Century Bancorp Inc.
Annual Report 2019

Plain-text annual report

400 Mystic Avenue Medford, MA 02155 USA (866) 823-6887 CenturyBank.com Customer centric. Digitally enhanced. Equal Housing Lender/Member FDIC © 2020 Century Bancorp, Inc. All rights reserved. 002CSNA6CF 2019 Annual Report Let’s have a conversation Your Personal Banker Lina, North End 30 years banking experience. I’m very energetic and enthusiastic. Expertise: Banking Solutions, Home Lending Hi! I’m Lina. Thanks for choosing Century. How can I help you? I’m thinking about buying my first home. How do I apply for a mortgage? Congrats on your home search! Where are you looking to buy? Type your message here Send About Century Century Bancorp, Inc. is a $5.5 billion banking and fnancial services company headquartered in Medford, Massachusetts. The Company operates 28 banking offces and provides a full range of business, personal, and institutional services. Headquarters – Medford 400 Mystic Avenue (781) 393-4160 Allston 300 Western Avenue (617) 562-1700 Andover 15 Elm Street (978) 474-4191 Back Bay 437 Boylston Street (617) 424-1644 Beverly 428 Rantoul Street (978) 921-2300 Braintree 703 Granite Street (781) 356-3400 Chestnut Hill Square 210 Boylston Street/Rte 9 (617) 582-0920 Coolidge Corner 1354 Beacon Street (617) 713-1890 North End 275 Hanover Street (617) 557-2950 Peabody 12 Peabody Square (978) 977-4900 Everett 1763 Revere Beach Parkway/Rte 16 (617) 381-6300 Quincy 651 Hancock Street (617) 376-8100 Federal Street 24 Federal Street (617) 423-1490 Fellsway 503 Riverside Avenue (781) 393-6520 Lynn 2 State Street (781) 586-8700 Brookline 1184-1186 Boylston Street/Rte 9 (617) 713-4910 Malden 140 Ferry Street at Eastern Avenue (781) 388-2100 Burlington 134 Cambridge Street/Rte 3A (781) 238-8700 Cambridge 2309 Massachusetts Avenue (617) 349-5300 Medford Square One Salem Street (781) 391-9830 Newton Centre 32 Langley Road (617) 641-2300 Salem, MA 37 Central Street (978) 740-6900 Salem, NH (Coming Soon) 365 South Broadway Somerville 102 Fellsway West at Mystic Avenue (617) 629-0929 State Street 136 State Street (617) 367-3712 Wellesley 258 Washington Street (781) 235-6500 Winchester 522 Main Street (781) 756-3480 Woburn 299 Mishawum Road (781) 932-5612 “Boston has lost a one-of-a-kind leader who was always looking to do good and bring people together.“ In Remembrance ~ Louis J. Woolf, President & CEO of Hebrew SeniorLife “Marshall Sloane was a role model for everyone in the way he lived his life and gave back to the community.” ~ President Antoinette M. Hays, Regis College “Marshall Sloane exemplifed the best qualities of a person dedicated to his family, his friends, including the people of the Century Bank family, and his local community.” ~ Cardinal Sean P. O’Malley, Archbishop of Boston “Massachusetts lost a banking icon… remembered for his philanthropy, his relentless work ethic and his contributions to the industry.” ~ Banker & Tradesman “A great example of what a community banker should be.” ~ Former Comptroller of the Currency Thomas J. Curry “He was an incredible gentleman and he ran a very, very well-run community bank.” ~ Neal J. Curtin, Veteran Boston Banking Attorney Marshall M. Sloane was much more than the visionary architect of Century Bank. He was our Dad. He taught us the value of working hard, doing the right thing, and serving the community. He always wanted the bank he founded to live long beyond his generation — and he insisted we do it in a way he would be proud of. Dad’s wisdom, compassion, generosity and kindness will be remembered by his family, the thousands of employees who worked at Century over the past 50 years, and the countless people whose lives he touched over his long and extraordinary life. Barry R. Sloane Linda Sloane Kay Marshall M. Sloane Founder & Chairman April 15, 1926 – April 6, 2019 Chairman’s Message Dear Fellow Shareholders: 2019 was a year of excellent fnancial results but much sadness with the death in April of my Dad and our Founder, Marshall, at age 92. He had a life of profound accomplishments, and we begin every day with a devotion to building on his superb legacy. He would have been very proud to know that 2019 was the tenth consecutive year of record setting for assets, earnings, and loans, and the record size of capital. Dad missed the celebration of our 50th Anniversary of our founding on May 1, 1969. It was a much subdued event without him. So many factors have contributed to our success, but most importantly the unwavering strategic discipline devised and implemented by our Founder. Net earnings were $39.7 million, an increase of 10% over 2018 earnings, and our capital grew to $333 million. We ended 2019 at a milestone: $5.5 billion in assets, signifcant growth of 6.4%, achieved when many of our peers were fat. Century earned $7.13 per share in 2019, as compared to $6.50 in 2018. Our stock closed the year at $89.96, an increase of 33% over the prior year, outpacing our peers. Our stock, symbol CNBKA, has a three-year cumulative total return of 52%, and a fve-year cumulative total return of 131%. All three principal business units again performed extremely well in 2019. Through up and down business and interest rate cycles of varying duration and severity, we have produced consistent and superior results. We continued that trend in 2019. Our Family’s Bank. And Yours. Our slogan translates into our devotion to treat our clients, as we, as a family and a business, would wish to be treated. It means fair products, rates, and fees, quick credit decisions and closings, transparency of process, and respect for the continuity and loyalty of our clients. Yet we also appreciate the frailty of life and business conditions and try to support our clients through those inevitable undulations. Our theme this year is “Customer Centric/Digitally Enhanced.” It represents the essential challenge of regional and community banks, to utilize the power of the digital platform to improve customer relationship management through offcer contact, rather than the reverse strategy practiced by our giant competitors to substitute computers for people. The following examines the multiple elements of Century’s results that have contributed to our success in 2019: Vice Chair Linda Sloane Kay and Chairman, President & CEO Barry R. Sloane A S&P/CFRA Quality Ranking Customer Centric through Centralized Hands on Management Banking is a business of temperament and daily routine. We are steadfast in our centralized control and transparency of management. Our Loan Committee is a weekly institution that approves in open forum every loan over $500,000. So-called Deal of the Day meets almost every afternoon to approve all other loans and lines of credit. I participate in virtually every one. It is a level of centralized credit approval that ensures we know the risks we take, makes sure we reward customer loyalty, and connects us to our clients and communities. Our Management Committee is composed of the 10 most senior sector executives at Century. This bi-weekly, half-day meeting follows an agenda that covers offcer hirings, contracts, leases, audits, marketing campaigns, signifcant complaints, policy changes, donations, and pipelines of all new business. MANCOM, as we call it, sets our cultural tone of centralized, yet participatory, management engagement. Opinions and dialogue are encouraged; the wisdom of our collective executive team is shared. All have a stake in decisions made. It works. Net Earnings Growth and Return on Equity Net earnings increased by 10% to $39.7 million, for the year ended December 31, 2019, as compared to earnings of $36.2 million for 2018. Century’s return on average equity (ROE) was 12.44% for 2019, as compared to 2018’s 13.05%. The ROE is the primary building block of our fnancial goal setting. It refects our priority to grow shareholder value as the key driver of our strategic plan, our annual budget, and our tactical decisions. We can’t control the equity markets, but we can have a high level of confdence that if we continue to produce a double-digit ROE, the share price will follow over time. We received an S&P/CFRA “A” quality rating, one of 49 banks in America, and one of only four in Massachusetts, to receive this rating or higher. It is a strong external contributing confdence factor. Our family’s bank. And yours. LOCATIONS CONTACT % RATES SEARCH LOGIN $5.5 Billion in Assets 2019 Total Assets (in thousands) Net Income (in thousands) $5,492,424 $39,699 Earnings per Class A share, diluted $7.13 Medford Public Library Ground Breaking Ceremony Pictured from left: Senator Patricia D. Jehlen; Erin DiBenedetto; Mayor Breanna Lungo-Koehn; Ann Frenning Kossuth; Former Mayor Stephanie M. Burke; Councillor Michael J. Marks; Barry R. Sloane; Linda Sloane Kay; Council President John C. Falco, Jr.; Representative Sean Garballey; Representative Paul J. Donato; Councillor Adam Knight; Council Vice President Richard Caraviello and Representative Christine Barber In addition, our effciency ratio of overhead to revenue, the key comparative metric of non-interest expense decreased slightly from 59% in 2018 to 58% in 2019. We watch our expenses carefully and are very proud of the effciency ratio remaining below 60%, an industry threshold target, for the past three years. Customer Centric Signifcant Asset Growth Total assets grew 6.4% to a record of $5.5 billion on December 31, 2019, up from $5.2 billion on December 31, 2018, an increase of $328 million. We experienced signifcant growth in 2019 for all three of our business lines: consumer, business, and institutional services. We are proud to have dozens of depositors who each routinely keep tens of millions at Century with confdence in our high performing earnings and asset growth. Customer Centric Record Capital Total equity was $332.6 million on December 31, 2019, an increase of $32 million or 10.7% from $300.4 million on December 31, 2018. Book value per share increased to $59.73 at December 31, 2019, up by $5.77 from $53.96 at December 31, 2018. Century is “well capitalized” by all regulatory standards, and we have passed all “Basel III” requirements through organic capital generation from earnings. Customer Centric Record Loan Portfolio Size Our unique loan portfolio strategy continues to work exceptionally well. Total loans grew by $141 million or 6% to a record $2.4 billion on December 31, 2019, our largest loan portfolio ever, and a loan to deposit ratio of 55.1%. Non-performing assets continued to be minimal for a portfolio of our size, decreasing from $3.5 million at December 31, 2018 to $2.0 million at December 31, 2019. The education and healthcare sectors continue to anchor our loan portfolio. We are, by any standard, one of the leading experts in tax-exempt fnancing in New England. We believe the magnetism and quality of Massachusetts’ colleges and universities validate our decade-long strategic conclusion that education and healthcare were, and are, the future of our region. Linda Sloane Kay elected as the Chair of the Newton-Needham Chamber of Commerce We constantly evaluate industry developments to look for warning signs for our portfolio. We constantly incorporate risk management techniques in our loan approval and monitoring discipline. Our calling offcers are seeking new middle market business prospects every day. We combine expert market knowledge with extraordinary product expertise, leading to some of the longest duration satisfed relationships in commercial banking. The process goes on, every day, pushing up our market share, but it’s not easy as many of our peers have lower underwriting and pricing standards than we do. The middle business market is an exceptionally competitive environment. Loan quality is religion to us; our portfolio continues to be well diversifed with emphasis on quality underwriting and effective ongoing monitoring of the loan portfolio. 2019 was a productive year in which we closed $84 million in residential frst mortgages, and $198 million in home equity loans. We extended 290 energy conservation loans through the Mass Save loan program, which helped us do our part for conservation while originating many new long-term relationships. In addition, we have begun a residential solar energy lending program. We acknowledge the important role of solar energy in our generating future and will attempt to grow that business line. Customer Centric Results in our Branch System We are proud that fve of our twenty-seven branches hold over $100 million in deposits, and total branch deposits exceed $2.3 billion. In late 2020 we will open branch #28, our frst branch in southern New Hampshire in Salem. The New Hampshire market is an important geographic expansion for our consumer business, as it is only 10 miles north of our Andover branch. The low tax climate of New Hampshire makes it particularly attractive to closely held businesses, and we expect to see signifcant relationship originations in Salem. We are very discerning in the search for our next branch, #29. We are on the lookout for further high visibility market-extending locations; small size and manageable cost is paramount. In addition, we now operate 51 ATMs, processing over 500,000 annual transactions. We are in the early stages of implementing a CRM (customer relationship management) system across all of our client facing businesses. When fully operational it will assist our communication and responsiveness to our thousands of clients. In 2020, we’ll expand our geographic footprint by opening a branch in Salem, NH Customer Centric Record Growth in Institutional Services The Institutional Services Group, which includes our government, cash management, and not-for-proft banking teams, had another record year of client growth. Our share of government banking deposits is now the highest among Massachusetts chartered banks, and we have expanded our client set signifcantly in Rhode Island and New Hampshire. We processed over 43 million check and payment items in 2019, with exceptional quality control and customer service. The lockbox function remains a time-tested magnet for corporate and institutional clients. 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. For the seventh consecutive year, the audit of our automated lockbox services and its operative effectiveness of controls was without any fnding of defciency. We believe our service, execution, and reputation is without peer in New England. We will do our utmost to ensure it is always true. Customer Centric Record Size in Wealth Management 2019 was the ffth full year of our wealth management function. Our assets under management grew 20.2% to over $157 million. Our wealth management business is a great opportunity to serve the generational transition challenges of our private clients while providing our not-for-proft clients an institutional quality offering that embraces industry best practices. We specialize in growth and income “defensive” portfolios that we believe are particularly relevant when equity markets continue to behave with meaningful volatility. Customer Centric - Our Brand It’s easy to be different in this realm as there is no other family managed and controlled bank of our size in New England. Our advertising, in print, radio, and now regional television, promotes our consistent message of local family control, permanence, approachability, and personal service. Linda and I keep taking the time to personally sign each welcome note thanking every new client of Century. This level of personal touch is unique from all others in the industry. Pictured from top: Gerald S. Algere, EVP; Richard L. Billig, SVP; Bradford J. Buckley, SVP; Peter R. Castiglia, SVP; Gracine Copithorne, SVP; Susan B. Delahunt, SVP; Paul A. Evangelista, EVP; Brian J. Feeney, EVP; James M. Flynn, Jr., SVP; William J. Gambon, Jr., SVP; Timothy L. Glynn, SVP; Anna M. Gorska, SVP; William P. Hornby, CFO & Treasurer; Anthony C. LaRosa, SVP; Cary E. Lynch, SVP; Shipley C. Mason, SVP; Jason J. Melius, SVP; Nancy R. Miller, SVP; Thomas E. Piemontese, SVP; Deborah R. Rush, SVP; Kenneth A. Samuelian, SVP; Yasmin D. Whipple, SVP; and David B. Woonton, EVP Customer Centric Digitally Enhanced Results in Information Systems We pride ourselves on a technology platform of redundancy and expertise that our clients can rely on for fnancial inquiry, transactions, and high-quality service. We are proud to say that Information Systems met all of its operational and service goals in 2019. We are constantly monitoring our systems’ reliability, and when customers encounter problems at night or on weekends, we’re always reachable. In connection to storm and food resiliency, in 2019 we took the important step of moving our backup internet servers from Quincy to a level three data center at high elevation in Northborough. We believe this step signifcantly strengthens our backup redundancy and reliability. Customer Centric Digital Services Platform Transformation A metamorphosis is underway in banking from face to face to digital customer service. A most effective partnership of our Marketing and Information Systems departments began two years ago to perform a strategic analysis of the full realm of digital banking services. Our goal is to provide the menu of digital services offered by our most advanced giant competitors, yet ALWAYS enable the intervention of live bankers to assist and educate customers in their relationship needs. We are well down this road, with the offering of 10 digital services, on a par with our largest peers. The challenge is to seamlessly integrate these new services into our highly reliable legacy platform systems. It’s what we call a “digitally enhanced relationship.” We believe it’s our version of the future of banking. The next step in the digital enhancement process is what’s called the “conversation” (shown on the cover of this report). Using this capability, a client would, through our mobile app, touch an icon of their favorite banker. Once activated, a live conversation would ensue by voice, email, or text with the customer. If the banker was unavailable, the app would default to the next in the chain. The “conversation” could redefne client communication in banking. We have purchased the system and will debut the frst elements later this year. Century Celebrates Rosalie A. Cunio Our frst employee retired after working more than 50 years at the Bank Our Client Centric Commitment to the Community We are focused on our social responsibility to our home communities. Led by our imperative for locally controlled enterprise, community development, and relationship-based philanthropy, we live our social mission every day. We support the Community Reinvestment Act function with staff, resources, and management commitment. We are proud that our most recent completed Massachusetts CRA audit was ranked a “High Satisfactory.” We diligently try to better serve our minority and lower income communities with home ownership opportunities and access to traditional banking services. We are very proud that we are the lead lender to a new affordable housing project in Jamaica Plain of four two-family homes occupied in 2019. We are also proud to be one of the leaders raising the endowment to construct the new Medford Public Library. Century’s commitment to sustainability continues to grow. In addition to electric messenger vehicles and highly effcient HVAC systems throughout our network, we ensured that all effcient measures were implemented in the construction of our new operations building on Hicks Avenue in Medford. These included repurposing an existing foundation system and constructing the new building shell in full compliance with the enhanced 2015 IECC energy code. TM Our Commitment to Sustainability We use electric vehicles for our courier services and extend use of our charging station to our customers and local residents for free. Celebrating our Customer Centric People and our Values We can’t say enough about the commitment and capability of our over 450 Century Associates. When bad weather, family calamity, or industry changes bring challenges, our colleagues faultlessly respond with time, ability and ingenuity. So many of our colleagues 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. Thank you to our shareholders, our clients, our associates, and our communities, for their confdence and relationships. We will endeavor to make 2020 another year of superior results through our diligence and resourcefulness, in Dad’s memory. Sincerely, Barry R. Sloane Chairman, President & CEO This year, we continued to invest in our communities, supporting 286 organizations. First District of Omega Psi Phi Fraternity, Inc. AbilityPLUS Adaptive Sports Action for Boston Community Development, Inc. Adopt-A-Student Foundation AFSCME Council 93 Alzheimer’s Association American Foundation for Suicide Prevention Andover Business Community Association Andover Center for History & Culture Andover Rotary Club Andover Senior Community Friends Andover Youth Foundation Animal Rescue League of Boston Archdiocese of Boston Armenian Heritage Foundation Asian Community Development Corporation Associazione Gizio At Home on the Sound Babson College Back Bay Association Bais Yaakov of Boston High School for Girls Best Buddies Beth Israel Deaconess Medical Center-Milton Bigelow Middle School Billerica Pop Warner Bishop Fenwick High School Boston Architectural College Boston Ballet Boston Children’s Hospital Boston Chinatown Neighborhood Center, Inc. Boston College High School Boston Harbor Now Boston Jewish Film Festival Boston Landmarks Orchestra Boy Scout Troop 205 Newton Boy Scout Troop 513 Stoneham Boy Scout Troop 9 Weymouth Boys & Girls Club of Greater Salem Boys & Girls Clubs of Boston Boys and Girls Clubs of Stoneham & Wakefeld Brandeis University Bread of Life Brendan M. Curtin Scholarship Fund Brookline Chamber of Commerce Brookline Community Foundation Brookline Food Pantry Brookline High School Innovation Fund Brookline Senior Center Cam Coye Memorial Scholarship Fund Cambridge Athletic Hall of Fame Cambridge Camping Cambridge College Cambridge Montessori School Cambridge School Volunteers Cambridge YWCA Camp Harbor View Foundation, Inc. Cardinal Cushing Centers, Inc. Cardinal Spellman High School Catholic Charities of Boston Catholic Schools Foundation, Inc./Inner-City Scholarship Fund Challenge Unlimited Children’s Trust Christians and Jews United for Israel City of Beverly City of Chicopee City of Everett City of Medford City of Peabody City of Somerville Colby-Sawyer College Colleen E. Ritzer Memorial Scholarship Fund Combined Jewish Philanthropies Community Dispute Settlement Center Congregation B’nai B’rith Congregation Kehillath Israel Congregation Shirat Hayam Coolidge Corner Community Chorus Creative Living Inc. Cristo Rey Boston High School Cyrus E. Dallin Art Museum, Inc. Cystic Fibrosis Foundation Dana-Farber Cancer Institute Dante Alighieri Society of Massachusetts Deutsches Altenheim, Inc. Dimock Community Health Centers DONNE 2000 Eliot School Elizabeth Peabody House Emerge Epstein Hillel School Essex North Shore Agricultural Technical Foundation, Inc. Facing Cancer Together Fisher Center for Alzheimer’s Research Fund Fontbonne Academy James