CENTURY BANCORP INC - FORM 10-K

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EX-21 - EX-21 - CENTURY BANCORP INC	d831292dex21.htm
EX-31.2 - EX-31.2 - CENTURY BANCORP INC	d831292dex312.htm
EX-32.2 - EX-32.2 - CENTURY BANCORP INC	d831292dex322.htm
EX-32.1 - EX-32.1 - CENTURY BANCORP INC	d831292dex321.htm
EX-31.1 - EX-31.1 - CENTURY BANCORP INC	d831292dex311.htm
EXCEL - IDEA: XBRL DOCUMENT - CENTURY BANCORP INC	Financial_Report.xls
EX-23.1 - EX-23.1 - CENTURY BANCORP INC	d831292dex231.htm

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, 2014
¨		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 ¨ 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 ¨ No þ

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

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 þ No ¨

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 ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ 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, 2014 was $126,730,689.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of February 28, 2015:

Class A Common Stock, $1.00 par value 3,600,729 Shares

Class B Common Stock, $1.00 par value 1,967,180 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, 2014 are incorporated into Part II, Items 5-8 of this Form 10-K.

CENTURY BANCORP INC.

FORM 10-K

TABLE OF CONTENTS


		Page

	PART I
ITEM 1	BUSINESS		1-5
ITEM 1A	RISK FACTORS		5-6
ITEM 1B	UNRESOLVED STAFF COMMENTS		6
ITEM 2	PROPERTIES		6
ITEM 3	LEGAL PROCEEDINGS		6
ITEM 4	MINE SAFETY DISCLOSURES		6

	PART II
ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		7-8
ITEM 6	SELECTED FINANCIAL DATA		8
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION		8
ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		8
ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		8
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		8
ITEM 9A	CONTROLS AND PROCEDURES		8-9
ITEM 9B	OTHER INFORMATION		9

	PART III
ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		91-95
ITEM 11	EXECUTIVE COMPENSATION		96-105
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		106-107
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		107
ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES		108

	PART IV
ITEM 15	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		108-110
SIGNATURES			111

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, 2014, the Company had total assets of $3.6 billion. Currently, the Company operates 26 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover 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 interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, 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, non-profit 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 lock box collection services, cash management services and account reconciliation services, and 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 third party full-service securities brokerage business.

The Company provides financial services, including cash management, lockbox processing and short-term and long-term financing, to municipalities in Massachusetts, New Hampshire and Rhode Island. The Company has client engagements with approximately 235 government entities throughout the region.

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.centurybank.com.

Employees

As of December 31, 2014, the Company had 361 full-time and 79 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 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 regulatory authority over holding company activities and performed a review of the Company and its subsidiaries as of June 2014.

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 Treasury 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 Holding Company Act or Bank Merger Act.

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 Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012. In addition, the Act added a new Section 13 to

the Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013, and under an extended conformance regulation, compliance must be achieved by July 21, 2015 and with the covered funds restrictions by July 21, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation.

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.

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. The Company’s quarterly risk-based deposit insurance assessments were paid from this amount until June 30, 2013. The Company received a refund of $2.4 million of prepaid FDIC assessments in June 2013.

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 has kept the overall amount collected from the industry very close to the amount collected prior to the new calculation.

Risk-Based Capital Guidelines

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule, that came into effect in January 2015, sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raises the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The Company has analyzed the final rules; the implementation of the framework will not have a material impact on the Company’s financial condition or results of operations.

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

“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.

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, New Hampshire and Rhode Island. The national and local economies 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, New Hampshire, and Rhode Island, 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;

(iv) at December 31, 2014, approximately 63.5% 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, 2014, approximately 30.7% of the Company’s loan portfolio was comprised of residential real estate and home equity 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 collectibility 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. At December 31, 2014, our goodwill and other identifiable intangible assets were approximately $2.7 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;

(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; and

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 25 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2015 to 2026. The Company believes that its banking offices are in good condition.

During July 2012, the Company received state regulatory approval to close a branch at Chestnut Hill in Newton, Massachusetts. The branch closed on September 21, 2012 and the accounts were temporarily moved to the Brookline, Massachusetts branch. During July 2012, the Company entered into a lease agreement and received regulatory approval to open a branch at a new location at Chestnut Hill in Newton, Massachusetts. The branch opened on November 7, 2013 and the majority of the accounts that were temporarily moved to the Brookline, Massachusetts branch were moved to the new branch at Chestnut Hill in Newton, Massachusetts.

During December 2013, the Company entered into a lease agreement to open a branch located in Woburn, Massachusetts. The branch opened on November 3, 2014.

During March 2014, the Company entered into a lease agreement to open a branch located on Boylston Street in Boston, Massachusetts. This property is leased from an entity affiliated with Marshall M. Sloane, Chairman of the Board of the Company. This agreement was approved by the Board of Directors in the absence of the Chairman of the Board. The branch is scheduled to open during the first quarter of 2015. The deposits from the Kenmore Square, Boston Massachusetts branch, which closed on September 30, 2014, will be moved to the new Boylston Street branch.

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.

MINE SAFETY DISCLOSURES

Not applicable.

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, 2013 is shown on page 12. The Company’s Class B Common Stock is not traded on any national securities exchange or other public trading market.

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, 2014:


Title of Class	Approximate Number of Record Holders
Class A Common Stock		1,067
Class B Common Stock		39

(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.

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
2013
First quarter	$	.12	$	.06
Second quarter		.12		.06
Third quarter		.12		.06
Fourth quarter		.12		.06
2014
First quarter	$	.12	$	.06
Second quarter		.12		.06
Third quarter		.12		.06
Fourth quarter		.12		.06

The Company’s ability to pay dividends on its shares depends generally on dividends it receives from the Bank. Both Massachusetts and federal law limit the payment of dividends by the Bank to the Company. Under FDIC regulations and applicable Massachusetts law, the dollar amount of dividends and any other capital distributions that the Bank may make depends upon its capital position and recent net income. Generally, so long as the Bank remains adequately capitalized, it may potentially make capital distributions during any calendar year equal to up to 100% of net income for the year to date plus retained net income for the two preceding years. However, if the Bank’s capital becomes impaired or the FDIC or Commissioner otherwise determines that the Bank should conserve capital, the Bank may be prohibited or otherwise limited from paying any dividends or making any other capital distributions.

The Federal Reserve Board also has authority to prohibit dividends by bank holding companies such as the Company, if their actions constitute unsafe or unsound practices. Prior to the recent financial crisis, the Federal Reserve Board issued a policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that, (1) the company’s net income for the past year is sufficient to cover the cash dividends, (2) the rate of earnings retention is consistent with the company’s capital needs, asset quality, and overall financial condition, and (3) the minimum regulatory capital adequacy ratios are met. It is also the Federal Reserve Board’s policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries. It is expected that the Federal Reserve Board will be more rather than less restrictive for the foreseeable future about dividend practices.

