Edgar Filing: CENTURY BANCORP INC

Form 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2012
¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 0-15752

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)


COMMONWEALTH OF MASSACHUSETTS		04-2498617
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification number)

400 MYSTIC AVENUE, MEDFORD, MA		02155
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number including area code:

(781) 391-4000

Securities registered pursuant to Section 12(b) of the Act:


Class A Common Stock, $1.00 par value		Nasdaq Global Market
(Title of class)		(Name of Exchange)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

State the aggregate market value of the registrant’s voting and nonvoting stock held by nonaffiliates, computed using the closing price as reported on Nasdaq as of June 30, 2012 was $106,506,833.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of February 28, 2013:

Class A Common Stock, $1.00 par value 3,569,679 Shares

Class B Common Stock, $1.00 par value 1,986,880 Shares

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

(1)	Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2012 are incorporated into Part II, Items 5-8 of this Form 10-K.

CENTURY BANCORP INC.

FORM 10-K

TABLE OF CONTENTS


		Page

	PART I
ITEM 1	BUSINESS		1-5
ITEM 1A	RISK FACTORS		5-6
ITEM 1B	UNRESOLVED STAFF COMMENTS		6
ITEM 2	PROPERTIES		6-7
ITEM 3	LEGAL PROCEEDINGS		7
ITEM 4	MINE SAFETY DISCLOSURES		7

	PART II
ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		8-9
ITEM 6	SELECTED FINANCIAL DATA		9
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION		9
ITEM 7a	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		9
ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		9
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		9
ITEM 9A	CONTROLS AND PROCEDURES		9-10
ITEM 9B	OTHER INFORMATION		10

	PART III
ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		90-94
ITEM 11	EXECUTIVE COMPENSATION		95-105
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		106-107
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		107
ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES		107-108

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

PART I

ITEM 1. BUSINESS

The Company

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At December 31, 2012, the Company had total assets of $3.1 billion. Currently, the Company operates 25 banking offices in 19 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.

The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and the interest paid on deposits and borrowings. The results of operations are also affected by the level of income/fees from loans and deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, nonprofit organizations, and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans, and consumer loans and accepts savings, time and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lockbox collection services, cash management services and account reconciliation services, and it actively promotes the marketing of these services to the municipal market. Also, the Company provides full-service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a full-service third-party securities brokerage business.

The Company is also a provider of financial services, including cash management, transaction processing and short-term financing, to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with 192 (55%) of the 351 cities and towns in Massachusetts.

Availability of Company Filings

Under the Securities Exchange Act of 1934, Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The Company electronically files with the SEC its periodic and current reports, as well as other filings it makes with the SEC from time to time. The SEC maintains an Internet site that contains reports and other information regarding issuers, including the Company, that file electronically with the SEC, at www.sec.gov, in which all forms filed electronically may be accessed. Additionally, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and additional shareholder information are available free of charge on the Company’s website: www.centurybank.com.

Employees

As of December 31, 2012, the Company had 336 full-time and 82 part-time employees. The Company’s employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good.

Financial Services Modernization

On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act (“Gramm-Leach”) which significantly altered banking laws in the United States. Gramm Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm Leach, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies were repealed. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking.

In order to engage in these financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a “financial holding company” by demonstrating that each of its bank subsidiaries is “well capitalized,” “well managed,” and has at least a “satisfactory” rating under the Community Reinvestment Act of 1977 (the “CRA”). The Company has not elected to become a financial holding company under Gramm-Leach.

These financial activities authorized by Gramm-Leach may also be engaged in by a “financial subsidiary” of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and any bank affiliates) to be “well capitalized” and “well managed;” the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if the bank is one of the 100 largest banks, it must meet certain financial rating or other comparable requirements. The Company does not currently conduct activities through a financial subsidiary.

Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the SEC will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers’ nonpublic, personal information.

Holding Company Regulation

The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”), and is registered as such with the Board of Governors of the Federal Reserve Bank (the “FRB”), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (i) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth.

The Holding Company Act prohibits a bank holding company, with certain exceptions, from (i) acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any company which is not a bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks, or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Company and its subsidiaries are examined by federal and state regulators. The FRB has responsibility for holding company activities and performed a review of the Company and its subsidiaries as of June 2012.

Federal Deposit Insurance Corporation Improvement Act of 1991

On December 19, 1991, the FDIC Improvement Act of 1991 (the “1991 Act”) was enacted. This legislation provides for, among other things: enhanced federal supervision of depository institutions, including greater authority for the appointment of a conservator or receiver for undercapitalized institutions; the establishment of risk-based deposit insurance premiums; a requirement that the federal banking agencies amend their risk-based capital requirements to include components for interest-rate risk, concentration of credit risk, and the risk of nontraditional activities; expanded authority for cross-industry mergers and acquisitions; mandated consumer protection disclosures with respect to deposit accounts; and imposed restrictions on the activities of state-chartered banks, including the Bank.

