Century Bancorp Inc.
Annual Report 2010

Plain-text annual report

Our family’s bank. And yours. 400 Mystic Avenue, Medford, MA 02155 (866) 823-6887 www.AskCentury.com 2010 Annual Report million in loans billion in assets 9 .442 2 0 6.2 1 3.6 REC RD 0 For many reasons, this was a million in profits year. Equal Housing Lender/Member FDIC © 2011 Century Bancorp, Inc. All rights reserved. 002-CSI0881 410991.Cover.CS5.indd 1 3/1/11 10:42 AM About Century Century Bancorp, Inc. is a $2.4 billion banking and financial services company headquartered in Medford, Massachusetts. The Company operates 23 banking offices in 17 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.” Headquarters Opening this Fall Allston Branch Andover Branch Beverly Branch Braintree Branch Brookline Branch Burlington Branch Century Bank Locations Cambridge Branch Coolidge Corner Branch Everett Branch Federal Street Branch Fellsway Branch Kenmore Square Branch Opening this Spring Lynn Branch Malden Branch Medford Square Branch Newton Branch Newton Centre Branch North End Branch Peabody Branch Quincy Branch Salem Branch Somerville Branch State Street Branch Winchester Branch 32 Langley Road, Newton Centre, MA 02459 OPENING SPRING 2011 Stockholder Information Corporate Headquarters Century Bank 400 Mystic Avenue Medford, MA 02155-6316 TEL (866) 823-6887 AskCentury.com Annual Meeting Transfer Agent and Registrar Computershare Investor Services P.O. Box 43078 Providence, RI 02940-3078 TEL (781) 575-3400 Computershare.com The annual meeting of stockholders will be held on Tuesday, April 12, 2011, at 10:00 a.m. The meeting will take place at Century Bank, 400 Mystic Avenue, Medford, MA. Century Bancorp, Inc. became a public company in 1987. Century’s Class A Common Stock is listed on the NASDAQ market and is traded under the symbol “CNBKA.” 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. 1184-1186 Boylston Street/Rt 9 East, Brookline, MA 02467 1354 Beacon Street, Brookline, MA 02446 (617) 734-1890 300 Western Avenue, Allston, MA 02134 15 Elm Street, Andover, MA 01810 428 Rantoul Street, Beverly, MA 01915 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 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 1 Salem Street, Medford, MA 02155 400 Mystic Avenue, Medford, MA 02155 503 Riverside Avenue, 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 522 Main Street, Winchester, MA 01890 (617) 562-1700 OPENING FALL 2011 (978) 921-2300 (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) 391-9830 (781) 393-4160 (781) 393-6520 (617) 582-0920 (978) 977-4900 (617) 376-8100 (978) 740-6900 (617) 629-0929 (781) 756-3480 Free-Standing Cash Dispensers The Hotel Commonwealth, 500 Commonwealth Avenue, Boston, MA 02215 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 North Andover Merrimack College, Volpe Center, 125 Cullan Avenue, North Andover, MA 01845 North Andover Merrimack College, Sakowich Center, 90 Flaherty Extension, North Andover, MA 01845 Weston Regis College, 235 Wellesley Street, Weston, MA 02493 Stock Listing 10-K Report Offices Allston Andover Beverly Boston Boston Boston Boston Braintree Brookline Brookline Burlington Cambridge Everett Lynn Malden Medford Medford Medford Newton Newton Peabody Quincy Salem Somerville Winchester Boston Cambridge Cambridge Medford Milton 410991.Cover.CS5.indd 2 2/25/11 1:49 PM 2010 Dear Fellow Shareholders: 2010 was a record year for Century Bank. We ended the year with $2.44 billion in assets, and net earnings increased to $13.6 million, the highest levels in our 42 years. Century’s stock price rose as well in 2010, by 21.6%, to close at $26.79, exceeding the increases in both the broad market and regional bank indexes. Our Bank achieved new heights of prosperity for two principal reasons: First, the marketplace again assigns great value to the safety, soundness, and responsiveness of financial institutions. Further, Century’s founding values of community service and fair dealing are understood and appreciated by our customers. Century has cultivated and expanded upon these core values in its markets, its products, its technology, and most of all the professionalism of its officers and associates. We care about our customers and communities; it shows, and people respect us for it. Second, risk management is everything to us. In 2010, we continued our highly centralized credit approval process. The daily approval system ensures that loan applications are carefully reviewed for suitability, underwriting, and collateral. We know our credits, our borrowers, and our communities. We meet in loan committee almost every day so that we can provide a fast and thoughtful response to each application. a record $2.44 billion in assets 410991.Editorial.CS5.indd 1 2/23/11 1:58 AM a record $13.6 million in net income Some important highlights of 2010 • Net income grew 33.6% to a record $13.6 million, or $2.45 per diluted share, for the year ended December 31, 2010, as compared to net income of $10.2 million, or $1.84 per diluted share, for 2009. • Total assets increased 8.3% to a record $2.44 billion on December 31, 2010, from $2.25 billion on December 31, 2009, a gain of $188 million. Many consider our bank a “safe haven” for deposits, which is why we frequently receive unsolicited deposits from government agencies, other banks, and scores of trust fiduciaries. • Total equity rose to $145.0 million on December 31, 2010, up 9.3% from $132.7 million at December 31, 2009. Book value per share increased to $26.18 at December 31, 2010, from $24.00 at the end of 2009. • Total loans grew by 3.3% to $906.2 million on December 31, 2010. Nonperforming assets fell, ending the year at a manageable $8.1 million. We continue to utilize the SBA lending guaranty programs as a resourceful mechanism to expand the availability of credit to small businesses. In 2009 (the latest data available), Century was the eighth largest lender to small business in lower-income areas in Massachusetts. • Our efficiency ratio, one of the key metrics of our operations, improved again (decreased) to 65.0% in 2010 from 68.5% in the prior year. Total Assets (in thousands) Earnings per share, diluted Net Income (in thousands) 5 3 0 , 4 5 2 , 2 $ 4 8 6 , 1 4 4 , 2 $ 6 6 5 , 1 0 8 , 1 $ 5 4 . 2 $ 4 8 . 1 $ 3 6 . 1 $ 4 7 5 , 3 1 $ 6 4 0 , 9 $ 0 6 1 , 0 1 $ 08 09 10 08 09 10 08 09 10 410991.Editorial.CS5.indd 2 2/23/11 1:58 AM Century Bank is proud to be recognized by these organizations in 2010. • We are preparing to open two new branches in 2011, at 32 Langley Road in Newton Centre and 15 Elm Street in Andover. Century already has well-developed relationships and a client following in both Newton and Andover, and we expect significant new deposits and loans from additions #24 and #25 to our branch office network. • We continued our focus on enhancing the communities we serve. In 2010, we made hundreds of charitable donations and coordinated our holiday radio advertising with the “What’s in the Box?” promotion to bring resources and enhanced visibility to one of our key philanthropic relationships, the Franciscan Hospital for Children. • Standard and Poors issued a “bullish” recommendation on our stock, symbol CNBKA on NASDAQ, in November 2010. • Finally, we’re very proud of our Institutional Services (IS) Group for significantly growing its average deposit balances. Century now has the third-largest payment processing activity in New England. The IS Group also made major headway in 2010 with the strategic expansion of institutional and governmental client processing relationships in New Hampshire and Rhode Island. Coolidge Corner Branch Grand Opening Ribbon Cutting Ceremony May 3, 2010 Pictured from left: Barry R. Sloane, The Honorable Dorothy Kelly Gay of Hebrew SeniorLife, Linda Sloane Kay, Marshall M. Sloane, Barbara J. Sloane, State Representative Frank Israel Smizik, and State Senator Cynthia Stone Creem 410991.Editorial.CS5.indd 3 2/23/11 1:58 AM a record $906.2 million in loans We are in the waning months of a national recession, one that treated New England, and especially Massachusetts, relatively kindly, as our stubborn unemployment rate remained consistently below the national average and dramatically below many Southern states. We owe much of this condition to Massachusetts’ status as the “intellectual capital of the world,” a reputation built on our universities that have fueled the growth of the knowledge-intensive sectors of our economy. We have followed that demographic by focusing on lending to two of those expanding segments: healthcare and higher education. Over the ten years ending in 2016, Massachusetts healthcare employment is projected to increase 18.6% and private educational services, 11.8%. Hence, the fastest growth in our loan portfolio has been the direct purchase of tax-exempt loans issued by state agencies for the benefit of regional not-for-profit institutions. The country is in the midst of a generational “deleveraging” of debt. Households, businesses, and governments were burdened with excessive debt when this recession struck. Whether it’s the impact on a family from a layoff, a fall in a small business’ sales, or the significant reduction in state capital gains taxes, the recession reminded us of the real level of sustainable debt service in our lives. Even though personal debt levels have recently fallen, our total societal debt now exceeds 100% of Gross Domestic Product (GDP), a stunning total that is miles away from an appropriate level of debt leverage. In our view, coping with the spending cuts necessary to “balance” our national and personal budgets is the real economic challenge ahead. The US economy will continue to recover, and Massachusetts will prosper, barring international calamity. We intend to be a part of that prosperity by lending to the sectors with strong cash flow and to households that have prudently managed their assets. The case for an independent regional bank has never been stronger; the 410991.Editorial.CS5.indd 4 2/23/11 1:58 AM combination of Century’s command of our client base and the commitment of our superb associates will serve us well in 2011 and beyond. Thank you for your confidence in our leadership. For 42 years, the “family values” of our Founder and Chairman, Marshall M. Sloane, have enabled us to set our compass for our own version of “True North.” It hasn’t changed. We aspire to break more records in the years ahead. Sincerely, Barry R. Sloane for the Management Committee Management Committee Members Sitting from left: Barry R. Sloane, Linda Sloane Kay, and Marshall M. Sloane Standing from left: Brian J. Feeney, William P. Hornby, James M. Flynn, Jr., David B. Woonton, Jason J. Melius, and Paul A. Evangelista 410991.Editorial.CS5.indd 5 2/23/11 1:58 AM 2010 Charitable donations Century Bank continued our proud family tradition of community service by providing financial and leadership support to these charitable and civic organizations in 2010: 2020 Women on Boards AbilityPLUS Action for Boston Community Development, Inc. Adopt-A-Student Foundation Allston Village Main Streets Alzheimer’s Association we are proud to have helped support a record 205 organizations this year American Cancer Society American Heart Association American Red Cross of Massachusetts Bay Anti-Defamation League Archdiocese of Boston Associazione Gizio Aviv Centers for Living Bais Yaakov of Boston High School for Girls Bay State Chapter Freedoms Foundation Beacon Academy Beth Israel Deaconess Medical Center Beverly Football Boosters Beverly Holiday Parade Boston Bruins Alumni Association Boston Harbor Association Boston Initiative to Advance Human Rights Boston MedFlight Boston Minuteman Council, Boy Scouts of America Boston Renaissance Charter Public School Boston University Boy Scouts of America Bread of Life Brendan M. Curtin Sponsorship Fund Brookline Chamber of Commerce Brookline First Light Festival Brookline Music School Burlington Community Scholarship Foundation/Dollars for Scholars Burlington Food Pantry Burlington Housing Authority Burlington Knights of Columbus Burlington Recreation Department Cambridge & Somerville Program for Alcoholism and Drug Abuse Rehabilitation (CASPAR) Cambridge YMCA Cambridge Youth Dance Program Camp Harbor View Foundation, Inc. Cardinal Cushing Centers, Inc. Casa Monte Casino Catholic Charities of Boston Center for Women & Enterprise City of Chicopee City of Malden City of Peabody City of Somerville Combined Jewish Philanthropies Community Action Agency of Somerville (CAAS) Congregation Beth Israel of Malden Dante Alighieri Society of Massachusetts Dimock Community Health Centers Don Guanella Center DONNE 2000 Dreamfar High School Marathon Elizabeth Peabody House Endicott College Everett Chamber of Commerce Everett Kiwanis Club Everett Little League Family Action Network of Winchester First Candle/Marley Jaye Cherella Memorial Fund Fontbonne Academy Foundation for Faces of Children Fourth Presbyterian Church of South Boston Franciscan Hospital for Children Friends of Christopher Columbus Park Friends of South Shore Hospital Friends of Winter Pond Gift of Life Bone Marrow Foundation Greater Medford Visiting Nursing Association Hebrew SeniorLife Historic Newton Holy Family Hospital Foundation Housing Families I.B.E.W. Local 103 Jewish Big Brothers Big Sisters Jewish Cemetery Association of Massachusetts Jewish Family Service of the North Shore Jewish Vocational Service Junior Aid Association of Malden Kids Clothes Club KIPP Academy Lynn Ladies Ancient Order of Hibernians Liberty Belle Chorus of Sweet Adelines Little League of Somerville Little Sisters of the Poor Live “What’s in the Box?” Holiday Radio Broadcast Standing from left: Linda Sloane Kay, Barry R. Sloane, Chief Development Officer, Steven Snyder of the Franciscan Hospital for Children, and Marshall M. Sloane Sitting from left: Loren Owens and Wally Brine, WROR Morning Show Hosts Lynn Housing Authority & Neighborhood Development Lynn Lions Club Lynn Vocational & Technical Institute Make-A-Wish Foundation Malden Babe Ruth League Malden Rotary Club Malden YMCA Marblehead Arts Association March of Dimes 410991.Editorial.CS5.indd 6 2/25/11 1:52 PM MASCO Massachusetts General Hospital, Melanoma Research Fund Massachusetts School of Law Matignon High School Medford Chamber of Commerce Marshall M. Sloane named Medford Chamber of Commerce Citizen of the Year From left: Sam Tarabelsi, System Director of Operation for Physician Practices at Hallmark Health, Marshall M. Sloane, and State Representative Paul J. Donato Medford Family Network Medford High School Medford Housing Authority Medford Jingle Bell Festival Medford Mustangs Football Medford Police Association Mental Health Programs, Inc. (MHPI) Merrimack Valley Striders MetroCast Foundation MetroWest Jewish Day School Mil Milagros, Inc. Milton Hospital NAIOP Massachusetts National Library of Addictions Newton-Needham Chamber of Commerce North Bennet Street School North Cambridge Catholic High School North Cambridge Senior Center North End Against Drugs, Inc. North End Community Health Center North Reading Little League North Shore Chamber of Commerce North Shore Medical Cancer Walk North Shore Veterans Counseling Service, Inc. Notre Dame Education Center Operation A.B.L.E. of Greater Boston Pan-Mass Challenge Peabody Chamber of Commerce Peabody High School Hockey Boosters Pope John XXIII High School Prospect Hill Academy Charter School Rashi School Redemptoris Mater Seminary Regis College Rodman Ride for Kids Rotary Club of Lexington Sacred Heart School Saint John School Saint Joseph School Saint Mary’s School Saint Peter School Save the Children Federation, Inc. Seven Mile Road Shakespeare & Company Shannon Hayward Fundraiser Campaign Silent Spring Institute Societa di San Giuseppe Solomon Schechter Day School Somerville Chamber of Commerce Somerville Historic Preservation Commission Somerville Housing Authority Somerville Mental Health Somerville Pop Warner Somerville Rotary Club Somerville Youth Hockey Association, Inc. The American Ireland Fund The Andovers Village at Home The Angel Fund The ARC of Greater Boston The Black Ministerial Alliance of Greater Boston, Inc. The David Project The Friends of Donny Higgins Fund The Genesis Fund The Gifford School The Greater Boston Food Bank The Home for Little Wanderers The Wellesley-Weston Chapter of Hadassah Torah Academy Tower Hill Tenant Association Town of Burlington Town of Georgetown Town of Swampscott Town of Wayland Town of Weymouth Team Century, Rodman Ride for Kids From left: Ben Pagett, Merlen Schaepe, Bharti Gudipaty, Alan Cohen, Thomas Piemontese, and Zubin Bagwadia Sons of Italy Special Olympics of Massachusetts Springstep St. Francis House St. Joseph’s Food Pantry St. Patrick’s Shelter for Homeless Women Stone Family Adoption Assistance Fund Synagogue Council of Massachusetts Temple Beth Elohim Temple B’nai Brith Temple Emmanuel Temple Israel of Boston Temple Ohabei Shalom The 9691 Foundation Tri-City Community Action Program, Inc. U.S. Small Business Administration Uniting Against Lung Cancer New England Wachusett Area Rotary Club Ward 7 Improvement Association We Are Boston Winchester Historical Society Winchester Hospital Foundation Winchester Rotary Club Woburn Public Library WORK, Inc. World Unity Xaverian Brothers High School Young Israel of Brookline 410991.Editorial.CS5.indd 7 2/23/11 1:58 AM Century Bancorp, Inc. Directors George R. Baldwin1,4,6* President & CEO Baldwin & Company Roger S. Berkowitz 2,5,7* President & CEO Legal Sea Foods, Inc. Marshall I. Goldman 3*,5** Professor Emeritus Wellesley College Russell B. Higley, Esq.6,7 Attorney Higley & Higley Jackie Jenkins-Scott 4,5 President Wheelock College Linda Sloane Kay 4,5,7 Executive Vice President Century Bank and Trust Company Fraser Lemley 2*,4,5 Chairman & CEO Sentry Auto Group Joseph P. Mercurio 4,7 Executive Vice President Boston University Joseph J. Senna, Esq.1*,4 Attorney Barry R. Sloane 4,5,6,7 President & CEO Century Bank and Trust Company Marshall M. Sloane 4,5 Chairman of the Board Century Bank and Trust Company Stephanie Sonnabend 1,3,5* CEO & President Sonesta International Hotels Corporation George F. Swansburg 4*,5 Jon Westling 1,2,3 President Emeritus Boston University Officers Marshall M. Sloane Founder and Chairman Barry R. Sloane President & CEO William P. Hornby, CPA Chief Financial Officer & Treasurer Rosalie A. Cunio Clerk Paula A. Grimaldi Assistant Clerk Century Bank and Trust Company Officers Management Committee Marshall M. Sloane Chairman of the Board Barry R. Sloane President & CEO William P. Hornby, CPA Chief Financial Officer & Treasurer Paul A. Evangelista Executive Vice President Brian J. Feeney Executive Vice President Linda Sloane Kay Executive Vice President David B. Woonton Executive Vice President James M. Flynn, Jr. Senior Vice President Jason J. Melius Senior Vice President Senior Vice Presidents Gerald S. Algere Richard L. Billig Janice A. Brandano Bradford J. Buckley Peter R. Castiglia William J. Gambon, Jr. Timothy L. Glynn Anthony C. LaRosa, CPA Nancy Lindstrom Thomas E. Piemontese Deborah R. Rush Kenneth A. Samuelian Yasmin D. Whipple First Vice Presidents Susan B. Delahunt Phillip A. Gallagher Shipley C. Mason David J. Waryas Vice Presidents Barry M. Aldorisio Michael D. Ballard Roger F. Ballou, CPA Jean P. Belcher-Scarpa Robert A. Bennett Gerald Bovardi Pasqualina Buttiri Toni M. Chardo Gracine Copithorne Rosalie A. Cunio Barbara J. Cunningham Sandra R. Edey Paul C. Eldredge Michele English Judith A. Fallon Howard N. Gold Lisa Gosling T. Daniel Kausel Kathleen A. Kelly Michael F. Long Nancy M. Marsh Karen M. Martin Carl M. Mattos Cornelius C. Prioleau Bernice A. Shuman Janice D. Taylor Tuesday N. Thomas Assistant Vice Presidents John S. Bosco, Jr. Cynthia A. Davidson Laura A. DiFava John R. Ferguson Marissa L. Fitzgerald Thatcher L. Freeborn Anna M. Gorska Janice D. Hallinan Michelle L. Haughton Kristine M. Holopainen James J. Jordan Malcolm I. Maloon Ann E. Mannion Kathleen McGillicuddy Carol A. Melisi Sarah A. O’Toole Karen J. Pessia Elizabeth M. Pinault Laurie A. Rizzo William F. Shutt, Jr. Richard A. Thimble Lawrence H. Tsoi Jose I. Umana Christina Welch-Matthews Officers Leonard A. Adjetey Zubin C. Bagwadia Valerie R. Bosse Roberta M. Byington John J. Ferren Janet Garcia Sara A. Gaudet Paula A. Grimaldi Amelia N. Iocco William B. Keefe Joseph P. Kelley Brian Kelly Earl K. Kishida Brandon N. Letellier Robson G. Miguel Anne M. Milczarek John L. Norris III Marie A. Nugent Scott M. Rembis Judith A. Shannon Krzysztof A. Sikorski Elizabeth A. Theriault Jeanne A. Wood 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, ** Committee Vice Chairperson 410991.Editorial.CS5.indd 8 2/23/11 1:58 AM Century Bancorp, Inc. AR ’10 Financial Highlights 1 FINAN C IAL STATEMENTS 3 Management’s Discussion and Analysis of Results of Operations and Financial Condition 19 20 21 22 23 48 50 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 410991.Financial.CS5.indd 1 2/23/11 2:05 AM Financial Highlights Century Bancorp, Inc. AR ’10 (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 2010 2009 2008 2007 2006 $ 76,583 24,817 51,766 5,575 46,191 15,999 47,372 14,818 1,244 $ 79,600 31,723 47,877 6,625 41,252 16,470 46,379 11,343 1,183 $ $ 80,693 35,914 44,779 4,425 40,354 13,975 43,028 11,301 2,255 $ 83,008 43,805 39,203 1,500 37,703 13,948 40,255 11,396 3,532 $ 13,574 $ 10,160 $ 9,046 $ 7,864 $ 80,707 43,944 36,763 825 35,938 11,365 40,196 7,107 2,419 4,688 5,533,506 5,535,742 5,540,247 $ $ 2.45 2.45 16.0 % $ 2,441,684 906,164 1,902,023 145,025 26.18 $ 0.56 % 9.52 % 2.52 % 0.44 % 5.93 % 65.0 % 5,532,249 5,534,340 5,530,297 $ $ 1.84 1.84 21.4 % $ 2,254,035 877,125 1,701,987 132,730 24.00 $ 0.50 % 7.98 % 2.69 % 0.63 % 6.26 % 68.5 % 5,541,983 5,543,702 5,538,407 5,542,461 5,546,707 5,543,804 5,540,966 5,550,722 5,541,188 $ $ 1.63 1.63 24.0 % $ $ 1.42 1.42 27.6 % $ $ 0.85 0.84 46.2 % $ 1,801,566 836,065 1,265,527 120,503 21.76 $ $ 1,680,281 726,251 1,130,061 118,806 21.43 $ $ 1,644,290 736,773 1,268,965 106,818 19.28 $ 0.54 % 7.43 % 3.00 % 0.38 % 7.23 % 70.6 % 0.49 % 7.05 % 2.65 % 0.22 % 6.97 % 77.5 % 0.28 % 4.45 % 2.40 % 0.06 % 6.39 % 83.5 % 1 410991.Financial.CS5.indd 1 2/23/11 2:05 AM Per Share Data 2010, Quarter Ended Market price range (Class A) High Low Dividends Class A Dividends Class B 2009, Quarter Ended Market price range (Class A) High Low Dividends Class A Dividends Class B Financial Highlights Century Bancorp, Inc. AR ’10 December 31, September 30, June 30, March 31, $ 27.39 22.54 0.12 0.06 $ 24.00 19.40 0.12 0.06 $ 23.22 16.77 0.12 0.06 $ 23.60 18.65 0.12 0.06 December 31, September 30, June 30, March 31, $ 25.00 18.53 0.12 0.06 $ 24.99 17.60 0.12 0.06 $ 18.99 13.00 0.12 0.06 $ 17.75 9.46 0.12 0.06 The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2005 to December 31, 2010 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the table below represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used. Comparison of Five-Year $200 Cumulative Total Return* $175 $150 $125 $100 $75 $50 $25 $0 NASDAQ Banks Century Bancorp, Inc. NASDAQ U.S. 2005 2006 2007 2008 2009 2010 Value of $100 Invested on December 31, 2005 at: 2006 2007 2008 2009 2010 Century Bancorp, Inc. NASDAQ U.S. NASDAQ Banks $ 94.97 112.23 109.84 $ 71.67 88.95 119.14 $ 57.57 64.86 57.41 $ 82.67 54.35 82.53 $ 102.68 64.28 97.95 * Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2005 and that all dividends were reinvested. 