Century Bancorp Inc.
Annual Report 2012

Plain-text annual report

44 years of Stability Our family’s bank. And yours. in our financial performance 400 Mystic Avenue, Medford, MA 02155 (866) 823-6887 www.CenturyBank.com in our client service in our leadership in our communities in our values Equal Housing Lender/Member FDIC © 2013 Century Bancorp, Inc. All rights reserved. 002-CSN0443 2012 Annual Report Pictured from left: Executive Vice President Linda Sloane Kay, Founder & Chairman Marshall M. Sloane, and President & CEO Barry R. Sloane Much has been said in the media of late regarding the financial industry. Let me affirm that Century Bank’s integrity has not diminished in any way. Our dedication to our community, “ our customers and our shareholders is unwavering. I charted a course for Century based on making character count, and we remain true to our strategy. Our solid financial performance and stability have positioned us for growth well into the future. “ Marshall M. Sloane, Founder and Chairman 2012 Dear Fellow Shareholders: 2012 was the third consecutive record year for Century Bank. As we approach our 44th anniversary, assets, deposits, earnings, and loans all reached record levels. We ended 2012 at $3.09 billion in assets and $19.04 million of annual earnings. In a year when bank stock prices generally declined, ours rose 17% to close at $32.95; a three-year increase of 50%. 2012 was another solid year of achievements in the midst of a banking industry in transition. Our theme this year is “ability,” and its many derivatives. It takes a combination of skills to achieve a sustainable and stable platform for growth. Century continues to prove that the pathway set nearly 44 years ago by our intrepid Founder and Chairman, Marshall M. Sloane, a man with many different abilities, resonates equally well in 2013. Dependability: Double-Digit Net Earnings Growth Net income grew by 14% to a record $19.04 million, or $3.43 per Class A share diluted, for the year ended December 31, 2012, as compared to net income of $16.7 million, or $3.01 per Class A share diluted, for 2011. Century’s return on average equity (ROE) is now 11.1%, up from 2011’s 10.7%. Our ROE is within the top quartile of our regional peer group. Our average efficiency ratio of overhead to revenue improved to 62.1%, down from 62.2% in 2011, and below the median (lower is favorable) within our regional peer group. This achievement proves that, while we have grown, we have lost no increment of control over expenses. Senior management continues to review and sign every expense invoice. SUSTAINAbILITY Credibility: Significant Asset Growth Total assets increased 12.5% to a record $3.09 billion on December 31, 2012, up from $2.74 billion on December 31, 2011, an increase of $343 million. Century has added record numbers of new client acquisitions in all three segments: consumer, business, and institutional. Clients seek a stable banking environment, free of event risk, and predicated on the three markers of consistent growth of earnings, assets, and capital. We continue to produce all three, and client originations follow. We are proud to cite an increasing number of the most established educational and governmental institutions in New England as our clients. Sustainability: Consistent Capital Growth Total equity rose to $180 million on December 31, 2012, an increase of 11.8% from $161 million on December 31, 2011. Book value per share Total Assets (in thousands) Earnings Per Class A Share, Diluted Net Income (in thousands) $3,086,209 $2,743,225 $3.43 $3.01 $2,441,684 $2.45 $19,039 $16,693 $13,574 ’12 ’11 ’10 ’12 ’11 ’10 ’12 ’11 ’10 increased to $32.40 at December 31, 2012, up from $28.98 at December 31, 2011. Century is “well capitalized” by all regulatory standards, and we foresee no difficulty passing all proposed “Basel III” standards with organic capital generation from earnings. Quality: Sound Loan Growth Total loans grew by 12.9% to $1.1 billion on December 31, 2012, marking the first time we passed the billion-dollar loan milestone. Nonperforming assets fell from the previous year, to $4.5 million. The education and healthcare sectors continue to drive our loan growth, increasing some 27%, as a mirror image of the dynamic economic engine of Southern New England. Century has earned the right to be known as the expert in not-for-profit tax-exempt bond finance. Business lending is always a core focus; we have a dozen business development officers in the field, a talented group of energized underwriters, and a daily loan review and approval process that ensures speedy and thoughtful decisions by experienced senior managers. We utilize the SBA lending programs wherever possible to increase credit availability and minimize risk. 2012 was a record year in which we closed $117 million in residential first mortgages and $67 million in home equity loans. We extended 307 energy conservation loans through the Mass Save loan program, which helped us do our part for conservation and build new long-term relationships. Risk management is in our blood, and the results show it. We make loans in our geographic footprint to organizations and families of character and promise who see us as the center of their banking relationship. Every loan is reviewed and approved by senior management, who receive robust and collegial input from our bankers in the field. Decisions are made swiftly with an eye to the macro and micro risks present in every loan. We know the loans that we do – and do not – want in our portfolio. The decisions are clear, and the analysis is thorough and respectful to all. Borrowers are not just credit scores to Century; they are families and companies, hopes and dreams. We try to bring value to all types of applicants in their search for financing. Cambridge College Inaugural Celebration Pictured from left: Barry R. Sloane, Deborah C. Jackson, President of Cambridge College, Gerald S. Algere, SVP, Century Bank, Barbara J. G. Sloane, and Marshall M. Sloane Pictured from left: Executive Vice President Brian J. Feeney, Executive Vice President David B. Woonton, Executive Vice President Paul A. Evangelista and Chief Financial Officer & Treasurer William P. Hornby Wellesley Grand Opening Ribbon Cutting Pictured from left: Fraser Lemley, Chairman and CEO of Sentry Auto Group and Director, Century Bank, Linda Sloane Kay, Barbara J. G. Sloane, Marshall M. Sloane, Professor Marshall I. Goldman, Wellesley College and Founding Director of Century Bank, Barry R. Sloane, Melissa A. Murphy, Wellesley Branch Manager, and Patricia Galindo, Wellesley College Capability: Growing Branch System In 2012, we opened two new branches: #24 in Andover, at 15 Elm Street, and #25 in Wellesley at 35 Central Street. Both are prestigious communities where we are already off to strong starts. In 2012, we also remodeled and rededicated our second-oldest and busiest branch in Malden. Accountability: Additional Clients in Institutional Services The Institutional Services Group, which includes our government, cash management, and not-for-profit banking teams, had a record year of client growth. Our share of government banking deposits is now reported to be the highest among Massachusetts chartered banks, and we have made promising inroads into the Rhode Island and New Hampshire markets. We processed over 20 million check and payment items in 2012, with exceptional quality control and customer service. The “giant” item processors Malden Remodeling Ribbon Cutting Pictured from left: State Representative Paul J. Donato, James M. Flynn, Jr., SVP, Century Bank, Barbara J. G. Sloane, Linda Sloane Kay, Marshall M. Sloane, Malden Mayor Gary Christenson, Malden City Councillor Neal Anderson, Janice D. Taylor, VP and Malden Branch Manager, Barry R. Sloane, Dr. Candace Lapidus Sloane, and Gabriella Snyder, Bread of Life continue to contract in services and entry points of deposits; we are filling several of those gaps in our region. The lockbox function remains a time-tested magnet for corporate and institutional deposits. We are proud of the most stable operational management team in the industry, combining an advanced technology platform with live and experienced customer service personnel. Visibility: Widely Recognized Branding Program Our best-in-class corporate marketing programs promote our message of local family control, permanence, approachability, and personal service. This message has molded an identity that resonates with our communities and drives favorability. Marshall, Linda, and I personally sign welcome notes to thank all new clients of Century. This level of personal touch differentiates us from others in the industry. We are proud to be recognized as 74 on the Boston Globe 100 best performing companies in Massachusetts CAPAbILITY Reliability: Information Systems 2012 marked a year when we experienced no unplanned outage in information systems. We pride ourselves on a technology platform of redundancy and expertise that our clients can rely on for financial inquiry, transactions, and high-quality service. We are proud to say that Information Systems met all of its operational and service goals in 2012. Mobile banking “apps” are a revolutionary and popular channel that our clients are increasingly using to bank and communicate with us. Andover Grand Opening Ribbon Cutting Pictured from left: James M. Flynn, Jr., SVP, Century Bank, Brian J. Feeney, EVP, Century Bank, Linda Sloane Kay, Holly Nahabedian, VP and Andover Branch Manager, Barry R. Sloane, Barbara J. G. Sloane, Marshall M. Sloane, State Senator Barry R. Finegold, and Alexander J. Vispoli, Vice Chairman, Andover Board of Selectmen Fidelity: Commitment to the Community and ESG To describe the ethical orientation of a public company, the investment industry has adopted the Environmental, Societal, and Governance (ESG) Index. We find this term especially appropriate to the way we run Century. Our environmental responsibility, the “E” in ESG, is highlighted by our 2012 deployment of electric hybrid fleet cars for our couriers and installation of community electric car-charging stations in Medford. As a result, we were awarded the 2012 Medford Energy Committee “Green Award.” We are focused on our social responsibility, the “S” in ESG. Led by our imperative for locally controlled enterprise, community development, and relationship-based philanthropy, we live our social mission every day. In 2012, we greatly expanded our Community Reinvestment Act (CRA) capabilities, in staff, resources, and management commitment. We are utilizing these resources to better serve our minority and lower-income communities with opportunities for home ownership and access to traditional banking services. Century Bank Electric Vehicle Charging Station Dedication Pictured from left: Linda Sloane Kay, Marshall M. Sloane, Medford Mayor Michael J. McGlynn, Jason J. Melius, SVP, Century Bank, and Barry R. Sloane RELIAbILITY Sound corporate governance, the “G” in ESG, has been a watchword for Century since its inception. Our governance philosophy is evident in a vibrant and independent Board of Directors, a long history of sound and valued relationships with regulators and auditors, and a long-term view of share ownership and control. We expect to continue to be well regarded by all who utilize the ESG metric in their investing. Capacity: Pay Down the Federal Debt and Deficit We’re terribly concerned about the trend lines of the country’s debt and deficit. We all have a share in our nation’s financial future; we worry so much about how our economy, no matter how productive, can survive the mountain of debt, which will approach 90% of GDP in a decade. The optimists among us rely on the likelihood that a return to boom-time levels of economic growth Senior Vice Presidents Opposite page pictured from left. Front row: William J. Gambon, Jr., Yasmin D. Whipple, Kenneth A. Samuelian, Nancy Lindstrom, Susan B. Delahunt, and James M. Flynn, Jr. Middle row: Thomas E. Piemontese, Deborah R. Rush, Gerald S. Algere, Jason J. Melius, Janice A. Brandano, and Peter R. Castiglia Back row: Bradford J. Buckley, Richard L. Billig, Anthony C. LaRosa, Timothy L. Glynn, Shipley C. Mason, and Phillip A. Gallagher will reduce the deficit and debt to reasonable levels. Frankly, we see that as a combination of hope and speculation. One can run neither a company nor a country on that foundation. We budget first the things we can control, namely expenses. We implore our elected leaders to make 2013 the year that they cut expenditures to balance the budget and rely on revenue growth to further reduce the debt. We must balance the budget and pay down the debt…by trillions, not billions. Now. Sincerity: People and Values We can’t say enough about the commitment and capability of our 400 Century Associates. When foul weather, family calamity, or industry changes bring challenges, our colleagues faultlessly respond with time, ability and ingenuity. A great many of them have worked together for decades, a rare condition in our industry that makes our teamwork superb. Most of the achievements described above are the result of the talent and resourcefulness of the Century team. Finally, we see so clearly our family and corporate values of industry, fairness, and community. The more we watch the revealed unethical behavior of many of our “giant” competitors, through their government fines and settlements, the more pride we bring every day to our mission. We thank our shareholders, our clients, our associates, and our communities, for their confidence and relationships. We will endeavor to make 2013 another year of achievement through ability. Gratefully, Barry R. Sloane President and CEO ACCOUNTAbILITY In 2012, we continued to invest in our communities, supporting over 267 organizations. A Brighter Way ACCESO Action for Boston Community Development, Inc. Advocates, Inc. American Cancer Society American Heart Association American Jewish Committee American Red Cross of Northeast Massachusetts Andover Senior Center Andover Youth Foundation Angela & Patrick Palmer Research Fund for Brain Cancer Anti-Defamation League Apollo Club of Boston Archdiocese of Boston Associazione Gizio Bais Yaakov of Boston High School for Girls Beacon Academy Best Buddies Beth Israel Deaconess Medical Center Beverly Hockey Alumni Association Birthday Wishes Bishop Fenwick High School Boston Architectural College Boston Ballet Boston Harbor Association Boston Minuteman Council, Boy Scouts of America Boston Renaissance Charter Public School Boy Scouts of America Braintree High School Brandeis University Bread of Life Brendan M. Curtin Scholarship Fund Brewster Academy Brookline Chamber of Commerce Brookline Literacy Partnership Brookline Music School Brookline Senior Center Burlington Community Scholarship Foundation/ Dollars for Scholars Burlington D.A.R.E. Burlington High School Scholarship Program Burlington Recreation Department Cambridge & Somerville Program for Alcoholism and Drug Abuse Rehabilitation (CASPAR) Cambridge College Cambridge YWCA Camp Harbor View Foundation, Inc. Cape Ann Animal Aid Cardinal Cushing Centers, Inc. Cardinal Spellman High School Cathedral High School Catholic Charities North Catholic Charities, Archdiocese of Boston Cheverus School Sacred Hearts Parish Citizens for Affordable Housing in Newton Development Organization, Inc. City of Chicopee City of Malden City of Medford City of Newton City of Taunton Clark School Combined Jewish Philanthropies Cops for Kids with Cancer Covenant Christian Academy Cristo Rey Boston High School Currier Museum of Art Cystic Fibrosis Foundation Dana-Farber Cancer Institute Century Bank Holiday Card Designer - Payton Gordinier, 6 years old, Acute Lymphoblastic Leukemia at age 3, Survivor, Dana-Farber Cancer Institute Dimock Community Health Centers Don Guanella Center Dorothy C. Gabriel Foundation Dreamfar High School Marathon Edward M. Kennedy Institute for the United States Senate Eliot School Elizabeth Peabody House Emerald Necklace Conservancy English At Large Essex Chamber Music Players Essex Park Rehabilitation and Nursing Center Everett Chamber of Commerce Everett High School Everett Kiwanis Club Facing Cancer Together Facing History and Ourselves Family Service, Inc. Fayerweather Street School Fisher Center for Alzheimer’s Research Foundation Fontbonne Academy Foundation for Faces of Children Fourth Presbyterian Church of South Boston Franciscan Hospital for Children Friends of Christopher Columbus Park Gann Academy Greater Lynn Senior Services Greater Medford Visiting Nursing Association Harry Langburd Scholarship Fund Hebrew SeniorLife Help Serena Trust Historic Somerville Homes for Our Troops Horizons for Homeless Children Housing Families I.B.E.W. Local 103 Innovation Academy Charter School Interfaithfamily.com It Happened to Alexa Foundation Italia Unita Italian Home for Children Jesuits of the New England Province Jewish Big Brothers Big Sisters Jewish Cemetery Association of Massachusetts Jewish National Fund Jewish Women International John J. Shea Memorial Scholarship Fund John M. Barry Boys & Girls Club of Newton Junior Aid Association of Malden Knights of Pythias, Lodge 158 Koleinu Boston’s Jewish Community Chorus Ladies Ancient Order of Hibernians Lexington Rotary Club Liberty Belle Chorus of Sweet Adelines Literacy Volunteers of Massachusetts Little Sisters of the Poor Longwood Giving Lowell Adult Education Center Lynn Chamber of Commerce Lynn Community Elder Services Lynn Heritage State Park Lynn Housing Authority & Neighborhood Development Lynn Museum & Historical Society Lynn Vocational & Technical Institute Innovation Academy Charter School New Track & Field Ground Breaking Pictured from left: Gerald S. Algere, SVP, Century Bank, Barry R. Sloane, Oliver Renau, Athletic Director, and Walter