Century Bancorp Inc.
Annual Report 2007

Plain-text annual report

CA14518 Cover 2/27/08 9:03 AM Page 1 400 Mystic Avenue Medford, MA 02155 (866) 8.CENTURY or (866) 823.6887 www.century-bank.com Equal Housing Lender / Member FDIC 002-CS60930 A n n u a l R e p o r t 2 0 0 7 Family focused. It defines our values and drives our success. CA14518 Cover 2/27/08 9:03 AM Page 2 A W O R D F R O M O U R C H A I R M A N As a family-run business, the values that define our company are not just part of our company culture. They are the principles that guide our decisions and help us position our company for sustained growth. Our prudent approach and long-term view proved to be the right course in 2007 as we steered clear of the pitfalls faced by so many other financial institutions. Marshall M. Sloane The last major credit crisis I witnessed was in the early nineties, over 15 years ago. Century weathered that storm, while watching scores of peer institutions fail or be compelled to merge. The current credit crisis is again predicated on real estate, but in a different securitized structure. Regardless of the mechanics, we believed then, and we believe now, that banks will lose money when they make the mistake of decentralized credit authority and allow unsupervised geographic lending expansion. While our loan policies and choice to remain focused within our market area may have appeared overly conservative several years ago, our decisions have served us well. We chose not to get involved in an overheated market of inflated appraisals and aggressive brokers. We have always tightly controlled loan authorities and customer geography because we believe there is no substitute for local market knowledge. Our risk management philosophy has worked for us since our inception, and it is one of the reasons we have consistently paid a dividend on our stock for the last 34 years. By staying true to our own family’s values, we continue to build our franchise value. I watch with amazement as the “giants” of our industry replenish their depleted capital, following the sub-prime charge-offs, with huge foreign equity infusions. Little is said about the dramatic dilution of value for existing shareholders in those recapitalizations. We have always been sensitive to maintaining and creating value for our loyal long-term shareholders. This latest crisis is one more example of how being guided by our values and our independent thinking has proven to be in our shareholders’ best interests. Our shareholders are always foremost in our thoughts and plans. As we approach our 40th anniversary, I am confident that Century’s strategy will hold true for the future. Sincerely, Marshall M. Sloane Founder and Chairman About Century Century Bancorp, Inc. is a $1.7 billion banking and financial services company headquartered in Medford, Massachusetts. The Company operates 21 banking offices in 16 cities and towns in Massachusetts and provides a full range of business, personal and institutional services. The Company’s common stock is listed on the NASDAQ Market under the symbol: CNBKA. Stockholder Information C O R P O R AT E H E A D Q UA RT E RS Century Bank 400 Mystic Avenue Medford, MA 02155-6316 TEL (866) 8.CENTURY or (866) 823.6887 century-bank.com T R A N S F E R AG E N T A N D R E G I S T R A R Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 TEL (781) 575.3400 computershare.com A N N UA L M E E T I N G The annual meeting of stockholders will be held on Tuesday, April 8, 2008, at 10:00 a.m. The meeting will take place at Century Bank, 400 Mystic Avenue, Medford, MA. S TO C K L I S T I N G Century Bancorp, Inc. became a public company in 1987. Century’s Class A Common Stock is listed in the NASDAQ national market and is traded under the symbol CNBKA. The stock is listed as CntyBcMA in The Boston Globe and CentBcp A in The Wall Street Journal. 10 - K R E P O RT A copy of the Company’s annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge upon written request to: Century Bancorp, Inc., Investor Relations, 400 Mystic Avenue, Medford, MA 02155 or online at http://www.century-bank.com/about/investorrelations.cfm Century Bank Locations O F F I C E S Allston Beverly Boston Boston Boston Boston Boston Braintree Brookline Burlington Cambridge Everett Lynn Malden Medford Medford Square Newton Peabody Quincy Salem Somerville C o m i n g S o o n Medford Medford 300 Western Avenue, Allston, MA 02134 428 Rantoul Street, Beverly, MA 01915 710 Albany Street, Boston, MA 02118 512 Commonwealth Avenue, Boston, MA 02215 275 Hanover Street, Boston, MA 02113 24 Federal Street, Boston, MA 02110 136 State Street, Boston, MA 02110 703 Granite Street, Braintree, MA 02184 1184-1186 Boylston Street/Rt 9 East, Brookline, MA 02467 134 Cambridge Street/Rt 3A, Burlington, MA 01803 2309 Massachusetts Avenue, Cambridge, MA 02140 1763 Revere Beach Parkway/Rt 16, Everett, MA 02149 2 State Street, Lynn, MA 01901 140 Ferry Street at Eastern Avenue, Malden, MA 02148 400 Mystic Avenue, Medford, MA 02155 55 High Street, Medford, MA 02155 31 Boylston Street/Rt 9 West, Newton, MA 02467 12 Peabody Square, Peabody, MA 01960 651 Hancock Street, Quincy, MA 02170 37 Central Street, Salem, MA 01970 102 Fellsway West at Mystic Avenue, Somerville, MA 02145 1 Salem Street, Medford, MA 02155 503 Riverside Avenue, Fellsway Plaza, Medford, MA 02155 F R E E S TA N D I N G C A S H D I S P E N S E RS Boston Boston Boston Boston Cambridge Cambridge Medford Milton Weston Dental School, Boston University, 100 East Newton Street, Boston, MA 02118 The Hotel Commonwealth, 500 Commonwealth Avenue, Boston, MA 02215 Medical School, Boston University, 715 Albany Street, Boston, MA 02118 Parking Garage, Boston University, 710 Albany Street, Boston, MA 02118 CambridgeSide Galleria, 100 CambridgeSide Place, Cambridge, MA 02141 One Kendall Square, Building #100, Cambridge, MA 02139 Sloane Square, 110 Medford Street, Medford, MA 02155 Milton Hospital, 199 Reedsdale Road, Milton, MA 02186 College Hall, Regis College, 235 Wellesley Street, Weston, MA 02493 (617) 562.1700 (978) 921.2300 (617) 578.9250 (617) 424.1644 (617) 557.2950 (617) 423.1490 (617) 367.3712 (781) 356.3400 (617) 713.4910 (781) 238.8700 (617) 349.5300 (617) 381.6300 (781) 586.8700 (781) 388.2100 (781) 393.4160 (781) 391.9830 (617) 582.0920 (978) 977.4900 (617) 376.8100 (978) 740.6900 (617) 629.0929 CA14518 Editorial:Layout 1 2/27/08 11:15 AM Page 1 Jonathan and Barry Sloane D E A R F E L L O W S H A R E H O L D E R S : 2007 was a year of much improved performance for Century Bancorp. Building on our strong foundation, we grew our income, increased deposits and achieved growth across a range of business lines despite challenging economic conditions. A solid performance. Net income for the year ended December 31, 2007 rose 68% to $7,864,000, or $1.42 per diluted share, compared to $0.84 per diluted share in 2006. Our book value per share grew 11.2% to $21.43 at December 31, 2007, compared to $19.28 at year-end 2006. Total stockholders equity at year-end stood at over $118 million. In a year when profitable deposit growth was exceptionally difficult due to a nearly flat, and frequently inverted, yield environment, we attracted new deposits and built on the strength of our customer relationships. We offer a distinct alternative to the “giant” banks as customers turn to us for a personalized relationship from the locally controlled bank they know and trust. In 2007, we grew “core” branch deposits 6.6%, or $23 million, and we increased total assets 2.2%, year-over-year, to $1.7 billion. Our net interest margin improved to 2.65% during 2007, up from 2.40% in 2006. Our efficiency ratio also improved to 77.5% in 2007, down from 83.5% in 2006. While both ratios are still below our goals, we continue to implement strategies to achieve both higher loan yields and lower operating expenses—while striving to attain the optimum level of efficiency in the context of providing the highest service quality and regulatory compliance. Growing our business. The competition for quality middle-market business loans continues to be intense, and developing credit relationships remained a focus in 2007. While maintaining credit quality through our disciplined and prudent approach to lending, we held the total portfolio roughly even, year-over-year, at $726 million. With our local market knowledge and experience, our Business Development Officers and Branch Managers grew our small business loans 7.4% in 2007 through originations of $28.4 million, expanding the total small business portfolio to $67 million. The Institutional Services Group added eight new major lockbox relationships in 2007, growing the total number of items processed to over 23 million, up some 5% from 2006. CA14518 Editorial:Layout 1 2/27/08 11:15 AM Page 2 This achievement is especially noteworthy as the number of items processed industry-wide continues to decline with the shift to electronic payments. To that end, we grew our electronic payment activity by 14.2% in 2007 to over 3.2 million ACH transactions. The Institutional business made a major contribution to our 23% increase in other operating income, reaching a record level of $13.9 million. While some banks were shaken to their core in 2007, we stayed true to our values and prospered. True to our values. As important as what we did in 2007, is what we did not do; and that was exploit the perceived opportunities in sub-prime lending or investing. Century has avoided the sub-prime mortgage disaster that is shaking the banking industry. Time and again over the past decade we were approached by the mortgage industry with proposals to join the flood of banks into sub-prime lending, and each time we came to a head-shaking conclusion that, regardless of the potential profits, these transactions were predatory, and largely unsuitable, to our clients. We saw clearly that unsupported and inappropriate levels of debt would ultimately fail the borrowing families and their lending institutions. We believe that our rejection of sub-prime lending as a profit opportunity is yet another way that the family values that guide our company make a difference for the soundness Total Assets (In Thousands) Net Income (In Thousands) , 9 6 7 8 2 7 1 $ , , 0 9 2 4 4 6 1 $ , , 1 8 2 0 8 6 1 $ , 4 6 8 7, $ 0 8 8 6 $ , 8 8 6 4 $ , Earnings per share, diluted . 2 4 1 $ . 4 2 1 $ . 4 8 0 $ 05 06 07 05 06 07 05 06 07 CA14518 Editorial:Layout 1 2/27/08 11:15 AM Page 3 of our balance sheet and fiscal safety of our customers. As we review the 2007 performance of our regional bank peer group, it is clear that our commitment to sound principles of risk management and the value of long-term customer relationships has proven itself once again. Successful community banking is an incremental business of careful execution to achieve consistent earnings and asset growth. We are very comfortable with the business strategy cast by our Founder and Chairman in 1969: the 2007 sub-prime crisis was a clear validation of our continuing shared values. Challenges and opportunities. The economic conditions ahead will likely provide earnings challenges, yet may also yield opportunities for client and business acquisitions. Guided by our core values, with the flexibility to nimbly react to changing business and economic conditions, we believe we are well positioned to navigate this latest business cycle. As always, we remain focused on our core communities and our relationships with both the business and not-for-profit sectors. We will continue to seek ways to improve service, lower costs, and ensure prudent risk management. We will continue to invest in our communities as a valued neighbor and resource. We encourage our officers to devote time and effort to local charitable endeavors, and we financially support their efforts as resources allow. Century Bank is, most of all, a collection of highly skilled professionals whose knowledge of their clients and communities is the core of our franchise. We thank our employees for their hard work and dedication in making our success possible, and we thank you, our shareholders, for your trust. We are optimistic about the year ahead and look forward to continued success. Sincerely, Barry R. Sloane Co-CEO and Co-President Jonathan G. Sloane Co-CEO and Co-President Management Committee members, from left: William P. Hornby, David B. Woonton, Brian J. Feeney, and Paul A. Evangelista CA14518 Editorial:Layout 1 2/27/08 11:15 AM Page 4 Continuing our proud family tradition, we provided financial and leadership support to these organizations in 2007. Adopt-A-Student Foundation Adrian Colasacco Scholarship Fund All Care Hospice Alliance for Lupus Research American Diabetes Association American Heart Association American Lung Association American Red Cross Angel Fund Anti-Defamation League Arlington Visiting Nurse and Community Health Association for Retarded Citizens of Eastern Middlesex Association for Retarded Citizens of Greater Boston Associazione Gizio Avon Walk for Breast Cancer Bay State Chapter Freedoms Foundation Beacon Academy Beverly Holiday Parade Beverly Main Streets Bishop Fenwick School Boston College Carroll School of Management Boston Harbor Association Boston Minuteman Council, Boy Scouts of America Boston Police Athletic League Chelsea Restoration Corporation Cheryl Mulhern Benefit Fund Citizens for Citizens Digital Credit Union for Kids Dimock Community Health Centers Donne 2000 Scholarship Fund Easter Seals of Massachusetts Eastern Mystic Watershed Alliance Edgar P. Benjamin Healthcare Center Edward J. Sullivan Scholarship Fund Elizabeth Peabody House Essex County Sheriff’s Department Annual Women’s Empowerment Conference Everett Chamber of Commerce Everett Kiwanis Club Fourth Presbyterian Church of South Boston Gann Academy Greater Boston Chamber of Commerce Greater Medford Visiting Nurse Association Hallmark Health System Hallmark Health Visiting Nurse Association Hebrew Senior Life Higginbottom Jones College Program Horace Mann Laboratory School Housing Families Irish Chamber of Commerce USA Italian Home for Children Jeffrey Arthur Education Fund Jewish Big Brothers and Big Sisters Jewish Cemetery Association of Massachusetts Jewish Community Housing Jewish Family Services of the North Shore Jimmy Fund Justin Graceffa Recovery Fund Little Sisters of the Poor Lynn Area Chamber of Commerce Lynn Housing Authority & Neighborhood Development Lynn Rotary Club Maimonides School Boston University Boys & Girls Club of Lynn Boys & Girls Club of Salem Brain Tumor Society Bread of Life Brendan M. Curtin Sponsorship Fund Brian D. Silber Memorial Fund Brookline Community Mental Health Center Brookline Kids Clothes Club Burlington Area Chamber of Commerce Burlington Dollars for Scholars Burlington Education Foundation Burlington High School Burlington Rotary Cam Neely Foundation for Cancer Care Cambridge & Somerville Program for Alcoholism and Drug Abuse Rehabilitation (CASPAR) Caritas Carney Hospital Foundation Catholic Charities of Boston Charles C. Yancey Book Fair Massachusetts General Hospital Massachusetts Hospital School Massachusetts Juvenile Police Association Massachusetts Society of CPAs Matignon High School Medford and Somerville Relay for Life Medford Chamber of Commerce Medford Community Housing Medford Environmental Alliance Medford Fire Fighters Union Medford Jingle Bell Festival Medford Kiwanis Medford Police Patrolman’s Association Medford Rotary Medford War Memorial Rodman Ride for Kids Sacred Heart Parish of Lynn Salem 4th of July Celebration Salem Chamber of Commerce Salem Partnership Salem Sound Coastwatch Salem State College Salem Street Business Association Salvation Army Silent Spring Institute Social Capital Societa di San Guiseppe Solomon Schechter Day School Somerville Chamber of Commerce Somerville Community Corporation Somerville Community Transportation Somerville Council on Aging Somerville High School Football Team Somerville Homeless Coalition Somerville Housing Authority Somerville Little League Medical Academic & Scientific Community Organization Mental Health Programs, Inc. Metrowest Jewish Day School Milton Hospital Muscular Dystrophy Association Mystic Learning Centers Mystic Valley Elder Services Neurofibromatosis of New England New England Aquarium New England Baptist Hospital New England Center for Children New England Center for Homeless Veterans New England Province of Jesuits North Cambridge Senior Center North End Action of Boston Community Development North End Chamber of Commerce North End Music Performing Arts Center North Shore Catholic Charities North Shore Chamber of Commerce Ocular Immunology and Uveitis Foundation Our Lady of Nazareth Academy Pan Mass Challenge Somerville Memorial Day Parade Somerville Pop Warner Football Somerville Veterans’ Services Somerville-Cambridge Elder Services South Shore Chamber of Commerce South Shore Women’s Business Network Springstep St. Francis House of Boston St. Clement Parish School of Medford St. John School of Boston St. Joseph of Medford St. Joseph Society of Boston St. Leonard of Boston St. Peter School of Cambridge Synagogue Council of Massachusetts Temple Israel of Boston The Women’s Congress Torah Academy Town of Brookline Recreation Department US Marine Corps Toys for Tots Weymouth Annual Senior Picnic Wheelock College World Unity YMCAs of Greater Boston Young Israel of Brookline Youth Care Youville Hospital & Rehabilitation