410991.Financial.CS5.indd 2 2 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 FORWARD-LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward- looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. RECENT MARKET DEVELOPMENTS The financial services industry is facing unprecedented challenges in the face of the current national and global economic crisis. The global and U.S. economies are experiencing significantly reduced business activity. Dramatic declines in the housing market during the past several years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write- downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital; to merge with larger and stronger institutions; and, in some cases, to fail. The Company is fortunate that the markets it serves have been impacted to a lesser extent than many areas around the country. In response to the financial crises affecting the banking system and financial markets, there have been several announcements of federal programs designed to purchase assets from, provide equity capital to, and guarantee the liquidity of the industry. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. The EESA authorizes the U.S. Treasury to, among other things, purchase up to $750 billion of mortgages, mortgage-backed securities, and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Company does not expect to participate in the sale of any of our assets into these programs. On October 14, 2008, the U.S. Treasury announced that it would purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Assets Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), the U.S. Treasury made $250 billion of capital available (from the $750 billion authorized by the EESA) to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the U.S. Treasury received warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions were required to adopt the U.S. Treasury’s standards for executive compensation, dividend restrictions and corporate governance for the period during which the Treasury holds equity issued under 3 the TARP Capital Purchase Program. The U.S. Treasury also announced that nine large financial institutions had already agreed to participate in the TARP Capital Purchase Program. Subsequently, a number of smaller institutions had participated in the TARP Capital Purchase Program. On December 18, 2008, the Company announced in a press release, it had received preliminary approval from the U.S. Treasury to participate in the TARP Capital Purchase Program, in an amount up to $30 million in the form of Century Bancorp, Inc. preferred stock and warrants to purchase Class A common stock. In light of uncertainty surrounding additional restrictions that may be imposed on participants under pending legislation, the Company, on January 14, 2009, informed the U.S. Treasury that it would not be closing on the transaction on January 16, 2009, as originally scheduled. The Company subsequently withdrew its application. On October 14, 2008, the U.S. Treasury and the FDIC jointly announced a new program, known as the Temporary Liquidity Guarantee Program (“TLGP”), to strengthen confidence and encourage liquidity in the nation’s banking system. The TLGP consists of two programs: the Debt Guarantee Program (“DGP”) and the Transaction Account Guarantee Program (“TAGP”). Under the DGP, as amended, the FDIC guaranteed certain newly issued senior unsecured debt of participating banks, thrifts and certain holding companies issued from October 14, 2008 through October 31, 2009, which debt matures on or prior to December 31, 2012, up to a fixed maximum amount per participant. In addition, under the TAGP, the FDIC fully guaranteed deposits in noninterest bearing transaction accounts without dollar limitation through December 31, 2009. Institutions opting to participate in the DGP were be charged a 50-, 75- or 100-basis point fee (depending on maturity) for the guarantee of eligible debt, and a 10-basis point assessment was applicable to deposits in noninterest bearing transaction accounts at institutions participating in the TAGP that exceed the existing deposit insurance limit of $250,000. The Company opted to participate in both the DGP and the TAGP. The annual assessment rate that was applied during the extension period was either 15, 20 or 25 basis points, depending on the risk category assigned to the institution under the FDIC’s risk-based premium system. On April 13, 2010 the FDIC approved an interim rule to extend the TAGP to December 31, 2010. The Company continued to participate in the TAGP through December 31, 2010. The interim rule gave the FDIC discretion to extend the program to the end of 2011, without additional rulemaking, if it determines that economic conditions warrant such an extension. On November 9, 2010, the FDIC approved temporary unlimited coverage for noninterest-bearing transaction accounts. This coverage became effective on December 31, 2010, and will end on December 31, 2012. On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment was five basis points of each FDIC-insured depository institution’s assets minus Tier 1 capital, as of June 30, 2009. The Company recorded a pre-tax charge of approximately $1.0 million in the second quarter of 2009 in connection with the special assessment. On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. As a result, the Company is carrying a prepaid asset of $6.1 million as of December 31, 2010. The Company’s quarterly risk-based deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Company. 410991.Financial.CS5.indd 3 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Dodd-Frank Wall Street Reform and Consumer Protection Act also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. OVERVIEW Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At December 31, 2010, the Company had total assets of $2.4 billion. Currently, the Company operates 23 banking offices in 17 cities and towns in Massachusetts, ranging from Braintree in the south to Beverly in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts. The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and the interest paid on deposits and borrowings. The results of operations are also affected by the level of income/fees from loans and deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity. The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, nonprofit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans, and consumer loans and accepts savings, time and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lockbox collection services, cash management services and account reconciliation services, and it actively promotes the marketing of these services to the municipal market. Also, the Company provides full-service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a full-service securities brokerage business. The Company is also a provider of financial services, including cash management, transaction processing and short-term financing, to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with 178 (51%) of the 351 cities and towns in Massachusetts. The Company had net income of $13,574,000 for the year ended December 31, 2010, compared with net income of $10,160,000 for the year ended December 31, 2009 and net income of $9,046,000 for the year ended December 31, 2008. Diluted earnings per share were $2.45 in 2010, compared to $1.84 in 2009 and $1.63 in 2008. Throughout 2008, the Company had seen improvement in its net interest margin; however, the first quarter of 2009 reflected a decrease in the net interest margin with a modest increase during the second and third quarters of 2009 followed by a general decline through the fourth quarter of 2010 as illustrated in the graph below: 3.60 % 3.20 % 2.86% Net Interest Margin 2.82% 2.80 % 3.14% 2.81% 3.16% 2.63% 2.64% 2.57% 2.58% 2.55% 2.55% 2.39% 2.40 % 2.00 % Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 2010 The primary factors accounting for the increase in net interest margin during 2008 are: • a continuing decline in the cost of funds as a result of increased pricing discipline related to deposits • an increase in average loans outstanding during 2008 • the maturity of lower-yielding investment securities • an increase in the slope of the yield curve • an increase in investment yields due, in part, to taking advantage of elevated yields in the municipal auction rate securities market, particularly in the third quarter of 2008 The primary factors accounting for the general decrease in the net interest margin during 2009 and 2010 were a large influx of deposits, primarily from municipalities, and a corresponding increase in short-term investments. While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as prepayments of loans and changes in market interest rates, will continue to positively impact the net interest margin. 5.00 % Historical U.S. Treasury Yield Curve 4.00 % 3.00 % 2.00 % 1.00 % 0.00 % 3 Month 6 Month 2 Year 3 Year 5 Year 10 Year 30 Year U.S. Treasury Yield Curve 12/31/2008 U.S. Treasury Yield Curve 12/31/2009 U.S. Treasury Yield Curve 12/31/2010 A yield curve is a line that typically plots the interest rates of U.S. Treasury Debt, which have different maturity dates but the same credit quality, at a specific point in time. The three main types of yield curve shapes are normal, inverted and flat. Over the past three years, the U.S. economy has experienced low short-term rates. From 2008 to 2009, the yield curve steepened significantly, offset somewhat by a slight flattening from 2009 to 2010. 410991.Financial.CS5.indd 4 4 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 Allowance for Loan Losses Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances for identified problem loans. The formula allowance evaluates groups of loans to determine the allocation appropriate within each portfolio segment. Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. The formula allowance and specific allowances also include management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors. Further information regarding the Company’s methodology for assessing the appropriateness of the allowance is contained within footnote 1 of the Company’s financial statements. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. FINANCIAL CONDITION Investment Securities The Company’s securities portfolio consists of securities available-for-sale (“AFS”) and securities held-to-maturity (“HTM”). Securities available-for-sale consist of certain U.S. Treasury and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; foreign debt securities; and other marketable equities. These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders’ equity. The fair value of securities available-for-sale at December 31, 2010 totaled $909,391,000 and included gross unrealized gains of $12,450,000 and gross unrealized losses of $6,615,000. A year earlier, securities available-for-sale were $647,796,000 including gross unrealized gains of $9,442,000 and gross unrealized losses of $2,656,000. In 2010, the Company recognized gains of $1,851,000 on the sale of available- for-sale securities. In 2009, the Company recognized gains of $2,734,000. Securities which management intends to hold until maturity consist of U.S. Government Sponsored Enterprises and mortgage-backed securities. Securities held-to-maturity as of December 31, 2010 are carried at their amortized cost of $230,116,000 and exclude gross unrealized gains of $5,394,000 and gross unrealized losses of $1,986,000. A year earlier, securities held-to-maturity totaled $217,643,000 excluding gross unrealized gains of $4,526,000 and gross unrealized losses of $756,000. During 2010, the Company’s earnings were positively impacted primarily by an increase in net interest income. This increase was primarily due to an increase in earning assets. During 2010, 2009 and 2008, the U.S. economy has experienced a lower short-term rate environment along with a general steepening of the yield curve, which means that the spread between the long- term and short-term yields has increased. The lower short-term rates negatively impacted the net interest margin for 2010 and 2009 as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits. Total assets were $2,441,684,000 at December 31, 2010, an increase of 8.3% from total assets of $2,254,035,000 on December 31, 2009. On December 31, 2010, stockholders’ equity totaled $145,025,000, compared with $132,730,000 on December 31, 2009. Book value per share increased to $26.18 at December 31, 2010 from $24.00 on December 31, 2009. During October 2008, the Company received regulatory approval to close a branch on Albany Street in Boston, Massachusetts. This branch closed in January 2009. During August 2009, the Company entered into a lease agreement to open a branch located at Coolidge Corner in Brookline, Massachusetts. The branch opened on April 27, 2010. During July 2010, the Company entered into a lease agreement to open a branch located at Newton Centre in Newton, Massachusetts. The branch is scheduled to open during the first half of 2011. During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch is scheduled to open during the fourth quarter of 2011. CRITICAL ACCOUNTING POLICIES Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. The Company considers impairment of investment securities and allowance for loan losses to be its critical accounting policies. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions. Impaired Investment Securities If a decline in fair value below the amortized cost basis of an investment security is judged to be “other-than-temporary,” the cost basis of the investment is written down to fair value. The amount of the writedown is included as a charge to earnings. The amount of the impairment charge is recognized in earnings with an offset for the noncredit component which is recognized through other comprehensive income. Some factors considered for other-than-temporary impairment related to a debt security include an analysis of yield which results in a decrease in expected cash flows, whether an unrealized loss is issuer specific, whether the issuer has defaulted on scheduled interest and principal payments, whether the issuer’s current financial condition hinders its ability to make future scheduled interest and principal payments on a timely basis or whether there was a downgrade in ratings by rating agencies. The Company does not intend to sell any of its debt securities with an unrealized loss, and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, which may be maturity. 5 410991.Financial.CS5.indd 5 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Fair Value of Securities Available-for-Sale The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated. At December 31, 2010 2009 Century Bancorp, Inc. AR ’10 2008 (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Privately Issued Commercial Mortgage-Backed Securities Obligations Issued by States and Political Subdivisions Other Debt Securities Equity Securities Total Amount Percent Amount Percent Amount Percent $ 2,005 175,663 9,732 0.2 % 19.3 % 1.1 % $ 2,003 192,364 — 0.3 % 29.7 % — $ 2,028 161,292 — 0.4 % 32.5 % — 680,898 74.9 % 418,512 64.6 % 260,132 52.5 % 3,968 287 34,074 2,253 511 0.4 % 0.1 % 3.7 % 0.2 % 0.1 % 4,910 544 26,289 2,259 915 0.8 % 0.1 % 4.1 % 0.3 % 0.1 % 5,659 3,367 1.1 % 0.7 % 60,259 12.2 % 2,100 748 0.4 % 0.2 % $ 909,391 100.0 % $ 647,796 100.0 % $ 495,585 100.0 % Included in Obligations Issued by States and Political Subdivisions as of December 31, 2010, are $4,393,000 of auction rate municipal obligations (“ARSs”) and $10,000,000 of variable rate demand notes (“VRDNs”) with unrealized losses of $284,000 for ARSs. VRDNs’ fair value equals the carrying value. These debt securities were issued by governmental entities but are not necessarily debt obligations of the issuing entity. Of the total of $14,393,000 of ARSs and VRDNs, $10,000,000 are obligations of governmental entities and the remainder are the obligation of a large nonprofit entity. These obligations are variable rate securities with long-term maturities whose interest rates are set periodically through an auction process for ARSs and by prevailing market rates for VRDNs. Should the auction not attract sufficient bidders, the interest rate adjusts to the default rate defined in each obligation’s underlying documents. The Company increased its holdings in these types of securities during the second and third quarters of 2008 to take advantage of yields available due to market disruption. Although many of these issuers have bond insurance, the Company purchased the securities based on the creditworthiness of the underlying obligor. In the case of a failed auction, the Company may not have access to funds as only a limited market exists for failed ARSs. As of December 31, 2010, the Company’s ARS was purchased subsequent to its failure with a fair value of $4,393,000 and an amortized cost of $4,677,000. As of December 31, 2010, the weighted average taxable equivalent yield on these securities was 0.47%. The majority of the Company’s securities AFS are classified as Level 2, as defined in footnote 1 of the “Notes to Consolidated Financial Statements.” The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2010. Securities available-for-sale totaling $20,660,000, or 0.85% of assets, are classified as Level 3, as defined in footnote 1 of the “Notes to Consolidated Financial Statements.” These securities are generally equity investments or municipal securities with no readily determinable fair value. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations. Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the third quarter of 2008. Amortized Cost of Securities Held-to-Maturity The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated. At December 31, 2010 2009 2008 Amount Percent Amount Percent Amount Percent (dollars in thousands) U.S. Government Sponsored Enterprises $ 84,534 36.7 % $ 69,555 32.0 % $ 44,000 23.9 % U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities 145,582 63.3 % 148,088 68.0 % 140,047 76.1 % Total $ 230,116 100.0 % $ 217,643 100.0 % $ 184,047 100.0 % For all years presented, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. 