of state-chartered banks, including the Bank.
 
Provisions of the 1991 Act relating to the activities of state-chartered banks significantly impact the way the Company conducts its business. In this regard, the 1991 Act provides that insured state banks, such as the Bank, may not engage as principal in any activity that is not permissible for a national bank, unless the FDIC has determined that the activity would pose no significant risk to the Bank Insurance Fund (“BIF”) and the state bank is in compliance with applicable capital standards. Activities of subsidiaries of insured state banks are similarly restricted to those activities permissible for subsidiaries of national banks, unless the FDIC has determined that the activity would pose no significant risk to the BIF and the state bank is in compliance with applicable capital standards.
 
Interstate Banking
 
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the “Interstate Banking Act”), generally permits bank holding companies to acquire banks in any state and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching; permits a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition; and operated de novo interstate branches whenever the host state opts-in to de novo branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed.
 
USA PATRIOT Act
 
Under Title III of the USA PATRIOT Act, also known as the “International Money Laundering Abatement and Anti-Terrorism Act of 2001”, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the Gramm-Leach Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasurer to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act.


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Sarbanes-Oxley Act
 
The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection and enhanced and timely disclosure of corporate information. The SEC has adopted a substantial number of implementing rules and the Financial Industry Regulatory Authority (FINRA) has adopted corporate governance rules that have been approved by the SEC and are applicable to the Company. The changes are intended to allow stockholders to monitor more effectively the performance of companies and management. As directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s disclosure controls and procedures and internal controls over financial reporting; that they have made certain disclosures to the Company’s auditors and the Board of Directors about the Company’s disclosure controls and procedures and internal control over financial reporting, and that they have included information in the Company’s quarterly and annual reports about their evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting, and whether there have been significant changes in the Company’s internal disclosure controls and procedures or in other factors that could significantly affect such controls and procedures subsequent to the evaluation and whether there have been any significant changes in the Company’s internal control over financial reporting that have materially affected or reasonably likely to materially affect the Company’s internal control over financial reporting, and compliance with certain other disclosure objectives. Section 906 of the Sarbanes-Oxley Act requires an additional certification that each periodic report containing financial statements fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 and that the information in the report fairly presents, in all material respects, the financial conditions and results of operations of the Company.
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Dodd-Frank Wall Street Reform and Consumer Protection Act also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000.
 
Deposit Insurance Premiums
 
The Bank’s deposits have the benefit of FDIC insurance up to applicable limits. The FDIC’s Deposit Insurance Fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of assets that it holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.
 
The Bank is also a participant in the Temporary Liquidity Guarantee Program as discussed within the Management’s Discussion and Analysis of Results of Operations and Financial Condition under Recent Market Developments.
 
On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment is five basis points of each FDIC-insured depository institution’s assets minus Tier 1 capital, as of June 30, 2009. The Company recorded a pre-tax charge of approximately $1.0 million in the second quarter of 2009 in connection with the special assessment.


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On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. As a result, the Company is carrying a prepaid asset of $6.1 million as of December 31, 2010. The Company’s quarterly risk-based deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Company.
 
In February 2011, the FDIC approved a rule to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The rule should keep the overall amount collected from the industry very close to the amount collected prior to the new calculation.
 
Competition
 
The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. A number of these competitors are not subject to the regulatory oversight that the Company is subject to, which increases these competitors’ flexibility.
 
Forward-Looking Statements
 
Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by a reference to a “estimate,” “anticipate” “continue” or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities market and the availability of and costs associated with sources of liquidity.
 
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
 
ITEM 1A.   RISK FACTORS
 
The risk factors that may affect the Company’s performance and results of operations include the following:
 
(i) the Company’s business is dependent upon general economic conditions in Massachusetts. Currently the national and local economies are in recession; this may adversely affect the Company’s performance and results of operations;
 
(ii) the Company’s earnings depend to a great extent upon the level of net interest income generated by the Company, and therefore the Company’s results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve;
 
(iii) the banking business is highly competitive and the profitability of the Company depends upon the Company’s ability to attract loans and deposits in Massachusetts, where the Company competes with a variety of traditional banking companies, some of which have vastly greater resources, and nontraditional institutions such as credit unions and finance companies;


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(iv) at December 31, 2010, approximately 57.8% of the Company’s loan portfolio was comprised of commercial and commercial real estate loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans;
 
(v) at December 31, 2010, approximately 35.5% of the Company’s loan portfolio was comprised of residential real estate loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk and the value of underlying collateral. Accordingly, the Company’s profitability may be negatively impacted by errors in risk analyses, by loan defaults and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions;
 
(vi) economic conditions and interest rate risk could adversely impact the fair value and the ultimate collectability of the Company’s investments. Should an investment be deemed “other than temporarily impaired”, the Company would be required to writedown the carrying value of the investment through earnings. Such writedown(s) may have a material adverse effect on the Company’s financial condition and results of operations;
 
(vii) writedown of goodwill and other identifiable intangible assets would negatively impact our financial condition and results of operations. The amount of the purchase price which is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. At December 31, 2010, our goodwill and other identifiable intangible assets were approximately $3.2 million;
 
(viii) acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States of America generally and in the Company’s markets, which could adversely affect the Company’s financial performance and that of the Company’s borrowers and on the financial markets and the price of the Company’s Class A common stock;
 
(ix) changes in the extensive laws, regulations and policies governing bank holding companies and their subsidiaries could alter the Company’s business environment or affect the Company’s operations; and
 
(x) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent to secure bank and customer financial information, could present operational issues, require significant capital spending or impact the Company’s reputation.
 
These factors, as well as general economic and market conditions in the United States of America, may materially and adversely affect the Company’s performance, results of operations and the market price of shares of the Company’s Class A common stock.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
No written comments received by the Company from the SEC regarding the Company’s periodic or current reports remain unresolved.
 
ITEM 2.  PROPERTIES
 
The Company owns its main banking office, headquarters, and operations center in Medford, Massachusetts, which were expanded in 2004, and 11 of the 22 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2011 to 2026. The Company believes that its banking offices are in good condition.
 
During August 2009, the Company entered into a lease agreement to open a branch located at Coolidge Corner in Brookline, Massachusetts. The branch opened on April 27, 2010. During July 2010, the Company entered into a lease agreement to open a branch located at Newton Centre in Newton, Massachusetts. The branch is scheduled to open during the first half of 2011. During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch is scheduled to open during the fourth quarter of 2011.


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ITEM 3.   LEGAL PROCEEDINGS
 
The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Company’s consolidated financial position.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of the Company’s Stockholders during the fourth quarter of the fiscal year ended December 31, 2010.


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PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
(a) The Class A Common Stock of the Company is traded on the NASDAQ National Global Market under the symbol “CNBKA.” The price range of the Company’s Class A common stock since January 1, 2009 is shown on page 11. The Company’s Class B Common Stock is not traded on any national securities exchange or other public trading market.
 
                                 
    Issuer Purchases of Equity Securities  
          Weighted
    Total Number of Shares
    Maximum Number of
 
    Total Number
    Average
    Purchased as Part of
    Shares That May Yet be
 
    of Shares
    Price Paid
    Publicly Announced
    Purchased Under the
 
Period
  Purchased     per Share     Plans or Programs     Plans or Programs(1)  
 
October 1 — October 31, 2010
                      300,000  
November 1 — November 30, 2010
                      300,000  
December 1 — December 31, 2010
                      300,000  
 
 
(1) On July 13, 2010, the Company announced a reauthorization of the Class A common stock repurchase program to repurchase up to 300,000 shares. The Company placed no deadline on the repurchase program. There were no shares purchased other than through a publicly announced plan or program.
 
The shares of Class A Common Stock are generally not entitled to vote on any matter, including in the election of Company Directors, but, in limited circumstances, may be entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of the Company’s Class B Common Stock, voting as a separate class, is required to approve certain extraordinary corporate transactions, the holders of Class B Common Stock have the power to prevent any takeover of the Company not approved by them.
 
(b) Approximate number of equity security holders as of December 31, 2010:
 
         
    Approximate Number
Title of Class
  of Record Holders
 
Class A Common Stock
    1,414  
Class B Common Stock
    100  
 
(c) Under the Company’s Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.


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The following table shows the dividends paid by the Company on the Class A and Class B Common Stock for the periods indicated.
 
                 
    Dividends per
    Share
    Class A   Class B
 
2009
               
First quarter
  $ .12     $ .06  
Second quarter
    .12       .06  
Third quarter
    .12       .06  
Fourth quarter
    .12       .06  
2010
               
First quarter
  $ .12     $ .06  
Second quarter
    .12       .06  
Third quarter
    .12       .06  
Fourth quarter
    .12       .06  
 
As a bank holding company, the Company’s ability to pay dividends is dependent in part upon the receipt of dividends from the Bank, which is subject to certain restrictions on the payment of dividends. A Massachusetts trust company may pay dividends out of net profits from time to time, provided that either (i) the trust company’s capital stock and surplus account equal an aggregate of at least 10% of its deposit liabilities, or (ii) the amount of its surplus account is equal to at least the amount of its capital account.
 
(d) The following schedule provides information with respect to the Company’s equity compensation plans under which shares of Class A Common Stock are authorized for issuance as of December 31, 2010:
 
                         
                Number of Shares
 
                Remaining Available for
 
                Future Issuance Under
 
    Number of Shares
          Equity Compensation
 
    to be Issued
    Weighted-Average
    Plans (Excluding
 
    Upon Exercise of
    Exercise Price of
    Shares Reflected in
 
    Outstanding Options
    Outstanding Options
    Column (a))
 
Plan Category
  (a)     (b)     (c)  
 
Equity compensation plans approved by security holders
    38,712     $ 28.36       222,884  
Equity compensation plans not approved by security holders
                 
                         
Total
    38,712     $ 28.36       222,884  
 
(e) The performance graph information required herein is shown on page 12.
 
ITEM 6.   SELECTED FINANCIAL DATA
 
The information required herein is shown on pages 11 and 12.
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
The information required herein is shown on pages 13 through 35.
 
Item 7a.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The information required herein is shown on page 32.
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The information required herein is shown on pages 36 through 80.


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ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A.   CONTROLS AND PROCEDURES
 
The Company’s principal executive officers and principal financial officer have evaluated the Company’s disclosure controls and procedures as of December 31, 2010. Based on this evaluation, the principal executive officers and principal financial officer have concluded that the Company’s disclosure controls and procedures effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act is accumulated and reported to Company management (including the principal executive officer and principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal control over financial reporting and there have been no significant changes in its internal control over financial reporting or in other factors that could significantly affect its internal control over financial reporting. Management’s report on internal control over financial reporting is shown on page 83. The audit report of the registered public accounting firm is shown on page 82.
 
ITEM 9B.   OTHER INFORMATION
 
None.