(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, 2014:


	Equity Compensation Plan Information
Plan Category	Number of Shares to be Issued Upon Exercise of Outstanding Options (a)		Weighted-Average Exercise Price of Outstanding Options (b)		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in Column (a)) (c)
Equity compensation plans approved by security holders		—	$	—		233,934
Equity compensation plans not approved by security holders		—		—		—

Total		—	$	—		233,934

(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 36.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required herein is shown on pages 32 and 33.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required herein is shown on pages 37 through 87.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

The Company’s principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures as of December 31, 2014. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective. The Company’s disclosure controls and procedures also effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Securities Exchange Act of 1934 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 changes that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting or in other factors that could significantly affect its internal control over financial reporting.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released an updated version of its Internal Control — Integrated Framework (2013) (2013 Framework). The 2013 Framework’s internal control components (i.e., control environment, risk assessment, control activities, information and communication, and monitoring activities) remain predominantly the same as those in the 1992 Framework. However, the 2013 Framework was expanded to include 17 principles which must be present and functioning in order to have an effective system of internal controls. The Company implemented the 2013 Framework effective December 31, 2014.

Management’s report on internal control over financial reporting is shown on page 90. The audit report of the registered public accounting firm is shown on page 89.

ITEM 9B.

OTHER INFORMATION

None.

FINANCIAL STATEMENTS


Financial Highlights		11

Management’s Discussion and Analysis of Results of Operations and Financial Condition		13

Consolidated Balance Sheets		37

Consolidated Statements of Income		38

Consolidated Statements of Comprehensive Income		39

Consolidated Statements of Changes in Stockholders’ Equity		40

Consolidated Statements of Cash Flows		41

Notes to Consolidated Financial Statements		42

Reports of Independent Registered Public Accounting Firm		88

Management’s Report on Internal Control Over Financial Reporting		90

Financial Highlights


	2014			2013			2012			2011			2010
(dollars in thousands, except share data)
FOR THE YEAR
Interest income	$	85,371		$	79,765		$	81,494		$	78,065		$	76,583
Interest expense		19,136			18,805			19,540			22,766			24,817

Net interest income		66,235			60,960			61,954			55,299			51,766
Provision for loan losses		2,050			2,710			4,150			4,550			5,575

Net interest income after provision for loan losses		64,185			58,250			57,804			50,749			46,191
Other operating income		15,271			18,615			15,865			16,240			15,999
Operating expenses		56,730			55,812			53,238			48,742			47,372

Income before income taxes		22,726			21,053			20,431			18,247			14,818
Provision for income taxes		866			1,007			1,392			1,554			1,244

Net income	$	21,860		$	20,046		$	19,039		$	16,693		$	13,574

Average shares outstanding Class A, basic		3,591,732			3,575,683			3,557,693			3,543,233			3,521,179
Average shares outstanding Class B, basic		1,969,030			1,980,855			1,990,474			1,997,411			2,012,327
Average shares outstanding Class A, diluted		5,562,209			5,557,693			5,549,191			5,541,794			5,535,742
Average shares outstanding Class B, diluted		1,969,030			1,980,855			1,990,474			1,997,411			2,012,327
Total shares outstanding at year-end		5,567,909			5,556,584			5,554,959			5,542,697			5,540,247
Earnings per share:
Basic, Class A	$	4.78		$	4.39		$	4.18		$	3.68		$	3.00
Basic, Class B	$	2.39		$	2.19		$	2.09		$	1.84		$	1.50
Diluted, Class A	$	3.93		$	3.61		$	3.43		$	3.01		$	2.45
Diluted, Class B	$	2.39		$	2.19		$	2.09		$	1.84		$	1.50
Dividend payout ratio		10.1	%		10.9	%		11.5	%		13.1	%		16.0	%
AT YEAR-END
Assets	$	3,624,036		$	3,431,154		$	3,086,209		$	2,743,225		$	2,441,684
Loans		1,331,366			1,264,763			1,111,788			984,492			906,164
Deposits		2,737,591			2,715,839			2,445,073			2,124,584			1,902,023
Stockholders’ equity		192,500			176,472			179,990			160,649			145,025
Book value per share	$	34.57		$	31.76		$	32.40		$	28.98		$	26.18
SELECTED FINANCIAL PERCENTAGES
Return on average assets		0.61	%		0.60	%		0.65	%		0.63	%		0.56	%
Return on average stockholders’ equity		11.57	%		11.58	%		11.06	%		10.72	%		9.52	%
Net interest margin, taxable equivalent		2.22	%		2.21	%		2.51	%		2.48	%		2.52	%
Net charge-offs as a percent of average loans		0.05	%		0.08	%		0.15	%		0.21	%		0.44	%
Average stockholders’ equity to average assets		5.27	%		5.22	%		5.85	%		5.88	%		5.93	%
Efficiency ratio		62.0	%		63.0	%		62.1	%		62.2	%		65.0	%

Financial Highlights — (Continued)

Per Share Data

2014, Quarter Ended

December 31,

September 30,

June 30,

March 31,

Market price range (Class A)

High

40.50

38.88

37.68

37.00

Low

34.26

34.10

33.05

32.95

Dividends Class A

0.12

Dividends Class B

0.06

2013, Quarter Ended

December 31,

September 30,

June 30,

March 31,

Market price range (Class A)

High

35.98

37.80

35.75

35.40

Low

29.67

31.22

31.11

30.41

Dividends Class A

0.12

Dividends Class B

0.06

The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2009 to December 31, 2014 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph 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*

LOGO


Value of $100 Invested on December 31, 2009 at:	2010		2011		2012		2013		2014
Century Bancorp, Inc.	$	124.20	$	133.36	$	158.08	$	161.79	$	197.55
NASDAQ Banks		111.35		83.04		111.88		152.85		170.93
NASDAQ U.S.		118.02		117.04		137.47		192.62		221.02

*	Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2009 and that all dividends were reinvested.

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.

RECENT MARKET DEVELOPMENTS

The financial services industry continues to face challenges in the aftermath of the recent national and global economic crisis. Since June 2009, the U.S. economy has been recovering from the most severe recession and financial crisis since the Great Depression. There have been some improvements in private sector employment, industrial production and U.S. exports; nevertheless, the pace of economic recovery has been slow. Financial markets have improved since the depths of the crisis but are still unsettled and volatile. There is continued concern about the U.S. economic outlook.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “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 that as the specific new or incremental requirements applicable to the Company become effective, the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012. In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance, must be achieved by July 21, 2015 and with the covered funds restrictions by July 21, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

OVERVIEW

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit 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 lock box collection services, cash management services and account reconciliation services, and 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 third party full-service securities brokerage business.

The Company has client engagements in Massachusetts, New Hampshire and Rhode Island with approximately 235 government entities throughout the region.