410991.Financial.CS5.indd 6 6 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 Fair Value of Securities Available-for-Sale The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2010. Actual maturities will differ from contractual Amounts Maturing maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 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 Over Ten Years Weighted % of Average Total Yield (dollars in thousands) U.S. Treasury $ 2,005 0.2 % 0.95 % $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored Enterprise — — 0.0 % 0.00 % 148,019 16.3 % 1.41 % 27,644 3.0 % 1.22 % — 0.0 % 0.00 % 0.0 % 0.00 % 1,158 0.1 % 0.71 % 3,983 0.4 % 0.77 % 4,591 0.5 % 0.93 % Mortgage-Backed Securities Privately Issued Residential Mortgage- Backed Securities Privately Issued Commercial Mortgage- Backed Securities Obligations of States and Political Subdivisions Other Debt Securities Equity Securities 21,536 2.4 % 5.21 % 539,454 59.3 % 2.71 % 118,267 13.0 % 2.84 % 1,641 0.2 % 2.60 % — 0.0 % 0.00 % 3,968 0.4 % 2.88 % — 0.0 % 0.00 % — 0.0 % 0.00 % 287 0.0 % 3.78 % — 0.0 % 0.00 % — 0.0 % 0.00 % — 0.0 % 0.00 % 17,505 2.0 % 1.39 % 2,176 0.3 % 4.98 % 5,000 0.6 % 0.41 % 9,393 1.0 % 0.46 % 200 0.0 % 5.38 % 600 0.1 % 2.10 % — 0.0 % 0.00 % — 0.0 % 0.00 % — — 0.0 % 0.00 % 0.0 % 0.00 % — — 0.0 % 0.00 % 0.0 % 0.00 % Total $ 41,533 4.6 % 3.36 % $ 695,375 76.5 % 2.44 % $ 154,894 17.0 % 2.42 % $ 15,625 1.7 % 0.82 % Non- Maturing % of Total Weighted Average Yield Total Weighted Average Yield % of Total $ — — — — — — — 0.0 % 0.00 % $ 2,005 0.2 % 0.95 % 0.0 % 0.00 % 175,663 19.3 % 1.38 % 0.0 % 0.00 % 9,732 1.1 % 0.84 % 0.0 % 0.00 % 680,898 75.0 % 2.82 % 0.0 % 0.00 % 3,968 0.4 % 2.88 % 0.0 % 0.00 % 287 0.0 % 3.78 % 0.0 % 0.00 % 34,074 3.7 % 1.22 % 1,453 0.1 % 4.63 % 2,253 0.2 % 4.02 % 511 0.1 % 1.71 % 511 0.1 % 1.71 % $ 1,964 0.2 % 3.87 % $ 909,391 100.0 % 2.45 % (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Privately Issued Commercial Mortgage-Backed Securities Obligations of States and Political Subdivisions Other Debt Securities Equity Securities 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 $ U.S. Government Sponsored Enterprise Mortgage- — 0.0 % 0.00 % $ 9,998 4.4 % 1.63 % $ 74,536 32.4 % 1.67 % $ 84,534 36.7 % 1.67 % Backed Securities 7,298 3.2 % 4.49 % 113,059 49.1 % 4.11 % 25,225 11.0 % 2.69 % 145,582 63.3 % 3.88 % Total $ 7,298 3.2 % 4.49 % $ 123,057 53.5 % 3.91 % $ 99,761 43.4 % 1.93 % $ 230,116 100.0 % 3.07 % 7 410991.Financial.CS5.indd 7 2/28/11 4:22 PM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 At December 31, 2010 and 2009, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2010, sales of securities totaling $41,251,000 in gross proceeds resulted in a net realized gain of $1,851,000. There were no sales of state, county or municipal securities during 2010. In 2009, there were sales totaling $16,185,000 in gross proceeds in state, county or municipal securities resulting in gross gains of $0 and gross losses of $0. In 2009, sales of securities totaling $94,142,000 in gross proceeds resulted in a net realized gain of $2,734,000. Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are dependent upon general market conditions and specific conditions related to the issuers of our securities. Loans The Company’s lending activities are conducted principally in Massachusetts. The Company grants single and multi-family residential loans, commercial and commercial real estate loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers’ geographic areas and of the general economy. December 31, 2010 2009 2008 2007 2006 The following summary shows the composition of the loan portfolio at the dates indicated. Amount Amount Amount Percent of Total Percent of Total Percent of Total Amount Percent of Total Amount Percent of Total (dollars in thousands) Construction and land development $ 53,583 5.9 % $ 60,349 6.9 % $ 59,511 7.1 % $ 62,412 8.6 % $ 49,709 6.7 % Commercial and industrial 90,654 10.0 % 141,061 16.1 % 141,373 16.9 % 117,332 16.2 % 117,497 15.9 % Commercial real estate 433,337 47.8 % 361,823 41.2 % 332,325 39.8 % 299,920 41.3 % 327,040 44.4 % Residential real estate 207,787 22.9 % 188,096 21.4 % 194,644 23.3 % 168,204 23.2 % 167,946 22.8 % Consumer Home equity Overdrafts Total 5,957 0.7 % 7,105 0.8 % 8,246 1.0 % 8,359 1.1 % 7,104 114,209 12.6 % 118,076 13.5 % 98,954 11.8 % 68,585 9.4 % 66,157 637 0.1 % 615 0.1 % 1,012 0.1 % 1,439 0.2 % 1,320 1.0 % 9.0 % 0.2 % $ 906,164 100.0 % $ 877,125 100.0 % $ 836,065 100.0 % $ 726,251 100.0 % $ 736,773 100.0 % At December 31, 2010, 2009, 2008, 2007 and 2006, loans were carried net of discounts of $598,000, $645,000, $692,000, $3,000 and $3,000, respectively. Net deferred loan fees of $186,000, $71,000, $81,000, $38,000 and $183,000 were carried in 2010, 2009, 2008, 2007 and 2006, respectively. The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2010. The table excludes loans secured by 1-4 family residential real estate and loans for household and family personal expenditures. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date. Remaining Maturities of Selected Loans at December 31, 2010 One Year or Less One to Five Years Over Five Years Total (dollars in thousands) Construction and land development Commercial and industrial Commercial real estate Total December 31, 2010 $ 12,379 36,995 30,238 $ 79,612 $ 32,322 28,602 135,767 $ 8,882 25,057 267,332 $ 53,583 90,654 433,337 $ 196,691 $ 301,271 $ 577,574 The following table indicates the rate variability of the above loans due after one year. (dollars in thousands) One to Five Years Over Five Years Total Predetermined interest rates Floating or adjustable interest rates Total $ 91,435 105,256 $ 50,431 250,840 $ 141,866 356,096 $ 196,691 $ 301,271 $ 497,962 410991.Financial.CS5.indd 8 8 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 The Company’s commercial and industrial (“C&I”) loan customers represent various small and middle-market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers. Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s market area, which generally includes Eastern Massachusetts and Southern New Hampshire. Also included are loans to educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and ten years. Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized nonresidential-type owner-occupied properties. This complements our C&I emphasis placed on the operating business entities and will continue. The regional economic environment affects the risk of both nonresidential and residential mortgages. Residential real estate (1-4 family) includes two categories of loans. Included in residential real estate are approximately $11,109,000 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. The other category of residential real estate loans is mostly 1-4 family residential properties located in the Bank’s market area. General underwriting criteria are largely the same as those used by Fannie Mae. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a “First Time Homebuyer” product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category. Home equity loans are extended as both first and second mortgages on owner-occupied residential properties in the Bank’s market area. Loans are underwritten to a maximum loan to property value of 75%. Bank officers evaluate the feasibility of construction projects, based on independent appraisals of the project, architects’ or engineers’ evaluations of the cost of construction and other relevant data. As of December 31, 2010, the Company was obligated to advance a total of $22,337,000 to complete projects under December 31, construction. (dollars in thousands) The composition of nonperforming assets is as follows: Total nonperforming loans 2010 2009 2008 2007 2006 $ 8,068 — $ 12,311 — $ 3,661 — $ 1,312 452 $ 135 — Other real estate owned Total nonperforming assets Accruing troubled debt 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 Residential real estate, multi-family The composition of impaired loans at December 31, is as follows: Commercial real estate Construction and land development Commercial and industrial Total impaired loans $ 8,068 $ 1,248 50 0.89 % 0.33 % 2010 $ — 2,492 4,000 1,471 $ 7,963 $ 12,311 $ 521 — 1.40 % 0.55 % 2009 $ — 4,260 4,900 1,356 $ 10,516 $ 3,661 $ — 89 0.44 % 0.20 % 2008 $ 194 1,175 — 1,329 $ 2,698 $ 1,764 $ 135 $ — 122 0.18 % 0.10 % $ — 789 0.02 % 0.01 % 2007 $ — — — 196 $ 196 2006 $ — — — 16 $ 16 At December 31, 2010, 2009, 2008 and 2007, impaired loans had specific reserves of $317,000, $745,000, $600,000 and $75,000, respectively. There were no impaired loans with specific reserves at December 31, 2006. The Company was servicing mortgage loans sold to others without recourse of approximately $983,000, $1,127,000, $768,000, $559,000 and $798,000 at December 31, 2010, 2009, 2008, 2007 and 2006, respectively. Additionally, the Company services mortgage loans sold to others with limited recourse. The outstanding balance of these loans with limited recourse was approximately $36,000, $47,000, $56,000, $65,000 and $72,000 at December 31, 2010, 2009, 2008, 2007 and 2006, respectively. Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features. Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company’s commercial and commercial real estate loan portfolios. This 9 410991.Financial.CS5.indd 9 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank. Nonaccrual loans decreased during 2010 primarily as a result of resolution of a $2,479,000 commercial real estate loan as well as $900,000 in charge-offs from two construction loans during 2010. Nonaccrual loans increased from 2008 to 2009 primarily as a result of three loan relationships, one primarily commercial real estate and two construction totaling $7,379,000. Nonaccrual loans increased from 2007 to 2008 primarily as a result of eight consumer mortgages totaling $1,649,000. Nonaccrual loans increased from 2006 to 2007 primarily as a result of three consumer mortgages totaling $938,000. The relatively low level of nonperforming assets of $135,000 in 2006 and $949,000 in 2005 resulted from fewer additions to nonperforming assets during the year combined with an improvement in the resolution of nonperforming assets, including payments on nonperforming loans. The Company continues to monitor closely $32,905,000 and $35,229,000 at December 31, 2010 and 2009, respectively, of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2010, although such values may fluctuate with changes in the economy and the real estate market. Allowance for Loan Losses The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, the Year Ended December 31, 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. (dollars in thousands) 2010 2007 2009 2008 2006 Year-end loans outstanding (net of unearned discount and deferred loan fees) $ 906,164 $ 877,125 $ 836,065 $ 726,251 $ 736,773 Average loans outstanding (net of unearned discount and deferred loan fees) $ 877,858 $ 853,422 $ 775,337 $ 725,903 $ 723,825 Balance of allowance for loan losses at the beginning of year Loans charged-off: Commercial Construction Commercial real estate Residential real estate Consumer Total loans charged-off Recovery of loans previously charged-off: Commercial Construction Real estate Consumer Total recoveries of loans previously charged-off: Net loan charge-offs Provision charged to operating expense $ 12,373 $ 11,119 $ 9,633 $ 9,713 $ 9,340 1,559 900 922 515 547 4,443 172 — 8 368 548 3,895 5,575 1,498 3,639 — 490 443 6,070 352 25 4 318 699 5,371 6,625 2,869 15 — — 489 3,373 159 — 5 270 434 2,939 4,425 1,828 — — — 311 2,139 268 — 149 142 559 1,580 1,500 386 — — — 322 708 96 — 49 111 256 452 825 Balance at end of year $ 14,053 $ 12,373 $ 11,119 $ 9,633 $ 9,713 Ratio of net charge-offs during the year to average loans outstanding Ratio of allowance for loan losses to loans outstanding 0.44 % 1.55 % 0.63 % 1.41 % 0.38 % 1.33 % 0.22 % 1.33 % 0.06 % 1.32 % These provisions are the result of management’s evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The pace of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge-offs increased during 2006 through 2009 due to an increase in commercial loan charge-offs and construction loan charge-offs for 2009 as a result of the weakening of the overall economy and real estate market. Charge-offs declined in 2010 as a result of the overall decrease in the level of nonaccrual loans. In evaluating the allowance for loan losses the Company considered the following categories to be higher risk: Construction loans — The outstanding loan balance of construction loans at December 31, 2010 is $53,583,000. A major factor in nonaccrual loans are two large construction loans. Based on this fact, and the general local construction conditions facing construction, the management closely monitors all construction loans and considers this type of loan to be higher risk. 410991.Financial.CS5.indd 10 10 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 Higher balance loans — Loans greater than $1.0 million are considered “high balance loans.” The balance of these loans is $434,829,000 at December 31, 2010. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high balance loans. Included in high balance loans are loans greater than $10.0 million. The balance of these loans is $124,685,000 at December 31, 2010. Additional allowance allocations are made based upon the level of this type of high balance loans that is separate and greater than the $1.0 million allocation. Small business loans — The outstanding loan balances of small business loans is $47,815,000 at December 31, 2010. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion. The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current 2009 economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At Percent December 31 of each year listed below, the allowance was comprised of the following: of Loans in Each Category to Total Loans Percent of Loans in Each Category to Total Loans Percent of Loans in Each Category to Total Loans Percent of Loans in Each Category to Total Loans Percent of Loans in Each Category to Total Loans Amount Amount Amount Amount Amount 2010 2008 2007 2006 (dollars in thousands) Construction and land development $ 1,752 5.9 % $ 362 6.9 % $ 677 7.1 % $ 583 8.6 % $ 849 6.7 % Commercial and industrial Commercial real estate Residential real estate Consumer and other Home equity Unallocated Total 3,163 10.0 4,972 16.1 5,125 16.9 5,671 47.8 2,983 41.2 2,620 39.8 1,718 22.9 1,304 21.4 1,753 0.9 778 23.3 342 1.1 298 0.8 725 12.6 726 761 13.5 1,527 11.8 238 50 4,645 2,548 637 392 686 142 16.2 41.3 23.2 1.3 9.4 1,916 4,502 512 135 219 1,580 15.9 44.4 22.8 1.2 9.0 $ 14,053 100.0 % $ 12,373 100.0 % $ 11,119 100.0 % $ 9,633 100.0 % $ 9,713 100.0 % The shift in the allocations of the allowance for loan losses in 2007 is the result of the implementation of guidance issued by the FDIC. The current allocation is based on historical charge-off rates with additional allocations based on risk factors for each category and general economic factors. Prior to 2007, the allowance related to general economic factors was included solely in the unallocated category. Futher information regarding the allocation of the allowance is contained within footnote 6 of the Company’s financial statements. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Deposits The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. Additionally, the Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customer’s checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a computerized report balancing the customer’s checking account. 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. 2010 2009 2008 The following table sets forth the average balances of the Bank’s deposits for the periods indicated. Amount Percent Amount Amount Percent Percent (dollars in thousands) Demand Deposits $ 298,825 15.8 % $ 277,300 17.8 % $ 267,966 22.0 % Savings and Interest Checking 696,232 36.7 % 528,973 34.0 % 369,687 30.3 % Money Market 543,432 28.7 % 432,159 27.8 % 308,432 25.3 % Time Certificates of Deposit 356,457 18.8 % 318,413 20.4 % 273,925 22.4 % Total $ 1,894,946 100.0 % $ 1,556,845 100.0 % $ 1,220,010 100.0 % 11 410991.Financial.CS5.indd 11 2/28/11 2:15 PM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 (dollars in thousands) Time Deposits of $100,000 or more as of December 31 are as follows: 2010 Three months or less Three months through six months Six months through twelve months Over twelve months Borrowings $ 16,215 43,910 99,533 86,816 $ 246,474 The Bank’s borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLBB”) borrowings collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowings from the FHLBB totaled $221,000,000, a decrease of $11,500,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2010 was approximately $73,241,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12, “Other Borrowed Funds and Subordinated Debentures,” for a schedule, their interest rates and other information. Subordinated Debentures In May 1998, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $29,639,000 of subordinated debt securities due 2029 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust. Century Bancorp Capital Trust then issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30%. The Company redeemed through its subsidiary, Century Bancorp Capital Trust, its 8.30% Trust Preferred Securities, January 10, 2005. In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II. Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities pay dividends at an annualized rate of 6.65% for the first ten years and then convert to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The Company is using the proceeds primarily for general business purposes. Securities Sold Under Agreements to Repurchase The Bank’s remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled $108,550,000, a decrease of $10,195,000 from the prior year. See Note 11, “Securities Sold Under Agreements to Repurchase,” for a schedule, including their interest rates and other information. RESULTS OF OPERATIONS Net Interest Income The Company’s operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 11.1% in 2010 to $56,893,000, compared with $51,215,000 in 2009. The increase in net interest income for 2010 was mainly due to an 18.8% increase in the average balances of earning assets, combined with a similar increase in deposits. The increased volume was partially offset by a decrease of seventeen basis points in the net interest margin. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis decreased to 2.52% in 2010 from 2.69% in 2009 and decreased from 3.00% in 2008. Additional information about the increased net interest margin is contained in the “Overview” section of this report. Also, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories. 410991.Financial.CS5.indd 12 12 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 Year Ended December 31, 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. Average Balance Interest Income/ Expense(1) Interest Income/ Expense(1) Interest Income/ Expense(1) Rate Earned/ Paid(1) Rate Earned/ Paid(1) Rate Earned/ Paid(1) Average Balance Average Balance 2010 2009 2008 (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 $ 877,858 $ 53,356 6.08 % $ 853,422 $ 51,174 6.00 % $ 775,337 $ 50,199 6.47 % 756,544 32,407 18,958 596 2.51 1.84 562,899 48,347 20,439 1,061 3.63 2.19 411,938 61,406 18,183 3,204 4.41 5.24 222,154 7,158 3.22 193,520 8,093 4.18 193,584 8,265 4.27 — — — — — — 99,784 2,442 2.45 371,665 1,642 0.44 245,002 2,171 0.87 14,478 371 2.56 Total interest-earning assets 2,260,628 81,710 3.61 % 1,903,190 82,938 4.36 % 1,556,527 82,664 5.31 % Noninterest-earning assets Allowance for loan losses 155,956 (13,686) Total assets $ 2,402,898 143,984 (13,331) $ 2,033,843 136,830 (9,997) $ 1,683,360 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing deposits: NOW accounts Savings accounts Money market accounts Time deposits $ 423,693 272,539 543,432 356,457 $ 2,504 1,568 3,942 7,914 0.59 % 0.58 0.73 2.22 $ 279,213 249,761 432,159 318,412 $ 2,396 2,862 6,100 9,438 0.86 % 1.15 1.41 2.96 $ 203,678 $ 3,076 2,929 7,260 9,744 166,009 308,432 273,925 1.51 % 1.76 2.35 3.56 Total interest-bearing deposits 1,596,121 15,928 1.00 1,279,545 20,796 1.63 952,044 23,009 2.42 Securities sold under agreements to repurchase Other borrowed funds and subordinated debentures 133,080 573 0.43 98,635 576 0.58 94,526 1,393 1.47 201,273 8,316 4.13 219,713 10,351 4.71 225,743 11,512 5.10 Total interest-bearing liabilities 1,930,474 24,817 1.29 % 1,597,893 31,723 1.99 % 1,272,313 35,914 2.82 % Noninterest-bearing liabilities Demand deposits Other liabilities Total liabilities Stockholders’ equity Total liabilities and 298,825 31,074 2,260,373 142,525 stockholders’ equity $ 2,402,898 Net interest income on a fully taxable equivalent basis Less taxable equivalent adjustment Net interest income Net interest spread Net interest margin (1) 277,300 31,289 1,906,482 127,361 $ 2,033,843 267,966 21,363 1,561,642 121,718 $ 1,683,360 $ 56,893 (5,127) $ 51,766 $ 51,215 (3,338) $ 47,877 $ 46,750 (1,971) $ 44,779 2.32 % 2.52 % 2.37 % 2.69 % 2.49 % 3.00 % (2) (3) On a fully taxable equivalent basis calculated using a federal tax rate of 34%. Nonaccrual loans are included in average amounts outstanding. At amortized cost. 13 410991.Financial.CS5.indd 13 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 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 Year Ended December 31, are computed by multiplying the change in volume by the prior year’s rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change. 