Landberg, PhD., Executive Director, Innovation Academy Charter School The Sloane Family/Century Bank Primary & Specialty Care Center Ribbon Cutting at Hebrew SeniorLife Pictured from left: Dr. Jennifer Rhodes-Kropf, Medical Director, Louis Woolf, President & CEO, HSL, Hon. Dorothy Kelly Gay of HSL, Kitty Dukakis, Former Governor Michael S. Dukakis, Marshall M. Sloane, Barbara J. G. Sloane, Barry R. Sloane, Linda Sloane Kay, Jonathan Kay, Len Fishman, Former CEO, HSL, and Jennifer K. Silver, Board of Directors Chair, HSL Malden Chamber of Commerce Malden Rotary Club Malden YWCA MASCO Massachusetts Eye and Ear Infirmary Massachusetts General Hospital Research Fund for Dr. Cristina Ferrone Massachusetts Mortgage Bankers Foundation, Inc. Massachusetts School of Law Matignon High School Medford Chamber of Commerce Medford Community Housing Medford Family Network Medford Farmers Market Medford Jingle Bell Festival Medford Mustangs Football Medford Police Association Medford Public Schools Mental Health Programs, Inc. (MHPI) MetroCast Foundation MetroWest Jewish Day School Milton Hospital Muscular Dystrophy Association Museum of Science Mystic Valley Elder Services Mystic Valley Regional Charter School NAIOP Massachusetts National Brain Tumor Society National Tay-Sachs & Allied Diseases Association Neighborhood House Charter School Neurofibromatosis, Inc., Northeast Newton at Home Newton Centre Green Newton Cultural Alliance Newton-Needham Chamber of Commerce North Bennet Street School North Cambridge Senior Center North End Chamber of Commerce North End Community Health Center North Reading Little League North Shore Chamber of Commerce North Shore Medical Center Cancer Walk North Shore Technical High School On The Rise Operation A.B.L.E. of Greater Boston Our Lady of the Cedars of Lebanon Church Pan-Mass Challenge Parish of Sacred Heart Peabody Chamber of Commerce Peabody High School Soccer Boosters Peabody Veterans’ Services Pescosolido Family Scholarship Foundation, Inc. Pine Street Inn Project Bread Rashi School Redemptoris Mater Seminary RESPOND, Inc. Rogerson Communities Ron Burton Training Village Sacred Heart School Sail Cape Cod Saint Agrippina di Mineo Saint Joseph School Saint Michael School Saint Peter School Saint Tarcisius Parish Salem Chamber of Commerce Salem Main Streets Salve Regina University Save the Children SCM Community Transportation Shakespeare & Company Silent Spring Institute Societa di San Giuseppe Solomon Schechter Day School Somerville Chamber of Commerce Somerville Council on Aging Somerville Historic Preservation Commission Somerville Housing Authority Somerville Mental Health Somerville Museum Somerville Rotary Club Somerville Youth Hockey Special Olympics of Massachusetts Springstep St. Bonaventure Monastery St. Clement Parish St. Francis House St. John School St. John the Evangelist Church St. John’s Catholic Church St. Mary’s High School Stone Family Adoption Assistance Fund Straight Ahead Ministries Suzuki School of Newton Synagogue Council of Massachusetts Teamsters Local 25 Temple Aliyah Temple Beth Elohim Temple Beth Shalom Temple Ohabei Shalom Temple Shalom of Newton The Angel Fund The ARC of the South Shore The Boston Minstrel Company The David Project The Home for Little Wanderers The Jimmy Fund The Lustgarten Foundation for Pancreatic Cancer Research The Marshall I. Goldman Endowed Professorship Fund at Wellesley College The Michael Joyce Memorial Playground The New England Council The Professional Center for Child Development The Second Step, Inc. Town of Beverly Town of Brookline Town of Littleton Town of Seekonk Town of Swampscott Town of Weymouth United Way University of New Hampshire School of Law Urban League of Eastern Massachusetts UWUA Local 369 Wachusett Area Rotary Club Ward 7 Improvement Association Watertown Youth Baseball We Are Boston Winchester Chamber of Commerce Winchester Foundation for Educational Excellence Winchester Rotary Charitable Fund, Inc. Winchester Rotary Club Winter Hill Yacht Club Women & Wishes World Unity Wounded Warrior Project Xaverian Brothers High School YMCA of Metro North Young Israel of Brookline Franciscan Hospital for Children Community Leadership Award Ceremony Pictured in front, Korey T. Foley, Profile in Children’s Courage Award recipient is joined by, from left: Linda Sloane Kay, Marshall M. Sloane, Barry R. Sloane, John D. Nash, President & CEO of Franciscan Hospital for Children, and Robert K. Sheridan, Former President & CEO of SBLI Century Bancorp, Inc. Directors George R. Baldwin1,4,6* President & CEO Baldwin & Company 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 4,5,6,7 Executive Vice President Century Bank and Trust Company Fraser Lemley 2*,4,5 Chairman & CEO Sentry Auto Group James P. McDonough 4,7 Private Investor Joseph P. Mercurio 2,4,7* CEO, TJAC Development Higher Education Business Consultant 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* President Sonesta Collection George F. Swansburg 4*,5,6 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 Richard L. Billig Senior Vice President James M. Flynn, Jr. Senior Vice President Jason J. Melius Senior Vice President Senior Vice Presidents Gerald S. Algere Janice A. Brandano Bradford J. Buckley Peter R. Castiglia Susan B. Delahunt Phillip A. Gallagher William J. Gambon, Jr. Timothy L. Glynn Anthony C. LaRosa, CPA Nancy Lindstrom Shipley C. Mason Thomas E. Piemontese Deborah R. Rush Kenneth A. Samuelian Yasmin D. Whipple First Vice Presidents T. Daniel Kausel David J. Waryas Vice Presidents Barry M. Aldorisio Michael D. Ballard Jean P. Belcher-Scarpa Robert A. Bennett John S. Bosco, Jr. Gerald Bovardi Pasqualina Buttiri Toni M. Chardo Gracine Copithorne Rosalie A. Cunio Barbara J. Cunningham Sandra R. Edey Paul C. Eldredge, CPA, CIA Michele English Judith A. Fallon Thatcher L. Freeborn Howard N. Gold Anna M. Gorska Lisa Gosling Kristine M. Holopainen Darlene Joyce Michael F. Long Nancy M. Marsh Karen M. Martin Carl M. Mattos Patricia M. Moran Holly E. Nahabedian Sarah A. O’Toole Cornelius C. Prioleau Bernice A. Shuman Paul A. Sughrue Janice D. Taylor Tuesday N. Thomas Lawrence H. Tsoi Assistant Vice Presidents Valerie R. Bosse Cynthia A. Davidson Laura A. DiFava John R. Ferguson Marissa L. Fitzgerald Janice D. Hallinan Michelle L. Haughton Ashkon Hedvat James J. Jordan William B. Keefe Malcolm I. Maloon Ann E. Mannion Kathleen McGillicuddy Carol A. Melisi Anne M. Milczarek Meredith O’Keefe Karen J. Pessia Scott M. Rembis William F. Shutt, Jr. Mary V. Spadoni Jeremy P. Styles Jose I. Umana Julie A. Walker Officers Leonard A. Adjetey Andrew Agyei Zubin C. Bagwadia Roberta M. Byington Cindy Cohen Marie D. Costello John J. Ferren Sara A. Gaudet Adam S. Glick Paula A. Grimaldi Jill A. Holak Saida Idouahmane Amelia N. Iocco Linda M. Johns Joseph P. Kelley Brian Kelly Brianna L. Kennedy Earl K. Kishida Brandon N. Letellier Robson G. Miguel Nancy R. Miller Melissa A. Murphy Jennifer A. Nickerson John L. Norris III Marie A. Nugent Samantha A. Petrou Emmanuella Renelique Krzysztof A. Sikorski Anandha Subramanian, ACA, CPA, CIA Oliver Sun 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 Financial Highlights 1 FINAN C IAL STATEMENTS 3 Management’s Discussion and Analysis of Results of Operations and Financial Condition 18 19 20 21 22 23 52 54 Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive 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 Century Bancorp, Inc. AR ’12(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 Class A, basic Average shares outstanding Class B, basic Average shares outstanding Class A, diluted Average shares outstanding Class B, diluted Total shares outstanding at year-end Earnings per share: Basic, Class A Basic, Class B Diluted, Class A Diluted, Class B 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 2012 2011 2010 2009 2008 $ 81,494 19,540 61,954 4,150 57,804 15,865 53,238 20,431 1,392 $ 78,065 22,766 55,299 4,550 50,749 16,240 48,742 18,247 1,554 $ 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 $ 19,039 $ 16,693 $ 13,574 $ 10,160 $ 9,046 3,557,693 1,990,474 5,549,191 1,990,474 5,554,959 $ $ $ $ 4.18 2.09 3.43 2.09 11.5 % $ 3,086,209 1,111,788 2,445,073 179,990 32.40 $ 0.65 % 11.06 % 2.51 % 0.15 % 5.85 % 62.1 % 3,543,233 1,997,411 5,541,794 1,997,411 5,542,697 $ $ $ $ 3.68 1.84 3.01 1.84 13.1 % $ 2,743,225 984,492 2,124,584 160,649 28.98 $ 0.63 % 10.72 % 2.48 % 0.21 % 5.88 % 62.2 % 3,521,179 2,012,327 5,535,742 2,012,327 5,540,247 $ $ $ $ 3.00 1.50 2.45 1.50 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 % 3,509,931 2,022,318 5,534,340 2,022,318 5,530,297 $ $ $ $ 2.25 1.12 1.84 1.12 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 % 3,514,883 2,027,100 5,543,702 2,027,100 5,538,407 $ $ $ $ 2.00 1.00 1.63 1.00 24.0 % $ 1,801,566 836,065 1,265,527 120,503 21.76 $ 0.54 % 7.43 % 3.00 % 0.38 % 7.23 % 70.6 % 1 Century Bancorp, Inc. AR ’12Financial Highlights Per Share Data 2012, Quarter Ended Market price range (Class A) High Low Dividends Class A Dividends Class B 2011, Quarter Ended Market price range (Class A) High Low Dividends Class A Dividends Class B December 31, September 30, June 30, March 31, $ 34.00 28.02 0.12 0.06 $ 33.00 28.46 0.12 0.06 $ 30.24 25.00 0.12 0.06 $ 29.50 23.51 0.12 0.06 December 31, September 30, June 30, March 31, $ 28.80 20.50 0.12 0.06 $ 28.91 21.96 0.12 0.06 $ 27.80 23.25 0.12 0.06 $ 28.38 24.75 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, 2007 to December 31, 2012 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used. Comparison of Five-Year $200 Cumulative Total Return* Century Bancorp, Inc. NASDAQ U.S. NASDAQ Banks $175 $150 $125 $100 $75 $50 $25 $0 2007 2008 2009 2010 2011 2012 Value of $100 Invested on December 31, 2007 at: 2008 2009 2010 2011 2012 Century Bancorp, Inc. NASDAQ Banks NASDAQ U.S. $ 80.32 72.91 61.17 $ 115.35 60.66 87.93 $ 143.27 72.13 104.35 $ 153.83 64.51 104.92 $ 182.35 77.18 123.85 * Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2007 and that all dividends were reinvested. 2 Century Bancorp, Inc. AR ’12Financial Highlights 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 continues to face unprecedented challenges in the aftermath of the recent national and global economic crisis. Since June 2009, the U.S. economy has been recovering from the most severe recession and financial crisis since the Great Depression. There have been some improvements in private-sector employment, industrial production and U.S. exports; nevertheless, the pace of economic recovery has been extremely slow. The housing markets continue to be depressed. Financial markets have improved since the depths of the crisis but are still unsettled and volatile. Investors have pulled back from risky assets. There is continued concern about the U.S. economic outlook and the potential effects of the continued crisis in the European financial markets. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope, affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non- interest bearing transaction accounts through December 31, 2012. 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 $2.8 million as of December 31, 2012. The Company’s quarterly risk-based 3 deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Company. On September 30, 2011, the Massachusetts Department of Revenue issued a draft directive prohibiting a corporation from pledging more than 50 percent of security corporation stock it owns to secure a borrowing, effective for tax years beginning on or after October, 2012. Century Bank currently utilizes the stock of two of its security corporations to secure Federal Home Loan Bank of Boston (“FHLBB”) advances. Should this draft directive have become effective, Century Bank would have had fewer assets available to secure FHLBB advances, or would have had a higher tax rate if it chose to utilize security corporations to a lesser extent. On April 6, 2012, the Massachusetts Department of Revenue issued an updated draft directive allowing a corporation to pledge up to 100% of security corporation stock it owns to secure a borrowing. This revised draft directive would allow Century Bank to continue to utilize existing assets to secure FHLBB advances without pledging limitations. On May 24, 2012, the Massachusetts Department of Revenue issued Directive 12-2. The directive states that the pledge by a shareholder of shares of stock of a corporation as security or collateral for a loan to the shareholder, in and of itself, will not preclude classification of the corporation as a security corporation or result in revocation of a corporation’s existing security corporation classification. Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). Although the Company is not currently subject to these requirements, if adopted in their current form by U.S. banking regulators, the Basel III rules could increase the capital requirements of the Company. If enacted, the new Basel III requirements would be phased-in over a ten year timeframe, resulting in an increase in capital requirements along with the restriction of certain items in Tier 1 capital. Restricted items from Tier 1 capital would include trust preferred securities along with certain levels of deferred tax assets and mortgage servicing assets. Federal banking regulators then issued a notice of proposed rulemaking (NPR, proposal, or proposed rule) to revise the general risk-based capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). The Company is currently analyzing the proposed rules and the impact on the Company’s capital requirements. The Governor of Massachusetts has proposed a tax plan that would modify existing income tax rules. The governor’s plan is part of his budget recommendations for fiscal year 2014, and will subject security corporations to the same tax base and rate as regular business corporations. The proposed tax changes would take effect as of January 1, 2014. The Company is currently analyzing the financial impact of the proposed changes. 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, 2012, the Company had total assets of $3.1 billion. Currently, the Company operates 25 banking offices in 19 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts. The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and the interest paid on deposits and borrowings. The results of operations are also affected by the level of income/fees from loans and Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition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 third party 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 192 (55%) of the 351 cities and towns in Massachusetts. The Company had net income of $19,039,000 for the year ended December 31, 2012, compared with net income of $16,693,000 for the year ended December 31, 2011, and net income of $13,574,000 for the year ended December 31, 2010. Class A diluted earnings per share were $3.43 in 2012, compared to $3.01 in 2011 and $2.45 in 2010. 2012 2011 2010 Earnings per share (EPS) for each class of stock and for each year ended Basic EPS – Class A common December 31, is as follows: Basic EPS – Class B common Diluted EPS – Class A common Diluted EPS – Class B common $ 4.18 $ 2.09 $ 3.43 $ 2.09 $ 3.68 $ 1.84 $ 3.01 $ 1.84 $ 3.00 $ 1.50 $ 2.45 $ 1.50 5.00 % 4.00 % Historical U.S. Treasury Yield Curve 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 12/31/2010 U.S. Treasury Yield Curve 12/31/2011 U.S. Treasury Yield Curve 12/31/2012 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. Since December 31, 2010, longer-term rates have declined resulting in a flatter yield curve. During 2012, 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 2012, 2011 and 2010, the U.S. economy experienced a lower short-term rate environment. The lower short-term rates negatively impacted the net interest margin for 2011 and 2010 as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits. The net interest margin also increased in 2012 as a result of prepayment penalties that were collected during the year. Total assets were $3,086,209,000 at December 31, 2012, an increase of 12.5% from total assets of $2,743,225,000 on December 31, 2011. On December 31, 2012, stockholders’ equity totaled $179,990,000, compared with $160,649,000 on December 31, 2011. Book value per share increased to $32.40 at December 31, 2012, from $28.98 on December 31, 2011. The trends in the net interest margin are illustrated in the graph below: 3.20 % 3.00 % Net Interest Margin 2.80 % 2.58% 2.55% 2.60 % 2.40 % 2.20 % 2.00 % 2.48% 2.64% 2.43% 2.39% 2.42% 2.55% 2.44% 2.52% 2.73% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 The primary factor accounting for the general level of the net interest margin for 2010 was a large influx of deposits, primarily from municipalities, and a corresponding increase in short-term investments. The net interest margin fell somewhat during the second quarter of 2011 mainly as a result of increased deposits and corresponding lower-yield short-term investments. During the third quarter of 2011 through the third quarter of 2012, management stabilized the net interest margin by continuing to lower cost of funds and by deploying excess liquidity through expansion of the investment portfolio. Also, the Company collected approximately $3,000,000 of prepayment penalties during the first three quarters of 2012. The primary factor accounting for the decrease in the net interest margin for the fourth quarter of 2012 was an additional large influx of deposits, primarily from municipalities. Management invested the funds in shorter term securities. While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. 