The Company had net income of $21,860,000 for the year ended December 31, 2014, compared with net income of $20,046,000 for the year ended December 31, 2013, and net income of $19,039,000 for the year ended December 31, 2012. Class A diluted earnings per share were $3.93 in 2014, compared to $3.61 in 2013 and $3.43 in 2012.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

Earnings per share (EPS) for each class of stock and for each year ended December 31, is as follows:


	2014		2013		2012
Basic EPS – Class A common	$	4.78	$	4.39	$	4.18
Basic EPS – Class B common	$	2.39	$	2.19	$	2.09
Diluted EPS – Class A common	$	3.93	$	3.61	$	3.43
Diluted EPS – Class B common	$	2.39	$	2.19	$	2.09

The trends in the net interest margin are illustrated in the graph below:

Net Interest Margin

LOGO

From the beginning of 2012 through the third quarter of 2012, management stabilized the net interest margin by continuing to lower the cost of funds, and by deploying excess liquidity through expansion of the investment portfolio. Also, the Company collected approximately $3,253,000 of prepayment penalties during 2012. The primary factor accounting for the decrease in the net interest margin for the fourth quarter of 2012 and through the fourth quarter of 2013 was an additional large influx of deposits. Management invested the funds in shorter term securities. The net interest margin has declined slightly throughout 2014.

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 the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin.

Historical U.S. Treasury Yield Curve

LOGO

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. During 2013, longer-term rates increased resulting in a steepening of the yield curve. During 2014, longer-term rates decreased resulting in a flattening of the yield curve.

During 2014, 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 2013, the Company’s earnings were positively impacted primarily by an increase in other operating income and a decrease in provision for loan

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

losses. This increase in other operating income was primarily due to an increase in net gains on sales of loans and net gains on sales of securities. The decrease in the provision for loan losses was primarily attributable to a lower level of charge-off activity and changes in portfolio composition. During 2014, 2013 and 2012, the U.S. economy experienced a lower short-term rate environment. The lower short-term rates negatively impacted the net interest margin as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits. The net interest margin was positively impacted in 2012 as a result of prepayment penalties that were collected during the year.

Total assets were $3,624,036,000 at December 31, 2014, an increase of 5.6% from total assets of $3,431,154,000 at December 31, 2013.

On December 31, 2014, stockholders’ equity totaled $192,500,000, compared with $176,472,000 on December 31, 2013. Book value per share increased to $34.57 at December 31, 2014, from $31.76 on December 31, 2013.

During December 2013, the Company entered into a lease agreement to open a branch located in Woburn, Massachusetts. The branch opened on November 3, 2014.

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 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.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

The Company does not intend to sell any of its debt securities with an unrealized loss, and it is not more likely than not 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 factors, including business and economic conditions, delinquency trends, charge-off experience and other qualitative factors. Further information regarding the Company’s methodology for assessing the appropriateness of the allowance is contained within Note 1 of the “Notes to Consolidated 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; other 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, 2014 totaled $448,390,000 and included gross unrealized gains of $1,630,000 and gross unrealized losses of $1,450,000. A year earlier, the fair value of securities available-for-sale was $464,245,000 including gross unrealized gains of $821,000 and gross unrealized losses of $2,519,000. In 2014, the Company recognized gains of $450,000 on the sale of available-for-sale securities. In 2013 and 2012, the Company recognized gains of $3,019,000 and $1,843,000, respectively.

Securities classified as held-to-maturity consist of U.S. Government Sponsored Enterprises and mortgage-backed securities. Securities held-to-maturity as of December 31, 2014 are carried at their amortized cost of $1,406,792,000. A year earlier, securities held-to-maturity totaled $1,487,884,000.

During the third quarter of 2013, $987,037,000 of securities available-for-sale with unrealized losses of $25,333,000 were transferred to securities held-to-maturity. This was done in response to rising interest rates and an assessment of liquidity needs.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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


	2014					2013					2012
At December 31,	Amount		Percent			Amount		Percent			Amount		Percent
(dollars in thousands)
U.S. Treasury	$	2,000		0.4	%	$	1,998		0.4	%	$	2,004		0.1	%
U.S. Government Sponsored Enterprises		—		0.0	%		10,004		2.2	%		130,340		9.1	%
SBA Backed Securities		6,717		1.5	%		7,302		1.6	%		8,156		0.6	%
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities		337,093		75.2	%		403,189		86.8	%		1,233,357		86.0	%
Privately Issued Residential Mortgage-Backed Securities		1,874		0.4	%		2,277		0.5	%		2,947		0.2	%
Obligations Issued by States and Political Subdivisions		96,784		21.6	%		36,723		7.9	%		55,174		3.8	%
Other Debt Securities		3,524		0.8	%		2,176		0.5	%		2,253		0.2	%
Equity Securities		398		0.1	%		576		0.1	%		570		0.0	%

Total	$	448,390		100.0	%	$	464,245		100.0	%	$	1,434,801		100.0	%

The majority of the Company’s securities AFS are classified as Level 2, as defined in Note 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. Management’s understanding of a pricing service’s pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing controls. Management’s validation of a vendor’s pricing methodology includes establishing internal controls to determine that the pricing information received by a pricing service and used by management in the valuation process is relevant and reliable. 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 more likely than not 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, 2014.

Securities available-for-sale totaling $96,886,000, or 2.67% of assets, are classified as Level 3, as defined in Note 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 refer primarily to debt securities of Fannie Mae and Freddie Mac.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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


	2014					2013					2012
At December 31,	Amount		Percent			Amount		Percent			Amount		Percent
(dollars in thousands)
U.S. Government Sponsored Enterprises	$	251,617		17.9	%	$	291,779		19.6	%	$	17,747		6.4	%
U.S. Government Sponsored Enterprise Mortgage-Backed Securities		1,155,175		82.1	%		1,196,105		80.4	%		257,760		93.6	%

Total	$	1,406,792		100.0	%	$	1,487,884		100.0	%	$	275,507		100.0	%

The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2014. 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
One
Year

% of
Total

Weighted
Average
Yield

One
Year to
Five
Years

% of
Total

Weighted
Average
Yield

Five
Years to
Ten
Years

% of
Total

Weighted
Average
Yield

Over
Ten
Years

% of
Total

Weighted
Average
Yield

(dollars in thousands)

U.S. Treasury

2,000

0.4

0.23

—

0.0

0.00

—

0.0

0.00

—

0.0

0.00

SBA Backed Securities

—

0.0

0.00

—

0.0

0.00

4,560

1.0

0.84

2,157

0.5

0.93

U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities

344

0.1

3.74

205,354

45.8

0.60

131,173

29.3

0.55

222

0.1

2.21

Privately Issued Residential Mortgage-Backed Securities

1,874

0.4

1.54

—

0.0

0.00

—

0.0

0.00

—

0.0

0.00

Obligations of States and Political Subdivisions

90,700

20.2

0.68

2,264

0.5

2.73

—

0.0

0.00

3,820

0.8

0.59

Other Debt Securities

200

0.1

0.98

900

0.2

1.11

—

0.0

0.00

1,025

0.2

6.00

Equity Securities

—

0.0

0.00

—

0.0

0.00

—

0.0

0.00

—

0.0

0.00

Total

95,118

21.2

0.70

208,518

46.5

0.63

135,733

30.3

0.56

7,224

1.6

1.51

Non-
Maturing

% of
Total

Weighted
Average
Yield

Total

% of
Total

Weighted
Average
Yield

(dollars in thousands)