2010 Compared with 2009 Increase/(Decrease) Due to Change in 2009 Compared with 2008 Increase/(Decrease) Due to Change in (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 Volume Rate Total Volume Rate Total $ 1,465 $ 717 $ 2,182 $ 5,110 $(4,135) $ 975 5,885 (312) 1,090 — 822 8,950 999 241 1,306 1,036 3,582 171 (825) 2,928 (7,366) (153) (2,025) — (1,351) (1,481) (465) (935) — (529) 5,867 (574) (3) (2,442) 2,198 (3,611) (1,569) (169) — (398) (10,178) (1,228) 10,156 (9,882) (891) (1,535) (3,464) (2,560) (8,450) (174) (1,210) (9,834) 108 (1,294) (2,158) (1,524) (4,868) (3) (2,035) (6,906) 913 1,172 2,329 1,452 5,866 58 (301) 5,623 (1,593) (1,239) (3,489) (1,758) (8,079) (875) (860) (9,814) 2,256 (2,143) (172) (2,442) 1,800 274 (680) (67) (1,160) (306) (2,213) (817) (1,161) (4,191) $ 6,022 $ (344) $ 5,678 $ 4,533 $ (68) $ 4,465 Average earning assets were $2,260,628,000 in 2010, an increase of $357,438,000 or 18.8% from the average in 2009, which was 22.3% higher than the average in 2008. Total average securities, including securities available-for-sale and securities held-to-maturity, were $1,011,105,000, an increase of 25.6% from the average in 2009. The increase in securities volume was mainly attributable to an increase in taxable securities. An increase in securities balances offset by lower securities returns resulted in lower securities income, which decreased 9.7% to $26,712,000 on a fully tax equivalent basis. Total average loans increased 2.9% to $877,858,000 after increasing $78,085,000 in 2009. The primary reason for the increase in loans was due in large part to an increase in tax-exempt commercial real estate lending as well as residential first and second mortgage lending. The increase in loan volume as well as an increase in loan rates resulted in higher loan income, which increased by 4.3% or $2,182,000 to $53,356,000. Total loan income was $50,199,000 in 2008. The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 21.7% or $338,101,000 in 2010 after increasing by 27.6% or $336,835,000 in 2009. Deposits increased in 2010, primarily as a result of increases in demand deposits, savings, money market, NOW and time deposit accounts. Deposits increased in 2009 primarily as a result of increases in savings, money market, NOW and time deposit accounts. Borrowed funds and subordinated debentures increased by 5.0% in 2010 following a decrease of 0.6% in 2009. The majority of the Company’s borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $18,568,000, and average retail repurchase agreements increased by $34,445,000 in 2010. Interest expense totaled $24,817,000 in 2010, a decrease of $6,906,000 or 21.8% from 2009 when interest expense decreased 11.7% from 2008. The decrease in interest expense is primarily due to market decreases in deposit rates and continued deposit pricing discipline. 410991.Financial.CS5.indd 14 14 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 Provision for Loan Losses The provision for loan losses was $5,575,000 in 2010, compared with $6,625,000 in 2009 and $4,425,000 in 2008. These provisions are the result of management’s evaluation of the amounts and quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses decreased during 2010, primarily as a result of decreases in loans on nonaccrual as well as management’s quantitative analysis of the loan portfolio. The provision increased during 2009 primarily as a result of growth in the loan portfolio, nonperforming loans and an increase in net charge-offs during the year as well as management’s quantitative analysis of the loan portfolio. The allowance for loan losses was $14,053,000 at December 31, 2010, compared with $12,373,000 at December 31, 2009. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.55% in 2010 and 1.41% in 2009. This ratio increased as a result of management’s evaluation of the loan portfolio. Nonperforming loans, which include all nonaccruing loans, totaled $8,068,000 on December 31, 2010, compared with $12,311,000 on December 31, 2009. Nonperforming loans decreased primarily as a result of resolution of a $2,479,000 commercial real estate loan as well as $900,000 in charge-offs from two construction loans during 2010. Other Operating Income During 2010, the Company continued to experience positive results in its fee- based services, including fees derived from traditional banking activities such as deposit-related services, its automated lockbox collection system and full- service securities brokerage supported by LPL Financial, a full-service securities brokerage business. Under the lockbox program, which is not tied to extensions of credit by the Company, the Company’s customers arrange for payments of their accounts receivable to be made directly to the Company. The Company records the amounts paid to its customers, deposits the funds to the customer’s account and provides automated records of the transactions to customers. Typical customers for the lockbox service are municipalities that use it to automate tax collections, cable TV companies and other commercial enterprises. Through a program called Investment Services at Century Bank, the Bank provides full-service securities brokerage services supported by LPL Financial, a full-service securities brokerage business. Registered representatives employed by Century Bank offer limited investment advice, execute transactions and assist customers in financial and retirement planning. LPL Financial provides research to the Bank’s representatives. The Bank receives a share in the commission revenues. Total other operating income in 2010 was $15,999,000, a decrease of $471,000 or 2.9% compared to 2009. This decrease followed an increase of $2,495,000 or 17.9% in 2009, compared to 2008. Included in other operating income are net gains on sales of securities of $1,851,000, $2,734,000 and $249,000 in 2010, 2009 and 2008, respectively. Service charge income, which continues to be a major area of other operating income, totaling $7,876,000 in 2010, decreased $127,000 compared to 2009. This followed a decrease of $187,000 compared to 2008. Service charges on deposit accounts decreased during 2010 mainly because of decreases in fees collected. The decrease in fees collected was mainly attributable to a reduction in processing activity as well as a decrease in money service business activity. Service charges on deposit accounts decreased during 2009 mainly 15 because of decreases in overdraft fees. The decrease in overdraft fees was mainly attributable to a decrease in overdraft lines. Lockbox revenues totaled $2,911,000, up $97,000 in 2010 following a decrease of $139,000 in 2009. Other income totaled $3,131,000, up $352,000 in 2010 following an increase of $300,000 in 2009. The increase in 2010 was mainly attributable to an increase of $378,000 in the growth of cash surrender values on life insurance policies, which was attributable to additional earnings as a result of certain policies reaching their twenty year anniversary during the first quarter of 2010. The increase in 2009 was mainly attributable to an increase of $263,000 in the growth of cash surrender values on life insurance policies, which was attributable to higher returns on life insurance policies. Operating Expenses Total operating expenses were $47,372,000 in 2010, compared to $46,379,000 in 2009 and $43,028,000 in 2008. Salaries and employee benefits expenses increased by $1,479,000 or 5.5% in 2010, after increasing by 5.1% in 2009. The increase in 2010 was mainly attributable to $916,000 due to Jonathan G. Sloane, former Co-CEO, in accordance with his separation agreement as previously announced as well as an increase in staff levels and merit increases in salaries and increases in health insurance costs. The increase in 2009 was mainly attributable to increases in pension expense and health insurance costs. Occupancy expense decreased by $67,000 or 1.6% in 2010, following a decrease of $142,000 or 3.3% in 2009. The decrease in 2010 was primarily attributable to a decrease in utility and building maintenance costs offset somewhat by an increase in rent expense and real estate taxes. The decrease in 2009 was primarily attributable to a decrease in depreciation offset, somewhat, by an increase in rent expense associated with full year costs of branch expansion as well as general rent escalations. Equipment expense decreased by $240,000 or 10.1% in 2010, following a decrease of $502,000 or 17.5% in 2009. The decrease in 2010 and 2009 was primarily attributable to a decrease in depreciation expense. Other operating expenses increased by $192,000 in 2010, which followed a $32,000 decrease in 2009. The increase in 2010 was primarily attributable to an increase in marketing expense and software maintenance offset somewhat by decreases in legal expense. The decrease in 2009 was primarily attributable to a decrease in personnel recruitment expense and other real estate owned expense, offset, somewhat by an increase in legal expense. FDIC assessments decreased by $371,000 or 11.1% in 2010, following an increase of $2,723,000 or 444.2% in 2009. FDIC assessments decreased in 2010 mainly as a result of a special assessment $1,000,000 during 2009, offset somewhat by an increase in the deposit base. FDIC assessments increased in 2009 by $2,723,000, mainly because of an increase in the assessment rate, a special assessment and an increase in the deposit base. The FDIC assessment rate was raised beginning on January 1, 2009 and contributed approximately $1,000,000 to the increase in assessments. On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment was five basis points of each FDIC-insured depository institution’s assets minus Tier 1 capital, as of June 30, 2009. The Company recorded a pre-tax charge of approximately $1,000,000 in the second quarter of 2009 in connection with the special assessment. The remainder of the increase was associated with an increase in the deposit base and from participation in the TAGP. Participation in the TAGP is discussed in the “Recent Market Developments” section. 410991.Financial.CS5.indd 15 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 Provision for Income Taxes Liquidity and Capital Resources Income tax expense was $1,244,000 in 2010, $1,183,000 in 2009 and $2,255,000 in 2008. The effective tax rate was 8.4% in 2010, 10.4% in 2009 and 20.0% in 2008. The decreases in the effective tax rate for 2010 and 2009 were mainly attributable to an increase in tax-exempt interest income and tax credits as a percentage of taxable income. The federal tax rate was 34% in 2010, 2009 and 2008. Liquidity is provided by maintaining an adequate level of liquid assets that include cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $302,470,000 on December 31, 2010, compared with $417,160,000 on December 31, 2009. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity. The source of funds for dividends paid by the Company is dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements. Capital Adequacy Total stockholders’ equity was $145,025,000 at December 31, 2010, compared with $132,730,000 at December 31, 2009. The increase in 2010 was primarily the result of earnings and a decrease in accumulated other comprehensive loss, net of taxes, offset by dividends paid. The decrease in accumulated other comprehensive loss was mainly attributable to a decrease of $1,259,000 in the pension liability, net of taxes, offset by a decrease of $536,000 in the net unrealized gains on the Company’s available-for-sale portfolio, net of taxes Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The current guidelines require a Tier 1 capital-to-risk assets ratio of at least 4.00% and a total capital-to-risk assets ratio of at least 8.00%. The Company and the Bank exceeded these requirements with a Tier 1 capital-to-risk assets ratio of 14.86% and 12.43%, respectively, and total capital-to-risk assets ratio of 16.03% and 13.61%, respectively, at December 31, 2010. Additionally, federal banking regulators have issued leverage ratio guidelines, which supplement the risk-based capital guidelines. The minimum leverage ratio requirement applicable to the Company is 4.00%; and at December 31, 2010, the Company and the Bank exceeded this requirement with leverage ratios of 7.35% and 6.14%, respectively. On July 3, 2008, the Commonwealth of Massachusetts enacted a law that included reducing the tax rates on net income applicable to financial institutions. The rate drops from 10.5% to 10% for tax years beginning on or after January 1, 2010 to 9.5% for tax years beginning on or after January 1, 2011 and to 9% for tax years beginning on or after January 1, 2012 and thereafter. The Company has analyzed the impact of this law and as a result of revaluing its net deferred tax assets; we calculated the impact to be additional tax expense of approximately $80,000 that was recognized during 2008. Market Risk and Asset Liability Management Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company’s exposure to differential changes in interest rates between assets and liabilities is an interest rate risk management test. This test measures the impact on net interest income of an immediate change in interest rates in 100-basis point increments as set forth in the following table: Change in Interest Rates (in Basis Points) Percentage Change in Net Interest Income(1) +400 +300 +200 +100 –100 –200 (10.1) % (7.6) % (5.6) % (2.8) % 2.9 % 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. 410991.Financial.CS5.indd 16 16 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 Contractual Obligations, Commitments, and Contingencies Contractual Obligations and Commitments by Maturity The Company has entered into contractual obligations and commitments. The following tables summarize the Company’s contractual cash obligations and other (dollars in thousands) commitments at December 31, 2010. Payments Due—By Period CONTRACTUAL OBLIGATIONS FHLBB advances Subordinated debentures Retirement benefit obligations Lease obligations Other Treasury, tax and loan Customer repurchase agreements Total contractual cash obligations OTHER COMMITMENTS Lines of credit Standby and commercial letters of credit Other commitments Total commitments Total $ 221,000 36,083 25,024 8,552 975 108,550 $ 400,184 Total $ 169,862 4,935 40,309 $ 215,106 Less Than One Year $ 91,500 — 1,924 1,856 975 108,550 $ 204,805 One to Three Years $ 50,500 — 3,995 2,530 — — Three to Five Years $ 37,000 — 4,215 1,765 — — After Five Years $ 42,000 36,083 14,890 2,401 — — $ 57,025 $ 42,980 $ 95,374 Amount of Commitment Expiring—By Period Less Than One Year $ 86,403 4,539 15,468 $ 106,410 One to Three Years $ 11,198 396 4,216 $ 15,810 Three to Five Years $ 14,050 — 1,863 $ 15,913 After Five Years $ 58,211 — 18,762 $ 76,973 Financial Instruments with Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notational amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on- 2009 Contract or Notational Amount balance-sheet instruments. Financial instruments with off-balance-sheet risk at (dollars in thousands) December 31 are as follows: Financial instruments whose contract amount 2010 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 $ 14,635 4,935 169,862 22,337 3,337 $ 1,262 8,904 143,556 22,699 4,407 Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit was $68,000 and $93,000 for 2010 and 2009, respectively. Recent Accounting Developments FASB ASC 860, Transfers and Servicing (formerly Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”). In June 2009, the FASB issued FASB ASC 860. FASB ASC 860 was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically to address: (1) practices that have developed since the issuance of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” that are not 17 410991.Financial.CS5.indd 17 2/23/11 2:05 AM Management’s Discussion and Analysis of Results of Operations and Financial Condition Century Bancorp, Inc. AR ’10 The Statement will require disclosures related to the allowance for credit losses on a “portfolio segment” basis instead of on an aggregate basis. “Portfolio segment” is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. The Statement also establishes the concept of a “class of financing receivables”. A class is generally a disaggregation of a portfolio segment. The Statement requires numerous disclosures at the class level including (a) delinquency and nonaccrual information and related significant accounting policies, (b) impaired financing receivables and related significant accounting policies, (c) a description of credit quality indicators used to monitor credit risk and (d) modifications of financing receivables that meet the definition of a troubled debt restructuring. The Statement will expand disclosure requirements to include all financing receivables that are individually evaluated for impairment and determined to be impaired, and require the disclosures at the class level. Entities will be required to disclose the activity within the allowance for credit losses, including the beginning and ending balance of the allowance for each portfolio segment, as well as current-period provisions for credit losses, direct write-downs charged against the allowance and recoveries of any amounts previously written off. Entities will also be required to disclose the effect on the provision for credit losses due to changes in accounting policies or methodologies from prior periods. Public entities will need to provide disclosures related to period-end information (e.g., credit quality information and the ending financing receivables balance segregated by impairment method) in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period (e.g., modifications and the rollforward of the allowance for credit losses by portfolio segment) are required in interim and annual periods beginning on or after December 15, 2010. As this Statement amends only the disclosure requirements for loans and the allowance, adoption will have no impact on the Company’s financial statements. The Company has provided the disclosures required as of December 31, 2010 in Note 6. consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on or after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. FASB ASC 860 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010. FASB ASC 810, Consolidation (formerly Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”). In June 2009, the FASB issued FASB ASC 810. FASB ASC 810 was issued to improve financial reporting by enterprises involved with variable interest entities, specifically to address: (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in FASB ASC 860 and (2) constituent concerns about the application of certain key provisions of FASB ASC 860, including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FASB ASC 810 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010. In January 2010, the FASB issued an amendment to the Fair Value Measurements and Disclosures topic of the ASC. This amendment requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010. In July, 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This Statement will significantly increase disclosures that entities must make about the credit quality of financing receivables and the allowance for credit losses. The Statement will require reporting entities to make new disclosures about (a) the nature of credit risk inherent in the entity’s portfolio of financing receivables (loans), (b) how that risk is analyzed and assessed in determining the allowance for credit (loan) losses and (c) the reasons for changes in the allowance for credit losses. 