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Financial Highlights
 
                                         
    2010     2009     2008     2007     2006  
    (Dollars in thousands, except share data)  
 
FOR THE YEAR
                                       
Interest income
  $ 76,583     $ 79,600     $ 80,693     $ 83,008     $ 80,707  
Interest expense
    24,817       31,723       35,914       43,805       43,944  
                                         
Net interest income
    51,766       47,877       44,779       39,203       36,763  
Provision for loan losses
    5,575       6,625       4,425       1,500       825  
                                         
Net interest income after provision for loan losses
    46,191       41,252       40,354       37,703       35,938  
Other operating income
    15,999       16,470       13,975       13,948       11,365  
Operating expenses
    47,372       46,379       43,028       40,255       40,196  
                                         
Income before income taxes
    14,818       11,343       11,301       11,396       7,107  
Provision for income taxes
    1,244       1,183       2,255       3,532       2,419  
                                         
Net income
  $ 13,574     $ 10,160     $ 9,046     $ 7,864     $ 4,688  
                                         
Average shares outstanding, basic
    5,533,506       5,532,249       5,541,983       5,542,461       5,540,966  
Average shares outstanding, diluted
    5,535,742       5,534,340       5,543,702       5,546,707       5,550,722  
Shares outstanding at year-end
    5,540,247       5,530,297       5,538,407       5,543,804       5,541,188  
Earnings per share:
                                       
Basic
  $ 2.45     $ 1.84     $ 1.63     $ 1.42     $ 0.85  
Diluted
  $ 2.45     $ 1.84     $ 1.63     $ 1.42     $ 0.84  
Dividend payout ratio
    16.0 %     21.4 %     24.0 %     27.6 %     46.2 %
AT YEAR-END
                                       
Assets
  $ 2,441,684     $ 2,254,035     $ 1,801,566     $ 1,680,281     $ 1,644,290  
Loans
    906,164       877,125       836,065       726,251       736,773  
Deposits
    1,902,023       1,701,987       1,265,527       1,130,061       1,268,965  
Stockholders’ equity
    145,025       132,730       120,503       118,806       106,818  
Book value per share
  $ 26.18     $ 24.00     $ 21.76     $ 21.43     $ 19.28  
SELECTED FINANCIAL PERCENTAGES
                                       
Return on average assets
    0.56 %     0.50 %     0.54 %     0.49 %     0.28 %
Return on average stockholders’ equity
    9.52 %     7.98 %     7.43 %     7.05 %     4.45 %
Net interest margin, taxable equivalent
    2.52 %     2.69 %     3.00 %     2.65 %     2.40 %
Net charge-offs as a percent of average loans
    0.44 %     0.63 %     0.38 %     0.22 %     0.06 %
Average stockholders’ equity to average assets
    5.93 %     6.26 %     7.23 %     6.97 %     6.39 %
Efficiency ratio
    65.0 %     68.5 %     70.6 %     77.5 %     83.5 %
 
                                 
    2010, Quarter Ended
Per Share Data
  December 31,   September 30,   June 30,   March 31,
 
Market price range (Class A)
                               
High
  $ 27.39     $ 24.00     $ 23.22     $ 23.60  
Low
    22.54       19.40       16.77       18.65  
Dividends Class A
    0.12       0.12       0.12       0.12  
Dividends Class B
    0.06       0.06       0.06       0.06  
 
                                 
    2009, Quarter Ended  
    December 31,     September 30,     June 30,     March 31,  
 
Market price range (Class A)
                               
High
  $ 25.00     $ 24.99     $ 18.99     $ 17.75  
Low
    18.53       17.60       13.00       9.46  
Dividends Class A
    0.12       0.12       0.12       0.12  
Dividends Class B
    0.06       0.06       0.06       0.06  


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The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2005 to December 31, 2010 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the table below represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used.
 
Comparison of Five-Year
Cumulative Total Return*
 
(PERFORMANE GRAPH)
 
                                                   
Value of $100 Invested on December 31, 2005 at:     2006     2007     2008     2009     2010
Century Bancorp, Inc. 
    $ 94.97       $ 71.67       $ 57.57       $ 82.67       $ 102.68  
NASDAQ Banks
      112.23         88.95         64.86         54.35         64.28  
NASDAQ U.S. 
      109.84         119.14         57.41         82.53         97.95  
                                                   
 
 
* Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2005 and that all dividends were reinvested.


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Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
 
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
 
RECENT MARKET DEVELOPMENTS
 
The financial services industry is facing unprecedented challenges in the face of the current national and global economic crisis. The global and U.S. economies are experiencing significantly reduced business activity. Dramatic declines in the housing market during the past several years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant writedowns of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital; to merge with larger and stronger institutions; and, in some cases, to fail. The Company is fortunate that the markets it serves have been impacted to a lesser extent than many areas around the country.
 
In response to the financial crises affecting the banking system and financial markets, there have been several announcements of federal programs designed to purchase assets from, provide equity capital to, and guarantee the liquidity of the industry.
 
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. The EESA authorizes the U.S. Treasury to, among other things, purchase up to $750 billion of mortgages, mortgage-backed securities, and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Company does not expect to participate in the sale of any of our assets into these programs.
 
On October 14, 2008, the U.S. Treasury announced that it would purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Assets Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), the U.S. Treasury made $250 billion of capital available (from the $750 billion authorized by the EESA) to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the U.S. Treasury received warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions were required to adopt the U.S. Treasury’s standards for executive compensation, dividend restrictions and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program. The U.S. Treasury also announced that nine large financial institutions had already agreed to participate in the TARP Capital Purchase Program. Subsequently, a number of smaller institutions had participated in the TARP Capital Purchase Program. On December 18, 2008, the Company announced in a press release, it had received preliminary approval from the U.S. Treasury to participate in the TARP Capital Purchase Program, in an amount up to $30 million in the form of Century Bancorp, Inc. preferred stock and warrants to purchase Class A common stock. In light of uncertainty


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surrounding additional restrictions that may be imposed on participants under pending legislation, the Company, on January 14, 2009, informed the U.S. Treasury that it would not be closing on the transaction on January 16, 2009, as originally scheduled. The Company subsequently withdrew its application.
 
On October 14, 2008, the U.S. Treasury and the FDIC jointly announced a new program, known as the Temporary Liquidity Guarantee Program (“TLGP”), to strengthen confidence and encourage liquidity in the nation’s banking system. The TLGP consists of two programs: the Debt Guarantee Program (“DGP”) and the Transaction Account Guarantee Program (“TAGP”). Under the DGP, as amended, the FDIC guaranteed certain newly issued senior unsecured debt of participating banks, thrifts and certain holding companies issued from October 14, 2008 through October 31, 2009, which debt matures on or prior to December 31, 2012, up to a fixed maximum amount per participant. In addition, under the TAGP, the FDIC fully guaranteed deposits in noninterest bearing transaction accounts without dollar limitation through December 31, 2009. Institutions opting to participate in the DGP were be charged a 50-, 75- or 100-basis point fee (depending on maturity) for the guarantee of eligible debt, and a 10-basis point assessment was applicable to deposits in noninterest bearing transaction accounts at institutions participating in the TAGP that exceed the existing deposit insurance limit of $250,000. The Company opted to participate in both the DGP and the TAGP. The annual assessment rate that was applied during the extension period was either 15, 20 or 25 basis points, depending on the risk category assigned to the institution under the FDIC’s risk-based premium system. On April 13, 2010 the FDIC approved an interim rule to extend the TAGP to December 31, 2010. The Company continued to participate in the TAGP through December 31, 2010. The interim rule gave the FDIC discretion to extend the program to the end of 2011, without additional rulemaking, if it determines that economic conditions warrant such an extension. On November 9, 2010, the FDIC approved temporary unlimited coverage for noninterest-bearing transaction accounts. This coverage became effective on December 31, 2010, and will end on December 31, 2012.
 
On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment was five basis points of each FDIC-insured depository institution’s assets minus Tier 1 capital, as of June 30, 2009. The Company recorded a pre-tax charge of approximately $1.0 million in the second quarter of 2009 in connection with the special assessment.
 
On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. As a result, the Company is carrying a prepaid asset of $6.1 million as of December 31, 2010. The Company’s quarterly risk-based deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Company.
 
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Dodd-Frank Wall Street Reform and Consumer Protection Act also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000.
 
OVERVIEW
 
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century


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Bank and Trust Company formed in 1969. At December 31, 2010, the Company had total assets of $2.4 billion. Currently, the Company operates 23 banking offices in 17 cities and towns in Massachusetts, ranging from Braintree in the south to Beverly in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.
 
The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and the interest paid on deposits and borrowings. The results of operations are also affected by the level of income/fees from loans and deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.
 
The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, nonprofit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans, and consumer loans and accepts savings, time and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lockbox collection services, cash management services and account reconciliation services, and it actively promotes the marketing of these services to the municipal market. Also, the Company provides full-service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a full-service securities brokerage business.
 
The Company is also a provider of financial services, including cash management, transaction processing and short-term financing, to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with 178 (51%) of the 351 cities and towns in Massachusetts.
 
The Company had net income of $13,574,000 for the year ended December 31, 2010, compared with net income of $10,160,000 for the year ended December 31, 2009 and net income of $9,046,000 for the year ended December 31, 2008. Diluted earnings per share were $2.45 in 2010, compared to $1.84 in 2009 and $1.63 in 2008.
 
Throughout 2008, the Company had seen improvement in its net interest margin; however, the first quarter of 2009 reflected a decrease in the net interest margin with a modest increase during the second and third quarters of 2009 followed by a general decline through the fourth quarter of 2010 as illustrated in the graph below:
 
(PERFORMANE GRAPH)
 
The primary factors accounting for the increase in net interest margin during 2008 are:
 
  •  a continuing decline in the cost of funds as a result of increased pricing discipline related to deposits
 
  •  an increase in average loans outstanding during 2008
 
  •  the maturity of lower-yielding investment securities
 
  •  an increase in the slope of the yield curve
 
  •  an increase in investment yields due, in part, to taking advantage of elevated yields in the municipal auction rate securities market, particularly in the third quarter of 2008
 
The primary factors accounting for the general decrease in the net interest margin during 2009 and 2010 were a large influx of deposits, primarily from municipalities, and a corresponding increase in short-term investments.
 
While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as prepayments of loans and changes in market interest rates, will continue to positively impact the net interest margin.


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(PERFORMANE GRAPH)
 
A yield curve is a line that typically plots the interest rates of U.S. Treasury Debt, which have different maturity dates but the same credit quality, at a specific point in time. The three main types of yield curve shapes are normal, inverted and flat. Over the past three years, the U.S. economy has experienced low short-term rates. From 2008 to 2009, the yield curve steepened significantly, offset somewhat by a slight flattening from 2009 to 2010.
 
During 2010, the Company’s earnings were positively impacted primarily by an increase in net interest income. This increase was primarily due to an increase in earning assets. During 2010, 2009 and 2008, the U.S. economy has experienced a lower short-term rate environment along with a general steepening of the yield curve, which means that the spread between the long-term and short-term yields has increased. The lower short-term rates negatively impacted the net interest margin for 2010 and 2009 as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits.
 
Total assets were $2,441,684,000 at December 31, 2010, an increase of 8.3% from total assets of $2,254,035,000 on December 31, 2009.
 
On December 31, 2010, stockholders’ equity totaled $145,025,000, compared with $132,730,000 on December 31, 2009. Book value per share increased to $26.18 at December 31, 2010 from $24.00 on December 31, 2009.
 
During October 2008, the Company received regulatory approval to close a branch on Albany Street in Boston, Massachusetts. This branch closed in January 2009.
 
During August 2009, the Company entered into a lease agreement to open a branch located at Coolidge Corner in Brookline, Massachusetts. The branch opened on April 27, 2010.
 
During July 2010, the Company entered into a lease agreement to open a branch located at Newton Centre in Newton, Massachusetts. The branch is scheduled to open during the first half of 2011.
 
During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch is scheduled to open during the fourth quarter of 2011.
 
CRITICAL ACCOUNTING POLICIES
 
Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies.
 
The Company considers impairment of investment securities and allowance for loan losses to be its critical accounting policies. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions.
 
Impaired Investment Securities
 
If a decline in fair value below the amortized cost basis of an investment security is judged to be “other-than-temporary,” the cost basis of the investment is written down to fair value. The amount of the writedown is included as a charge to earnings. The amount of the impairment charge is recognized in earnings with an offset for


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the noncredit component which is recognized through other comprehensive income. Some factors considered for other-than-temporary impairment related to a debt security include an analysis of yield which results in a decrease in expected cash flows, whether an unrealized loss is issuer specific, whether the issuer has defaulted on scheduled interest and principal payments, whether the issuer’s current financial condition hinders its ability to make future scheduled interest and principal payments on a timely basis or whether there was a downgrade in ratings by rating agencies.
 
The Company does not intend to sell any of its debt securities with an unrealized loss, and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, which may be maturity.
 
Allowance for Loan Losses
 
Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances for identified problem loans.
 
The formula allowance evaluates groups of loans to determine the allocation appropriate within each portfolio segment. Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. The formula allowance and specific allowances also include management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors. Further information regarding the Company’s methodology for assessing the appropriateness of the allowance is contained within footnote 1 of the Company’s financial statements.
 
Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
 
FINANCIAL CONDITION
 
Investment Securities
 
The Company’s securities portfolio consists of securities available-for-sale (“AFS”) and securities held-to-maturity (“HTM”).
 
Securities available-for-sale consist of certain U.S. Treasury and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; foreign debt securities; and other marketable equities.
 