L. McKeown Boys & Girls Club of Woburn Jeanne Geiger Crisis Center Jewish Big Brothers Big Sisters Jewish Cemetery Association of Massachusetts Jewish Community Centers of Greater Boston Jewish Family Service John T. Forcellese Memorial Fund Joseph N. Hermann Youth Center Joslin Diabetes Center Knights of Pythias, Local 158 Koleinu Boston’s Jewish Community Chorus Kosher Dental Study Ladies Ancient Order of Hibernians Lawrence CommunityWorks Lazarus House Ministries LimmudBoston Lynn Chamber of Commerce Lynn Housing Authority & Neighborhood Development Lynn Museum & Historical Society Lynn Police Association Malden YMCA Mary Ann Brett Food Pantry-Dorchester Catholic Massachusetts Association of Mental Health Massachusetts Eye and Ear Infrmary Team Century participated in the Rodman Ride for Kids Foundation for MetroWest Foundation for Racial, Ethnic & Religious Harmony Francis X. Irwin Class of 1952 Scholarship Fund Franciscan Children’s Friends of Christopher Columbus Park Gann Academy German International School Boston Girl Scouts of Eastern Massachusetts Greater Beverly Chamber of Commerce Greater Boston Real Estate Board Greater Lawrence Family Health Center Habitat for Humanity Greater Boston Harvard Club of Boston Heart Warrior Foundation Hebrew SeniorLife Hillel House at Boston University Hospice & Palliative Care Federation of Massachusetts Hospitality Homes, Inc. Housing Families, Inc. Independence House, Inc. Initiative for a Competitive Inner City Interfaithfamily.com Irish International Immigrant Center Italian American Association Italian Home for Children Massachusetts General Hospital Massachusetts Network of Foster Care Alumni Massachusetts Production Coalition Matignon High School May Institute Medford Babe Ruth Baseball Medford Chamber of Commerce Medford Jingle Bell Festival Medford Public Library Foundation Medford Public Schools Medford Rotary Club Medical Mission Sisters and Associates Merrimack Valley Catholic Charities Merrimack Valley YMCA MetroWest Jewish Day School Monsignor Neagle Apartments Morgan Memorial Goodwill Industries My Brother’s Table Mystic Learning Center, Inc. Mystic Valley Elder Services NAIOP Massachusetts Nashua Senior Activity Center National Brain Tumor Society National Institute for Children’s Heath Quality National Kidney Foundation National Tay-Sachs & Allied Diseases Association Nativity Preparatory School Needham History Center & Museum Neighborhood House Charter School Neighbors in Need New England Commission of Higher Education New England Conservatory New England Friends of Bosnia and Herzegovina New England Yachad Newbury Street League Newton Little League Newton North High School Newton-Needham Chamber of Commerce Newton-Wellesley Hospital Charitable Foundation North Andover Housing Authority North End Against Drugs, Inc. North End Beautifcation Committee North End Music and Performing Arts Center North End Waterfront Health North Reading Little League North Shore Chamber of Commerce North Shore Community Action Programs, Inc. Northeast Arc Northern Essex Community College On the Rise Our Lady of Cedars of Lebanon Church Pan-Mass Challenge Parenting Journey Parkinson’s Foundation Peabody Institute Library Foundation Plummer Youth Promise Prospect Hill Academy Charter School Quincy College Quincy School Community Partnership Redemptoris Mater Seminary Regis College RESPOND, Inc. Ridgefeld Academy Rodman Ride for Kids Rosie’s Place Run for the Troops Sacred Heart Parish Sacred Heart School Sail Cape Cod Saint Anthony’s Society Saint John School Saint Leonard Parish Saint Peter School Salem Academy Charter School Salem Rotary Club Salve Regina University Save the Children Scholar Athletes Service Club of Andover Shakespeare & Company Sisterhood Temple Emanuel of Newton Suzuki School of Newton Teamsters Local 25, Autism Fund Inc. Temple Beth Shalom Temple Beth Zion The Sloane Family and Associates celebrated the Bank’s 50th anniversary Sisters of St. Joseph of Boston Social Law Library Somerville Chamber of Commerce Somerville Council on Aging Somerville High School Somerville Media Center Somerville Museum Somerville Police Department Somerville Pop Warner Somerville Rotary Club South End Community Health Center South Shore Chamber of Commerce Spirit of Adventure Council, Boy Scouts of America Sportsmen’s Tennis & Enrichment Center St. Anthony Shrine St. John the Evangelist Church St. Joseph Parish St. Vincent DePaul Society Stonehill College Temple Emanuel Andover Temple Emanuel Newton Temple Israel Boston Temple Ohabei Shalom Temple Reyim Temple Sinai Sharon The Arc of the South Shore The Cam Neely Foundation The Carroll Center For The Blind The Forest Park Project The Genesis Fund The Jimmy Fund The Joey Fund The Kennek Foundation The Progeria Research Foundation The Skating Club of Boston The Soldiers Fund Threads Unbroken Torah Academy Town of Acton Town of Burlington Town of Groveland Town of Swampscott Town of Winchester Travis Roy Foundation Tufts University Dental Alumni Association UNICO Merrimack Valley Usher Syndrome Society USS Constitution Museum Visiting Nurse & Community Care VNA Hospice Care Ward 7 Improvement Association Wellesley Rotary Club Whittier Street Health Center Winchester Rotary Club Woburn Kiwanis Club Woburn Middlesex Lions Club Wounded Warrior Project YouthConnect Century Bank presented the Marshall M. Sloane Memorial Scholarship Century Bancorp, Inc. Directors Century Bank and Trust Company Officers Management Committee Barry R. Sloane Chairman, President & CEO Linda Sloane Kay Vice Chair William P. Hornby, CPA Chief Financial Officer & Treasurer Gerald S. Algere Executive Vice President Paul A. Evangelista Executive Vice President Brian J. Feeney 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 Bradford J. Buckley Peter R. Castiglia Gracine Copithorne Susan B. Delahunt William J. Gambon, Jr. Timothy L. Glynn Anna M. Gorska Anthony C. LaRosa, CPA Cary E. Lynch Shipley C. Mason Nancy R. Miller Thomas E. Piemontese Deborah R. Rush Kenneth A. Samuelian Yasmin D. Whipple George R. Baldwin4,6* President & CEO Baldwin & Company Stephen R. Delinsky, Esq.1,3*,7 Attorney Louis J. Grossman 3,4,7 Chairman The Grossman Companies, Inc. Russell B. Higley, Esq.6,7 Attorney Jackie Jenkins-Scott 4,5* President Emeritus Wheelock College Linda Sloane Kay 4,5,6,7 Vice Chair Century Bank and Trust Company Fraser Lemley 2*,3,4,5 Chairman & CEO Sentry Auto Group Joseph P. Mercurio1,2,7* Independent Consultant Higher Education and Administration Joseph J. Senna, Esq.1*,4 Attorney Jo Ann Simons 1,2,5 CEO Northeast ARC Barry R. Sloane 4,5,6,7 Chairman, President & CEO Century Bank and Trust Company George F. Swansburg 4*,5,6 Officers Barry R. Sloane Chairman, President & CEO Linda Sloane Kay Vice Chair William P. Hornby, CPA Chief Financial Officer & Treasurer Judith Sinclair Clerk First Vice Presidents Assistant Vice Presidents Anel J. Cetina-Santos Jeana A. DeBenedetto Jeanette E. duMee John R. Ferguson Joshua L. Jick Linda M. Johns Brandon N. Letellier Ann E. Mannion Carol A. Melisi Robson G. Miguel Marie A. Nugent Kathleen E. Schroeder Krzysztof A. Sikorski Jeanne A. Wood Officers Zabi Abhar Scott Atkinson Susan A. Cabral Heather J. Donnellan Sarah K. Doracaj Paul A. Ennis Joseph R. Ferreira Richard Forrest Sara A. Gaudet Lisa M. Glynn Fatima M. Goncalves Paula A. Grimaldi Simohammed Hakkaoui Earl K. Kishida Amanda A. Leitz David M. Leung Paula A. Malley Kimberly J. Matsumoto Phil McManus Sambo Mean Cheryl L. Miller Lisa M. Ramos Pratik Rana Christopher M. Ross Cynthia E. Sarnie Biljana Savic Michael E. Serieka Maria R. Serrentino Robert J. Silva Judith Sinclair Lyndsey H. Starks Matthew Sullivan Elizabeth A. Theriault Michael D. Ballard Jeffrey R. Bradbury T. Daniel Kausel Nancy M. Marsh Carl M. Mattos Jennifer A. Nickerson, CPA Meredith O’Keefe Vice Presidents Zubin C. Bagwadia Robert A. Bennett John S. Bosco, Jr. Pasqualina Buttiri Roberta M. Byington James W. Clark Cindy Cohen Derek J. Craig Anthony Daniels Ray DeBarros Brian J. DeVenne James P. Dever III Laura A. DiFava Margaret DiMasco Sandra R. Edey Michele English Judith A. Fallon Marissa L. Fitzgerald Jane C. Gilberti Howard N. Gold Lisa Gosling Michelle L. Haughton Ashkon Hedvat James J. Jordan Darlene Joyce William B. Keefe Brian Kelly Emma M. Lindsay Michael F. Long Karen M. Martin Kathleen McGillicuddy Lois M. McGinness John L. Norris III Sarah A. O’Toole Patricia A. Pace Keith M. Pauletti Karen Pessa Scott M. Piccolo Cornelius C. Prioleau Scott M. Rembis Danielle G. Sheehan Youyi Shi Daisy S. Siddiqui Mary Spadoni Rita C. Spitz Jeremy P. Styles Valerie R. Trevisone Lawrence H. Tsoi Jose I. Umana Calvin M. Wong 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 Financial Highlights 1 FINAN C IAL STATEMENTS 3 Management’s iscussion and Analysis of Results of Operations and Financial Condition 18 19 20 21 22 23 56 58 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 ’19 2019 2018 2017 2016 2015 (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 Core earnings—Non-GAAP (1) 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—Non-GAAP (1) $ $ $ $ $ $ $ 159,139 63,350 95,789 1,250 94,539 18,399 72,129 40,809 1,110 39,699 39,699 3,633,044 1,934,865 5,567,909 1,934,865 5,567,909 8.63 4.31 7.13 4.31 5.6 % $ $ $ $ $ $ $ 137,056 44,480 92,576 1,350 91,226 16,248 69,693 37,781 1,568 36,213 36,213 3,608,179 1,959,730 5,567,909 1,959,730 5,567,909 7.89 3.95 6.50 3.95 6.1 % $ $ $ $ $ $ $ 113,436 27,820 85,616 1,790 83,826 16,552 67,119 33,259 10,958 22,301 30,749 3,604,029 1,963,880 5,567,909 1,963,880 5,567,909 4.86 2.43 4.01 2.43 9.9 % $ $ $ $ $ $ $ 96,699 22,617 74,082 1,375 72,707 16,222 64,757 24,172 (362) 24,534 24,534 3,600,729 1,967,180 5,567,909 1,967,180 5,567,909 5.35 2.68 4.41 2.68 9.0 % $ $ $ $ $ $ $ 90,093 20,134 69,959 200 69,759 15,993 62,198 23,554 533 23,021 23,021 3,600,729 1,967,180 5,567,909 1,967,180 5,567,909 5.02 2.51 4.13 2.51 9.6 % 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 (recoveries) as a percent of average loans Average stockholders’ equity to average assets Efficiency ratio—Non-GAAP (1) $ 5,492,424 2,426,119 4,400,111 332,581 59.73 $ $ 5,163,935 2,285,578 4,406,964 300,439 53.96 $ $ 4,785,572 2,175,944 3,916,967 260,297 46.75 $ $ 4,462,608 1,923,933 3,653,218 240,041 43.11 $ $ 3,947,441 1,731,536 3,075,060 214,544 38.53 $ 0.76 % 12.44 % 2.10 % 0.01 % 6.12 % 58.4 % 0.74 % 13.05 % 2.18 % (0.04) % 5.71 % 59.2 % 0.48 % 8.75 % 2.25 % 0.00 % 5.50 % 57.8 % 0.57 % 10.80 % 2.12 % 0.00 % 5.29 % 62.7 % 0.59 % 11.26 % 2.18 % (0.04) % 5.25 % 64.1 % (1) 2019 2018 2017 2016 2015 Non-GAAP Financial Measures are reconciled in the following tables: Calculation of Efficiency Ratio: Total Operating Expenses Less: Other Real Estate Owned Expenses Total Adjusted Operating Expenses (numerator) Net Interest Income Total Other Operating Income Tax Equivalent Adjustment Total Income (denominator) $ $ $ 72,129 (134) 71,995 95,789 18,399 9,068 123,256 $ $ $ 69,693 (59) 69,634 92,576 16,248 8,854 117,678 $ $ $ 67,119 — 67,119 85,616 16,552 13,979 116,147 $ $ $ 64,757 — 64,757 74,082 16,222 12,917 103,221 $ $ $ 62,198 — 62,198 69,959 15,993 11,140 97,092 Efficiency Ratio, Year—Non-GAAP 58.4 % 59.2 % 57.8 % 62.7 % 64.1 % 2019 2018 2017 2016 2015 $ $ 2,207 39,699 $ $ 2,203 36,213 $ $ 2,200 22,301 $ $ 2,201 24,534 $ $ 2,200 23,021 5.6 % 6.1 % 9.9 % 9.0 % 9.6 % 2019 2018 2017 2016 2015 $ $ 39,699 — 39,699 $ $ 36,213 — 36,213 $ $ 22,301 8,448 30,749 $ $ 24,534 — 24,534 $ $ 23,021 — 23,021 Calculation of Dividend Payout Ratio: Dividends Paid (numerator) Net Income (denominator) Dividend Payout Ratio—Non-GAAP Calculation of Core Earnings: Net Income Add: Deferred Tax Remeasurement Charge Core earnings—Non-GAAP 1 Century Bancorp, Inc. AR ’19Financial Highlights The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from ecember 31, 2014 to ecember 31, 2019 with the cumulative total return of the NAS AQ Market Index (U.S. Companies) and the NAS AQ 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 $300 Cumulative Total Return* Century Bancorp, Inc. NASDAQ U.S. NASDAQ Banks $250 $200 $150 $100 $50 $0 2014 2015 2016 2017 2018 2019 Value of $100 Invested on December 31, 2014 at: 2015 2016 2017 2018 2019 Century Bancorp, Inc. NASDAQ Banks NASDAQ U.S. $ 109.76 102.21 106.96 $ 153.14 129.34 116.45 $ 201.10 153.13 150.96 $ 175.20 128.02 146.67 $ 234.04 175.61 200.49 *Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on ecember 31, 2014 and that all dividends were reinvested. 2 Century Bancorp, Inc. AR ’19Financial Highlights FORWARD-LOOKING STATE ENTS 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 ARKET DEVELOP ENTS On July 21, 2010, the odd-Frank Wall Street Reform and Consumer Protection Act (the “ -F Act”) became law. The -F 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 -F 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 -F 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 -F Act broadened the base for F IC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum F IC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through ecember 31, 2012. In addition, the -F Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The egula tory final implementing regulations for the Rule were issued by various r agencies in ecember 2013 and under an extended conformance r egulation compliance was required to be achieved by July 21, 2015. The conformance period for investments in and relationships with certain “legacy covered funds” was extended to July 21, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation. The federal banking agencies have issued amendments to the Rule to provide greater clarity and certainty about what activities are prohibited and to improve the effective allocation of compliance resources, and to conform the Rule to the EGRRCPA (discussed below). The federal banking agencies have also issued a notice of proposed rulemaking to liberalize the covered fund rules. Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule that came into effect in January 2015 sets the Basel III minimum regulatory capital requirements for all organizations. It included a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raised the minimum Tier I capital ratio from 4 percent to 6 percent of risk-w and would set a new conservation buffer of 2.5 percent of risk-w The implementation of the framework did not have a material impact on the Company’s financial condition or results of operations. ed assets eight eighted assets. On ecember 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act took effect on January 1, 2018. The Tax Act lowered the Company’s federal tax rate from 34% to 21%. Also, for tax years beginning after ecember 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, it is anticipated that the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards. Tax Act changes for individuals include lower tax rates, mortgage interest and state and local tax limitations as well as an increase in the standard deduction, among others. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or the EGRRCPA, became law. This is arguably the most significant financial institution legislation since the -F Act. The EGRRCPA changes certain of the regulatory requirements of the -F Act and includes provisions intended to relieve the regulatory burden on “community banks.” Among other things, for qualifying community banks with less than $10 billion in total consolidated assets, the EGRRCPA contains a safe harbor from the -F Act “ability to repay” mortgage requirements, an exemption from the Volcker Rule, may permit filing of simplified Call Reports, and potentially will result in some alleviation of the -F Act and U.S. Basel III capital mandates. The EGRRCPA requires the federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%. The federal banking agencies jointly issued a final rule, effective January 1, 2020, which set the minimum ratio at 9%. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements including the capital ratio requirements that are required to be considered well capitalized under Section 38 of Federal eposit Insurance Act. Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 ecember 31, 2019, the Company had total assets of $5.5 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher education institutions throughout Massachusetts, New Hampshire, Rhode Island, Connecticut and New York. The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity. The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium sized businesses and retail customers in its market area. In recent years, the Company has increased business to larger institutions, specifically, healthcare and higher education. 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 its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business. The Company has municipal cash management client engagements in Massachusetts, New Hampshire and Rhode Island comprising of approximately 298 government entities. The Company had net income of $39,699,000 for the year ended ecember 31, 2019, compared with net income of $36,213,000 for the year ended ecember 31, 2018, and net income of $22,301,000 for the year ended ecember 31, 2017. Class A diluted earnings per share were $7.13 in 2019 compared to $6.50 in 2018 and compared to $4.01 in 2017. uring 2017, the Company’s earnings were negatively impacted by a reduction in the value of its net deferred tax asset resulting in a charge of $8.4 million to income tax expense. This was the result of the enactment of the Tax Act on ecember 22, 2017, which lowered the Company’s federal tax rate from 34% to 21%. uring 2019 and 2018, 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. Earnings per share (EPS) for each class of stock and for each year ended Basic EPS—Class A common ecember 31, is as follows: Basic EPS—Class B common 2019 $ 8.63 $ 4.31 $ 7.13 $ 4.31 2018 $ 7.89 $ 3.95 $ 6.50 $ 3.95 2017 $ 4.86 $ 2.43 $ 4.01 $ 2.43 Diluted EPS—Class A common Diluted EPS—Class B common The trends in the net interest margin are illustrated in the graph below: 2.40 % 2.30 % Net Interest Margin 2.20 % 2.19% 2.20% 2.19% 2.26% 2.26% 2.31% 2.13% 2.11% 2.06% 2.08% 2.14% 2.10 % 2.16% 2.00 % Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2017 2018 2019 The margin increased during 2017 primarily as a result of an increase in rates on earning assets. This increase was primarily the result of the yield on floating rate assets increasing as a result of recent increases in short term interest rates as well as an increase in prepayment penalties collected during the second quarter of 2017. Prepayment penalties collected amounted to $825,000 and contributed approximately seven basis points to the net interest margin for the second quarter of 2017. uring 2017, the Company did not see a corresponding increase in short term rates on interest bearing liabilities. The margin decreased for 2018 mainly as a result of a decrease in the corporate tax rate from 34% to 21%. This decrease results in a lower tax equivalent yield on tax-exempt assets. uring the fourth quarter of 2018 and first and second quarters of 2019, the Company increased its average interest-bearing deposits. These deposits increased net interest income but decreased the net interest margin. uring the third quarter of 2019, the net interest margin increased mainly as a result of deposit rate decreases. These deposits increased net interest income and the net interest margin. uring the fourth quarter of 2019, the net interest margin increased mainly as a result of prepayment penalties collected. Prepayment penalties collected amounted to $1.4 million and contributed approximately eleven basis points to the net interest margin for the fourth quarter of 2019. 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 3.50 % the net interest margin. 3.00 % Historical U.S. Treasury Yield Curve 2.50 % 2.00 % 1.50 % 1.00 % 0.00 % 3 Month 6 Month 2 Year 3 Year 5 Year 10 Year 30 Year U.S. Treasury Yield Curve 12/31/2019 U.S. Treasury Yield Curve 12/31/2018 U.S. Treasury Yield Curve 12/31/2017 4 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition A yield curve typically plots the interest rates of U.S. Treasury ebt, 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. uring 2018, short-term rates increased more than longer-term rates resulting in a flattening of the yield curve. uring 2019, short-term rates decreased more than longer-term rates resulting in a steepening of the yield curve. Total assets were $5,492,424,000 at ecember 31, 2019, an increase of 6.4% from total assets of $5,163,935,000 at ecember 31, 2018. uring 2018, the Company further enhanced its methodology to the allowance for loan losses by including additional metrics for qualitative factors on certain loan portfolios. Further enhancements and refinements include adding qualitative factors to certain loan portfolios to enhance granularity. The Company also updated and added data sources to measure present and forecasted economic conditions. 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. On ecember 31, 2019, stockholders’ equity totaled $332,581,000, compared with $300,439,000 on ecember 31, 2018. Book value per share increased to $59.73 at ecember 31, 2019, from $53.96 on ecember 31, 2018. FINANCIAL CONDITION Investment Securities uring the third quarter of 2019, the Company purchased the existing Brookline branch location that the Company was leasing. Also, during the third quarter, the Company purchased a future branch location in Salem, New Hampshire. The Company plans to open this branch during the fourth quarter of 2020. 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 allowance for loan losses to be its critical accounting policy. 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 specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. After considering the above components, an unallocated component may be generated to cover uncertainties that could affect management’s estimate of probable losses. 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”. The Company’s securities portfolio consists of securities available-for-sale (“AFS”), securities held-to-maturity (“HTM”), and equity securities. Securities available-for-sale consist of certain U.S. Treasury, U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; and other debt securities. 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 ecember 31, 2019 totaled $260,502,000 and included gross unrealized gains of $274,000 and gross unrealized losses of $696,000. A year earlier, the fair value of securities available-for-sale was $336,759,000 including gross unrealized gains of $635,000 and gross unrealized losses of $627,000. In 2019, the Company recognized gains of $13,000 on the sale of available-for-sale securities. In 2018 and 2017, the Company recognized gains of $302,000 and $47,000, respectively. Securities classified as held-to-maturity consist of U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities. Securities held-to-maturity as of ecember 31, 2019 are carried at their amortized cost of $2,351,120,000. A year earlier, securities held-to-maturity totaled $2,046,647,000. In 2019, 2018, and 2017, the company recognized gains of $48,000 and $0, and $0 respectively, on the sale of held-to-maturity securities. The sale from securities held-to-maturity relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment. Equity securities are reported at fair value with unrealized gains and losses included in earnings. The fair value of equity securities at ecember 31, 2019 and ecember 31, 2018, amounted to $1,688,000 and $1,596,000, respectively. 