U.S. Treasury

—

0.0

0.00

2,000

0.4

0.23

SBA Backed Securities

—

0.0

0.00

6,717

1.5

0.87

U.S. Government Agency and Sponsored

Enterprise Mortgage-Backed Securities

—

0.0

0.00

337,093

75.2

0.59

Privately Issued Residential Mortgage-Backed Securities

—

0.0

0.00

1,874

0.4

1.54

Obligations of States and Political Subdivisions

—

0.0

0.00

96,784

21.6

0.72

Other Debt Securities

1,399

0.3

3.24

3,524

0.8

2.08

Equity Securities

398

0.1

3.09

398

0.1

3.09

Total

1,797

0.4

3.21

448,390

100.0

0.64

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

Amortized Cost of Securities Held-to-Maturity Amounts Maturing

Within
One
Year

% of
Total

Weighted
Average
Yield

One
Year
to Five
Years

% of
Total

Weighted
Average
Yield

Five
Years
to Ten
Years

% of
Total

Weighted
Average
Yield

Over
Ten
Years

% of
Total

Weighted
Average
Yield

Total

% of
Total

Weighted
Average
Yield

(dollars in thousands)

U.S. Government Sponsored Enterprises

—

0.0

0.00

103,044

7.3

1.19

148,573

10.6

1.85

—

0.0

0.00

251,617

17.9

1.58

U.S. Government Sponsored Enterprise Mortgage-Backed Securities

3,837

0.3

3.16

992,434

70.5

2.34

157,117

11.2

2.31

1,787

0.1

3.36

1,155,175

82.1

2.34

Total

3,837

0.3

3.16

1,095,478

77.8

2.23

305,690

21.8

2.09

1,787

0.1

3.36

1,406,792

100.0

2.20

At December 31, 2014 and 2013, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2014, sales of securities totaling $40,285,000 in gross proceeds resulted in a net realized gain of $450,000. There were no sales of state, county or municipal securities during 2014 and 2013. In 2013, sales of securities totaling $224,045,000 in gross proceeds resulted in net realized gains of $3,019,000. In 2012, sales of securities totaling $294,881,000 in gross proceeds resulted in net realized gains of $1,843,000.

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, New Hampshire, and Rhode Island. The Company grants single-family and multi-family residential loans, commercial and commercial real estate loans, municipal 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.

The following summary shows the composition of the loan portfolio at the dates indicated.


	2014					2013					2012					2011					2010
December 31,	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
(dollars in thousands)
Construction and land development	$	22,744		1.7	%	$	33,058		2.6	%	$	38,618		3.5	%	$	56,819		5.7	%	$	53,583		5.9	%
Commercial and industrial		149,732		11.2	%		76,675		6.1	%		88,475		8.0	%		82,404		8.4	%		90,654		10.0	%
Municipal		41,850		3.1	%		32,737		2.6	%		1,446		0.1	%		—		0.0	%		—		0.0	%
Commercial real estate		696,272		52.3	%		696,317		55.0	%		575,019		51.7	%		487,495		49.5	%		433,337		47.8	%
Residential real estate		257,305		19.3	%		286,041		22.6	%		281,857		25.3	%		239,307		24.3	%		207,787		22.9	%
Consumer		10,925		0.8	%		8,824		0.7	%		6,823		0.6	%		6,197		0.6	%		5,957		0.7	%
Home equity		151,275		11.4	%		130,277		10.3	%		118,923		10.7	%		110,786		11.3	%		114,209		12.6	%
Overdrafts		1,263		0.2	%		834		0.1	%		627		0.1	%		1,484		0.2	%		637		0.1	%

Total	$	1,331,366		100.0	%	$	1,264,763		100.0	%	$	1,111,788		100.0	%	$	984,492		100.0	%	$	906,164		100.0	%

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

At December 31, 2014, 2013, 2012, 2011 and 2010, loans were carried net of discounts of $407,000, $454,000, $498,000, $550,000 and $598,000, respectively. Net deferred loan fees of $908,000, $174,000, $369,000, $666,000 and $186,000 were carried in 2014, 2013, 2012, 2011 and 2010, respectively.

The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2014. 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, 2014

One Year
or Less

One to
Five Years

Over Five
Years

Total

(dollars in thousands)

Construction and land development

7,229

440

15,075

22,744

Commercial and industrial

24,902

24,129

100,701

149,732

Commercial real estate

27,455

70,144

598,673

696,272

Total

59,586

94,713

714,449

868,748

The following table indicates the rate variability of the above loans due after one year.

December 31, 2014

One to
Five Years

Over Five
Years

Total

(dollars in thousands)

Predetermined interest rates

50,223

238,012

288,235

Floating or adjustable interest rates

44,490

476,437

520,927

Total

94,713

714,449

809,162

The Company’s commercial and industrial (“C&I”) 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 Massachusetts, New Hampshire, and Rhode Island. 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 for terms between three and thirty 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&I 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 $20,766,000 of C&I 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&I loans, notwithstanding the collateral position.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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, 2014, the Company was obligated to advance a total of $3,035,000 to complete projects under construction.

The composition of nonperforming assets is as follows:


December 31,	2014			2013			2012			2011			2010
(dollars in thousands)
Total nonperforming loans	$	4,146		$	2,549		$	4,471		$	5,827		$	8,068
Other real estate owned		—			—			—			1,182			—

Total nonperforming assets	$	4,146		$	2,549		$	4,471		$	7,009		$	8,068

Accruing troubled debt restructured loans	$	3,296		$	5,969		$	3,048		$	4,634		$	1,248
Loans past due 90 and still accruing		—			—			—			18			50
Nonperforming loans as a percent of gross loans		0.31	%		0.20	%		0.40	%		0.59	%		0.89	%
Nonperforming assets as a percent of total assets		0.11	%		0.07	%		0.14	%		0.26	%		0.33	%

The composition of impaired loans at December 31, is as follows:


	2014		2013		2012		2011		2010
Residential real estate, multi-family	$	1,054	$	1,293	$	862	$	516	$	—
Commercial real estate		4,318		4,520		2,281		4,561		2,492
Construction and land development		103		608		1,500		1,500		4,000
Commercial and industrial		852		1,367		1,282		1,525		1,471
Municipals		—		—		—		—		—

Total impaired loans	$	6,327	$	7,788	$	5,925	$	8,102	$	7,963

At December 31, 2014, 2013, 2012, 2011 and 2010, impaired loans had specific reserves of $904,000, $1,019,000, $1,732,000, $741,000 and $317,000 respectively.