These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders’ equity. The fair value of securities available-for-sale at December 31, 2010 totaled $909,391,000 and included gross unrealized gains of $12,450,000 and gross unrealized losses of $6,615,000. A year earlier, securities available-for-sale were $647,796,000 including gross unrealized gains of $9,442,000 and gross unrealized losses of $2,656,000. In 2010, the Company recognized gains of $1,851,000 on the sale of available-for-sale securities. In 2009, the Company recognized gains of $2,734,000.
 
Securities which management intends to hold until maturity consist of U.S. Government Sponsored Enterprises and mortgage-backed securities. Securities held-to-maturity as of December 31,2010 are carried at their amortized cost of $230,116,000 and exclude gross unrealized gains of $5,394,000 and gross unrealized losses of $1,986,000. Ayear earlier, securities held-to-maturity totaled $217,643,000 excluding gross unrealized gains of $4,526,000 and gross unrealized losses of $756,000.


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The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated.
 
Fair Value of Securities Available-for-Sale
 
                                                 
    2010     2009     2008  
At December 31,
  Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
 
U.S. Treasury
  $ 2,005       0.2 %   $ 2,003       0.3 %   $ 2,028       0.4 %
U.S. Government Sponsored Enterprises
    175,663       19.3 %     192,364       29.7 %     161,292       32.5 %
SBA Backed Securities
    9,732       1.1 %                        
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities
    680,898       74.9 %     418,512       64.6 %     260,132       52.5 %
Privately Issued Residential Mortgage-Backed Securities
    3,968       0.4 %     4,910       0.8 %     5,659       1.1 %
Privately Issued Commercial Mortgage-Backed Securities
    287       0.1 %     544       0.1 %     3,367       0.7 %
Obligations Issued by States and Political Subdivisions
    34,074       3.7 %     26,289       4.1 %     60,259       12.2 %
Other Debt Securities
    2,253       0.2 %     2,259       0.3 %     2,100       0.4 %
Equity Securities
    511       0.1 %     915       0.1 %     748       0.2 %
                                                 
Total
  $ 909,391       100.0 %   $ 647,796       100.0 %   $ 495,585       100.0 %
                                                 
 
Included in Obligations Issued by States and Political Subdivisions as of December 31, 2010, are $4,393,000 of auction rate municipal obligations (“ARSs”) and $10,000,000 of variable rate demand notes (“VRDNs”) with unrealized losses of $284,000 for ARSs. VRDNs’ fair value equals the carrying value. These debt securities were issued by governmental entities but are not necessarily debt obligations of the issuing entity. Of the total of $14,393,000 of ARSs and VRDNs, $10,000,000 are obligations of governmental entities and the remainder are the obligation of a large nonprofit entity. These obligations are variable rate securities with long-term maturities whose interest rates are set periodically through an auction process for ARSs and by prevailing market rates for VRDNs. Should the auction not attract sufficient bidders, the interest rate adjusts to the default rate defined in each obligation’s underlying documents. The Company increased its holdings in these types of securities during the second and third quarters of 2008 to take advantage of yields available due to market disruption. Although many of these issuers have bond insurance, the Company purchased the securities based on the creditworthiness of the underlying obligor.
 
In the case of a failed auction, the Company may not have access to funds as only a limited market exists for failed ARSs. As of December 31, 2010, the Company’s ARS was purchased subsequent to its failure with a fair value of $4,393,000 and an amortized cost of $4,677,000.
 
As of December 31, 2010, the weighted average taxable equivalent yield on these securities was 0.47%.
 
The majority of the Company’s securities AFS are classified as Level 2, as defined in footnote 1 of the “Notes to Consolidated Financial Statements.” The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2010.


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Securities available-for-sale totaling $20,660,000, or 0.85% of assets, are classified as Level 3, as defined in footnote 1 of the “Notes to Consolidated Financial Statements.” These securities are generally equity investments or municipal securities with no readily determinable fair value. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.
 
Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the third quarter of 2008.
 
The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated.
 
Amortized Cost of Securities Held-to-Maturity
 
                                                 
    2010     2009     2008  
At December 31,
  Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
 
U.S. Government Sponsored Enterprises
  $ 84,534       36.7 %   $ 69,555       32.0 %   $ 44,000       23.9 %
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
    145,582       63.3 %     148,088       68.0 %     140,047       76.1 %
                                                 
Total
  $ 230,116       100.0 %   $ 217,643       100.0 %   $ 184,047       100.0 %
                                                 
 
For all years presented, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises.
 
The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2010. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Fair Value of Securities Available-for-Sale Amounts Maturing
 
                                                                                                 
    Within
          Weighted
    One Year
          Weighted
    Five Years
          Weighted
    Over
          Weighted
 
    One
    % of
    Average
    to Five
    % of
    Average
    to Ten
    % of
    Average
    Ten
    % of
    Average
 
    Year     Total     Yield     Years     Total     Yield     Years     Total     Yield     Years     Total     Yield  
    (Dollars in thousands)  
 
U.S. Treasury
  $ 2,005       0.2 %     0.95 %   $       0.0 %     0.00 %   $       0.0 %     0.00 %   $       0.0 %     0.00 %
U.S. Government Sponsored Enterprises
          0.0 %     0.00 %     148,019       16.3 %     1.41 %     27,644       3.0 %     1.22 %           0.0 %     0.00 %
SBA Backed Securities
          0.0 %     0.00 %     1,158       0.1 %     0.71 %     3,983       0.4 %     0.77 %     4,591       0.5 %     0.93 %
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
    21,536       2.4 %     5.21 %     539,454       59.3 %     2.71 %     118,267       13.0 %     2.84 %     1,641       0.2 %     2.60 %
Privately Issued Residential Mortgage-Backed Securities
          0.0 %     0.00 %     3,968       0.4 %     2.88 %           0.0 %     0.00 %           0.0 %     0.00 %
Privately Issued Commercial Mortgage-Backed Securities
    287       0.0 %     3.78 %           0.0 %     0.00 %           0.0 %     0.00 %           0.0 %     0.00 %
Obligations of States and Political Subdivisions
    17,505       2.0 %     1.39 %     2,176       0.3 %     4.98 %     5,000       0.6 %     0.41 %     9,393       1.0 %     0.46 %
Other Debt Securities
    200       0.0 %     5.38 %     600       0.1 %     2.10 %           0.0 %     0.00 %           0.0 %     0.00 %
Equity Securities
          0.0 %     0.00 %           0.0 %     0.00 %           0.0 %     0.00 %           0.0 %     0.00 %
                                                                                                 
Total
  $ 41,533       4.6 %     3.36 %   $ 695,375       76.5 %     2.44 %   $ 154,894       17.0 %     2.42 %   $ 15,625       1.7 %     0.82 %
                                                                                                 
 


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                Weighted
                Weighted
 
    Non-
    % of
    Average
          % of
    Average
 
    Maturing     Total     Yield     Total     Total     Yield  
    (Dollars in thousands)  
 
U.S. Treasury
  $       0.0 %     0.00 %   $ 2,005       0.2 %     0.95 %
U.S. Government Sponsored Enterprises
          0.0 %     0.00 %     175,663       19.3 %     1.38 %
SBA Backed Securities
          0.0 %     0.00 %     9,732       1.1 %     0.84 %
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
          0.0 %     0.00 %     680,898       75.0 %     2.82 %
Privately Issued Residential Mortgage-Backed Securities
          0.0 %     0.00 %     3,968       0.4 %     2.88 %
Privately Issued Commercial Mortgage-Backed Securities
          0.0 %     0.00 %     287       0.0 %     3.78 %
Obligations of States and Political Subdivisions
          0.0 %     0.00 %     34,074       3.7 %     1.22 %
Other Debt Securities
    1,453       0.1 %     4.63 %     2,253       0.2 %     4.02 %
Equity Securities
    511       0.1 %     1.71 %     511       0.1 %     1.71 %
                                                 
Total
  $ 1,964       0.2 %     3.87 %   $ 909,391       100.0 %     2.45 %
                                                 
 
Amortized Cost of Securities Held-to-Maturity Amounts Maturing
 
                                                                                                 
    Within
          Weighted
    One Year
          Weighted
    Five Years
          Weighted
                Weighted
 
    One
    % of
    Average
    to Five
    % of
    Average
    to Ten
    % of
    Average
          % of
    Average
 
    Year     Total     Yield     Years     Total     Yield     Years     Total     Yield     Total     Total     Yield  
    (Dollars in thousands)  
 
U.S. Government Sponsored Enterprises
  $       0.0 %     0.00 %   $ 9,998       4.4 %     1.63 %   $ 74,536       32.4 %     1.67 %   $ 84,534       36.7 %     1.67 %
U.S. Government Sponsored Enterprise Mortgage-Backed Securities
    7,298       3.2 %     4.49 %     113,059       49.1 %     4.11 %     25,225       11.0 %     2.69 %     145,582       63.3 %     3.88 %
                                                                                                 
Total
  $ 7,298       3.2 %     4.49 %   $ 123,057       53.5 %     3.91 %   $ 99,761       43.4 %     1.93 %   $ 230,116       100.0 %     3.07 %
                                                                                                 
 
At December 31, 2010 and 2009, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2010, sales of securities totaling $41,251,000 in gross proceeds resulted in a net realized gain of $1,851,000. There were no sales of state, county or municipal securities during 2010. In 2009, there were sales totaling $16,185,000 in gross proceeds in state, county or municipal securities resulting in gross gains of $0 and gross losses of $0. In 2009, sales of securities totaling $94,142,000 in gross proceeds resulted in a net realized gain of $2,734,000.
 
Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are dependent upon general market conditions and specific conditions related to the issuers of our securities.
 
Loans
 
The Company’s lending activities are conducted principally in Massachusetts. The Company grants single and multi-family residential loans, commercial and commercial real estate loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers’ geographic areas and of the general economy.

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The following summary shows the composition of the loan portfolio at the dates indicated.
 
                                                                                 
    2010     2009     2008     2007     2006  
          Percent
          Percent
          Percent
          Percent
          Percent
 
December 31,
  Amount     of Total     Amount     of Total     Amount     of Total     Amount     of Total     Amount     of Total  
    (Dollars in thousands)  
 
Construction and land development
  $ 53,583       5.9 %   $ 60,349       6.9 %   $ 59,511       7.1 %   $ 62,412       8.6 %   $ 49,709       6.7 %
Commercial and industrial
    90,654       10.0 %     141,061       16.1 %     141,373       16.9 %     117,332       16.2 %     117,497       15.9 %
Commercial real estate
    433,337       47.8 %     361,823       41.2 %     332,325       39.8 %     299,920       41.3 %     327,040       44.4 %
Residential real estate
    207,787       22.9 %     188,096       21.4 %     194,644       23.3 %     168,204       23.2 %     167,946       22.8 %
Consumer
    5,957       0.7 %     7,105       0.8 %     8,246       1.0 %     8,359       1.1 %     7,104       1.0 %
Home equity
    114,209       12.6 %     118,076       13.5 %     98,954       11.8 %     68,585       9.4 %     66,157       9.0 %
Overdrafts
    637       0.1 %     615       0.1 %     1,012       0.1 %     1,439       0.2 %     1,320       0.2 %
                                                                                 
Total
  $ 906,164       100.0 %   $ 877,125       100.0 %   $ 836,065       100.0 %   $ 726,251       100.0 %   $ 736,773       100.0 %
                                                                                 
 
At December 31, 2010, 2009, 2008, 2007 and 2006, loans were carried net of discounts of $598,000, $645,000, $692,000, $3,000 and $3,000, respectively. Net deferred loan fees of $186,000, $71,000, $81,000, $38,000 and $183,000 were carried in 2010, 2009, 2008, 2007 and 2006, respectively.
 
The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2010. The table excludes loans secured by 1-4 family residential real estate and loans for household and family personal expenditures. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.
 
Remaining Maturities of Selected Loans at December 31, 2010
 
                                 
    One Year
    One to Five
    Over
       
    or Less     Years     Five Years     Total  
    (Dollars in thousands)  
 
Construction and land development
  $ 12,379     $ 32,322     $ 8,882     $ 53,583  
Commercial and industrial
    36,995       28,602       25,057       90,654  
Commercial real estate
    30,238       135,767       267,332       433,337  
                                 
Total
  $ 79,612     $ 196,691     $ 301,271     $ 577,574  
                                 
 
The following table indicates the rate variability of the above loans due after one year.
 