410991.Financial.CS5.indd 18 18 2/23/11 2:05 AM Consolidated Balance Sheets Century Bancorp, Inc. AR ’10 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 Short-term investments Securities available-for-sale, amortized cost $903,556 in 2010 and $641,010 in 2009 (Notes 3 and 9) Securities held-to-maturity, fair value $233,524 in 2010 and $221,413 in 2009 (Notes 4 and 11) Federal Home Loan Bank of Boston, stock at cost Loans, net (Note 5) Less: allowance for loan losses (Note 6) Net loans Bank premises and equipment (Note 7) Accrued interest receivable Prepaid FDIC assessments Other assets (Notes 8 and 14) Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Demand deposits Savings and NOW deposits Money market accounts Time deposits (Note 10) Total deposits Securities sold under agreements to repurchase (Note 11) Other borrowed funds (Note 12) Subordinated debentures (Note 12) Other liabilities Total liabilities Commitments and contingencies (Notes 7, 16 and 17) Stockholders’ equity (Note 13): Common stock, Class A, $1.00 par value per share; authorized 10,000,000 shares; issued 3,528,867 shares in 2010 and 3,515,767 shares in 2009 Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 2,011,380 shares in 2010 and 2,014,530 shares in 2009 Additional paid-in capital Retained earnings Unrealized gains on securities available-for-sale, net of taxes Pension liability, net of taxes Total accumulated other comprehensive loss, net of taxes (Notes 3 and 13) Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying “Notes to Consolidated Financial Statements.” 2010 2009 $ 37,215 151,337 $ 188,552 113,918 909,391 230,116 15,531 906,164 14,053 892,111 21,228 6,601 6,129 58,107 42,627 356,015 398,642 18,518 647,796 217,643 15,531 877,125 12,373 864,752 21,015 5,806 8,757 55,575 $ 2,441,684 $ 2,254,035 $ 322,002 649,402 513,359 417,260 1,902,023 108,550 222,118 36,083 27,885 $ 279,874 575,592 553,883 292,638 1,701,987 118,745 234,024 36,083 30,466 2,296,659 2,121,305 3,529 3,516 2,011 11,537 131,526 148,603 3,593 (7,171) (3,578) 2,014 11,376 120,125 137,031 4,129 (8,430) (4,301) 145,025 132,730 $ 2,441,684 $ 2,254,035 19 410991.Financial.CS5.indd 19 2/23/11 2:05 AM $ 2010 40,163 8,271 18,958 391 — 7,158 1,642 76,583 4,072 3,942 7,914 573 8,316 24,817 51,766 5,575 46,191 7,876 2,911 230 1,851 — 3,131 15,999 28,398 4,037 2,132 2,965 9,840 47,372 14,818 1,244 Year Ended December 31, (dollars in thousands except share data) INTEREST INCOME Loans, taxable Loans, non-taxable Securities available-for-sale, taxable Securities available-for-sale, non-taxable Federal Home Loan Bank of Boston dividends Securities held-to-maturity Federal funds sold, interest-bearing deposits in other banks and short-term investments 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 gains on sales of securities Writedown of certain investments to fair value (Note 3) Other income Total other operating income OPERATING EXPENSES Salaries and employee benefits (Note 15) Occupancy Equipment FDIC assessments Other (Note 18) Total operating expenses Income before income taxes Provision for income taxes (Note 14) Net income SHARE DATA (Note 13) 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.” Consolidated Statements of Income 2009 Century Bancorp, Inc. AR ’10 2008 $ $ 43,119 5,080 20,439 698 — 8,093 2,171 79,600 5,258 6,100 9,438 576 10,351 31,723 47,877 6,625 41,252 8,003 2,814 140 2,734 — 2,779 16,470 26,919 4,104 2,372 3,336 9,648 46,379 11,343 1,183 47,521 1,782 17,680 2,101 531 8,265 2,813 80,693 6,005 7,260 9,744 1,393 11,512 35,914 44,779 4,425 40,354 8,190 2,953 180 249 (76) 2,479 13,975 25,615 4,246 2,874 613 9,680 43,028 11,301 2,255 9,046 $ 13,574 $ 10,160 $ 5,533,506 5,535,742 $ 2.45 2.45 5,532,249 5,534,340 $ 1.84 1.84 5,541,983 5,543,702 $ 1.63 1.63 410991.Financial.CS5.indd 20 20 2/23/11 2:05 AM Consolidated Statements of Changes in Stockholders’ Equity Century Bancorp, Inc. AR ’10 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Other Total Retained Comprehensive Stockholders’ Earnings Equity Loss (dollars in thousands except share data) BALANCE, DECEMBER 31, 2007 $ 3,517 $ 2,027 $ 11,553 $ 105,550 $ (3,841) $ 118,806 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $32 in taxes and $249 in realized net gains Pension liability adjustment, net of $3,054 in taxes Comprehensive income Effects of changing pension plans measurement date pursuant to SFAS 158, net of $177 in taxes Stock repurchased, 5,397 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — — (6) — — — — — — — — — — 9,046 — 9,046 — — — (78) — — — — (81) (4,754) (287) — (1,687) (487) 31 — — — (81) (4,754) 4,211 (256) (84) (1,687) (487) BALANCE, DECEMBER 31, 2008 $ 3,511 $ 2,027 $ 11,475 $ 112,135 $ (8,645) $ 120,503 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $2,826 in taxes and $2,734 in realized net gains Pension liability adjustment, net of $50 in taxes Comprehensive income Conversion of Class B Common Stock to Class A Common Stock, 12,570 shares Stock repurchased, 8,110 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — 13 (8) — — — — — (13) — — — — 10,160 — 10,160 — — — (99) — — — — 4,421 (77) — — (1,684) (486) — — — — 4,421 (77) 14,504 0 (107) (1,684) (486) BALANCE, DECEMBER 31, 2009 $ 3,516 $ 2,014 $ 11,376 $ 120,125 $ (4,301) $ 132,730 Net income Other comprehensive income, net of tax: Unrealized holding losses arising during period, net of $415 in taxes and $1,851 in realized net gains Pension liability adjustment, net of $836 in taxes Comprehensive income Conversion of Class B Common Stock to Class A Common Stock, 3,150 shares Stock options exercised, 9,950 shares Tax benefit of stock option exercises Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — 3 10 — — — — — — (3) — — — — — 13,574 — 13,574 — — — 140 21 — — — — (536) 1,259 — — — (1,690) (483) — — — — — (536) 1,259 14,297 — 150 21 (1,690) (483) BALANCE, DECEMBER 31, 2010 $ 3,529 $ 2,011 $ 11,537 $ 131,526 $ (3,578) $ 145,025 See accompanying “Notes to Consolidated Financial Statements.” 21 410991.Financial.CS5.indd 21 2/25/11 2:32 PM 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: Consolidated Statements of Cash Flows 2010 2009 Century Bancorp, Inc. AR ’10 2008 $ 13,574 $ 10,160 $ 9,046 Mortgage loans originated for sales Proceeds from mortgage loans sold Gain on sale of loans Gain on sale of fixed assets Net gains on sales of securities Writedown of certain investments to fair value Provision for loan losses Deferred tax benefit Net depreciation and amortization (Increase) decrease in accrued interest receivable Decrease (increase) in prepaid FDIC assessments Loss on sales of other real estate owned Writedown of other real estate owned Increase in other assets (Increase) decrease in other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of short-term investments Purchase of short-term investments 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 Loan acquired, net of discount Net increase in loans Proceeds from sales of other real estate owned Proceeds from sales of fixed assets Capital expenditures Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in time deposit accounts Net increase in demand, savings, money market and NOW deposits Net payments for the repurchase of stock Net proceeds from the exercise of stock options Cash dividends Net (decrease) increase in securities sold under agreements to repurchase Net decrease in other borrowed funds Net cash provided by financing activities Net decrease (increase) 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 Pension liability adjustment, net of taxes Effects of changing pension plans’ measurement date pursuant to FASB ASC 715-30 (formerly SFAS 158), net of taxes Transfer of loans to other real estate owned See accompanying “Notes to Consolidated Financial Statements.” — — — (7) (1,851) — 5,575 (1,546) 4,955 (795) 2,629 (127) — (1,417) (849) 20,141 131,762 (227,162) 610,975 41,251 (914,944) 154,445 (167,442) — (33,315) 555 13 (2,281) (406,143) 124,622 75,414 — 150 (2,173) (10,195) (11,906) 175,912 (210,090) 398,642 $ 188,552 $ 24,930 3,580 (536) 1,259 $ — 428 (374) 379 (5) (70) (2,734) — 6,625 (2,294) 6,035 917 (8,757) — — (3,822) 2,003 8,063 221,628 (196,332) 327,615 94,142 (566,680) 94,069 (128,373) — (46,385) — 100 (1,257) (201,473) (34,234) 470,694 (107) — (2,170) 6,235 (4,534) 435,884 242,474 156,168 $ 398,642 $ 32,202 2,858 4,421 (77) $ — — (512) 515 (3) — (249) 76 4,425 (1,094) 3,229 (133) — 33 77 (1,415) 737 14,732 3,717 (47,531) 282,705 238,894 (593,958) 56,123 (91,431) (4,099) (108,950) 673 — (3,009) (266,866) 31,294 104,172 (84) — (2,174) 26,520 (51,327) 108,401 (143,733) 299,901 $ 156,168 $ 35,997 2,750 (81) (4,754) $ (256) 330 410991.Financial.CS5.indd 22 22 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 1. Summary of Significant Accounting Policies BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly owned subsidiaries, Century Subsidiary Investments, Inc. (“CSII”), Century Subsidiary Investments, Inc. II (“CSII II”), Century Subsidiary Investments, Inc. III (“CSII III”) and Century Financial Services Inc. (“CFSI”). CSII, CSII II, and CSII III are engaged in buying, selling and holding investment securities. CFSI has the power to engage in financial agency, securities brokerage, and investment and financial advisory services and related securities credit. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”) and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company’s business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are susceptible to change in the near term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on independent appraisals and review of other factors, including, historical charge-off rates with additional allocations based on risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation. FAIR VALUE MEASUREMENTS In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB ASC 820, Fair Value Measurements and Disclosures (formerly SFAS 157, “Fair Value Measurements”), which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. FASB ASC 820 is effective for fiscal years beginning after November 15, 2007. The effective date of FASB ASC 820 was delayed for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. FASB ASC 820 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the FASB ASC 820 hierarchy are as follows: Level I — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments. Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments that are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives. Level III — Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, and noninvestment grade residual interests in securitizations as well as certain highly structured OTC derivative contracts. FASB ASC 820-10, Fair Value Measurements and Disclosures – Overall (formerly FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). On April 9, 2009, FASB issued FASB ASC 820, which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements. The Company adopted FASB ASC 820 as of April 1, 2009. The adoption did not have a material effect on the Company’s consolidated financial statements. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, federal funds sold and certificates of deposit. SHORT-TERM INVESTMENTS As of December 31, 2009 and 2010, short-term investments include highly liquid certificates of deposit with original maturities of more than 90 days but less than one year. 23 410991.Financial.CS5.indd 23 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 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 total amount of the impairment charge is recognized in earnings, with an offset for the noncredit component which is recognized as other comprehensive income. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis. The Company owns Federal Home Loan Bank of Boston (“FHLBB”) stock which is considered a restricted equity security. As a voluntary member of the FHLBB, the Company is required to invest in stock of the FHLBB in an amount equal to 4.5% of its outstanding advances from the FHLBB. Stock is purchased at par value. As and when such stock is redeemed, the Company would receive from the FHLBB an amount equal to the par value of the stock. At its discretion, the FHLBB may declare dividends on the stock. On April 10, 2009, the FHLBB reiterated to its members that, while it currently meets all its regulatory capital requirements, it is focusing on preserving capital in response to ongoing market volatility, and accordingly, had suspended its quarterly dividend and has extended the moratorium on excess stock repurchases. It also announced that it had taken a write-down of $381.7 million in other-than-temporary impairment charges on its private-label mortgage-backed securities for the year ended December 31, 2008. This resulted in a net loss of $115.8 million. For the year ended December 31, 2009, the FHLBB reported a net loss of $186.8 million resulting from the recognition of $444.1 million of impairment losses which were recognized through income. For the year ended December 31, 2010, the FHLBB reported net income of $106.6 million. The FHLBB also declared a dividend equal to an annual yield of 0.30%. The FHLBB’s board of directors anticipates that it will continue to declare modest cash dividends through 2011. In the future, if additional unrealized losses are deemed to be other-than-temporary, the associated impairment charges could exceed the FHLBB’s current level of retained earnings and possibly put into question whether the fair value of the FHLBB stock owned by the Company is less than par value. The FHLBB has stated that it expects and intends to hold its private-label mortgage-backed securities to maturity. Despite these negative trends, the FHLBB exceeded the regulatory capital requirements promulgated by the Federal Home Loan Banks Act and the Federal Housing Financing Agency. The FHLBB has the capacity to issue additional debt if necessary to raise cash. If needed, the FHLBB also has the ability to secure funding available to U.S. Government Sponsored Enterprises through the U.S. Treasury. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no other-than-temporary impairment related to the carrying amount of the Company’s FHLBB stock as of December 31, 2010. The Company will continue to monitor its investment in FHLBB stock. LOANS interest has been discontinued, are designated nonaccrual loans. When a loan is placed on nonaccrual, all income that has been accrued but remains unpaid is reversed against current period income, and all amortization of deferred loan costs and fees is discontinued. Nonaccrual loans may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. Income received on nonaccrual loans is either recorded in income or applied to the principal balance of the loan, depending on management’s evaluation as to the collectibility of principal. Loan origination fees and related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. Prepayments are not initially considered when amortizing premiums and discounts. The Bank measures impairment for impaired loans at either the fair value of the loan, the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. This method applies to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans such as residential real estate and consumer loans that are collectively evaluated for impairment and loans that are measured at fair value. Management considers the payment status, net worth and earnings’ potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Loans are charged-off when management believes that the collectibility of the loan’s principal is not probable. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification rate of interest. ACQUIRED LOANS In accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,”) the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loan’s contractually required payments received in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30 requires that the Company recognize the excess of all cash flows expected at acquisition over the Company’s initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a reduction of the loan balance. Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of FASB ASC 310-30. For such loans, the discount, if any, representing the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the interest method over the term of the loan. Prepayments are not considered in the calculation of accretion income. Additionally, discount is not accreted on nonperforming loans. Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become 90 days’ delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Past due status is based on contractual terms of the loan. Loans, including impaired loans, on which the accrual of When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the Company’s acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees. 410991.Financial.CS5.indd 24 24 2/25/11 5:22 PM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 NONPERFORMING ASSETS In addition to nonperforming loans, nonperforming assets include other real estate owned. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned is recorded initially at estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred. Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations, while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans that ultimately prove uncollectible. In determining the level of the allowance, periodic evaluations are made of the loan portfolio, which takes into account such factors as the character of the loans, loan status, financial posture of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgment. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances, if appropriate, for identified problem loans and the unallocated allowance. While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in management’s opinion, collectibility is not probable. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances for identified problem loans. The formula allowance evaluates groups of loans to determine the allocation appropriate within each portfolio segment. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect the amount of the formula allowance. Risk grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical net loss experience and qualitative adjustments. For the residential real estate and consumer loan portfolios, the reserves are calculated by applying historical charge-off and recovery experience and qualitative adjustments to the current outstanding balance in each loan category. Loss factors are based on the Company’s historical net loss experience, as well as regulatory guidelines. 25 Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a) present value of anticipated future cash flows, (b) the loan’s observable fair market price or (c) fair value of collateral if the loan is collateral dependent. The formula allowance and specific allowances also include management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. Management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: (a) market risk factors, such as the effects of economic variability on the entire portfolio and (b) unique portfolio risk factors that are inherent characteristics of the Company’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Company’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include industry concentrations and geographic concentrations or trends that may exacerbate losses resulting from economic events which the Company may not be able to fully diversify out of its portfolio. The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows: Residential real estate — The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates will have an effect on the credit quality in the segment. Commercial real estate — Loans in this segment are primarily income-producing properties. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans. Construction loans — Loans in this segment primarily include real estate development loans for which payment is derived from sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions. Commercial and industrial loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment. 410991.Financial.CS5.indd 25 2/23/11 2:05 AM BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization. Identifiable intangible assets consist of core deposit intangibles and are assets resulting from acquisitions that are being amortized over their estimated useful lives. Goodwill and identifiable intangible assets are included in other assets on the consolidated balance sheets. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Currently, the Company’s goodwill is evaluated at the entity level as there is only one reporting unit. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment. STOCK OPTION ACCOUNTING The Company follows the fair value recognition provisions of FASB ASC 718, Compensation – Stock Compensation (formerly SFAS 123R) for all share-based payments, using the modified-prospective transition method. The Company’s method of valuation for share-based awards granted utilizes the Black-Scholes option-pricing model, which was also previously used for the Company’s pro forma information required under FASB ASC 718. The Company will recognize compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) that provide for granting of options to purchase up to 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive nonqualified or incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were options to purchase an aggregate of 38,712 shares of Class A common stock exercisable at December 31, 2010. On December 30, 2005, the Board of Directors approved the acceleration and immediate vesting of all unvested options with an exercise price of $31.60 or greater per share. As a consequence, options to purchase 23,950 shares Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 of Class A common stock became exercisable immediately. The average of the high and low price at which the Class A common stock traded on December 30, 2005, the date of the acceleration and vesting, was $29.28 per share. In connection with this acceleration, the Board of Directors approved a technical amendment to each of the Option Plans to eliminate the possibility that the terms of any outstanding or future stock option would require a cash settlement on the occurrence of any circumstance outside the control of the Company. Effective as of January 1, 2006, the Company adopted FASB ASC 718 for all share-based payments. The Company estimates that, as a result of this accelerated vesting, approximately $190,000 of 2006 noncash compensation expense was eliminated that would otherwise have been recognized in the Company’s earnings. The Company decided to accelerate the vesting of certain stock options primarily to reduce the noncash compensation expense that would otherwise be expected to be recorded in conjunction with the Company’s required adoption of FASB ASC 718 in 2006. There was no earnings impact for 2006 due to the Company’s adoption of FASB ASC 718. The Company uses the fair value method to account for stock options. All of the Company’s stock options are vested, and there were no options granted during 2010 and 2009. INCOME TAXES The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In July 2006, the FASB issued FASB ASC 740, Income Taxes (formerly Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”). This clarified the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. FASB ASC 740 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. The Company adopted FASB ASC 740 on January 1, 2007. The adoption of FASB ASC 740 did not have a material impact on the Company’s results of operations or its financial position. The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s 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. 410991.Financial.CS5.indd 26 26 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 PENSION The Company provides pension benefits to its employees under a noncontributory, defined benefit plan, which is funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and recognizes costs over the estimated employee service period. The Company also has a Supplemental Executive Insurance/Retirement Plan (“the Supplemental Plan”), which is limited to certain officers and employees of the Company. The Supplemental Plan is accrued on a current basis and recognizes costs over the estimated employee service period. Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary, and participants are required to contribute to its cost. Individual life insurance policies, which are owned by the Company, are purchased covering the life of each participant. RECENT ACCOUNTING DEVELOPMENTS FASB ASC 860, Transfers and Servicing (formerly Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”). In June 2009, the FASB issued FASB ASC 860. FASB ASC 860 was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically to address: (1) practices that have developed since the issuance of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on or after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. FASB ASC 860 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010. FASB ASC 810, Consolidation (formerly Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”). In June 2009, the FASB issued FASB ASC 810. FASB ASC 810 was issued to improve financial reporting by enterprises involved with variable interest entities, specifically to address: (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in FASB ASC 860 and (2) constituent concerns about the application of certain key provisions of FASB ASC 860, including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FASB ASC 810 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010. 27 In January 2010, the FASB issued an amendment to the Fair Value Measurements and Disclosures topic of the ASC. This amendment requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010. In July, 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This Statement will significantly increase disclosures that entities must make about the credit quality of financing receivables and the allowance for credit losses. The Statement will require reporting entities to make new disclosures about (a) the nature of credit risk inherent in the entity’s portfolio of financing receivables (loans), (b) how that risk is analyzed and assessed in determining the allowance for credit (loan) losses and (c) the reasons for changes in the allowance for credit losses. The Statement will require disclosures related to the allowance for credit losses on a “portfolio segment” basis instead of on an aggregate basis. Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. The Statement also establishes the concept of a “class of financing receivables.” A class is generally a disaggregation of a portfolio segment. The Statement requires numerous disclosures at the class level including, (a) delinquency and nonaccrual information and related significant accounting policies, (b) impaired financing receivables and related significant accounting policies, (c) a description of credit quality indicators used to monitor credit risk and (d) modifications of financing receivables that meet the definition of a troubled debt restructuring. The Statement will expand disclosure requirements to include all financing receivables that are individually evaluated for impairment and determined to be impaired, and require the disclosures at the class level. Entities will be required to disclose the activity within the allowance for credit losses, including the beginning and ending balance of the allowance for each portfolio segment, as well as current-period provisions for credit losses, direct write-downs charged against the allowance and recoveries of any amounts previously written off. Entities will also be required to disclose the effect on the provision for credit losses due to changes in accounting policies or methodologies from prior periods. Public entities will need to provide disclosures related to period-end information (e.g., credit quality information and the ending financing receivables balance segregated by impairment method) in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occurs during a reporting period (e.g., modifications and the rollforward of the allowance for credit losses by portfolio segment) are required in interim and annual periods beginning on or after December 15, 2010. As this Statement amends only the disclosure requirements for loans and the allowance, adoption will have no impact on the Company’s financial statements. The Company has provided the disclosures required as of December 31, 2010 in Note 6. 2. Cash and Due from Banks The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $3,543,000 at December 31, 2010 and $1,061,000 at December 31, 2009. 410991.Financial.CS5.indd 27 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 3. Securities Available-for-Sale (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored December 31, 2010 Gross Unrealized Losses Gross Unrealized Gains Estimated Fair Value Amortized Cost* December 31, 2009 Gross Gross Unrealized Losses Gains Amortized Unrealized Cost* Estimated Fair Value $ 2,000 175,842 9,735 $ 5 386 1 $ — 565 4 $ 2,005 175,663 9,732 $ 1,998 192,942 — $ 5 374 — $ — 952 — $ 2,003 192,364 — Enterprises Mortgage-Backed Securities 674,481 11,842 5,425 680,898 410,181 8,855 524 418,512 Privately Issued Residential Mortgage-Backed Securities Privately Issued Commercial Mortgage-Backed Securities Obligations Issued by States and Political Subdivisions Other Debt Securities Equity Securities 4,247 285 34,271 2,300 395 — 2 98 — 116 279 — 295 47 — 3,968 287 34,074 2,253 511 5,383 537 26,627 2,300 1,042 — 7 130 — 71 473 4,910 — 468 41 198 544 26,289 2,259 915 Total $ 903,556 $ 12,450 $ 6,615 $ 909,391 $ 641,010 $ 9,442 $ 2,656 $ 647,796 * Amortized cost is net of impairment writedown. Included in U.S. Government Sponsored Enterprise Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $363,240,000 and $332,064,000 at December 31, 2010 and 2009, respectively. Also included in securities available-for-sale at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $124,189,000 and $172,497,000 at December 31, 2010 and 2009, respectively. The Company realized net gains on sales of securities of $1,851,000, $2,734,000 and $249,000 from the proceeds of sales of available-for-sale securities of $41,251,000, $94,142,000 and $238,894,000 for the years ended December 31, 2010, 2009, and 2008, respectively. Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the third quarter of 2008. Amortized Cost* Fair Value The following table shows the estimated maturity distribution of the Company’s securities available-for-sale at December 31, 2010. (dollars in thousands) Within one year After one but within five years After five but within ten years More than ten years Nonmaturing Total $ 40,963 $ 41,533 695,375 687,158 154,894 157,710 15,625 15,830 1,964 1,895 $ 903,556 $ 909,391 * Amortized cost is net of impairment writedown. The weighted average remaining life of investment securities available-for-sale at December 31, 2010, was 4.0 years. Auction rate municipal obligations (“ARSs”) and variable rate demand notes (“VRDNs”) are included in Obligations Issued by States and Political Subdivisions. Included in the weighted average remaining life calculation at December 31, 2010, was $175,663,000 of U.S. Government Sponsored Enterprise obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual 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, 2010. 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 59 and 5 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 345 holdings at December 31, 2010. As of December 31, 2010, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade. The change in the unrealized losses on the state and municipal securities and the nonagency mortgage-backed securities was primarily caused by changes in credit spreads and liquidity issues in the marketplace. 410991.Financial.CS5.indd 28 28 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrates and origination dates of Temporarily Impaired Investments* underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuer’s Less Than 12 Months financial performance are considered. 12 Months or Longer December 31, 2010 Total (dollars in thousands) U.S. Government Sponsored Enterprise SBA Backed Securities U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Obligations Issued by States and Political Subdivisions Other Debt Securities Equity Securities Total temporarily impaired securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 74,290 2,246 $ 565 4 $ $ — — 191,155 1,503 9,257 — — $ 278,451 5,425 52 11 — — $ 6,057 — 2,465 4,393 1,454 — $ 8,312 $ — — — 227 284 47 — 558 $ 74,290 2,246 $ 565 4 191,155 3,968 13,650 1,454 — 5,425 279 295 47 — $ 286,763 $ 6,615 * At December 31, 2010, the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost. The unrealized losses on Obligations Issued by States and Political Subdivisions were considered by management to be temporary in nature. Full collection of those debt securities is expected because the financial condition of the obligors is considered to be sound, there has been no default in scheduled payment and the debt securities are rated investment grade. The unrealized loss on U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprises Mortgage-Backed Securities related primarily to 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, 2010. Excluded from the table above are two equity securities that were written down in 2008 by $76,000. The fair value is $156,000 with an unrealized gain of $47,000 at December 31, 2010. In 2008, these stocks were deemed to be other than temporarily impaired based on the extent of the decline in value and the length of time the stocks had been trading below cost. The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2009. 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. Temporarily Impaired Investments* There are 41 and 17 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 287 holdings at December 31, 2009. Less Than 12 Months 12 Months or Longer December 31, 2009 Total (dollars in thousands) U.S. Government Sponsored Enterprises U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Obligations Issued by States and Political Subdivisions Other Debt Securities Equity Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 127,259 $ 952 $ — $ — $ 127,259 $ 952 51,903 — 3,427 — — 428 — 187 — — 11,752 4,910 4,393 1,459 495 96 473 281 41 198 63,655 4,910 7,820 1,459 495 524 473 468 41 198 Total temporarily impaired securities $ 182,589 $ 1,567 $ 23,009 $ 1,089 $ 205,598 $ 2,656 * The decline in fair 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, 2009. Excluded from the table above are two equity securities that were written down by $76,000. The fair value is $121,000 with an unrealized gain of $12,000. In 2008, these stocks were deemed to be other than temporarily impaired based on the extent of the decline in value and the length of time the stocks had been trading below cost. 4. Investment Securities Held-to-Maturity Amortized Cost (dollars in thousands) December 31, 2010 Gross Gross Unrealized Unrealized Losses Gains Estimated Fair Value December 31, 2009 Gross Gross Unrealized Unrealized Losses Gains Estimated Fair Value Amortized Cost U.S. Government Sponsored Enterprise $ 84,534 $ 148 $ 488 $ 84,194 $ 69,555 $ 36 $ 707 $ 68,884 U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities 145,582 5,246 1,498 149,330 148,088 4,490 49 152,529 Total $ 230,116 $ 5,394 $ 1,986 $ 233,524 $ 217,643 $ 4,526 $ 756 $ 221,413 29 410991.Financial.CS5.indd 29 2/23/11 2:05 AM Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $10,000,000 and $9,036,000 at December 31, 2010, and 2009, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $79,844,000 and $83,693,000 at December 31, 2010, and 2009, respectively. Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 At December 31, 2010 and 2009, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the third quarter of 2008. Fair Value The following table shows the maturity distribution of the Company’s securities held-to-maturity at December 31, 2010. (dollars in thousands) Amortized Cost Within one year After one but within five years After five but within ten years 7,298 $ $ 123,057 99,761 7,497 127,932 98,095 Total $ 230,116 $ 233,524 The weighted average remaining life of investment securities held-to-maturity at December 31, 2010, was 4.6 years. Included in the weighted average remaining life calculation at December 31, 2010, were $84,534,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. 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, 2010. 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 11 and 0 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 101 holdings at December 31, 2010. As of December 31, 2010, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell this debt security and it is not likely that it will be required to sell this debt security before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on this security are from an issuer that is investment grade. Temporarily Impaired Investments* In evaluating the underlying credit quality of a security, management considers several factors such as the credit notary of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. Less Than 12 Months 12 Months or Longer December 31, 2010 Total (dollars in thousands) U.S. Government Sponsored Enterprises U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities Total temporarily impaired securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 29,491 $ 488 37,628 $ 67,119 1,498 $ 1,986 $ $ — — — $ $ — — — $ 29,491 $ 488 37,628 1,498 $ 67,119 $ 1,986 * The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these investments and it is not likely that it will be required to sell these investments before the anticipated recovery of the remaining amortized cost, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2010. The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2009. 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. Temporarily Impaired Investments* There are 12 and 0 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 94 holdings at December 31, 2009. December 31, 2009 Less Than 12 Months 12 Months or Longer Total (dollars in thousands) U.S. Government Sponsored Enterprises U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities Total temporarily impaired securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 49,848 $ 707 $ — $ 11,152 49 $ 61,000 $ 756 $ — — $ — — — $ 49,848 $ 707 11,152 $ 61,000 $ 49 756 * The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these investments and it is not likely that it will be required to sell these investments before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2009. 410991.Financial.CS5.indd 30 30 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 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. December 31, 2010 2009 The following summary shows the composition of the loan portfolio at the dates indicated. (dollars in thousands) Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity Overdrafts Total $ 53,583 90,654 433,337 207,787 5,957 114,209 637 $ 906,164 $ 60,349 141,061 361,823 188,096 7,105 118,076 615 $ 877,125 Net deferred fees included in loans at December 31, 2010 and December 31, 2009 were $186,000 and $71,000, respectively. The Company was servicing mortgage loans sold to others without recourse of approximately $983,000 and $1,127,000 at December 31, 2010, and December 31, 2009, 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 $36,000 and $47,000 at December 31, 2010, and at December 31, 2009, respectively. As of December 31, 2010, and 2009, the Company’s recorded investment in impaired loans was $7,963,000 and $10,516,000, respectively. If an impaired loan is placed on nonaccrual, the loan may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. At December 31, 2010, there were $2,110,000 of impaired loans with a specific reserve of $317,000. At December 31, 2009, there were $1,980,000 of impaired loans with a specific reserve of $745,000. Loans are designated as troubled debt restructures when a concession is made on a credit as a result of financial difficulties of the borrower. Typically, such concessions consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, or a deferment of payments, principal or interest, which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is December 31, materially less than those contractually established at the loan’s origination. Restructured loans are included in the impaired loan category. 2010 2009 2008 (dollars in thousands) The composition of nonaccrual loans and impaired loans is as follows: Loans on nonaccrual Loans 90 days past due and still accruing Impaired loans on nonaccrual included above Total recorded investment in impaired loans Average recorded investment of impaired loans Accruing troubled debt restructures Interest income not recorded on nonaccrual loans according to their original terms Interest income on nonaccrual loans actually recorded Interest income recognized on impaired loans $ 8,068 50 5,353 7,963 9,606 1,248 1,313 — 256 $ 12,311 — 9,736 10,516 9,718 521 1,121 — 24 $ 3,661 89 1,511 2,698 1,194 — 121 — 24 31 410991.Financial.CS5.indd 31 2/23/11 2:05 AM During the first quarter of 2008, the Company purchased a loan for $4,823,000 with a discount of $724,000. The entire discount is classified as an accretable discount. The Company accreted $47,000 and $46,000 of the discount during 2010 and 2009, respectively. Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 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. Balance at Balance at December 31, 2010 December 31, 2009 The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2010. (dollars in thousands) Repayments and Deletions Additions $ 2,973 $ 1,007 $ 182 $ 3,798 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. 