Center Malden Beautification Program Malden Chamber of Commerce Malden Pop Warner Football Association Malden Rotary Club Malden YMCA Peabody Chamber of Commerce Peabody High School Hockey Boosters Rashi School Regis College Robbie Mills Memorial Fund Andrew J. Santos, Jr. Janice D. Taylor David J. Waryas ASSISTANT VICE PRESIDENTS John S. Bosco, Jr. Pasqualina Buttiri Toni M. Chardo Cynthia A. Davidson Laura A. DiFava John R. Ferguson Thatcher L. Freeborn Lisa Gosling Daniel F. Griffin Janice D. Hallinan Kristine M. Holopainen Sandy J. Jackson James J. Jordan Paul R. Loiselle Malcolm I. Maloon Ann E. Mannion Carol A. Melisi Richard D. Murray Sarah A. O’Toole Karen J. Pessia Cornelius C. Prioleau William F. Shutt, Jr. Richard A. Thimble Tuesday N. Thomas Lawrence H. Tsoi Jose I. Umana Christina Welch-Matthews OFFICERS John J. Ferren Marissa L. Fitzgerald Janet Garcia Anna M. Gorska Paula A. Grimaldi Amelia N. Iocco Brian Kelly Brandon N. Letellier Kathleen McGillicuddy David C. Pennybaker, Jr. Judith A. Shannon Elizabeth A. Theriault Jeanne A. Wood CA14518_Financials 2/28/08 2:47 PM Page 1 CENTURY BANCORP, INC. DIRECTORS CENTURY BANK AND TRUST COMPANY OFFICERS George R. Baldwin1,4,6 President & CEO Baldwin & Company Roger S. Berkowitz2,5,7* President & CEO Legal Sea Foods, Inc. Henry L. Foster, D.V.M. Director Emeritus Founder & Chairman Emeritus Charles River Labs, Inc. Marshall I. Goldman3*,5** Professor Emeritus Wellesley College Russell B. Higley, Esq.6*,7 Attorney Higley & Higley Jackie Jenkins-Scott5,6 President Wheelock College Linda Sloane Kay7 Vice President Century Bank Fraser Lemley2,4,5 Chairman & CEO Sentry Auto Group Joseph J. Senna, Esq.1*,4 Attorney Jonathan G. Sloane4,5,6,7 Co-President & Co-CEO Century Bank and Trust Company Barry R. Sloane4,5,6,7 Co-President & Co-CEO Century Bank and Trust Company Marshall M. Sloane4,5 Chairman of the Board Century Bank and Trust Company Stephanie Sonnabend1,3,5* CEO & President Sonesta International Hotels Corporation George F. Swansburg4*,5 Jon Westling1,2*,3 President Emeritus Boston University OFFICERS Marshall M. Sloane Founder and Chairman Jonathan G. Sloane Co-President & Co-CEO Barry R. Sloane Co-President & Co-CEO William P. Hornby, CPA Chief Financial Officer & Treasurer Rosalie A. Cunio Clerk Paula A. Grimaldi Assistant Clerk MANAGEMENT COMMITTEE Marshall M. Sloane Chairman of the Board Jonathan G. Sloane Co-President & Co-CEO Barry R. Sloane Co-President & Co-CEO William P. Hornby, CPA Chief Financial Officer & Treasurer Paul A. Evangelista Executive Vice President Brian J. Feeney Executive Vice President David B. Woonton Executive Vice President SENIOR VICE PRESIDENTS Gerald S. Algere Richard L. Billig Janice A. Brandano Bradford J. Buckley Diana L. Carito, CIA, CRP Peter R. Castiglia James M. Flynn, Jr. William J. Gambon, Jr. Anthony C. LaRosa, CPA Nancy Lindstrom Jason J. Melius Deborah R. Rush FIRST VICE PRESIDENTS Phillip A. Gallagher Timothy L. Glynn Shipley C. Mason Kenneth A. Samuelian Yasmin D. Whipple VICE PRESIDENTS Michael D. Ballard Robert A. Bennett Vincent C. Bertrand Gerald Bovardi Joseph B. Chapman Gracine Copithorne Rosalie A. Cunio Barbara J. Cunningham Sylvia Daikos Susan B. Delahunt Anthony J. DiGuilio Sandra R. Edey Judith A. Fallon Jeffrey E. Fox Howard N. Gold Ann J. Hollup T. Daniel Kausel Linda Sloane Kay Kathleen A. Kelly Nancy M. Marsh Karen M. Martin Carl M. Mattos Joanne C. McNamara, CISA Thomas E. Piemontese 1 Audit Committee, 2 Compensation Committee, 3 Nominating Committee, 4 Executive Committee, 5 Asset Liability Committee, 6 Non-deposit Investment and Insurance Products Committee, 7 Trust Committee, * Committee Chairperson, ** Vice Chairperson CA14518_Financials 2/28/08 2:47 PM Page 2 CA14518_Financials 2/28/08 2:47 PM Page 3 Century Bancorp, Inc. AR ’07 F I N A N C I A L S TAT E M E N T S 1 3 16 17 18 19 20 38 40 Financial Highlights Management’s Discussion and Analysis of Results of Operations and Financial Condition Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm Management’s Report on Internal Control Over Financial Reporting CA14518_Financials 2/28/08 2:47 PM Page 4 2007 2006 2005 2004 2003 $ 83,008 43,805 39,203 1,500 37,703 13,948 40,255 11,396 3,532 $ 7,864 5,542,461 5,546,707 5,543,804 $ $ 1.42 1.42 27.6 % $ 1,680,281 726,251 1,130,061 118,806 21.43 $ 0.49 % 7.05 % 2.65 % 0.22 % 6.97 % 77.5 % $ $ $ $ 80,707 43,944 36,763 825 35,938 11,365 40,196 7,107 2,419 4,688 $ 72,811 32,820 39,991 600 39,391 10,973 40,318 10,046 3,166 $ 65,033 23,646 41,387 300 41,087 10,431 37,663 13,855 4,974 $ 69,298 23,942 45,356 450 44,906 10,009 34,272 20,643 8,963 $ 6,880 $ 8,881 $ 11,680 5,540,966 5,550,722 5,541,188 5,535,202 5,553,009 5,535,422 5,526,202 5,553,197 5,534,088 5,519,800 5,548,615 5,524,438 0.85 0.84 46.2 % $ $ 1.24 1.24 31.3 % $ $ 1.61 1.60 24.2 % $ $ 2.12 2.11 17.2 % $ 1,644,290 736,773 1,268,965 106,818 19.28 $ $ 1,728,769 689,645 1,217,040 103,201 18.64 $ $ 1,833,701 580,003 1,394,010 104,773 18.93 $ $ 1,688,911 512,314 1,338,853 103,728 18.78 $ 0.28 % 4.45 % 2.40 % 0.06 % 6.39 % 83.5 % 0.41 % 6.57 % 2.58 % 0.04 % 6.31 % 79.1 % 0.55 % 8.61 % 2.75 % 0.01 % 6.38 % 72.7 % 0.74 % 11.57 % 3.08 % 0.04 % 6.40 % 61.9 % Financial Highlights Century Bancorp, Inc. AR ’07 (dollars in thousands, except share data) FOR THE YEAR Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other operating income Operating expenses Income before income taxes Provision for income taxes Net income Average shares outstanding, basic Average shares outstanding, diluted Shares outstanding at year-end Earnings per share: Basic Diluted Dividend payout ratio AT YEAR-END Assets Loans Deposits Stockholders’ equity Book value per share SELECTED FINANCIAL PERCENTAGES Return on average assets Return on average stockholders’ equity Net interest margin, taxable equivalent Net charge-offs as a percent of average loans Average stockholders’ equity to average assets Efficiency ratio 01 CA14518_Financials 2/28/08 2:47 PM Page 5 Per Share Data 2007, Quarter Ended Market price range (Class A) High Low Dividends Class A Dividends Class B 2006, Quarter Ended Market price range (Class A) High Low Dividends Class A Dividends Class B Financial Highlights Century Bancorp, Inc. AR ’07 December 31, September 30, June 30, March 31, $ 25.49 19.80 0.12 0.06 $ 22.67 19.26 0.12 0.06 $ 26.55 21.17 0.12 0.06 $ 28.25 26.00 0.12 0.06 December 31, September 30, June 30, March 31, $ 29.48 25.77 0.12 0.06 $ 27.24 24.05 0.12 0.06 $ 29.10 24.01 0.12 0.06 $ 30.00 27.29 0.12 0.06 The stock performance graph below compares the cumulative total shareholder return of the Company’s Common Stock from December 31, 2002 to December 31, 2007 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock index. The lines in the table below represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used. Comparison of Five-Year Cumulative Total Return* NASDAQ U.S. NASDAQ Banks Century Bancorp, Inc. $200 $175 $150 $125 $100 $75 $50 $25 $0 2002 2003 2004 2005 2006 2007 Value of $100 Invested on December 31, 2002 at: 2003 2004 2005 2006 2007 Century Bancorp, Inc. NASDAQ Banks NASDAQ U.S. $ 135.64 128.64 149.52 $ 114.56 147.22 162.72 $ 115.51 143.82 166.18 $ 109.69 161.41 182.57 $ 82.78 127.92 197.98 * Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2002 and that all dividends were reinvested. 02 CA14518_Financials 2/28/08 2:47 PM Page 6 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 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 polices 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. OVERVIEW Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. The Company had total assets of $1.7 billion at December 31, 2007. The Company presently operates 21 banking offices in 16 cities and towns in Massachusetts ranging from Braintree in the south to Beverly in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts. The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income/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 lockbox 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 supported by Linsco/Private Ledger Corp., a full service securities brokerage business. The Company is also a provider of financial services including cash management, transaction processing and short-term financing, to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with approximately 39% of the 351 cities and towns in Massachusetts. 03 The Company had net income of $7,864,000 for the year ended December 31, 2007, compared with net income of $4,688,000 for the year ended December 31, 2006 and net income of $6,880,000 for the year ended December 31, 2005. Basic earnings per share were $1.42 in 2007, compared to $0.85 in 2006 and $1.24 in 2005. Diluted earnings per share were $1.42 in 2007, compared to $0.84 in 2006 and $1.24 in 2005. Included in income for 2007 is $1,321,000 pre-tax gain on the sale of the building that houses the Company’s Medford Square branch. Included in income for 2006 is a pre-tax gain of $600,000 from the sale of the Company’s rights to future royalty payments for a portion of its Merchant Credit Card customer base. Throughout 2007, the Company has seen improvement in its net interest margin as illustrated in the graph below: Net Interest Margin 3.00 % 2.80 % 2.60 % 2.40 % 2.20 % 2.00 % 2.64% 2.77% 2.79% 2.41% 1st Qtr 2007 2nd Qtr 2007 3rd Qtr 2007 4th Qtr 2007 2.30% 4th Qtr 2006 The primary factors accounting for the increase in net interest margin are: • A continuing decline in the cost of funds as a result of increased pricing discipline related to deposits, • An increase in the loan yield due to an increase in prepayment fees, particularly in the second quarter of 2007, and • The maturity of lower-yielding investment securities. While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as prepayments of loans and changes in market interest rates, will continue to positively impact the net interest margin. In addition, a great deal of emphasis has been placed on cost control during 2007 as demonstrated by the increase of 0.1% in operating expenses for the year ended December 31, 2007. Historical U.S. Treasury Yield Curve 6.00 % 5.00 % 4.00 % 3.00 % 2.00 % 1.00 % 0.00 % 3 Month 6 Month 2 Year 3 Year 5 Year 10 Year 30 Year Treasury Yield Curve 12/31/2005 Treasury Yield Curve 12/31/2006 Treasury Yield Curve 12/31/2007 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. During 2005 and 2006, the U.S. economy experienced a flattening and subsequent inversion of the yield curve, which means that the spread between CA14518_Financials 2/28/08 2:47 PM Page 7 Management’s Discussion and Analysis of Results of Operations and Financial Condition the long-term and short-term yields has decreased or inverted. During 2007, rates have fallen and the yield curve has steepened somewhat. This has positively impacted the net interest margin. During 2006 the Company’s earnings were negatively impacted primarily by a decrease in net interest income. This decrease was primarily due to the inverted yield curve during 2006 as well as increased funding costs. Total assets were $1,680,281,000 at December 31, 2007, an increase of 2.2% from total assets of $1,644,290,000 on December 31, 2006. On December 31, 2007, stockholders’ equity totaled $118,806,000, compared with $106,818,000 on December 31, 2006. Book value per share increased to $21.43 at December 31, 2007 from $19.28 on December 31, 2006. During the fourth quarter of 2007, the Company sold the assets associated with the Sherman Union branch located on Commonwealth Avenue in Boston, Massachusetts as well as Automated Teller Machines (ATMs) located at or near Boston University. The buyer assumed the leases for the branch and ATMs. The deposits associated with the Sherman Union branch were transferred to Century’s Hotel Commonwealth branch located at 512 Commonwealth Avenue in Boston, Massachusetts. This resulted in a gain of $115,000. During 2007, the Company entered into a lease agreement to open a branch located on Riverside Avenue in Medford, Massachusetts. The branch is scheduled to open during the second quarter of 2008. On August 17, 2007, the Company sold the building which houses one of its branches located at 55 High Street, Medford, Massachusetts for $1.5 million at market terms. The Bank is relocating this branch to 1 Salem Street (formerly 3 Salem Street), Medford, Massachusetts. This sale resulted in a gain of $1,321,000. On February 7, 2006, the Company announced that it had renewed its contract with NOVA Information Systems, a wholly owned subsidiary of U.S. Bancorp, and had also sold its rights to future royalty payments for a portion of its Merchant Credit Card customer base for $600,000, which the Bank has included as other income. 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 the following to be its critical accounting policies: allowance for loan losses and impairment of investment securities. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions. 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. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect Century Bancorp, Inc. AR ’07 the amount of the formula allowance. Risk grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and qualitative adjustments. For the residential real estate and consumer loan portfolios, the reserves are calculated by applying historical charge-off and recovery experience and qualitative adjustments to the current outstanding balance in each loan category. Loss factors are based on the Company’s historical loss experience, as well as regulatory guidelines. Specific allowances for loan losses entails the assignment of allowance amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Company will not collect all the contractual interest and principle payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or non-accrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a.) present value of anticipated future cash flows, (b.) the loan’s observable fair market price or (c.) fair value of collateral, if the loan is collateral dependent. The formula allowance and specific allowances also include management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors. Management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: (a.) market risk factors, such as the effects of economic variability on the entire portfolio, and (b.) unique portfolio risk factors that are inherent characteristics of the Company’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Company’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include industry concentrations and geographic concentrations or trends that may exacerbate losses resulting from economic events which the Company may not be able to fully diversify out of its portfolio. 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. 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 write-down is included as a charge to earnings. An “other-than-temporary” impairment exists for debt securities if it is probable that the Company will be unable to collect all amounts due according to contractual terms of the security. 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 hinder its ability to make future scheduled interest and principal payments on a timely basis or whether there was downgrade in ratings by rating agencies. 04 CA14518_Financials 2/28/08 2:47 PM Page 8 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 The Company has the ability and intent to hold all securities with an unrealized loss until recovery of fair value, which may be maturity. FINANCIAL CONDITION Investment Securities The Company’s securities portfolio consists of securities available-for-sale and securities held-to-maturity. Securities available-for-sale consist of certain U.S. Treasury and U.S. Government Sponsored Enterprises, mortgage-backed securities, state, county, municipal securities, foreign debt securities, other marketable equities and Federal Home Loan Bank (“FHLB”) stock. 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, 2007 totaled $403,635,000 and include gross unrealized gains of $1,728,000 and gross unrealized losses of $2,077,000. A year earlier, securities available-for-sale were $415,481,000 including gross unrealized gains of $221,000 and unrealized losses of $8,447,000. In 2007, the Company recognized gross gains of $153,000 on the sale of one stock. In 2006, the Company recognized no net gains or losses on the sale of available-for-sale securities. Securities which management intends to hold until maturity consist of U.S. Government Sponsored Enterprises and mortgage-backed securities. Securities held-to-maturity as of December 31, 2007 are carried at their amortized cost of $183,710,000 and exclude gross unrealized gains of $131,000 and gross unrealized losses of $2,137,000. A year earlier, securities held-to-maturity totaled $265,712,000 excluding gross unrealized gains of $76,000 and gross unrealized losses of $7,368,000. 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 At December 31, (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises Mortgage-backed securities Obligations of states and political subdivisions FHLB Stock Other Total 2007 2006 2005 Amount Percent Amount Percent Amount Percent $ 2,036 218,729 162,162 1,678 15,531 3,499 0.5 % 54.2 % 40.2 % 0.4 % 3.8 % 0.9 % $ 1,991 221,037 179,076 — 9,823 3,554 0.5 % 53.2 % 43.1 % 0 % 2.4 % 0.8 % $ 1,979 292,153 218,552 807 16,312 3,179 0.4 % 54.7 % 41.0 % 0.2 % 3.1 % 0.6 % $ 403,635 100.0 % $ 415,481 100.0 % $ 532,982 100.0 % Included in mortgage-backed securities are U.S. Government Sponsored Enterprises totaling $148,856,000, $148,134,000 and $180,690,000 for 2007, 2006 and 2005, respectively. 