Provisions of the 1991 Act relating to the activities of state-chartered banks significantly impact the way the Company conducts its business. In this regard, the 1991 Act provides that insured state banks, such as the Bank, may not engage as principal in any activity that is not permissible for a national bank, unless the FDIC has determined that the activity would pose no significant risk to the Bank Insurance Fund (“BIF”) and the state bank is in compliance with applicable capital standards. Activities of subsidiaries of insured state banks are similarly restricted to those activities permissible for subsidiaries of national banks, unless the FDIC has determined that the activity would pose no significant risk to the BIF and the state bank is in compliance with applicable capital standards.

Interstate Banking

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the “Interstate Banking Act”), generally permits bank holding companies to acquire banks in any state and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching; permits a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition; and operated de novo interstate branches whenever the host state opts-in to de novo branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed.

USA PATRIOT Act

Under Title III of the USA PATRIOT Act, also known as the “International Money Laundering Abatement and Anti-Terrorism Act of 2001”, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the Gramm-Leach Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasurer to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection and enhanced and timely disclosure of corporate information. The SEC has adopted a substantial number of implementing rules and the Financial Industry Regulatory Authority (FINRA) has adopted corporate governance rules that have been approved by the SEC and are applicable to the Company. The changes

are intended to allow stockholders to monitor more effectively the performance of companies and management. As directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s disclosure controls and procedures and internal controls over financial reporting; that they have made certain disclosures to the Company’s auditors and the Board of Directors about the Company’s disclosure controls and procedures and internal control over financial reporting, and that they have included information in the Company’s quarterly and annual reports about their evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting, and whether there have been significant changes in the Company’s internal disclosure controls and procedures or in other factors that could significantly affect such controls and procedures subsequent to the evaluation and whether there have been any significant changes in the Company’s internal control over financial reporting that have materially affected or reasonably likely to materially affect the Company’s internal control over financial reporting, and compliance with certain other disclosure objectives. Section 906 of the Sarbanes-Oxley Act requires an additional certification that each periodic report containing financial statements fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 and that the information in the report fairly presents, in all material respects, the financial conditions and results of operations of the Company.

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012.

Deposit Insurance Premiums

The Bank’s deposits have the benefit of FDIC insurance up to applicable limits. The FDIC’s Deposit Insurance Fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of assets that it holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.

The Bank was also a participant in the FDIC’s Temporary Liquidity Guarantee Program.

On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment is five basis points of each FDIC-insured depository institution’s assets minus Tier 1 capital, as of June 30, 2009. The Company recorded a pre-tax charge of approximately $1.0 million in the second quarter of 2009 in connection with the special assessment.

On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. As a result, the Company is carrying a prepaid asset of $2.8 million as of December 31, 2012.

The Company’s quarterly risk-based deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Company.

In February 2011, the FDIC approved a rule to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The rule should keep the overall amount collected from the industry very close to the amount collected prior to the new calculation.

Competition

The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. A number of these competitors are not subject to the regulatory oversight that the Company is subject to, which increases these competitors’ flexibility.

Forward-Looking Statements

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 a reference to a “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 market and the availability of and costs associated with sources of liquidity.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

ITEM 1A. RISK

FACTORS

The risk factors that may affect the Company’s performance and results of operations include the following:

(i) the Company’s business is dependent upon general economic conditions in Massachusetts. The national and local economies may adversely affect the Company’s performance and results of operations;

(ii) the Company’s earnings depend to a great extent upon the level of net interest income generated by the Company, and therefore the Company’s results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve;

(iii) the banking business is highly competitive and the profitability of the Company depends upon the Company’s ability to attract loans and deposits in Massachusetts, where the Company competes with a variety of traditional banking companies, some of which have vastly greater resources, and nontraditional institutions such as credit unions and finance companies;

(iv) at December 31, 2012, approximately 59.8% of the Company’s loan portfolio was comprised of commercial and commercial real estate loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans;

(v) at December 31, 2012, approximately 36.0% of the Company’s loan portfolio was comprised of residential real estate loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk and the value of underlying collateral. Accordingly, the Company’s profitability may be

negatively impacted by errors in risk analyses, by loan defaults and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions;