2.30% During July 2010, the Company entered into a lease agreement to open a branch located at Newton Centre in Newton, Massachusetts. The branch opened on June 20, 2011. During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch opened on July 16, 2012. During June 2012, the Company entered into a lease agreement to open a branch located in Wellesley, Massachusetts. The branch opened on November 26, 2012. During July 2012, the Company received state regulatory approval to close a branch at Chestnut Hill in Newton, Massachusetts. The branch closed on September 21, 2012 and the accounts were temporarily moved to the Brookline, Massachusetts branch. During July 2012, the Company entered into a lease agreement and received regulatory approval to open a branch at a new location at Chestnut Hill in Newton, Massachusetts. The branch is scheduled to open during the fourth quarter of 2013 and the majority of the accounts that were temporarily moved to the Brookline, Massachusetts branch will be moved to the new branch at Chestnut Hill in Newton, Massachusetts. 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. 4 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition 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. 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 Note 1 of the “Notes to Consolidated Financial Statements.” Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. FINANCIAL CONDITION Investment Securities The Company’s securities portfolio consists of securities available-for-sale (“AFS”) and securities held-to-maturity (“HTM”). Securities available-for-sale consist of certain U.S. Treasury and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; other debt securities; and other marketable equities. These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders’ equity. The fair value of securities available-for-sale at December 31, 2012 totaled $1,434,801,000 and included gross unrealized gains of $21,477,000 and gross unrealized losses of $1,271,000. A year earlier, the fair value of securities available-for-sale was $1,258,676,000 including gross unrealized gains of $16,842,000 and gross unrealized losses of $3,138,000. In 2012, the Company recognized gains of $1,843,000 on the sale of available-for-sale securities. In 2011 and 2010, the Company recognized gains of $1,940,000 and $1,851,000, respectively. 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, 2012 are carried at their amortized cost of $275,507,000 and exclude gross unrealized gains of $6,499,000 and gross unrealized losses of $82,000. A year earlier, securities held-to-maturity totaled $179,368,000, excluding gross unrealized gains of $5,471,000 and gross unrealized losses of $17,000. 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, 2012 2011 2010 (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 Obligations Issued by States and Political Subdivisions Other Debt Securities Equity Securities Total Amount Percent Amount Percent Amount Percent $ 2,004 130,340 8,156 0.1 % 9.1 % 0.6 % $ 2,012 0.2 % 174,957 13.9 % 8,801 0.7 % $ 2,005 175,663 9,732 0.2 % 19.3 % 1.1 % 1,233,357 86.0 % 1,035,838 82.3 % 680,898 74.9 % 2,947 55,174 2,253 570 0.2 % 3.8 % 0.2 % 0.0 % 3,198 20,642 12,610 618 0.3 % 1.6 % 1.0 % 0.0 % 3,968 34,074 2,253 798 0.4 % 3.7 % 0.2 % 0.2 % $ 1,434,801 100.0 % $ 1,258,676 100.0 % $ 909,391 100.0 % 5 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition Included in Obligations Issued by States and Political Subdivisions as of December 31, 2012, is $3,963,000 of an auction rate municipal obligation (“ARS”) with an unrealized loss of $722,000. This debt security was issued by a governmental entity but is not a debt obligation of the issuing entity. This ARS is the obligation of a large nonprofit entity. This obligation is a variable rate security with long-term maturity whose interest rate is set periodically through an auction process for ARS. As the auctions have not attracted sufficient bidders, i.e., failed, the interest rate adjusts to the default rate defined in the obligation’s underlying documents. Although many of these issuers have bond insurance, the Company purchased the security 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 the failed ARS. As of December 31, 2012, the Company’s ARS was purchased subsequent to its failure with a fair value of $3,963,000 and an amortized cost of $4,685,000. As of December 31, 2012, the taxable equivalent yield on this security was 0.36%. The majority of the Company’s securities AFS are classified as Level 2, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Management’s understanding of a pricing service’s pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing controls. Management’s validation of a vendor’s pricing methodology includes establishing internal controls to determine that the pricing information received by a pricing service and used by management in the valuation process is relevant and reliable. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not 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, 2012. Securities available-for-sale totaling $53,782,000, or 1.74% of assets, are classified as Level 3, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” These securities are generally equity investments or municipal securities with no readily determinable fair value. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations. Debt securities of Government Sponsored Enterprises refer primarily to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken Amortized Cost of Securities Held-to-Maturity over by the U.S. Government in the third quarter of 2008. At December 31, The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated. 2012 2011 2010 (dollars in thousands) U.S. Government Sponsored Enterprises U.S. Government Sponsored Enterprise Mortgage-Backed Securities Amount Percent Amount Percent Amount Percent $ 17,747 6.4 % $ 26,979 15.0 % $ 84,534 36.7 % 257,760 93.6 % 152,389 85.0 % 145,582 63.3 % Total $ 275,507 100.0 % $ 179,368 100.0 % $ 230,116 100.0 % Fair Value of Securities Available-for-Sale The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2012. 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 Weighted One Year Weighted Five Years Weighted Over Weighted One Year % of Total Average Yield to Five Years % of Total Average Yield to Ten Years % of Total Average Yield Ten Years % of Average Total Yield (dollars in thousands) U.S. Treasury $ 2,004 0.1 % 0.63 % $ — 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 % 30,077 2.1 % 0.92 % 100,263 7.0 % 1.63 % — 0.0 % 0.00 % 0.0 % 0.00 % — 0.0 % 0.00 % 4,548 0.3 % 0.81 % 3,608 0.3 % 0.93 % 17,027 1.2 % 3.36 % 1,057,605 73.7 % 1.76 % 155,757 10.8 % 1.66 % 2,968 0.2 % 4.14 % — 0.0 % 0.00 % 2,144 0.1 % 2.56 % 803 0.1 % 3.14 % — 0.0 % 0.00 % Other Debt Securities 200 0.0 % 1.32 % 600 0.1 % 1.71 % 50,083 3.4 % 0.98 % 1,128 0.1 % 3.82 % — 0.0 % 0.00 % — 0.0 % 0.00 % — — — 0.0 % 0.00 % 3,963 0.3 % 0.36 % 0.0 % 0.00 % 0.0 % 0.00 % — — 0.0 % 0.00 % 0.0 % 0.00 % $ 69,314 4.7 % 1.55 % $ 1,091,554 76.1 % 1.74 % $ 261,371 18.2 % 1.64 % $ 10,539 0.8 % 1.72 % 6 Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Obligations of States and Political Subdivisions Equity Securities Total Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition Non- Maturing % of Total Weighted Average Yield Total Weighted Average Yield % of Total 0.0 % 0.00 % $ 2,004 0.1 % 0.63 % 0.0 % 0.00 % 130,340 9.1 % 1.46 % 0.0 % 0.00 % 8,156 0.6 % 0.86 % 0.0 % 0.00 % 1,233,357 85.9 % 1.78 % 0.0 % 0.00 % 0.0 % 0.00 % 1,453 0.1 % 4.16 % 570 0.1 % 1.47 % 2,947 55,174 2,253 570 0.2 % 2.72 % 3.8 % 0.98 % 0.2 % 3.27 % 0.1 % 1.47 % $ 2,023 0.2 % 3.40 % $ 1,434,801 100.0 % 1.72 % (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 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 Weighted Over % of Total Average to Five Yield Years % of Total Average Yield to Ten Years % of Total Average Yield Ten Years % of Total Weighted Average Yield Total Weighted Average Yield % of Total $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % $ 17,747 6.4 % 2.13 % $ — 0.0 % 0.00 % $ 17,747 6.4 % 2.13 % (dollars in thousands) U.S. Government Sponsored Enterprises U.S. Government Sponsored Enterprise Mortgage-Backed Securities 6,780 2.5 % 3.80 % 205,981 74.8 % 2.44 % 44,725 16.2 % 2.38 % 274 0.1 % 2.60 % 257,760 93.6 % 2.47 % Total $ 6,780 2.5 % 3.80 % $ 205,981 74.8 % 2.44 % $ 62,472 22.6 % 2.31 % $ 274 0.1 % 2.60 % $ 275,507 100.0 % 2.44 % At December 31, 2012 and 2011, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2012, sales of securities totaling $294,881,000 in gross proceeds resulted in a net realized gain of $1,843,000. There were no sales of state, county or municipal securities during 2012 and 2011. In 2011, sales of securities totaling $75,615,000 in gross proceeds resulted in net realized gains of $1,940,000. In 2010, sales of securities totaling $41,251,000 in gross proceeds resulted in net realized gains of $1,851,000. 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. 7 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition Loans The Company’s lending activities are conducted principally in Massachusetts. The Company grants single-family 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, 2012 2011 2010 2009 2008 The following summary shows the composition of the loan portfolio at the dates indicated. Percent of Total Amount Amount Percent of Total Percent of Total Amount Percent of Total Amount Percent of Total Amount (dollars in thousands) Construction and land development $ 38,618 Commercial and industrial Commercial real estate Residential real estate 88,475 576,465 281,857 3.5 % 8.0 % $ 56,819 82,404 5.7 % $ 53,583 5.9 % $ 60,349 6.9 % $ 59,511 7.1 % 8.4 % 90,654 10.0 % 141,061 16.1 % 141,373 16.9 % 51.8 % 487,495 49.5 % 433,337 47.8 % 361,823 41.2 % 332,325 39.8 % 25.3 % 239,307 24.3 % 207,787 22.9 % 188,096 21.4 % 194,644 23.3 % Consumer Home equity Overdrafts Total 6,823 0.6 % 6,197 0.6 % 5,957 0.7 % 7,105 0.8 % 8,246 1.0 % 118,923 10.7 % 110,786 11.3 % 114,209 12.6 % 118,076 13.5 % 98,954 11.8 % 627 0.1 % 1,484 0.2 % 637 0.1 % 615 0.1 % 1,012 0.1 % $ 1,111,788 100.0 % $ 984,492 100.0 % $ 906,164 100.0 % $ 877,125 100.0 % $ 836,065 100.0 % At December 31, 2012, 2011, 2010, 2009 and 2008, loans were carried net of discounts of $498,000, $550,000, $598,000, $645,000 and $692,000, respectively. Net deferred loan fees of $369,000, $666,000, $186,000, $71,000 and $81,000 were carried in 2012, 2011, 2010, 2009 and 2008, respectively. The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2012. 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, 2012 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, 2012 $ 8,899 16,098 23,935 $ 48,932 $ 4,786 24,872 127,480 $ 24,933 47,505 425,050 $ 157,138 $ 497,488 $ 38,618 88,475 576,465 $ 703,558 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 $ 92,616 64,522 $ 125,554 371,934 $ 218,170 436,456 $ 157,138 $ 497,488 $ 654,626 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, Southern New Hampshire, and Rhode Island. Also included are loans to educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and ten 8 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 $12,460,000 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, 2012, the Company was obligated to advance a total of $17,609,000 to complete projects under construction. December 31, 2012 2011 2010 2009 2008 (dollars in thousands) The composition of nonperforming assets is as follows: Total nonperforming loans 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 $ 4,471 — $ 4,471 $ 3,048 — 0.40 % 0.14 % 2012 $ 862 2,281 1,500 1,282 $ 5,925 $ 5,827 1,182 $ 7,009 $ 4,634 18 0.59 % 0.26 % 2011 $ 516 4,561 1,500 1,525 $ 8,102 $ 8,068 — $ 8,068 $ 1,248 50 0.89 % 0.33 % 2010 $ — 2,492 4,000 1,471 $ 7,963 $ 12,311 — $ 12,311 $ 521 — 1.40 % 0.55 % $ 3,661 — $ 3,661 $ — 89 0.44 % 0.20 % 2009 $ — 4,260 4,900 1,356 $ 10,516 2008 $ 194 1,175 — 1,329 $ 2,698 At December 31, 2012, 2011, 2010, 2009 and 2008, impaired loans had specific reserves of $1,732,000, $741,000, $317,000, $745,000 and $600,000 respectively. The Company was servicing mortgage loans sold to others without recourse of approximately $26,786,000, $18,196,000, $983,000, $1,127,000 and $768,000 at December 31, 2012, 2011, 2010, 2009, and 2008, respectively. The Company had $9,378,000 of loans held for sale at December 31, 2012, $3,389,000 at December 31, 2011, and $0 for December 31, 2008, through December 31, 2010. Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage servicing assets (“MSA”) are amortized into non-interest income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets and are amortized in proportion to, and over the period of estimated net servicing income and are assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $137,000 at December 31, 2012, $123,000 for December 31, 2011, and $0 for December 31, 2008, through December 31, 2010. 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. 9 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company’s commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank. Nonaccrual loans decreased during 2012, primarily as a result of a decrease in home equity and residential real estate nonperforming loans. Nonaccrual loans decreased during 2011, primarily as a result of $1,200,000 in charge-offs from two construction loans as well as the subsequent foreclosure of $1,300,000 of one of the construction loans. 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. The Company continues to monitor closely $18,645,000 and $20,906,000 at December 31, 2012 and 2011, 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, 2012, 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, financial Year Ended December 31, 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 (dollars in thousands) loan losses for the years indicated. Year-end loans outstanding 2012 2011 2010 2009 2008 (net of unearned discount and deferred loan fees) $ 1,111,788 $ 984,492 $ 906,164 $ 877,125 $ 836,065 Average loans outstanding (net of unearned discount and deferred loan fees) $ 1,036,296 $ 948,883 $ 877,858 $ 853,422 $ 775,337 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 $ 16,574 $ 14,053 $ 12,373 $ 11,119 $ 9,633 1,253 — — 351 697 2,301 307 — 45 422 774 1,527 4,150 676 1,200 — 341 607 2,824 293 — 35 467 795 2,029 4,550 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 Balance at end of year $ 19,197 $ 16,574 $ 14,053 $ 12,373 $ 11,119 Ratio of net charge-offs during the year to average loans outstanding Ratio of allowance for loan losses to loans outstanding 0.15 % 1.73 % 0.21 % 1.68 % 0.44 % 1.55 % 0.63 % 1.41 % 0.38 % 1.33 % The amount of the allowance for loan losses results from management’s evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The pace of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge- offs increased during 2009 due to an increase in commercial loan charge-offs and construction loan charge-offs as a result of the weakening of the overall economy and real estate market. Charge-offs declined in 2010, 2011, and 2012 as a result of the overall decrease in the level of nonaccrual loans. The dollar amount of the allowance for loan losses and the level of the allowance for loan losses to total loans increased primarily as a result of a lower level of charge-off activity combined with changes in the portfolio composition. 10 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition 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, 2012 is $38,618,000. A major portion in nonaccrual loans is one construction loan. Based on this fact, and the general local construction conditions, management closely monitors all construction loans and considers this type of loan to be higher risk. Higher-balance loans — Loans greater than $1.0 million are considered “high-balance loans.” The balance of these loans is $567,306,000 at December 31, 2012, as compared to $489,114,000 at December 31, 2011. 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 $245,198,000 at December 31, 2012, as compared to $189,222,000 at December 31, 2011. 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 $42,032,000 at December 31, 2012. 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 2011 economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At December 31 of each year listed below, the allowance is comprised of the following: 2012 2009 2010 2008 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 Percent of Loans in Each Category to Total Loans Amount Amount Amount Amount Amount (dollars in thousands) Construction and land development $ 3,041 3.5 % $ 2,893 5.7 % $ 1,752 5.9 % $ 362 6.9 % $ 677 7.1 % Commercial and industrial Commercial real estate Residential real estate Consumer and other Home equity Unallocated Total 3,118 8.0 3,139 8.4 3,163 10.0 4,972 16.1 9,065 51.8 6,566 49.5 5,671 47.8 2,983 41.2 1,994 25.3 1,886 24.3 1,718 22.9 1,304 21.4 333 0.7 886 10.7 760 356 0.8 704 11.3 298 0.8 1,753 0.9 725 12.6 761 13.5 1,527 11.8 1,030 726 238 50 $ 19,197 100.0 % $ 16,574 100.0 % $ 14,053 100.0 % $ 12,373 100.0 % $ 11,119 100.0 % 5,125 2,620 778 342 16.9 39.8 23.3 1.1 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. Further information regarding the allocation of the allowance is contained within Note 6 of the “Notes to Consolidated Financial Statements.” 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. 11 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition Amount The following table sets forth the average balances of the Bank’s deposits for the periods indicated. (dollars in thousands) Percent Amount Amount Percent Percent 2012 2011 2010 Demand Deposits $ 386,863 16.5 % $ 326,102 15.3 % $ 298,825 15.8 % Savings and Interest Checking 870,046 37.1 % 735,022 34.6 % 696,232 36.7 % Money Market 666,949 28.5 % 584,059 27.4 % 543,432 28.7 % Time Certificates of Deposit 418,789 17.9 % 484,142 22.7 % 356,457 18.8 % Total $ 2,342,647 100.0 % $ 2,129,325 100.0 % $ 1,894,946 100.0 % 2012 (dollars in thousands) Time Deposits of $100,000 or more as of December 31, are as follows: Three months or less Three months through six months Six months through twelve months Over twelve months $ 99,957 57,643 59,972 69,476 Total $ 287,048 Borrowings The Bank’s borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLBB”) borrowings collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowings from the FHLBB totaled $195,000,000, a decrease of $49,000,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2012, was approximately $280,598,000. 