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 At December 31, (dollars in thousands) 2007 2006 2005 Amount Percent Amount Percent Amount Percent U.S. Government Sponsored Enterprises Mortgage-backed securities $ 94,987 88,723 51.7 % 48.3 % $ 159,969 105,743 60.2 % 39.8 % $ 159,952 126,626 55.8 % 44.2 % Total $ 183,710 100.0 % $ 265,712 100.0 % $ 286,578 100.0 % For all years presented all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. 05 CA14518_Financials 2/28/08 2:47 PM Page 9 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2007. 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 (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises Mortgage-backed securities Obligations of state and political subdivisions and other Within One Year Weighted One Year Weighted Five Years % of Total Average Yield to Five Years % of Total Average Yield to Ten Years % of Total Weighted Average Yield $ 2,036 0.5 % 4.60 % $ — 0.0 % — $ — 0.0 % — 84,581 21.0 % 7,017 2,424 1.7 % 0.6 % 3.20 % 3.51 % 4.00 % 98,862 148,100 — 24.5 % 36.7 % 0.0 % 4.87 % 4.46 % — 35,286 7,045 8.7 % 5.00 % 1.8 % 4.95 % — 0.0 % — Total $ 96,058 23.8 % 3.27 % $ 246,962 61.2 % 4.62 % $ 42,331 10.5 % 4.99 % Non- Maturing % of Total Weighted Average Yield Total Weighted Average Yield % of Total $ — — — 18,284 0.0 % 0.0 % 0.0 % 4.5 % — — — 6.10 % $ 2,036 218,729 162,162 20,708 0.5 % 54.2 % 40.2 % 5.1 % 4.60 % 4.24 % 4.44 % 5.85 % $ 18,284 4.5 % 6.10 % $ 403,635 100.0 % 4.40 % (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises Mortgage-backed securities Obligations of state and political subdivisions and other Total Amortized Cost of Securities Held-to-Maturity Amounts Maturing Within One Year Weighted One Year Weighted Five Years % of Total Average Yield to Five Years % of Total Average Yield to Ten Years % of Total Weighted Average Yield Total Weighted Average Yield % of Total (dollars in thousands) U.S. Government Sponsored Enterprises $ 69,988 38.1 % 3.31 % $ 24,999 13.6 % 3.92 % $ — 0.0 % — $ 94,987 51.7 % 3.47 % Mortgage-backed securities 1 0.0 % 5.29 % 88,558 48.2 % 4.17 % 164 0.1 % 4.78 % 88,723 48.3 % 4.17 % Total $ 69,989 38.1 % 3.31 % $ 113,557 61.8 % 4.11 % $ 164 0.1 % 4.78 % $ 183,710 100.0 % 3.81 % At December 31, 2007 and 2006, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In addition, there were no sales of state, county or municipal securities in 2007 or 2006. One equity security was sold during 2007 with gross proceeds of $336,000 resulting in a gain of $153,000. Loans The Company’s lending activities are conducted principally in Massachusetts. The Company grants single and multi-family residential loans, commercial and commercial real estate loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties, and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate market in the borrowers’ geographic areas and the general economy. 06 CA14518_Financials 2/28/08 2:47 PM Page 10 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 The following summary shows the composition of the loan portfolio at the dates indicated. December 31, 2007 2006 2005 2004 2003 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 $ 62,412 8.6 % $ 49,709 6.7 % $ 58,846 8.5 % $ 51,918 9.0 % $ 34,121 Commercial and industrial Commercial real estate Residential real estate Consumer Home Equity Overdrafts Total 117,332 299,920 168,204 20,149 56,795 1,439 16.2 % 41.3 % 23.2 % 2.8 % 7.7 % 0.2 % 117,497 327,040 167,946 9,881 63,380 1,320 16.0 % 44.5 % 22.8 % 1.3 % 8.5 % 0.2 % 94,139 302,279 146,355 9,977 13.7 % 43.8 % 21.2 % 1.5 % 8,607 1.5 % 76,710 11.1 % 69,957 12.0 % 1,339 0.2 % 812 0.1 % 8,025 49,382 483 1.6 % 9.6 % 0.1 % 71,962 12.4 % 39,742 258,524 44.6 % 293,781 57.3 % 118,223 20.4 % 86,780 16.9 % 6.7 % 7.8 % $ 726,251 100.0 % $ 736,773 100.0 % $ 689,645 100.0 % $ 580,003 100.0 % $ 512,314 100.0 % At December 31, 2007, 2006, 2005, 2004 and 2003 loans were carried net of discounts of $3,000, $3,000, $4,000, $20,000 and $138,000, respectively. Net deferred loan fees of $38,000, $183,000, $482,000, $485,000 and $389,000 were carried in 2007, 2006, 2005, 2004 and 2003, respectively. The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2007. 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. (dollars in thousands) Construction and land development Commercial and industrial Commercial real estate Total Remaining Maturities of Selected Loans at December 31, 2007 One Year or Less One to Five Years Over Five Years Total $ 41,025 67,572 30,473 $139,070 $ 14,865 40,194 118,108 $ 173,167 $ 6,522 9,566 151,339 $ 167,427 $ 62,412 117,332 299,920 $ 479,664 The following table indicates the rate variability of the above loans due after one year. December 31, 2007 (dollars in thousands) Predetermined interest rates Floating or adjustable interest rates Total One to Five Years Over Five Years Total $ 94,598 78,569 $ 173,167 $ 30,294 137,133 $ 167,427 $ 124,892 215,702 $ 340,594 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 to any one business sector and loan risks are generally diversified among many borrowers. Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s market area, which generally includes Eastern Massachusetts and Southern New Hampshire. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three to five years. Amortization schedules are long-term and thus a balloon payment is due at maturity. Under most circumstances, the Bank will offer to re-write or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized non-residential 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 non-residential and residential mortgages. Residential real estate (1-4 family) includes two categories of loans. Included in residential real estate are approximately $9,503,000 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. 07 CA14518_Financials 2/28/08 2:47 PM Page 11 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 The other category of residential real estate loans are mostly 1-4 family residential properties located in the Bank’s market area. General underwriting criteria are largely the same as those used by Federal National Mortgage Association (Fannie Mae) but normally only one or three year adjustable interest rates are used. 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%. The Bank intends to maintain a market for construction loans, principally for smaller local residential projects or an owner-occupied commercial project. Individual consumer residential home construction loans are also extended on a similar basis. 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, 2007, the Company was obligated to advance a total of $27,294,000 to complete projects under construction. The composition of nonperforming assets is as follows: December 31, (dollars in thousands) Total nonperforming loans/loans on non-accrual Other real estate owned Total nonperforming assets Restructured loans Loans past due 90 and still accruing Nonperforming loans as a percent of gross loans Nonperforming assets as a percent of total assets The composition of impaired loans at December 31, is as follows: Residential real estate, multi-family Construction and land development Commercial and industrial Total impaired loans 2007 2006 2005 2004 2003 $ 1,312 452 $ 1,764 $ — 122 0.18 % 0.10 % 2007 $ — — 196 $ 196 $ 135 — $ 135 $ — 789 0.02 % 0.01 % 2006 $ — — 16 $ 16 $ 949 — $ 949 $ — — 0.14 % 0.05 % 2005 $ — 675 211 $ 886 $ $ $ $ $ 628 — 628 — 160 0.11 % 0.03 % $ 1,175 — $ 1,175 $ — — 0.23 % 0.07 % 2004 512 — 452 964 2003 $ 541 — 1,077 $ 1,618 At December 31, 2007, impaired loans of $75,000 had specific reserves of $75,000. There were no impaired loans with specific reserves from December 31, 2003 through December 31, 2006. The Company was servicing mortgage loans sold to others without recourse of approximately $559,000, $798,000, $1,078,000, $1,538,000 and $2,397,000 at December 31, 2007, 2006, 2005, 2004 and 2003, respectively. Additionally, the Company services mortgage loans sold to others with limited recourse. The outstanding balance of these loans with limited recourse was approximately $65,000, $72,000, $80,000, $86,000 and $183,000 at December 31, 2007, 2006, 2005, 2004 and 2003, respectively. 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 non-accrual 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, are reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank. Non-accrual loans increased from 2006 to 2007 primarily as a result of three consumer mortgages totaling $938,000. The relatively low level of nonperforming assets of $135,000 in 2006 and $949,000 in 2005 resulted from fewer additions to nonperforming assets during the year combined with an improvement in the resolution of nonperforming assets including payments on nonperforming loans. In addition to the above, the Company continues to monitor closely $14,117,000 and $20,779,000 at December 31, 2007 and 2006, respectively, of potential problem 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, 2007, although such values can fluctuate with changes in the economy and the real estate market. 08 CA14518_Financials 2/28/08 2:47 PM Page 12 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 Allowance for Loan Losses The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, the financial condition of borrowers, the value of collateral securing 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, (dollars in thousands) Year-end loans outstanding 2007 2006 2005 2004 2003 (net of unearned discount and deferred loan fees) $ 726,251 $ 736,773 $ 689,645 $ 580,003 $ 512,314 Average loans outstanding (net of unearned discount and deferred loan fees) $ 725,903 $ 723,825 $ 641,103 $ 546,147 $ 500,723 Balance of allowance for loan losses at the beginning of year Loans charged-off: Commercial Residential real estate Consumer Total loans charged-off Recovery of loans previously charged-off: Commercial Real estate Consumer Total recoveries of loans previously charged-off: Net loan charge-offs Additions to allowance charged to operating expense $ 9,713 $ 9,340 $ 9,001 $ 8,769 $ 8,506 1,828 — 311 2,139 268 149 142 559 1,580 1,500 386 — 322 708 96 49 112 256 452 825 366 — 324 690 75 235 119 429 261 600 1 194 113 308 117 103 20 240 68 300 240 — 125 365 127 29 22 178 187 450 Balance at end of year $ 9,633 $ 9,713 $ 9,340 $ 9,001 $ 8,769 Ratio of net charge-offs during the year to average loans outstanding Ratio of allowance for loan losses to loans outstanding 0.22 % 1.33 % 0.06 % 1.32 % 0.04 % 1.35 % 0.01 % 1.55 % 0.04 % 1.71 % These provisions are the result of management’s evaluation of the 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 pace of the charge-offs depends on many factors including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge-offs increased during 2007 due to an increase in commercial loan charge-offs. The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories the entire allowance is available to absorb losses attributable to all loan categories. At December 31, of each year listed below, the allowance was comprised of the following: 2007 2006 2005 2004 2003 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 Percent of Loans in Each Category to Total Loans Amount Amount (dollars in thousands) Construction and land development $ 592 8.6 % $ 849 6.8 % $ 1,014 8.5 % $ 806 9.0 % $ 563 6.7 % Commercial and industrial Commercial real estate Residential real estate Consumer and other Home equity Unallocated Total 09 16.2 39.0 23.2 5.0 8.0 4,714 2,457 647 1,006 217 — 15.9 43.9 22.8 2.0 8.6 1,916 4,460 512 220 176 1,580 13.7 43.8 21.2 1.7 11.1 1,575 4,131 778 173 600 1,069 12.4 44.6 20.4 1.6 12.0 1,232 3,626 628 144 546 2,019 7.8 57.3 16.9 1.7 9.6 895 4,182 551 130 385 2,063 $ 9,633 100.0 % $ 9,713 100.0 % $ 9,340 100.0 % $ 9,001 100.0 % $ 8,769 100.0 % CA14518_Financials 2/28/08 2:47 PM Page 13 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 The shift in the allocations of the allowance for loan losses in 2007 is the result of the implementation of guidance issued by the FDIC. The current allocation is based on historical charge-off rates with additional allocations based on risk factors for each category and general economic factors. In prior years, the allowance related to general economic factors was included solely in the unallocated category. Deposits The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. 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 bi-monthly by the Bank’s rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee. The following table sets forth the average balances of the Bank’s deposits for the periods indicated. 2007 2006 2005 Amount Percent Amount Percent Amount Percent (dollars in thousands) Demand Deposits $ 278,402 Savings and Interest Checking Money Market Time Certificates of Deposit 314,961 277,482 335,972 23.1 % 26.1 % 23.0 % 27.8 % $ 284,295 290,172 327,203 359,045 22.6 % 23.0 % 26.0 % 28.4 % $ 283,876 23.1 % 313,146 25.5 % 366,623 29.8 % 265,310 21.6 % Total $1,206,817 100.0 % $1,260,715 100.0 % $1,228,955 100.0 % Time Deposits of $100,000 or more as of December 31, are as follows: (dollars in thousands) Three months or less Three months through six months Six months through twelve months Over twelve months 2007 $ 74,153 59,677 19,602 19,160 $ 172,592 Borrowings The Bank’s borrowings consisted primarily of FHLB borrowings collateralized by a blanket pledge agreement on the Bank’s FHLB stock, certain qualified investment securities, deposits at the FHLB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowing from the FHLB totaled $289,250,000, an increase of $167,500,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLB at December 31, 2007 was approximately $31,452,000. In addition, the Bank has a $14,500,000 line of credit with the FHLB. See note 10 “Other Borrowed Funds and Subordinated Debentures” for a schedule, their interest rates and other information. Subordinated Debentures In May 1998, the Company consummated the sale of a trust preferred securities offering, in which it issued $29,639,000 of subordinated debt securities due 2029 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust. Century Bancorp Capital Trust then issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30%. The Company redeemed through its subsidiary, Century Bancorp Capital Trust, its 8.30% Trust Preferred Securities, January 10, 2005. In December 2004, the Company consummated the sale of a trust preferred securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II. Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities pay dividends at an annualized rate of 6.65% for the first ten years and then convert to the three-month LIBOR rate plus 1.87% for the remaining twenty years. The Company is using the proceeds primarily for general business purposes. 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 $85,990,000, a decrease of $970,000 from the prior year. See note 9 “Securities Sold Under Agreements to Repurchase” for a schedule, including their interest rates and other informa- tion. 10 CA14518_Financials 2/28/08 2:47 PM Page 14 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 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 increased 6.6% in 2007 to $39,203,000, compared with $36,763,000 in 2006. The increase in net interest income for 2007 was mainly due to a 10.4% or a twenty-five basis point increase in the net interest margin. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis increased to 2.65% in 2007 from 2.40% in 2006, which had decreased from 2.58% in 2005. 