2010 2009 2008 An analysis of the allowance for loan losses for each of the three years ending December 31, 2010, 2009 and 2008 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 $ 12,373 (4,443) 548 $ 11,119 (6,070) 699 $ 9,633 (3,373) 434 (3,895) 5,575 (5,371) 6,625 (2,939) 4,425 Allowance for loan losses, end of year $ 14,053 $ 12,373 $ 11,119 ALLOWANCE FOR LOAN LOSSES AND AMOUNT OF INVESTMENTS IN LOANS Construction Commercial Further information pertaining to the allowance for loan losses at December 31, 2010 follows: and Land Development and Industrial Commercial Real Estate Residential Real Estate Consumer Home Equity Unallocated Total (dollars in thousands) Allowance for Loan Losses: Balance at December 31, 2009 Charge-offs Recoveries Provision $ 362 (900) — 2,290 $ 4,972 (1,559) 172 (422) $ 2,983 (922) — 3,610 $ 1,304 (515) 8 921 $ 1,753 (495) 368 (1,328) Ending balance at December 31, 2010 $ 1,752 $ 3,163 $ 5,671 $ 1,718 $ 298 Amount of allowance for loan losses for loans deemed to be impaired Amount of allowance for loan losses $ — $ 292 $ 25 $ — $ — for loans not deemed to be impaired $ 1,752 $ 2,871 $ 5,646 $ 1,718 $ 298 $ $ $ $ 761 (52) — 16 $ 238 — — 488 $ 12,373 (4,443) 548 5,575 725 $ 726 $ 14,053 — $ — $ 317 725 $ 726 $ 13,736 Loans: Ending balance Loans deemed to be impaired Loans not deemed to be impaired $ 53,583 $ 4,000 $ 49,583 $ 90,654 $ 1,471 $ 89,183 $ 433,337 $ 2,492 $ 430,845 $ 207,787 $ — $ 207,787 $ 6,594 $ — $ 6,594 $ 114,209 $ — $ 114,209 $ — $ — $ — $ 906,164 $ 7,963 $ 898,201 410991.Financial.CS5.indd 32 32 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 CREDIT QUALITY INFORMATION The Company utilizes a six grade internal loan rating system for commercial real estate, construction and commercial loans as follows: Loans rated 1-3 (Pass) — Loans in this category are considered “pass” rated loans with low to average risk. Loans rated 4 (Monitor) — These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of December 31, 2010. Loans rated 5 (Substandard) — Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of December 31, 2010. Loans rated 6 (Doubtful) — Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of December 31, 2010 and are doubtful for full collection. Impaired — Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due. Construction Commercial The following table presents the Company’s loans by risk rating at December 31, 2010. and Land Development and Industrial Commercial Real Estate (dollars in thousands) Grade: 1-3 (Pass) 4 (Monitor) 5 (Substandard) 6 (Doubtful) Impaired Total $ 42,887 6,696 — — 4,000 $ 88,103 1,080 — — 1,471 $ 415,528 15,317 — — 2,492 $ 53,583 $ 90,654 $ 433,337 The Company utilized payment performance as credit quality indicators for residential real state, consumer and overdrafts, and the home equity portfolio. The indicators are depicted in the table “aging of past due loans,” below. AGING OF PAST DUE LOANS Further information pertaining to the allowance for loan losses at December 31, 2010 follows: Accruing 30-89 Days Accruing Greater Than 90 Days Total Past Due Current Loans Total (dollars in thousands) Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer and overdrafts Home equity Past Due Non Accrual $ — 912 1,737 4,172 8 574 $ 4,000 569 784 2,487 4 224 Total $ 7,403 $ 8,068 $ — 50 — — — — $ 50 $ 4,000 1,531 2,521 6,659 12 798 $ 49,583 89,123 430,816 201,128 6,582 113,411 $ 53,583 90,654 433,337 207,787 6,594 114,209 $ 15,521 $ 890,643 $ 906,164 IMPAIRED LOANS A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statement. 33 410991.Financial.CS5.indd 33 2/23/11 2:05 AM The following is information pertaining to impaired loans at December 31, 2010: Carrying Value Unpaid Balance Principal Required Reserve Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 Average Carrying Value Interest Income Recognized (dollars in thousands) With no required reserve recorded: Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity $ 4,000 893 960 — — — $ 8,504 1,092 969 — — — Total $ 5,853 $ 10,565 With required reserve recorded: Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity $ — 578 1,532 — — — $ — 588 1,532 — — — Total $ 2,110 $ 2,120 Total Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity $ 4,000 1,471 2,492 — — — $ 8,504 1,680 2,501 — — — Total $ 7,963 $ 12,685 $ — — — — — — $ — $ — 292 25 — — — $ 317 $ — 292 25 — — — $ 317 $ 2,262 826 2,013 — — — $ 5,101 $ 2,500 842 1,163 — — — $ 4,505 $ 4,762 1,668 3,176 — — — $ 9,606 $ — 83 122 — — — $ 205 $ — 31 20 — — — $ 51 $ — 114 142 — — — $ 256 December 31, 7. Bank Premises and Equipment (dollars in thousands) Land Bank premises Furniture and equipment Leasehold improvements Accumulated depreciation and amortization Total 2010 2009 Estimated Useful Life $ 3,478 18,270 27,472 6,869 56,089 (34,861) $ 21,228 $ 3,478 17,883 26,202 6,328 53,891 (32,876) $ 21,015 — 30-39 years 3-10 years 30-39 years or lease term 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 $1,730,000, $1,673,000 and $1,533,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Rental income approximated $438,000, $418,000 and $399,000 in 2010, 2009 and 2008, respectively. Amount Year (dollars in thousands) Future minimum rental commitments for noncancelable operating leases with initial or remaining terms of one year or more at December 31, 2010, were as follows: 2011 2012 2013 2014 2015 Thereafter $ 1,856 1,447 1,083 987 778 2,401 $ 8,552 410991.Financial.CS5.indd 34 34 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 8. Goodwill and Identifiable Intangible Assets Historically, the Company has determined fair values of reporting units based on stock prices, market earnings and tangible book value multiples of peer companies for the reporting unit. During the third quarter of 2008, management determined that the Company’s goodwill should be tested for impairment as the Company’s Class A common stock had been trading below book value per share. In the third quarter of 2008, management enhanced the valuation methodology with discounted cash flow analysis. During the fourth quarter of 2008, management reviewed the assumptions used during the third quarter and concluded that the assumptions continued to be appropriate. Based on management’s assessment of the reporting unit’s fair value, goodwill was not considered to be impaired at December 31, 2008. During the second half of 2009 and the full year of 2010, the Company’s Class A common stock traded closer to or above book value per share. Accordingly, at December 31, 2009 and 2010, management measured for impairment utilizing the fair value of the reporting unit based on the recent stock price of the Company. Total Carrying Amount of Goodwill and Intangibles Management determined that the Company’s goodwill is not considered to be impaired at December 31, 2010. Goodwill Core Deposit Intangibles The changes in goodwill and identifiable intangible assets for the years ended December 31, 2010 and 2009 are shown in the table below. (dollars in thousands) Balance at December 31, 2008 Amortization Expense Balance at December 31, 2009 Amortization Expense Balance at December 31, 2010 $ $ 2,714 — 2,714 — $ 2,714 $ $ $ 1,283 (387) 896 (388) $ 3,997 (387) $ 3,610 (388) 508 $ 3,222 Core Deposit Intangibles Year Amount (dollars in thousands) The following table sets forth the estimated annual amortization expense of the identifiable intangible assets. 2011 2012 $ 388 120 $ 508 9. Fair Value Measurements The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures (formerly SFAS 157, “Fair Value Measurements”), which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. The principles were effective for fiscal years beginning after November 15, 2007. The effective date for nonfinancial assets and nonfinancial liabilities was delayed, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. These elements were adopted on January 1, 2009. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the 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 include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value 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 this category are corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives. Level III — Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, non-investment grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts. 35 410991.Financial.CS5.indd 35 2/23/11 2:05 AM The results of the fair value hierarchy as of December 31, 2010 are as follows: (dollars in thousands) Financial Instruments Measured at Fair Value on a Recurring Basis – Securities AFS U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Privately Issued Commercial Mortgage-Backed Securities Obligations Issued by States and Political Subdivisions Other Debt Securities Equity Securities Total Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets Observable Inputs Significant (Level 1) (Level 2) Significant Other Unobservable Inputs (Level 3) $ — — — — — — — — 232 $ 232 $ 2,005 175,663 9,732 680,898 3,968 287 13,692 2,254 — $ — — — — — — 20,381 — 279 $ 888,499 $ 20,660 Carrying Value $ 2,005 175,663 9,732 680,898 3,968 287 34,073 2,254 511 $ 909,391 $ 5,026 $ — $ — $ 5,026 Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss during the year by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Specific provisions relates to impaired loans recognized for 2010 for the estimated credit loss amounted to $2,378,000. The Company uses discounts to appraisals, as necessary, based on management’s observations of the local real estate market for loans in this category. The changes in Level 3 securities for the year ended December 31, 2010 are shown in the table below: Auction Rate Securities Obligations Issued by States and Political Subdivisions (dollars in thousands) Balance at December 31, 2009 Purchases Maturities Change in fair value Balance at December 31, 2010 $ 7,820 — (3,427) — $ 4,393 $ 5,623 25,194 (14,790) (39) $ 15,988 Equity Securities $ 234 64 (19) — $ 279 Total $ 13,677 25,258 (18,236) (39) $ 20,660 The amortized cost of Level 3 securities was $20,956,000 with an unrealized loss of $296,000 at December 31, 2010. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity. 410991.Financial.CS5.indd 36 36 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 The results of the fair value hierarchy as of December 31, 2009 are as follows: Carrying Value Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) (dollars in thousands) Financial Instruments Measured at Fair Value on a Recurring Basis – Securities AFS U.S. Treasury U.S. Government Sponsored Enterprises U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Privately Issued Commercial Mortgage-Backed Securities Obligations Issued by States and Political Subdivisions Other Debt Securities Equity Securities Total Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans $ 2,003 192,364 418,512 4,910 544 26,289 2,259 915 $ 647,796 $ — — — — — — — 681 $ 681 $ 2,003 192,364 418,512 4,910 544 12,846 2,259 — $ 633,438 $ — — — — — 13,443 — 234 $ 13,677 $ 6,855 $ — $ — $ 6,855 Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss during the year by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Specific provisions relates to impaired loans recognized for 2009 for the estimated credit loss amounted to $4,553,000. There was an $8,500,000 reclassification of impaired loans to Level 3 during the third quarter of 2009 due to the lack of an active real estate market for the loans in this category. The Company uses discounts to appraisals, as necessary, based on management’s observations of the local real estate market for loans in this category. The changes in Level 3 securities for the year ended December 31, 2009 are shown in the table below: Auction Rate Securities Obligations Issued by States and Political Subdivisions (dollars in thousands) Balance at December 31, 2008 Purchases Maturities Reclassification Change in fair value Balance at December 31, 2009 $ — — (12,580) 21,061 (661) $ 7,820 $ 3,300 7,790 (5,467) — — $ 5,623 Equity Securities $ 170 64 — — — $ 234 Total $ 3,470 7,854 (18,047) 21,061 (661) $ 13,677 There was a $21,061,000 reclassification of failed auction rate securities to Level 3 during the first quarter of 2009 due to the lack of an active market. The amortized cost of Level 3 securities was $14,142,000 with an unrealized loss of $465,000 at December 31, 2009. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity. 10. Deposits 2010 Percent 2009 Percent Within one year (dollars in thousands) The following is a summary of original maturities or repricing of time deposits as of December 31, $ 180,498 84,395 16,788 10,957 $ 272,940 54,683 70,702 18,935 65 % 13 % 17 % 5 % Over two years to three years Over three years to five years Over one year to two years 61 % 29 % 6 % 4 % Total $ 417,260 100 % $ 292,638 100 % Time deposits of $100,000 or more totaled $246,474,000 and $151,680,000 in 2010 and 2009, respectively. 37 410991.Financial.CS5.indd 37 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 11. Securities Sold Under Agreements to Repurchase 2010 2009 2008 (dollars in thousands) The following is a summary of securities sold under agreements to repurchase as of December 31, $ 118,745 Amount outstanding at December 31 $ 108,550 $ 112,510 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 0.36 % 0.52 % 1.08 % $ 239,830 $ 133,080 $ 122,521 $ 98,635 $ 112,510 $ 94,526 0.43 % 0.58 % 1.47 % Amounts outstanding at December 31, 2010, 2009 and 2008 carried maturity dates of the next business day. U.S. Government Sponsored Enterprise securities with a total amortized cost of $107,030,000, $115,792,000 and $112,072,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 2010, 2009 and 2008, respectively. The approximate fair value of the collateral at those dates was $108,200,000, $118,186,000 and $112,990,000, respectively. 12. Other Borrowed Funds and Subordinated Debentures 2010 2009 2008 (dollars in thousands) The following is a summary of other borrowed funds and subordinated debentures as of December 31, Amount outstanding at December 31 $ 270,107 $ 258,201 $ 274,641 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 2.88 % 3.63 % 4.22 % $ 266,564 $ 201,273 $ 272,071 $ 219,713 $ 293,668 $ 225,743 4.13 % 4.71 % 5.10 % FEDERAL HOME LOAN BANK BORROWINGS Federal Home Loan Bank of Boston (“FHLBB”) borrowings are collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, December 31, 2010, was approximately $73,241,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. A schedule of the maturity distribution of FHLBB advances with the weighted average interest rates is as follows: 2010 2009 2008 (dollars in thousands) Within one year Over one year to two years Over two years to three years Over three years to five years Over five years Total Amount $ 91,500 9,000 41,500 37,000 42,000 $ 221,000 Weighted Average Rate 0.39 % 1.98 % 3.82 % 2.70 % 4.55 % 2.28 % Weighted Average Rate 2.72 % 1.81 % 2.08 % 3.65 % 4.55 % 3.18 % Amount $ 104,000 11,000 19,500 56,000 42,000 $ 232,500 Amount $ 104,500 59,000 11,000 20,500 42,000 $ 237,000 Weighted Average Rate 2.80 % 5.17 % 4.05 % 4.18 % 4.55 % 3.88 % Included in the table above are $35,000,000, $82,500,000 and $85,000,000 of FHLBB advances at December 31, 2010, 2009 and 2008, respectively, that are putable at the discretion of FHLBB. These put dates were not utilized in the table above. During 2010, the Company restructured $12,500,000 of FHLBB advances. Prior to restructure, the weighted average rate on these advances was 2.40% and the weighted average remaining maturity was 21 months. Subsequent to restructure, the weighted average rate was 2.52% and the weighted average maturity was 57 months. The restructures were accounted for as a modification. During 2009, the Company restructured $19,000,000 of FHLBB advances. Prior to restructure, the weighted average rate on these advances was 4.10% and the weighted average remaining maturity was 15 months. Subsequent to restructure, the weighted average rate was 3.56% and the weighted average maturity was 46 months. The restructure was accounted for as a modification. SUBORDINATED DEBENTURES Subordinated debentures totaled $36,083,000 at December 31, 2010 and 2009. 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 on January 10, 2005. 410991.Financial.CS5.indd 38 38 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 In December 2004, the Company consummated the sale of a trust preferred securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust II. Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities pay dividends at an annualized rate of 6.65% for the first ten years and then convert to the three-month LIBOR rate plus 1.87% for the remaining 20 years. OTHER BORROWED FUNDS There were no overnight federal funds purchased at December 31, 2010 and 2009. 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 $975,000 and $1,380,000 at December 31, 2010 and 2009, respectively. The Bank also has an outstanding loan in the amount of $143,000 and $144,000 at December 31, 2010 and 2009, respectively, borrowed against the cash value of a whole life insurance policy for a key executive of the Bank. 13. 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 per 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 2010, 2009 and 2008 was an increase of 2,236, 2,091 and 1,719 shares, respectively. STOCK REPURCHASE PLAN During 2010, the Board of Directors of the Company approved a reauthorization of the stock repurchase program. Under the program, the Company is reauthorized to repurchase up to 300,000, or less than 9%, of Century Bancorp Class A Common Stock outstanding. This vote supersedes the previous program voted by the Board of Directors during 2009, which also authorized the Company to repurchase up to 300,000, or less than 9%, of Century Bancorp Class A Common Stock. The stock buy back is authorized to take place from time-to-time, subject to prevailing market conditions. The purchases are made on the open market and are funded from available cash. During 2009, the Company repurchased 8,110 shares at an average price of $13.04 per share. STOCK OPTION PLAN During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) that provide 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 nonqualified 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 nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were 38,712 options exercisable at December 31, 2010. December 31, 2010 December 31, 2009 December 31, 2008 Stock option activity under the plan is as follows: Amount Shares under option: Outstanding at beginning of year Forfeited Exercised Outstanding at end of year Exercisable at end of year 68,637 (19,975) (9,950) 38,712 38,712 $ $ $ 26.09 27.18 15.06 28.36 28.36 Weighted Average Exercise Price Weighted Average Exercise Price $ $ $ 27.42 34.77 — 26.09 26.09 Amount 81,037 (12,400) — 68,637 68,637 Available to be granted at end of year 222,884 202,909 Weighted Average Exercise Price $ $ $ 27.66 29.07 — 27.42 27.42 Amount 94,787 (13,750) — 81,037 81,037 190,509 At December 31, 2010, 2009 and 2008, the options outstanding have exercise prices between $15.063 and $35.010, and a weighted average remaining contractual life of three years for 2010, three years for 2009 and four years for 2008. The weighted average intrinsic value of options exercised for the period ended December 31, 2010 was $4.14 per share with an aggregate value of $41,236. The average intrinsic value of options exercisable at December 31, 2010, 2009 and 2008 had an aggregate value of $41,895, $74,056 and $7,331, respectively. 39 410991.Financial.CS5.indd 39 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 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, 2010, that the Bank and the Company meet all capital adequacy requirements to which they are subject. As of December 31, 2010, 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 To Be Well Capitalized below. There are no conditions or events since that notification that management believes would cause a change in the Bank’s categorization. Under Prompt Corrective Action Provisions For Capital Adequacy Purposes The Bank’s actual capital amounts and ratios are presented in the following table: Ratio Amount Ratio Amount Ratio Actual Amount As of December 31, 2010 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, 2009 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) $ 162,944 148,891 148,891 13.61 % 12.43 % 6.14 % $ 145,586 133,213 133,213 12.76 % 11.68 % 6.23 % The Company’s actual capital amounts and ratios are presented in the following table: Ratio Actual Amount As of December 31, 2010 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, 2009 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) $ 192,387 178,334 178,334 16.03 % 14.86 % 7.35 % $ 177,808 165,435 165,435 15.53 % 14.45 % 7.73 % $ 95,793 47,897 96,945 $ 91,262 45,631 85,466 8.00 % 4.00 % 4.00 % 8.00 % 4.00 % 4.00 % For Capital Adequacy Purposes Amount Ratio $ 95,992 47,996 97,089 $ 91,571 45,786 85,619 8.00 % 4.00 % 4.00 % 8.00 % 4.00 % 4.00 % $ 119,742 10.00 % 71,845 121,182 6.00 % 5.00 % $ 114,078 10.00 % 68,447 106,832 6.00 % 5.00 % To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 119,990 10.00 % 71,994 121,362 6.00 % 5.00 % $ 114,464 10.00 % 68,678 107,024 6.00 % 5.00 % 14. Income Taxes 2010 2009 2008 (dollars in thousands) The current and deferred components of income tax expense for the years ended December 31 are as follows: Current expense: Federal State Total current expense Deferred benefit: Federal State Total deferred benefit Provision for income taxes $ 2,262 528 $ 3,058 419 $ 3,117 232 2,790 3,477 3,349 (1,223) (323) (1,546) (1,759) (535) (2,294) (954) (140) (1,094) $ 1,244 $ 1,183 $ 2,255 There were no penalties during 2008, 2009, or 2010. 