                         
    One to Five
    Over
       
December 31, 2010
  Years     Five Years     Total  
    (Dollars in thousands)  
 
Predetermined interest rates
  $ 91,435     $ 50,431     $ 141,866  
Floating or adjustable interest rates
    105,256       250,840       356,096  
                         
Total
  $ 196,691     $ 301,271     $ 497,962  
                         
 
The Company’s commercial and industrial (“C&l”) loan customers represent various small and middle-market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.
 
Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s market area, which generally includes Eastern Massachusetts and Southern New Hampshire. Also included are loans to educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally


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for terms between three and ten years. Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized nonresidential-type owner-occupied properties. This complements our C&l emphasis placed on the operating business entities and will continue. The regional economic environment affects the risk of both nonresidential and residential mortgages.
 
Residential real estate (1-4 family) includes two categories of loans. Included in residential real estate are approximately $11,109,000 of C&l type loans secured by 1-4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&l loans, notwithstanding the collateral position.
 
The other category of residential real estate loans is mostly 1-4 family residential properties located in the Bank’s market area. General underwriting criteria are largely the same as those used by Fannie Mae. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a “First Time Homebuyer” product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category.
 
Home equity loans are extended as both first and second mortgages on owner-occupied residential properties in the Bank’s market area. Loans are underwritten to a maximum loan to property value of 75%.
 
Bank officers evaluate the feasibility of construction projects, based on independent appraisals of the project, architects’ or engineers’ evaluations of the cost of construction and other relevant data. As of December 31, 2010, the Company was obligated to advance a total of $22,337,000 to complete projects under construction.
 
The composition of nonperforming assets is as follows:
 
                                         
December 31,
  2010     2009     2008     2007     2006  
    (Dollars in thousands)  
 
Total nonperforming loans
  $ 8,068     $ 12,311     $ 3,661     $ 1,312     $ 135  
Other real estate owned
                      452        
                                         
Total nonperforming assets
  $ 8,068     $ 12,311     $ 3,661     $ 1,764     $ 135  
                                         
Accruing troubled debt restructured loans
  $ 1,248     $ 521     $     $     $  
Loans past due 90 and still accruing
    50             89       122       789  
Nonperforming loans as a percent of gross loans
    0.89 %     1.40 %     0.44 %     0.18 %     0.02 %
                                         
Nonperforming assets as a percent of total assets
    0.33 %     0.55 %     0.20 %     0.10 %     0.01 %
                                         
 
The composition of impaired loans at December 31, is as follows:
 
                                         
    2010     2009     2008     2007     2006  
 
Residential real estate, multi-family
  $     $     $ 194     $     $  
Commercial real estate
    2,492       4,260       1,175              
Construction and land development
    4,000       4,900                    
Commercial and industrial
    1,471       1,356       1,329       196       16  
                                         
Total impaired loans
  $ 7,963     $ 10,516     $ 2,698     $ 196     $ 16  
                                         
 
At December 31, 2010, 2009, 2008 and 2007, impaired loans had specific reserves of $317,000, $745,000, $600,000 and $75,000, respectively. There were no impaired loans with specific reserves at December 31, 2006.
 
The Company was servicing mortgage loans sold to others without recourse of approximately $983,000, $1,127,000, $768,000, $559,000 and $798,000 at December 31, 2010, 2009, 2008, 2007 and 2006, respectively. Additionally, the Company services mortgage loans sold to others with limited recourse. The outstanding balance of these loans with limited recourse was approximately $36,000, $47,000, $56,000, $65,000 and $72,000 at December 31, 2010, 2009, 2008, 2007 and 2006, respectively.


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Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. 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 and do not involve more than normal risk of collection or present other unfavorable features.
 
Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company’s commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank.
 
Nonaccrual loans decreased during 2010 primarily as a result of resolution of a $2,479,000 commercial real estate loan as well as $900,000 in charge-offs from two construction loans during 2010. Nonaccrual loans increased from 2008 to 2009 primarily as a result of three loan relationships, one primarily commercial real estate and two construction totaling $7,379,000. Nonaccrual loans increased from 2007 to 2008 primarily as a result of eight consumer mortgages totaling $1,649,000. Nonaccrual loans increased from 2006 to 2007 primarily as a result of three consumer mortgages totaling $938,000. The relatively low level of nonperforming assets of $135,000 in 2006 and $949,000 in 2005 resulted from fewer additions to nonperforming assets during the year combined with an improvement in the resolution of nonperforming assets, including payments on nonperforming loans.
 
The Company continues to monitor closely $32,905,000 and $35,229,000 at December 31, 2010 and 2009, respectively, of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31,2010, although such values may fluctuate with changes in the economy and the real estate market.
 
Allowance for Loan Losses
 
The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, the financial condition of borrowers, the value of collateral securing


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loans and other relevant factors. The following table summarizes the changes in the Company’s allowance for loan losses for the years indicated.
 
                                         
Year Ended December 31,
  2010     2009     2008     2007     2006  
    (Dollars in thousands)  
 
Year-end loans outstanding (net of unearned discount and deferred loan fees)
  $ 906,164     $ 877,125     $ 836,065     $ 726,251     $ 736,773  
                                         
Average loans outstanding (net of unearned discount and deferred loan fees)
  $ 877,858     $ 853,422     $ 775,337     $ 725,903     $ 723,825  
                                         
Balance of allowance for loan losses at the beginning of year
  $ 12,373     $ 11,119     $ 9,633     $ 9,713     $ 9,340  
                                         
Loans charged-off:
                                       
Commercial
    1,559       1,498       2,869       1,828       386  
Construction
    900       3,639       15              
Commercial real estate
    922                          
Residential real estate
    515       490                    
Consumer
    547       443       489       311       322  
                                         
Total loans charged-off
    4,443       6,070       3,373       2,139       708  
                                         
Recovery of loans previously charged-off:
                                       
Commercial
    172       352       159       268       96  
Construction
          25                    
Real estate
    8       4       5       149       49  
Consumer
    368       318       270       142       111  
                                         
Total recoveries of loans previously charged-off:
    548       699       434       559       256  
                                         
Net loan charge-offs
    3,895       5,371       2,939       1,580       452  
Provision charged to operating expense
    5,575       6,625       4,425       1,500       825  
                                         
Balance at end of year
  $ 14,053     $ 12,373     $ 11,119     $ 9,633     $ 9,713  
                                         
Ratio of net charge-offs during the year to average loans outstanding
    0.44 %     0.63 %     0.38 %     0.22 %     0.06 %
                                         
Ratio of allowance for loan losses to loans outstanding
    1.55 %     1.41 %     1.33 %     1.33 %     1.32 %
                                         
 
These provisions are the result of management’s evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The pace of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge-offs increased during 2006 through 2009 due to an increase in commercial loan charge-offs and construction loan charge-offs for 2009 as a result of the weakening of the overall economy and real estate market. Charge-offs declined in 2010 as a result of the overall decrease in the level of nonaccrual loans.
 
In evaluating the allowance for loan losses the Company considered the following categories to be higher risk:
 
Construction loans — The outstanding loan balance of construction loans at December 31, 2010 is $53,583,000. A major factor in nonaccrual loans are two large construction loans. Based on this fact, and the general local construction conditions facing construction, the management closely monitors all construction loans and considers this type of loan to be higher risk.


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Higher balance loans — Loans greater than $1.0 million are considered “high balance loans.” The balance of these loans is $434,829,000 at December 31, 2010. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high balance loans. Included in high balance loans are loans greater than $10.0 million. The balance of these loans is $124,685,000 at December 31, 2010. Additional allowance allocations are made based upon the level of this type of high balance loans that is separate and greater than the $1.0 million allocation.
 
Small business loans — The outstanding loan balances of small business loans is $47,815,000 at December 31, 2010. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion.
 
The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At December 31 of each year listed below, the allowance was comprised of the following:
 
                                                                                 
    2010     2009     2008     2007     2006  
          Percent
          Percent
          Percent
          Percent
          Percent
 
          of Loans
          of Loans
          of Loans
          of Loans
          of Loans
 
          in Each
          in Each
          in Each
          in Each
          in Each
 
          Category
          Category
          Category
          Category
          Category
 
          to Total
          to Total
          to Total
          to Total
          to Total
 
    Amount     Loans     Amount     Loans     Amount     Loans     Amount     Loans     Amount     Loans  
    (Dollars in thousands)  
 
Construction and land development
  $ 1,752       5.9 %   $ 362       6.9 %   $ 677       7.1 %   $ 583       8.6 %   $ 849       6.7 %
Commercial and industrial
    3,163       10.0       4,972       16.1       5,125       16.9       4,645       16.2       1,916       15.9  
Commercial real estate
    5,671       47.8       2,983       41.2       2,620       39.8       2,548       41.3       4,502       44.4  
Residential real estate
    1,718       22.9       1,304       21.4       778       23.3       637       23.2       512       22.8  
Consumer and other
    298       0.8       1,753       0.9       342       1.1       392       1.3       135       1.2  
Home equity
    725       12.6       761       13.5       1,527       11.8       686       9.4       219       9.0  
Unallocated
    726               238               50               142               1,580          
                                                                                 
Total
  $ 14,053       100.0 %   $ 12,373       100.0 %   $ 11,119       100.0 %   $ 9,633       100.0 %   $ 9,713       100.0 %
                                                                                 
 
The shift in the allocations of the allowance for loan losses in 2007 is the result of the implementation of guidance issued by the FDIC. The current allocation is based on historical charge-off rates with additional allocations based on risk factors for each category and general economic factors. Prior to 2007, the allowance related to general economic factors was included solely in the unallocated category. Further information regarding the allocation of the allowance is contained within footnote 6 of the Company’s financial statements.
 
Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
 
Deposits
 
The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. Additionally, the Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customer’s checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a computerized report balancing the customer’s checking account.


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Interest rates on deposits are set bi-monthly by the Bank’s rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee.
 
The following table sets forth the average balances of the Bank’s deposits for the periods indicated.
 
                                                 
    2010     2009     2008  
    Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
 
Demand Deposits
  $ 298,825       15.8 %   $ 277,300       17.8 %   $ 267,966       22.0 %
Savings and Interest Checking
    696,232       36.7 %     528,973       34.0 %     369,687       30.3 %
Money Market
    543,432       28.7 %     432,159       27.8 %     308,432       25.3 %
Time Certificates of Deposit
    356,457       18.8 %     318,413       20.4 %     273,925       22.4 %
                                                 
Total
  $ 1,894,946       100.0 %   $ 1,556,845       100.0 %   $ 1,220,010       100.0 %
                                                 
 
Time Deposits of $100,000 or more as of December 31 are as follows:
 
         
    2010  
    (Dollars in thousands)  
 
Three months or less
  $ 16,215  
Three months through six months
    43,910  
Six months through twelve months
    99,533  
Over twelve months
    86,816  
         
    $ 246,474  
         
 
Borrowings
 
The Bank’s borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLBB”) borrowings collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowings from the FHLBB totaled $221,000,000, a decrease of $11,500,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2010 was approximately $73,241,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12, “Other Borrowed Funds and Subordinated Debentures,” for a schedule, their interest rates and other information.
 
Subordinated Debentures
 
In May 1998, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $29,639,000 of subordinated debt securities due 2029 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust.
 
Century Bancorp Capital Trust then issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30%. The Company redeemed through its subsidiary, Century Bancorp Capital Trust, its 8.30% Trust Preferred Securities, January 10,2005.
 
In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II.
 
Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities pay dividends at an annualized rate of 6.65% for the first ten years and then convert to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The Company is using the proceeds primarily for general business purposes.


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Securities Sold Under Agreements to Repurchase
 
The Bank’s remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled $108,550,000, a decrease of $10,195,000 from the prior year. See Note 11, “Securities Sold Under Agreements to Repurchase,” for a schedule, including their interest rates and other information.
 