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. Year Ended December 31, (dollars in thousands) ASSETS Interest-earning assets: Loans(2) Securities available-for-sale:(3) Taxable Tax-exempt Securities held-to-maturity: Taxable Federal funds sold Interest-bearing deposits in other banks 2007 Interest Income/ Expense(1) Rate Earned/ Paid(1) 2006 Interest Income/ Expense(1) Rate Earned/ Paid(1) 2005 Interest Income/ Expense(1) Rate Earned/ Paid(1) Average Balance Average Balance Average Balance $ 725,903 $ 52,902 7.29 % $ 723,825 $ 51,466 7.11 % $ 641,103 $ 41,274 6.44 % 372,878 330 14,466 17 248,338 131,737 9,065 6,661 3.88 5.21 3.65 5.06 497,113 354 17,182 18 275,897 10,112 37,511 1,955 3.46 5.02 3.67 5.21 580,129 878 19,518 32 311,738 11,635 15,847 362 3.36 3.85 3.73 2.28 163 7 4.29 217 9 4.15 50 — 0.64 Total interest-earning assets 1,479,349 83,118 5.62 % 1,534,917 80,742 5.26 % 1,549,745 72,821 4.70 % Non interest-earning assets Allowance for loan losses Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing deposits: NOW accounts Savings accounts Money market accounts Time deposits 130,652 (9,719) $ 1,600,282 123,601 (9,608) $ 1,648,910 118,325 (9,353) $ 1,658,717 $ 202,761 112,200 277,482 335,972 $ 4,235 2,477 8,901 15,640 2.09 % 2.21 3.21 4.66 $ 205,645 84,527 327,203 359,045 $ 3,936 1,013 9,804 16,026 1.91 % 1.20 3.00 4.46 $ 237,016 76,130 366,623 265,310 $ 3,265 287 7,018 8,835 1.38 % 0.38 1.91 3.33 Total interest-bearing deposits 928,415 31,253 3.37 976,420 30,779 3.15 945,079 19,405 2.05 Securities sold under agreements to repurchase 89,815 3,193 3.56 70,862 2,681 3.78 39,746 813 2.05 Other borrowed funds and subordinated debentures 168,535 9,359 5.55 192,143 10,484 5.46 268,878 12,602 4.69 Total interest-bearing liabilities 1,186,765 43,805 3.69 % 1,239,425 43,944 3.55 % 1,253,703 32,820 2.62 % Non-interest-bearing liabilities Demand deposits Other liabilities Total liabilities Stockholders’ equity Total liabilities & 278,402 23,565 1,488,732 111,550 284,295 19,801 1,543,521 105,389 283,876 16,463 1,554,042 104,675 stockholders’ equity $ 1,600,282 $ 1,648,910 $ 1,658,717 Less taxable equivalent adjustment Net interest income Net interest spread Net interest margin (110) $ 39,203 1.93 % 2.65 % (35) $ 36,763 1.71 % 2.40 % (10) $ 39,991 2.08 % 2.58 % (1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%. (2) Non-accrual loans are included in average amounts outstanding. (3) At amortized cost. 11 CA14518_Financials 2/28/08 2:47 PM Page 15 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 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. Year Ended December 31, (dollars in thousands) Interest income: Loans Securities available-for-sale: Taxable Tax-exempt Securities held-to-maturity: Taxable Federal funds sold Interest-bearing deposits in other banks Total interest income Interest expense: Deposits: NOW accounts Savings accounts Money market accounts Time deposits Total interest-bearing deposits Securities sold under agreements to repurchase Other borrowed funds and subordinated debentures Total interest expense Change in net interest income 2007 Compared with 2006 Increase/(Decrease) Due to Change in 2006 Compared with 2005 Increase/(Decrease) Due to Change in Volume Rate Total Volume Rate Total $ 148 $ 1,288 $ 1,436 $ 5,633 $ 4,559 $10,192 (4,647) (1) (1,006) 4,766 (2) (742) (56) 410 (1,562) (1,056) (2,264) 682 (1,308) (2,890) 1,931 — (41) (60) — 3,118 355 1,054 659 670 2,738 (170) 183 2,751 (2,716) (1) (1,047) 4,706 (2) 2,376 299 1,464 (903) (386) 474 512 (1,125) (139) (2,857) (23) (1,317) 822 4 521 9 (206) 771 5 (2,336) (14) (1,523) 1,593 9 2,262 5,659 7,921 (475) 35 (823) 3,663 2,400 896 (3,971) 1,146 691 3,609 3,528 8,974 972 1,853 671 726 2,786 7,191 11,374 1,868 (2,118) (675) 11,799 11,124 $ 2,148 $ 367 $ 2,515 $ 2,937 $ (6,140) $ (3,203) Average earning assets were $1,479,349,000 in 2007, a decrease of $55,568,000 or 3.6% from the average in 2006, which was 1.0% lower than the average in 2005. Total average securities, including securities available-for-sale and securities held-to-maturity, were $621,546,000, a decrease of 19.6% from the average in 2006. The decrease in securities volume was mainly attributable to an increase in pricing discipline relating to deposits that resulted in a smaller average balance sheet. A decrease in securities balances resulted in lower securities income, which decreased 13.8% to $23,548,000. Total average loans increased 0.3% to $725,903,000 after increasing $82,722,000 in 2006. The primary reason for the increase in loans was due in large part to an increase in small business lending. The increase in loan volume and increases in loan rates resulted in higher loan income, which increased by 2.8% or $1,436,000 to $52,902,000. Total loan income was $41,274,000 in 2005. The Company’s sources of funds include deposits and borrowed funds. On average, deposits showed a decrease of 4.3% or $53,898,000 in 2007 after increasing by 2.6% or $31,760,000 in 2006. Deposits decreased in 2007 primarily as a result of decreases in money market accounts, which decreased by 15.2% or $49,721,000 and time deposits, which decreased by 6.4% or $23,073,000. Borrowed funds and subordinated debentures decreased by 12.3% in 2007 following a decrease of 14.8% in 2006. The majority of the Company’s borrowed funds are borrowings from the FHLB and retail repurchase agreements. Borrowings from the FHLB decreased by approximately $22,801,000 and retail repurchase agreements increased by $18,953,000. Interest expense totaled $43,805,000 in 2007, a slight decrease of $139,000 or 0.3% from 2006 when interest expense increased 33.9% from 2005. The decrease in interest expense is primarily due to deposit pricing discipline. Provision for Loan Loss The provision for loan losses was $1,500,000 in 2007, compared with $825,000 in 2006 and $600,000 in 2005. These provisions are the result of management’s evaluation of the amounts and quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision increased during 2007 primarily as a result of an increase in net charge-offs during the year. The allowance for loan losses was $9,633,000 at December 31, 2007, compared with $9,713,000 at December 31, 2006. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.33% in 2007 and 1.32% in 2006. This ratio increased mainly as a result of a small decrease in the loan portfolio. Nonperforming loans, which include all non-accruing loans, totaled $1,312,000 on December 31, 2007, compared with $135,000 on December 31, 2006. Nonperforming loans increased primarily as a result of three consumer mortgages totaling $938,000. 12 CA14518_Financials 2/28/08 2:47 PM Page 16 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 Other Operating Income During 2007, the Company continued to experience positive results in its fee-based services including fees derived from traditional banking activities such as deposit related services, its automated lockbox collection system and full service securities brokerage offered through Linsco/Private Ledger Corp. (“LPL”), an unaffiliated registered securities broker-dealer and investment advisor. The brokerage service was previously offered through IFMG, also an unaffiliated registered securities broker-dealer and investment advisor. 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 who use it to automate tax collections, cable TV companies and other commercial enterprises. Through a program called Investment Services at Century Bank, the Bank provides full service securities brokerage services supported by LPL, a full service securities brokerage business. Registered representatives employed by LPL offer limited investment advice, execute transactions and assist customers in financial and retirement planning. LPL provides research to and supervises its representatives. The Bank receives a share in the commission revenues. Total other operating income in 2007 was $13,948,000, an increase of $2,583,000 or 22.7% compared to 2006. This increase followed an increase of $392,000 or 3.6% in 2006, compared to 2005. Included in 2007 is the $1,321,000 pre-tax gain on the sale of the building that houses the Company’s Medford Square branch. Service charge income, which continues to be a major area of other operating income totaling $7,579,000 in 2007, increased $877,000 compared to 2006. This followed an increase of $856,000 compared to 2005. Service charges on deposit accounts increased mainly because of increases in fees and an increase in overdraft charges. Lockbox revenues totaled $2,956,000, up $184,000 in 2007 following a decrease of $35,000 in 2006. This increase was mainly attributable to an increase in the customer base. Other income totaled $1,687,000, down $55,000 in 2007 following a decrease of $116,000 in 2006. The decrease in 2007 was mainly attributable to an increase of $217,000 in foreign ATM surcharges and an increase of $183,000 in the growth of cash surrender values on life insurance policies that was attributable to higher returns on life insurance policies offset by a pre-tax gain of $600,000 from the sale of rights to future royalty payments for a portion of the Company’s Merchant Credit Card customer base during 2006. Foreign ATM surcharges increased because of an increase in rates charged and the addition of ATM machines. The decrease in 2006 was mainly attributable to a decrease in the growth of cash surrender values by $697,000 due to a decline in the policy returns offset by a pre-tax gain of $600,000 from the sale of rights to future royalty payments for a portion of the Company’s Merchant Credit Card customer base. Operating Expenses Total operating expenses were $40,255,000 in 2007, compared to $40,196,000 in 2006 and $40,318,000 in 2005. Salaries and employee benefits expenses increased by $728,000 or 3.1% in 2007, after decreasing by 1.6% in 2006. The increase in 2007 was mainly attributable to an increase in staff levels, merit increases in salaries and increases in health insurance costs. The decrease in 2006 was mainly attributable to the retirement of the former Chief Executive Officer offset somewhat by an increase in pension expense and health insurance costs. 13 Occupancy expense decreased by $55,000 or 1.4% in 2007, following an increase of $109,000 or 2.9% in 2006. The decrease in 2007 was primarily attributable to an increase in rental income. The increase in 2006 was primarily attributable to an increase in utility rates. Equipment expense decreased by $86,000 or 2.8% in 2007, following an increase of $56,000 or 1.9% in 2006. The decrease in 2007 was primarily attributable to a decrease in depreciation expense. The increase in 2006 was primarily attributable to depreciation associated with the addition of capital expenditures. Other operating expenses decreased by $528,000 in 2007, which followed a $95,000 increase in 2006. The decrease in 2007 was primarily attributable to a decrease in bank processing charges and legal expense. The increase in 2006 was primarily attributable to an increase in contributions. Provision for Income Taxes Income tax expense was $3,532,000 in 2007, $2,419,000 in 2006 and $3,166,000 in 2005. The effective tax rate was 31.0% in 2007, 34.0% in 2006 and 31.5% in 2005. The decrease in the effective tax rate for 2007 was mainly attributable to a higher level of non-taxable income. The increase in the effective tax rate for 2006 was primarily the result of a decrease in non-taxable income. The federal tax rate was 34% in 2007, 2006 and 2005. 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, and to that end, management actively monitors and manages its interest rate risk exposure. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company’s exposures 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) +300 +200 +100 –100 –200 –300 (0.2)% (0.4)% (0.7)% (2.5)% (3.8)% (4.9)% (1) The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment. The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. CA14518_Financials 2/28/08 2:47 PM Page 17 Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 $299,901,000 on December 31, 2007, compared with $159,668,000 on December 31, 2006. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity. The source of funds for dividends paid by the Company is dividends received from the Bank. 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. Century Bancorp, Inc. AR ’07 Capital Adequacy Total stockholders’ equity was $118,806,000 at December 31, 2007, compared with $106,818,000 at December 31, 2006. The increase in 2007 was primarily the result of earnings and a decrease in accumulated other comprehensive loss less dividends paid. The decrease in accumulated other comprehensive loss was mainly attributable to an improvement of $4,900,000 in the net unrealized loss on the Company’s available-for-sale portfolio, and an improvement of $1,346,000 in the additional pension liability, net of taxes. Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance sheet items. The current guidelines require a Tier 1 capital-to-risk assets ratio of at least 4.00% and a total capital-to-risk assets ratio of at least 8.00%. The Company and the Bank exceeded these requirements with a Tier 1 capital-to-risk assets ratio of 16.46% and 13.02%, respectively, and total capital-to-risk assets ratio of 17.51% and 14.08%, respectively, at December 31, 2007. 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, 2007, the Company and the Bank exceeded this requirement with leverage ratios of 9.56% and 7.56%, 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, 2007. Contractual Obligations and Commitments by Maturity (dollars in thousands) CONTRACTUAL OBLIGATIONS FHLB advances Subordinated debentures Retirement benefit obligations Lease obligations Other Treasury, tax and loan Customer repurchase agreements and federal funds purchased Payments Due — by Period Total $289,250 36,083 20,467 5,486 Less than One Year $ 124,750 — 1,637 1,311 489 489 85,990 85,990 One to Three Years $ 113,500 — 3,478 2,098 — — Three to Five Years $ 9,000 — 3,789 907 — — After Five Years $ 42,000 36,083 11,563 1,170 — — Total contractual cash obligations $ 437,765 $ 214,177 $ 119,076 $ 13,696 $ 90,816 OTHER COMMITMENTS Lines of credit Standby and commercial letters of credit Other commitments Total commitments Amount of Commitment Expiring — by Period Total $ 155,378 13,498 38,482 Less than One Year $ 89,431 12,956 15,550 $ 207,358 $ 117,937 One to Three Years $ 8,987 542 10,430 $ 19,959 Three to Five Years $ 1,002 — 1,770 $ 2,772 After Five Years $ 55,958 — 10,732 $ 66,690 Financial Instruments with Off-Balance Sheet Risk The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notational amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. 14 CA14518_Financials 2/28/08 2:47 PM Page 18 Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’07 The Company’s exposure to credit loss in the event of non-performance 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: date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include commercial mortgage loans, certain private equity investments, distressed debt, non-investment grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts. Contract or Notational Amount 2007 2006 (dollars in thousands) Financial instruments whose contract amount represents credit risk: Commitments to originate 1-4 family mortgages Standby and commercial letters of credit Unused lines of credit Unadvanced portions of construction loans Unadvanced portions of other loans $ 2,442 13,498 155,378 27,294 8,746 $ 2,305 10,397 168,290 16,793 5,975 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. Recent Accounting Developments In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, “Fair Value Measurements,” which among other things, requires enhanced disclosures about financial instruments carried at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007. SFAS 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the SFAS 157 hierarchy are as follows: Level I – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments. Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair values have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in the category are corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives. Level III – Instruments that have little to no pricing observability as of the reported 15 The Company is currently evaluating the impact SFAS 157 will have upon disclosures upon adoption. In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities,” which gives entities the option to measure eligible financial assets, and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement is effective as of the beginning of a company’s first fiscal year after November 15, 2007. The Company adopted SFAS 159 on January 1, 2008 and did not elect to apply the fair value to any existing financial instruments. In March 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-10 will require employers to recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement if the employer remains subject to the risks or rewards associated with the underlying insurance contract (in the postretirement period) that collateralizes the employer’s asset. Additionally, an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement by assessing what future cash flows the employer is entitled to, if any, as well as the employer’s obligation and ability to repay the employer. The employer’s asset should be limited to the amount of the cash surrender value of the insurance policy, unless the arrangement requires the employee (or retiree) to repay the employer irrespective of the amount of the cash surrender value of the insurance policy (and assuming the employee (or retiree) is an adequate credit risk), in which case the employer should recognize the value of the loan including accrued interest, if applicable. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, earlier application permitted. Entities should recognize the effects of applying EITF 06-10 through either a change in accounting principle through a cumulative-effect adjustment to retained earnings in the statement of financial position as of the beginning of the year of adoption or through a change in accounting principle through retrospective application to all prior periods. The Company anticipates the impact of EITF 06-10 to be immaterial to the Company’s consolidated financial statements. In December 2007, the FASB issued SFAS 141R, "Business Combinations." SFAS 141R replaces FASB Statement No. 141, “Business Combinations,” but retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. It also retains the guidance in Statement 141 for identifying and recognizing intangible assets separately from goodwill. However, SFAS 141R's scope is broader than that of Statement 141. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. For any business combinations entered into by the Company subsequent to January 1, 2009, the Company will be required to apply the guidance in SFAS 141R. CA14518_Financials 2/28/08 2:47 PM Page 19 December 31, (dollars in thousands except share data) ASSETS Cash and due from banks (note 2) Federal funds sold and interest-bearing deposits in other banks Total cash and cash equivalents Securities available-for-sale, amortized cost $403,984 in 2007 and $423,707 in 2006 (note 3) Securities held-to-maturity, fair value $181,704 in 2007 and $258,420 in 2006 (notes 4 and 9) Loans, net (note 5) Less: allowance for loan losses (note 6) Net loans Bank premises and equipment (note 7) Accrued interest receivable Other assets (note 12) Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits Savings and NOW deposits Money market accounts Time deposits (note 8) Total deposits Securities sold under agreements to repurchase (note 9) Other borrowed funds (note 10) Subordinated debentures (note 10) Other liabilities Total liabilities Commitments and contingencies (notes 7, 14 and 15) Stockholders' equity (note 11): Common stock, Class A, $1.00 par value per share; authorized 10,000,000 shares; issued 3,516,704 shares in 2007 and 3,498,738 shares in 2006 Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 2,027,100 shares in 2007 and 2,042,450 shares in 2006 Additional paid-in-capital Retained earnings Unrealized losses on securities available-for-sale, net of taxes Additional pension liability, net of taxes Total accumulated other comprehensive loss, net of taxes (note 3) Total stockholders' equity Total liabilities and stockholders' equity See accompanying Notes to Consolidated Financial Statements. Consolidated Balance Sheets Century Bancorp, Inc. AR ’07 2007 2006 $ 66,974 232,927 299,901 $ 60,465 99,203 159,668 403,635 183,710 726,251 9,633 716,618 21,985 6,590 47,842 415,481 265,712 736,773 9,713 727,060 22,955 7,372 46,042 $ 1,680,281 $ 1,644,290 $ 289,526 310,858 234,099 295,578 $ 283,449 274,231 301,188 410,097 1,130,061 1,268,965 85,990 289,885 36,083 19,456 86,960 123,023 36,083 22,441 1,561,475 1,537,472 3,517 3,499 2,027 11,553 105,550 122,647 (211) (3,630) (3,841) 118,806 2,042 11,505 99,859 116,905 (5,111) (4,976) (10,087) 106,818 $ 1,680,281 $ 1,644,290 16 CA14518_Financials 2/28/08 2:47 PM Page 20 Consolidated Statements of Income Century Bancorp, Inc. AR ’07 Year Ended December 31, (dollars in thousands except share data) INTEREST INCOME Loans Securities available-for-sale Securities held-to-maturity Federal funds sold and interest-bearing deposits in other banks Total interest income INTEREST EXPENSE Savings and NOW deposits Money market accounts Time deposits (note 8) Securities sold under agreements to repurchase Other borrowed funds and subordinated debentures Total interest expense Net interest income Provision for loan losses (note 6) Net interest income after provision for loan losses OTHER OPERATING INCOME Service charges on deposit accounts Lockbox fees Brokerage commissions Net gain on sale of fixed assets Net gains on sales of securities Other income Total other operating income OPERATING EXPENSES Salaries and employee benefits (note 13) Occupancy Equipment Other (note 16) Total operating expenses Income before income taxes Provision for income taxes (note 12) Net income SHARE DATA (note 11) Weighted average number of shares outstanding, basic Weighted average number of shares outstanding, diluted Net income per share, basic Net income per share, diluted See accompanying Notes to Consolidated Financial Statements. 17 2007 2006 2005 $ $ $ 52,796 14,478 9,065 6,669 83,008 6,712 8,901 15,640 3,191 9,361 43,805 39,203 1,500 37,703 7,579 2,956 135 1,438 153 1,687 13,948 24,543 3,852 2,957 8,903 40,255 11,396 3,532 7,864 5,542,461 5,546,707 1.42 1.42 $ $ $ 51,437 17,194 10,112 1,964 80,707 4,950 9,804 16,026 2,681 10,483 43,944 36,763 825 35,938 6,702 2,772 149 — — 1,742 11,365 23,815 3,907 3,043 9,431 40,196 7,107 2,419 4,688 5,540,966 5,550,722 0.85 0.84 $ $ $ 41,274 19,540 11,635 362 72,811 3,552 7,018 8,835 813 12,602 32,820 39,991 600 39,391 5,846 2,807 462 — — 1,858 10,973 24,197 3,798 2,987 9,336 40,318 10,046 3,166 6,880 5,535,202 5,553,009 1.24 1.24 CA14518_Financials 2/28/08 2:47 PM Page 21 Consolidated Statements of Changes in Stockholders’ Equity Century Bancorp, Inc. AR ’07 Class A Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Other Total Retained Earnings Comprehensive Stockholders' Loss Equity (dollars in thousands except share data) BALANCE, DECEMBER 31, 2004 $ 3,434 $ 2,099 $ 11,395 $ 92,611 $ (4,766) $ 104,773 Net income Other comprehensive income, net of tax: Unrealized holding losses arising during period, net of $3,357 in taxes Minimum pension liability adjustment, net of $761 in taxes Comprehensive income Conversion of Class B Common Stock to Class A Common Stock, 17,400 shares Stock options exercised, 1,354 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — 17 2 — — — — — (17) — — — — — — — 21 — — 6,880 — 6,880 — — (5,261) (1,061) — — (1,649) (504) — — — — (5,261) (1,061) 558 — 23 (1,649) (504) BALANCE, DECEMBER 31, 2005 $ 3,453 $ 2,082 $ 11,416 $ 97,338 $ (11,088) $ 103,201 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $2,156 in taxes Comprehensive income Adjustment to initially apply SFAS 158, net of $1,421 in taxes Conversion of Class B Common Stock to Class A Common Stock, 39,790 shares Stock options exercised, 5,746 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — 40 6 — — — — — (40) — — — — — — — 89 — — 4,688 — 4,688 — 3,159 3,159 — — — (1,674) (493) (2,158) — — — — 7,847 (2,158) — 95 (1,674) (493) BALANCE, DECEMBER 31, 2006 $ 3,499 $ 2,042 $ 11,505 $ 99,859 $ (10,087) $ 106,818 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $2,977 in taxes Pension liability adjustment, net of $934 in taxes Comprehensive income Conversion of Class B Common Stock to Class A Common Stock, 15,350 shares Stock options exercised, 2,616 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — 15 3 — — — — — (15) — — — — — — — 48 — — 7,864 — 7,864 — — 4,900 1,346 — — (1,685) (488) — — — — 4,900 1,346 14,110 — 51 (1,685) (488) BALANCE, DECEMBER 31, 2007 $ 3,517 $ 2,027 $ 11,553 $ 105,550 $ (3,841) $ 118,806 See accompanying Notes to Consolidated Financial Statements. 18 CA14518_Financials 2/28/08 2:47 PM Page 22 Consolidated Statements of Cash Flows Century Bancorp, Inc. AR ’07 Year Ended December 31, (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Deferred income taxes Net depreciation and amortization Decrease (increase) in accrued interest receivable Increase in other assets Gain on sales of securities available-for-sale Gain on sales of fixed assets (Decrease) increase in other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from calls/maturities of securities available-for-sale Proceeds from sales of securities available-for-sale Purchase of securities available-for-sale Proceeds from calls/maturities of securities held-to-maturity Purchase of securities held-to-maturity Net decrease (increase) in loans Proceeds from sales of fixed assets Capital expenditures Net cash provided by investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in time deposit accounts Net (decrease) increase in demand, savings, money market and NOW deposits Net proceeds from the exercise of stock options Cash dividends Net (decrease) increase in securities sold under agreements to repurchase Net increase (decrease) in other borrowed funds Retirement of subordinated debentures Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest Income taxes Change in unrealized gains on securities available-for-sale, net of taxes Change in additional pension liability, net of taxes See accompanying Notes to Consolidated Financial Statements. 19 2007 2006 2005 $ 7,864 $ 4,688 $ 6,880 1,500 111 3,443 782 (5,809) (153) (1,438) (656) 5,644 197,322 160 (177,870) 82,074 — 8,489 1,800 (2,252) 109,723 (114,519) (24,385) 51 (2,173) (970) 166,862 — 24,866 140,233 159,668 825 (713) 3,595 (245) (2,644) — — 1,202 6,708 123,013 — (498) 20,965 — (47,580) — (723) 95,177 8,324 43,601 95 (2,167) 36,950 (181,699) — (94,896) 6,989 152,679 600 128 3,348 (327) (3,646) — — 299 7,282 180,317 — (112,235) 60,950 (2,022) (110,369) — (1,916) 14,725 41,957 (218,927) 23 (2,153) 11,360 89,816 (29,639) (107,563) (85,556) 238,235 $ 299,901 $ 159,668 $ 152,679 $ 44,787 3,942 4,900 1,346 $ $ $ 42,887 2,713 3,159 (2,158) $ 33,369 3,050 (5,261) (1,061) $ CA14518_Financials 2/28/08 2:47 PM Page 23 1. Summary of Significant Accounting Policies BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly-owned subsidiaries, Century Subsidiary Investments, Inc. (“CSII”), Century Subsidiary Investments, Inc. II (“CSII II”), Century Subsidiary Investments, Inc. Ill (“CSII III”) and Century Financial Services Inc. (“CFSI”). CSII, CSII II, CSII III are engaged in buying, selling and holding investment securities. CFSI has the power to engage in financial agency, securities brokerage and investment and financial advisory services and related securities credit. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”) and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company’s business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are susceptible to change in the near-term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on independent appraisals and review of other factors associated with the loans. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Certain reclassifications are made to prior year amounts whenever necessary to conform with the current year presentation. Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 INVESTMENT SECURITIES Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated related income taxes. The Company has no securities held for trading. Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value. The amount of the write-down is included as a charge to earnings. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis. LOANS Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become 90 days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Loans, including impaired loans, on which the accrual of interest has been discontinued are designated non-accrual loans. When a loan is placed on non-accrual, all income which has been accrued but remains unpaid is reversed against current period income and all amortization of deferred loan costs and fees is discontinued. Non-accrual loans may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and income. Income received on non-accrual loans is either recorded in income or applied to the principal balance of the loan depending on management’s evaluation as to the collectibility of principal. Loan origination fees and related direct loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. The Bank accounts for impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value, by either the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. This method applies to all loans, uncollateralized, as well as collateralized, except large groups of smaller-balance homogeneous loans such as residential real estate and consumer loans that are collectively evaluated for impairment and loans that are measured at fair value. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Loans are charged-off when management believes that the collectibility of the loan’s principal is not probable. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification rate of interest. 20 CA14518_Financials 2/28/08 2:47 PM Page 24 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans which ultimately prove uncollectible. In determining the level of the allowance, periodic evaluations are made of the loan portfolio which take into account such factors as the character of the loans, loan status, financial posture of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgment. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances, if appropriate, for identified problem loans and the unallocated allowance. While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in management’s opinion, collectibility is not probable. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated. STOCK OPTION ACCOUNTING Prior to January 1, 2006, the Company accounted for its stock-based plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). No compensation cost was recognized for stock options in the Consolidated Statement of Income for the periods ended on or prior to December 31, 2005, as options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R for all share-based payments, using the modified- prospective transition method. In accordance with the modified-prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Upon adoption of SFAS 123R, the Company elected to retain its method of valuation for share-based awards granted using the Black-Scholes option-pricing model which was also previously used for the Company’s pro forma information required under SFAS 123. The Company will recognize compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) that provide for granting of options to purchase up to 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive non-qualified or incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of 21 Directors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for non-qualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were options to purchase an aggregate of 94,787 shares of Class A common stock exercisable at December 31, 2007. On December 30, 2005, the Board of Directors approved the acceleration and immediate vesting of all unvested options with an exercise price of $31.60 or greater per share. As a consequence, options to purchase 23,950 shares of Class A common stock became exercisable immediately. The average of the high and low price at which the Class A common stock traded on December 30, 2005, the date of the acceleration and vesting, was $29.28 per share. In connection with this acceleration the Board of Directors approved a technical amendment to each of the Option Plans to eliminate the possibility that the terms of any outstanding or future stock option would require a cash settlement on the occurrence of any circumstance outside the control of the Company. Effective as of January 1, 2006, the Company adopted SFAS 123R for all share-based payments. The Company estimates that, as a result of this accelerated vesting, approximately $190,000 of 2006 non-cash compensation expense was eliminated that would otherwise have been recognized in the Company’s earnings. The Company decided to accelerate the vesting of certain stock options primarily to reduce the non-cash compensation expense that would otherwise be expected to be recorded in conjunction with the Company’s required adoption of SFAS 123R in 2006. There was no earnings impact for 2006 due to the Company’s adoption of SFAS 123R. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date, the Company’s net income and earnings per share for the year ended December 31, 2005 would have been reduced to the pro forma amounts indicated in the following table: Net income: As reported Less: Pro forma stock based compensation cost (net of tax): Pro forma net income Basic earning per share As reported Pro forma Diluted earnings per share As reported Pro forma $6,880 282 $6,598 $ 1.24 $ 1.19 $ 1.24 $ 1.19 In determining the pro forma amounts, the fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Dividend yield Expected life in years Expected volatility Risk-free interest rate 1.59 % 9 28 % 3.95 % The Company uses the fair value method to account for stock options. All of the Company’s stock options are vested and there were no options granted during 2007. CA14518_Financials 2/28/08 2:47 PM Page 25 INCOME TAXES The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s results of operation or its financial position. The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgment changes regarding an uncertain tax position. TREASURY STOCK Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act, provisions of which eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares. PENSION The Company provides pension benefits to its employees under a noncontributory, defined benefit plan which is funded on a current basis in compliance with the requirements at the Employee Retirement Income Security Act of 1974 (“ERISA”) and recognizes costs over the estimated employee service period. The Company also has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan) which is limited to certain officers and employees of the Company. The Supplemental Plan is accrued on a current basis and recognizes costs over the estimated employee service period. Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Individual life insurance policies, which are owned by the Company, are purchased covering the lives of each participant. Effective December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans— An Amendment of FASB Statements No. 87, 88, 106, and 132(R),” which requires the Company to recognize the overfunded or underfunded status of a single employer defined benefit pension or postretirement plan as an asset or liability on its Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 balance sheet and to recognize changes in the funded status in comprehensive income in the year in which the change occurred. However, gains or losses, prior service costs or credits, and transition assets or obligations that have not yet been included in net periodic benefit cost as of the end of 2006, the fiscal year in which the Statement is initially applied, are to be recognized as components of the ending balance of accumulated other comprehensive income, net of tax. The Company recorded an additional $2,158,000 pension liability adjustment, net of tax, through stockholders’ equity, as a result of the adoption of SFAS 158. SFAS 158 also requires the Company to measure plan assets and benefit obligations as of the date of the Company’s fiscal year-end effective for fiscal years ending after December 15, 2008. RECENT ACCOUNTING DEVELOPMENTS In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, “Fair Value Measurements,” which among other things, requires enhanced disclosures about financial instruments carried at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007. SFAS 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the SFAS 157 hierarchy are as follows: Level I – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments. Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair values have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in the category are corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives. Level III – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include commercial mortgage loans, certain private equity investments, distressed debt, non-investment grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts. The Company is currently evaluating the impact SFAS 157 will have upon disclosures upon adoption. In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities,” which gives entities the option to measure eligible financial assets, and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement is effective as of the beginning of a company’s first fiscal year after November 15, 2007. The Company adopted SFAS 159 on January 1, 2008 and did not elect to apply the fair value to any existing financial instruments. 22 CA14518_Financials 2/28/08 2:47 PM Page 26 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 In March 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-10 will require employers to recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement if the employer remains subject to the risks or rewards associated with the underlying insurance contract (in the postretirement period) that collateralizes the employer’s asset. Additionally, an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement by assessing what future cash flows the employer is entitled to, if any, as well as the employer’s obligation and ability to repay the employer. The employer’s asset should be limited to the amount of the cash surrender value of the insurance policy, unless the arrangement requires the employee (or retiree) to repay the employer irrespective of the amount of the cash surrender value of the insurance policy (and assuming the employee (or retiree) is an adequate credit risk), in which case the employer should recognize the value of the loan including accrued interest, if applicable. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, earlier application permitted. Entities should recognize the effects of applying EITF 06-10 through either a change in accounting principle through a cumulative-effect adjustment to retained earnings in the statement of financial position as of the beginning of the year of adoption or through a change in accounting principle through retrospective application to all prior periods. The Company anticipates the impact of EITF 06-10 to be immaterial to the Company’s consolidated financial statements. In December 2007, the FASB issued SFAS 141R, “Business Combinations.” SFAS 141R replaces FASB Statement No. 141, “Business Combinations,” but retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. It also retains the guidance in Statement 141 for identifying and recognizing intangible assets separately from goodwill. However, SFAS 141R's scope is broader than that of Statement 141. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. For any business combinations entered into by the Company subsequent to January 1, 2009, the Company will be required to apply the guidance in SFAS 141R. 2. Cash and Due from Banks The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $1,909,000 at December 31, 2007 and $805,000 at December 31, 2006. 3. Securities Available-for-Sale December 31, 2007 Gross Unrealized Losses Gross Unrealized Gains Estimated Fair Value Amortized Cost December 31, 2006 Gross Gross Unrealized Unrealized Losses Gains Estimated Fair Value Amortized Cost (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises Mortgage-backed securities Obligations of states and political subdivisions FHLB stock Other Total $ $ 1,997 218,168 163,323 1,678 15,531 3,287 39 982 402 — — 305 $ — 421 1,563 $ 2,036 218,729 162,162 $ $ 2,000 224,960 183,458 — — 93 1,678 15,531 3,499 800 9,823 2,666 — — 56 — — 165 $ 9 3,923 4,438 $ 1,991 221,037 179,076 11 — 66 789 9,823 2,765 $ 403,984 $ 1,728 $ 2,077 $ 403,635 $ 423,707 $ 221 $ 8,447 $ 415,481 Included in U.S. Government Sponsored Enterprises securities are securities pledged to secure public deposits and repurchase agreements amounting to $80,260,000 and $91,510,000 at December 31, 2007 and 2006, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank amounting to $233,544,000 and $190,961,000 at December 31, 2007 and 2006, respectively. The Company realized gross gains of $153,000 in 2007 from gross proceeds of $336,000 on the sale of one stock. The Company did not realize any gains or losses in 2006 and 2005. Included in mortgage-backed securities are U.S. Government Sponsored Enterprises totaling $148,856,000 and $148,134,000 in 2007 and 2006, respectively. The following table shows the maturity distribution of the Company’s securities available-for-sale at December 31, 2007. Amortized Cost Fair Value $ 96,490 $ 96,058 246,962 42,331 18,284 247,321 42,105 18,068 $ 403,984 $ 403,635 (dollars in thousands) Within one year After one but within five years After five but within ten years Non-maturing Total 23 CA14518_Financials 2/28/08 2:47 PM Page 27 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 The weighted average remaining life of investment securities available-for-sale at December 31, 2007 and 2006 was 2.2 and 2.1 years, respectively. Included in the weighted average remaining life calculation at December 31, 2007 and 2006 were $113,160,000 and $10,000,000, respectively, of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life. The actual maturities, which were used in the table above, of mortgage-backed securities will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations. The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2007. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 5 and 63 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 174 holdings at December 31, 2007. The Company believes that the investments are temporarily impaired. Temporarily Impaired Investments* December 31, 2007 (dollars in thousands) U.S. Government Sponsored Enterprises Mortgage-backed securities Other Total temporarily impaired securities Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ — 10,404 198 $ — 82 28 $ 89,570 96,113 1,985 $ 421 1,481 65 $ 89,570 106,517 2,183 $ 421 1,563 93 $ 10,602 $ 110 $ 187,668 $ 1,967 $ 198,270 $ 2,077 * The decline in market value is attributable to change in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007. The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2006. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 2 and 101 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 161 holdings at December 31, 2006. The Company believes that the investments are temporarily impaired. Temporarily Impaired Investments* December 31, 2006 (dollars in thousands) U.S. Government Sponsored Enterprises Mortgage-backed securities Other Total temporarily impaired securities Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ $ — — 82 82 $ $ — — 1 1 $ 218,028 170,828 2,037 $ 3,932 4,438 76 $ 218,028 170,828 2,119 $ 3,932 4,438 77 $ 390,893 $ 8,446 $ 390,975 $ 8,447 * The decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2006. 4. Investment Securities Held-to-Maturity December 31, 2007 Gross Gross Unrealized Unrealized Losses Gains Estimated Fair Value Amortized Cost December 31, 2006 Gross Gross Unrealized Unrealized Losses Gains Estimated Fair Value Amortized Cost (dollars in thousands) U.S. Government Sponsored Enterprises $ 94,987 $ Mortgage-backed securities 88,723 59 72 $ 251 $ 94,795 1,886 86,909 Total $ 183,710 $ 131 $ 2,137 $ 181,704 $ 159,969 105,743 $ 265,712 $ $ — 76 76 $ 3,406 $ 156,563 3,962 101,857 $ 7,368 $ 258,420 Included in U.S. Government and Agency securities are securities pledged to secure public deposits and repurchase agreements amounting to $93,000,000 and $130,949,000 at December 31, 2007 and 2006, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank amounting to $86,987,000 and $103,971,000 at December 31, 2007 and 2006, respectively. At December 31, 2007 and 2006, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. 24 CA14518_Financials 2/28/08 2:47 PM Page 28 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 The following table shows the maturity distribution of the Company’s securities held-to-maturity at December 31, 2007. (dollars in thousands) Within one year After one but within five years After five but within ten years Total Amortized Cost Fair Value $ 69,989 113,557 164 $ 69,753 111,785 166 $ 183,710 $ 181,704 The weighted average remaining life of investment securities held-to-maturity at December 31, 2007 and 2006 was 1.8 and 2.3 years, respectively. The actual maturities, which were used in the table above, of mortgage-backed securities will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations. The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2007. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 63 securities that are temporarily impaired for 12 months or longer, out of a total of 78 holdings at December 31, 2007. The Company believes that the investments are temporarily impaired. Temporarily Impaired Investments* December 31, 2007 (dollars in thousands) U.S. Government Sponsored Enterprises Mortgage-backed securities Total temporarily impaired securities Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ $ — — — $ $ — — — $ 74,737 82,667 $ 251 1,886 $ 74,737 82,667 $ 251 1,886 $ 157,404 $ 2,137 $ 157,404 $ 2,137 * The decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007. The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2006. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 0 and 84 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 91 holdings at December 31, 2006. The Company believes that the investments are temporarily impaired. Temporarily Impaired Investments* December 31, 2006 (dollars in thousands) U.S. Government Sponsored Enterprises Mortgage-backed securities Total temporarily impaired securities Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ $ — — — $ $ — — — $ 156,563 98,937 $ 3,406 3,962 $ 156,563 98,937 $ 3,406 3,962 $ 255,500 $ 7,368 $ 255,500 $ 7,368 * The decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2006. 25 CA14518_Financials 2/28/08 2:47 PM Page 29 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 5. Loans The majority of the Bank’s lending activities are conducted in the Commonwealth of Massachusetts. The Bank originates construction, commercial and residential real estate loans, commercial and industrial loans, consumer, home equity and other loans for its portfolio. The following summary shows the composition of the loan portfolio at the dates indicated. December 31, 2007 2006 (dollars in thousands) Construction and land development $ 62,412 $ 49,709 Commercial and industrial Commercial real estate Residential real estate Consumer Home equity Overdrafts Total 117,332 299,920 168,204 20,149 56,795 1,439 117,497 327,040 167,946 9,881 63,380 1,320 $ 726,251 $ 736,773 Net deferred fees included in loans at December 31, 2007 and December 31, 2006 were $38,000 and $183,000, respectively. The Company was servicing mortgage loans sold to others without recourse of approximately $559,000 and $798,000 at December 31, 2007 and December 31, 2006, respectively. Additionally, the Company was servicing mortgage loans sold to others with limited recourse. The outstanding balance of these loans with limited recourse was approximately $65,000 and $72,000 at December 31, 2007 and at December 31, 2006, respectively. As of December 31, 2007 and 2006, the Bank recorded investment in impaired loans was $196,000 and $16,000, respectively. At December 31, 2007, there were $75,000 of impaired loans with a specific reserve of $75,000. There were no impaired loans with specific reserves December 31, 2006. The composition of non-accrual loans and impaired loans is as follows: December 31, (dollars in thousands) Loans on non-accrual Impaired loans on non-accrual included above Total recorded investment in impaired loans Average recorded value of impaired loans Interest income on non-accrual loans according to their original terms Interest income on non-accrual loans actually recorded Interest income recognized on impaired loans 2007 2006 2005 $ 1,312 196 196 332 52 — — $ 135 16 16 278 3 — — $ 949 886 886 1,384 77 — — 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. The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2007. Balance at December 31, 2006 (dollars in thousands) Additions Repayments and Deletions Balance at December 31, 2007 $ 1,943 $ 1,298 $ 1,085 $ 2,156 26 CA14518_Financials 2/28/08 2:47 PM Page 30 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 6. Allowance for Loan Losses The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, the financial condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Company’s allowance for loan losses for the years indicated. An analysis of the total allowances for loan losses for each of the three years ending December 31, 2007, 2006 and 2005 are as follows: (dollars in thousands) Allowance for loan losses, beginning of year Loans charged-off Recoveries on loans previously charged-off Net charge-offs Provision charged to expense Allowance for loan losses, end of year 7. Bank Premises and Equipment December 31, (dollars in thousands) Land Bank premises Furniture and equipment Leasehold improvements Accumulated depreciation and amortization 2007 2006 2005 $ 9,713 (2,139) 559 (1,580) 1,500 $ 9,340 (708) 256 (452) 825 $ 9,001 (690) 429 (261) 600 $ 9,633 $ 9,713 $ 9,340 2007 2006 Estimated Useful Life $ 3,478 17,710 23,889 5,114 50,191 (28,206) $ 3,650 17,146 22,952 5,310 49,058 (26,103) — 30-39 years 3-10 years 30-39 years or lease term Total $ 21,985 $ 22,955 During 2007, the Company sold the building which houses one of its branches located at 55 High Street, Medford, Massachusetts for $1,500,000 at market terms. This property was sold to an entity affiliated with a director of the Company. The Bank financed $1,000,000 of this purchase at market terms. This sale resulted in a pre-tax gain of $1,321,000. The Bank is relocating this branch to 1 Salem Street (formerly 3 Salem Street), Medford, Massachusetts. This property will be leased from an entity affiliated with Marshall M. Sloane, Chairman of the Board of the Company. The lease is for a period of fifteen years. The annual base rent amount will be $28,500 with annual increases based on the consumer price index. The Company is also required to pay 25% of all real estate taxes and operating costs. The lease contains options to extend the lease for three additional five-year periods. The lease was effective on September 1, 2007. The terms of the lease were based on an independent appraisal of the property and are considered to be market terms. Until such time as 1 Salem Street is opened as a branch, 55 High Street has been leased to the Bank as a tenant-at-will at market terms. It is anticipated that the new branch will be opened during the second or third quarter of 2008. The Company and its subsidiaries are obligated under a number of noncancelable operating leases for premises and equipment expiring in various years through 2026. Total lease expense approximated $1,349,000, $1,113,000 and $1,076,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Rental income approximated $351,000, $69,000 and $61,000 in 2007, 2006 and 2005, respectively. Future minimum rental commitments for noncancelable operating leases with initial or remaining terms of one year or more at December 31, 2007 were as follows: Year Amount 2008 2009 2010 2011 2012 Thereafter $ 1,311 1,177 921 687 220 1,170 $ 5,486 (dollars in thousands) 27 CA14518_Financials 2/28/08 2:47 PM Page 31 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 8. Deposits The following is a summary of original maturities or repricing of time deposits as of December 31, (dollars in thousands) Within 1 year Over 1 year to 2 years Over 2 years to 3 years Over 3 years to 5 years Total 2007 Percent 2006 Percent $ 255,983 27,945 5,849 5,801 $ 295,578 87 % 9 % 2 % 2 % $ 361,825 37,719 9,109 1,444 88 % 9 % 2 % 1 % 100 % $ 410,097 100 % Time deposits of $100,000 or more totaled $172,592,000 and $229,576,000 in 2007 and 2006, respectively. 