(vi) economic conditions and interest rate risk could adversely impact the fair value and the ultimate collectability of the Company’s investments. Should an investment be deemed “other than temporarily impaired”, the Company would be required to writedown the carrying value of the investment through earnings. Such writedown(s) may have a material adverse effect on the Company’s financial condition and results of operations;

(vii) writedown of goodwill and other identifiable intangible assets would negatively impact our financial condition and results of operations. At December 31, 2012, our goodwill and other identifiable intangible assets were approximately $2.7 million;

(viii) acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States of America generally and in the Company’s markets, which could adversely affect the Company’s financial performance and that of the Company’s borrowers and on the financial markets and the price of the Company’s Class A common stock;

(ix) changes in the extensive laws, regulations and policies governing bank holding companies and their subsidiaries could alter the Company’s business environment or affect the Company’s operations;

(x) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent to secure bank and customer financial information, could present operational issues, require significant capital spending or impact the Company’s reputation; and

(xi) the Governor of Massachusetts has proposed a tax plan that would modify existing income tax rules. The Governor’s plan is part of his budget recommendations for fiscal year 2014, and will subject security corporations to the same tax base and rate as regular business corporations. The proposed tax changes would take effect as of January 1, 2014. The Company is currently analyzing the financial impact of the proposed changes.

These factors, as well as general economic and market conditions in the United States of America, may materially and adversely affect the Company’s performance, results of operations and the market price of shares of the Company’s Class A common stock.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

No written comments received by the Company from the SEC regarding the Company’s periodic or current reports remain unresolved.

ITEM 2.

PROPERTIES

The Company owns its main banking office, headquarters, and operations center in Medford, Massachusetts, which were expanded in 2004, and 11 of the 24 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2013 to 2026. The Company believes that its banking offices are in good condition.

During July 2010, the Company entered into a lease agreement to open a branch located at Newton Centre in Newton, Massachusetts. The branch opened on June 20, 2011.

During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch opened on July 16, 2012.

During June 2012, the Company entered into a lease agreement to open a branch located in Wellesley, Massachusetts. The branch opened on November 26, 2012.

During July 2012, the Company received state regulatory approval to close a branch at Chestnut Hill in Newton, Massachusetts. The branch closed on September 21, 2012 and the accounts were temporarily moved to the Brookline, Massachusetts branch. During July 2012, the Company entered into a lease agreement and received regulatory approval to open a branch at a new location at Chestnut Hill in Newton, Massachusetts. The branch is scheduled to open during the fourth quarter of 2013 and the accounts that were temporarily moved to the Brookline, Massachusetts branch will be moved to the new branch at Chestnut Hill in Newton, Massachusetts.

ITEM 3.

LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Company’s consolidated financial position.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) The Class A Common Stock of the Company is traded on the NASDAQ National Global Market under the symbol “CNBKA.” The price range of the Company’s Class A common stock since January 1, 2011 is shown on page 12. The Company’s Class B Common Stock is not traded on any national securities exchange or other public trading market.


	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased		Weighted Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs(1)
October 1 — October 31, 2012		—		—		—		300,000
November 1 — November 30, 2012		—		—		—		300,000
December 1 — December 31, 2012		—		—		—		300,000

(1)	On July 10, 2012, the Company announced a reauthorization of the Class A common stock repurchase program to repurchase up to 300,000 shares. The Company placed no deadline on the repurchase program. There were no shares purchased other than through a publicly announced plan or program.

The shares of Class A Common Stock are generally not entitled to vote on any matter, including in the election of Company Directors, but, in limited circumstances, may be entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of the Company’s Class B Common Stock, voting as a separate class, is required to approve certain extraordinary corporate transactions, the holders of Class B Common Stock have the power to prevent any takeover of the Company not approved by them.

(b) Approximate number of equity security holders as of December 31, 2012:


Title of Class	Approximate Number of Record Holders
Class A Common Stock		1,130
Class B Common Stock		49

(c) Under the Company’s Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.

The following table shows the dividends paid by the Company on the Class A and Class B Common Stock for the periods indicated.


	Dividends per Share
	Class A		Class B
2011
First quarter	$	.12	$	.06
Second quarter		.12		.06
Third quarter		.12		.06
Fourth quarter		.12		.06
2012
First quarter	$	.12	$	.06
Second quarter		.12		.06
Third quarter		.12		.06
Fourth quarter		.12		.06

As a bank holding company, the Company’s ability to pay dividends is dependent in part upon the receipt of dividends from the Bank, which is subject to certain restrictions on the payment of dividends. A Massachusetts trust company may pay dividends out of net profits from time to time, provided that either (i) the trust company’s capital stock and surplus account equal an aggregate of at least 10% of its deposit liabilities, or (ii) the amount of its surplus account is equal to at least the amount of its capital account.