RESULTS OF OPERATIONS
 
Net Interest Income
 
The Company’s operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 11.1% in 2010 to $56,893,000, compared with $51,215,000 in 2009. The increase in net interest income for 2010 was mainly due to an 18.8% increase in the average balances of earning assets, combined with a similar increase in deposits. The increased volume was partially offset by a decrease of seventeen basis points in the net interest margin. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis decreased to 2.52% in 2010 from 2.69% in 2009 and decreased from 3.00% in 2008.
 
Additional information about the increased net interest margin is contained in the “Overview” section of this report. Also, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories.


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The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the years indicated.
 
                                                                         
    2010     2009     2008  
          Interest
    Rate
          Interest
    Rate
          Interest
    Rate
 
    Average
    Income/
    Earned/
    Average
    Income/
    Earned/
    Average
    Income/
    Earned/
 
Year Ended December 31,   Balance     Expense(1)     Paid(1)     Balance     Expense(1)     Paid(1)     Balance     Expense(1)     Paid(1)  
    (Dollars in thousands)  
 
ASSETS
Interest-earning assets:
                                                                       
Loans(2)
  $ 877,858     $ 53,356       6.08 %   $ 853,422     $ 51,174       6.00 %   $ 775,337     $ 50,199       6.47 %
Securities available-for-sale:(3)
                                                                       
Taxable
    756,544       18,958       2.51       562,899       20,439       3.63       411,938       18,183       4.41  
Tax-exempt
    32,407       596       1.84       48,347       1,061       2.19       61,406       3,204       5.24  
Securities held-to-maturity:
                                                                       
Taxable
    222,154       7,158       3.22       193,520       8,093       4.18       193,584       8,265       4.27  
Federal funds sold
                                        99,784       2,442       2.45  
Interest-bearing deposits in other banks
    371,665       1,642       0.44       245,002       2,171       0.87       14,478       371       2.56  
                                                                         
Total interest-earning assets
    2,260,628       81,710       3.61 %     1,903,190       82,938       4.36 %     1,556,527       82,664       5.31 %
Noninterest-earning assets
    155,956                       143,984                       136,830                  
Allowance for loan losses
    (13,686 )                     (13,331 )                     (9,997 )                
                                                                         
Total assets
  $ 2,402,898                     $ 2,033,843                     $ 1,683,360                  
                                                                         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
                                                                       
NOW accounts
  $ 423,693     $ 2,504       0.59 %   $ 279,213     $ 2,396       0.86 %   $ 203,678     $ 3,076       1.51 %
Savings accounts
    272,539       1,568       0.58       249,761       2,862       1.15       166,009       2,929       1.76  
Money market accounts
    543,432       3,942       0.73       432,159       6,100       1.41       308,432       7,260       2.35  
Time deposits
    356,457       7,914       2.22       318,412       9,438       2.96       273,925       9,744       3.56  
                                                                         
Total interest-bearing deposits
    1,596,121       15,928       1.00       1,279,545       20,796       1.63       952,044       23,009       2.42  
Securities sold under agreements to repurchase
    133,080       573       0.43       98,635       576       0.58       94,526       1,393       1.47  
Other borrowed funds and subordinated debentures
    201,273       8,316       4.13       219,713       10,351       4.71       225,743       11,512       5.10  
                                                                         
Total interest-bearing liabilities
    1,930,474       24,817       1.29 %     1,597,893       31,723       1.99 %     1,272,313       35,914       2.82 %
Noninterest-bearing liabilities
                                                                       
Demand deposits
    298,825                       277,300                       267,966                  
Other liabilities
    31,074                       31,289                       21,363                  
                                                                         
Total liabilities
    2,260,373                       1,906,482                       1,561,642                  
                                                                         
Stockholders’ equity
    142,525                       127,361                       121,718                  
Total liabilities and stockholders’ equity
  $ 2,402,898                     $ 2,033,843                     $ 1,683,360                  
                                                                         
Net interest income on a fully taxable equivalent basis
          $ 56,893                     $ 51,215                     $ 46,750          
                                                                         
Less taxable equivalent adjustment
            (5,127 )                     (3,338 )                     (1,971 )        
                                                                         
Net interest income
          $ 51,766                     $ 47,877                     $ 44,779          
                                                                         
Net interest spread
                    2.32 %                     2.37 %                     2.49 %
                                                                         
Net interest margin
                    2.52 %                     2.69 %                     3.00 %
                                                                         
 
 
(1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%.
 
(2) Nonaccrual loans are included in average amounts outstanding.
 
(3) At amortized cost.


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The following table summarizes the year-to-year changes in the Company’s net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest-bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior year’s volume. Changes due to volume are computed by multiplying the change in volume by the prior year’s rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change.
 
                                                 
    2010 Compared with 2009
    2009 Compared with 2008
 
    Increase/(Decrease)
    Increase/(Decrease)
 
    Due to Change in     Due to Change in  
Year Ended December 31,   Volume     Rate     Total     Volume     Rate     Total  
    (Dollars in thousands)  
 
Interest income:
                                               
Loans
  $ 1,465     $ 717     $ 2,182     $ 5,110     $ (4,135 )   $ 975  
Securities available-for-sale:
                                               
Taxable
    5,885       (7,366 )     (1,481 )     5,867       (3,611 )     2,256  
Tax-exempt
    (312 )     (153 )     (465 )     (574 )     (1,569 )     (2,143 )
Securities held-to-maturity:
                                               
Taxable
    1,090       (2,025 )     (935 )     (3 )     (169 )     (172 )
Federal funds sold
                      (2,442 )           (2,442 )
Interest-bearing deposits in other banks
    822       (1,351 )     (529 )     2,198       (398 )     1,800  
                                                 
Total interest income
    8,950       (10,178 )     (1,228 )     10,156       (9,882 )     274  
                                                 
Interest expense:
                                               
Deposits:
                                               
NOW accounts
    999       (891 )     108       913       (1,593 )     (680 )
Savings accounts
    241       (1,535 )     (1,294 )     1,172       (1,239 )     (67 )
Money market accounts
    1,306       (3,464 )     (2,158 )     2,329       (3,489 )     (1,160 )
Time deposits
    1,036       (2,560 )     (1,524 )     1,452       (1,758 )     (306 )
                                                 
Total interest-bearing deposits
    3,582       (8,450 )     (4,868 )     5,866       (8,079 )     (2,213 )
Securities sold under agreements to repurchase
    171       (174 )     (3 )     58       (875 )     (817 )
Other borrowed funds and subordinated debentures
    (825 )     (1,210 )     (2,035 )     (301 )     (860 )     (1,161 )
                                                 
Total interest expense
    2,928       (9,834 )     (6,906 )     5,623       (9,814 )     (4,191 )
                                                 
Change in net interest income
  $ 6,022     $ (344 )   $ 5,678     $ 4,533     $ (68 )   $ 4,465  
                                                 
 
Average earning assets were $2,260,628,000 in 2010, an increase of $357,438,000 or 18.8% from the average in 2009, which was 22.3% higher than the average in 2008. Total average securities, including securities available-for-sale and securities held-to-maturity, were $1,011,105,000, an increase of 25.6% from the average in 2009. The increase in securities volume was mainly attributable to an increase in taxable securities. An increase in securities balances offset by lower securities returns resulted in lower securities income, which decreased 9.7% to $26,712,000 on a fully tax equivalent basis. Total average loans increased 2.9% to $877,858,000 after increasing $78,085,000 in 2009. The primary reason for the increase in loans was due in large part to an increase in tax-exempt commercial real estate lending as well as residential first and second mortgage lending. The increase in loan volume as well as an increase in loan rates resulted in higher loan income, which increased by 4.3% or $2,182,000 to $53,356,000. Total loan income was $50,199,000 in 2008.
 
The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 21.7% or $338,101,000 in 2010 after increasing by 27.6% or $336,835,000 in 2009. Deposits increased in 2010, primarily as a result of increases in demand deposits, savings, money market, NOW and time deposit accounts. Deposits


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increased in 2009 primarily as a result of increases in savings, money market, NOW and time deposit accounts. Borrowed funds and subordinated debentures increased by 5.0% in 2010 following a decrease of 0.6% in 2009. The majority of the Company’s borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $18,568,000, and average retail repurchase agreements increased by $34,445,000 in 2010. Interest expense totaled $24,817,000 in 2010, a decrease of $6,906,000 or 21.8% from 2009 when interest expense decreased 11.7% from 2008. The decrease in interest expense is primarily due to market decreases in deposit rates and continued deposit pricing discipline.
 
Provision for Loan Losses
 
The provision for loan losses was $5,575,000 in 2010, compared with $6,625,000 in 2009 and $4,425,000 in 2008. These provisions are the result of management’s evaluation of the amounts and quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses decreased during 2010, primarily as a result of decreases in loans on nonaccrual as well as management’s quantitative analysis of the loan portfolio. The provision increased during 2009 primarily as a result of growth in the loan portfolio, nonperforming loans and an increase in net charge-offs during the year as well as management’s quantitative analysis of the loan portfolio.
 
The allowance for loan losses was $14,053,000 at December 31, 2010, compared with $12,373,000 at December 31, 2009. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.55% in 2010 and 1.41% in 2009. This ratio increased as a result of management’s evaluation of the loan portfolio.
 
Nonperforming loans, which include all nonaccruing loans, totaled $8,068,000 on December 31, 2010, compared with $12,311,000 on December 31, 2009. Nonperforming loans decreased primarily as a result of resolution of a $2,479,000 commercial real estate loan as well as $900,000 in charge-offs from two construction loans during 2010.
 
Other Operating Income
 
During 2010, the Company continued to experience positive results in its fee-based services, including fees derived from traditional banking activities such as deposit-related services, its automated lockbox collection system and full-service securities brokerage supported by LPL Financial, a full-service securities brokerage business.
 
Under the lockbox program, which is not tied to extensions of credit by the Company, the Company’s customers arrange for payments of their accounts receivable to be made directly to the Company. The Company records the amounts paid to its customers, deposits the funds to the customer’s account and provides automated records of the transactions to customers. Typical customers for the lockbox service are municipalities that use it to automate tax collections, cable TV companies and other commercial enterprises.
 
Through a program called Investment Services at Century Bank, the Bank provides full-service securities brokerage services supported by LPL Financial, a full-service securities brokerage business. Registered representatives employed by Century Bank offer limited investment advice, execute transactions and assist customers in financial and retirement planning. LPL Financial provides research to the Bank’s representatives. The Bank receives a share in the commission revenues.
 
Total other operating income in 2010 was $15,999,000, a decrease of $471,000 or 2.9% compared to 2009. This decrease followed an increase of $2,495,000 or 17.9% in 2009, compared to 2008. Included in other operating income are net gains on sales of securities of $1,851,000, $2,734,000 and $249,000 in 2010, 2009 and 2008, respectively. Service charge income, which continues to be a major area of other operating income, totaling $7,876,000 in 2010, decreased $127,000 compared to 2009. This followed a decrease of $187,000 compared to 2008. Service charges on deposit accounts decreased during 2010 mainly because of decreases in fees collected. The decrease in fees collected was mainly attributable to a reduction in processing activity as well as a decrease in money service business activity. Service charges on deposit accounts decreased during 2009 mainly because of decreases in overdraft fees. The decrease in overdraft fees was mainly attributable to a decrease in overdraft lines. Lockbox revenues totaled $2,911,000, up $97,000 in 2010 following a decrease of $139,000 in 2009. Other income totaled $3,131,000, up $352,000 in 2010 following an increase of $300,000 in 2009. The increase in 2010 was


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mainly attributable to an increase of $378,000 in the growth of cash surrender values on life insurance policies, which was attributable to additional earnings as a result of certain policies reaching their twenty year anniversary during the first quarter of 2010. The increase in 2009 was mainly attributable to an increase of $263,000 in the growth of cash surrender values on life insurance policies, which was attributable to higher returns on life insurance policies.
 
Operating Expenses
 
Total operating expenses were $47,372,000 in 2010, compared to $46,379,000 in 2009 and $43,028,000 in 2008.
 
Salaries and employee benefits expenses increased by $1,479,000 or 5.5% in 2010, after increasing by 5.1% in 2009. The increase in 2010 was mainly attributable to $916,000 due to Jonathan G. Sloane, former Co-CEO, in accordance with his separation agreement as previously announced as well as an increase in staff levels and merit increases in salaries and increases in health insurance costs. The increase in 2009 was mainly attributable to increases in pension expense and health insurance costs.
 