The Company was servicing mortgage loans sold to others without recourse of approximately $143,696,000, $109,301,000, $26,786,000, $18,196,000 and $983,000 at December 31, 2014, 2013, 2012, 2011, and 2010, respectively. The Company had no loans held for sale at December 31, 2014 and December 31, 2013, $9,378,000 at December 31, 2012, $3,389,000 at December 31, 2011, and none for December 31, 2010.

Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage servicing assets (“MSA”) are amortized into non-interest income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets and are amortized in proportion to, and over the period of estimated net servicing income and are assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $941,000 at December 31, 2014, $703,000 for December 31, 2013, and $137,000 for December 31, 2012.

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 increased during 2014 primarily as a result of a large commercial real estate loan. Nonaccrual loans decreased during 2013 primarily as a result of a charge-off of a construction loan and a decrease in residential real estate nonperforming loans. Nonaccrual loans decreased during 2012, primarily as a result of a decrease in home equity and residential real estate nonperforming loans.

Nonaccrual loans decreased during 2011, primarily as a result of $1,200,000 in charge-offs from two construction loans as well as the subsequent foreclosure of $1,300,000 of one of the construction loans.

The Company continues to monitor closely $14,558,000 and $16,918,000 at December 31, 2014 and 2013, 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, 2014, although such values may fluctuate with changes in the economy and the real estate market.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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, financial condition of borrowers, the value of collateral securing 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,	2014			2013			2012			2011			2010
(dollars in thousands)
Year-end loans outstanding (net of unearned discount and deferred loan fees)	$	1,331,366		$	1,264,763		$	1,111,788		$	984,492		$	906,164

Average loans outstanding (net of unearned discount and deferred loan fees)	$	1,307,888		$	1,184,912		$	1,036,296		$	948,883		$	877,858

Balance of allowance forloan losses at the beginning of year	$	20,941		$	19,197		$	16,574		$	14,053		$	12,373

Loans charged-off:
Commercial		333			234			1,253			676			1,559
Construction		500			1,000			—			1,200			900
Commercial real estate		—			—			—			—			922
Residential real estate		24			—			351			341			515
Consumer		525			579			697			607			547

Total loans charged-off		1,382			1,813			2,301			2,824			4,443

Recovery of loans previously charged-off:
Commercial		201			389			307			293			172
Construction		—			—			—			—			—
Real estate		117			31			45			35			8
Consumer		391			427			422			467			368

Total recoveries of loans previously charged-off:		709			847			774			795			548

Net loan charge-offs		673			966			1,527			2,029			3,895
Provision charged to operating expense		2,050			2,710			4,150			4,550			5,575

Balance at end of year	$	22,318		$	20,941		$	19,197		$	16,574		$	14,053

Ratio of net charge-offs during the year to average loans outstanding		0.05	%		0.08	%		0.15	%		0.21	%		0.44	%

Ratio of allowance for loan losses to loans outstanding		1.68	%		1.66	%		1.73	%		1.68	%		1.55	%

The amount of the allowance for loan losses results from 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 declined in 2011, 2012, 2013, and 2014 as a result of the overall decrease in the level of nonaccrual loans. The dollar amount of the allowance for loan losses and the level of the allowance for loan losses to total loans increased primarily as a result of a lower level of charge-off activity combined with changes in the portfolio composition.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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, 2014 is $22,744,000. A major portion in nonaccrual loans is one construction loan. Based on this fact, and the general local construction conditions, management closely monitors all construction loans and considers this type of loan to be higher risk.

Higher-balance loans — Loans greater than $1.0 million are considered “high-balance loans.” The balance of these loans is $785,521,000 at December 31, 2014, as compared to $701,103,000 at December 31, 2013. 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 $482,624,000 at December 31, 2014, as compared to $377,915,000 at December 31, 2013. 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. Also included in high-balance loans are loans greater than $25.0 million. The balance of these loans is $211,519,000 at December 31, 2014, as compared to $131,834,000 at December 31, 2013. 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 and $10.0 million allocation.

Small business loans — The outstanding loan balances of small business loans is $35,312,000 at December 31, 2014. 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.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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 is comprised of the following:


	2014					2013					2012					2011					2010
	Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans
(dollars in thousands)
Construction and land development	$	1,592		1.7	%	$	2,174		2.6	%	$	3,041		3.5	%	$	2,893		5.7	%	$	1,752		5.9	%
Commercial and industrial		4,757		11.2			2,617		6.1			3,118		8.0			3,139		8.4			3,163		10.0
Municipal		1,488		3.1			655		2.6			24		0.1			—		0.0			—		0.0
Commercial real estate		11,199		52.3			10,935		55.0			9,041		51.7			6,566		49.5			5,671		47.8
Residential real estate		776		19.3			2,006		22.6			1,994		25.3			1,886		24.3			1,718		22.9
Consumer and other		810		1.0			432		0.8			333		0.7			356		0.8			298		0.8
Home equity		599		11.4			959		10.3			886		10.7			704		11.3			725		12.6
Unallocated		1,097					1,163					760					1,030					726

Total	$	22,318		100.0	%	$	20,941		100.0	%	$	19,197		100.0	%	$	16,574		100.0	%	$	14,053		100.0	%

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.

Interest rates on deposits are set twice per month 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.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

The following table sets forth the average balances of the Bank’s deposits for the periods indicated.


	2014					2013					2012
	Amount		Percent			Amount		Percent			Amount		Percent
(dollars in thousands)
Demand Deposits	$	481,035		16.8	%	$	441,193		16.6	%	$	386,863		16.5	%
Savings and Interest Checking		1,096,303		38.2	%		1,037,320		38.9	%		870,046		37.1	%
Money Market		920,485		32.1	%		800,052		30.0	%		666,949		28.5	%
Time Certificates of Deposit		372,699		12.9	%		387,514		14.5	%		418,789		17.9	%

Total	$	2,870,522		100.0	%	$	2,666,079		100.0	%	$	2,342,647		100.0	%

Time Deposits of $100,000 or more as of December 31, are as follows:


	2014
(dollars in thousands)
Three months or less	$	66,690
Three months through six months		50,150
Six months through twelve months		30,320
Over twelve months		111,808

Total	$	258,968

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 $395,500,000, an increase of $140,500,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2014, was approximately $221,384,000. 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, including related interest rates and other information.

Subordinated Debentures

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 paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years.

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 $212,360,000, a decrease of $2,080,000 from the prior year. See Note 11, “Securities Sold Under Agreements to Repurchase,” for a schedule, including related interest rates and other information.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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 9.0% in 2014 to $76,268,000, compared with $69,944,000 in 2013. The increase in net interest income for 2014 was mainly due to an 8.5% increase in the average balances of earning assets, combined with a similar increase in deposits. The increase in net interest income for 2013 was mainly due to an 13.6% increase in the average balances of earning assets, combined with a similar increase in deposits. This was offset, somewhat, by prepayment penalties that were collected during the prior year. 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 increased to 2.22% in 2014 from 2.21% in 2013 and decreased from 2.51% in 2012. The increase in the net interest margin, for 2014, was primarily the result of a decrease in rates paid on deposits and borrowed funds. The decrease in the net interest margin, for 2013, was primarily the result of a decrease in asset yields. The Company collected approximately $693,000, $491,000, and $3,253,000 respectively, of prepayment penalties, which are included in interest income on loans, for 2014, 2013, and 2012, respectively.