(d) The following schedule provides information with respect to the Company’s equity compensation plans under which shares of Class A Common Stock are authorized for issuance as of December 31, 2012:


	Equity Compensation Plan Information
Plan Category	Number of Shares to be Issued Upon Exercise of Outstanding Options (a)		Weighted-Average Exercise Price of Outstanding Options (b)		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in Column (a)) (c)
Equity compensation plans approved by security holders		23,350	$	31.17		223,534
Equity compensation plans not approved by security holders		—		—		—

Total		23,350	$	31.17		223,534

(e) The performance graph information required herein is shown on page 12.

ITEM 6.

SELECTED FINANCIAL DATA

The information required herein is shown on pages 11 and 12.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The information required herein is shown on pages 13 through 36.

ITEM 7a.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required herein is shown on page 33.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required herein is shown on pages 37 through 86.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

The Company’s principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures as of December 31, 2012. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act is accumulated and reported to Company management (including the principal executive officer and principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal control over financial reporting and there have been no

significant changes in its internal control over financial reporting or in other factors that could significantly affect its internal control over financial reporting. Management’s report on internal control over financial reporting is shown on page 89. The audit report of the registered public accounting firm is shown on page 88.

ITEM 9B.

OTHER INFORMATION

None.

Financial Highlights


	2012			2011			2010			2009			2008
	(dollars in thousands, except share data)
FOR THE YEAR
Interest income	$	81,494		$	78,065		$	76,583		$	79,600		$	80,693
Interest expense		19,540			22,766			24,817			31,723			35,914

Net interest income		61,954			55,299			51,766			47,877			44,779
Provision for loan losses		4,150			4,550			5,575			6,625			4,425

Net interest income after provision for loan losses		57,804			50,749			46,191			41,252			40,354
Other operating income		15,865			16,240			15,999			16,470			13,975
Operating expenses		53,238			48,742			47,372			46,379			43,028

Income before income taxes		20,431			18,247			14,818			11,343			11,301
Provision for income taxes		1,392			1,554			1,244			1,183			2,255

Net income	$	19,039		$	16,693		$	13,574		$	10,160		$	9,046

Average shares outstanding Class A, basic		3,557,693			3,543,233			3,521,179			3,509,931			3,514,883
Average shares outstanding Class B, basic		1,990,474			1,997,411			2,012,327			2,022,318			2,027,100
Average shares outstanding Class A, diluted		5,549,191			5,541,794			5,535,742			5,534,340			5,543,702
Average shares outstanding Class B, diluted		1,990,474			1,997,411			2,012,327			2,022,318			2,027,100
Total shares outstanding at year-end		5,554,959			5,542,697			5,540,247			5,530,297			5,538,407
Earnings per share:
Basic, Class A	$	4.18		$	3.68		$	3.00		$	2.25		$	2.00
Basic, Class B	$	2.09		$	1.84		$	1.50		$	1.12		$	1.00
Diluted, Class A	$	3.43		$	3.01		$	2.45		$	1.84		$	1.63
Diluted, Class B	$	2.09		$	1.84		$	1.50		$	1.12		$	1.00
Dividend payout ratio		11.5	%		13.1	%		16.0	%		21.4	%		24.0	%
AT YEAR-END
Assets	$	3,086,209		$	2,743,225		$	2,441,684		$	2,254,035		$	1,801,566
Loans		1,111,788			984,492			906,164			877,125			836,065
Deposits		2,445,073			2,124,584			1,902,023			1,701,987			1,265,527
Stockholders’ equity		179,990			160,649			145,025			132,730			120,503
Book value per share	$	32.40		$	28.98		$	26.18		$	24.00		$	21.76
SELECTED FINANCIAL PERCENTAGES
Return on average assets		0.65	%		0.63	%		0.56	%		0.50	%		0.54	%
Return on average stockholders’ equity		11.06	%		10.72	%		9.52	%		7.98	%		7.43	%
Net interest margin, taxable equivalent		2.51	%		2.48	%		2.52	%		2.69	%		3.00	%
Net charge-offs as a percent of average loans		0.15	%		0.21	%		0.44	%		0.63	%		0.38	%
Average stockholders’ equity to average assets		5.85	%		5.88	%		5.93	%		6.26	%		7.23	%
Efficiency ratio		62.1	%		62.2	%		65.0	%		68.5	%		70.6	%

Financial Highlights — (Continued)

2012, Quarter Ended

Per Share Data

December 31,

September 30,

June 30,

March 31,

Market price range (Class A)

High

34.00

33.00

30.24

29.50

Low

28.02

28.46

25.00

23.51

Dividends Class A

0.12

Dividends Class B

0.06

2011, Quarter Ended

December 31,

September 30,

June 30,

March 31,

Market price range (Class A)

High

28.80

28.91

27.80

28.38

Low

20.50

21.96

23.25

24.75

Dividends Class A

0.12

Dividends Class B

0.06

The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2007 to December 31, 2012 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used.