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 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 $191,390,000, an increase of $48,070,000 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 12.6% in 2012 to $69,918,000, compared with $62,081,000 in 2011. The increase in net interest income for 2012 was mainly due to an 11.5% increase in the average balances of earning assets, combined with a similar increase in deposits. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis increased to 2.51% in 2012 from 2.48% in 2011 and decreased from 2.52% in 2010. The Company collected approximately $3,253,000, $158,000, and $102,000, respectively, of prepayment penalties, which are included in interest income on loans, for 2012, 2011, and 2010, respectively. Additional information about the net interest margin is contained in the “Overview” section of this report. Also, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories. 12 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition 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. 2012 2011 2010 Average Balance Interest Income/ Expense(1) Rate Earned/ Paid(1) Average Balance Interest Income/ Expense(1) Rate Earned/ Paid(1) Average Balance Interest Income/ Expense(1) Rate Earned/ Paid(1) (dollars in thousands) ASSETS Interest-earning assets: Loans(2) Taxable Tax-exempt Securities available-for-sale:(3) Taxable Tax-exempt Securities held-to-maturity: Taxable Interest-bearing deposits in other banks $ 715,553 320,743 $ 34,983 24,220 4.89 % 7.55 $ 703,491 245,392 $ 36,772 17,996 5.23 % 7.33 $ 711,422 166,436 $ 40,163 13,193 5.65 % 7.93 1,214,352 49,023 22,363 516 1.84 1.05 1,076,689 22,410 22,828 321 2.12 1.43 756,544 32,407 18,958 596 2.51 1.84 270,525 6,746 2.49 178,659 5,816 3.26 222,154 7,158 3.22 219,540 630 0.29 276,413 1,114 0.40 371,665 1,642 0.44 Total interest-earning assets 2,789,736 $ 89,458 3.21 % 2,503,054 $ 84,847 3.39 % 2,260,628 $ 81,710 3.61 % Noninterest-earning assets Allowance for loan losses 172,748 (18,039) Total assets $ 2,944,445 158,297 (15,767) $ 2,645,584 155,956 (13,686) $ 2,402,898 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing deposits: NOW accounts Savings accounts Money market accounts Time deposits $ 588,500 281,546 666,949 418,789 $ 1,561 689 2,373 6,250 0.27 % 0.24 0.36 1.49 $ 476,807 258,215 584,059 484,142 $ 1,715 824 2,706 9,356 0.36 % 0.32 0.46 1.93 $ 423,693 272,539 543,432 356,457 $ 2,504 1,568 3,942 7,914 0.59 % 0.58 0.73 2.22 Total interest-bearing deposits 1,955,784 10,873 0.56 1,803,223 14,601 0.81 1,596,121 15,928 1.00 Securities sold under agreements to repurchase Other borrowed funds and subordinated debentures 174,624 367 0.21 129,137 379 0.29 133,080 573 0.43 217,542 8,300 3.82 202,209 7,786 3.85 201,273 8,316 4.13 Total interest-bearing liabilities 2,347,950 $ 19,540 0.83 % 2,134,569 $ 22,766 1.07 % 1,930,474 $ 24,817 1.29 % Noninterest-bearing liabilities Demand deposits Other liabilities Total liabilities Stockholders’ equity Total liabilities and 386,863 37,497 2,772,310 172,135 stockholders’ equity $ 2,944,445 Net interest income on a fully taxable equivalent basis Less taxable equivalent adjustment Net interest income Net interest spread Net interest margin (1) 326,102 29,253 2,489,924 155,660 $ 2,645,584 298,825 31,074 2,260,373 142,525 $ 2,402,898 $ 69,918 (7,964) $ 61,954 $ 62,081 (6,782) $ 55,299 $ 56,893 (5,127) $ 51,766 2.38 % 2.51 % 2.32 % 2.48 % 2.32 % 2.52 % (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 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition 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. 2012 Compared with 2011 Increase/(Decrease) Due to Change in 2011 Compared with 2010 Increase/(Decrease) Due to Change in (dollars in thousands) Interest income: Loans Taxable Tax-exempt Securities available-for-sale: Taxable Tax-exempt Securities held-to-maturity: Taxable 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 $ 622 5,675 $ (2,411) 549 $(1,789) 6,224 $ (443) 5,854 $(2,948) (1,051) $(3,391) 4,803 2,730 299 2,510 (202) 11,634 352 70 350 (1,156) (384) 113 586 315 (3,195) (104) (1,580) (282) (7,023) (506) (205) (683) (1,950) (3,344) (125) (72) (3,541) (465) 195 930 (484) 4,611 (154) (135) (333) (3,106) (3,728) (12) 514 (3,226) 7,117 (160) (1,415) (393) (3,247) (115) 73 (135) 10,560 (7,423) 284 (79) 276 2,565 3,046 (17) 40 3,069 (1,073) (665) (1,512) (1,123) (4,373) (177) (570) (5,120) 3,870 (275) (1,342) (528) 3,137 (789) (744) (1,236) 1,442 (1,327) (194) (530) (2,051) $ 11,319 $ (3,482) $ 7,837 $ 7,491 $(2,303) $ 5,188 Average earning assets were $2,789,736,000 in 2012, an increase of $286,682,000 or 11.5% from the average in 2011, which was 10.7% higher than the average in 2010. Total average securities, including securities available-for-sale and securities held-to-maturity, were $1,533,900,000, an increase of 20.0% from the average in 2011. The increase in securities volume was mainly attributable to an increase in taxable securities. An increase in securities balances offset, somewhat, by lower securities returns resulted in higher securities income, which increased 2.3% to $29,625,000 on a fully tax equivalent basis. Total average loans increased 9.2% to $1,036,296,000 after increasing $71,025,000 in 2011. 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 mortgage lending. The increase in loan volume was offset, somewhat, by a decrease in loan rates resulted in higher loan income, which increased by 8.1% or $4,435,000 to $59,203,000. Total loan income was $53,356,000 in 2010. The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 10.0%, or $213,322,000, in 2012 after increasing by 12.4%, or $234,379,000, in 2011. Deposits increased in 2012, primarily as a result of increases in demand deposits, savings, money market, NOW and time deposit accounts. Deposits increased in 2011, primarily as a result of increases in demand deposits, money market savings and NOW accounts. Borrowed funds and subordinated debentures increased by 18.4% in 2012, following a decrease of 0.9% in 2011. The majority of the Company’s borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB increased by approximately $15,633,000, and average retail repurchase agreements increased by $45,487,000 in 2012. Interest expense totaled $19,540,000 in 2012, a decrease of $3,226,000, or 14.2%, from 2011 when interest expense decreased 8.3% from 2010. The decrease in interest expense is primarily due to market decreases in deposit rates and continued deposit pricing discipline. Interest expense on time deposits accounted for a majority of this decrease. Provision for Loan Losses The provision for loan losses was $4,150,000 in 2012, compared with $4,550,000 in 2011 and $5,575,000 in 2010. 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 2012 and 2011, primarily as a result of decreased provisions related to nonaccrual loans as well as management’s quantitative analysis of the loan portfolio. The allowance for loan losses was $19,197,000 at December 31, 2012, compared with $16,574,000 at December 31, 2011. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.73% in 2012 and 1.68% in 2011. The allowance for loan losses increased despite a decrease in the provision for loan losses due to a lower level of charge-off activity combined with changes in the portfolio composition. Nonperforming loans, which include all non-accruing loans, totaled $4,471,000 on December 31, 2012, compared with $5,827,000 on December 31, 2011. Nonperforming loans decreased primarily as a result of a decrease in home equity and residential real estate nonperforming loans. 14 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition Other Operating Income During 2012, 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 2012 was $15,865,000, a decrease of $375,000, or 2.3%, compared to 2011. This decrease followed an increase of $241,000, or 1.5%, in 2011, compared to 2010. Included in other operating income are net gains on sales of securities of $1,843,000, $1,940,000 and $1,851,000 in 2012, 2011 and 2010, respectively. Service charge income, which continues to be a major area of other operating income, totaling $7,880,000 in 2012, decreased $5,000 compared to 2011. This followed an increase of $9,000 compared to 2010. The decrease in fees was mainly attributable to a decrease in overdraft fees, which was offset, somewhat, by an increase in debit card fees and fees collected from processing activities. Service charges on deposit accounts increased during 2011. The increase in fees was mainly attributable to an increase in overdraft fees and debit card fees, which was offset, somewhat, by a decrease in fees collected from processing activities. Lockbox revenues totaled $2,930,000, up $160,000 in 2012 following a decrease of $141,000 in 2011. Other income totaled $3,212,000, down $433,000 in 2012 following an increase of $284,000 in 2011. The decrease in 2012 was mainly attributable to a decrease in net gains on sales of loans of $363,000 as well as a decrease in brokerage commissions. The increase in 2011 was mainly attributable to net gains on sales of loans of $660,000 and an increase in brokerage commissions. This was offset, somewhat, by a decrease of $514,000 in the growth of cash surrender values on life insurance policies, which was attributable to lower returns on life insurance policies. Operating Expenses Total operating expenses were $53,238,000 in 2012, compared to $48,742,000 in 2011 and $47,372,000 in 2010. Salaries and employee benefits expenses increased by $3,313,000 or 11.2% in 2012, after increasing by 4.3% in 2011. The increase in 2012 was mainly attributable to increases in pension costs, staff levels, merit increases in salaries and increases in health insurance costs. The increase in pension costs was mainly attributable to a decrease in the discount rate. The increase in 2011 was mainly attributable to increases in staff levels, merit increases in salaries and increases in health insurance costs. Occupancy expense increased by $284,000, or 6.4%, in 2012, following an increase of $374,000, or 9.3%, in 2011. The increase in 2012 was primarily attributable to an increase in rent expense and depreciation expense associated with branch expansion. The increase in 2011 was primarily attributable to an increase in rent expense, depreciation expense and building maintenance costs associated with branch expansion. 15 Equipment expense increased by $20,000, or 0.9%, in 2012, following an increase of $103,000, or 4.8%, in 2011. The increase in 2012 was primarily attributable to an increase in service contracts. The increase in 2011 was primarily attributable to an increase in service contracts and depreciation expense. FDIC assessments decreased by $288,000, or 14.2%, in 2012, following a decrease of $940,000, or 31.7%, in 2011. FDIC assessments decreased in 2012 and 2011 mainly as a result of a decrease in the assessment rate. Other operating expenses increased by $1,167,000 in 2012, which followed a $601,000 increase in 2011. The increase in 2012 was primarily attributable to an increase in contributions, software maintenance and marketing expense offset somewhat by a decrease in core deposit intangible amortization. The increase in 2011 was primarily attributable to an increase in customer expenses, other real estate owned expense and contributions offset somewhat by decreases in marketing expense. Provision for Income Taxes Income tax expense was $1,392,000 in 2012, $1,554,000 in 2011 and $1,244,000 in 2010. The effective tax rate was 6.8% in 2012, 8.5% in 2011 and 8.4% in 2010. The decrease in the effective tax rate for 2012 was 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 2012, 2011 and 2010. 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 (17.0) % (12.4) % (8.4) % (4.1) % 1.0 % 4.4 % (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. Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition Liquidity and Capital Resources Liquidity is provided by maintaining an adequate level of liquid assets that include cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $169,650,000 on December 31, 2012, compared with $226,117,000 on December 31, 2011. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity. The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements. Capital Adequacy Total stockholders’ equity was $179,990,000 at December 31, 2012, compared with $160,649,000 at December 31, 2011. The increase in 2012 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 an increase of $4,011,000 in the net unrealized gains on the Company’s available-for-sale portfolio, net of taxes, offset by an increase of $1,839,000 in the additional pension liability, net of taxes. Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The current guidelines require a Tier 1 capital-to-risk assets ratio of at least 4.00% and a total capital-to-risk assets ratio of at least 8.00%. The Company and the Bank exceeded these requirements with a Tier 1 capital-to-risk assets ratio of 14.34% and 12.90%, respectively, and total capital-to-risk assets ratio of 15.59% and 14.15%, respectively, at December 31, 2012. 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, 2012, the Company and the Bank exceeded this requirement with leverage ratios of 6.80% and 6.11%, respectively. 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, 2012. Payments Due—By Period CONTRACTUAL OBLIGATIONS FHLBB advances Subordinated debentures Retirement benefit obligations Lease obligations Customer repurchase agreements Total contractual cash obligations OTHER COMMITMENTS Lines of credit Standby and commercial letters of credit Other commitments Total commitments Total $ 195,000 36,083 29,238 12,340 191,390 $ 464,051 Total $ 217,246 8,411 36,061 $ 261,718 Less Than One Year $ 46,000 — 2,089 1,858 191,390 $ 241,337 One to Three Years $ 37,000 — 4,315 3,606 — $ 44,921 Amount of Commitment Expiring—By Period Less Than One Year $ 123,324 7,120 14,793 $ 145,237 One to Three Years $ 4,159 1,011 2,920 $ 8,090 Three to Five Years $ 90,000 — 5,836 2,645 — $ 98,481 Three to Five Years $ 4,705 75 1,244 $ 6,024 After Five Years $ 22,000 36,083 16,998 4,231 — $ 79,312 After Five Years $ 85,058 205 17,104 $ 102,367 Financial Instruments with Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. 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: 16 Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition Contract or Notional Amount 2012 2011 (dollars in thousands) Financial instruments whose contract amount represents credit risk: Commitments to originate 1–4 family mortgages Standby and commercial letters of credit Unused lines of credit Unadvanced portions of construction loans Unadvanced portions of other loans $ 13,580 8,411 217,246 17,609 4,872 $ 12,638 4,645 195,181 16,819 4,605 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 $36,000 and $39,000 for 2012 and 2011, respectively. Recent Accounting Developments In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. This update revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. This update removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in this update were effective for interim and annual reporting periods beginning on or after December 15, 2011. The amendments were applied prospectively to transactions or modifications of existing transactions that occurred on or after the effective date and early adoption was permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires, for public entities, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this update are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application was permitted. The Company has presented the requirements for this amendment in Note 9. 17 In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the consolidated statement of changes in stockholders’ equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes were effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with retrospective application required. Early application was permitted. There was no impact on the Company’s consolidated financial results as the amendments relate only to changes in financial statement presentation. In December 2011, the FASB elected to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The Company has presented a separate financial statement as a result of this pronouncement. In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment. This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill. Under the new guidance, an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. The Company implemented the provisions of ASU 2011-08 as of January 1, 2012. The adoption of this pronouncement did not have a material effect on the consolidated financial statements. In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures About Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company is currently assessing the impact on the Company’s financial statements and will implement the provisions of ASU 2011-11 as of January 1, 2013. In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment. This ASU permits an entity to make a qualitative assessment to determine whether it is more likely than not than an indefinite-lived intangible asset, other than goodwill, is impaired. Entities are required to test indefinite-lived intangible assets for impairment at least annually and more frequently if indicators of impairment exist. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it is not required to perform the quantitative impairment test for that asset. The ASU applies to both public and nonpublic entities and is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company evaluated for goodwill impairment under this standard as of December 31, 2012, and determined no impairment existed. Century Bancorp, Inc. AR ’12Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 $1,414,595 in 2012 and $1,244,972 in 2011 (Notes 3, 9 and 11) Securities held-to-maturity, fair value $281,924 in 2012 and $184,822 in 2011 (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 5, 8 and 15) 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, 17 and 18) Stockholders’ equity (Note 14): Preferred Stock – $1.00 par value; 100,000 shares authorized; no shares issued and outstanding Common stock, Class A, $1.00 par value per share; authorized 10,000,000 shares; issued 3,568,079 shares in 2012 and 3,548,317 shares in 2011 Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,986,880 shares in 2012 and 1,994,380 shares in 2011 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 14) Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying “Notes to Consolidated Financial Statements.” Consolidated Balance Sheets 2012 2011 $ 53,646 98,637 152,283 17,367 $ 50,187 157,579 207,766 18,351 1,434,801 1,258,676 275,507 15,146 1,111,788 19,197 1,092,591 23,899 5,811 2,773 66,031 $ 3,086,209 $ 438,429 933,316 653,345 419,983 2,445,073 191,390 195,144 36,083 38,529 179,368 15,531 984,492 16,574 967,918 21,757 6,022 4,335 63,501 $ 2,743,225 $ 365,854 708,988 616,241 433,501 2,124,584 143,320 244,143 36,083 34,446 2,906,219 2,582,576 — — 3,568 3,548 1,986 11,891 162,892 180,337 12,330 (12,677) (347) 179,990 1,994 11,587 146,039 163,168 8,319 (10,838) (2,519) 160,649 $ 3,086,209 $ 2,743,225 18 Century Bancorp, Inc. AR ’12 Consolidated Statements of Income 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 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 Other income Total other operating income OPERATING EXPENSES Salaries and employee benefits (Note 16) Occupancy Equipment FDIC assessments Other (Note 19) Total operating expenses Income before income taxes Provision for income taxes (Note 15) Net income SHARE DATA (Note 13) Weighted average number of shares outstanding, basic Class A Class B Weighted average number of shares outstanding, diluted Class A Class B Basic earnings per share Class A Class B Diluted earnings per share Class A Class B See accompanying “Notes to Consolidated Financial Statements.” 19 2012 2011 2010 $ 34,983 $ 36,772 $ 40,163 16,432 22,286 340 77 6,746 630 81,494 2,250 2,373 6,250 367 8,300 19,540 61,954 4,150 57,804 7,880 2,930 364 1,843 2,848 15,865 32,943 4,695 2,255 1,737 11,608 53,238 20,431 1,392 11,324 22,782 211 46 5,816 1,114 78,065 2,539 2,706 9,356 379 7,786 22,766 55,299 4,550 50,749 7,885 2,770 441 1,940 3,204 16,240 29,630 4,411 2,235 2,025 10,441 48,742 18,247 1,554 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 $ 19,039 $ 16,693 $ 13,574 3,557,693 1,990,474 5,549,191 1,990,474 $ $ $ $ 4.18 2.09 3.43 2.09 3,543,233 1,997,411 5,541,794 1,997,411 $ $ $ $ 3.68 1.84 3.01 1.84 3,521,179 2,012,327 5,535,742 2,012,327 $ $ $ $ 3.00 1.50 2.45 1.50 Century Bancorp, Inc. AR ’12 Year Ended December 31, (dollars in thousands) NET INCOME Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized holding gains arising during period Less: reclassification adjustment for gains included in net income Total unrealized gains on securities Defined benefit pension plans: Pension liability adjustment: Net gain (loss) Amortization of prior service cost and loss included in net periodic benefit cost Total pension liability adjustment Other comprehensive income Comprehensive income See accompanying “Notes to Consolidated Financial Statements.” Consolidated Statements of Comprehensive Income 2012 2011 2010 $ 19,039 $ 16,693 $ 13,574 5,854 (1,843) 4,011 (2,488) 649 (1,839) 2,172 6,666 (1,940) 4,726 (4,047) 380 (3,667) 1,059 1,315 (1,851) (536) 771 488 1,259 723 $ 21,211 $ 17,752 $ 14,297 20 Century Bancorp, Inc. AR ’12 Consolidated Statements of Changes in Stockholders’ Equity 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, 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 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 — 150 21 (1,690) (483) BALANCE, DECEMBER 31, 2010 $ 3,529 $ 2,011 $ 11,537 $ 131,526 $ (3,578) $ 145,025 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $3,143 in taxes and $1,940 in realized net gains Pension liability adjustment, net of $2,439 in taxes Conversion of Class B Common Stock to Class A Common Stock, 17,000 shares Stock options exercised, 2,450 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — 17 2 — — — — — (17) — — — — 16,693 — 16,693 — — — 50 — — — — 4,726 (3,667) — — (1,701) (479) — — — — 4,726 (3,667) — 52 (1,701) (479) BALANCE, DECEMBER 31, 2011 $ 3,548 $ 1,994 $ 11,587 $ 146,039 $ (2,519) $ 160,649 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $2,491 in taxes and $1,843 in realized net gains Pension liability adjustment, net of $1,223 in taxes Conversion of Class B Common Stock to Class A Common Stock, 7,500 shares Stock options exercised, 12,262 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 — — — 8 12 — — — — — 19,039 — 19,039 — — (8) — — — — — — — 292 12 — — — — 4,011 (1,839) — — — (1,708) (478) — — — — — 4,011 (1,839) — 304 12 (1,708) (478) BALANCE, DECEMBER 31, 2012 $ 3,568 $ 1,986 $ 11,891 $ 162,892 $ (347) $ 179,990 See accompanying “Notes to Consolidated Financial Statements.” 21 Century Bancorp, Inc. AR ’12 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 2012 2011 2010 $ 19,039 $ 16,693 $ 13,574 Mortgage loans originated for sale Proceeds from mortgage loans sold Gain on sales of mortgage loans held for sale Gain on sale of loans Gain on sale of fixed assets Net gains on sales of securities Provision for loan losses Deferred tax benefit Net depreciation and amortization Decrease (increase) in accrued interest receivable Decrease in prepaid FDIC assessments (Gain) loss on sales of other real estate owned Write down 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 redemption of Federal Home Loan Bank of Boston stock 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 Proceeds from sales of loans 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 (decrease) increase in time deposit accounts Net increase in demand, savings, money market and NOW deposits Net proceeds from the exercise of stock options Cash dividends Net increase (decrease) in securities sold under agreements to repurchase Net (decrease) increase 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 Transfer of loans to other real estate owned See accompanying “Notes to Consolidated Financial Statements.” (20,149) 14,457 (297) — (1) (1,843) 4,150 (2,104) 6,445 211 1,562 (1) — (3,113) 1,070 19,426 38,397 (37,413) 385 532,734 294,881 (998,955) 88,628 (185,346) — (123,183) 1,584 1 (4,300) (392,587) (13,518) 334,007 304 (2,186) 48,070 (48,999) 317,678 (55,483) 207,766 $ 152,283 $ 19,597 3,348 4,011 (1,839) 400 $ (22,664) 19,697 (422) (238) — (1,940) 4,550 (953) 5,558 579 1,794 8 117 (4,456) 503 18,826 121,106 (25,539) — 722,403 75,615 (1,140,194) 119,315 (68,863) 4,000 (82,793) 802 — (2,692) (276,840) 16,241 206,320 52 (2,180) 34,770 22,025 277,228 19,214 188,552 $ 207,766 $ 22,799 3,109 4,726 (3,667) 2,110 $ — — — — (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 $ 22 Century Bancorp, Inc. AR ’12  1. Summary of Significant Accounting Policies FAIR VALUE MEASUREMENTS 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. In determining fair values a hierarchal disclosure framework is used 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 over the counter (“OTC”) derivatives. Level III — These instruments 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. 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, 2012 and 2011, short-term investments include highly liquid certificates of deposit with original maturities of more than 90 days but less than one year. INVESTMENT SECURITIES Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated related income taxes. The Company has no securities held for trading. 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. 23 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial StatementsFEDERAL HOME LOAN BANK STOCK TRANSFERS OF FINANCIAL ASSETS The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”) system, is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis of the stock. For the year ended December 31, 2012, the FHLBB reported preliminary net income of $207.1 million. The FHLBB also declared a dividend equal to an annual yield of 0.37%. As of December 31, 2012, no impairment has been recognized. LOANS HELD FOR SALE Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. LOANS Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become ninety days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Past-due status is based on contractual terms of the loan. Loans, including impaired loans, on which the accrual of interest has been discontinued, are designated nonaccrual loans. When a loan is placed on nonaccrual, all income that has been accrued but remains unpaid is reversed against current period income, and all amortization of deferred loan costs and fees is discontinued. Nonaccrual loans may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. Income received on nonaccrual loans is either recorded in income or applied to the principal balance of the loan, depending on management’s evaluation as to the collectibility of principal. Loan origination fees and related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. Prepayments are not initially considered when amortizing premiums and discounts. The Bank measures impairment for impaired loans at either the fair value of the loan, the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan 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. Transfers of financial assets, typically residential mortgages and loan participations for the Company, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets. ACQUIRED LOANS In accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”) the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loan’s contractually required payments received in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30 requires that the Company recognize the excess of all cash flows expected at acquisition over the Company’s initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a reduction of the loan balance. Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of FASB ASC 310-30. For such loans, the discount, if any, representing the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the interest method over the term of the loan. Prepayments are not considered in the calculation of accretion income. Additionally, discount is not accreted on nonperforming loans. When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the Company’s acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees. NONPERFORMING ASSETS In addition to nonperforming loans, nonperforming assets include other real estate owned. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned is recorded initially at estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred. Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations, while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized. 24 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements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. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. 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. The formula allowance evaluates groups of loans to determine the allocation appropriate within each portfolio segment. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect the amount of the formula allowance. Risk grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical net loss experience and qualitative adjustments. For the residential real estate and consumer loan portfolios, the reserves are calculated by applying historical charge-off and recovery experience and qualitative adjustments to the current outstanding balance in each loan category. Loss factors are based on the Company’s historical net loss experience as well as regulatory guidelines. Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a) present value of anticipated future cash flows, (b) the loan’s observable fair market price or (c) fair value of collateral if the loan is collateral dependent. The formula allowance and specific allowances also include management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. 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. 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. Also included are loans to educational institutions, hospitals and other non-profit organizations. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans. Construction loans — Loans in this segment primarily include real estate development loans for which payment is derived from sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price and market conditions. Commercial and industrial loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Land is stated at cost. 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. 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 Goodwill impairment is evaluated by first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and 25 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statementscircumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary. The first step, in the two-step impairment test, 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. SERVICING The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in loan servicing fee income. 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 23,350 shares of Class A common stock exercisable at December 31, 2012. On December 30, 2005, the Board of Directors approved the acceleration and immediate vesting of all unvested options with an exercise price of $31.60 or greater per share. As a consequence, options to purchase 23,950 shares of Class A common stock became exercisable immediately. The average of the high and low price at which the Class A common stock traded on December 30, 2005, the date of the acceleration and vesting, was $29.28 per share. In connection with this acceleration, the Board of Directors approved a technical amendment to each of the Option Plans to eliminate the possibility that the terms of any outstanding or future stock option would require a cash settlement on the occurrence of any circumstance outside the control of the Company. Effective as of January 1, 2006, the Company adopted FASB ASC 718 for all share-based payments. The Company estimates that, as a result of this accelerated vesting, approximately $190,000 of 2006 noncash compensation expense was eliminated that would otherwise have been recognized in the Company’s earnings. The Company decided to accelerate the vesting of certain stock options primarily to reduce the noncash compensation expense that would otherwise be expected to be recorded in conjunction with the Company’s required adoption of FASB ASC 718 in 2006. There was no earnings impact for 2006 due to the Company’s adoption of FASB ASC 718. The Company uses the fair value method to account for stock options. All of the Company’s stock options are vested, and there were no options granted during 2012 and 2011. 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. The Company accounts for uncertain tax positions in accordance with FASB ASC 740. The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgment changes regarding an uncertain tax position. TREASURY STOCK Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act, provisions of which eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares. PENSION The Company provides pension benefits to its employees under a noncontributory, defined benefit plan, which is funded on a current basis in compliance with the requirements 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. Individual life insurance policies, which are owned by the Company, are purchased covering the life of each participant. 