Occupancy expense decreased by $67,000 or 1.6% in 2010, following a decrease of $142,000 or 3.3% in 2009. The decrease in 2010 was primarily attributable to a decrease in utility and building maintenance costs offset somewhat by an increase in rent expense and real estate taxes. The decrease in 2009 was primarily attributable to a decrease in depreciation offset, somewhat, by an increase in rent expense associated with full year costs of branch expansion as well as general rent escalations.
 
Equipment expense decreased by $240,000 or 10.1% in 2010, following a decrease of $502,000 or 17.5% in 2009. The decrease in 2010 and 2009 was primarily attributable to a decrease in depreciation expense. Other operating expenses increased by $192,000 in 2010, which followed a $32,000 decrease in 2009. The increase in 2010 was primarily attributable to an increase in marketing expense and software maintenance offset somewhat by decreases in legal expense. The decrease in 2009 was primarily attributable to a decrease in personnel recruitment expense and other real estate owned expense, offset, somewhat by an increase in legal expense.
 
FDIC assessments decreased by $371,000 or 11.1% in 2010, following an increase of $2,723,000 or 444.2% in 2009. FDIC assessments decreased in 2010 mainly as a result of a special assessment $1,000,000 during 2009, offset somewhat by an increase in the deposit base. FDIC assessments increased in 2009 by $2,723,000, mainly because of an increase in the assessment rate, a special assessment and an increase in the deposit base. The FDIC assessment rate was raised beginning on January 1, 2009 and contributed approximately $1,000,000 to the increase in assessments. On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment was five basis points of each FDIC-insured depository institution’s assets minus Tier 1 capital, as of June 30, 2009. The Company recorded a pre-tax charge of approximately $1,000,000 in the second quarter of 2009 in connection with the special assessment. The remainder of the increase was associated with an increase in the deposit base and from participation in the TAGP. Participation in the TAGP is discussed in the “Recent Market Developments” section.
 
Provision for Income Taxes
 
Income tax expense was $1,244,000 in 2010, $1,183,000 in 2009 and $2,255,000 in 2008. The effective tax rate was 8.4% in 2010, 10.4% in 2009 and 20.0% in 2008. The decreases in the effective tax rate for 2010 and 2009 were mainly attributable to an increase in tax-exempt interest income and tax credits as a percentage of taxable income. The federal tax rate was 34% in 2010, 2009 and 2008.
 
On July 3, 2008, the Commonwealth of Massachusetts enacted a law that included reducing the tax rates on net income applicable to financial institutions. The rate drops from 10.5% to 10% for tax years beginning on or after January 1, 2010 to 9.5% for tax years beginning on or after January 1, 2011 and to 9% for tax years beginning on or after January 1, 2012 and thereafter. The Company has analyzed the impact of this law and as a result of revaluing its net deferred tax assets; we calculated the impact to be additional tax expense of approximately $80,000 that was recognized during 2008.


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Market Risk and Asset Liability Management
 
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure.
 
The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company’s exposure to differential changes in interest rates between assets and liabilities is an interest rate risk management test.
 
This test measures the impact on net interest income of an immediate change in interest rates in 100-basis point increments as set forth in the following table:
 
             
Change in Interest Rates
  Percentage Change in
(in Basis Points)
  Net Interest Income(1)
 
  +400       (10.1 )%
  +300       (7.6 )%
  + 200       (5.6 )%
  + 100       (2.8 )%
  −100       2.9 %
  −200       4.9 %
 
 
(1) The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment.
 
The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk.
 
Liquidity and Capital Resources
 
Liquidity is provided by maintaining an adequate level of liquid assets that include cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $302,470,000 on December 31, 2010, compared with $417,160,000 on December 31, 2009. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity.
 
The source of funds for dividends paid by the Company is dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.
 
Capital Adequacy
 
Total stockholders’ equity was $145,025,000 at December 31, 2010, compared with $132,730,000 at December 31, 2009. The increase in 2010 was primarily the result of earnings and a decrease in accumulated other comprehensive loss, net of taxes, offset by dividends paid. The decrease in accumulated other comprehensive loss was mainly attributable to a decrease of $1,259,000 in the pension liability, net of taxes, offset by a decrease of $536,000 in the net unrealized gains on the Company’s available-for-sale portfolio, net of taxes
 
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The current guidelines require a Tier 1 capital-to-risk assets ratio of at least 4.00% and a total capital-to-risk assets ratio of at least 8.00%. The Company and the Bank exceeded these


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requirements with a Tier 1 capital-to-risk assets ratio of 14.86% and 12.43%, respectively, and total capital-to-risk assets ratio of 16.03% and 13.61%, respectively, at December 31, 2010. Additionally, federal banking regulators have issued leverage ratio guidelines, which supplement the risk-based capital guidelines. The minimum leverage ratio requirement applicable to the Company is 4.00%; and at December 31, 2010, the Company and the Bank exceeded this requirement with leverage ratios of 7.35% and 6.14%, respectively.
 
Contractual Obligations, Commitments, and Contingencies
 
The Company has entered into contractual obligations and commitments. The following tables summarize the Company’s contractual cash obligations and other commitments at December 31, 2010.
 
Contractual Obligations and Commitments by Maturity
 
 
                                         
    Payments Due — By Period  
          Less Than
    One to
    Three to
    After Five
 
Contractual Obligations
  Total     One Year     Three Years     Five Years     Years  
    (Dollars in thousands)  
 
FHLBB advances
  $ 221,000     $ 91,500     $ 50,500     $ 37,000     $ 42,000  
Subordinated debentures
    36,083                         36,083  
Retirement benefit obligations
    25,024       1,924       3,995       4,215       14,890  
Lease obligations
    8,552       1,856       2,530       1,765       2,401  
Other
                                       
Treasury, tax and loan
    975       975                    
Customer repurchase agreements
    108,550       108,550                    
                                         
Total contractual cash obligations
  $ 400,184     $ 204,805     $ 57,025     $ 42,980     $ 95,374  
                                         
 
                                         
    Amount of Commitment Expiring — By Period  
          Less Than
    One to
    Three to
    After Five
 
Other Commitments
  Total     One Year     Three Years     Five Years     Years  
 
Lines of credit
  $ 169,862     $ 86,403     $ 11,198     $ 14,050     $ 58,211  
Standby and commercial letters of credit
    4,935       4,539       396              
Other commitments
    40,309       15,468       4,216       1,863       18,762  
                                         
Total commitments
  $ 215,106     $ 106,410     $ 15,810     $ 15,913     $ 76,973  
                                         
 
Financial Instruments with Off-Balance-Sheet Risk
 
The Company is 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 primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notational amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.
 
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making


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commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments with off-balance-sheet risk at December 31 are as follows:
 
                 
Contract or Notational Amount
  2010     2009  
    (Dollars in thousands)  
 
Financial instruments whose contract amount represents credit risk:
               
Commitments to originate 1-4 family mortgages
  $ 14,635     $ 1,262  
Standby and commercial letters of credit
    4,935       8,904  
Unused lines of credit
    169,862       143,556  
Unadvanced portions of construction loans
    22,337       22,699  
Unadvanced portions of other loans
    3,337       4,407  
 
Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer provided 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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.
 
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit was $68,000 and $93,000 for 2010 and 2009, respectively.
 
Recent Accounting Developments
 
FASB ASC 860, Transfers and Servicing (formerly Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140”). In June 2009, the FASB issued FASB ASC 860. FASB ASC 860 was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically to address: (1) practices that have developed since the issuance of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on or after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. FASB ASC 860 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.
 
FASB ASC 810, Consolidation (formerly Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”). In June 2009, the FASB issued FASB ASC 810. FASB ASC 810 was issued to improve financial reporting by enterprises involved with variable interest entities, specifically to address: (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in FASB ASC 860 and (2) constituent concerns about the application of certain key provisions of FASB ASC 860, including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FASB ASC 810 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early


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application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.
 
In January 2010, the FASB issued an amendment to the Fair Value Measurements and Disclosures topic of the ASC. This amendment requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.
 
In July, 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This Statement will significantly increase disclosures that entities must make about the credit quality of financing receivables and the allowance for credit losses. The Statement will require reporting entities to make new disclosures about (a) the nature of credit risk inherent in the entity’s portfolio of financing receivables (loans), (b) how that risk is analyzed and assessed in determining the allowance for credit (loan) losses and (c) the reasons for changes in the allowance for credit losses.
 
The Statement will require disclosures related to the allowance for credit losses on a “portfolio segment” basis instead of on an aggregate basis. “Portfolio segment” is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. The Statement also establishes the concept of a “class of financing receivables”. A class is generally a disaggregation of a portfolio segment. The Statement requires numerous disclosures at the class level including (a) delinquency and nonaccrual information and related significant accounting policies, (b) impaired financing receivables and related significant accounting policies, (c) a description of credit quality indicators used to monitor credit risk and (d) modifications of financing receivables that meet the definition of a troubled debt restructuring. The Statement will expand disclosure requirements to include all financing receivables that are individually evaluated for impairment and determined to be impaired, and require the disclosures at the class level.
 
Entities will be required to disclose the activity within the allowance for credit losses, including the beginning and ending balance of the allowance for each portfolio segment, as well as current-period provisions for credit losses, direct write-downs charged against the allowance and recoveries of any amounts previously written off. Entities will also be required to disclose the effect on the provision for credit losses due to changes in accounting policies or methodologies from prior periods.
 
Public entities will need to provide disclosures related to period-end information (e.g., credit quality information and the ending financing receivables balance segregated by impairment method) in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period (e.g., modifications and the rollforward of the allowance for credit losses by portfolio segment) are required in interim and annual periods beginning on or after December 15, 2010. As this Statement amends only the disclosure requirements for loans and the allowance, adoption will have no impact on the Company’s financial statements. The Company has provided the disclosures required as of December 31, 2010 in Note 6.


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CENTURY BANCORP, INC.
 
Consolidated Balance Sheets
 
                 
    December 31,  
    2010     2009  
    (Dollars in thousands except share data)  
 
ASSETS
Cash and due from banks (Note 2)
  $ 37,215     $ 42,627  
Federal funds sold and interest-bearing deposits in other banks
    151,337       356,015  
                 
Total cash and cash equivalents
    188,552       398,642  
Short-term investments
    113,918       18,518  
Securities available-for-sale, amortized cost $903,556 in 2010 and $641,010 in 2009 (Notes 3 and 9)
    909,391       647,796  
Securities held-to-maturity, fair value $233,524 in 2010 and $221,413 in 2009 (Notes 4 and 11)
    230,116       217,643  
Federal Home Loan Bank of Boston, stock at cost
    15,531       15,531  
Loans, net (Note 5)
    906,164       877,125  
Less: allowance for loan losses (Note 6)
    14,053       12,373  
                 
Net loans
    892,111       864,752  
Bank premises and equipment (Note 7)
    21,228       21,015  
Accrued interest receivable
    6,601       5,806  
Prepaid FDIC assessments
    6,129       8,757  
Other assets (Notes 8 and 14)
    58,107       55,575  
                 
Total assets
  $ 2,441,684     $ 2,254,035  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits
  $ 322,002     $ 279,874  
Savings and NOW deposits
    649,402       575,592  
Money market accounts
    513,359       553,883  
Time deposits (Note 10)
    417,260       292,638  
                 
Total deposits
    1,902,023       1,701,987  
Securities sold under agreements to repurchase (Note 11)
    108,550       118,745  
Other borrowed funds (Note 12)
    222,118       234,024  
Subordinated debentures (Note 12)
    36,083       36,083  
Other liabilities
    27,885       30,466  
                 
Total liabilities
    2,296,659       2,121,305  
Commitments and contingencies (Notes 7, 16 and 17)
               
Stockholders’ equity (Note 13):
               
Common stock, Class A,
               
$1.00 par value per share; authorized 10,000,000 shares; issued 3,528,867 shares in 2010 and 3,515,767 shares in 2009
    3,529       3,516  
Common stock, Class B,
               
$1.00 par value per share; authorized 5,000,000 shares; issued 2,011,380 shares in 2010 and 2,014,530 shares in 2009
    2,011       2,014  
Additional paid-in capital
    11,537       11,376  
Retained earnings
    131,526       120,125  
                 
      148,603       137,031  
Unrealized gains on securities available-for-sale, net of taxes
    3,593       4,129  
Pension liability, net of taxes
    (7,171 )     (8,430 )
                 
Total accumulated other comprehensive loss, net of taxes (Notes 3 and 13)
    (3,578 )     (4,301 )
                 
Total stockholders’ equity
    145,025       132,730  
                 
Total liabilities and stockholders’ equity
  $ 2,441,684     $ 2,254,035  
                 
 
See accompanying “Notes to Consolidated Financial Statements.”