5 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition Fair Value of Securities Available-for-Sale The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated. At December 31, 2018 2019 2017 (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 Total Amount Percent Amount Percent Amount Percent $ — — 0.0 % 0.0 % $ 1,992 3,915 0.6 % 1.2 % $ 1,984 — 0.5 % 0.0 % 54,211 20.8 % 70,194 20.9 % 80,950 20.5 % 184,187 70.7 % 396 18,076 3,632 0.2 % 6.9 % 1.4 % 162,890 672 93,503 3,593 48.4 % 0.2 % 27.7 % 1.0 % 225,775 892 82,600 3,629 57.0 % 0.2 % 20.9 % 0.9 % $ 260,502 100.0 % $ 336,759 100.0 % $ 395,830 100.0 % The majority of the Company’s securities AFS are classified as Level 2, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Management’s understanding of a pricing service’s pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing controls. Management’s validation of a vendor’s pricing methodology includes establishing internal controls to determine that the pricing information received by a pricing service and used by management in the valuation process is relevant and reliable. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for- sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not more likely than not that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at ecember 31, 2019. Securities available-for-sale totaling $13,301,000, or 0.2% of assets, are classified as Level 3, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” These securities are generally municipal securities with no readily determinable fair value. The Company also utilizes internal pricing analysis on various municipal securities using market rates on comparable securities. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations. ebt securities of Government Sponsored Enterprises refer primarily to debt securities of Fannie Mae and Freddie Mac. Amortized Cost of Securities Held-to-Maturity The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated. At December 31, 2018 2019 2017 (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Sponsored Enterprise Mortgage-Backed Securities Amount Percent Amount Percent Amount Percent $ — 98,867 44,379 0.0 % 4.2 % 1.9 % $ 9,960 234,228 52,051 0.5 % 11.5 % 2.5 % $ — 104,653 57,235 0.0 % 6.2 % 3.4 % 2,207,874 93.9 % 1,750,408 85.5 % 1,539,345 90.4 % Total $ 2,351,120 100.0 % $ 2,046,647 100.0 % $ 1,701,233 100.0 % 6 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition Fair Value of Securities Available-for-Sale The following two tables set forth contractual maturities of the Bank’s securities portfolio at ecember 31, 2019. Actual maturities may differ from contractual Amounts Maturing maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Within One Year Weighted One Year Weighted Five Years Weighted Over Weighted % of Average to Five % of Average to Ten % of Average Ten % of Average Total Yield Years Total Yield Years Total Yield Years Total Yield Total Weighted Average Yield % of Total (dollars in thousands) U.S. Treasury $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % U.S. Government Sponsored Enterprises — 0.0 % SBA Backed Securities — 0.0 % 0.00 % 33,796 13.0 % 1.97 % 15,598 6.0 % 2.23 % 4,817 1.8 % 2.26 % 54,211 20.8 % 2.07 % U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Obligations of States and Political Subdivisions 164 0.1 % 2.14 % 77,472 29.7 % 2.16 % 106,551 40.9 % 2.27 % — 0.0 % 0.00 % 184,187 70.7 % 2.22 % 396 0.2 % 2.20 % — 0.0 % 0.00 % — 0.0 % 0.00 % — 0.0 % 0.00 % 396 0.2 % 2.20 % 17,616 6.7 % 2.48 % 385 0.1 % 3.92 % 75 0.1 % 4.04 % — 0.0 % 0.00 % 18,076 6.9 % 2.24 % Other Debt Securities 300 0.1 % 1.92 % 1,282 0.6 % 2.08 % 2,050 0.7 % 6.00 % — 0.0 % 0.00 % 3,632 1.4 % 4.24 % Total $ 18,476 7.1 % 2.46 % $ 112,935 43.4 % 2.11 % $ 124,274 47.7 % 2.33 % $ 4,817 1.8 % 2.26 % $ 260,502 100.0 % 2.22 % Amortized Cost of Securities Held-to-Maturity Amounts Maturing Within One Year Weighted One Year Weighted Five Years Weighted Over Weighted % of Average to Five % of Average to Ten % of Average Ten % of Average Total Yield Years Total Yield Years Total Yield Years Total Yield Total Weighted Average Yield % of Total (dollars in thousands) U.S. Treasury $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % $ — 0.0 % 0.00 % U.S. Government Sponsored Enterprises 34,934 1.5 % 2.33 % 63,933 2.7 % 2.48 % — 0.0 % 0.00 % — 0.0 % 0.00 % 98,867 4.2 % 2.43 % SBA Backed Securities U.S. Government Sponsored Enterprise Mortgage- Backed Securities — 0.0 % 0.00 % 6,782 0.3 % 1.82 % 37,597 1.6 % 2.40 % — 0.0 % 0.00 % 44,379 1.9 % 2.31 % 38,642 1.6 % 2.51 % 1,820,328 77.5 % 2.60 % 336,474 14.3 % 2.60 % 12,430 0.5 % 2.81 % 2,207,874 93.9 % 2.60 % Total $ 73,576 3.1 % 2.42 % $ 1,891,043 80.5 % 2.59 % $ 374,071 15.9 % 2.58 % $ 12,430 0.5 % 2.81 % $ 2,351,120 100.0 % 2.59 % At ecember 31, 2019 and 2018, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2019, sales of securities totaling $17,478,000 in gross proceeds resulted in a net realized gain of $61,000. In 2018, sales of securities totaling $27,517,000 in gross proceeds resulted in a net realized gain of $302,000. There were no sales of state, county or municipal securities during 2019, 2018 and 2017. 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 ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition Loans The Company’s lending activities are conducted principally in Massachusetts, New Hampshire, Rhode Island, Connecticut and New York. The Company grants single-family and multi-family residential loans, commercial and commercial real estate loans, municipal loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers’ geographic areas and of the general economy. December 31, The following summary shows the composition of the loan portfolio at the dates indicated. 2019 2018 2016 2017 2015 Amount Amount Amount Amount Amount Percent of Total Percent of Total Percent of Total Percent of Total Percent of Total (dollars in thousands) Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer Home equity Overdrafts Total $ 8,992 812,417 120,455 786,102 371,897 21,071 304,363 822 0.4 % $ 33.5 % 5.0 % 32.4 % 15.3 % 0.9 % 12.5 % 0.0 % 13,628 761,625 97,290 750,362 348,250 21,359 292,340 724 0.6 % $ 33.3 % 4.3 % 32.8 % 15.2 % 0.9 % 12.9 % 0.0 % 18,931 763,807 106,599 732,491 287,731 18,458 247,345 582 0.9 % $ 35.1 % 4.9 % 33.7 % 13.2 % 0.8 % 11.4 % 0.0 % 14,928 612,503 135,418 696,173 241,357 11,013 211,857 684 0.8 % $ 31.8 % 7.0 % 36.2 % 12.5 % 0.6 % 11.0 % 0.1 % 27,421 452,235 85,685 721,506 255,346 10,744 178,020 579 1.6 % 26.1 % 4.9 % 41.7 % 14.7 % 0.6 % 10.3 % 0.1 % $ 2,426,119 100.0 % $ 2,285,578 100.0 % $ 2,175,944 100.0 % $ 1,923,933 100.0 % $ 1,731,536 100.0 % At ecember 31, 2019, 2018, 2017, 2016 and 2015, loans were carried net of (premiums) discounts of $(292,000), $(364,000), $46,000, $313,000 and $360,000, respectively. Net deferred loan fees of $220,000, $496,000, $588,000, $641,000 and $988,000 were carried in 2019, 2018, 2017, 2016 and 2015, respectively. The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on ecember 31, 2019. The table excludes loans secured by 1–4 family residential real estate, loans for household and family personal expenditures, and municipal loans. Maturities are presented as if scheduled One to Five Years principal amortization payments are due on the last contractual payment date. Remaining Maturities of Selected Loans at December 31, 2019 One Year or Less Over Five Years Total (dollars in thousands) Construction and land development Commercial and industrial Commercial real estate Total $ 568 45,963 31,485 $ 78,016 $ — 33,963 105,580 $ 139,543 $ 8,424 732,491 649,037 $ 8,992 812,417 786,102 $ 1,389,952 $ 1,607,511 December 31, 2019 One to Five Years Over Five Years Total (dollars in thousands) The following table indicates the rate variability of the above loans due after one year. Predetermined interest rates Floating or adjustable interest rates Total $ 99,014 40,529 $ 139,543 $ 378,347 1,011,605 $ 1,389,952 $ 477,361 1,052,134 $ 1,529,495 The Company’s commercial and industrial (“C&I”) loan customers include large healthcare and higher education institutions. uring 2017, the Company increased its lending activities to these types of organizations. This increase may expose the Company to concentration risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other more intangible factors, which are considered in originating commercial loans. The percentage of these types of organizations to total C&I loans has remained stable at 87% at ecember 31, 2019, compared to 86% at ecember 31, 2018. C&I loan customers also include 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 educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and thirty years. Also included in commercial real estate loans are loans extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s market area, which generally includes Massachusetts, New Hampshire, and Rhode Island. 8 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition 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. uring 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. Municipal loans customers include loans to municipalities or related interests, primarily for infrastructure projects. The Company had increased its lending activities to municipalities through 2016. Municipal loans decreased during 2017 and 2018 as a result of loan payoffs. Municipal loans increased during 2019 as a result of increased loan originations. Residential real estate (1–4 family) includes two categories of loans. Included in residential real estate are approximately $48,023,000 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 ecember 31, 2019, the Company was obligated to advance a total of $11,062,000 to complete projects under construction. 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 irectors of the Bank. Nonaccrual loans remained relatively stable from 2016 through 2019. Nonaccrual loans decreased during 2016, primarily as a result of a decrease in home equity and residential real estate nonperforming loans. December 31, 2019 2016 2017 2018 2015 (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 is as follows: Home equity Commercial real estate Construction and land development Commercial and industrial Total impaired loans $ 2,014 — $ 2,014 $ 2,361 — 0.08 % 0.04 % $ 2019 — — 2,346 — 906 $ 1,313 2,225 $ 3,538 $ 2,559 — 0.15 % 0.07 % $ 2018 — — 2,650 — 401 $ 1,684 — $ 1,684 $ 2,749 — 0.08 % 0.04 % $ 2017 4,212 — 2,554 — 348 $ 1,084 — $ 1,084 $ 3,526 — 0.06 % 0.02 % $ 2016 198 — 3,149 94 389 $ 2,336 — $ 2,336 $ 2,893 — 0.13 % 0.06 % $ 2015 916 90 1,678 98 443 $ 3,252 $ 3,051 $ 7,114 $ 3,830 $ 3,225 At ecember 31, 2019, 2018, 2017, 2016 and 2015 impaired loans had specific reserves of $102,000, $145,000, $164,000, $173,000 and $250,000, respectively. The Company was servicing mortgage loans sold to others without recourse of approximately $204,690,000, $209,160,000, $229,533,000, $229,730,000 and $185,299,000 at ecember 31, 2019, 2018, 2017, 2016 and 2015, respectively. The Company had no loans held for sale at ecember 31, 2019, 2018, 2017, 2016 and 2015. 9 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $1,202,000 at ecember 31, 2019, $1,226,000 at ecember 31, 2018, $1,525,000 at ecember 31, 2017, $1,629,000 at ecember 31, 2016 and $1,305,000 at ecember 31, 2015. irectors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features. The Company continues to monitor closely $31,631,000 and $31,728,000 at ecember 31, 2019 and 2018, 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 ecember 31, 2019, although such values may fluctuate with changes in the economy and the real estate market. The decrease is primarily attributable to two loan relationships secured by real estate. 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 securi ny’s allowance for loan losses for the years indicated. (dollars in thousands) ant factors. The followi ng loans and other relev ng table summarizes the changes in the Compa 2019 2018 2017 2016 2015 Year-end loans outstanding (net of unearned discount and deferred loan fees) $ 2,426,119 $ 2,285,578 $ 2,175,944 $ 1,923,933 $ 1,731,536 Average loans outstanding (net of unearned discount and deferred loan fees) $ 2,341,190 $ 2,222,946 $ 2,059,797 $ 1,838,136 $ 1,507,546 Balance of allowance for loan losses at the beginning of year Loans charged-off: Commercial and industrial Construction Commercial real estate Residential real estate Consumer Total loans charged-off Recovery of loans previously charged-off: Commercial and industrial Construction Real estate Consumer Total recoveries of loans previously charged-off: Net loan charge-offs (recoveries) Provision charged to operating expense Reclassification to other liabilities $ 28,543 $ 26,255 $ 24,406 $ 23,075 $ 22,318 137 — — 22 295 454 60 — — 186 246 208 1,250 — 67 — — 450 316 833 57 1,436 75 203 1,771 (938) 1,350 — 49 — — — 341 390 110 — 84 255 449 (59) 1,790 — — — — 27 362 389 132 — 6 296 434 (45) 1,375 (89) — 172 298 — 311 781 212 780 91 255 1,338 (557) 200 — Balance at end of year $ 29,585 $ 28,543 $ 26,255 $ 24,406 $ 23,075 Ratio of net charge-offs (recoveries) during the year to average loans outstanding Ratio of allowance for loan losses to loans outstanding 0.01 % 1.22 % (0.04) % 1.25 % 0.00 % 1.21 % 0.00 % 1.27 % (0.04) % 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 ge-offs reserves on impaired loans, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The level of the char ge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Char declined in 2015 and 2016 as a result of the overall decrease in the level of nonaccrual loans. Charge-offs increased in 2018 primarily as a result of one residential real estate loan. uring 2018, there was also a large recovery of a construction loan that was previously charged-off. The dollar amount of the allowance for loan losses increased primarily as a result of an increase in loan balances offset, somewhat, by lower historical loss factors. uring 2015, the Company enhanced its approach to the development of the historical loss factors and qualitative factors used on certain loan portfolios. The methodology enhancement was in response to the changes in the risk characteristics of the Company’s new loan originations, as the Company has continued to increase its exposure to larger loan originations to large institutions with strong credit quality. The Company has limited internal loss history experience with these types of loans, 10 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition and has determined a more appropriate representation of loss expectation is to utilize external historical loss factors based on public credit ratings, as there is a great deal of default and loss data available on these types of loans from the credit rating agencies. As of June 30, 2015, the Company incorporated this information into the development of the historical loss rates for these loan types. The combination of the enhancements made to the allowance methodology to address the changing risk profile of the Company’s new loan originations and the increase in these loan types as a percentage of the overall portfolio. For 2016 and 2017, the change in the ratio of the allowance for loan losses to loans outstanding, was primarily due to changes in portfolio composition, lower historical loss rates, and qualitative factor adjustments. For 2018, the ratio increased, primarily as a result of changes in qualitative factors related to general economic factors pertaining to certain industries. For 2019, the ratio decreased primarily as a result of improvements in historical loss factors. In addition, the Company monitors the outlook for the industries in which these institutions operate. Healthcare and higher education are the primary industries. The Company also monitors the volatility of the losses within the historical data. By combining the credit rating, the industry outlook and the loss volatility, the Company arrives at the quantitative loss factor for each credit grade. Commercial and Industrial Municipal Commercial Real Estate Total Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at ecember 31, 2019. (in thousands) Credit Rating: Aaa-Aa3 A1-A3 Baa1-Baa3 Ba2 Total $ $ 523,644 186,044 — — 53,273 7,354 51,133 5,895 $ 40,437 148,346 144,711 — $ 617,354 341,744 195,844 5,895 $ 709,688 $ 117,655 $ 333,494 $ 1,160,837 Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at ecember 31, 2018. (in thousands) Commercial and Industrial Municipal Commercial Real Estate Total Credit Rating: Aaa-Aa3 A1-A3 Baa1-Baa3 Ba2 Total $ $ 491,247 172,472 — — 54,105 7,605 26,970 6,810 $ 42,790 151,381 118,197 — $ 588,142 331,458 145,167 6,810 $ 663,719 $ 95,490 $ 312,368 $ 1,071,577 The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At Percent ecember 31 of each year listed below, the allowance is comprised of the following: of Loans in Each Category to Total Loans Percent of Loans in Each Category to Total Loans Percent of Loans in Each Category to Total Loans Percent of Loans in Each Category to Total Loans Percent of Loans in Each Category to Total Loans Amount Amount Amount Amount Amount 2019 2016 2017 2018 2015 (dollars in thousands) Construction and land development $ Commercial and industrial Municipal Commercial real estate Residential real estate Consumer and other Home equity Unallocated Total 331 11,596 2,566 11,464 2,194 312 1,065 57 0.4 % $ 1,092 10,998 1,838 10,663 2,190 365 1,111 33.5 % 5.0 % 32.4 % 15.3 % 0.9 % 12.5 % 0.6 % $ 1,645 9,651 1,720 9,728 1,873 373 989 33.3 % 4.3 % 32.8 % 15.2 % 0.9 % 12.9 % 0.9 % $ 1,012 6,972 1,612 11,135 1,698 582 1,102 35.1 % 4.9 % 33.7 % 13.2 % 0.8 % 11.4 % 0.8 % $ 2,041 5,899 994 10,589 1,320 644 1,077 31.8 % 7.1 % 36.2 % 12.5 % 0.6 % 11.0 % 1.6 % 26.1 % 4.9 % 41.7 % 14.7 % 0.7 % 10.3 % 286 276 293 511 $ 29,585 100.0 % $ 28,543 100.0 % $ 26,255 100.0 % $ 24,406 100.0 % $ 23,075 100.0 % 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. The enhancements described above have resulted in a lower level of unallocated allowance for loan losses. Further information regarding the allocation of the allowance is contained within Note 6 of the “Notes to Consolidated Financial Statements.” 11 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 report balancing the customer’s checking account. Interest rates on deposits are set twice per month by the Bank’s rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee. 2019 2018 2017 The following table sets forth the average balances of the Bank’s deposits for the periods indicated. (dollars in thousands) Amount Percent Amount Percent Amount Percent Demand Deposits Savings and Interest Checking Money Market Time Certificates of Deposit Total $ 760,420 1,810,481 1,273,389 519,761 17.4 % 41.5 % 29.2 % 11.9 % $ 753,604 1,514,259 1,230,010 577,975 18.5 % 37.1 % 30.2 % 14.2 % $ 687,853 1,457,872 1,105,072 566,940 18.0 % 38.2 % 28.9 % 14.9 % $ 4,364,051 100.0 % $ 4,075,848 100.0 % $ 3,817,737 100.0 % 2019 2018 (dollars in thousands) Time eposits of $100,000 or more as of ecember 31, are as follows: Three months or less $ 84,940 94,562 146,830 130,719 $ 457,051 $ 141,500 110,189 100,446 107,182 $ 459,317 Three months through six months Six months through twelve months Over twelve months Total 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 $370,955,000, an increase of $168,577,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at ecember 31, 2019, was approximately $245,138,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12 of the notes to consolidated financial statements, “Other Borrowed Funds and Subordinated ebentures,” for a schedule, including related interest rates and other information. Subordinated Debentures In ecember 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II. Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The coupon rate on these securities was 3.76% at ecember 31, 2019. 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 $266,045,000, an increase of $111,805,000 from the prior year. See Note 11 of the notes to consolidated financial statements, “Securities Sold Under Agreements to Repurchase,” for a schedule, including related 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 3.4% in 2019 to $104,857,000, compared with $101,430,000 in 2018. The increase in net interest income for 2019 was mainly due to a 7.2% increase in the average balances of earning assets, combined with a similar increase in deposits and prepayment penalties collected. The increase in net interest income for 2018 was mainly due to a 5.1% 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 decreased to 2.10% in 2019 and decreased to 2.18% in 2018 from 2.25% in 2017. The decrease in the net interest margin for 2019 was primarily attributable to an increase in rates paid on deposits. The decrease in the net interest margin for 2018 was primarily the result of a decrease in the federal corporate tax rate from 34% to 21% as well as lower prepayment penalties collected during 2018. The decrease in the tax rate results in a lower tax equivalent yield on tax-exempt assets. The Company collected approximately $1,456,000, $39,000 and $907,000, respectively, of prepayment penalties, which are included in interest income on loans, for 2019, 2018 and 2017, 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 ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 Year Ended December 31, equivalent basis for each of the years indicated. 2019 2018 2017 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(2) Rate Earned/ Paid(2) (dollars in thousands) ASSETS Interest-earning assets: Loans(3) Taxable Tax-exempt Securities available-for-sale:(4) Taxable Tax-exempt Securities held-to-maturity: Taxable Interest-bearing deposits in other banks $ 1,207,896 1,133,294 $ 54,720 41,998 4.53 % $ 1,102,390 1,120,556 3.71 % $ 46,615 40,439 4.23 % $ 978,593 1,081,204 3.61 % $ 39,103 40,420 4.00 % 3.74 % 268,516 45,088 8,078 1,324 3.01 % 2.94 % 310,071 90,027 7,864 1,938 2.54 % 2.15 % 354,918 106,717 5,859 1,588 1.65 % 1.49 % 2,152,580 58,036 2.70 % 1,854,328 45,556 2.46 % 1,725,280 38,348 2.22 % 189,710 4,051 2.14 % 183,903 3,498 1.90 % 189,193 2,097 1.11 % Total interest-earning assets 4,997,084 168,207 3.37 % 4,661,275 145,910 3.13 % 4,435,905 127,415 2.87 % Noninterest-earning assets Allowance for loan losses 250,864 (29,004) Total assets $ 5,218,944 229,244 (27,531) $ 4,862,988 221,628 (25,329) $ 4,632,204 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing deposits: NOW accounts Savings accounts Money market accounts Time deposits $ 940,998 869,483 1,273,389 519,761 $ 9,357 11,826 21,170 11,804 0.99 % $ 926,143 588,116 1.36 % 1,230,010 1.66 % 577,975 2.27 % $ 6,579 5,178 13,922 10,208 0.71 % $ 949,924 0.88 % 507,948 1,105,071 1.13 % 566,941 1.77 % $ 3,669 2,627 5,626 7,919 0.39 % 0.52 % 0.51 % 1.40 % Total interest-bearing deposits 3,603,631 54,157 1.50 % 3,322,244 35,887 1.08 % 3,129,884 19,841 0.63 % Securities sold under agreements to repurchase Other borrowed funds and subordinated debentures 224,361 2,347 1.05 % 147,944 976 0.66 % 189,684 496 0.26 % 231,926 6,846 2.95 % 291,674 7,617 2.61 % 309,102 7,483 2.42 % Total interest-bearing liabilities 4,059,918 63,350 1.56 % 3,761,862 44,480 1.18 % 3,628,670 27,820 0.77 % Noninterest-bearing liabilities Demand deposits Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Net interest income on a fully taxable equivalent basis Less taxable equivalent adjustment Net interest income Net interest spread Net interest margin 760,420 79,437 4,899,775 319,169 753,604 70,020 4,585,486 277,502 687,853 60,925 4,377,448 254,756 $ 5,218,944 $ 4,862,988 $ 4,632,204 $ 104,857 (9,068) $ 95,789 $ 101,430 (8,854) $ 92,576 $ 99,595 (13,979) $ 85,616 1.81 % 2.10 % 1.95 % 2.18 % 2.10 % 2.25 % (1) (2) (3) (4) able equiv alent basis calculat able equivalent basis calculat y t On a full ax y tax On a full Nonaccrual loans are included in average amounts outstanding. At amortized cost. ed using a feder al tax rate of 21%. ed using a federal tax rate of 34%. 