9. Securities Sold Under Agreements to Repurchase (dollars in thousands) Amount outstanding at December 31, Weighted average rate at December 31, Maximum amount outstanding at any month end Daily average balance outstanding during the year Weighted average rate during the year 2007 2006 2005 $ 85,990 $ 86,960 $ 50,010 2.95 % 3.71 % 3.05 % $ 102,110 $ 89,815 $139,460 $ 70,862 $ 52,680 $ 39,746 3.55 % 3.78 % 2.05 % Amounts outstanding at December 31, 2007, 2006 and 2005 carried maturity dates of the next business day. U.S. Government Sponsored Enterprises securities with a total book value of $86,760,000, $89,114,000 and $52,009,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 2007, 2006, and 2005, respectively. The approximate fair value of the collateral at those dates was $86,692,000, $87,249,000 and $50,328,000, respectively. 10. Other Borrowed Funds and Subordinated Debentures (dollars in thousands) Amount outstanding at December 31, Weighted average rate at December 31, Maximum amount outstanding at any month end Daily average balance outstanding during the year Weighted average rate during the year 2007 2006 2005 $ 325,968 $ 159,106 $ 340,805 4.94 % 5.54 % 4.79 % $ 325,968 $ 168,535 $ 339,858 $ 192,143 $ 393,734 $ 268,878 5.55 % 5.46 % 4.69 % FEDERAL HOME LOAN BANK BORROWINGS Federal Home Loan Bank (“FHLB”) borrowings are collateralized by a blanket pledge agreement on the Bank’s FHLB stock, certain qualified investment securities, deposits at the FHLB and residential mortgages held in the Bank’s portfolios. The Bank’s remaining term borrowing capacity at the FHLB at December 31, 2007 was approximately $31,452,000. In addition, the Bank has a $14,500,000 line of credit with the FHLB. A schedule of the maturity distribution of FHLB advances with the weighted average interest rates is as follows: December 31, 2007 2006 2005 (dollars in thousands) Within 1 year Over 1 year to 2 years Over 2 years to 3 years Over 3 years to 5 years Over 5 years Total Amount $ 124,750 54,500 59,000 9,000 42,000 $ 289,250 Weighted Average Rate 4.65 % 4.67 % 5.17 % 4.14 % 4.53 % 4.73 % Amount $ 2,750 19,500 32,000 40,500 27,000 $ 121,750 Weighted Average Rate 3.80 % 5.38 % 5.17 % 5.80 % 4.44 % 5.22 % Amount $ 197,156 2,500 19,500 63,500 16,000 $ 298,656 Weighted Average Rate 4.15 % 3.66 % 5.38 % 5.72 % 4.43 % 4.58 % SUBORDINATED DEBENTURES Subordinated debentures totaled $36,083,000 at December 31, 2007 and 2006. In May 1998, the Company consummated the sale of a trust preferred securities offering, in which it issued $29,639,000 of subordinated debt securities due 2029 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust. 28 CA14518_Financials 2/28/08 2:47 PM Page 32 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 Century Bancorp Capital Trust then issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30%. The Company redeemed through its subsidiary, Century Bancorp Capital Trust, its 8.30% Trust Preferred Securities, January 10, 2005. In December 2004, the Company consummated the sale of a trust preferred securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust II. Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities pay dividends at an annualized rate of 6.65% for the first ten years and then convert to the three-month LIBOR rate plus 1.87% for the remaining twenty years. OTHER BORROWED FUNDS The Bank had $270,000 of overnight federal funds purchased on December 31, 2006. The borrowings carried an interest rate of 5.00% for 2006. There were no such borrowings at December 31, 2007. The Bank serves as a Treasury Tax and Loan depository under a note option with the Federal Reserve Bank of Boston. This open-ended interest-bearing borrowing carries an interest rate equal to the daily Federal funds rate less 0.25%. This amount totaled $489,000 and $856,000 at December 31, 2007 and 2006, respectively. The Bank also has an outstanding loan in the amount of $146,000 and $147,000 at December 31, 2007 and 2006, respectively, borrowed against the cash value of a whole life insurance policy for a key executive of the Bank. 11. Stockholders’ Equity DIVIDENDS Holders of the Class A common stock may not vote in the election of directors, but may vote as a class to approve certain extraordinary corporate transactions. Holders of Class B common stock may vote in the election of directors. Class A common stockholders are entitled to receive dividends per share equal to at least 200% per share of that paid, if any, on each share of Class B common stock. Class A common stock is publicly traded. Class B common stock is not publicly traded, however, it can be converted on a share for share basis to Class A common stock at any time at the option of the holder. Dividend payments by the Company are dependent in part on the dividends it receives from the Bank, which are subject to certain regulatory restrictions. EARNINGS PER SHARE (EPS) Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are the stock options discussed below. The dilutive effect of these stock options for 2007, 2006 and 2005 was an increase of 4,246, 9,756 and 17,807 shares, respectively. STOCK OPTION PLAN During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) that provides for granting of options for not more than 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive non-qualified and incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for non-qualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were 94,787 options exercisable at December 31, 2007. Stock option activity under the plan is as follows: Shares under option: Outstanding at beginning of year Granted Forfeitured Exercised Outstanding at end of year Exercisable at end of year Available to be granted at end of year December 31, 2007 December 31, 2006 December 31, 2005 Weighted Average Exercise Price $ $ $ 27.20 — 26.32 19.20 27.66 27.66 Amount 122,737 — (25,334) (2,616) 94,787 94,787 176,759 Weighted Average Exercise Price $ $ $ 26.74 — 28.05 16.54 27.20 27.20 Amount 130,133 — (1,650) (5,746) 122,737 122,737 151,425 Weighted Average Exercise Price $ $ $ 26.65 — 28.56 16.82 26.74 26.74 Amount 131,787 — (300) (1,354) 130,133 130,133 149,775 At December 31, 2007, 2006 and 2005, the options outstanding have exercise prices between $15.063 and $35.010, and a weighted average remaining contractual life of four years for 2007, five years for 2006 and six years for 2005. The weighted average intrinsic value of options exercised for the period ended December 31, 2007, 2006 and 2005 was $4.90, $10.76 and $12.45 per share with an aggregate value of $12,808, $61,805 and $16,857, respectively. The average intrinsic value of options exercisable at December 31, 2007, 2006 and 2005 had an aggregate value of $54,805, $271,511 and $487,075, respectively. 29 CA14518_Financials 2/28/08 2:47 PM Page 33 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 The Bank and the Company are subject to various regulatory requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank and Company’s financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank and Company must meet specific capital guidelines that involve quantitative measures of the Bank and Company’s assets and liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank and Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2007, that the Bank and the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2007, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes would cause a change in the Bank’s categorization. The Bank’s actual capital amounts and ratios are presented in the following table: As of December 31, 2007 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) As of December 31, 2006 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) Actual Amount $ 128,405 118,772 118,772 $ 123,173 113,460 113,460 Ratio 14.08 % 13.02 % 7.56 % 13.62 % 12.55 % 6.76 % The Company’s actual capital amounts and ratios are presented in the following table: As of December 31, 2007 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) As of December 31, 2006 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) Actual Amount $ 160,076 150,443 150,443 $ 154,027 144,314 144,314 Ratio 17.51 % 16.46 % 9.56 % 17.00 % 15.93 % 8.58 % For Capital Adequacy Purposes Amount Ratio $ 72,960 36,480 62,846 $ 72,352 36,176 67,174 8.00 % 4.00 % 4.00 % 8.00 % 4.00 % 4.00 % For Capital Adequacy Purposes Amount Ratio $ 73,130 36,565 62,966 $ 72,488 36,244 67,282 8.00 % 4.00 % 4.00 % 8.00 % 4.00 % 4.00 % To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 91,200 10.00 % 54,720 78,557 6.00 % 5.00 % $ 90,440 10.00 % 54,264 83,968 6.00 % 5.00 % To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 91,413 10.00 % 54,848 78,708 6.00 % 5.00 % $ 90,609 10.00 % 54,366 84,103 6.00 % 5.00 % 12. Income Taxes The current and deferred components of income tax expense for the years ended December 31 are as follows: (dollars in thousands) Current expense: Federal State Total current expense Deferred expense (benefit): Federal State Total deferred expense (benefit) Provision for income taxes 2007 2006 2005 $ 3,137 284 3,421 $ 2,968 164 3,132 $ 2,842 196 3,038 50 61 111 (592) (121) (713) 117 11 128 $ 3,532 $ 2,419 $ 3,166 Included in income tax expense for the year ended December 31, 2007, 2006, and 2005 is interest of $0, $24,000 and $0, respectively. There were no penalties during these periods. 30 CA14518_Financials 2/28/08 2:47 PM Page 34 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 Income tax accounts included in other assets at December 31 are as follows: (dollars in thousands) Currently receivable Deferred income tax asset, net Total 2007 2006 $ $ 589 8,465 9,054 $ 67 12,487 $ 12,554 Differences between income tax expense at the statutory federal income tax rate and total income tax expense are summarized as follows: (dollars in thousands) Federal income tax expense at statutory rates State income tax, net of federal income tax benefit Insurance income Effect of tax-exempt interest Other Total Effective tax rate 2007 2006 2005 $ 3,875 225 (210) (105) (253) $ 2,417 108 (109) (4) 7 $ 3,516 135 (356) (8) (121) $ 3,532 $ 2,419 $ 3,166 31.0 % 34.0 % 31.5 % The following table sets forth the Company’s gross deferred income tax assets and gross deferred income tax liabilities at December 31: The Company and its subsidiaries file a consolidated federal tax return and separate state income tax return. For years before 2004 the Company is no longer subject to federal or state income tax examinations. (dollars in thousands) Deferred income tax assets: Allowance for loan losses Deferred compensation Unrealized loss on securities available-for-sale Pension and SERP liability Acquisition premium Investments write-down Deferred gain Other Gross deferred income tax asset Deferred income tax liabilities: Depreciation Limited partnerships Other Gross deferred income tax liability Deferred income tax asset net 2007 2006 13. $ 3,943 4,132 $ 3,975 4,141 137 2,514 515 27 112 2 3,115 3,447 502 27 132 33 11,382 15,372 (360) (2,415) (142) (733) (2,048) (104) (2,917) (2,885) $ 8,465 $ 12,487 Based on the Company’s historical and current pre-tax earnings, management believes it is more likely than not that the Company will realize the deferred income tax asset existing at December 31, 2007. Management believes that existing net deductible temporary differences which give rise to the deferred tax asset will reverse during periods in which the Company generates net taxable income. In addition, gross deductible temporary differences are expected to reverse in periods during which offsetting gross taxable temporary differences are expected to reverse. Factors beyond management’s control, such as the general state of the economy and real estate values, can affect future levels of taxable income, and no assurance can be given that sufficient taxable income will be generated to fully absorb gross deductible temporary differences. 31 Employee Benefits The Company has a Qualified Defined Benefit Pension Plan (the “Plan”), which had been offered to all employees reaching minimum age and service requirements. In 2006, the Bank became a member of the Savings Bank Employees Retirement Association (“SBERA”) within which it then began maintaining the Qualified Defined Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for pension plans participating in SBERA. The Trustees of SBERA, through SBERA’s Investment Committee, select investment managers for the common and collective trust portfolio. A professional advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify equity investments across a spectrum of investment types (e.g., small cap, large cap, international, etc.) and styles (e.g., growth, value, etc.). The Company closed the plan to employees hired after March 31, 2006. The measurement date for the Plan is September 30 for each year. The benefits expected to be paid in each year from 2008-2012 are $604,000, $693,000, $727,000, $780,000 and $925,000. The aggregate benefits expected to be paid in the five years from 2013-2017 are $5,720,000. The Company plans to contribute $1,387,000 to the Plan in 2008. The weighted-average asset allocation of pension benefit assets at September 30 were: Asset Category Fixed income Domestic equity International equity Total 2007 2006 38 % 46 % 16 % 36 % 49 % 15 % 100 % 100 % CA14518_Financials 2/28/08 2:47 PM Page 35 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 The Company has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan), which is limited to certain officers and employees of the Company. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Individual life insurance policies, which are owned by the Company, are purchased covering the lives of each participant. An increase in recognized net losses resulted in an increase in the cost of the Supplemental Plan in 2006. Effective December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132(R).” The Company recorded an additional $2,158,000 net pension liability adjustment, through stockholders’ equity, as a result of this adoption. The measurement date for the Supplemental Plan is September 30 for each year. The benefits expected to be paid in each year from 2008-2012 are $1,033,000, $1,029,000, $1,029,000, $1,041,000 and $1,043,000. The aggregate benefits expected to be paid in the five years from 2013-2017 are $5,843,000. (dollars in thousands) Change projected in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Actuarial (gain)/loss Benefits paid Defined Benefit Pension Plan Supplemental Insurance/ Retirement Plan 2007 2006 2007 2006 $ 18,795 867 1,081 (1,116) (488) $ 18,339 882 997 (1,039) (384) $ 13,740 107 758 (111) (1,032) $ 14,130 106 766 (613) (649) Projected benefit obligation at end of year $ 19,139 $ 18,795 $ 13,462 $ 13,740 Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets at end of year (Unfunded) Funded status Accumulated benefit obligation Weighted-average assumptions as of December 31 Discount rate — Liability Discount rate — Expense Expected return on plan assets Rate of compensation increase Components of net periodic benefit cost Service cost Interest cost Expected return on plan assets Recognized prior service cost Recognized net losses Net periodic cost Other changes in plan assets and benefit obligations recognized in other comprehensive income Amortization of prior service cost Net (gain) loss Total recognized in other comprehensive income Total recognized in net periodic benefit cost and other comprehensive income $ $ $ $ $ 13,873 1,735 1,540 (488) 16,660 (2,479) 17,375 6.00 % 5.75 % 8.00 % 4.00 % 867 1,081 (1,110) (116) 398 $ $ $ $ $ 12,194 645 1,418 (384) 13,873 (4,922) 17,050 5.75 % 5.50 % 8.00 % 4.00 % 882 996 (1,015) (115) 371 $ $ (13,462) 12,584 $ $ (13,740) 12,962 6.00 % 5.75 % NA 4.00 % 107 758 — 64 81 $ 5.75 % 5.50 % NA 4.00 % 106 766 — 64 110 $ $ 1,120 $ 1,119 $ 1,010 $ 1,046 $ 116 (2,140) (2,024) $ 115 1,807 1,922 $ (904) $ 3,041 $ $ (64) (192) (256) $ (64) 1,721 1,657 754 $ 2,703 32 CA14518_Financials 2/28/08 2:47 PM Page 36 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 The following table summarizes amounts recognized in Accumulated Other Comprehensive Loss as of : Prior service cost Net actuarial loss Total $ $ Plan 1,190 (4,225) December 31, 2007 Supplemental Plan $ (964) (2,146) Total 226 (6,371) (6,145) December 31, 2006 Supplemental Plan $ (1,028) (2,338) Plan 1,305 (6,364) (5,059) $ (3,366) Total 277 (8,702) (8,425) $ $ $ $ $ $ (3,035) $ (3,110) The following table summarizes the amounts included in Accumulated Other Comprehensive Income (loss) at December 31, 2007 expected to be recognized as components of net periodic benefit cost in the next year: Amortization of prior service cost to be recognized in 2008 Amortization of loss to be recognized in 2008 Plan $ (116) 211 Supplemental Plan $ 64 53 Assumptions for the expected return on plan assets and discount rates in the Company’s Plan and Supplemental Plan are periodically reviewed. As part of the review, management in consultation with independent consulting actuaries performs an analysis of expected returns based on the plan’s asset allocation. This forecast reflects the Company’s and actuarial firm’s expected return on plan assets for each significant asset class or economic indicator. The range of returns developed relies on forecasts and on broad market historical benchmarks for expected return, correlation, and volatility for each asset class. Also, as a part of the review, the Company’s management in consultation with independent consulting actuaries performs an analysis of discount rates based on expected returns of high grade fixed income debt securities. The Company offers a 401(k) defined contribution plan for all employees reaching minimum age and service requirements. The plan is voluntary and employee contributions are matched by the Company at a rate of 33.3% for the first 6% of compensation contributed by each employee. The Company’s match totaled $229,000 for 2007, $210,000 for 2006 and $217,000 for 2005. Administrative costs associated with the plan are absorbed by the Company. The Company does not offer any postretirement programs other than pensions. 