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CENTURY BANCORP, INC.
 
Consolidated Statement of Income
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (Dollars in thousands except share data)  
 
INTEREST INCOME
                       
Loans, taxable
  $ 40,163     $ 43,119     $ 47,521  
Loans, non-taxable
    8,271       5,080       1,782  
Securities available-for-sale, taxable
    18,958       20,439       17,680  
Securities available-for-sale, non-taxable
    391       698       2,101  
Federal Home Loan Bank of Boston dividends
                531  
Securities held-to-maturity
    7,158       8,093       8,265  
Federal funds sold, interest-bearing deposits in other banks and short-term investments
    1,642       2,171       2,813  
                         
Total interest income
    76,583       79,600       80,693  
INTEREST EXPENSE
                       
Savings and NOW deposits
    4,072       5,258       6,005  
Money market accounts
    3,942       6,100       7,260  
Time deposits (Note 8)
    7,914       9,438       9,744  
Securities sold under agreements to repurchase
    573       576       1,393  
Other borrowed funds and subordinated debentures
    8,316       10,351       11,512  
                         
Total interest expense
    24,817       31,723       35,914  
                         
Net interest income
    51,766       47,877       44,779  
Provision for loan losses (Note 6)
    5,575       6,625       4,425  
                         
Net interest income after provision for loan losses
    46,191       41,252       40,354  
OTHER OPERATING INCOME
                       
Service charges on deposit accounts
    7,876       8,003       8,190  
Lockbox fees
    2,911       2,814       2,953  
Brokerage commissions
    230       140       180  
Net gains on sales of securities
    1,851       2,734       249  
Writedown of certain investments to fair value (Note 3)
                (76 )
Other income
    3,131       2,779       2,479  
                         
Total other operating income
    15,999       16,470       13,975  
OPERATING EXPENSES
                       
Salaries and employee benefits (Note 15)
    28,398       26,919       25,615  
Occupancy
    4,037       4,104       4,246  
Equipment
    2,132       2,372       2,874  
FDIC assessments
    2,965       3,336       613  
Other (Note 18)
    9,840       9,648       9,680  
                         
Total operating expenses
    47,372       46,379       43,028  
                         
Income before income taxes
    14,818       11,343       11,301  
Provision for income taxes (Note 14)
    1,244       1,183       2,255  
                         
Net income
  $ 13,574     $ 10,160     $ 9,046  
                         
SHARE DATA (Note 13)
                       
Weighted average number of shares outstanding, basic
    5,533,506       5,532,249       5,541,983  
Weighted average number of shares outstanding, diluted
    5,535,742       5,534,340       5,543,702  
Net income per share, basic
  $ 2.45     $ 1.84     $ 1.63  
Net income per share, diluted
    2.45       1.84       1.63  
 
See accompanying “Notes to Consolidated Financial Statements.”


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CENTURY BANCORP, INC.
 
Consolidated Statements of Changes in Stockholders’ Equity
 
                                                 
                            Accumulated
       
    Class A
    Class B
    Additional
          Other
    Total
 
    Common
    Common
    Paid-In
    Retained
    Comprehensive
    Stockholders’
 
    Stock     Stock     Capital     Earnings     Loss     Equity  
    (Dollars in thousands except share data)  
 
BALANCE, DECEMBER 31, 2007
  $ 3,517     $ 2,027     $ 11,553     $ 105,550     $ (3,841 )   $ 118,806  
Net income
                      9,046             9,046  
Other comprehensive income, net of tax:
                                               
Unrealized holding gains arising during period, net of $32 in taxes and $249 in realized net gains
                            (81 )     (81 )
Pension liability adjustment, net of $3,054 in taxes
                            (4,754 )     (4,754 )
                                                 
Comprehensive income
                                            4,211  
Effects of changing pension plans measurement date pursuant to SFAS 158, net of $177 in taxes
                      (287 )     31       (256 )
Stock repurchased, 5,397 shares
    (6 )           (78 )                 (84 )
Cash dividends, Class A Common Stock, $0.48 per share
                      (1,687 )           (1,687 )
Cash dividends, Class B Common Stock, $0.24 per share
                      (487 )           (487 )
                                                 
BALANCE, DECEMBER 31, 2008
  $ 3,511     $ 2,027     $ 11,475     $ 112,135     $ (8,645 )   $ 120,503  
Net income
                      10,160             10,160  
Other comprehensive income, net of tax:
                                               
Unrealized holding gains arising during period, net of $2,826 in taxes and $2,734 in realized net gains
                            4,421       4,421  
Pension liability adjustment, net of $50 in taxes
                            (77 )     (77 )
                                                 
Comprehensive income
                                            14,504  
Conversion of Class B Common Stock to Class A Common Stock, 12,570 shares
    13       (13 )                       0  
Stock repurchased, 8,110 shares
    (8 )           (99 )                 (107 )
Cash dividends, Class A Common Stock, $0.48 per share
                      (1,684 )           (1,684 )
Cash dividends, Class B Common Stock, $0.24 per share
                      (486 )           (486 )
                                                 
BALANCE, DECEMBER 31, 2009
  $ 3,516     $ 2,014     $ 11,376     $ 120,125     $ (4,301 )   $ 132,730  
Net income
                      13,574             13,574  
Other comprehensive income, net of tax:
                                               
Unrealized holding losses arising during period, net of $415 in taxes and $1,851 in realized net gains
                            (536 )     (536 )
Pension liability adjustment, net of $836 in taxes
                            1,259       1,259  
                                                 
Comprehensive income
                                            14,297  
Conversion of Class B Common Stock to Class A Common Stock, 3,150 shares
    3       (3 )                        
Stock options exercised, 9,950 shares
    10             140                   150  
Tax benefit of stock option exercises
                21                   21  
Cash dividends, Class A Common Stock, $0.48 per share
                      (1,690 )           (1,690 )
Cash dividends, Class B Common Stock, $0.24 per share
                      (483 )           (483 )
                                                 
BALANCE, DECEMBER 31, 2010
  $ 3,529     $ 2,011     $ 11,537     $ 131,526     $ (3,578 )   $ 145,025  
                                                 
 
See accompanying “Notes to Consolidated Financial Statements.”


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CENTURY BANCORP, INC.
 
Consolidated Statements of Cash Flows
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (Dollars in thousands)  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income
  $ 13,574     $ 10,160     $ 9,046  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Mortgage loans originated for sales
          (374 )     (512 )
Proceeds from mortgage loans sold
          379       515  
Gain on sale of loans
          (5 )     (3 )
Gain on sale of fixed assets
    (7 )     (70 )      
Net gains on sales of securities
    (1,851 )     (2,734 )     (249 )
Writedown of certain investments to fair value
                76  
Provision for loan losses
    5,575       6,625       4,425  
Deferred tax benefit
    (1,546 )     (2,294 )     (1,094 )
Net depreciation and amortization
    4,955       6,035       3,229  
(Increase) decrease in accrued interest receivable
    (795 )     917       (133 )
Decrease (increase) in prepaid FDIC assessments
    2,629       (8,757 )      
Loss on sales of other real estate owned
    (127 )           33  
Writedown of other real estate owned
                77  
Increase in other assets
    (1,417 )     (3,822 )     (1,415 )
(Increase) decrease in other liabilities
    (849 )     2,003       737  
                         
Net cash provided by operating activities
    20,141       8,063       14,732  
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Proceeds from maturities of short-term investments
    131,762       221,628       3,717  
Purchase of short-term investments
    (227,162 )     (196,332 )     (47,531 )
Proceeds from calls/maturities of securities available-for-sale
    610,975       327,615       282,705  
Proceeds from sales of securities available-for-sale
    41,251       94,142       238,894  
Purchase of securities available-for-sale
    (914,944 )     (566,680 )     (593,958 )
Proceeds from calls/maturities of securities held-to-maturity
    154,445       94,069       56,123  
Purchase of securities held-to-maturity
    (167,442 )     (128,373 )     (91,431 )
Loan acquired, net of discount
                (4,099 )
Net increase in loans
    (33,315 )     (46,385 )     (108,950 )
Proceeds from sales of other real estate owned
    555             673  
Proceeds from sales of fixed assets
    13       100        
Capital expenditures
    (2,281 )     (1,257 )     (3,009 )
                         
Net cash used in investing activities
    (406,143 )     (201,473 )     (266,866 )
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Net increase (decrease) in time deposit accounts
    124,622       (34,234 )     31,294  
Net increase in demand, savings, money market and NOW deposits
    75,414       470,694       104,172  
Net payments for the repurchase of stock
          (107 )     (84 )
Net proceeds from the exercise of stock options
    150              
Cash dividends
    (2,173 )     (2,170 )     (2,174 )
Net (decrease) increase in securities sold under agreements to repurchase
    (10,195 )     6,235       26,520  
Net decrease in other borrowed funds
    (11,906 )     (4,534 )     (51,327 )
                         
Net cash provided by financing activities
    175,912       435,884       108,401  
                         
Net decrease (increase) in cash and cash equivalents
    (210,090 )     242,474       (143,733 )
Cash and cash equivalents at beginning of year
    398,642       156,168       299,901  
                         
Cash and cash equivalents at end of year
  $ 188,552     $ 398,642     $ 156,168  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                       
Cash paid during the year for:
                       
Interest
  $ 24,930     $ 32,202     $ 35,997  
Income taxes
    3,580       2,858       2,750  
Change in unrealized gains on securities available-for-sale, net of taxes
  $ (536 )   $ 4,421     $ (81 )
Pension liability adjustment, net of taxes
    1,259       (77 )     (4,754 )
Effects of changing pension plans’ measurement date pursuant to FASB ASC 715-30 (formerly SFAS 158), net of taxes
                (256 )
Transfer of loans to other real estate owned
    428             330  
 
See accompanying “Notes to Consolidated Financial Statements.”


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements
 
1.   Summary of Significant Accounting Policies
 
BASIS OF FINANCIAL STATEMENT PRESENTATION
 
The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly owned subsidiaries, Century Subsidiary Investments, Inc. (“CSII”), Century Subsidiary Investments, Inc. II (“CSII II”), Century Subsidiary Investments, Inc. III (“CSII III”) and Century Financial Services Inc. (“CFSI”). CSII, CSII II, and CSII III are engaged in buying, selling and holding investment securities. CFSI has the power to engage in financial agency, securities brokerage, and investment and financial advisory services and related securities credit. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company.
 
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”) and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company’s business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment.
 
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.
 
Material estimates that are susceptible to change in the near term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on independent appraisals and review of other factors, including, historical charge-off rates with additional allocations based on risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.
 
Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.
 
FAIR VALUE MEASUREMENTS
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 820, Fair Value Measurements and Disclosures (formerly SFAS 157, “Fair Value Measurements”), which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. FASB ASC 820 is effective for fiscal years beginning after November 15, 2007. The effective date of FASB ASC 820 was delayed for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. FASB ASC 820 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the FASB ASC 820 hierarchy are as follows:
 
Level I — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.
 
Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments that are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives.
 
Level III — Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, and noninvestment grade residual interests in securitizations as well as certain highly structured OTC derivative contracts.
 
FASB ASC 820-10, Fair Value Measurements and Disclosures — Overall (formerly FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). On April 9, 2009, FASB issued FASB ASC 820, which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements. The Company adopted FASB ASC 820 as of April 1, 2009. The adoption did not have a material effect on the Company’s consolidated financial statements.
 
CASH AND CASH EQUIVALENTS
 
For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, federal funds sold and certificates of deposit.
 