1 Century Bancorp, Inc. AR ’19Management’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 2019 Compared with 2018 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 Increase/(Decrease) proportion to the relationship of the absolute dollar amounts of each change. Due to Change in 2018 Compared with 2017 Increase/(Decrease) Due to Change in Volume Rate Total Volume Rate Total (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 $ 4,644 463 $ 3,461 1,096 $ 8,105 1,559 $ 5,144 1,445 $ 2,368 (1,426) $ 7,512 19 (1,136) (1,171) 7,772 113 10,685 107 3,108 507 (1,105) 2,617 642 (1,685) 1,574 1,350 557 4,708 440 11,612 2,671 3,540 6,741 2,701 15,653 729 914 17,296 214 (614) 12,480 553 22,297 2,778 6,648 7,248 1,596 18,270 1,371 (771) 18,870 (816) (277) 2,994 (61) 8,429 (94) 468 702 157 1,233 (130) (437) 666 2,821 627 4,214 1,462 10,066 3,004 2,083 7,594 2,132 14,813 610 571 15,994 2,005 350 7,208 1,401 18,495 2,910 2,551 8,296 2,289 16,046 480 134 16,660 $ 9,111 $ (5,684) $ 3,427 $ 7,763 $ (5,928) $ 1,835 Average earning assets were $4,997,084,000 in 2019, an increase of $335,809,000 or 7.2% from the average in 2018, which was 5.1% higher than the average in 2017. Total average securities, including securities available-for-sale and securities held-to-maturity, were $2,466,184,000, an increase of 9.4% from the average in 2018. The increase in securities volume was mainly attributable to an increase in taxable securities held-to-maturity. An increase in securities volume and rates resulted in higher securities income, which increased 21.8% to $67,438,000 on a fully taxable equivalent basis. Total average loans increased 5.3% to $2,341,190,000 after increasing $163,149,000 in 2018. The primary reason for the increase in loans was due in large part to an increase in taxable commercial real estate and residential mortgage lending. The increase in loan volume resulted in higher loan income. Loan income increased by 11.1% or $9,664,000 to $96,718,000 in 2019 compared to 2018. This was mainly the result of an increase in rates and average balances. Total loan income was $79,523,000 in 2017. The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 7.1%, or $288,203,000, in 2019 after increasing by 6.8%, or $258,111,000, in 2018. eposits increased in 2019, primarily as a result of increases in savings, NOW, demand deposits, and money market accounts. This was offset, somewhat, by a decrease in time deposits. eposits increased in 2018, primarily as a result of increases in time deposits, savings, demand deposits, and money market accounts. Borrowed funds and subordinated debentures decreased by 3.8% in 2019, following a decrease of 11.9% in 2018. The majority of the Company’s borrowed funds are borrowings from the FHLBB, and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $59,748,000, and average retail repurchase agreements increased by $76,417,000 in 2019. Interest expense totaled $63,350,000 in 2019, an increase of $18,870,000, or 42.4%, from 2018 when interest expense increased 59.9% from 2017. The increase in interest expense, for 2019, is primarily due to increases in the rates on deposits and borrowed funds as well as an increase in average balances of deposits and repurchase agreements. The increase in interest expense, for 2018, is primarily due to increases in the rates on deposits as well as an increase in average balances of deposits. Provision for Loan Losses The provision for loan losses was $1,250,000 in 2019, compared with $1,350,000 in 2018 and $1,790,000 in 2017. These provisions are the result of management’s evaluation of the amounts and credit quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses decreased during 2019, primarily as a result improvements in historical loss factors. The provision for loan losses decreased during 2018, primarily as a result of net recoveries of $938,000 offset by changes in qualitative factors. Other Operating Income uring 2019, the Company continued to experience strong results in its fee-based services, including fees derived from traditional banking activities such as deposit- related services, its automated lockbox collection system and full-service securities brokerage supported by LPL Financial, a full-service securities brokerage business. 14 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition 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, utilities, 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 2019 was $18,399,000, an increase of $2,151,000, or 13.2%, compared to 2018. This increase followed a decrease of $304,000, or 1.8%, in 2018, compared to 2017. Included in other operating income are net gains on sales of securities of $61,000, $302,000 and $47,000 in 2019, 2018 and 2017, respectively. Also included in other operating income are net gains on sales of mortgage loans of $412,000, $0 and $370,000 in 2019, 2018 and 2017, respectively. Service charge income, which continues to be a major source of other operating income, totaling $9,220,000 in 2019, increased $660,000 compared to 2018. This followed a decrease of $26,000 in 2018 compared to 2017. The increase in fees, in 2019, was mainly attributable to an increase processing activities and an increase in debit card fees. The decrease in fees, in 2018, was mainly attributable to an increase earnings credit rates paid to customers used to offset fees charged for processing activities. This was offset somewhat by an increase in debit card fees. Lockbox revenues totaled $3,973,000, an increase of $699,000 in 2019 following a decrease of $16,000 in 2018. Lockbox revenues increased during 2019 primarily as a result of the addition of a large lockbox customer. Other income totaled $4,456,000, up $692,000 in 2019 following a decrease of $142,000 in 2018. The increase in 2019 was primarily the result of a death benefit received from life insurance policies as well as increases in wealth management fees. The decrease in 2018 was primarily the result of decreases in the returns on life insurance policies offset, somewhat by increase in wealth management fees, and merchant card sales royalties. Operating Expenses Total operating expenses were $72,129,000 in 2019, compared to $69,693,000 in 2018 and $67,119,000 in 2017. Salaries and employee benefits expenses increased by $1,304,000 or 3.1% in 2019, after increasing by 5.4% in 2018. The increase in 2019 and 2018 was mainly attributable to merit increases in salaries. Occupancy expense increased by $154,000, or 2.5%, in 2019, following a decrease of $48,000, or 0.8%, in 2018. The increase in 2019 was primarily attributable to an increase in rent and real estate tax expense. The decrease in 2018 was primarily attributable to a decrease in depreciation expense. Equipment expense increased by $106,000, or 3.4%, in 2019, following an increase of $240,000, or 8.3%, in 2018. The increase in 2019 was primarily attributable to an increase in service contracts expense. The increase in 2018 was primarily attributable to an increase in depreciation expense. F IC assessments decreased by $742,000, or 50.4%, in 2019, following a decrease of $110,000, or 7.0%, in 2018. F IC assessments decreased in 2019 mainly as a result of F IC assessment credits recognized during 2019. F IC assessments decreased in 2018 mainly as a result of a decrease in the assessment rate. Other operating expenses increased by $1,614,000 in 2019, which followed a $299,000 increase in 2018. The increase in 2019 was primarily attributable to an increase in pension and software maintenance expense. The increase in 2018 was primarily attributable to an increase in consultants’ expense and software maintenance expense. 15 Provision for Income Taxes Income tax expense was $1,110,000 in 2019, $1,568,000 in 2018, and $10,958,000 in 2017. The effective tax rate was 2.7% in 2019, 4.2% in 2018, and 32.9% in 2017. The decrease for 2019 was primarily as a result of a reduction in tax accruals related to sequestration of the refundable portion of our alternative minimum tax (AMT) credit carryforward. On January 14, 2019, the IRS updated its announcement “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations” to clarify that refundable AMT credits under Section 53(e) of the Internal Revenue Code are not subject to sequestration for taxable years beginning after ecember 31, 2017. Therefore, the full amount of the AMT credit carryover will be refunded to the Company. The decrease for 2018 was primarily as a result of a reduction in the value of its net deferred tax asset resulting in a charge of $8,448,000 to 2017 income tax expense as a result of the Tax Act as previously discussed. On ecember 22, 2017, the Tax Act was enacted, which lowered the Company’s federal tax rate from 34% to 21%. As a result of the rate reduction, the Company recorded a reduction in the value of its net deferred tax asset. The federal tax rate was 21% in 2019 and 2018, and 34% in 2017. arket Risk and Asset Liability anagement 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 (13.0) (10.8) (6.3) (4.3) 2.7 4.6 (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 changes in the table above are within the Company’s policy parameters. 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. Liquidit y and Capital Resources Liquidity is provided by maintaining an adequate level of liquid assets that includes cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $258,693,000 on ecember 31, 2019, compared with $342,503,000 on ecember 31, 2018. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity. Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition y the Compan y are dividends received y the Company. The Company and the The sources of funds for dividends paid b from the Bank and liquid funds held b 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. available-for-sale, net of taxes, offset somewhat by a decrease in unrealized losses on securities transferred from available-for-sale to held-to-maturity, 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 following table reflects capital ratios computed utilizing the recently implemented Basel III regulatory capital framework: Leverage ratios Minimum Capital Ratios Company Bank 4.00 % 7.25 % 7.01 % Capital Adequacy Total stockholders’ equity was $332,581,000 at ecember 31, 2019, compared with $300,439,000 at ecember 31, 2018. The Company’s equity increased primarily as a result of earnings, offset somewhat by an increase in other comprehensive loss, net of taxes, and by dividends paid. Other comprehensive loss, net of taxes, increased primarily as a result of an increase in the pension liability, net of taxes, and an increase in unrealized losses on securities Common equity tier 1 risk weighted capital ratios Tier 1 risk weighted capital ratios Total risk weighted capital ratios 4.50 % 6.00 % 8.00 % 12.57 % 12.57 % 13.57 % 11.80 % 12.98 % 13.97 % 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 ecember 31, 2019. 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 $ 370,955 36,083 56,651 8,446 266,045 $ 738,180 Total $ 625,524 5,779 40,669 $ 671,972 Less Than One Year $ 218,000 — 4,171 2,300 266,045 $ 490,516 One to Three Years $ 46,000 — 8,907 3,421 — $ 58,328 Three to Five Years $ 70,000 — 10,551 2,144 — $ 82,695 Amount of Commitment Expiring—By Period Less Than One Year $ 71,336 4,547 18,277 $ 94,160 One to Three Years $ 32,191 371 2,521 $ 35,083 Three to Five Years $ 80,346 768 5,804 $ 86,918 After Five Years $ 36,955 36,083 33,022 581 — $ 106,641 After Five Years $ 441,651 93 14,067 $ 455,811 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. Contract or Notional Amount 2019 2018 (dollars in thousands) Financial instruments with off-balance-sheet risk at ecember 31 are as follows: 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 $ 13,806 5,779 625,524 11,062 $ 5,075 4,258 553,045 28,746 15,801 20,305 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, 16 Century Bancorp, Inc. AR ’19Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 $44,000 and $51,000 for 2019 and 2018, respectively. Recent Accounting Developments Accounting Standards Issued but not yet Adopted The following list identifies ASUs applicable to the Company that have been issued by the FASB but are not yet effective: In ecember 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after ecember 15, 2020. The effect of this ASU is not expected to have a material impact on the Company’s consolidated financial position. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL). This ASU was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after ecember 15, 2019, including interim periods within those fiscal years. To implement the new standard the Company has purchased a software solution and has captured the information needed to implement this ASU. As part of the FASB ASC 326 implementation process, the company is using two models: a rating migration model and a probability of default model. The ratings migration model, which will be used for our larger loans made to institutions with available credit ratings, is designed to estimate loss reserves according to the CECL standard for rated loans or similar instruments. The model structure follows a grade migration approach, where the default rate is based on the probabilit each grade transition which is modelled using historical data. The probabilit default model, which will be used for our remaining commercial loans and our consumer loans, is based primarily on four components: loss history, product lifecycle, behavioural attributes and the economic environment. uring the fourth quarter of 2019, the Company has been testing the two CECL credit models in parallel with the existing incurred loss models. The Company is currently refining the qualitative framework that overlays the two models. In addition, the Company is continuing to work on finalizing the CECL accounting policies and the CECL processes and related controls. The Company does not expect a material impact to the financial statements upon implementation on January 1, 2020; however, the final impact is subject to change as the Company refines its calculation. y of y of ed Enterprises, BSA Backed Securities and U.S. Government Agency and The securities held-to-maturity include U.S. Treasury, U.S. Government Sponsor Sponsored Enterprise Mortgage-Backed Securities. The Company expects no impact from ASU 2016-13 to arise from this portfolio. Since ASU 2016-13, the FASB has issued amendments intended on improving the clarification of the amendment, ASU 2018-19 Codification Improvements to Topic 326, Financial Instruments—Credit Losses and ASU 2019-04 17 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, erivatives and Hedging. The amendment in ASU 2018-19 was issued in November 2018 and was intended to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The amendment in ASU 2019-04 was issued in April 2019 and was intended to clarify stakeholders’ specific issues about certain aspects of the amendments in ASU 2016-13. ASU 2019-05 Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief was also issued in May 2019. This ASU provides entities the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized costs basis. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall. The amendments in this ASU should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity early adopted the amendments in ASU 2016-13. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in this ASU affect a variety of Topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. This ASU is effective for annual reporting periods beginning after ecember 15, 2019. The effects of these ASUs are not expected to have a material impact on the Company’s consolidated financial position. In August 2018, FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for annual reporting periods beginning after ecember 15, 2019. The effect of this ASU is not expected to have a material impact on the Company’s consolidated financial position. In August 2018, FASB issued ASU 2018-14, Compensation-Retirement Benefits- efined Benefit Plans-General (Subtopic 715-20): isclosure Framework- Changes to the isclosure Requirements for efined Benefit Plans. The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. This ASU is effective for annual reporting periods beginning after ecember 15, 2020. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position. In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), isclosure Framework-Changes to the isclosure Requirements for Fair Value. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU is effective for annual reporting periods beginning after ecember 15, 2019. The effect of this update is not expected to have a material impact on the Company’s disclosures. In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. For public entities, this ASU is effective for the fiscal years beginning after ecember 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, and application should be on a prospective basis. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position. Century Bancorp, Inc. AR ’19Management’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 Securities available-for-sale, amortized cost $260,924 in 2019 and $336,751 in 2018 (Notes 3, 9 and 11) Securities held-to-maturity, fair value $2,361,304 in 2019 and $1,991,421 in 2018 (Notes 4 and 11) Federal Home Loan Bank of Boston, stock at cost Equity securities, amortized cost $1,635 in 2019 and $1,635 in 2018, respectively Loans, net (Note 5) Less: allowance for loan losses (Note 6) Net loans Bank premises and equipment (Note 7) Accrued interest receivable Other assets (Notes 5, 6, 8, 16, 23) 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, 18 and 19) Stockholders’ equity (Note 15): Preferred Stock—$1.00 par value; 100,000 shares authorized; no shares issued and outstanding Common stock, Class A, $1.00 par value per share; authorized 10,000,000 shares; issued 3,650,949 shares in 2019 and 3,608,329 shares in 2018 Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,916,960 in 2019 and 1,959,580 shares in 2018 Additional paid-in capital Retained earnings Unrealized (losses) gains on securities available-for-sale, net of taxes Unrealized losses on securities transferred to held-to maturity, net of taxes Pension liability, net of taxes Total accumulated other comprehensive loss, net of taxes (Notes 3 and 13) Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying “Notes to Consolidated Financial Statements.” Consolidated Balance Sheets 2019 2018 $ 44,420 214,273 258,693 $ 89,540 252,963 342,503 260,502 336,759 2,351,120 19,471 1,688 2,426,119 29,585 2,396,534 33,952 13,110 157,354 2,046,647 17,974 1,596 2,285,578 28,543 2,257,035 23,921 14,406 123,094 $ 5,492,424 $ 5,163,935 $ 712,842 1,678,250 1,453,572 555,447 4,400,111 266,045 370,955 36,083 86,649 $ 813,478 1,707,019 1,325,888 560,579 4,406,964 154,240 202,378 36,083 63,831 5,159,843 4,863,496 — — 3,651 3,608 1,917 12,292 338,980 356,840 (308) (1,812) (22,139) (24,259) 332,581 1,960 12,292 301,488 319,348 6 (2,565) (16,350) (18,909) 300,439 $ 5,492,424 $ 5,163,935 18 Century Bancorp, Inc. AR ’19 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 Gains on sales of mortgage loans Other income Total other operating income OPERATING EXPENSES Salaries and employee benefits (Note 17) Occupancy Equipment FDIC assessments Other (Note 20) Total operating expenses Income before income taxes Provision for income taxes (Note 16) Net income SHARE DATA (Note 14) 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 2019 2018 2017 $ 54,720 33,167 7,125 1,087 953 58,036 4,051 $ 46,615 31,936 6,748 1,587 1,116 45,556 3,498 $ 39,103 26,910 4,987 1,119 872 38,348 2,097 159,139 137,056 113,436 21,183 21,170 11,804 2,347 6,846 63,350 95,789 1,250 94,539 9,220 3,973 277 61 412 4,456 18,399 44,014 6,246 3,238 729 17,902 72,129 40,809 1,110 11,757 13,922 10,208 976 7,617 44,480 92,576 1,350 91,226 8,560 3,274 348 302 — 3,764 16,248 42,710 6,092 3,132 1,471 16,288 69,693 37,781 1,568 6,296 5,626 7,919 496 7,483 27,820 85,616 1,790 83,826 8,586 3,290 353 47 370 3,906 16,552 40,517 6,140 2,892 1,581 15,989 67,119 33,259 10,958 $ 39,699 $ 36,213 $ 22,301 3,633,044 1,934,865 5,567,909 1,934,865 $ $ $ $ 8.63 4.31 7.13 4.31 3,608,179 1,959,730 5,567,909 1,959,730 $ $ $ $ 7.89 3.95 6.50 3.95 3,604,029 1,963,880 5,567,909 1,963,880 $ $ $ $ 4.86 2.43 4.01 2.43 Century Bancorp, Inc. AR ’19 Year Ended December 31, (dollars in thousands) NET INCOME Other comprehensive (loss) income, net of tax: Unrealized (losses) gains on securities: Unrealized holding (losses) gains arising during period Less: reclassification adjustment for gains included in net income Total unrealized (losses) gains on securities Accretion of net unrealized losses transferred during period Defined benefit pension plans: Pension liability adjustment: Net (loss) gain Amortization of prior service cost and loss included in net periodic benefit cost Total pension liability adjustment Other comprehensive (loss) income Comprehensive income (loss) See accompanying “Notes to Consolidated Financial Statements.” Consolidated Statements of Comprehensive Income 2019 2018 2017 $ 39,699 $ 36,213 $ 22,301 (270) (44) (314) 753 (6,842) 1,053 (5,789) (5,350) 326 (217) 109 1,086 3,770 1,167 4,937 6,132 533 (28) 505 1,034 (2,315) 931 (1,384) 155 $ 34,349 $ 42,345 $ 22,456 20 Century Bancorp, Inc. AR ’19 Consolidated Statements of Changes in Stockholders’ Equity Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Other Total Retained Earnings Comprehensive Stockholders’ Loss Equity (dollars in thousands except share data) BALANCE, DECEMBER 31, 2016 $ 3,601 $ 1,967 $ 12,292 $ 243,565 $ (21,384) $ 240,041 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $331 in taxes and $47 in realized net gains Accretion of net unrealized losses transferred during the period, net of $1,258 in taxes Pension liability adjustment, net of $286 in taxes Conversion of Class B Common Stock to Class A Common Stock, 5,100 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — — 5 — — — — — — (5) — — — 22,301 — 22,301 — — — — — — — — — — (1,729) (471) 505 505 1,034 (1,384) — — — 1,034 (1,384) — (1,729) (471) BALANCE, DECEMBER 31, 2017 $ 3,606 $ 1,962 $ 12,292 $ 263,666 $ (21,229) $ 260,297 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $16 in taxes and $302 in realized net gains Accretion of net unrealized losses transferred during the period, net of $391 in taxes Pension liability adjustment, net of $1,930 in taxes Adoption of ASU 2018-2, Income Statement-Reporting Comprehensive Income (Topic 220)-Reclassification of Certain Tax Effects from AOCI Adoption of ASU 2016-1, Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities Conversion of Class B Common Stock to Class A Common Stock, 2,500 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — — — — 2 — — — — — — — — (2) — — — 36,213 — 36,213 — — — — — — — — — — — 109 1,086 4,937 3,783 (3,783) 29 — (1,732) (471) (29) — — — 109 1,086 4,937 — — — (1,732) (471) BALANCE, DECEMBER 31, 2018 $ 3,608 $ 1,960 $ 12,292 $ 301,488 $ (18,909) $ 300,439 Net income Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $116 in taxes and $61 in realized net gains Accretion of net unrealized losses transferred during the period, net of $269 in taxes Pension liability adjustment, net of $2,263 in taxes Conversion of Class B Common Stock to Class A Common Stock, 42,620 shares Cash dividends, Class A Common Stock, $0.48 per share Cash dividends, Class B Common Stock, $0.24 per share — — — — 43 — — — — — — (43) — — — 39,699 — 39,699 — — — — — — — — — — (1,742) (465) (314) (314) 753 (5,789) — — — 753 (5,789) — (1,742) (465) BALANCE, DECEMBER 31, 2019 $ 3,651 $ 1,917 $ 12,292 $ 338,980 $ (24,259) $ 332,581 See accompanying “Notes to Consolidated Financial Statements.” 