33 CA14518_Financials 2/28/08 2:47 PM Page 37 14. Commitments and Contingencies A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2007. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse effect on the Company’s consolidated financial position or results of operation. 15. Financial Instruments with Off-Balance Sheet Risk The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notational amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments with off-balance sheet risk at December 31 are as follows: Contract or Notational Amount (dollars in thousands) Financial instruments whose contract amount represents credit risk: Commitments to originate 1-4 family mortgages Standby and commercial letters of credit Unused lines of credit Unadvanced portions of construction loans Unadvanced portions of other loans 2007 2006 $ 2,442 13,498 155,378 $ 2,305 10,397 168,290 27,294 16,793 8,746 5,975 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. Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 16. Other Operating Expenses Year ended December 31, 2007 2006 2005 (dollars in thousands) Marketing Processing services Legal and audit Postage and delivery Software maintenance/amortization Supplies Consulting Telephone Core deposit tangible amortization Insurance Director’s fees FDIC assessment Capital expense amortization Other Total $ 1,540 876 776 867 721 759 639 546 388 380 232 148 12 1,019 $ 8,903 $ 1,515 1,326 894 849 717 684 642 524 388 368 219 154 12 1,139 $ 1,478 1,281 881 820 876 605 616 489 388 370 200 186 9 1,137 $ 9,431 $ 9,336 17. Fair Values of Financial Instruments The following methods and assumptions were used by the Company in estimating fair values of its financial instruments. Excluded from this disclosure are all nonfinancial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. CASH AND CASH EQUIVALENTS The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair values of these assets because of the short-term nature of these financial instruments. SECURITIES HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE The fair value of these securities, excluding certain state and municipal securities whose fair value is estimated at book value because they are not readily marketable, is estimated based on prices published in financial newspapers or received from pricing services, or bid quotations received from securities dealers. LOANS For variable-rate loans, that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair value of other loans is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Incremental credit risk for nonperforming loans has been considered. ACCRUED INTEREST RECEIVABLE AND PAYABLE The carrying amounts for accrued interest receivable and payable approximate fair values because of the short-term nature of these financial instruments. 34 CA14518_Financials 2/28/08 2:47 PM Page 38 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 DEPOSITS The fair value of deposits, with no stated maturity, is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on the deposit products of similar maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding (“deposit base intangibles”). REPURCHASE AGREEMENTS AND OTHER BORROWED FUNDS The fair value of repurchase agreements and other borrowed funds is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other borrowed funds of similar remaining maturities. SUBORDINATED DEBENTURES The fair value of subordinated debentures is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other subordinated debentures of similar remaining maturities. OFF-BALANCE SHEET INSTRUMENTS The fair values of the Company’s unused lines of credit and unadvanced portions of construction loans, commitments to originate and sell loans and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The carrying amounts and fair values of the Company’s financial instruments at December 31 are as follows: (dollars in thousands) Financial assets: Cash and cash equivalents Securities available-for-sale Securities held-to-maturity Net loans Accrued interest receivable Financial liabilities: Deposits Repurchase agreement and other borrowed funds Subordinated debentures Accrued interest payable Standby letters of credit 2007 2006 Carrying Amounts Fair Value Carrying Amounts Fair Value $ 299,901 403,635 183,710 716,618 6,590 1,130,061 375,875 36,083 1,678 $ 299,901 403,635 181,704 711,611 6,590 1,131,503 379,229 36,694 1,678 $ 159,668 415,481 265,712 727,060 7,372 1,268,965 209,983 36,083 2,659 — 109 — $ 159,668 415,481 258,420 713,889 7,372 1,268,500 211,931 34,948 2,659 96 LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. 35 CA14518_Financials 2/28/08 2:47 PM Page 39 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 18. Quarterly Results of Operations (unaudited) 2007 Quarters (in thousands, except share data) Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other operating income Operating expenses Income before income taxes Provision for income taxes Net income Share data: Average shares outstanding, basic Average shares outstanding, diluted Earnings per share, basic Earnings per share, diluted 2006 Quarters (in thousands, except share data) Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other operating income Operating expenses Income before income taxes Provision for income taxes Net income Share data: Average shares outstanding, basic Average shares outstanding, diluted Earnings per share, basic Earnings per share, diluted Fourth Third Second First $ 20,481 10,378 10,103 600 9,503 3,591 9,765 3,329 955 $ 2,374 $ $ $ 5,543,804 5,547,234 0.43 0.43 Fourth 21,246 12,258 8,988 225 8,763 2,736 9,850 1,649 561 $ $ $ $ $ 20,944 10,835 10,109 300 9,809 4,416 9,940 4,285 1,421 2,864 5,542,483 5,545,915 0.52 0.52 Third 20,541 11,170 9,371 225 9,146 2,729 10,056 1,819 622 $ $ $ $ $ 20,837 11,048 9,789 300 9,489 3,092 10,247 2,334 711 1,623 5,542,304 5,548,105 0.29 0.29 $ 20,746 11,544 9,202 300 8,902 2,849 10,302 1,449 445 $ 1,004 5,541,225 5,550,653 $ $ 0.18 0.18 Second First 19,733 10,656 9,077 225 8,852 2,773 10,125 1,500 527 $ 19,187 9,860 9,327 150 9,177 3,127 10,165 2,139 709 $ 1,088 $ 1,197 $ 973 $ 1,430 5,541,156 5,550,796 $ $ 0.20 0.20 5,541,088 5,548,842 $ $ 0.22 0.22 5,541,088 5,550,784 $ $ 0.18 0.18 5,540,523 5,553,351 $ $ 0.26 0.26 36 CA14518_Financials 2/28/08 2:47 PM Page 40 Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’07 19. Parent Company Financial Statements The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of December 31, 2007 and 2006 and the statements of income and cash flows for each of the years in the three-year period ended December 31, 2007 are presented below. The statements of changes in stockholders’ equity are identical to the consolidated statements of changes in stockholders’ equity and are therefore not presented here. BALANCE SHEETS December 31, (dollars in thousands) ASSETS: Cash Investment in subsidiary, at equity Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY: Liabilities Subordinated debentures Stockholders’ equity Total liabilities and stockholders’ equity STATEMENTS OF INCOME Year Ended December 31, (dollars in thousands) Income: Dividends from subsidiary Interest income from deposits in bank Other income Total income Interest expense Operating expenses Income before income taxes and equity in undistributed income of subsidiary Benefit from income taxes Income before equity in undistributed income of subsidiary Equity in undistributed income of subsidiary 2007 2006 $ 30,399 122,085 2,512 $ 154,996 $ 107 36,083 118,806 $ 154,996 $ 30,103 110,915 2,029 $ 143,047 $ 146 36,083 106,818 $ 143,047 2007 2006 2005 $ 3,611 1,442 72 5,125 2,400 130 2,595 (345) 2,940 4,924 $ 2,891 1,381 72 4,344 2,400 158 1,786 (375) 2,161 2,527 $ 4,505 798 72 5,375 2,468 186 2,721 (638) 3,359 3,521 Net income $ 7,864 $ 4,688 $ 6,880 STATEMENTS OF CASH FLOWS December 31, (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: 2007 2006 2005 $ 7,864 $ 4,688 $ 6,880 Undistributed income of subsidiary Depreciation and amortization Decrease (increase) in other assets (Decrease) increase in liabilities Net cash provided by operating activities CASH FLOWS FROM FINANCING ACTIVITIES: Subordinated debt issuance (retirement) Net proceeds from the exercise of stock options Cash dividends paid Net cash (used in) provided by financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year 37 (4,924) 12 (495) (39) 2,418 — 51 (2,173) (2,122) 296 30,103 (2,527) 12 (490) 34 1,717 — 95 (2,167) (2,072) (355) 30,458 (3,521) 9 906 (751) 3,523 (29,639) 23 (2,153) (31,769) (28,246) 58,704 $ 30,399 $ 30,103 $ 30,458 CA14518_Financials 2/28/08 2:47 PM Page 41 Report of Independent Registered Public Accounting Firm KPMG LLP Independent Registered Public Accounting Firm 99 High Street Boston, Massachusetts 02110 The Board of Directors and Stockholders Century Bancorp, Inc.: Century Bancorp, Inc. AR ’07 We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and subsidiary as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Century Bancorp, Inc. and subsidiary as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Century Bancorp, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Boston, Massachusetts February 26, 2008 38 CA14518_Financials 2/28/08 2:47 PM Page 42 Report of Independent Registered Public Accounting Firm Century Bancorp, Inc. AR ’07 KPMG LLP Independent Registered Public Accounting Firm 99 High Street Boston, Massachusetts 02110 The Board of Directors and Stockholders Century Bancorp, Inc.: We have audited Century Bancorp, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Century Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Century Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Century Bancorp, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated February 26, 2008 expressed an unqualified opinion on those consolidated financial statements. Boston, Massachusetts February 26, 2008 39 CA14518_Financials 2/28/08 2:48 PM Page 43 CENTURY BANCORP, INC. 400 Mystic Avenue Medford, Massachusetts 02155 Management’s Report on Internal Control Over Financial Reporting Century Bancorp, Inc. AR ’07 We, together with the other members of Century Bancorp, Inc. and subsidiary (the “Company”), are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment we believe that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria. The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears on page 39. Marshall M. Sloane Chairman February 26, 2008 Jonathan G. Sloane Co-President and Co-CEO Barry R. Sloane Co-President and Co-CEO William P. Hornby, CPA Chief Financial Officer and Treasurer 40 CA14518_Financials 2/28/08 2:48 PM Page 44 Notes Century Bancorp, Inc. AR ’07 41 CA14518 Cover 2/27/08 9:03 AM Page 2 A W O R D F R O M O U R C H A I R M A N As a family-run business, the values that define our company are not just part of our company culture. They are the principles that guide our decisions and help us position our company for sustained growth. Our prudent approach and long-term view proved to be the right course in 2007 as we steered clear of the pitfalls faced by so many other financial institutions. Marshall M. Sloane The last major credit crisis I witnessed was in the early nineties, over 15 years ago. Century weathered that storm, while watching scores of peer institutions fail or be compelled to merge. The current credit crisis is again predicated on real estate, but in a different securitized structure. Regardless of the mechanics, we believed then, and we believe now, that banks will lose money when they make the mistake of decentralized credit authority and allow unsupervised geographic lending expansion. While our loan policies and choice to remain focused within our market area may have appeared overly conservative several years ago, our decisions have served us well. We chose not to get involved in an overheated market of inflated appraisals and aggressive brokers. We have always tightly controlled loan authorities and customer geography because we believe there is no substitute for local market knowledge. Our risk management philosophy has worked for us since our inception, and it is one of the reasons we have consistently paid a dividend on our stock for the last 34 years. By staying true to our own family’s values, we continue to build our franchise value. I watch with amazement as the “giants” of our industry replenish their depleted capital, following the sub-prime charge-offs, with huge foreign equity infusions. Little is said about the dramatic dilution of value for existing shareholders in those recapitalizations. We have always been sensitive to maintaining and creating value for our loyal long-term shareholders. This latest crisis is one more example of how being guided by our values and our independent thinking has proven to be in our shareholders’ best interests. Our shareholders are always foremost in our thoughts and plans. As we approach our 40th anniversary, I am confident that Century’s strategy will hold true for the future. Sincerely, Marshall M. Sloane Founder and Chairman About Century Century Bancorp, Inc. is a $1.7 billion banking and financial services company headquartered in Medford, Massachusetts. The Company operates 21 banking offices in 16 cities and towns in Massachusetts and provides a full range of business, personal and institutional services. The Company’s common stock is listed on the NASDAQ Market under the symbol: CNBKA. Stockholder Information C O R P O R AT E H E A D Q UA RT E RS Century Bank 400 Mystic Avenue Medford, MA 02155-6316 TEL (866) 8.CENTURY or (866) 823.6887 century-bank.com T R A N S F E R AG E N T A N D R E G I S T R A R Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 TEL (781) 575.3400 computershare.com A N N UA L M E E T I N G The annual meeting of stockholders will be held on Tuesday, April 8, 2008, at 10:00 a.m. The meeting will take place at Century Bank, 400 Mystic Avenue, Medford, MA. S TO C K L I S T I N G Century Bancorp, Inc. became a public company in 1987. Century’s Class A Common Stock is listed in the NASDAQ national market and is traded under the symbol CNBKA. The stock is listed as CntyBcMA in The Boston Globe and CentBcp A in The Wall Street Journal. 10 - K R E P O RT A copy of the Company’s annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge upon written request to: Century Bancorp, Inc., Investor Relations, 400 Mystic Avenue, Medford, MA 02155 or online at http://www.century-bank.com/about/investorrelations.cfm Century Bank Locations O F F I C E S Allston Beverly Boston Boston Boston Boston Boston Braintree Brookline Burlington Cambridge Everett Lynn Malden Medford Medford Square Newton Peabody Quincy Salem Somerville C o m i n g S o o n Medford Medford 300 Western Avenue, Allston, MA 02134 428 Rantoul Street, Beverly, MA 01915 710 Albany Street, Boston, MA 02118 512 Commonwealth Avenue, Boston, MA 02215 275 Hanover Street, Boston, MA 02113 24 Federal Street, Boston, MA 02110 136 State Street, Boston, MA 02110 703 Granite Street, Braintree, MA 02184 1184-1186 Boylston Street/Rt 9 East, Brookline, MA 02467 134 Cambridge Street/Rt 3A, Burlington, MA 01803 2309 Massachusetts Avenue, Cambridge, MA 02140 1763 Revere Beach Parkway/Rt 16, Everett, MA 02149 2 State Street, Lynn, MA 01901 140 Ferry Street at Eastern Avenue, Malden, MA 02148 400 Mystic Avenue, Medford, MA 02155 55 High Street, Medford, MA 02155 31 Boylston Street/Rt 9 West, Newton, MA 02467 12 Peabody Square, Peabody, MA 01960 651 Hancock Street, Quincy, MA 02170 37 Central Street, Salem, MA 01970 102 Fellsway West at Mystic Avenue, Somerville, MA 02145 1 Salem Street, Medford, MA 02155 503 Riverside Avenue, Fellsway Plaza, Medford, MA 02155 F R E E S TA N D I N G C A S H D I S P E N S E RS Boston Boston Boston Boston Cambridge Cambridge Medford Milton Weston Dental School, Boston University, 100 East Newton Street, Boston, MA 02118 The Hotel Commonwealth, 500 Commonwealth Avenue, Boston, MA 02215 Medical School, Boston University, 715 Albany Street, Boston, MA 02118 Parking Garage, Boston University, 710 Albany Street, Boston, MA 02118 CambridgeSide Galleria, 100 CambridgeSide Place, Cambridge, MA 02141 One Kendall Square, Building #100, Cambridge, MA 02139 Sloane Square, 110 Medford Street, Medford, MA 02155 Milton Hospital, 199 Reedsdale Road, Milton, MA 02186 College Hall, Regis College, 235 Wellesley Street, Weston, MA 02493 (617) 562.1700 (978) 921.2300 (617) 578.9250 (617) 424.1644 (617) 557.2950 (617) 423.1490 (617) 367.3712 (781) 356.3400 (617) 713.4910 (781) 238.8700 (617) 349.5300 (617) 381.6300 (781) 586.8700 (781) 388.2100 (781) 393.4160 (781) 391.9830 (617) 582.0920 (978) 977.4900 (617) 376.8100 (978) 740.6900 (617) 629.0929 CA14518 Cover 2/27/08 9:03 AM Page 1 400 Mystic Avenue Medford, MA 02155 (866) 8.CENTURY or (866) 823.6887 www.century-bank.com Equal Housing Lender / Member FDIC 002-CS60930 A n n u a l R e p o r t 2 0 0 7 Family focused. It defines our values and drives our success. 

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