410991.Financial.CS5.indd 40 40 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 Income tax accounts included in other assets/liabilities at December 31 (dollars in thousands) are as follows: Currently (payable) receivable 2010 2009 Deferred income tax asset, net Total $ 181 13,465 $ (628) 12,340 $ 13,646 $ 11,712 Differences between income tax expense at the statutory federal income tax rate and total income tax expense are summarized as follows: (dollars in thousands) 2010 2009 2008 Federal income tax expense at statutory rates State income tax, net of federal income tax benefit Insurance income Effect of tax-exempt interest Net tax credit Other Total $ 5,038 $ 3,856 $ 3,842 135 (570) (2,763) (622) 26 (76) (442) (1,965) (376) 186 $ 1,244 $ 1,183 62 (353) (1,307) — 11 $ 2,255 Effective tax rate 8.4 % 10.4 % 20.0 % 2009 The following table sets forth the Company’s gross deferred income tax assets (dollars in thousands) and gross deferred income tax liabilities at December 31: Deferred income tax assets: 2010 Allowance for loan losses Deferred compensation Pension and SERP liability Acquisition premium Investments writedown Deferred gain AMT Other Nonaccrual interest Gross deferred income tax asset Deferred income tax liabilities: Depreciation Limited partnerships Unrealized gain on securities available-for-sale Other Gross deferred income tax liability $ 7,078 4,895 4,959 543 31 51 172 77 727 18,533 (250) (2,576) (2,242) — (5,068) $ 6,430 4,384 5,795 532 31 71 — 60 444 17,747 (169) (2,466) (2,657) (115) (5,407) Deferred income tax asset net $ 13,465 $ 12,340 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, 2010. 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. The Company and its subsidiaries file a consolidated federal tax return. For the tax year beginning in 2009, the Commonwealth of Massachusetts requires a combined state tax return, except for security corporations, which file separate tax returns. For years before 2007, the Company is no longer subject to federal or state income tax examinations. 15. 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 its retirement plans. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range of 40% to 64% of total portfolio assets. The remainder of the portfolio is allocated to fixed income securities with target range of 15% to 25% and other investments including global asset allocation and hedge funds from 20% to 36%. The Trustees of SBERA, through its Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment 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 investments across a spectrum of investment types to limit risks from large market swings. The Company closed the plan to employees hired after March 31, 2006. Prior to 2008, the measurement date for the Plan was September 30 for each year. Beginning in 2008, the measurement date was changed to December 31. The benefits expected to be paid in each year from 2011 to 2015 are $809,000, $931,000, $957,000, $1,014,000 and $1,113,000, respectively. The aggregate benefits expected to be paid in the five years from 2016 to 2020 are $6,868,000. The Company plans to contribute $1,275,000 to the Plan in 2011. 41 410991.Financial.CS5.indd 41 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 Asset Category Percent Total Level 1 Level 2 Level 3 (dollars in thousands) The fair value of plan assets as of December 31, 2010 is as follows: Collective funds Equity securities Mutual funds Hedge funds Short term investments 46.1 % 27.8 % 14.7 % 7.1 % 4.3 % 100.0 % $ 9,186 5,531 2,928 1,431 855 $ 19,931 $ 5,467 5,531 2,928 — — $ 13,926 $ 3,719 — — — 855 $ 4,574 $ — — — 1,431 — $ 1,431 Asset Category Percent Total Level 1 Level 2 Level 3 (dollars in thousands) The fair value of plan assets as of December 31, 2009 is as follows: Collective funds Equity securities Mutual funds Hedge funds Short term investments 41.1 % 25.8 % 14.5 % 7.7 % 10.9 % 100.0 % $ 7,038 4,400 2,476 1,319 1,854 $ 17,087 $ 2,057 4,400 2,282 — — $ 8,739 $ 4,981 — 194 — 1,854 $ 7,029 $ — — — 1,319 — $ 1,319 The Bank’s fair value of major categories of pension plan assets are summarized above. LEVEL 1 The plan assets measured at fair value in Level 1 are based on quoted market prices in an active exchange market. LEVEL 2 Plan assets measured at fair value in Level 2 are based on pricing models that consider standard input factors, such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. LEVEL 3 Plan assets measured at fair value in Level 3 are based on unobservable inputs, which includes SBERA’s assumptions and the best information available under the circumstance. Level 3 assets consist of hedge funds. The underlying assets are valued based upon quoted exchange prices, over-the-counter trades, bid/ask prices, relative value assessments based on market conditions, and other information, as available. Further adjustments may be made based on factors impacting liquidity. Year Ended December 31, 2010 2009 The changes in Level 3 securities are shown in the table below: (dollars in thousands) Balance at beginning of year Actual return – assets still being held Actual return – assets sold during year Purchases Sales Maturities Transfers Balance at end of year $ 1,319 112 — — — — — $ 1,431 $ 1,174 145 — — — — — $ 1,319 The performance of the plan assets is dependent upon general market conditions and specific conditions related to the issuers of the underlying securities. 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. Prior to 2008, the measurement date for the Supplemental Plan was September 30 for each year. Beginning in 2008, the measurement date was changed to December 31 in accordance with FASB ASC 715-20. The benefits expected to be paid in each year from 2011 to 2015 are $1,115,000, $1,054,000, $1,053,000, $1,051,000 and $1,037,000, respectively. The aggregate benefits expected to be paid in the five years from 2016 to 2020 are $8,022,000. 410991.Financial.CS5.indd 42 42 2/28/11 5:09 PM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 (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 2010 2009 2010 2009 $ 24,247 851 1,334 5 (644) $ 21,413 792 1,240 1,396 (594) $ 16,906 588 892 (485) (1,048) $ 15,768 469 934 782 (1,047) Projected benefit obligation at end of year $ 25,793 $ 24,247 $ 16,853 $ 16,906 Change in plan assets Fair value of plan assets at beginning of year Actual (loss) 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 $ $ $ $ $ 17,087 2,213 1,275 (644) 19,931 (5,862) 23,485 5.50 % 5.50 % 8.00 % 4.00 % 851 1,334 (1,367) (104) 634 $ $ $ $ $ 14,059 2,347 1,275 (594) 17,087 (7,160) 21,939 5.50 % 5.75 % 8.00 % 4.00 % 792 1,240 (1,128) (113) 696 $ $ (16,853) 15,551 $ $ (16,906) 15,030 5.50 % 5.50 % NA 4.00 % 588 892 — 110 129 $ 5.50 % 5.75 % NA 4.00% 469 934 — 110 139 $ $ 1,348 $ 1,487 $ 1,719 $ 1,652 $ 104 (1,475) (1,371) $ 113 (519) (406) $ (110) (614) (724) $ (110) 643 533 $ (23) $ 1,081 $ 995 $ 2,185 The following table summarizes amounts recognized in Accumulated Other Comprehensive Loss as of: Plan Total December 31, 2010 Supplemental Plan December 31, 2009 Supplemental Plan Total Plan (dollars in thousands) Prior service cost Net actuarial loss Total $ 828 (7,823) $ (1,330) (3,658) $ (502) (11,481) $ 932 (9,298) $ (1,440) (4,272) $ (508) (13,570) $ (6,995) $ (4,988) $ (11,983) $ (8,366) $ (5,712) $ (14,078) 43 410991.Financial.CS5.indd 43 2/28/11 2:15 PM The following table summarizes the amounts included in Accumulated Other Comprehensive Loss at December 31, 2010, expected to be recognized as components of net periodic benefit cost in the next year: Amortization of prior service cost to be Supplemental Plan Plan recognized in 2011 Amortization of loss to be recognized in 2011 $ (104) 494 $ 110 131 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 $244,000 for 2010, $261,000 for 2009 and $265,000 for 2008. Administrative costs associated with the plan are absorbed by the Company. The Company has a cash incentive plan that is designed to reward our executives and officers for the achievement of annual financial performance goals of the Company as well as business line, department and individual performance. The plan supports the philosophy that management be measured for their performance as a team in the attainment of these goals. There were no payments under this plan for 2008, 2009 and 2010. Discretionary bonus expense amounted to $600,000, $403,000 and $348,000 in 2010, 2009, and 2008, respectively. The Company does not offer any postretirement programs other than pensions. 16. Commitments and Contingencies A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2010. 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 operations. 17. 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: Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 2010 2009 Contract or Notational Amount (dollars in thousands) Financial instruments whose contract amount represents credit risk: Commitments to originate 1-4 family mortgages $ 14,635 $ 1,262 Standby and commercial letters of credit 4,935 8,904 Unused lines of credit Unadvanced portions of construction loans Unadvanced portions of other loans 169,862 143,556 22,337 22,699 3,337 4,407 Commitments to originate loans, unadvanced portions of construction loans, unused lines of credit 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. Year ended December 31, 2010 2009 2008 18. Other Operating Expenses (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 Other Total $ 1,747 884 1,042 788 874 656 736 691 388 294 290 1,450 $ 1,518 981 1,284 882 794 662 733 585 388 304 256 1,261 $ 1,482 828 994 922 807 698 832 626 388 322 229 1,552 $ 9,840 $ 9,648 $ 9,680 19. 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. 410991.Financial.CS5.indd 44 44 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 SHORT-TERM INVESTMENTS The fair value of short-term investments is estimated using the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for short-term investments of similar remaining maturities. SECURITIES HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE The fair value of these securities were based on quoted market prices, where available, as provided by third-party investment portfolio pricing vendors. If quoted market prices were not available, fair values provided by the vendors were based on quoted market prices of comparable instruments in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association’s standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Management regards the inputs and methods used by third party pricing vendors to be “Level 2 inputs and methods” as defined in the “fair value hierarchy” provided by FASB. LOANS For variable-rate loans, which 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. 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. 2010 2009 The carrying amounts and fair values of the Company’s financial instruments at December 31 are as follows: Fair Value Carrying Amounts Carrying Amounts Fair Value (dollars in thousands) Financial assets: Cash and cash equivalents Short-term investments 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 $ 188,552 113,918 909,391 230,116 892,111 6,601 1,902,023 330,668 36,083 1,003 $ 188,552 114,134 909,391 233,524 913,394 6,601 1,908,125 334,872 38,749 1,003 $ 398,642 18,518 647,796 217,643 864,752 5,806 1,701,987 352,769 36,083 1,116 — 68 — $ 398,642 18,665 647,796 221,413 876,197 5,806 1,706,271 359,989 36,136 1,116 93 45 410991.Financial.CS5.indd 45 2/23/11 2:05 AM LIMITATIONS Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 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. 2010 Quarters Second Fourth Third First 20. Quarterly Results of Operations (unaudited) (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 2009 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 $ 19,122 5,811 13,311 1,350 11,961 4,223 11,895 4,289 365 $ 18,628 6,040 12,588 1,200 11,388 3,412 11,313 3,487 220 $ 19,325 6,183 13,142 1,450 11,692 4,105 12,598 3,199 238 $ 19,508 6,783 12,725 1,575 11,150 4,259 11,566 3,843 421 $ 3,924 $ 3,267 $ 2,961 $ 3,422 5,537,776 5,539,639 5,535,548 5,537,120 5,530,297 5,532,980 $ $ $ $ $ $ 0.71 0.71 Fourth 19,786 7,337 12,449 2,475 9,974 4,861 11,418 3,417 332 $ $ $ 0.59 0.59 Third 20,037 7,363 12,674 1,250 11,424 3,399 11,228 3,595 413 5,530,297 5,533,070 $ $ 0.62 0.62 0.54 0.54 Second First 20,194 8,232 11,962 1,050 10,912 3,540 12,283 2,169 162 $ 19,583 8,791 10,792 1,850 8,942 4,670 11,450 2,162 276 $ 3,085 $ 3,182 $ 2,007 $ 1,886 5,530,297 5,533,943 $ $ 0.56 0.56 5,530,297 5,533,622 $ $ 0.58 0.58 5,530,724 5,531,329 $ $ 0.36 0.36 5,537,781 5,537,781 $ $ 0.34 0.34 410991.Financial.CS5.indd 46 46 2/23/11 2:05 AM Notes to Consolidated Financial Statements Century Bancorp, Inc. AR ’10 21. Parent Company Financial Statements The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of December 31, 2010 and 2009 and the statements of income and cash flows for each of the BALANCE SHEETS years in the three-year period ended December 31, 2010, are presented below. The statements of changes in stockholders’ equity are identical to the consolidated December 31, 2010 statements of changes in stockholders’ equity and are therefore not presented here. (dollars in thousands) 2009 $ 27,352 151,303 2,560 $ 181,215 $ 107 36,083 145,025 $ 181,215 $ 29,488 135,459 3,973 $ 168,920 $ 107 36,083 132,730 $ 168,920 2010 2009 2008 $ — 156 72 228 2,400 172 (2,344) (797) 1,547 15,121 $ 13,574 $ 2,766 409 72 3,247 2,400 200 647 (720) 1,367 8,793 $ 4,778 884 72 5,734 2,400 165 3,169 (547) 3,716 5,330 $ 10,160 $ 9,046 2010 2009 2008 $ 13,574 $ 10,160 $ 9,046 (15,121) 12 1,422 — (113) — 150 (2,173) (2,023) (2,136) 29,488 $ 27,352 (8,793) 12 (1,197) (5) 177 (107) — (2,170) (2,277) (2,100) 31,588 $ 29,488 (5,330) 12 (286) 5 3,447 (84) — (2,174) (2,258) 1,189 30,399 $ 31,588 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 Net income 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: Undistributed income of subsidiary Depreciation and amortization Increase in other assets Increase (decrease) in liabilities Net cash provided by operating activities CASH FLOWS FROM FINANCING ACTIVITIES: Stock repurchases Net proceeds from the exercise of stock options Cash dividends paid Net cash used in financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year 47 410991.Financial.CS5.indd 47 2/23/11 2:05 AM Report of Independent Registered Public Accounting Firm Century Bancorp, Inc. AR ’10 KPMG LLP Independent Registered Public Accounting Firm Two Financial Center 60 South Street Boston, Massachusetts 02111-2759 The Board of Directors and Stockholders Century Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and its subsidiary as of December 31, 2010 and 2009 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. 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 its subsidiary as of December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with 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, 2010, 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 24, 2011, expressed an unqualified opinion on the effectiveness of the company’s internal control over financial reporting. Boston, Massachusetts February 24, 2011 410991.Financial.CS5.indd 48 48 2/23/11 2:05 AM Report of Independent Registered Public Accounting Firm Century Bancorp, Inc. AR ’10 KPMG LLP Independent Registered Public Accounting Firm Two Financial Center 60 South Street Boston, Massachusetts 02111-2759 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, 2010, 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 “Managements 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, 2010, 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, 2010 and 2009 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated February 24, 2011, expressed an unqualified opinion on those consolidated financial statements. Boston, Massachusetts February 24, 2011 49 410991.Financial.CS5.indd 49 2/23/11 2:05 AM Management’s Report on Internal Control Over Financial Reporting Century Bancorp, Inc. AR ’10 CENTURY BANCORP, INC. 400 Mystic Avenue Medford, Massachusetts 02155 We, together with the other members of Century Bancorp, Inc. and our 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, 2010. 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, 2010, 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 49. Barry R. Sloane President & CEO February 24, 2011 William P. Hornby, CPA Chief Financial Officer & Treasurer 410991.Financial.CS5.indd 50 50 2/25/11 2:33 PM Notes Century Bancorp, Inc. AR ’10 51 410991.Financial.CS5.indd 51 2/23/11 2:05 AM About Century Century Bancorp, Inc. is a $2.4 billion banking and financial services company headquartered in Medford, Massachusetts. The Company operates 23 banking offices in 17 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 Corporate Headquarters Transfer Agent and Registrar Century Bank 400 Mystic Avenue Medford, MA 02155-6316 TEL (866) 823-6887 AskCentury.com Annual Meeting Computershare Investor Services P.O. Box 43078 Providence, RI 02940-3078 TEL (781) 575-3400 Computershare.com The annual meeting of stockholders will be held on Tuesday, April 12, 2011, at 10:00 a.m. The meeting will take place at Century Bank, 400 Mystic Avenue, Medford, MA. Headquarters Stock Listing Opening this Fall 10-K Report Century Bancorp, Inc. became a public company in 1987. Century’s Class A Common Stock is listed on the NASDAQ market and is traded under the symbol “CNBKA.” 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. Allston Branch Andover Branch Beverly Branch Braintree Branch Brookline Branch Burlington Branch Century Bank Locations Cambridge Branch Coolidge Corner Branch Everett Branch Federal Street Branch Fellsway Branch Kenmore Square Branch Opening this Spring Lynn Branch Malden Branch Medford Square Branch Newton Branch Newton Centre Branch North End Branch Peabody Branch Quincy Branch Salem Branch Somerville Branch State Street Branch Winchester Branch Offices Allston Andover Beverly Boston Boston Boston Boston Braintree Brookline Brookline Burlington Cambridge Everett Lynn Malden Medford Medford Medford Newton Newton Peabody Quincy Salem Somerville Winchester (617) 562-1700 300 Western Avenue, Allston, MA 02134 OPENING FALL 2011 15 Elm Street, Andover, MA 01810 (978) 921-2300 428 Rantoul Street, Beverly, MA 01915 (617) 424-1644 512 Commonwealth Avenue, Boston, MA 02215 (617) 557-2950 275 Hanover Street, Boston, MA 02113 (617) 423-1490 24 Federal Street, Boston, MA 02110 (617) 367-3712 136 State Street, Boston, MA 02110 (781) 356-3400 703 Granite Street, Braintree, MA 02184 1184-1186 Boylston Street/Rt 9 East, Brookline, MA 02467 (617) 713-4910 1354 Beacon Street, Brookline, MA 02446 (617) 734-1890 (781) 238-8700 134 Cambridge Street/Rt 3A, Burlington, MA 01803 (617) 349-5300 2309 Massachusetts Avenue, Cambridge, MA 02140 (617) 381-6300 1763 Revere Beach Parkway/Rt 16, Everett, MA 02149 (781) 586-8700 2 State Street, Lynn, MA 01901 (781) 388-2100 140 Ferry Street at Eastern Avenue, Malden, MA 02148 (781) 391-9830 1 Salem Street, Medford, MA 02155 (781) 393-4160 400 Mystic Avenue, Medford, MA 02155 (781) 393-6520 503 Riverside Avenue, Medford, MA 02155 31 Boylston Street/Rt 9 West, Newton, MA 02467 (617) 582-0920 32 Langley Road, Newton Centre, MA 02459 OPENING SPRING 2011 (978) 977-4900 12 Peabody Square, Peabody, MA 01960 (617) 376-8100 651 Hancock Street, Quincy, MA 02170 (978) 740-6900 37 Central Street, Salem, MA 01970 (617) 629-0929 102 Fellsway West at Mystic Avenue, Somerville, MA 02145 (781) 756-3480 522 Main Street, Winchester, MA 01890 Free-Standing Cash Dispensers The Hotel Commonwealth, 500 Commonwealth Avenue, Boston, MA 02215 Boston CambridgeSide Galleria, 100 CambridgeSide Place, Cambridge, MA 02141 Cambridge One Kendall Square, Building #100, Cambridge, MA 02139 Cambridge Sloane Square, 110 Medford Street, Medford, MA 02155 Medford Milton Milton Hospital, 199 Reedsdale Road, Milton, MA 02186 North Andover Merrimack College, Volpe Center, 125 Cullan Avenue, North Andover, MA 01845 North Andover Merrimack College, Sakowich Center, 90 Flaherty Extension, North Andover, MA 01845 Weston Regis College, 235 Wellesley Street, Weston, MA 02493 410991.Cover.CS5.indd 2 2/25/11 1:49 PM Our family’s bank. And yours. million in loans 400 Mystic Avenue, Medford, MA 02155 (866) 823-6887 www.AskCentury.com 2010 Annual Report billion in assets 2 .442 9 0 6.2 million in profits 1 3.6 For many reasons, this was a REC RD 0 year. Equal Housing Lender/Member FDIC © 2011 Century Bancorp, Inc. All rights reserved. 002-CSI0881 410991.Cover.CS5.indd 1 3/1/11 10:42 AM 

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