21 Century Bancorp, Inc. AR ’19 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: Gain on sales of portfolio loans Gain on sale of fixed assets Net loss on other real estate owned Net gains on sales of securities Net (gain) loss on equity securities Provision for loan losses Deferred tax (expense) benefit Net depreciation and amortization Decrease (increase) in accrued interest receivable (Increase) decrease in other assets Increase 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 redemptions of Federal Home Loan Bank of Boston stock Purchase 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 Proceeds from sales of securities held-to-maturity Purchase of securities held-to-maturity Proceeds from life insurance policies Proceeds from sales of portfolio loans Net increase in loans Bank owned life insurance purchases 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 (decrease) increase in demand, savings, money market and NOW deposits Cash dividends Net increase (decrease) in securities sold under agreements to repurchase Net increase (decrease) in other borrowed funds Net cash provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the year for: Interest Income taxes Change in unrealized losses on securities available-for-sale, net of taxes Change in unrealized losses on securities transferred to held-to-maturity, net of taxes Pension liability adjustment, net of taxes Transfer of loans to other real estate owned See accompanying “Notes to Consolidated Financial Statements.” Consolidated Statements of Cash Flows 2019 2018 2017 $ 39,699 $ 36,213 $ 22,301 (412) — 79 (61) (92) 1,250 (2,135) (2,382) 1,296 8,532 2,075 — — — (302) 67 1,350 (1,766) 885 (3,227) 2,326 5,242 47,849 40,788 — — 14,380 (15,877) 144,739 16,285 (85,123) 458,915 1,193 (757,997) 5,461 22,120 (162,415) (33,664) 2,146 — (13,144) (402,981) (5,132) (1,721) (2,207) 111,805 168,577 271,322 (83,810) 342,503 — — 18,388 (14,583) 215,406 27,517 (183,588) 234,741 — (576,140) 375 — (110,874) — — — (3,601) (392,359) (64,782) 554,779 (2,203) (4,750) (145,400) 337,644 (13,927) 356,430 (370) (11) — (47) — 1,790 6,918 3,047 (1,534) (16,310) 5,802 21,586 5,284 (2,101) 10,127 (10,864) 259,388 18,180 (175,147) 293,221 — (337,773) 115 26,701 (278,242) — — 11 (3,244) (194,344) 147,002 116,747 (2,200) (23,290) 54,778 293,037 120,279 236,151 $ 258,693 $ 342,503 $ 356,430 $ $ $ $ $ $ 63,345 (6,504) (314) 753 (5,789) — $ $ $ $ $ $ 44,289 590 109 1,086 4,937 2,225 $ $ $ $ $ $ 27,731 5,330 505 1,034 (1,384) — 22 Century Bancorp, Inc. AR ’19 1. Summary of Significant Accounting Policies BASIS OF FINANCIAL STATE ENT 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, New Hampshire, Rhode Island, Connecticut and New York. 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 eposit Insurance Corporation (the “F IC”) 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 a review of factors, including historical charge-off rates with additional allocations based on qualitative 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 agencie 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. s periodically review the Company’s allowance for loan losses. Such FAIR VALUE EASURE ENTS The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, 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 2 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 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-TER INVEST ENTS Short-term investments include highly liquid certificates of deposit with original maturities of more than 90 days but less than one year. INVEST ENT SECURITIES ebt 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 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 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. Equity securities are reported at fair value with unrealized gains and losses included in earnings. 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. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis. Management also considers the Company’s capital adequacy, interest-rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the investment securities before recovery. Other-than-temporary-impairment (OTTI) arises when a security’s fair value is less than its amortized cost and, based on specific factors, the loss is considered OTTI. If the Company determines that a decline in fair value is OTTI and that it is more likely than not that the Company will not sell or be required Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements to sell the investment security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in the Company’s consolidated edit por statement of income and the noncr tion is recognized in accumulated other comprehensive income. The cr edit portion of the OTTI impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the investment security. If the Company determines that a decline in fair value is OTTI and it is more likely than not that it will sell or be required to sell the investment security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the security will be recognized in the Company’s consolidated statement of income. The transfer of a security between categories of investments shall be accounted for at fair value. For a debt security transferred into the held-to-maturity category from the available-for-sale category, the unrealized holding gain or loss at the date of the transfer shall continue to be reported in a separate component of shareholders’ equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain, or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held-to-maturity security. The sale of a security held-to-maturity may occur after a substantial portion (at least 85%) of the principal outstanding at acquisition has been paid. This may be due either to prepayments on the debt security or to scheduled payments on the debt security that is payable in equal installments over its term. For variable rate securities, the scheduled payments need not be equal. FEDERAL HO E LOAN BANK STOCK The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), 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. As of ecember 31, 2019, 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 Loans are stated at the principal amount outstanding, net of amounts charged off, unamortized premiums or discounts, and deferred loan fees or costs. 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. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged- off against the allowance for loan losses in lieu of an allocation of a specific allowance when such an amount has been identified definitively as uncollectible. 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. The specific factors that management considers in making the determination that the collectibility of the loan’s principal is not probable include the delinquency status of the loan, the fair value of the collateral, if secured, and, the financial strength of the borrower and/or guarantors. 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 effective rate of interest. TRANSFERS OF FINANCIAL ASSETS 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 ith Deteriorated Credit Quality (formerly Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or ebt 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, the 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. 24 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements NONPERFOR ING 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 the lower of cost or the estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred. Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations, while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans that ultimately prove uncollectible. The components of the allowance for loan losses represent estimates based upon Accounting Standards Codification (“ASC”) Topic 450, contingencies, and ASC Topic 310 Receivables. ASC Topic 450 applies to homogenous loan pools such as consumer installment, residential mortgages, consumer lines of credit and commercial loans that are not individually evaluated for impairment under ASC Topic 310. In determining the level of the allowance, periodic evaluations are made of the loan portfolio, which takes into account factors such as the characteristics of the loans, loan status, financial strength 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 specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an 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 specific factors that management considers in making the determination that the collectibility of the loan’s principal is not probable include the delinquency status of the loan, the fair value of the collateral and the financial strength of the borrower and/or guarantors. Under ASC Topic 310, a loan is impaired, based upon current information and in management’s opinion, when it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest, or if a loan is designated as a Troubled ebt Restructuring (“T R”). Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. 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 25 market price or (c) fair value of collateral if the loan is collateral dependent. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance when such an amount has been identified definitively as uncollectible. In estimating probable loan loss under ASC Topic 450, management considers numerous factors, including historical charge-offs and subsequent recoveries. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. 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. On these loans, the formula allowances are based on the risk ratings, the historical loss experience, and the loss emergence period. Historical loss data and loss emergence periods are developed based on the Company’s historical experience. For larger loans with available external credit ratings, these ratings are utilized rather than the Company’s risk ratings. The historical loss factor and loss emergence periods for these loans are based on data published by the rating agencies for similar credits as the Company has limited internal historical data. For the residential real estate and consumer loan portfolios, the formula allowances are calculated by applying historical loss experience and the loss emergence period to the outstanding balance in each loan category. Loss factors and loss emergence periods are based on the Company’s historical net loss experience. Additional allowances are added to portfolio segments based on qualitative factors. Management considers potential factors identified in regulatory guidance. Management has identified certain qualitative factors, which could impact the degree of loss sustained within the portfolio. These include market risk factors and unique portfolio risk factors that are inherent characteristics of the Company’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions, such as unemployment and G P 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 the outlooks for business segments in which the Company’s borrowers operate and loan size. The potential ranges for qualitative factors are based on historical volatility in losses. The actual amount utilized is based on management’s assessment of current conditions. After considering the above components, an unallocated component may be generated to cover uncertainties that could affect management’s estimate of probable losses. These uncertainties include the effects of loans in new geographical areas and new industries. 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. BANK PRE ISES AND EQUIP ENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Land is stated at cost. epreciation 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. Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements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. 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 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 it value including goodwill. If the fair value of a reporting unit exceeds it s 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. s carrying 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 for all share-based payments. The Company’s method of valuation for share-based awards granted utilizes the Black-Scholes option-pricing model. 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. uring 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 irectors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of irectors 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 no options to purchase shares of Class A common stock outstanding at ecember 31, 2019. The Company uses the fair value method to account for stock options. There were no options granted during 2019 and 2018. INCO E 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. eferred 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. For tax years beginning after ecember 31, 2017, the corporate alternative minimum tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the AMT credit carryforward will be recovered in tax years beginning before 2022. As a result of the change, the Company has classified its AMT credit carryforward as currently receivable. 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. iluted 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 stock options. 26 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements The company utilizes the two class method for reporting EPS. The two-class method is an earnings allocation formula that treats Class A and Class B shares as having rights to earnings that otherwise would have been available only to Class A shareholders and Class B shareholders as if converted to Class A shares. TREASURY STOCK Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156 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. Prior to ecember 31, 2018, the Company utilized a full yield curve approach in the estimation of the service and interest components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the underlying projected cash flows. Effective ecember 31, 2018, the discount rate is determined by preparing an analysis of the respective plan’s expected future cash flows and high-quality fixed-income investments currently available and expected to be available during the period to maturity of the benefits. LEASING A right-of-use (ROU) asset and corresponding lease liability is recognized at the lease commencement date when the Company is a lessee. ROU lease assets are included in other assets on the consolidated balance sheet. A ROU asset reflects the present value of the future minimum lease payments adjusted for any initial direct costs, incentives, or other payments prior to the lease commencement date. A lease liability represents a legal obligation to make lease payments and is determined by the present value of the future minimum lease payments discounted using the rate implicit in the lease, or the Company’s incremental borrowing rate. Variable lease payments that are dependent on an index, or rate, are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Renewal options are not included as part of the ROU asset or lease liability unless the option is deemed reasonably certain to exercise. For real estate leases, lease components and non-lease components are accounted for as a single lease component. Operating lease expense is comprised of operating lease costs and variable lease costs, net of sublease income, and is reflected as part of occupancy within non-interest expense in the consolidated statement of income. Operating lease expense is recorded on a straight-line basis. Refer to Note 23: Leasing for further information. RECENT ACCOUNTING DEVELOP ENTS Recently Adopted Accounting Standards Updates In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization of Purchased Callable ebt. The FASB is issuing this ASU to amend the amortization period for certain purchased callable debt securities held at a premium. The FASB is shortening the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles (GAAP), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after ecember 15, 2018. The effect of this update did not have a material impact on the Company’s consolidated financial position. In February 2016, the FASB issued ASU 2016-02, Leases. This ASU required lessees to put most leases on their balance sheet but recognize expenses on their income statements in a manner similar to today’s accounting. This ASU also eliminated today’s real estate-specific provisions for all companies. For lessors, this ASU modified the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years beginning after ecember 15, 2018, including interim periods therein. The Company also reviewed contracts to determine if they contain embedded leases. The Company’s balance sheet impact was $15.1 million as of January 1, 2019. This amount was recorded as a right of use asset, included in other assets, with a corresponding lease liability, included in other liabilities. In July 2018, ASU 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”) was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Also in July 2018, ASU 2018-11, “Targeted Improvements” (“ASU 2018-11”) was issued and allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements.” The Company used this optional transition method for the adoption of Topic 842. Securities and Exchange Commission (SEC) Ruling: In August 2018, the SEC issued a final rule that amends certain of the Commission’s disclosure requirements “that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment.” The financial reporting implications of the final rule’s amendments may vary by company, but the changes are generally expected to reduce or eliminate some of an SEC registrant’s disclosure requirements. In limited circumstances, however, the amendments may expand those requirements, including those related to interim disclosures about changes in stockholders’ equity. Under the requirements, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date periods, with subtotals for each interim period.” Beginning with its March 31, 2019 filing, the Company included a reconciliation for the current quarter and year-to-date interim periods as well as the comparative periods of the prior years (i.e., a reconciliation covering each period for which an income statement is presented). 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 $0 at ecember 31, 2019, and $0 at ecember 31, 2018. 27 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 3. Securities Available-for-Sale (dollars in thousands) U.S. Treasury U. S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities Privately Issued Residential Mortgage-Backed Securities Obligations Issued by States and Political Subdivisions Other Debt Securities December 31, 2019 Gross Unrealized Gains Gross Unrealized Losses Amortized Cost Estimated Fair Value Amortized Cost December 31, 2018 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ — $ — 54,331 — $ — 23 — $ — 143 — — 54,211 $ 2,000 $ 3,946 70,477 — $ — 1 8 $ 1,992 3,915 70,194 31 284 184,580 139 532 184,187 162,604 536 250 162,890 397 18,016 3,600 1 60 51 2 — 19 396 679 18,076 3,632 93,445 3,600 3 58 37 10 — 44 672 93,503 3,593 Total $ 260,924 $ 274 $ 696 $ 260,502 $ 336,751 $ 635 $ 627 $ 336,759 Included in SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $186,245,000 and $197,304,000 at ecember 31, 2019 and 2018, respectively. Also included in securities available-for-sale at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $32,297,000 and $34,787,000 at ecember 31, 2019 and 2018, respectively. The Company realized gains on sales of securities of $13,000, $302,000 and $47,000 from the proceeds of sales of available-for-sale securities of $16,285,000, $27,517,000 and $18,180,000 for the years ended ecember 31, 2019, 2018, and 2017, respectively. ebt securities of U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac. Fair Value The following table shows the estimated maturity distribution of the Company’s securities available-for-sale at ecember 31, 2019. (dollars in thousands) Amortized Cost Within one year After one but within five years After five but within ten years More than ten years Total $ 18,417 113,192 124,489 4,826 $ 18,476 112,935 124,274 4,817 $ 260,924 $ 260,502 The weighted average remaining life of investment securities available-for-sale at ecember 31, 2019, was 5.4 years. 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. Also, $244,688,000 of the securities are floating rate or adjustable rate and reprice prior to maturity. As of ecember 31, 2019 and ecember 31, 2018, 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 these debt securities and it is not more likely than not that it will be required to sell these debt securities 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 these securities are from issuers that are investment grade. The change in the unrealized losses on the Obligations Issued by States and Political Subdivisions, Privately Issued Residential Mortgage-Backed Securities and Other ebt Securities was primarily caused by changes in credit spreads and liquidity issues in the marketplace. The unrealized loss on SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality. 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 ecember 31, 2019 and ecember 31, 2018. 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 concentrations and origination dates of underlying loans. 28 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at ecember 31, 2019. 