Additional information about the 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.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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.


	2014									2013									2012
Year Ended December 31,	Average Balance			Interest Income/ Expense⁽¹⁾			Rate Earned/ Paid⁽¹⁾			Average Balance			Interest Income/ Expense⁽¹⁾			Rate Earned/ Paid⁽¹⁾			Average Balance			Interest Income/ Expense⁽¹⁾			Rate Earned/ Paid⁽¹⁾
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans⁽²⁾
Taxable	$	757,088		$	32,198			4.25	%	$	760,435		$	33,214			4.37	%	$	715,553		$	34,983			4.89	%
Tax-exempt		550,800			27,798			5.05			424,477			24,918			5.87			320,743			24,220			7.55
Securities available-for-sale:⁽³⁾
Taxable		445,656			2,883			0.65			951,757			13,083			1.37			1,214,352			22,363			1.84
Tax-exempt		55,272			428			0.77			46,226			434			0.94			49,023			516			1.05
Securities held-to-maturity:
Taxable		1,499,995			31,745			2.12			812,448			16,615			2.05			270,525			6,746			2.49
Interest-bearing deposits in other banks		129,472			352			0.27			174,264			485			0.28			219,540			630			0.29

Total interest-earning assets		3,438,283		$	95,404			2.77	%		3,169,607		$	88,749			2.80	%		2,789,736		$	89,458			3.21	%
Noninterest-earning assets		166,792									167,000									172,748
Allowance for loan losses		(21,876	)								(20,452	)								(18,039	)

Total assets	$	3,583,199								$	3,316,155								$	2,944,445


LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing deposits:
NOW accounts	$	762,280		$	1,677			0.22	%	$	713,677		$	1,673			0.23	%	$	588,500		$	1,561			0.27	%
Savings accounts		334,023			862			0.26			323,643			912			0.28			281,546			689			0.24
Money market accounts		920,485			2,715			0.29			800,052			2,472			0.31			666,949			2,373			0.36
Time deposits		372,699			4,421			1.19			387,514			4,777			1.23			418,789			6,250			1.49

Total interest-bearing deposits		2,389,487			9,675			0.40			2,224,886			9,834			0.44			1,955,784			10,873			0.56
Securities sold under agreements to repurchase		216,937			391			0.18			203,888			361			0.18			174,624			367			0.21
Other borrowed funds and subordinated debentures		271,710			9,070			3.34			231,032			8,610			3.73			217,542			8,300			3.82

Total interest-bearing liabilities		2,878,134		$	19,136			0.66	%		2,659,806		$	18,805			0.71	%		2,347,950		$	19,540			0.83	%
Noninterest-bearing liabilities
Demand deposits		481,035									441,193									386,863
Other liabilities		35,033									42,017									37,497

Total liabilities		3,394,202									3,143,016									2,772,310

Stockholders’ equity		188,997									173,139									172,135
Total liabilities and stockholders’ equity	$	3,583,199								$	3,316,155								$	2,944,445

Net interest income on a fully taxable equivalent basis				$	76,268								$	69,944								$	69,918

Less taxable equivalent adjustment					(10,033	)								(8,984	)								(7,964	)

Net interest income				$	66,235								$	60,960								$	61,954

Net interest spread								2.11	%								2.09	%								2.38	%

Net interest margin								2.22	%								2.21	%								2.51	%

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

(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.

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.


	2014 Compared with 2013									2013 Compared with 2012
	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
Taxable	$	(146	)	$	(870	)	$	(1,016	)	$	2,108		$	(3,877	)	$	(1,769	)
Tax-exempt		6,709			(3,829	)		2,880			6,800			(6,102	)		698
Securities available-for-sale:
Taxable		(5,112	)		(5,088	)		(10,200	)		(4,271	)		(5,009	)		(9,280	)
Tax-exempt		77			(83	)		(6	)		(28	)		(54	)		(82	)
Securities held-to-maturity:
Taxable		14,531			599			15,130			11,283			(1,414	)		9,869
Interest-bearing deposits in other banks		(123	)		(10	)		(133	)		(127	)		(18	)		(145	)

Total interest income		15,936			(9,281	)		6,655			15,765			(16,474	)		(709	)

Interest expense:
Deposits:
NOW accounts		110			(106	)		4			307			(195	)		112
Savings accounts		29			(79	)		(50	)		111			112			223
Money market accounts		359			(116	)		243			436			(337	)		99
Time deposits		(179	)		(177	)		(356	)		(442	)		(1,031	)		(1,473	)

Total interest-bearing deposits		319			(478	)		(159	)		412			(1,451	)		(1,039	)
Securities sold under agreements to repurchase		23			7			30			57			(63	)		(6	)
Other borrowed funds and subordinated debentures		1,418			(958	)		460			506			(196	)		310

Total interest expense		1,760			(1,429	)		331			975			(1,710	)		(735	)

Change in net interest income	$	14,176		$	(7,852	)	$	6,324		$	14,790		$	(14,764	)	$	26

Average earning assets were $3,438,283,000 in 2014, an increase of $268,676,000 or 8.5% from the average in 2013, which was 13.6% higher than the average in 2012. Total average securities, including securities available-for-sale and securities held-to-maturity, were $2,000,923,000, an increase of 10.5% from the average in 2013. The increase in securities volume was mainly attributable to an increase in taxable securities. An increase

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

in securities balances resulted in higher securities income, which increased 16.3% to $35,056,000 on a fully tax equivalent basis. Total average loans increased 10.4% to $1,307,888,000 after increasing $148,616,000 in 2013. The primary reason for the increase in loans was due in large part to an increase in tax-exempt lending as well as residential second mortgage lending. The increase in loan volume resulted in higher loan income. Loan income increased by 3.2% or $1,864,000 to $59,132,000. Total loan income was $59,203,000 in 2012. Prepayment penalties collected were $693,000, $491,000, and $3,253,000 for 2014, 2013, and 2012, respectively.

The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 7.7%, or $204,443,000, in 2014 after increasing by 13.8%, or $323,432,000, in 2013. Deposits increased in 2014, primarily as a result of increases in demand deposits, savings, money market, and NOW accounts. Deposits increased in 2013, primarily as a result of increases in demand deposits, savings, money market, and NOW accounts. Borrowed funds and subordinated debentures increased by 12.4% in 2014, following an increase of 10.9% in 2013. The majority of the Company’s borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB increased by approximately $40,678,000, and average retail repurchase agreements increased by $13,049,000 in 2014. Interest expense totaled $19,136,000 in 2014, an increase of $331,000, or 1.8%, from 2013 when interest expense decreased 3.8% from 2012. The increase in interest expense, for 2014, is primarily due to increases in the average balances of both borrowed funds and money market balances, this was offset, somewhat, by a decrease in rates paid on deposits and other borrowed funds. The decrease in interest expense, for 2013, is primarily due to market decreases in deposit rates and continued deposit pricing discipline. Interest expense on time deposits accounted for a majority of this decrease.