26 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial StatementsREVISION OF EPS PRESENTATION The Company has determined that although the Class A and Class B common stock have different dividend rates, the Company had not applied the two-class method when calculating earnings per share (“EPS”) separately for the Class A and Class B common stock. This resulted in immaterial revisions to previously For the year ended reported basic EPS for Class A and Class B common stock and diluted EPS for December 31, 2011: the Class B common stock as summarized below: Basic EPS – Class A common As previously reported As revised $ 3.01 $ 3.68 Basic EPS – Class B common Diluted EPS – Class A common Diluted EPS – Class B common For the year ended December 31, 2010: Basic EPS – Class A common Basic EPS – Class B common Diluted EPS – Class A common Diluted EPS – Class B common $ 3.01 $ 3.01 $ 3.01 $ 1.84 $ 3.01 $ 1.84 As previously reported As revised $ 2.45 $ 2.45 $ 2.45 $ 2.45 $ 3.00 $ 1.50 $ 2.45 $ 1.50 RECENT ACCOUNTING DEVELOPMENTS In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. This update revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. This update removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in this update will be effective for interim and annual reporting periods beginning on or after December 15, 2011. The amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date and early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires, for public entities, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this update are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application was permitted. The Company has presented the requirements for this amendment in Note 9. In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The 27 amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the consolidated statement of changes in stockholders’ equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with retrospective application required. Early application is permitted. There was no impact on the Company’s consolidated financial results as the amendments relate only to changes in financial statement presentation. In December 2011, the FASB elected to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The Company has presented a separate financial statement as a result of this pronouncement. In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment. This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill. Under the new guidance, an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary. The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company implemented the provisions of ASU 2011-08 as of January 1, 2012. The adoption of this pronouncement did not have a material effect on the consolidated financial statements. In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures About Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company is currently assessing the impact on the Company’s financial statements and will implement the provisions of ASU 2011-11 as of January 1, 2013. In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment. This ASU permits an entity to make a qualitative assessment to determine whether it is more likely than not than an indefinite-lived intangible asset, other than goodwill, is impaired. Entities are required to test indefinite-lived intangible assets for impairment at least annually and more frequently if indicators of impairment exist. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it is not required to perform the quantitative impairment test for that asset. The ASU applies to both public and nonpublic entities and is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company is currently assessing the impact on the Company’s financial statements and will implement the provisions of ASU No. 2012-02 as of January 1, 2013. Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements 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 $9,608,000 at December 31, 2012, and $4,684,000 at December 31, 2011. December 31, 2012 Gross Unrealized Losses Gross Unrealized Gains Estimated Fair Value December 31, 2011 Gross Gross Unrealized Losses Gains Amortized Unrealized Cost Estimated Fair Value 3. Securities Available-for-Sale Amortized Cost (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored $ 2,000 130,048 8,043 $ 4 360 113 $ — 68 — $ 2,004 130,340 8,156 $ $ 1,999 174,657 8,714 13 311 87 $ — $ 11 — 2,012 174,957 8,801 Enterprises Mortgage-Backed Securities 1,212,953 20,816 412 1,233,357 1,020,752 16,262 1,176 1,035,838 Privately Issued Residential Mortgage-Backed Securities Obligations Issued by States and Political Subdivisions Other Debt Securities Equity Securities 2,938 55,855 2,300 458 31 41 — 112 22 722 47 — 2,947 3,509 55,174 2,253 570 21,515 13,293 533 — 84 — 85 311 957 683 — 3,198 20,642 12,610 618 Total $ 1,414,595 $ 21,477 $ 1,271 $ 1,434,801 $ 1,244,972 $ 16,842 $ 3,138 $ 1,258,676 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 $665,028,000 and $488,690,000 at December 31, 2012 and 2011, respectively. Also included in securities available-for-sale at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $220,313,000 and $246,036,000 at December 31, 2012 and 2011, respectively. The Company realized gains on sales of securities of $1,843,000, $1,940,000 and $1,851,000 from the proceeds of sales of available-for-sale securities of $294,881,000, $75,615,000 and $41,251,000 for the years ended December 31, 2012, 2011, and 2010, 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, 2012. (dollars in thousands) Within one year After one but within five years After five but within ten years More than ten years Nonmaturing Total $ 69,122 1,073,778 258,646 11,092 1,957 $ 69,314 1,091,554 261,371 10,539 2,023 $ 1,414,595 $ 1,434,801 The weighted average remaining life of investment securities available-for-sale at December 31, 2012, was 4.0 years. An auction rate municipal obligation (“ARS”) is included in Obligations Issued by States and Political Subdivisions. Included in the weighted average remaining life calculation at December 31, 2012, was $105,050,000 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, 2012. This table shows the unrealized 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 20 and 7 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 458 holdings at December 31, 2012. As of December 31, 2012, 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. 28 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements 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 financial performance are considered. Less Than 12 Months 12 Months or Longer December 31, 2012 Total (dollars in thousands) U.S. Government Sponsored Enterprise 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 Total temporarily impaired securities $ 127,973 $ Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 34,967 $ 68 $ — $ — $ 34,967 $ 68 93,006 — — — 383 — — — 451 10,169 1,863 3,963 1,453 $ 17,448 $ 29 22 722 47 820 103,175 1,863 3,963 1,453 412 22 722 47 $ 145,421 $ 1,271 At December 31, 2012, 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, 2012. Excluded from the table above are two equity securities that were written down in 2008 by $76,000. The fair value is $158,000 with an unrealized gain of $49,000 at December 31, 2012. 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, 2011. This table shows the unrealized loss Temporarily Impaired Investments 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 60 and 6 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 393 holdings at December 31, 2011. Less Than 12 Months Unrealized Losses Unrealized Losses Unrealized Losses 12 Months or Longer December 31, 2011 Fair Value Fair Value Fair Value Total (dollars in thousands) U.S. Government Sponsored Enterprise 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 Total temporarily impaired securities $ 14,989 $ 11 $ — $ — $ 14,989 $ 11 331,469 — — 10,542 $ 357,000 1,176 — — 652 $ 1,839 — 3,198 3,725 1,468 — 311 957 31 331,469 3,198 3,725 12,010 1,176 311 957 683 $ 8,391 $ 1,299 $ 365,391 $ 3,138 At December 31, 2011, 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, 2011. Excluded from the table above are two equity securities that were written down in 2008 by $76,000. The fair value is $141,000 with an unrealized gain of $32,000 at December 31, 2011. 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. 29 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements  4. Investment Securities Held-to-Maturity Amortized Cost (dollars in thousands) December 31, 2012 Gross Gross Unrealized Unrealized Losses Gains Estimated Fair Value December 31, 2011 Gross Gross Unrealized Unrealized Losses Gains Estimated Fair Value Amortized Cost U.S. Government Sponsored Enterprise $ 17,747 $ 19 $ 8 $ 17,758 $ 26,979 $ 36 $ 2 $ 27,013 U.S. Government Sponsored Enterprise Mortgage-Backed Securities Total 257,760 $ 275,507 6,480 $ 6,499 74 82 264,166 $ 281,924 $ 152,389 5,435 $ 179,368 $ 5,471 $ 15 17 157,809 $ 184,822 Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $149,366,000 and $8,885,000 at December 31, 2012, and 2011, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $103,617,000 and $49,345,000 at December 31, 2012, and 2011, respectively. At December 31, 2012 and 2011, 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. Amortized Cost Fair Value The following table shows the maturity distribution of the Company’s securities held-to-maturity at December 31, 2012. (dollars in thousands) Within one year After one but within five years After five but within ten years More than ten years 6,780 $ $ 205,981 62,472 274 6,865 210,897 63,880 282 Total $ 275,507 $ 281,924 The weighted average remaining life of investment securities held-to-maturity at December 31, 2012, was 3.9 years. Included in the weighted average remaining life calculation at December 31, 2012, were $17,747,000 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, 2012. 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 3 and 1 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 96 holdings at December 31, 2012. As of December 31, 2012, 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 quality 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, 2012 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 $ 9,994 $ 8 $ — $ — $ 9,994 $ 8,936 $ 18,930 $ 50 58 5,371 $ 5,371 $ 24 24 14,307 $ 24,301 $ 8 74 82 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, 2012. 30 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2011. 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 2 and 0 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 92 holdings at December 31, 2011. Less Than 12 Months 12 Months or Longer December 31, 2011 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 $ 4,994 $ 2 $ — $ 5,367 $ 10,361 $ 15 17 — — $ $ — — — $ 4,994 $ 5,367 $ 10,361 $ 2 15 17 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, 2011. 5. Loans The majority of the Bank’s lending activities are conducted in 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, 2012 2011 (dollars in thousands) The following summary shows the composition of the loan portfolio at the dates indicated. Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity Overdrafts $ 38,618 88,475 576,465 281,857 6,823 118,923 627 Total $ 1,111,788 $ 56,819 82,404 487,495 239,307 6,197 110,786 1,484 $ 984,492 At December 31, 2012, and December 31, 2011, loans were carried net of discounts of $498,000 and $550,000, respectively. Net deferred fees included in loans at December 31, 2012, and December 31, 2011, were $369,000 and $666,000, respectively. The Company was servicing mortgage loans sold to others without recourse of approximately $26,786,000 and $18,196,000 at December 31, 2012, and December 31, 2011, respectively. The Company had $9,378,000 of residential real estate loans held for sale at December 31, 2012 and $3,389,000 at December 31, 2011. As of December 31, 2012 and 2011, the Company’s recorded investment in impaired loans was $5,925,000 and $8,102,000, 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 and 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, 2012, there were $5,223,000 of impaired loans with a specific reserve of $1,732,000. At December 31, 2011, there were $6,073,000 of impaired loans with a specific reserve of $741,000. 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 materially less than those contractually established at the loan’s origination. Restructured loans are included in the impaired loan category. 31 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements December 31, 2012 2011 2010 (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 $ 4,471 — 2,878 5,925 7,043 3,048 753 — 180 $ 5,827 18 3,468 8,102 10,284 4,634 846 — 155 $ 8,068 50 5,353 7,963 9,606 1,248 1,313 — 256 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 $51,000, $47,000 and $47,000 of the discount during 2012, 2011 and 2010, 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. Balance at Balance at December 31, 2012 December 31, 2011 The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2012. (dollars in thousands) Repayments and Deletions Additions $ 4,226 $ 1,452 $ 1,015 $ 4,663 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, 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. 2012 2011 2010 (dollars in thousands) An analysis of the allowance for loan losses for each of the three years ending December 31, 2012, 2011 and 2010 is as follows: Allowance for loan losses, beginning of year Loans charged-off Recoveries on loans previously charged-off $ 14,053 (2,824) 795 $ 16,574 (2,301) 774 $ 12,373 (4,443) 548 Net charge-offs Provision charged to expense (1,527) 4,150 (2,029) 4,550 (3,895) 5,575 Allowance for loan losses, end of year $ 19,197 $ 16,574 $ 14,053 32 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements ALLOWANCE FOR LOAN LOSSES AND AMOUNT OF INVESTMENTS IN LOANS Construction Commercial Further information pertaining to the allowance for loan losses at December 31, 2012 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, 2011 Charge-offs Recoveries Provision $ 2,893 — — 148 $ 3,139 (1,253) 307 925 $ 6,566 — 9 2,490 $ 1,886 (192) 17 283 $ 356 (697) 422 252 Ending balance at December 31, 2012 $ 3,041 $ 3,118 $ 9,065 $ 1,994 $ 333 Amount of allowance for loan losses for loans deemed to be impaired Amount of allowance for loan losses $ 1,000 $ 104 $ 415 $ 117 $ — for loans not deemed to be impaired $ 2,041 $ 3,014 $ 8,650 $ 1,877 $ 333 $ $ $ $ 704 (159) 19 322 $ 1,030 $ — — (270) 16,574 (2,301) 774 4,150 886 $ 760 $ 19,197 96 $ — $ 1,732 790 $ 760 $ 17,465 Loans: Ending balance Loans deemed to be impaired Loans not deemed to be impaired $ 38,618 $ 1,500 $ 37,118 $ 88,475 $ 1,282 $ 87,193 $ 576,465 $ 2,281 $ 574,184 $ 281,857 $ 766 $ 281,091 $ 7,450 $ — $ 7,450 $ 118,923 $ 96 $ 118,827 $ — $ — $ — $ 1,111,788 $ 5,925 $ 1,105,863 Construction Commercial Further information pertaining to the allowance for loan losses at December 31, 2011 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, 2010 Charge-offs Recoveries Provision $ 1,752 (1,200) — 2,341 $ 3,163 (676) 293 359 $ 5,671 — 6 889 $ 1,718 (337) 27 478 $ 298 (607) 467 198 Ending balance at December 31, 2011 $ 2,893 $ 3,139 $ 6,566 $ 1,886 $ 356 Amount of allowance for loan losses for loans deemed to be impaired Amount of allowance for loan losses $ — $ 335 $ 282 $ 124 $ — for loans not deemed to be impaired $ 2,893 $ 2,804 $ 6,284 $ 1,762 $ 356 $ $ $ $ 725 (4) 2 (19) $ 726 — — 304 $ 14,053 (2,824) 795 4,550 704 $ 1,030 $ 16,574 — $ — $ 741 704 $ 1,030 $ 15,833 Loans: Ending balance Loans deemed to be impaired Loans not deemed to be impaired $ 56,819 $ 1,500 $ 55,319 $ 82,404 $ 1,525 $ 80,879 $ 487,495 $ 4,561 $ 482,934 $ 239,307 $ 516 $ 238,791 $ 7,681 $ — $ 7,681 $ 110,786 $ — $ 110,786 $ — $ — $ — $ 984,492 $ 8,102 $ 976,390 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, 2012. 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, 2012. 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, 2012, 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. The percentage of the allowance for loan losses allocated to construction and land development loans to total construction and land development loans increased from 5.1%, at December 31, 2011, to 7.9%, at December 31, 2012, mainly as a result of an increase in the historical loss factor. This factor was increased to account for the incremental risk in the portfolio. 33 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements Construction Commercial Commercial The following table presents the Company’s loans by risk rating at December 31, 2012. Real Estate and Land Development and Industrial (dollars in thousands) Grade: 1-3 (Pass) 4 (Monitor) 5 (Substandard) 6 (Doubtful) Impaired Total $ 29,719 7,399 — — 1,500 $ 86,587 606 — — 1,282 $ 569,760 4,424 — — 2,281 $ 38,618 $ 88,475 $ 576,465 Construction Commercial Commercial The following table presents the Company’s loans by risk rating at December 31, 2011. Real Estate and Land Development and Industrial (dollars in thousands) Grade: 1-3 (Pass) 4 (Monitor) 5 (Substandard) 6 (Doubtful) Impaired Total $ 48,298 7,021 — — 1,500 $ 80,140 739 — — 1,525 $ 478,186 4,748 — — 4,561 $ 56,819 $ 82,404 $ 487,495 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, 2012 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 $ — 1,256 3,450 864 32 1,088 $ 1,500 676 674 1,597 24 — Total $ 6,690 $ 4,471 $ — — — — — — $ — $ 1,500 1,932 4,124 2,461 56 1,088 $ 37,118 $ 86,543 572,341 279,396 7,394 117,835 38,618 88,475 576,465 281,857 7,450 118,923 $ 11,161 $ 1,100,627 $ 1,111,788 Further information pertaining to the allowance for loan losses at December 31, 2011 follows: Accruing 30-89 Days Past Due Non Accrual 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 $ — 1,417 2,528 2,635 519 171 $ 1,500 763 736 2,324 9 495 Total $ 7,270 $ 5,827 $ — 18 — — — — $ 18 $ 1,500 2,198 3,264 4,959 528 666 $ 55,319 $ 80,206 484,231 234,348 7,153 110,120 56,819 82,404 487,495 239,307 7,681 110,786 $ 13,115 $ 971,377 $ 984,492 34 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements 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 “Notes to Consolidated Financial Statements.” The following is information pertaining to impaired loans at December 31, 2012: Carrying Value Unpaid Balance Principal Required Reserve 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 $ — 503 169 30 — — $ — 994 199 31 — — $ — — — — — — $ 346 425 176 124 — — Total $ 702 $ 1,224 $ — $ 1,071 With required reserve recorded: Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity $ 1,500 779 2,112 736 — 96 $ 3,292 995 2,158 736 — 96 $ 1,000 104 415 117 — 96 $ 1,154 1,317 2,817 640 — 44 Total $ 5,223 $ 7,277 $ 1,732 $ 5,972 Total Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity $ 1,500 1,282 2,281 766 — 96 $ 3,292 1,989 2,357 767 — 96 $ 1,000 104 415 117 — 96 $ 1,500 1,742 2,993 764 — 44 Total $ 5,925 $ 8,501 $ 1,732 $ 7,043 $ — 1 — — — — $ 1 $ — 40 138 1 — — $ 179 $ — 41 138 1 — — $ 180 35 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements The following is information pertaining to impaired loans at December 31, 2011: Carrying Value Unpaid Balance Principal Required Reserve 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 $ 1,500 313 183 33 — — $ 3,292 