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 45 and 18 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 122 holdings at ecember 31, 2019. Less Than 12 Months 12 Months or Longer December 31, 2019 Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (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 Issued by States and Political Subdivisions Other Debt Securities $ — — 14,560 $ 108,806 252 — 800 Total temporarily impaired securities $ 124,418 $ — — 30 379 2 — 1 412 $ $ — — 22,092 29,178 — — 481 $ 51,751 $ — — 113 153 — — 18 284 $ — — 36,652 $ 137,984 252 — 1,281 $ 176,169 $ — — 143 532 2 — 19 696 The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at ecember 31, 2018. 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 10 and 30 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 190 holdings at ecember 31, 2018. December 31, 2018 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (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 Issued by States and Political Subdivisions Other Debt Securities $ $ — 3,914 17,950 19,244 — — — Total temporarily impaired securities $ 41,108 $ — 31 28 21 — — — 80 $ $ 1,992 — 44,323 45,782 495 — 455 $ 93,047 $ 8 — 256 229 10 — 44 547 $ $ 1,992 3,914 62,273 65,026 495 — 455 $ 134,155 $ 8 31 284 250 10 — 44 627 4. Investment Securities Held-to- aturity (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Sponsored Enterprises Mortgage-Backed Securities December 31, 2019 Gross Gross December 31, 2018 Gross Gross Amortized Cost Unrealized Unrealized Gains Losses Estimated Fair Value Amortized Cost Unrealized Unrealized Gains Losses Estimated Fair Value $ — $ — $ 98,867 44,379 527 182 — $ 96 303 — 99,298 44,258 $ 9,960 $ — $ 2 $ 234,228 52,051 336 — 803 2,065 9,958 233,761 49,986 2,207,874 20,720 10,846 2,217,748 1,750,408 2,324 55,016 1,697,716 Total $ 2,351,120 $ 21,429 $ 11,245 $ 2,361,304 $ 2,046,647 $ 2,660 $ 57,886 $ 1,991,421 29 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements Included in U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprise Mortgage-Backed Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,776,399,000 and $1,441,059,000 at ecember 31, 2019, and 2018, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $399,646,000 and $291,190,000 at ecember 31, 2019, and 2018, respectively. The Compan ealized gains on sales of securities of $48,000 from the proceeds of sales of held-to-maturity securities of $1,193,000. The sales from securities held-to-maturit The Company did not realize any gains of sales of securities for the year ending ecember 31, 2018 and 2017. y r y relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment. At ecember 31, 2019 and 2018, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Government Sponsored Enterprises Fair primarily refer to debt securities of Fannie Mae and Freddie Mac. Value Amortized Cost The following table shows the maturity distribution of the Company’s securities held-to-maturity at ecember 31, 2019. (dollars in thousands) Within one year After one but within five years After five but within ten years More than ten years Total $ 73,576 1,891,043 374,071 12,430 $ 2,351,120 $ 73,841 1,900,050 374,688 12,725 $ 2,361,304 The weighted average remaining life of investment securities held-to-maturity at ecember 31, 2019, was 3.7 years. Included in the weighted average remaining life calculation at ecember 31, 2019, were $33,491,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. 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. Also, $107,000 of the securities are floating rate or adjustable rate and reprice prior to maturity. As of ecember 31, 2019 and ecember 31, 2018, 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 these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. 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 unrealized loss on U.S. Government Sponsored Enterprises, SBA Backed Securities and U.S. Government 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 securities and it is not more likely than not that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than- temporarily impaired at ecember 31, 2019 and ecember 31, 2018. 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. The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at ecember 31, 2019. 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 114 and 103 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 531 holdings at ecember 31, 2019. Less Than 12 Months 12 Months or Longer December 31, 2019 Total Fair Value Fair Value Fair Value Unrealized Losses Unrealized Losses Unrealized Losses (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities $ — 24,420 25,251 $ — 72 303 $ — 9,976 — $ — 24 — $ — 34,396 25,251 $ — 96 303 613,905 3,949 389,919 6,897 1,003,824 10,846 Total temporarily impaired securities $ 663,576 $ 4,324 $ 399,895 $ 6,921 $ 1,063,471 $ 11,245 0 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at ecember 31, 2018. This table shows the unrealized market Temporarily Impaired Investments 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 56 and 315 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 475 holdings at ecember 31, 2018. Unrealized Losses Unrealized Losses Unrealized Losses Less Than 12 Months 12 Months or Longer December 31, 2018 Fair Value Fair Value Fair Value Total (dollars in thousands) U.S. Treasury U.S. Government Sponsored Enterprises SBA Backed Securities U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities $ 9,958 9,849 — $ 2 42 — $ — 69,499 49,987 $ — 761 2,065 $ 9,958 79,348 49,987 $ 2 803 2,065 188,125 2,032 1,249,689 52,984 1,437,814 55,016 Total temporarily impaired securities $ 207,932 $ 2,076 $ 1,369,175 $ 55,810 $ 1,577,107 $ 57,886 5. Loans The majority of the Bank’s lending activities are conducted in Massachusetts with other lending activity principally in New Hampshire, Rhode Island, Connecticut and New York. The Bank originates construction, commercial and residential real estate loans, commercial and industrial loans, municipal loans, consumer, home equity and December 31, other loans for its portfolio. 2019 2018 (dollars in thousands) The following summary shows the composition of the loan portfolio at the dates indicated. $ Construction and land development $ Commercial and industrial Municipal Commercial real estate Residential real estate Consumer Home equity Overdrafts Total 8,992 812,417 120,455 786,102 371,897 21,071 304,363 822 13,628 761,625 97,290 750,362 348,250 21,359 292,340 724 $ 2,426,119 $ 2,285,578 At ecember 31, 2019, and ecember 31, 2018, loans were carried net of (premiums) discounts of $(292,000) and $(364,000), respectively. Net deferred fees included in loans at ecember 31, 2019, and ecember 31, 2018, were $220,000 and $496,000, respectively. The Company was servicing mortgage loans sold to others without recourse of approximately $204,690,000 and $209,160,000 at ecember 31, 2019, and ecember 31, 2018, respectively. The Company had no residential real estate loans held for sale at ecember 31, 2019 and ecember 31, 2018. The Company’s mortgage servicing rights totaled $1,202,000 and $1,226,000 at ecember 31, 2019 and ecember 31, 2018, respectively. As of ecember 31, 2019, and 2018, the Company’s recorded investment in impaired loans was $3,252,000 and $3,051,000, 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 ecember 31, 2019, there were $2,322,000 of impaired loans with specific reserves of $102,000. At ecember 31, 2018, there were $2,774,000 of impaired loans with specific reserves of $145,000. 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. 1 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements December 31, 2019 2018 2017 The composition of nonaccrual loans and impaired loans is as follows: (dollars in thousands) 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 $ 2,014 — — 3,252 3,161 2,361 67 — 103 $ 1,313 — 296 3,051 5,491 2,559 64 — 196 $ 1,684 — 254 7,114 5,608 2,749 51 — 182 irectors 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, 2019 December 31, 2018 The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2019. (dollars in thousands) Repayments and Deletions Additions $ 12,547 $ 706 $ 1,222 $ 12,031 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. 2018 2017 2019 (dollars in thousands) An analysis of the allowance for loan losses for each of the three years ending ecember 31, 2019, 2018 and 2017 is as follows: Allowance for loan losses, beginning of year Loans charged-off Recoveries on loans previously charged-off $ 28,543 (454) 246 (208) 1,250 $ 29,585 $ 26,255 (833) 1,771 938 1,350 $ 28,543 $ 24,406 (390) 449 59 1,790 $ 26,255 Net recoveries (charge-offs ) Provision charged to expense Allowance for loan losses, end of year Construction Commercial Further information pertaining to the allowance for loan losses at ecember 31, 2019 follows: Industrial Municipal Real Estate Real Estate Consumer and Land Development and Commercial Residential Home Equity Unallocated Total (dollars in thousands) Allowance for Loan Losses: Ending balance at December 31, 2018 Charge-offs Recoveries Provision Ending balance at $ 1,092 — — (761) $ 10,998 $ 1,838 $ 10,663 $ (137) 60 675 — — 728 — — 801 2,190 $ — — 4 365 $ 1,111 (22) (295) — 186 (24) 56 $ 286 — — (229) $ 28,543 (454) 246 1,250 December 31, 2019 $ 331 $ 11,596 $ 2,566 $ 11,464 $ 2,194 $ 312 $ 1,065 $ 57 $ 29,585 Amount of allowance for loan losses for loans deemed to be impaired Amount of allowance for loan losses for loans not deemed to be impaired $ — $ 15 $ — $ 87 $ — $ — $ — $ — $ 102 $ 331 $ 11,581 $ 2,566 $ 11,377 $ 2,194 $ 312 $ 1,065 $ 57 $ 29,483 Loans: Ending balance Loans deemed to be impaired Loans not deemed to be impaired $ 8,992 $ — $ 8,992 $ 812,417 $ 120,455 $ 786,102 $ 371,897 $ 21,893 $304,363 $ — $ 811,511 $ 120,455 $ 783,756 $ 371,897 $ 21,893 $304,363 — $ 2,346 $ 906 $ — $ — $ $ — $ — $ — $ 2,426,119 $ 3,252 $ 2,422,867 2 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements Further information pertaining to the allowance for loan losses at ecember 31, 2018 follows: Municipal Commercial Residential Real Estate Real Estate Consumer Home Equity Unallocated Total Construction Commercial and Land Development and Industrial (dollars in thousands) Allowance for Loan Losses: Balance at December 31, 2017 Charge-offs Recoveries Provision Ending balance at $ 1,645 — 1,436 (1,989) $ 9,651 $ 1,720 $ (67) 57 1,357 — — 118 9,728 $ — — 935 1,873 $ (450) 75 692 373 $ (316) 203 105 989 — — 122 $ 276 — — 10 $ 26,255 (833) 1,771 1,350 December 31, 2018 $ 1,092 $ 10,998 $ 1,838 $ 10,663 $ 2,190 $ 365 $ 1,111 $ 286 $ 28,543 Amount of allowance for loan losses for loans deemed to be impaired Amount of allowance for loan losses for loans not deemed to be impaired Loans: Ending balance Loans deemed to be impaired Loans not deemed to be impaired $ — $ 54 $ — $ 91 $ — $ — $ — $ — $ 145 $ 1,092 $ 10,944 $ 1,838 $ 10,572 $ 2,190 $ 365 $ 1,111 $ 286 $ 28,398 $ 13,628 $ — $ 13,628 $ 761,625 $ 97,290 $ 750,362 $ 348,250 $ 22,083 $ 292,340 $ — $ 761,224 $ 97,290 $ 747,712 $ 348,250 $ 22,083 $ 292,340 2,650 $ 401 $ — $ — $ — $ $ — $ — $ — $ 2,285,578 $ 3,051 $ 2,282,527 CREDIT QUALITY INFOR ATION The Company utilizes a six-grade internal loan rating system for commercial real estate, construction and commercial loans as follows: Loans rated 1- (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 ecember 31, 2019. 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 ecember 31, 2019. Loans rated 6 (Doubtful)— oubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of ecember 31, 2019 and are doubtful for full collection. Impaired—Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due. Construction Commercial The following table presents the Company’s loans by risk rating at ecember 31, 2019. and Land Development and Industrial Municipal Commercial Real Estate (dollars in thousands) Grade: 1-3 (Pass) 4 (Monitor) 5 (Substandard) 6 (Doubtful) Impaired Total $ 8,992 — — — — $ 807,486 4,025 — — 906 $ 120,455 — — — — $ 759,402 24,354 — — 2,346 $ 8,992 $ 812,417 $ 120,455 $ 786,102 The Company has increased its exposure to larger loans to large institutions with publicly available credit ratings. These ratings are tracked as a credit quality indicator for these loans. Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements Commercial The following table presents the Company’s loans by credit rating at ecember 31, 2019. Real Estate Municipal Commercial and Industrial Total (dollars in thousands) Credit Rating: Aaa-Aa3 A1-A3 Baa1-Baa3 Ba1 Total $ 523,644 186,044 — — $ 53,273 7,354 51,133 5,895 $ 40,437 148,346 144,711 — $ 617,354 341,744 195,844 5,895 $ 709,688 $ 117,655 $ 333,494 $ 1,160,837 The following table presents the Company’s loans by risk rating at ecember 31, 2018. Construction and Land Development Commercial and Industrial Municipal Commercial Real Estate (dollars in thousands) Grade: 1-3 (Pass) 4 (Monitor) 5 (Substandard) 6 (Doubtful) Impaired Total $ 13,628 — — — — $ 757,089 4,135 — — 401 $ 97,290 — — — — $ 723,170 24,542 — — 2,650 $ 13,628 $ 761,625 $ 97,290 $ 750,362 Commercial The following table presents the Company’s loans by credit rating at ecember 31, 2018. Real Estate Municipal Commercial and Industrial Total (dollars in thousands) Credit Rating: Aaa-Aa3 A1-A3 Baa1-Baa3 Ba1 Total $ 491,247 172,472 — — $ 54,105 7,605 26,970 6,810 $ 42,790 151,381 118,197 — $ 588,142 331,458 145,167 6,810 $ 663,719 $ 95,490 $ 312,368 $1,071,577 The Company utilized payment performance as credit quality indicators for residential real estate, 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 At ecember 31, 2019 the aging of past due loans are as follows: Accruing 30-89 Days Past Due Non Accrual Accruing Greater Than 90 Days $ — — — — — — — Total Past Due Current Loans $ — 627 — 1,332 2,246 22 1,038 $ 8,992 $ 811,790 120,455 784,770 369,651 21,871 303,325 Total 8,992 812,417 120,455 786,102 371,897 21,893 304,363 $ — 227 — 840 1,563 18 603 $ — 400 — 492 683 4 435 (dollars in thousands) Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer and overdrafts Home equity Total $ 3,251 $ 2,014 $ — $ 5,265 $ 2,420,854 $ 2,426,119 4 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements At ecember 31, 2018 the aging of past due loans are as follows: Accruing 30-89 Days Past Due Non Accrual Accruing Greater Than 90 Days $ — — — — — — — Total Past Due Current Loans $ — 302 — 964 3,123 38 1,533 $ 13,628 $ 761,323 97,290 749,398 345,127 22,045 290,807 Total 13,628 761,625 97,290 750,362 348,250 22,083 292,340 $ — 187 — 774 2,554 24 1,108 $ — 115 — 190 569 14 425 $ 4,647 $ 1,313 $ — $ 5,960 $ 2,279,618 $ 2,285,578 (dollars in thousands) Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer and overdrafts Home equity Total I PAIRED 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. Loans are charged-off when management believes that the collectibility of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectibility of the loan’s principal is not probable include; the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. 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 ecember 31, 2019: Carrying Value Unpaid Balance Principal Required Reserve Average Carrying Value Recognized (dollars in thousands) With no required reserve recorded: Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer Home equity Total With required reserve recorded: Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer Home equity Total Total Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer Home equity Total 5 $ — 770 — 160 — — — $ — 976 — 189 — — — $ 930 $ 1,165 $ — 136 — 2,186 — — — $ — 137 — 2,306 — — — $ 2,322 $ 2,443 $ — 906 — 2,346 — — — $ — 1,113 — 2,495 — — — $ 3,252 $ 3,608 $ — — — — — — — $ — $ — 15 — 87 — — — $ 102 $ — 15 — 87 — — — $ 102 $ $ $ — 138 — 445 — — — 583 — 264 — 2,314 — — — $ 2,578 $ — 402 — 2,759 — — — $ 3,161 Interest Income $ — 6 — — — — — $ 6 $ — 7 — 90 — — — $ 97 $ — 13 — 90 — — — $ 103 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements The following is information pertaining to impaired loans at ecember 31, 2018: Carrying Value Unpaid Balance Principal Required Reserve Average Carrying Value Recognized Interest Income (dollars in thousands) With no required reserve recorded: Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer Home equity Total With required reserve recorded: Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer Home equity Total Total Construction and land development Commercial and industrial Municipal Commercial real estate Residential real estate Consumer Home equity Total $ — 87 — 189 — — — $ — 291 — 212 — — — $ 276 $ 503 $ — 314 — 2,461 — — — $ — 315 — 2,575 — — — $ 2,775 $ 2,890 $ — 401 — 2,650 — — — $ — 606 — 2,787 — — — $ 3,051 $ 3,393 $ — — — — — — — $ — $ — 54 — 91 — — — $ 145 $ — 54 — 91 — — — $ 145 $ $ $ — 46 — 249 — — — 295 — 462 — 2,322 2,412 — — $ 5,196 $ — 508 — 2,571 2,412 — — $ 5,491 $ — 5 — — — — — $ 5 $ — 13 — 97 81 — — $ 191 $ — 18 — 97 81 — — $ 196 Troubled ebt Restructurings are 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. There was one commercial and industrial loan that was modified during the first quarter of 2019. The loan was modified by reducing the interest rates as well as extending the term on the loan. The pre-modification and post-modification outstanding recorded investment was $39,000. The financial impact for the modification was not material. This loan was subsequently charged off during the third quarter of 2019. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There was one residential real estate loan and one consumer loan that were modified during the first quarter of 2018. The loans were modified by reducing the interest rates as well as extending the terms on both loans. The pre-modification and post-modification outstanding recorded investment was $2,675,000 for the residential real estate loan that was not accruing interest. The pre-modification and post-modification outstanding recorded investment was $17,000 for the consumer loan that was accruing interest. The financial impact for the modifications was not material. Both troubled debt restructurings subsequently defaulted during 2018. The residential real estate loan was partially charged off for $450,000 and was recorded as other real estate owned for $2,225,000 during the fourth quarter of 2018. This property was subsequently sold during the third quarter of 2019. Other real estate owned is included in other assets on the balance sheet. The consumer loan was fully charged off during the fourth quarter of 2018. 6 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements December 31, 2019 2018 Estimated Useful Life (dollars in thousands) 7. Bank Premises and Equipment Land Bank premises Furniture and equipment Leasehold improvements Accumulated depreciation and amortization $ 7,246 28,175 33,259 12,674 81,354 (47,402) $ 3,850 21,659 30,088 12,674 68,271 (44,350) — 30-39 years 3-10 years 30-39 years or lease term Total $ 33,952 $ 23,921 epreciation and amortization amounted to $3,235,000, $3,206,000, and $3,135,000 at ecember 31, 2019, 2018 and 2017, respectively. 8. Goodwill and Identifiable Intangible Assets At ecember 31, 2019 and 2018, 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. Carrying Amount of Goodwill and Intangibles The changes in goodwill and identifiable intangible assets for the years ended ecember 31, 2019 and 2018 are shown in the table below. (dollars in thousands) Mortgage Servicing Rights Goodwill Total Balance at December 31, 2017 Additions Amortization Expense Balance at December 31, 2018 Additions Amortization Expense Balance at December 31, 2019 9. Fair Value easurements $ 2,714 — — $ 2,714 — — $ 1,525 — (299) $ 1,226 237 (261) $ 2,714 $ 1,202 $ 4,239 — (299) $ 3,940 237 (261) $ 3,916 The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, 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. 7 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements The results of the fair value hierarchy as of ecember 31, 2019, are as follows: (dollars in thousands) Financial Instruments Measured at Fair Value on a Recurring Basis Securities AFS U.S. Treasury U.S. Government Agency 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 Total Equity Securities Carrying Value $ — — 54,211 184,187 396 18,076 3,632 $ 260,502 $ 1,688 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) $ — — — — — — — $ — $ 343 $ — — 54,211 184,187 396 4,775 3,632 $ 247,201 $ 1,345 $ $ $ $ — — — — — 13,301 — 13,301 — 877 Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans $ 877 $ — $ — Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category. Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for 2019 for the estimated credit loss amounted to $79,000. There were no transfers between level 1, 2 and 3 for the year ended ecember 31, 2019. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended ecember 31, 2019. 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 ecember 31, 2019. Management continues to monitor the assumptions used to value the assets listed below. Valuation Technique Unobservable Input Fair Value Unobservable Input Value or Range Securities AFS(1) Impaired Loans (1) $ 13,301 877 Discounted cash flow Appraisal of collateral(3) Discount rate Appraisal adjustments(4) 1.5%-3.2%(2) 0%-30% discount (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. 8 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements The changes in Level 3 securities for the year ended ecember 31, 2019 are as shown in the table below: Auction Rate Securities (dollars in thousands) Balance at December 31, 2018 Purchases Maturities/redemptions Transfer to Level 2 Amortization Change in fair value Balance at December 31, 2019 $ — — — — — — $ — Obligations Issued by States and Political Subdivisions $ 88,728 21,408 (96,812) — (23) — $ 13,301 Total $ 88,728 21,408 (96,812) — (23) — $ 13,301 The amortized cost of Level 3 securities was $13,301,000 with an unrealized loss of $0 at ecember 31, 2019. The securities in this category are generally 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 ecember 31, 2018, are as follows: (dollars in thousands) Financial Instruments Measured at Fair Value on a Recurring Basis Securities AFS U.S. Treasury U.S. Government Agency 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 Total Equity Securities Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans Other Real Estate Owned Carrying Value $ 1,992 3,915 70,194 162,890 672 93,503 3,593 $ 336,759 $ $ $ 1,596 251 2,225 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) $ — — — — — — — $ — $ 293 $ — $ — $ 1,992 3,915 70,194 162,890 672 4,775 3,593 $ 248,031 $ 1,303 $ $ — — $ $ $ $ $ — — — — — 88,728 — 88,728 — 251 2,225 Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category. Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for 2018 for the estimated credit loss amounted to $540,000. There was a transfer of an auction rate security during 2018 from level 3 to level 2. Quoted prices on the auction rate security became available but traded infrequently. There were no other transfers between level 1, 2 and 3 for the year ended ecember 31, 2018. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended ecember 31, 2018. 