Provision for Loan Losses

The provision for loan losses was $2,050,000 in 2014, compared with $2,710,000 in 2013 and $4,150,000 in 2012. These provisions are the result of management’s evaluation of the amounts and credit 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 2014, primarily as a result of a lower level of charge-off activity, changes in the portfolio composition, and changes in qualitative economic and other risk factors. The provision for loan losses decreased during 2013, primarily as a result of a lower level of charge-off activity and changes in the portfolio composition.

The allowance for loan losses was $22,318,000 at December 31, 2014, compared with $20,941,000 at December 31, 2013. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.68% in 2014 and 1.66% in 2013. The allowance for loan losses increased despite a decrease in the provision for loan losses due to the increase in the size and composition changes of the loan portfolio.

Nonperforming loans, which include all non-accruing loans, totaled $4,146,000 on December 31, 2014, compared with $2,549,000 on December 31, 2013. Nonperforming loans increased primarily as a result of an increase in commercial real estate nonperforming loans.

Other Operating Income

During 2014, the Company continued to experience strong 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.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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 2014 was $15,271,000, a decrease of $3,344,000, or 18.0%, compared to 2013. This decrease followed an increase of $2,750,000, or 17.3%, in 2013, compared to 2012. Included in other operating income are net gains on sales of securities of $450,000, $3,019,000 and $1,843,000 in 2014, 2013 and 2012, respectively. Service charge income, which continues to be a major source of other operating income, totaling $8,063,000 in 2014, decreased $50,000 compared to 2013. This followed an increase of $233,000 in 2013 compared to 2012. The decrease in fees, in 2014, was mainly attributable to a decrease in overdraft fees offset, somewhat, by an increase in fees collected from processing activities as well as an increase in debit card fees. The increase in fees, in 2013, was mainly attributable to an increase in fees collected from processing activities as well as an increase in debit card fees, which was offset, somewhat, by a decrease in overdraft fees. Lockbox revenues totaled $3,099,000, up $20,000 in 2014 following an increase of $149,000 in 2013. Gains on sales of mortgage loans totaled $757,000, down $807,000 in 2014 following an increase of $1,267,000 in 2013. Other income totaled $2,600,000, down $17,000 in 2014 following a decrease of $32,000 in 2013. The decrease in 2013 was mainly attributable to a decrease in ATM fees.

Operating Expenses

Total operating expenses were $56,730,000 in 2014, compared to $55,812,000 in 2013 and $53,238,000 in 2012.

Salaries and employee benefits expenses decreased by $148,000 or 0.4% in 2014, after increasing by 7.0% in 2013. The decrease in 2014 was mainly attributable to decreases in pension costs, mostly offset by increases in staff levels and merit increases in salaries. The increase in 2013 was mainly attributable to increases in staff levels and merit increases in salaries and increases in health insurance costs.

Occupancy expense increased by $503,000, or 10.1%, in 2014, following an increase of $305,000, or 6.5%, in 2013. The increase in 2014 and 2013 was primarily attributable to an increase in rent expense, depreciation expense and building maintenance associated with branch expansion.

Equipment expense increased by $31,000, or 1.3%, in 2014, following an increase of $43,000, or 1.9%, in 2013. The increase in 2014 and 2013 was primarily attributable to an increase in service contracts.

FDIC assessments increased by $180,000, or 10.1%, in 2014, following an increase of $53,000, or 3.1%, in 2013. FDIC assessments increased in 2014 and 2013 mainly as a result of deposit growth.

Other operating expenses increased by $352,000 in 2014, which followed a $128,000 decrease in 2013. The increase in 2014 was primarily attributable to an increase in debit card losses, consultants expense, and software maintenance fees. The decrease in 2013 was primarily attributable to a decrease in charitable contributions and marketing expense offset somewhat by an increase in software maintenance.

Provision for Income Taxes

Income tax expense was $866,000 in 2014, $1,007,000 in 2013 and $1,392,000 in 2012. The effective tax rate was 3.8% in 2014, 4.8% in 2013 and 6.8% in 2012. The decrease in the effective tax rate for 2014 and 2013 was mainly attributable to an increase in tax-exempt interest income as a percentage of taxable income offset slightly by a decrease in tax credits. The federal tax rate was 34% in 2014, 2013 and 2012.

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.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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 (in Basis Points)		Percentage Change in Net Interest Income(1)
+400		(9.4)
+300		(6.0)
+200		(4.3)
+100		(2.1)
–100		0.7
–200		0.1

(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 $307,489,000 on December 31, 2014, compared with $99,295,000 on December 31, 2013. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity.

The sources of funds for dividends paid by the Company are 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 $192,500,000 at December 31, 2014, compared with $176,472,000 at December 31, 2013. The Company’s equity increased primarily as a result of earnings, offset somewhat by an increase in other comprehensive loss, net of taxes, and dividends paid. Other comprehensive loss, net of taxes, increased as a result of an increase in the additional pension liability. The pension liability increased as a result of an increase in the discount rate utilized and the impact of recently updated mortality tables. This was offset somewhat by a decrease in unrealized losses on securities available-for-sale and securities transferred from available-for-sale to held-to-maturity. During the third quarter of 2013, $987,037,000 of securities available-for-sale with unrealized losses of $25,333,000 million were transferred to securities held-to-maturity. This was done in response to rising interest rates.

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

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

least 4.00% and a total capital-to-risk assets ratio of at least 8.00%. The Company and the Bank exceeded these requirements with a Tier 1 capital-to-risk assets ratio of 13.87% and 13.13%, respectively, and total capital-to-risk assets ratio of 15.12% and 14.38%, respectively, at December 31, 2014. 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, 2014, the Company and the Bank exceeded this requirement with leverage ratios of 6.91% and 6.52%, 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, 2014.

Contractual Obligations and Commitments by Maturity (dollars in thousands)

Payments Due — By Period

CONTRACTUAL OBLIGATIONS

Total

Less Than
One Year

One to
Three
Years

Three to
Five
Years

After Five
Years

FHLBB advances

395,500

169,500

100,000

70,000

56,000

Subordinated debentures

36,083

—

36,083

Retirement benefit obligations

35,579

2,322

6,186

6,803

20,268

Lease obligations

12,751

2,279

3,782

2,743

3,947

Customer repurchase agreements

212,360

—

Total contractual cash obligations

692,273

386,461

109,968

79,546

116,298

Amount of Commitment Expiring — By Period

OTHER COMMITMENTS

Total

Less Than
One Year

One to
Three
Years

Three to
Five
Years

After Five
Years

Lines of credit

298,279

26,706

128,542

13,640

129,391

Standby and commercial letters of credit

8,057

6,912

918

168

Other commitments

23,436

3,456

1,205

350

18,425

Total commitments

329,772

37,074

130,665

14,049

147,984

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 notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

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 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 Notional Amount	2014		2013
(dollars in thousands)
Financial instruments whose contract amount represents credit risk:
Commitments to originate 1–4 family mortgages	$	3,215	$	3,373
Standby and commercial letters of credit		8,057		7,930
Unused lines of credit		298,279		249,941
Unadvanced portions of construction loans		3,035		7,026
Unadvanced portions of other loans		17,186		17,750

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 $62,000 and $69,000 for 2014 and 2013, respectively.