537 203 33 — — Total $ 2,029 $ 4,065 With required reserve recorded: Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity $ — 1,212 4,378 483 — — $ — 1,240 4,409 483 — — Total $ 6,073 $ 6,132 Total Construction and land development Commercial and industrial Commercial real estate Residential real estate Consumer Home equity $ 1,500 1,525 4,561 516 — — $ 3,292 1,777 4,612 516 — — Total $ 8,102 $ 10,197 $ — — — — — — $ — $ — 335 282 124 — — $ 741 $ — 335 282 124 — — $ 741 $ 2,377 404 368 3 — — $ 3,152 $ 926 1,105 4,894 207 — — $ 7,132 $ 3,303 1,509 5,262 210 — — $ 10,284 $ — 3 — — — — $ 3 $ — 18 133 1 — — $ 152 $ — 21 133 1 — — $ 155 Troubled Debt Restructurings were identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations. Pre-modification Outstanding Recorded Investment The following is information pertaining to troubled debt restructurings occurring during the year ended December 31, 2012: Post-modification Outstanding Recorded Investment Number of Contracts (dollars in thousands) Commercial and industrial Residential real estate Home equity Total 1 1 1 3 $ 750 6 98 $ 854 $ 736 6 96 $ 838 There were no troubled debt restructurings, that subsequently defaulted, during 2012. The loans were modified during 2012, for the commercial and industrial, and residential real estate loans, by reducing interest rates as well as extending the terms of the loans. The financial impact of the modification for the performing commercial and industrial loan was a $6,000 reduction in principal payments for the year ended December 31, 2012. The financial impact of the modification for performing residential real estate loan was an $8,000 reduction in interest payments for the year ended December 31, 2012. The following is information pertaining to troubled debt restructurings occurring during the year ended December 31, 2011: Number of Contracts Pre-modification Outstanding Recorded Investment Post-modification Outstanding Recorded Investment (dollars in thousands) Construction and land development Commercial and industrial Commercial real estate Total 1 13 6 20 $ 39 960 3,199 $ 4,198 $ — 909 3,195 $ 4,104 36 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements There was one troubled debt restructuring, totaling $11,000, during the year ended December 31, 2011, that subsequently defaulted. The loans were modified during 2011, for the construction, commercial and industrial, and commercial real estate loans, by reducing interest rates as well as extending the terms of the loans. The financial impact of the modifications for performing commercial and industrial loans was a $38,000 reduction in principal and a $1,000 reduction in interest payments for the year ended December 31, 2011. The financial impact of the modifications for performing commercial real estate loans was a $30,000 reduction in principal and a $44,000 reduction in interest payments for the year ended December 31, 2011. The financial impact of the modifications for nonperforming loans was an $11,000 reduction in the carrying value of the loans as a result of payments received under the modified terms of the loans. 2011 December 31, Estimated Useful Life 2012 7. Bank Premises and Equipment (dollars in thousands) Land Bank premises Furniture and equipment Leasehold improvements Accumulated depreciation and amortization Total $ 3,478 18,353 31,319 9,930 63,080 (39,181) $ 23,899 $ 3,478 18,349 28,874 8,079 58,780 (37,023) $ 21,757 — 30-39 years 3-10 years 30-39 years or lease term The Company and its subsidiaries are obligated under a number of non-cancelable operating leases for premises and equipment expiring in various years through 2026. Total lease expense approximated $2,055,000, $2,007,000 and $1,730,000 for the years ended December 31, 2012, 2011 and 2010, respectively. Rental income approximated $329,000, $455,000 and $438,000 in 2012, 2011 and 2010, respectively. Amount Year (dollars in thousands) Future minimum rental commitments for non-cancelable operating leases with initial or remaining terms of one year or more at December 31, 2012, were as follows: 2013 2014 2015 2016 2017 Thereafter $ 1,858 1,954 1,652 1,492 1,153 4,231 $ 12,340 8. Goodwill and Identifiable Intangible Assets At December 31, 2012, the Company concluded that it is not more likely than not that fair value of the reporting unit is less than its carrying value, and goodwill is not considered to be impaired. During full years of 2010 and 2011, the Company’s Class A common stock traded close to or above book value per share. Accordingly, at December 31, 2010 and 2011, management measured for impairment utilizing the fair value of the reporting unit based on the recent stock price of the Company. Carrying Amount of Goodwill and Intangibles Goodwill Total The changes in goodwill and identifiable intangible assets for the years ended December 31, 2012 and 2011 are shown in the table below. (dollars in thousands) Core Deposit Intangibles Balance at December 31, 2010 Amortization Expense Balance at December 31, 2011 Amortization Expense Balance at December 31, 2012 $ $ 2,714 — 2,714 — $ 2,714 $ $ $ 508 (388) 120 (120) $ 3,222 (388) $ 2,834 (120) — $ 2,714 37 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements  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. 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 — These instruments 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. Fair Value Measurements Using The results of the fair value hierarchy as of December 31, 2012, are as follows: Carrying Value Quoted Prices in Active Markets for Identical Assets Observable Inputs Significant (Level 1) (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 SBA Backed Securities 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 Total Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans $ 2,004 130,340 8,156 1,233,357 2,947 55,174 2,253 570 $ 1,434,801 $ — — — — — — — 228 $ 228 $ 2,004 130,340 8,156 1,233,357 2,947 1,734 2,253 — $ 1,380,791 $ — — — — — 53,440 — 342 $ 53,782 $ 3,587 $ — $ — $ 3,587 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 relate to impaired loans recognized for 2012 for the estimated credit loss amounted to $1,909,000. The Company uses discounts to appraisals, as necessary, based on management’s observations of the local real estate market for loans in this category. There were no transfers between level 1 and 2 for the year ended December 31, 2012. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2012. 38 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 Asset inputs to determine fair value (dollars in thousands) at December 31, 2012. Management continues to monitor the assumptions used to value the assets listed below. Securities AFS(1) Impaired Loans Discount rate Appraisal adjustments(4) Discounted cash flow Appraisal of collateral(3) 0%-1%(2) 0%-25% discount $ 53,782 3,587 Valuation Technique Unobservable Input Fair Value Unobservable Input Value or Range (1) (2) (3) (4) Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. Weighted averages. Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses. The changes in Level 3 securities for the year ended December 31, 2012 are as shown in the table below: Auction Rate Securities Obligations Issued by States and Political Subdivisions (dollars in thousands) Balance at December 31, 2011 Purchases Maturities Amortization Change in fair value Balance at December 31, 2012 $ 3,725 — — — 238 $ 3,963 $ 14,772 90,960 (56,214) (41) — $ 49,477 Equity Securities $ 417 — (75) — — $ 342 Total $ 18,914 90,960 (56,289) (41) 238 $ 53,782 The amortized cost of Level 3 securities was $54,504,000 with an unrealized loss of $722,000 at December 31, 2012. 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. Fair Value Measurements Using The results of the fair value hierarchy as of December 31, 2011, are as follows: Carrying Value $ 2,012 174,957 8,801 1,035,838 3,198 — 20,642 12,610 618 $ 1,258,676 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) $ — — — — — — — — 201 $ 201 $ 2,012 174,957 8,801 1,035,838 3,198 — 2,145 12,610 — $ 1,239,561 $ — — — — — — 18,497 — 417 $ 18,914 $ $ 1,439 1,183 $ — $ — $ $ — — $ 1,439 $ 1,183 (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 Other Real Estate Owned 39 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements 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 2011 for the estimated credit loss amounted to $1,699,000. The Company uses discounts to appraisals, as necessary, based on management’s observations of the local real estate market for loans in this category. Other real estate owned is carried at fair value less costs to sell, based on the expected realizable fair value of collateral. There were no transfers between level 1 and 2 for the year ended December 31, 2011. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2011. The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 Asset inputs to determine fair value (dollars in thousands) at December 31, 2011. Management continues to monitor the assumptions used to value the assets listed below. Securities AFS(1) Valuation Technique Unobservable Input Discounted cash flow Fair Value Discount rate $ 18,914 1,439 1,183 Appraisal of collateral(3) Appraisal of collateral(3) Appraisal adjustments(4) Appraisal adjustments(4) Unobservable Input Value or Range 0%-1%(2) 0%-25% discount 0% Impaired Loans Other real estate owned (1) (2) (3) (4) Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. Weighted averages. Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses. Obligations Issued by States The changes in Level 3 securities for the year ended December 31, 2011, are shown in the table below: and Political Subdivisions Auction Rate Securities (dollars in thousands) Balance at December 31, 2010 Purchases Maturities Amortization Change in fair value Balance at December 31, 2011 $ 4,393 — — — (668) $ 3,725 $ 15,988 25,314 (26,528) (2) — $ 14,772 Equity Securities $ 279 145 (7) — — $ 417 Total $ 20,660 25,459 (26,535) (2) (668) $ 18,914 The amortized cost of Level 3 securities was $19,864,000 with an unrealized loss of $950,000 at December 31, 2011. 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 2012 Percent 2011 Percent (dollars in thousands) The following is a summary of remaining maturities or re-pricing of time deposits as of December 31, Within one year Over one year to two years Over two years to three years Over three years to five years $ 299,456 67,918 19,834 32,775 $ 231,099 111,752 48,014 42,636 71 % 16 % 5 % 8 % 53 % 26 % 11 % 10 % Total $ 419,983 100 % $ 433,501 100 % Time deposits of $100,000 or more totaled $287,048,000 and $280,208,000 in 2012 and 2011, respectively. 40 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements  11. Securities Sold Under Agreements to Repurchase 2012 2011 2010 (dollars in thousands) The following is a summary of securities sold under agreements to repurchase as of December 31, Amount outstanding at December 31 $ 143,320 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 $ 213,730 $ 174,624 $ 152,267 $ 129,137 $ 191,390 0.21 % 0.17 % 0.24 % 0.29 % $ 108,550 0.36 % $ 239,830 $ 133,080 0.43 % Amounts outstanding at December 31, 2012, 2011 and 2010 carried maturity dates of the next business day. U.S. Government Sponsored Enterprise securities with a total amortized cost of $187,995,000, $140,891,000 and $107,030,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 2012, 2011 and 2010, respectively. The approximate fair value of the collateral at those dates was $191,704,000, $143,212,000 and $108,200,000, respectively. 12. Other Borrowed Funds and Subordinated Debentures 2012 2011 2010 (dollars in thousands) The following is a summary of other borrowed funds and subordinated debentures as of December 31, Amount outstanding at December 31 Weighted average rate at December 31 Maximum amount outstanding at any month end Daily average balance outstanding during the year Weighted average rate during the year $ 277,226 $ 217,542 $ 280,226 $ 202,209 $ 231,227 $ 280,226 3.82 % 3.54 % 3.85 % 2.85 % $ 258,201 2.88 % $ 266,564 $ 201,273 4.13 % 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, 2012, was approximately $280,598,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. A schedule of the maturity distribution of FHLBB Weighted advances with the weighted average interest rates is as follows: Average Rate Weighted Average Rate Weighted Average Rate Amount Amount Amount 2012 2011 2010 (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 $ 46,000 17,500 19,500 90,000 22,000 $ 195,000 1.86 % 3.01 % 2.42 % 3.33 % 4.19 % 2.96 % $ 81,500 23,500 17,500 74,500 47,000 $ 244,000 0.42 % 3.34 % 3.01 % 2.90 % 4.38 % 2.41 % $ 91,500 9,000 41,500 37,000 42,000 $ 221,000 0.39 % 1.98 % 3.82 % 2.70 % 4.55 % 2.28 % Included in the table above are $35,000,000, $35,000,000 and $35,000,000 of FHLBB advances at December 31, 2012, 2011 and 2010, respectively, that are putable at the discretion of FHLBB. These put dates were not utilized in the table above. During 2011, the Company restructured $18,000,000 of FHLBB advances. Prior to restructure, the weighted average rate on these advances was 4.45% and the weighted average remaining maturity was 25 months. Subsequent to restructure, the weighted average rate was 3.50% and the weighted average maturity was 60 months. The restructures were accounted for as modifications. 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 modifications. 41 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements SUBORDINATED DEBENTURES Subordinated debentures totaled $36,083,000 at December 31, 2012 and 2011. 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. 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, 2012 and 2011. The Bank also has an outstanding loan in the amount of $144,000 and $143,000 at December 31, 2012 and 2011, respectively, borrowed against the cash value of a whole life insurance policy for a key executive of the Bank. 13. Earnings per share (“EPS”) Class A and Class B shares participate equally in undistributed earnings. Under the Company’s Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock. 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 2012, 2011 and 2010 was an increase of 1,024, 1,149 and 2,236 shares, respectively. Year Ended December 31, 2012 2011 2010 (in thousands except share and per share data) The following table is a reconciliation of basic EPS and diluted EPS: BASIC EPS COMPUTATION Numerator: Net income, Class A Net income, Class B Denominator: Weighted average shares outstanding, Class A Weighted average shares outstanding, Class B Basic EPS, Class A Basic EPS, Class B DILUTED EPS COMPUTATION Numerator: Net income, Class A Net income, Class B Total net income, for diluted EPS, Class A computation Denominator: Weighted average shares outstanding, basic, Class A Weighted average shares outstanding, Class B Dilutive effect of Class A stock options Weighted average shares outstanding diluted, Class A Weighted average shares outstanding, Class B Diluted EPS, Class A Diluted EPS, Class B $ 14,877 4,162 3,557,693 1,990,474 $ 4.18 2.09 $ 13,023 3,670 3,543,233 1,997,411 $ 3.68 1.84 $ 10,557 3,017 3,521,179 2,012,327 $ 3.00 1.50 $ 14,877 $ 13,023 $ 10,557 4,162 19,039 3,557,693 1,990,474 1,024 5,549,191 1,990,474 $ 3.43 2.09 3,670 16,693 3,543,233 1,997,411 1,150 5,541,794 1,997,411 $ 3.01 1.84 3,017 13,574 3,521,179 2,012,327 2,236 5,535,742 2,012,327 $ 2.45 1.50 42 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements  14. 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. STOCK REPURCHASE PLAN During 2012, 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 2011, which also authorized the Company to repurchase up to 300,000, or less than 9%, of Century Bancorp Class A Common Stock. The stock buyback 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. 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 23,350 options exercisable at December 31, 2012. December 31, 2012 December 31, 2011 December 31, 2010 Stock option activity under the plan is as follows: Shares under option: Outstanding at beginning of year Forfeited Exercised Outstanding at end of year Exercisable at end of year Weighted Average Exercise Price Amount 36,062 (450) (12,262) $ 28.90 22.50 24.82 23,350 $ 31.17 23,350 $ 31.17 Available to be granted at end of year 223,534 Weighted Average Exercise Price $ 28.36 15.06 21.44 $ 28.90 $ 28.90 Weighted Average Exercise Price $ 26.09 27.18 15.06 $ 28.36 $ 28.36 Amount 68,637 (19,975) (9,950) 38,712 38,712 222,884 Amount 38,712 (200) (2,450) 36,062 36,062 223,084 At December 31, 2012, 2011 and 2010, the options outstanding have exercise prices between $15.063 and $31.83, and a weighted average remaining contractual life of two years for 2012 and 2011 and three years for 2010. The weighted average intrinsic value of options exercised for the period ended December 31, 2012, was $8.13 per share with an aggregate value of $99,714. The average intrinsic value of options exercisable at December 31, 2012, 2011 and 2010 had an aggregate value of $41,549, $49,145 and $41,895, respectively. 