9 Century Bancorp, Inc. AR ’19Notes 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 Unobservable Input Level 3 inputs to determine fair value (dollars in thousands) at ecember 31, 2018. Management continues to monitor the assumptions used to value the assets Value or Range Asset listed below. Securities AFS(1) Valuation Technique Unobservable Input Discounted cash flow Fair Value Discount rate 2.1%-4.1%(2) $ 88,728 Other Real Estate Owned Impaired Loans 2,225 251 Appraisal of collateral(3) Appraisal of collateral(3) Appraisal adjustments (4) Appraisal adjustments (4) 30% discount 0%-30% discount (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. Auction Rate The changes in Level 3 securities for the year ended ecember 31, 2018 are as shown in the table below: Securities (dollars in thousands) Balance at December 31, 2017 Purchases Maturities/redemptions Transfer to Level 2 Amortization Change in fair value Balance at December 31, 2018 $ 4,459 — — (4,459) — — $ — $ 78,141 132,470 (121,753) — (130) — $ 88,728 Total $ 82,600 132,470 (121,753) (4,459) (130) — $ 88,728 Obligations Issued by States and Political Subdivisions The amortized cost of Level 3 securities was $88,728,000 with an unrealized loss of $0 at ecember 31, 2018. The securities in this category are generally 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 2019 Percent 2018 Percent (dollars in thousands) The following is a summary of remaining maturities or re-pricing of time deposits as of ecember 31, Within one year Over one year to two years Over two years to three years Over three years to five years Total $ 383,497 123,016 27,223 21,711 69 % 22 % 5 % 4 % $ 555,447 100 % $ 413,297 88,815 39,924 18,543 $ 560,579 74 % 16 % 7 % 3 % 100 % Time deposits of more than $250,000 totaled $342,809,000 and $293,046,000 in 2019 and 2018, respectively. eposits totaling $34,964,000 and $36,794,000 were attributable to related parties at ecember 31, 2019 and ecember 31, 2018, respectively. 11. Securities Sold Under Agreements to Repurchase 2019 2018 2017 (dollars in thousands) The following is a summary of securities sold under agreements to repurchase as of ecember 31, Amount outstanding at December 31 $ 266,045 $ 154,240 Weighted average rate at December 31 Maximum amount outstanding at any month end Daily average balance outstanding during the year Weighted average rate during the year 0.96 % $ 307,235 $ 224,361 1.05 % 0.82 % $ 174,150 $ 147,944 0.66 % $ 158,990 0.32 % $ 228,848 $ 189,684 0.26 % Amounts outstanding at ecember 31, 2019, 2018 and 2017 carried maturity dates of the next business day. U.S. Government Sponsored Enterprise securities with a total amortized cost of $264,737,000, $160,576,000, and $162,927,000 were pledged as collateral and held by custodians to secure the agreements at ecember 31, 2019, 2018 and 2017, respectively. The approximate fair value of the collateral at those dates was $265,687,000, $156,369,000, and $159,051,000, respectively. 40 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 12. Other Borrowed Funds and Subordinated Debentures 2019 2018 2017 (dollars in thousands) The following is a summary of other borrowed funds and subordinated debentures as of ecember 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 $ 407,038 2.37 % $ 487,502 $ 231,926 2.95 % $ 238,461 2.76 % $ 542,913 $ 291,674 2.61 % $ 383,861 2.26 % $ 491,583 $ 309,102 2.42 % FEDERAL HO E 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 ecember 31, 2019, was approximately $245,138,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. A schedule of the maturity distribution of FHLBB 2019 December 31, advances with the weighted average interest rates is as follows: 2018 2017 (dollars in thousands) Within one year Over one year to two years Over two years to three years Over three years to five years Over five years Total Amount $ 218,000 $ 42,500 $ 3,500 $ 70,000 $ 36,955 $ 370,955 Weighted Average Rate 1.86 % 2.58 % 2.15 % 2.85 % 2.88 % 2.23 % Amount $ 63,000 $ 28,000 $ 25,000 $ 33,500 $ 52,878 $ 202,378 Weighted Average Rate 2.17 % 2.29 % 3.34 % 2.23 % 2.47 % 2.42 % Amount $ 164,500 $ 63,000 $ 28,000 $ 28,500 $ 63,778 $ 347,778 Weighted Average Rate 1.82 % 2.17 % 2.29 % 3.19 % 2.38 % 2.13 % Included in the table above are $40,000,000, $40,000,000, and $20,000,000, respectively, of FHLBB advances at ecember 31, 2019, 2018 and 2017, that are puttable at the discretion of FHLBB. These put dates were not utilized in the table above. uring 2019, the Company restructured $15,000,000 of FHLBB advances. Prior to the restructure, the weighted average rate on these advances was 3.33% and the weighted average maturity was 14 months. Subsequent to the restructure, the weighted average rate was 2.37% and the weighted average maturity was 60 months. SUBORDINATED DEBENTURES Subordinated debentures totaled $36,083,000 at ecember 31, 2019 and 2018. In ecember 2004, the Company consummated the sale of a trust preferred securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust II. Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The coupon rate on these securities was 3.76% at ecember 31, 2019 and 4.66% at ecember 31, 2018. OTHER BORROWED FUNDS There were no overnight federal funds purchased at ecember 31, 2019 and 2018. 41 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 13. Reclassifications Out of Accumulated Other Comprehensive Income (a) Amount Reclassified from Accumulated Other Comprehensive Income Details About Accumulated Other Comprehensive Income Components Year Ended December 31, 2019 Year Ended December 31, 2018 Affected Line Item in the Statement Where Net Income is Presented Unrealized gains and losses on available-for-sale securities Accretion of unrealized losses transferred Amortization of defined benefit pension items Prior-service costs Actuarial gains (losses) Total before tax Tax (expense) or benefit Net of tax (a) (a) $ $ 61 (17) 44 $ (1,022) 269 $ (753) $ (114) (1,351) (1,465) 412 $ (1,053) $ 302 (85) $ 217 $ (1,477) 391 $ (1,086) $ (14) (1,610) (1,624) 457 $ (1,167) (a) Net gains on sales of investments Provision for income taxes Net income Securities held-to-maturity Provision for income taxes Net income Salaries and employee benefits Salaries and employee benefits (b) Income before taxes (b) Provision for income taxes Net income (b) Amounts in parentheses indicate decreases to profit/loss. These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see employee benefits footnote (Note 17) for additional details). 14. 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. iluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. There were no common stock equivalents for 2019, 2018 and 2017, respectively. Year Ended December 31, 2019 2018 2017 The following table is a reconciliation of basic EPS and diluted EPS: (in thousands except share and per share data) 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 Weighted average shares outstanding diluted, Class A Weighted average shares outstanding, Class B Diluted EPS, Class A Diluted EPS, Class B $ 31,351 $ 28,479 $ 17,526 8,348 7,734 4,775 3,633,044 1,934,865 $ $ 8.63 4.31 3,608,179 1,959,730 $ $ 7.89 3.95 3,604,029 1,963,880 $ $ 4.86 2.43 $ 31,351 $ 28,479 $ 17,526 8,348 39,699 3,633,044 1,934,865 5,567,909 1,934,865 $ $ 7.13 4.31 7,734 36,213 3,608,179 1,959,730 5,567,909 1,959,730 $ $ 6.50 3.95 4,775 22,301 3,604,029 1,963,880 5,567,909 1,963,880 $ $ 4.01 2.43 42 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 15. 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. ividend payments by the Company are dependent in part on the dividends it receives from the Bank, which are subject to certain regulatory restrictions. STOCK OPTION PLAN uring 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 irectors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of irectors 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 no options outstanding at ecember 31, 2019 and ecember 31, 2018. 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 ecember 31, 2019, that the Bank and the Company meet all capital adequacy requirements to which they are subject. The Basel Committee has issued capital standards entitled “Basel III: A global framework for more resilient banks and banking systems” (Basel III). The Federal Reserve has finalized its rule implementing the Basel III regulatory capital framework. The rule was effective in January 2015 and sets the Basel III minimum Regulatory capital requirements. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Common Equity tier 1, tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes would cause a change in the Bank’s categorization. The Bank’s actual capital amounts and ratios are presented in the following table: Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions As of December 31, 2019 (Basel III) Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) As of December 31, 2018 (Basel III) Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) Amount Ratio Amount Ratio Amount Ratio $ 401,850 372,265 372,265 372,265 $ 364,744 336,201 336,201 336,201 13.57 % 12.57 % 12.57 % 7.01 % 13.24 % 12.21 % 12.21 % 6.68 % $ 236,830 177,622 133,217 212,549 $ 220,335 165,251 123,938 201,228 8.00 % 6.00 % 4.50 % 4.00 % 8.00 % 6.00 % 4.50 % 4.00 % $ 296,037 10.00 % 236,830 192,424 265,686 8.00 % 6.50 % 5.00 % $ 275,419 10.00 % 220,335 179,022 251,535 8.00 % 6.50 % 5.00 % 4 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements The Company’s actual capital amounts and ratios are presented in the following table: Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2019 (Basel III) Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) As of December 31, 2018 (Basel III) Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to 4th Qtr. Average Assets) $ 415,863 386,308 351,308 386,308 $ 377,359 348,816 313,816 348,816 13.97 % 12.98 % 11.80 % 7.25 % 13.62 % 12.59 % 11.32 % 6.91 % $ 238,132 178,599 133,949 213,222 $ 221,690 166,268 124,701 201,913 8.00 % 6.00 % 4.50 % 4.00 % 8.00 % 6.00 % 4.50 % 4.00 % $ 297,665 10.00 % 238,132 193,482 266,528 8.00 % 6.50 % 5.00 % $ 277,113 10.00 % 221,690 180,123 252,391 8.00 % 6.50 % 5.00 % 16. Income Taxes 2019 2018 2017 (dollars in thousands) The current and deferred components of income tax expense (benefit) for the years ended ecember 31, are as follows: Current expense: Federal State Total current expense Deferred (benefit) expense: Federal State Valuation allowance reversal Total deferred (benefit) expense Provision for income taxes $ 2,548 697 3,245 (1,660) (367) (108) (2,135) $ 2,637 697 3,334 (1,238) (528) — (1,766) $ 3,628 412 4,040 6,496 422 — 6,918 $ 1,110 $ 1,568 $ 10,958 2019 2018 (dollars in thousands) Income tax accounts included in other assets at ecember 31, are as follows: Current receivable Deferred income tax asset, net Total $ 3,446 24,566 $ 28,012 $ 13,194 20,321 $ 33,515 2019 2018 2017 Insurance income Effect of tax-exempt interest State income tax, net of federal income tax benefit (dollars in thousands) ifferences between income tax expense (benefit) at the statutory federal income tax rate and total income tax expense are summarized as follows: $ 8,570 Federal income tax expense at statutory rates 261 (265) (6,737) (292) (108) (438) — 119 $ 7,934 134 (176) (6,510) (349) — 438 — 97 $ 11,308 550 (371) (8,683) (341) — — 8,448 47 Sequestration (reversal) accrual Deferred tax remeasurement Valuation allowance reversal Net tax credit Other Total Effective tax rate $ 1,110 $ 1,568 $ 10,958 2.72 % 4.15 % 32.95 % 44 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements (dollars in thousands) The following table sets forth the Company’s gross deferred income tax assets and gross deferred income tax liabilities at ecember 31: Deferred income tax assets: 2019 2018 Allowance for loan losses Deferred compensation Pension and SERP liability Operating lease liabilities Unrealized losses on securities transferred to held-to-maturity Depreciation QZAB credit Accrued bonus Charitable contributions carryforward Nonaccrual interest Unrealized (gains) losses on securities available-for-sale Other Gross deferred income tax asset Valuation allowance Gross deferred income tax asset, net of valuation allowance Deferred income tax liabilities: Pension liability Operating lease right-of-use assets Deferred origination costs Prepaid expenses Mortgage servicing rights Gross deferred income tax liability Deferred income tax asset net $ 8,354 8,910 8,770 3,567 643 1,060 812 708 276 115 114 206 33,535 — 33,535 (4,258) (3,520) (516) (337) (338) (8,969) $ 8,058 8,184 6,506 — 912 908 — 717 389 109 (2) 181 25,962 (108) 25,854 (4,436) — (524) (228) (345) (5,533) $ 24,566 $ 20,321 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 ecember 31, 2019. uring 2019, the valuation allowance on a charitable contribution carryforward was reversed. 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. On ecember 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The majority of the provisions of the Tax Act took effect on January 1, 2018. The Tax Act lowers the Company’s federal tax rate from 34% to 21%. The Company remeasured its deferred taxes at 21% as of the enactment date and recorded additional tax expense of $8,448,000. Also, for tax years beginning after ecember 31, 2018, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2017 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards. The Company is in an Alternative Minimum Tax (“AMT”) credit position. As the AMT has been repealed and the existing credit is refundable, the AMT credit, totaling $5,664,000, has been reclassified to currently receivable. Of this amount, the Company expects to recover $4,069,000 with the filing of its 2019 federal tax return. The Company and its subsidiaries file a consolidated federal tax return. The Company is subject to federal and state examinations for tax years after ecember 31, 2015. 17. Employee Benefits The Company has a Qualified efined 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 efined 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 43% to 57% 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 15% to 31%. 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. 45 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements The measurement date for the Plan is ecember 31 for each year. The benefits expected to be paid in each year from 2020 to 2024 are $1,798,000, $2,023,000, $2,157,000, $2,270,000, and $2,451,000, respectively. The aggregate benefits expected to be paid in the five years from 2025 to 2029 are $15,005,000. The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under Topic 820 are described as follows: LEVEL 1 Inputs to the valuation methodology are quoted market prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. LEVEL 2 Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly, such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other that quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability. LEVEL 3 Inputs that are unobservable inputs for the asset or liability. Below is a description of the valuation methodologies used for assets measured at fair value. Collective Funds Valued at either the closing price reported on the active market on which the individual securities are traded or valued at the net asset value (NAV) of units of a collective trust. The NAV, as provided by the trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV. Participant transactions (purchases and sales) may occur daily. Were SBERA to initiate a full redemption of the collective trust, the investment advisor reserves the right to temporarily delay withdrawal from the trust in order to ensure that securities liquidations will be carried out in an orderly business manner. Equity Securities Valued at the closing price reported on the active market on which the individual securities are traded. utual Funds Valued at the daily closing price as reported by the fund. Mutual funds held open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. The funds are required to publish their daily NAV and to transact at that price. The mutual funds held are deemed to be actively traded. Limited Partnerships and Hedge Funds The funds are valued at NAV, without further adjustment, as calculated by the fund’s manager based upon the terms and conditions of the organization documents of the underlying investments, with further consideration to portfolio risks. The following table sets forth by level, within the fair value hierarchy, the plan’s assets at fair value. Classification within the fair value hierarchy table is based upon the lowest level of any input that is significant to the fair value measurement: Description Percent Level 1 Level 3 Level 2 NAV Total (dollars in thousands) The fair value of plan assets and major categories as of ecember 31, 2019, is as follows: Collective Funds Equity Securities Diversified Mutual Funds Total investments measured in the fair value hierarchy Investments measured at net asset value(1) 8.3 % 9.7 % 31.1 % 49.1 % 50.9 % $ — — — — 26,274 $ 4,289 5,016 16,081 25,386 — $ 100.0 % $ 26,274 $ 25,386 $ — — — — — — $ $ — — — — — — $ 4,289 5,016 16,081 25,386 26,274 $ 51,660 (1) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. 46 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements Description Percent NAV Level 1 Level 2 Level 3 Total (dollars in thousands) The fair value of plan assets and major categories as of ecember 31, 2018, is as follows: Collective Funds Equity Securities Diversified Mutual Funds Short-term investments Total investments measured in the fair value hierarchy Investments measured at net asset value(1) 5.6 % 10.9 % 30.7 % 0.1 % 47.3 % 52.7 % $ — — — — — 23,398 $ 2,504 4,863 13,612 60 21,039 — $ 100.0 % $ 23,398 $ 21,039 $ — — — — — — — $ $ — — — — — — — $ 2,504 4,863 13,612 60 21,039 23,398 $ 44,437 (1) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. INVEST ENTS EASURED USING THE NET ASSET VALUE PER SHARE PRACTICAL EXPEDIENT The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient. There are no participant redemption restrictions for these investments. Percent Fair Value (dollars in thousands) The investments measured using the net asset value per share practical expedient as of ecember 31, 2019, is as follows: Collective Funds by Category: Equity US debt securities International equities Limited Partnerships by Category: Emerging markets Multi-strategy Hedge Funds by Category: Global opportunities(2) Private investment entities and/or separately managed accounts(3) 19.3 % 15.2 % 10.1 % 3.2 % 1.2 % 0.5 % 1.4 % 50.9 % $ 9,932 7,874 5,208 1,635 644 259 722 $ 26,274 Percent Fair Value (dollars in thousands) The investments measured using the net asset value per share practical expedient as of ecember 31, 2018, is as follows: Collective Funds by Category: Equity Diversified US debt securities International equities Limited Partnerships by Category: Emerging markets Multi-strategy Hedge Funds by Category: Multi-strategy(1) Global opportunities(2) Private investment entities and/or separately managed accounts(3) 20.8 % 0.0 % 12.1 % 9.7 % 2.9 % 1.9 % 3.6 % 0.3 % 1.4 % 52.7 % $ 9,204 — 5,386 4,311 1,289 826 1,593 150 639 $ 23,398 (1) This category includes investments in hedge funds that pursue multiple strategies to diversify risks and reduce volatility. Fund objectives are to seek above-average rates of return and long-term capital growth through in-vestments, which are fund of funds with a diversified portfolio of private investment entities and/or separately managed accounts managed by investment managers or achieve superior risk-adjusted capital appreciation over the long-term, generally through an investment, which invests in private investment funds and discretional managed accounts, structured notes, swaps or other similar (2) products. The fair values of the investments in this category have been determined using the net asset value per share of the fund(s). This category has an investment strategy to pursue a hybrid absolute return via portfolio managers, secondaries, and co-investments with a flexible and opportunistic mandate tactically allocating capital to look to capitalize on market dislocations and inefficiencies. The opportunities are expected to fall within the following strategies: Niche Alternatives and Private Credit and Hedge Fund secondaries. The fair value of the investments in this category have been determined using the last sales price, for listed securities, and in accordance with the agreement terms for portfolio-managed investments, notes, swaps, (3) and other similar products. The Fund’s investment objective is to invest in highly attractive, select investment opportunities by maintaining investments through private investment entities and/or separately managed accounts (each, an Investment or a Portfolio and collectively, the Investments or the Portfolios) with investment management professionals (each a Manager and collectively, the Managers) specializing in various alternative investment strategies. The Managers have broad investment experience and the ability to leverage their existing relationships with corporate management teams, investment banks and other institutions to gain access to certain investment opportunities. As such, the Manager is presented with “best idea” investment opportunities, typically in asset classes where market dislocations or other events have created attractive investment opportunities. The Managers are not restricted in the investment strategies that they may employ across different asset classes and regions. The Manager anticipates that any number of strategies will be eligible for consideration for investment by the Fund and the Fund reserves the right to invest in any particular strategy or asset class it deems appropriate. 47 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 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. 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. Supplemental Insurance/ The benefits expected to be paid in each year from 2020 to 2024 are $2,373,000, $2,318,000, $2,409,000, $2,692,000 and $3,138,000, respectively. The Retirement Plan aggregate benefits expected to be paid in the five years from 2025 to 2029 are $18,017,000. Defined Benefit Pension Plan 2019 2018 2019 2018 (dollars in thousands) Change projected in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Actuarial (gain)/loss Benefits paid Projected benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return (loss) 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 (benefit) 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 $ 40,509 1,103 1,892 7,099 (1,169) $ 49,434 $ 44,437 8,392 — (1,169) $ 51,660 $ 2,226 $ 49,434 3.71 % 4.76 % 7.50 % 4.00 % $ 1,103 1,892 (3,275) — 916 $ 636 $ — 1,066 1,066 $ 47,065 1,411 1,481 (8,263) (1,185) $ 40,509 $ 48,422 (2,800) — (1,185) $ 44,437 $ 3,928 $ 40,509 4.76 % 3.49 % 8.00 % 4.00 % $ 1,411 1,481 (3,813) (100) 904 $ (117) $ 100 (2,554) (2,454) $ 40,405 1,024 1,926 7,537 (916) $ 49,976 $ 42,579 1,107 1,386 (3,591) (1,076) $ 40,405 $ (49,976) $ 45,238 $ (40,405) $ 36,984 3.71 % 4.79 % NA 4.00 % $ 1,024 1,926 — 114 435 $ 3,499 $ (114) 7,101 6,987 4.79 % 3.42 % NA 4.00 % $ 1,107 1,386 — 114 706 $ 3,313 $ (114) (4,298) (4,412) $ 1,702 $ (2,571) $ 10,486 $ (1,099) (dollars in thousands) Prior service cost Net actuarial loss Total December 31, 2019 Supplemental Plan Plan Total Plan December 31, 2018 Supplemental Plan Total $ — (12,920) $ (307) (17,971) $ (307) (30,891) $ — (11,854) $ (421) (10,870) $ (421) (22,724) $ (12,920) $ (18,278) $ (31,198) $ (11,854) $ (11,291) $ (23,145) 48 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 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. iscretionary bonus expense amounted to $2,364,000, $2,355,000 and $1,859,000 in 2019, 2018, and 2017, respectively. The Company does not offer any postretirement programs other than pensions. 