SHORT-TERM INVESTMENTS
 
As of December 31, 2009 and 2010, short-term investments include highly liquid certificates of deposit with original maturities of more than 90 days but less than one year.
 
INVESTMENT SECURITIES
 
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated related income taxes. The Company has no securities held for trading.


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value. The total amount of the impairment charge is recognized in earnings, with an offset for the noncredit component which is recognized as other comprehensive income. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis.
 
The Company owns Federal Home Loan Bank of Boston (“FHLBB”) stock which is considered a restricted equity security. As a voluntary member of the FHLBB, the Company is required to invest in stock of the FHLBB in an amount equal to 4.5% of its outstanding advances from the FHLBB. Stock is purchased at par value. As and when such stock is redeemed, the Company would receive from the FHLBB an amount equal to the par value of the stock. At its discretion, the FHLBB may declare dividends on the stock. On April 10, 2009, the FHLBB reiterated to its members that, while it currently meets all its regulatory capital requirements, it is focusing on preserving capital in response to ongoing market volatility, and accordingly, had suspended its quarterly dividend and has extended the moratorium on excess stock repurchases. It also announced that it had taken a write-down of $381.7 million in other-than-temporary impairment charges on its private-label mortgage-backed securities for the year ended December 31, 2008. This resulted in a net loss of $115.8 million. For the year ended December 31, 2009, the FHLBB reported a net loss of $186.8 million resulting from the recognition of $444.1 million of impairment losses which were recognized through income. For the year ended December 31, 2010, the FHLBB reported net income of $106.6 million. The FHLBB also declared a dividend equal to an annual yield of 0.30%. The FHLBB’s board of directors anticipates that it will continue to declare modest cash dividends through 2011. In the future, if additional unrealized losses are deemed to be other-than-temporary, the associated impairment charges could exceed the FHLBB’s current level of retained earnings and possibly put into question whether the fair value of the FHLBB stock owned by the Company is less than par value. The FHLBB has stated that it expects and intends to hold its private-label mortgage-backed securities to maturity. Despite these negative trends, the FHLBB exceeded the regulatory capital requirements promulgated by the Federal Home Loan Banks Act and the Federal Housing Financing Agency. The FHLBB has the capacity to issue additional debt if necessary to raise cash. If needed, the FHLBB also has the ability to secure funding available to U.S. Government Sponsored Enterprises through the U.S. Treasury. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no other-than-temporary impairment related to the carrying amount of the Company’s FHLBB stock as of December 31, 2010. The Company will continue to monitor its investment in FHLBB stock.
 
LOANS
 
Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become 90 days’ delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Past due status is based on contractual terms of the loan. Loans, including impaired loans, on which the accrual of interest has been discontinued, are designated nonaccrual loans. When a loan is placed on nonaccrual, all income that has been accrued but remains unpaid is reversed against current period income, and all amortization of deferred loan costs and fees is discontinued. Nonaccrual loans may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. Income received on nonaccrual loans is either recorded in income or applied to the principal balance of the loan, depending on management’s evaluation as to the collectibility of principal.
 
Loan origination fees and related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. Prepayments are not initially considered when amortizing premiums and discounts.
 
The Bank measures impairment for impaired loans at either the fair value of the loan, the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
is collateral dependent. This method applies to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans such as residential real estate and consumer loans that are collectively evaluated for impairment and loans that are measured at fair value. Management considers the payment status, net worth and earnings’ potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Loans are charged-off when management believes that the collectibility of the loan’s principal is not probable. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification rate of interest.
 
ACQUIRED LOANS
 
In accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,”) the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loan’s contractually required payments received in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30 requires that the Company recognize the excess of all cash flows expected at acquisition over the Company’s initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a reduction of the loan balance.
 
Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of FASB ASC 310-30. For such loans, the discount, if any, representing the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the interest method over the term of the loan. Prepayments are not considered in the calculation of accretion income. Additionally, discount is not accreted on nonperforming loans.
 
When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the Company’s acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees.
 
NONPERFORMING ASSETS
 
In addition to nonperforming loans, nonperforming assets include other real estate owned. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned is recorded initially at estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred. Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations, while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized.
 
ALLOWANCE FOR LOAN LOSSES
 
The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans that ultimately prove uncollectible. In determining the level of the


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
allowance, periodic evaluations are made of the loan portfolio, which takes into account such factors as the character of the loans, loan status, financial posture of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgment. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances, if appropriate, for identified problem loans and the unallocated allowance.
 
While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in management’s opinion, collectibility is not probable.
 
Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances for identified problem loans.
 
The formula allowance evaluates groups of loans to determine the allocation appropriate within each portfolio segment. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect the amount of the formula allowance. Risk grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical net loss experience and qualitative adjustments. For the residential real estate and consumer loan portfolios, the reserves are calculated by applying historical charge-off and recovery experience and qualitative adjustments to the current outstanding balance in each loan category. Loss factors are based on the Company’s historical net loss experience, as well as regulatory guidelines.
 
Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a) present value of anticipated future cash flows, (b) the loan’s observable fair market price or (c) fair value of collateral if the loan is collateral dependent.
 
The formula allowance and specific allowances also include management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors.
 
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.
 
Management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: (a) market risk factors, such as the effects of economic variability on the entire portfolio and (b) unique portfolio risk factors that are inherent characteristics of the Company’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Company’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral.


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Unique portfolio risk factors may include industry concentrations and geographic concentrations or trends that may exacerbate losses resulting from economic events which the Company may not be able to fully diversify out of its portfolio.
 
The qualitative factors 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 — The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime 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 will have an effect on the credit quality in the segment.
 
Commercial real estate — Loans in this segment are primarily income-producing properties. 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 monitors the cash flows of these loans.
 
Construction loans — Loans in this segment primarily include real estate development loans for which payment is derived from sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
 
Commercial and industrial 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.
 
BANK PREMISES AND EQUIPMENT
 
Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated.
 
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
 
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization. Identifiable intangible assets consist of core deposit intangibles and are assets resulting from acquisitions that are being amortized over their estimated useful lives. Goodwill and identifiable intangible assets are included in other assets on the consolidated balance sheets. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Currently, the Company’s goodwill is evaluated at the entity level as there is only one reporting unit. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
 
The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
STOCK OPTION ACCOUNTING
 
The Company follows the fair value recognition provisions of FASB ASC 718, Compensation — Stock Compensation (formerly SFAS 123R) for all share-based payments, using the modified-prospective transition method. The Company’s method of valuation for share-based awards granted utilizes the Black-Scholes option-pricing model, which was also previously used for the Company’s pro forma information required under FASB ASC 718. The Company will recognize compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.
 
During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) that provide for granting of options to purchase up to 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive nonqualified or incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were options to purchase an aggregate of 38,712 shares of Class A common stock exercisable at December 31, 2010.
 
On December 30, 2005, the Board of Directors approved the acceleration and immediate vesting of all unvested options with an exercise price of $31.60 or greater per share. As a consequence, options to purchase 23,950 shares of Class A common stock became exercisable immediately. The average of the high and low price at which the Class A common stock traded on December 30, 2005, the date of the acceleration and vesting, was $29.28 per share. In connection with this acceleration, the Board of Directors approved a technical amendment to each of the Option Plans to eliminate the possibility that the terms of any outstanding or future stock option would require a cash settlement on the occurrence of any circumstance outside the control of the Company. Effective as of January 1, 2006, the Company adopted FASB ASC 718 for all share-based payments. The Company estimates that, as a result of this accelerated vesting, approximately $190,000 of 2006 noncash compensation expense was eliminated that would otherwise have been recognized in the Company’s earnings.
 
The Company decided to accelerate the vesting of certain stock options primarily to reduce the noncash compensation expense that would otherwise be expected to be recorded in conjunction with the Company’s required adoption of FASB ASC 718 in 2006. There was no earnings impact for 2006 due to the Company’s adoption of FASB ASC 718.
 
The Company uses the fair value method to account for stock options. All of the Company’s stock options are vested, and there were no options granted during 2010 and 2009.
 
INCOME TAXES
 
The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
In July 2006, the FASB issued FASB ASC 740, Income Taxes (formerly Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”). This clarified the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. FASB ASC 740 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. The Company adopted FASB ASC 740 on January 1, 2007. The adoption of FASB ASC 740 did not have a material impact on the Company’s results of operations or its financial position.
 
The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law.
 
The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgement changes regarding an uncertain tax position.
 
TREASURY STOCK
 
Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act, provisions of which eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares.
 
PENSION
 
The Company provides pension benefits to its employees under a noncontributory, defined benefit plan, which is funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and recognizes costs over the estimated employee service period.
 
The Company also has a Supplemental Executive Insurance/Retirement Plan (“the Supplemental Plan”), which is limited to certain officers and employees of the Company. The Supplemental Plan is accrued on a current basis and recognizes costs over the estimated employee service period.
 
Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary, and participants are required to contribute to its cost. Individual life insurance policies, which are owned by the Company, are purchased covering the life of each participant.
 
RECENT ACCOUNTING DEVELOPMENTS
 
FASB ASC 860, Transfers and Servicing (formerly Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140”). In June 2009, the FASB issued FASB ASC 860. FASB ASC 860 was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically to address: (1) practices that have developed since the issuance of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on or after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. FASB ASC 860 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.
 
FASB ASC 810, Consolidation (formerly Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”). In June 2009, the FASB issued FASB ASC 810. FASB ASC 810 was issued to improve financial reporting by enterprises involved with variable interest entities, specifically to address: (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in FASB ASC 860 and (2) constituent concerns about the application of certain key provisions of FASB ASC 860, including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FASB ASC 810 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.
 
In January 2010, the FASB issued an amendment to the Fair Value Measurements and Disclosures topic of the ASC. This amendment requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.
 
In July, 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This Statement will significantly increase disclosures that entities must make about the credit quality of financing receivables and the allowance for credit losses. The Statement will require reporting entities to make new disclosures about (a) the nature of credit risk inherent in the entity’s portfolio of financing receivables (loans), (b) how that risk is analyzed and assessed in determining the allowance for credit (loan) losses and (c) the reasons for changes in the allowance for credit losses.
 
The Statement will require disclosures related to the allowance for credit losses on a “portfolio segment” basis instead of on an aggregate basis. Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. The Statement also establishes the concept of a “class of financing receivables.” A class is generally a disaggregation of a portfolio segment. The Statement requires numerous disclosures at the class level including, (a) delinquency and nonaccrual information and related significant accounting policies, (b) impaired financing receivables and related significant accounting policies, (c) a description of credit quality indicators used to monitor credit risk and (d) modifications of financing receivables that meet the definition of a troubled debt restructuring. The Statement will expand disclosure requirements to include all financing receivables that are individually evaluated for impairment and determined to be impaired, and require the disclosures at the class level.
 
Entities will be required to disclose the activity within the allowance for credit losses, including the beginning and ending balance of the allowance for each portfolio segment, as well as current-period provisions for credit losses, direct write-downs charged against the allowance and recoveries of any amounts previously written off. Entities will also be required to disclose the effect on the provision for credit losses due to changes in accounting policies or methodologies from prior periods.
 
Public entities will need to provide disclosures related to period-end information (e.g., credit quality information and the ending financing receivables balance segregated by impairment method) in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period (e.g., modifications and the rollforward of the allowance for credit losses by portfolio segment) are


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CENTURY BANCORP, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
required in interim and annual periods beginning on or after December 15, 2010. As this Statement amends only the disclosure requirements for loans and the allowance, adoption will have no impact on the Company’s financial statements. The Company has provided the disclosures required as of December 31, 2010 in Note 6.
 
2.   Cash and Due from Banks
 
The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $3,543,000 at December 31, 2010 and $1,061,000 at December 31, 2009.
 
3.   Securities Available-for-Sale
 
                                                                 
    December 31, 2010     December 31, 2009  
          Gross
    Gross
    Estimated
          Gross
    Gross
    Estimated
 
    Amortized
    Unrealized
    Unrealized
    Fair
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost*     Gains     Losses     Value     Cost*     Gains     Losses     Value  
    (Dollars in thousands)  
 
U.S. Treasury
  $ 2,000     $ 5     $     $ 2,005     $ 1,998     $