Recent Accounting Developments

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company implemented the provisions of ASU 2011-11 as of January 1, 2013. The adoption of this pronouncement did not have a material effect on the consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income or as a separate disclosure in the notes to the financial statements. The new standard is effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. The Company has presented a separate footnote (Note 13) as a result of this pronouncement.

In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company has assessed the impact of ASU 2014-04 and the adoption of this amendment will not have a material impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860) Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This ASU eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. In addition, the ASU requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The ASU is effective for annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015; early application is not permitted. The Company has assessed the impact of ASU 2014-11 and the adoption of this amendment will not have a material impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This ASU which will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. ASU 2014-14 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the ASU is effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. An entity can elect a prospective or a modified retrospective transition method, but must use the same transition method that it elected under FASB ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. Early adoption, including adoption in an interim period, is permitted if the entity already adopted ASU 2014-04. The Company has assessed the impact of ASU 2014-14 and the adoption of this amendment will not have a material impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern. This ASU provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.” The ASU is effective for interim and annual periods beginning after December 15, 2016; early application is permitted. The Company has chosen not to early adopt ASU 2014-15.

Consolidated Balance Sheets


December 31,	2014			2013
(dollars in thousands except share data)
ASSETS
Cash and due from banks (Note 2)	$	43,367		$	59,956
Federal funds sold and interest-bearing deposits in other banks		261,990			34,722

Total cash and cash equivalents		305,357			94,678
Short-term investments		2,131			4,617
Securities available-for-sale, amortized cost $448,210 in 2014 and $465,943 in 2013 (Notes 3, 9 and 11)		448,390			464,245
Securities held-to-maturity, fair value $1,413,603 in 2014 and $1,464,449 in 2013 (Notes 4 and 11)		1,406,792			1,487,884
Federal Home Loan Bank of Boston, stock at cost		24,916			18,072
Loans, net (Note 5)		1,331,366			1,264,763
Less: allowance for loan losses (Note 6)		22,318			20,941

Net loans		1,309,048			1,243,822
Bank premises and equipment (Note 7)		24,182			23,400
Accrued interest receivable		6,241			6,539
Prepaid FDIC assessments		—			—
Other assets (Notes 8 and 16)		96,979			87,897

Total assets	$	3,624,036		$	3,431,154


LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits	$	484,928		$	475,862
Savings and NOW deposits		978,619			992,796
Money market accounts		890,899			864,957
Time deposits (Note 10)		383,145			382,224

Total deposits		2,737,591			2,715,839
Securities sold under agreements to repurchase (Note 11)		212,360			214,440
Other borrowed funds (Note 12)		395,500			255,144
Subordinated debentures (Note 12)		36,083			36,083
Other liabilities		50,002			33,176

Total liabilities		3,431,536			3,254,682
Commitments and contingencies (Notes 7, 18 and 19)
Stockholders’ equity (Note 15):
Preferred Stock – $1.00 par value; 100,000 shares authorized; no shares issued and outstanding		—			—
Common stock, Class A,
$1.00 par value per share; authorized 10,000,000 shares; issued 3,600,729 shares in 2014 and 3,580,404 shares in 2013		3,601			3,580
Common stock, Class B,
$1.00 par value per share; authorized 5,000,000 shares; issued 1,967,180 shares in 2014 and 1,976,180 shares in 2013		1,967			1,976
Additional paid-in capital		12,292			11,932
Retained earnings		200,411			180,747

		218,271			198,235
Unrealized gains (losses) on securities available-for-sale, net of taxes		77			(1,045	)
Unrealized losses on securities transferred to held-to-maturity, net of taxes		(10,479	)		(13,667	)
Pension liability, net of taxes		(15,369	)		(7,051	)

Total accumulated other comprehensive loss, net of taxes (Notes 3, 13 and 15)		(25,771	)		(21,763	)

Total stockholders’ equity		192,500			176,472

Total liabilities and stockholders’ equity	$	3,624,036		$	3,431,154

See accompanying “Notes to Consolidated Financial Statements.”

Consolidated Statements of Income


Year Ended December 31,	2014		2013		2012
(dollars in thousands except share data)
INTEREST INCOME
Loans, taxable	$	32,198	$	33,214	$	34,983
Loans, non-taxable		17,910		16,082		16,432
Securities available-for-sale, taxable		2,601		13,024		22,286
Securities available-for-sale, non-taxable		282		286		340
Federal Home Loan Bank of Boston dividends		283		59		77
Securities held-to-maturity		31,745		16,615		6,746
Federal funds sold, interest-bearing deposits in other banks and short-term investments		352		485		630

Total interest income		85,371		79,765		81,494
INTEREST EXPENSE
Savings and NOW deposits		2,539		2,585		2,250
Money market accounts		2,715		2,472		2,373
Time deposits		4,421		4,777		6,250
Securities sold under agreements to repurchase		391		361		367
Other borrowed funds and subordinated debentures		9,070		8,610		8,300

Total interest expense		19,136		18,805		19,540

Net interest income		66,235		60,960		61,954
Provision for loan losses (Note 6)		2,050		2,710		4,150

Net interest income after provision for loan losses		64,185		58,250		57,804
OTHER OPERATING INCOME
Service charges on deposit accounts		8,063		8,113		7,880
Lockbox fees		3,099		3,079		2,930
Brokerage commissions		302		257		364
Net gains on sales of securities		450		3,019		1,843
Gains on sales of mortgage loans		757		1,564		297
Other income		2,600		2,583		2,551

Total other operating income		15,271		18,615		15,865
OPERATING EXPENSES
Salaries and employee benefits (Note 17)		35,096		35,244		32,943
Occupancy		5,503		5,000		4,695
Equipment		2,329		2,298		2,255
FDIC assessments		1,970		1,790		1,737
Other (Note 20)		11,832		11,480		11,608

Total operating expenses		56,730		55,812		53,238

Income before income taxes		22,726		21,053		20,431
Provision for income taxes (Note 16)		866		1,007		1,392

Net income	$	21,860	$	20,046	$	19,039

SHARE DATA (Note 14)
Weighted average number of shares outstanding, basic
Class A		3,591,732		3,575,683		3,557,693
Class B		1,969,030		1,980,855		1,990,474
Weighted average number of shares outstanding, diluted
Class A		5,562,209		5,557,693		5,549,191

CENTURY BANCORP INC - FORM 10-K - March 12, 2015

Attached files