18. Commitments and Contingencies A number of legal claims against the Company arising in the normal course of business were outstanding at ecember 31, 2019. 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. 19. 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 ecember 31 are as follows: (dollars in thousands) 2019 2018 Financial instruments whose contract amount represents credit risk Commitments to originate 1–4 family mortgages $ 13,806 $ 5,075 Standby and commercial letters of credit 5,779 4,258 Unused lines of credit Unadvanced portions of construction loans Unadvanced portions of other loans 625,524 553,045 11,062 15,801 28,746 20,305 The following table summarizes the amounts included in Accumulated Other Supplemental Comprehensive Loss at ecember 31, 2019, expected to be recognized as Plan components of net periodic benefit cost in the next year: Amortization of prior service cost to be Plan recognized in 2020 Amortization of loss to be recognized in 2020 $ — 1,041 $ 114 $ 849 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. Prior to ecember 31, 2018, the Company utilized a full yield curve approach in the estimation of the service and interest components of the net periodic pensionable cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. Beginning ecember 31, 2018, the discount rate was determined by preparing an analysis of the respective plan’s expected future cash flows and high-quality fixed-income investments currently available and expected to be available during the period to maturity of the benefits. Mortality assumptions are based on the RP 2015 Mortality Table projected with Scale MP 2016. This methodology more accurately matches yields to the expected benefit payments than the previous method. The discount rate used is an estimate of the rate at which the plans could settle their obligations. Rather than using a rate and curve developed using a bond portfolio, this method selects individual bonds to match to the expected cash flows of the Plans. This provides a more accurate depiction of the true cost to the plans to settle the obligations as the Plans could theoretically go into the marketplace and purchase the specific bonds used in the analysis in order to settle the obligations of the Plans. The financial impact of the enhanced estimate to the discount rate amounted to approximately $6,800,000 decrease in the projected benefit obligations for the combined plans at ecember 31, 2018. 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 $458,000 for 2019, $454,000 for 2018 and $445,000 for 2017. Administrative costs associated with the plan are absorbed by the Company. 49 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 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, 2019 2018 2017 20. 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 Pension Other Total $ 2,132 2,409 1,514 813 1,875 1,552 1,002 985 956 414 456 2,008 1,786 $ 2,346 2,002 1,444 1,077 1,740 1,464 1,021 987 946 438 420 678 1,725 $ 2,315 1,859 1,543 993 1,160 1,199 966 945 1,020 440 308 1,396 1,845 21. 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 non- financial 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- ATURITY 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. $ 17,902 $ 16,288 $ 15,989 LOANS The fair value of loans is estimated using the exit price notion consistent with Topic 820, Fair Value Measurement. Fair value is determined based on a discounted cash flow analysis. The discounted cash flow analysis was based on the contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk. For certain non-performing assets fair value is determined based on the estimated values of the underlying collateral of individual analysis of receipts. 50 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements TI E DEPOSITS SUBORDINATED DEBENTURES 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. Carrying Amount Estimated Fair Value (dollars in thousands) December 31, 2019 Financial assets: Securities held-to-maturity Loans(1) $ 2,351,120 2,396,534 $ 2,361,304 2,424,770 Financial liabilities: Time deposits Other borrowed funds Subordinated debentures December 31, 2018 Financial assets: 555,447 370,955 36,083 560,746 374,531 36,083 Securities held-to-maturity Loans(1) $ 2,046,647 2,257,035 $ 1,991,421 2,279,712 Financial liabilities: Time deposits Other borrowed funds Subordinated debentures (1) 560,579 202,378 36,083 559,988 203,122 36,083 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 ecember 31, 2019 and ecember 31, 2018. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable. Fair Value Measurements Level 1 Inputs Level 2 Inputs Level 3 Inputs $ $ — — — — — — — — — — $ 2,361,304 — $ — 2,424,770 560,746 374,531 36,083 — — — $ 1,991,421 — $ — 2,279,712 559,988 203,122 36,083 — — — Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses. LI ITATIONS 22. Revenue from Contracts with Customers 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. Revenue from contracts with customers in the scope of ASC Topic 606 is measured based on the consideration specified in the contract with a customer, and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations. The Company’s performance obligations are typically satisfied as services are rendered, and our contracts do not include multiple performance obligations. Payment is generally collected at the time services are rendered, or monthly. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements. The Company pays sales commissions to its employees in accordance with certain incentive plans. The Company expenses sales commissions when incurred if we do not expect to recover these costs from the terms of the contract with the customer. Sales commissions are included in compensation expense. 51 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements In certain cases, other parties are involved with providing products and services to our customers. If the Company is a principal in the transaction (providing goods or services itself), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (arranging for another party to provide goods or services), the Company reports its net fee or commission retained as revenue. Waivers and reversals are recorded as a reduction of revenue either when the revenue is recognized by the Company or at the time the waiver or reversal is earned by the customer. A. Change in Accounting Policy The Company adopted Topic 606 Revenue from Contracts with Customers with a date of initial application of January 1, 2018 and has applied the guidance to all contracts within the scope of Topic 606 as of that date. As a result, the Company has changed its accounting policy for revenue recognition as detailed in this footnote. The Company applied Topic 606 using the cumulative effect method. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605. There was no cumulative effect adjustment as of January 1, 2018, and there were no material changes to the financial statements at or for the years ended ecember 31, 2018, and 2017 as a result of adopting Topic 606. B. Practical Expedients The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. The Company applies the practical expedient in paragraph 606-10-32-18 and does not adjust the consideration from customers for the effects of a significant financing component if at contract inception the period between when the entity transfers the goods or services and when the customer pays for that good or service will be one year or less. Year ended December 31, 2019 Revenue from Contracts in Scope of Topic 606 C. Nature of Goods and Services The vast majority of the Company’s revenue is specifically out-of-scope of Topic 606. For the revenue in-scope, the following is a description of principal activities, separated by the timing of revenue recognition, from which the Company generates its revenue from contracts with customers. 1. Revenue earned at a point in time—Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, NSF fees, credit and debit card interchange fees and foreign exchange transaction fees. Revenue is generally derived from transactional information accumulated by our systems and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is the principal in each of these contracts, with the exception of credit and debit card interchange fees, in which case we are acting as the agent and record revenue net of expenses paid to the principal. 2. Revenue earned over time—The Company earns revenue from contracts with customers in a variety of ways in which the revenue is earned over a period of time—generally monthly or quarterly. Examples of this type of revenue are deposit account service fees, lockbox fees, investment management fees, merchant referral services, and safe de-posit box fees. Account service charges, management fees and referral fees are recognized on a monthly basis while any transaction based income is recorded as the activity occurs. Revenue is primarily based on the number and type of transactions or assets managed and is generally derived from transactional information accumulated by our systems. Revenue is recorded in the same period as the related transactions occur or services are rendered to the customer. D. Disaggregation of Revenue The following table presents total revenues as presented in the Consolidated Statements of Income and the related amounts which are from contracts with customers within the scope of Topic 606. As illustrated here, the vast majority of our revenues are specifically excluded from the scope of Topic 606. Year ended December 31, 2018 Revenue from Contracts in Scope of Topic 606 Year ended December 31, 2017 Revenue from Contracts in Scope of Topic 606 (dollars in thousands) Total net interest income Noninterest income: Service charges on deposit accounts Lockbox fees Brokerage commissions Net gains on sales of securities Gains on sales of mortgage loans Other income $ 95,789 $ — $ 92,576 $ — $ 85,616 $ — 9,220 3,973 277 61 412 4,456 9,220 3,973 — — — 2,799 8,560 3,274 348 302 — 3,764 8,560 3,274 — — — 2,536 8,586 3,290 353 47 370 3,906 8,586 3,290 — — — 2,429 Total noninterest income 18,399 15,992 16,248 14,370 16,552 14,305 Total revenues $ 114,188 $ 15,992 $ 108,824 $ 14,370 $ 102,168 $ 14,305 December 31, 2019 2018 2017 (dollars in thousands) The following table provides information about receivables with customers. Receivables, which are included in “Other assets” $ 1,200 $ 1,205 $ 1,009 52 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements Year Ended December 31, 2019 Supplemental balance sheet information related to leases was as follows: (in thousands, except lease term and discount rate) Operating Leases: Operating lease right-of-use assets Operating lease liabilities Weighted Average Remaining Lease Term: Operating Leases Weighted Average Discount Rate: Operating Leases $ 12,521 $ 12,690 11 Years 3.5 % The Company is obligated under a number of non-cancelable operating leases for premises and equipment expiring in various years through 2028. Total lease expense approximated $2,744,000, $2,601,000 and $2,608,000 for the years ended ecember 31, 2019, 2018 and 2017, respectively. Included in lease expense are amounts paid to a company affiliated with Barry R. Sloane, Chairman, President and CEO, and Linda Sloane Kay, Vice Chair, amounting to $458,000, $444,000 and $439,000, respectively. Rental income approximated $419,000, $373,000 and $321,000 in 2019, 2018 and 2017, respectively. Year Ending December 31, 2019 2018 (in thousands) A summary of future payments of lease liabilities were as follows: 2019 2020 2021 2022 2023 2024 Thereafter Total lease payments Less imputed interest Present value of lease liability $ — 2,030 1,754 1,603 1,545 1,277 7,312 $ 15,521 (2,831) $ 12,690 $ 2,490 2,170 1,694 1,331 1,104 — 1,074 $ 9,863 23. Leases The Company has operating leases primarily for branch locations as well as data processing centers. The Company’s operating leases have remaining lease terms of 1 year to 32 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. The Company also has one sublease for part of a data processing center that the Company currently leases from a lessor. The sublease expires in 2022 with an option to terminate and no option to extend. Lease income, for the sublease, totaled approximately $39,000 for the year ended ecember 31, 2019. Variable lease costs include costs that are not included in the lease liability. 2019 Year Ended December 31, (in thousands) The components of lease expense were as follows: Operating lease cost Variable lease cost Total lease cost $ 2,216 528 $ 2,744 Year Ended December 31, 2019 (in thousands) Supplemental cash flow information related to leases was as follows: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 2,130 $ 1,745 5 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 2019 Quarters 24. 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 2018 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 Fourth Third Second First $ $ 40,518 15,187 25,331 550 24,781 4,689 18,212 11,258 526 $ 39,852 16,082 23,770 75 23,695 4,286 17,462 10,519 435 $ 10,732 $ 10,084 $ $ $ $ $ $ 3,650,949 1,916,960 5,567,909 1,916,960 2.33 1.16 1.93 1.16 Fourth 37,453 13,748 23,705 450 23,255 4,164 17,185 10,234 309 $ $ $ $ $ 3,650,449 1,917,460 5,567,909 1,917,460 2.19 1.09 1.81 1.09 Third 34,765 11,561 23,204 — 23,204 4,169 17,348 10,025 444 $ $ $ $ $ $ 9,925 $ 9,581 $ 39,692 16,442 23,250 250 23,000 4,997 18,264 9,733 267 9,466 3,620,449 1,947,460 5,567,909 1,947,460 2.06 1.03 1.70 1.03 Second 33,408 10,209 23,199 450 22,749 3,722 17,159 9,312 314 8,998 3,608,329 1,959,580 5,567,909 1,959,580 $ $ $ $ 2.16 1.08 1.78 1.08 3,608,329 1,959,580 5,567,909 1,959,580 $ $ $ $ 2.09 1.04 1.72 1.04 3,608,029 1,959,880 5,567,909 1,959,880 $ $ $ $ 1.96 0.98 1.62 0.98 $ 39,077 15,639 23,438 375 23,063 4,427 18,190 9,300 (118) $ 9,418 3,610,329 1,957,580 5,567,909 1,957,580 $ $ $ $ $ $ 2.05 1.03 1.69 1.03 First 31,430 8,962 22,468 450 22,018 4,193 18,001 8,210 501 7,709 3,608,029 1,959,880 5,567,909 1,959,880 $ $ $ $ 1.68 0.84 1.38 0.84 54 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements 25. Parent Company Financial Statements The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of ecember 31, 2019 and 2018 and the statements of income and cash flows for each of the years BALANCE SHEETS in the three-year period ended ecember 31, 2019, are presented below. The statements of changes in stockholders’ equity are identical to the consolidated statements December 31, of changes in stockholders’ equity and are therefore not presented here. (dollars in thousands) 2019 2018 $ 3,177 353,489 16,325 $ 372,991 $ 4,327 36,083 332,581 $ 372,991 $ 1,263 322,775 16,991 $ 341,029 $ 4,507 36,083 300,439 $ 341,029 2019 2018 2017 $ 5,000 — 65 5,065 1,577 215 3,273 (363) 3,636 36,063 $ 4,750 — 53 4,803 1,474 225 3,104 (347) 3,451 32,762 $ 2,500 1 34 2,535 1,121 209 1,205 (440) 1,645 20,656 $ 39,699 $ 36,213 $ 22,301 2019 2018 2017 $ 39,699 $ 36,213 $ 22,301 (36,063) 665 (180) 4,121 (2,207) (2,207) 1,914 1,263 (32,762) (158) (1,808) 1,485 (2,203) (2,203) (718) 1,981 (20,656) (6,498) 6,266 1,413 (2,200) (2,200) (787) 2,768 $ 3,177 $ 1,263 $ 1,981 ASSETS: Cash Investment in subsidiary, at equity Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY: Liabilities Subordinated debentures Stockholders’ equity Total liabilities and stockholders’ equity STATEMENTS OF INCOME Year Ended December 31, (dollars in thousands) Income: Dividends from subsidiary Interest income from deposits in bank Other income Total income Interest expense Operating expenses Income before income taxes and equity in undistributed income of subsidiary Benefit from income taxes Income before equity in undistributed income of subsidiary Equity in undistributed income of subsidiary Net income STATEMENTS OF CASH FLOWS December 31, (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities Undistributed income of subsidiary Decrease (increase) in other assets (Decrease) increase in liabilities Net cash provided by (used in) operating activities CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid Net cash used in financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year 55 Century Bancorp, Inc. AR ’19Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm KP G 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.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and its subsidiary (the “Company”) as of ecember 31, 2019 and 2018, 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 ecember 31, 2019, and the related notes, collectively, the consolidated financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of ecember 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended ecember 31, 2019, 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) (“PCAOB”), the Company’s internal control over financial reporting as of ecember 31, 2019, based on criteria established in Internal Control—Integrated Frame ork (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 1982. Boston, Massachusetts March 13, 2020 56 Century Bancorp, Inc. AR ’19 Report of Independent Registered Public Accounting Firm KP G 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.: Opinion on Internal Control Over Financial Reporting We have audited Century Bancorp, Inc. and its subsidiary’s (the “Company”) internal control over financial reporting as of ecember 31, 2019, based on criteria established in Internal Control—Integrated Frame ork (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of ecember 31, 2019, based on criteria established in Internal Control—Integrated Frame ork (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of ecember 31, 2019 and 2018, 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 ecember 31, 2019, and the related notes, collectively, the consolidated financial statements, and our report dated March 13, 2020 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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. Definition and Limitations of Internal Control Over Financial Reporting 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. Boston, Massachusetts March 13, 2020 57 Century Bancorp, Inc. AR ’19 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 executive management 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 ecember 31, 2019. 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 Frame ork (2013). Based on our assessment, we believe that, as of ecember 31, 2019, 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 57. Barry R. Sloane Chairman, President & CEO William P. Hornby, CPA Chief Financial Officer & Treasurer March 13, 2020 58 Century Bancorp, Inc. AR ’19 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 505000 Louisville, KY 40233 TEL (781) 575-3400 Computershare.com The annual meeting of stockholders will be held on Tuesday, April 14, 2020, 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. About Century Century Bancorp, Inc. is a $5.5 billion banking and fnancial services company headquartered in Medford, Massachusetts. The Company operates 28 banking offces and provides a full range of business, personal, and institutional services. Headquarters – Medford 400 Mystic Avenue (781) 393-4160 Allston 300 Western Avenue (617) 562-1700 Andover 15 Elm Street (978) 474-4191 Back Bay 437 Boylston Street (617) 424-1644 Beverly 428 Rantoul Street (978) 921-2300 Braintree 703 Granite Street (781) 356-3400 Chestnut Hill Square 210 Boylston Street/Rte 9 (617) 582-0920 Coolidge Corner 1354 Beacon Street (617) 713-1890 North End 275 Hanover Street (617) 557-2950 Peabody 12 Peabody Square (978) 977-4900 Everett 1763 Revere Beach Parkway/Rte 16 (617) 381-6300 Quincy 651 Hancock Street (617) 376-8100 Federal Street 24 Federal Street (617) 423-1490 Fellsway 503 Riverside Avenue (781) 393-6520 Lynn 2 State Street (781) 586-8700 Brookline 1184-1186 Boylston Street/Rte 9 (617) 713-4910 Malden 140 Ferry Street at Eastern Avenue (781) 388-2100 Burlington 134 Cambridge Street/Rte 3A (781) 238-8700 Cambridge 2309 Massachusetts Avenue (617) 349-5300 Medford Square One Salem Street (781) 391-9830 Newton Centre 32 Langley Road (617) 641-2300 Salem, MA 37 Central Street (978) 740-6900 Salem, NH (Coming Soon) 365 South Broadway Somerville 102 Fellsway West at Mystic Avenue (617) 629-0929 State Street 136 State Street (617) 367-3712 Wellesley 258 Washington Street (781) 235-6500 Winchester 522 Main Street (781) 756-3480 Woburn 299 Mishawum Road (781) 932-5612 “Boston has lost a one-of-a-kind leader who was always looking to do good and bring people together.“ In Remembrance ~ Louis J. Woolf, President & CEO of Hebrew SeniorLife “Marshall Sloane was a role model for everyone in the way he lived his life and gave back to the community.” ~ President Antoinette M. Hays, Regis College “Marshall Sloane exemplifed the best qualities of a person dedicated to his family, his friends, including the people of the Century Bank family, and his local community.” ~ Cardinal Sean P. O’Malley, Archbishop of Boston “Massachusetts lost a banking icon… remembered for his philanthropy, his relentless work ethic and his contributions to the industry.” ~ Banker & Tradesman “A great example of what a community banker should be.” ~ Former Comptroller of the Currency Thomas J. Curry “He was an incredible gentleman and he ran a very, very well-run community bank.” ~ Neal J. Curtin, Veteran Boston Banking Attorney Marshall M. Sloane was much more than the visionary architect of Century Bank. He was our Dad. He taught us the value of working hard, doing the right thing, and serving the community. He always wanted the bank he founded to live long beyond his generation — and he insisted we do it in a way he would be proud of. Dad’s wisdom, compassion, generosity and kindness will be remembered by his family, the thousands of employees who worked at Century over the past 50 years, and the countless people whose lives he touched over his long and extraordinary life. Barry R. Sloane Linda Sloane Kay Marshall M. Sloane Founder & Chairman April 15, 1926 – April 6, 2019 400 Mystic Avenue Medford, MA 02155 USA (866) 823-6887 CenturyBank.com Customer centric. Digitally enhanced. Equal Housing Lender/Member FDIC © 2020 Century Bancorp, Inc. All rights reserved. 002CSNA6CF 2019 Annual Report Let’s have a conversation Your Personal Banker Lina, North End 30 years banking experience. I’m very energetic and enthusiastic. Expertise: Banking Solutions, Home Lending Hi! I’m Lina. Thanks for choosing Century. How can I help you? I’m thinking about buying my first home. How do I apply for a mortgage? Congrats on your home search! Where are you looking to buy? Type your message here Send 

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