43 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements CAPITAL RATIOS 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, 2012, that the Bank and the Company meet all capital adequacy requirements to which they are subject. As of December 31, 2012, 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, 2012 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, 2011 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) $ 206,464 188,226 188,226 14.15 % 12.90 % 6.11 % $ 183,864 167,558 167,558 14.09 % 12.84 % 6.20 % The Company’s actual capital amounts and ratios are presented in the following table: Ratio Actual Amount As of December 31, 2012 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, 2011 Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) $ 227,945 209,668 209,668 15.59 % 14.34 % 6.80 % $ 208,852 192,516 192,516 15.98 % 14.73 % 7.12 % $ 116,726 58,363 123,202 $ 104,358 52,179 108,033 8.00 % 4.00 % 4.00 % 8.00 % 4.00 % 4.00 % For Capital Adequacy Purposes Amount Ratio $ 116,976 58,488 123,377 $ 104,550 52,275 108,179 8.00 % 4.00 % 4.00 % 8.00 % 4.00 % 4.00 % $ 145,907 10.00 % 87,544 154,002 6.00 % 5.00 % $ 130,448 10.00 % 78,269 135,042 6.00 % 5.00 % To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 146,220 10.00 % 87,732 154,221 6.00 % 5.00 % $ 130,687 10.00 % 78,412 135,224 6.00 % 5.00 % 44 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements  15. Income Taxes 2012 The current and deferred components of income tax expense for the years (dollars in thousands) ended December 31 are as follows: Current expense: 2011 2010 Federal State $ 3,181 315 $ 2,198 309 Total current expense 3,496 2,507 Deferred (benefit) expense: Federal State Total deferred benefit (1,833) (271) (2,104) (961) 8 (953) $ 2,262 528 2,790 (1,223) (323) (1,546) Provision for income taxes $ 1,392 $ 1,554 $ 1,244 There were no penalties during 2010, 2011, or 2012. There was approximately $2,000 paid to the Internal Revenue Service for interest during 2012. Income tax accounts included in other assets/liabilities at December 31 are (dollars in thousands) as follows: Currently receivable Deferred income tax asset, net $ 630 14,551 $ 785 13,714 2012 2011 Total $ 15,181 $ 14,499 2012 2011 2010 Differences between income tax expense at the statutory federal income tax rate (dollars in thousands) and total income tax expense are summarized as follows: Federal income tax expense at statutory rates State income tax, net of $ 6,204 $ 6,946 $ 5,038 federal income tax benefit Insurance income Effect of tax-exempt interest Net tax credit Other 29 (396) (4,628) (633) 74 209 (396) (3,801) (683) 21 135 (570) (2,763) (622) 26 Total $ 1,392 $ 1,554 $ 1,244 Effective tax rate 6.8 % 8.5 % 8.4 % 45 2012 2011 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: Allowance for loan losses Deferred compensation Pension and SERP liability Acquisition premium $ 8,103 5,643 8,621 541 26 11 1,908 180 151 $ 7,056 5,009 7,398 596 26 31 1,049 75 727 Investments writedown Deferred gain AMT Other Nonaccrual interest Gross deferred income tax asset 25,184 21,967 Deferred income tax liabilities: Depreciation Limited partnerships Unrealized gain on securities available-for-sale Gross deferred income tax liability (36) (2,722) (7,875) (10,633) (201) (2,667) (5,385) (8,253) Deferred income tax asset net $ 14,551 $ 13,714 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, 2012. 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 is in an Alternative Minimum Tax (“AMT”) position. The AMT is carried as a deferred asset and has an indefinite life. The Company has potential tax planning strategies available which support the deferred AMT and, at this time, no valuation allowance is needed. 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. The Company is subject to federal examinations for tax years after December 31, 2009, and state examinations for tax years after December 31, 2008. 16. 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%. Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements 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. The measurement date for the Plan is December 31 for each year. The benefits expected to be paid in each year from 2013 to 2017 are $987,000, $1,032,000, $1,105,000, $1,167,000, and $1,237,000, respectively. The aggregate benefits expected to be paid in the five years from 2018 to 2028 are $7,158,000. The Company plans to contribute $1,000,000 to the Plan in 2013. Asset Category Percent Level 2 Level 1 Level 3 Total (dollars in thousands) The fair value of plan assets and major categories as of December 31, 2012, is as follows: Collective funds Equity securities Mutual funds Hedge funds Short-term investments $ 12,593 5,892 3,370 1,691 437 52.5 % 24.6 % 14.1 % 7.0 % 1.8 % 100.0 % $ 23,983 $ 767 5,892 3,086 — 62 $ 9,807 $ 11,826 — 284 — 375 $ 12,485 $ — — — 1,691 — $ 1,691 Asset Category Percent Total Level 1 Level 2 Level 3 (dollars in thousands) The fair value of plan assets and major categories as of December 31, 2011, is as follows: Collective funds Equity securities Mutual funds Hedge funds Short-term investments LEVEL 1 51.1 % 24.1 % 14.2 % 7.4 % 3.2 % 100.0 % $ 10,491 4,934 2,918 1,522 652 $ 20,517 $ 6,657 4,934 2,918 — — $ 14,509 $ 3,834 — — — 652 $ 4,486 $ — — — 1,522 — $ 1,522 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. The asset or liability’s fair value measurement level within fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Below is a description of the valuation methodologies used for assets measured at fair value. The Trust reports bonds and other obligations, short-term investments and equity securities at fair values based on published quotations, Collective funds and hedge funds (Funds) are valued in accordance with valuations provided by such Funds, which generally value marketable securities at the last reported sales price on the valuation date and other investments at fair value, as determined by each Fund’s manager. The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, although the Trust believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Year Ended December 31, 2012 2011 (dollars in thousands) The changes in Level 3 securities are shown in the table below: Balance at beginning of year Purchases Actual return – assets still being held Balance at end of year $ 1,522 152 17 $ 1,691 $ 1,431 — 91 $ 1,522 46 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements 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. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant. The benefits expected to be paid in each year from 2013 to 2017 are $1,102,000, $1,098,000, $1,080,000, $1,494,000 and $1,938,000, respectively. The aggregate benefits expected to be paid in the five years from 2018 to 2022 are $9,840,000. Defined Benefit Pension Plan 2012 2011 2012 2011 Supplemental Insurance/ Retirement Plan (dollars in thousands) Change projected in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Actuarial (gain)/loss Benefits paid $ 28,784 1,097 1,295 1,401 (667) $ 25,793 843 1,419 1,390 (661) $ 21,097 1,425 923 3,482 (1,092) $ 16,853 680 932 3,678 (1,046) Projected benefit obligation at end of year $ 31,910 $ 28,784 $ 25,835 $ 21,097 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 $ $ $ $ $ 20,517 2,333 1,800 (667) 23,983 (7,927) 31,773 4.00 % 4.50 % 8.00 % 4.00 % 1,097 1,295 (1,641) (104) 735 $ $ $ $ $ 19,931 (28) 1,275 (661) 20,517 (8,267) 28,173 4.50 % 5.50 % 8.00 % 4.00 % 843 1,419 (1,595) (104) 494 $ $ (25,835) 22,181 $ $ (21,097) 18,567 4.00 % 4.50 % NA 4.00 % $ $ 1,425 923 — 114 336 4.50 % 5.50 % NA 4.00 % 680 932 — 111 131 $ 1,382 $ 1,057 $ 2,798 $ 1,854 $ 104 (25) 79 $ 104 2,519 2,623 $ (114) 3,098 2,984 $ (111) 3,546 3,435 $ 1,461 $ 3,680 $ 5,782 $ 5,289 December 31, 2012 Supplemental Plan Plan Total Plan December 31, 2011 Supplemental Plan Total $ 620 (10,317) $ (1,105) (10,302) $ (485) (20,619) $ 724 (10,342) $ (1,219) (7,204) $ (495) (17,546) $ (9,697) $ (11,407) $ (21,104) $ (9,618) $ (8,423) $ (18,041) (dollars in thousands) Prior service cost Net actuarial loss Total 47 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements The following table summarizes the amounts included in Accumulated Other Comprehensive Loss at December 31, 2012, 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 2013 Amortization of loss to be recognized in 2013 $ (104) 630 $ 114 515 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 $308,000 for 2012, $266,000 for 2011 and $244,000 for 2010. 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. Discretionary bonus expense amounted to $1,289,000, $1,100,000 and $600,000 in 2012, 2011, and 2010, respectively. The Company does not offer any postretirement programs other than pensions. 17. Commitments and Contingencies A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2012. 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. 18. Financial Instruments with Off-Balance-Sheet Risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. 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- Contract or Notional Amount balance-sheet instruments. Financial instruments with off-balance-sheet risk at December 31 are as follows: (dollars in thousands) 2012 2011 Financial instruments whose contract amount represents credit risk: Commitments to originate 1–4 family mortgages $ 13,580 $ 12,638 Standby and commercial letters of credit 8,411 4,645 Unused lines of credit Unadvanced portions 217,246 195,181 of construction loans 17,609 16,819 Unadvanced portions of other loans 4,872 4,605 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, 2012 2011 2010 19. Other Operating Expenses (dollars in thousands) Marketing Software maintenance/amortization Legal and audit Contributions Processing services Consulting Postage and delivery Supplies Telephone Directors’ fees Insurance Core deposit intangible amortization Other $ 1,853 1,256 1,179 1,074 921 890 877 849 750 330 279 120 1,230 $ 1,575 951 1,140 479 865 796 773 868 742 309 275 388 1,280 $ 1,747 874 1,042 355 884 736 788 656 691 290 294 388 1,095 Total $ 11,608 $ 10,441 $ 9,840 48 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements  20. 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. The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments. Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below. SECURITIES HELD-TO-MATURITY The fair values 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, that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair value of other loans is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Incremental credit risk for nonperforming loans has been considered. TIME DEPOSITS The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value. OTHER BORROWED FUNDS The fair value of 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. The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2012 and December 31, 2011. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets Estimated for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial Level 3 Inputs Fair Value liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable. (dollars in thousands) Fair Value Measurements Carrying Amount Level 2 Inputs Level 1 Inputs December 31, 2012 Financial assets: Securities held-to-maturity Loans(1) Financial liabilities: Time deposits Other borrowed funds Subordinated debentures December 31, 2011 Financial assets: Securities held-to-maturity Loans(1) Financial liabilities: Time deposits Other borrowed funds Subordinated debentures (1) $ 275,507 1,092,591 $ 281,924 1,124,716 $ 419,983 195,144 36,083 179,368 967,918 433,501 244,143 36,083 424,253 205,481 43,423 184,822 1,018,822 439,711 258,165 43,063 — — — — — — — — — — $ 281,924 — 424,253 205,481 — 184,822 — 439,711 258,165 — $ — 1,124,716 — — 43,423 — 1,018,822 — — 43,063 Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses. 49 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. 2012 Quarters Second Fourth Third First $ 19,365 4,963 14,402 1,100 13,302 3,619 12,800 4,121 313 3,808 $ 3,550,993 1,993,755 5,545,711 1,993,755 $ $ $ $ 0.84 0.42 0.69 0.42 Second First 21. 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 Class A Class B Average shares outstanding, diluted Class A Class B Earnings per share, basic Class A Class B Earnings per share, diluted Class A Class B 2011 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 Class A Class B Average shares outstanding, diluted Class A Class B Earnings per share, basic Class A Class B Earnings per share, diluted Class A Class B $ $ 19,738 4,795 14,943 900 14,043 4,153 13,279 4,917 139 4,778 3,564,145 1,986,880 5,552,121 1,986,880 $ $ $ $ $ $ 1.05 0.52 0.86 0.52 Fourth 19,252 5,233 14,019 950 13,069 4,361 12,702 4,728 539 4,189 3,546,418 1,994,380 5,542,052 1,994,380 $ $ $ $ 0.92 0.46 0.76 0.46 $ $ 22,079 4,859 17,220 1,250 15,970 4,105 13,708 6,367 685 5,682 3,559,125 1,989,380 5,549,810 1,989,380 $ $ $ $ $ $ 1.25 0.62 1.02 0.62 Third 19,638 5,800 13,838 1,200 12,638 4,503 12,055 5,086 504 4,582 3,544,967 1,995,630 5,541,646 1,995,630 $ $ $ $ 1.01 0.50 0.83 0.50 $ $ 20,312 4,923 15,389 900 14,489 3,988 13,451 5,026 255 4,771 3,556,474 1,991,880 5,548,830 1,991,880 $ $ $ $ $ $ 1.05 0.52 0.86 0.52 19,597 6,082 13,515 1,200 12,315 3,841 11,775 4,381 184 4,197 3,543,717 1,996,880 5,541,595 1,996,880 $ $ $ $ 0.92 0.46 0.76 0.46 $ 19,578 5,651 13,927 1,200 12,727 3,535 12,210 4,052 327 3,725 $ 3,537,828 2,002,755 5,541,927 2,002,755 $ $ $ $ 0.82 0.41 0.67 0.41 50 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements  22. Parent Company Financial Statements The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of December 31, 2012 and 2011 and the statements of income and cash flows for each of the BALANCE SHEETS years in the three-year period ended December 31, 2012, are presented below. The statements of changes in stockholders’ equity are identical to the consolidated December 31, 2012 statements of changes in stockholders’ equity and are therefore not presented here. (dollars in thousands) 2011 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: 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 Net cash (used in) provided by operating activities CASH FLOWS FROM FINANCING ACTIVITIES: 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 $ 19,536 193,499 3,145 $ 216,180 $ 107 36,083 179,990 $ 216,180 $ 23,467 170,642 2,730 $ 196,839 $ 107 36,083 160,649 $ 196,839 2012 2011 2010 $ 33 72 105 2,400 198 (2,493) (848) (1,645) 20,684 $ 19,039 $ 100 72 172 2,400 178 (2,406) (818) (1,588) 18,281 $ 16,693 $ 156 72 228 2,400 172 (2,344) (797) (1,547) 15,121 $ 13,574 2012 2011 2010 $ 19,039 $ 16,693 $ 13,574 (20,684) 12 (416) (2,049) 304 (2,186) (1,882) (3,931) 23,467 $ 19,536 (18,281) 12 (182) (1,758) 53 (2,180) (2,127) (3,885) 27,352 $ 23,467 (15,121) 12 1,422 (113) 150 (2,173) (2,023) (2,136) 29,488 $ 27,352 51 Century Bancorp, Inc. AR ’12Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 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, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. 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, 2012 and 2011 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, 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, 2012, 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 21, 2013, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Boston, Massachusetts February 21, 2013 52 Century Bancorp, Inc. AR ’12Report of Independent Registered Public Accounting Firm 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, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Century Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Century Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, 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, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 21, 2013, expressed an unqualified opinion on those consolidated financial statements. Boston, Massachusetts February 21, 2013 53 Century Bancorp, Inc. AR ’12Management’s Report on Internal Control Over Financial Reporting 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, 2012. 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, 2012, 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 53. Barry R. Sloane President & CEO February 21, 2013 William P. Hornby, CPA Chief Financial Officer & Treasurer 54 Century Bancorp, Inc. AR ’12 Stockholder Information Corporate Headquarters Transfer Agent and Registrar Century Bank 400 Mystic Avenue Medford, MA 02155-6316 TEL (866) 823-6887 CenturyBank.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 9, 2013, at 10:00 a.m. The meeting will take place at Century Bank, 400 Mystic Avenue, Medford, MA. Stock Listing 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.” 10-K Report 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.centurybank.com/about/investorrelations.cfm. About Century Headquarters Century Bancorp, Inc. is a $3.09 billion banking and financial services company headquartered in Medford, Massachusetts. The Company operates 25 banking offices in 19 cities and towns in Massachusetts and provides a full range of business, personal, and institutional services. Allston Branch Andover Branch Beverly Branch Braintree Branch Brookline Branch Burlington Branch Cambridge Branch Coolidge Corner Branch Everett Branch Federal Street Branch Fellsway Branch Kenmore Square Branch Pictured from left: Executive Vice President Linda Sloane Kay, Founder & Chairman Marshall M. Sloane, and President & CEO Barry R. Sloane Lynn Branch Malden Branch Medford Square Branch Newton Centre Branch North End Branch Peabody Branch Much has been said in the media of late regarding the financial industry. Let me affirm that Century Bank’s integrity has not diminished in any way. Our dedication to our community, “ our customers and our shareholders is unwavering. I charted a course for Century based on making character count, and we remain true to our strategy. Our solid financial performance Quincy Branch Salem Branch Somerville Branch State Street Branch Wellesley Branch Winchester Branch and stability have positioned us for growth well into the future. “ Marshall M. Sloane, Founder and Chairman Our family’s bank. And yours. 44 years of Stability Our family’s bank. And yours. in our financial performance 400 Mystic Avenue, Medford, MA 02155 (866) 823-6887 www.CenturyBank.com in our client service in our leadership in our communities in our values Equal Housing Lender/Member FDIC © 2013 Century Bancorp, Inc. All rights reserved. 002-CSN0443 2012 Annual Report 

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