Comparison of Five-Year

Cumulative Total Return*

LOGO


Value of $100 Invested on December 31, 2007 at:	2008		2009		2010		2011		2012
Century Bancorp, Inc.	$	80.32	$	115.35	$	143.27	$	153.83	$	182.35
NASDAQ Banks		72.91		60.66		72.13		64.51		77.18
NASDAQ U.S.		61.17		87.93		104.35		104.92		123.85

*	Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2007 and that all dividends were reinvested.

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

FORWARD-LOOKING STATEMENTS

Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.

RECENT MARKET DEVELOPMENTS

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

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope, affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012.

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

On September 30, 2011, the Massachusetts Department of Revenue issued a draft directive prohibiting a corporation from pledging more than 50 percent of security corporation stock it owns to secure a borrowing, effective for tax years beginning on or after October, 2012. Century Bank currently utilizes the stock of two of its security corporations to secure Federal Home Loan Bank of Boston (“FHLBB”) advances. Should this draft directive have become effective, Century Bank would have had fewer assets available to secure FHLBB advances, or would have had a higher tax rate if it chose to utilize security corporations to a lesser extent. On April 6, 2012, the Massachusetts Department of Revenue issued an updated draft directive allowing a corporation to pledge up to 100% of security corporation stock it owns to secure a borrowing. This revised draft directive would allow Century Bank to continue to utilize existing assets to secure FHLBB advances without pledging limitations. On May 24, 2012, the Massachusetts Department of Revenue issued Directive 12-2. The directive states that the pledge by a shareholder of shares of stock of a corporation as security or collateral for a loan to the shareholder, in and of itself, will not preclude classification of the corporation as a security corporation or result in revocation of a corporation’s existing security corporation classification.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). Although the Company is not currently subject to these requirements, if adopted in their current form by U.S. banking regulators, the Basel III rules could increase the capital requirements of the Company. If enacted, the new Basel III requirements would be phased-in over a ten year timeframe, resulting in an increase in capital requirements along with the restriction of certain items in Tier 1 capital. Restricted items from Tier 1 capital would include trust preferred securities along with certain levels of deferred tax assets and mortgage servicing assets. Federal banking regulators then issued a notice of proposed rulemaking (NPR, proposal, or proposed rule) to revise the general risk-based capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). The Company is currently analyzing the proposed rules and the impact on the Company’s capital requirements.

The Governor of Massachusetts has proposed a tax plan that would modify existing income tax rules. The governor’s plan is part of his budget recommendations for fiscal year 2014, and will subject security corporations to the same tax base and rate as regular business corporations. The proposed tax changes would take effect as of January 1, 2014. The Company is currently analyzing the financial impact of the proposed changes.

OVERVIEW

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, nonprofit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans, and consumer loans and accepts savings, time and demand deposits. In addition, the Company offers to its

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

corporate and institutional customers automated lockbox collection services, cash management services and account reconciliation services, and it actively promotes the marketing of these services to the municipal market. Also, the Company provides full-service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.

The Company had net income of $19,039,000 for the year ended December 31, 2012, compared with net income of $16,693,000 for the year ended December 31, 2011, and net income of $13,574,000 for the year ended December 31, 2010. Class A diluted earnings per share were $3.43 in 2012, compared to $3.01 in 2011 and $2.45 in 2010.

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


	2012		2011		2010
Basic EPS – Class A common	$	4.18	$	3.68	$	3.00
Basic EPS – Class B common	$	2.09	$	1.84	$	1.50
Diluted EPS – Class A common	$	3.43	$	3.01	$	2.45
Diluted EPS – Class B common	$	2.09	$	1.84	$	1.50

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

Net Interest Margin

LOGO

The primary factor accounting for the general level of the net interest margin for 2010 was a large influx of deposits, primarily from municipalities, and a corresponding increase in short-term investments. The net interest margin fell somewhat during the second quarter of 2011 mainly as a result of increased deposits and corresponding lower-yield short-term investments. During the third quarter of 2011 through the third quarter of 2012, management stabilized the net interest margin by continuing to lower cost of funds and by deploying excess liquidity through expansion of the investment portfolio. Also, the Company collected approximately $3,000,000 of prepayment penalties during the first three quarters of 2012. The primary factor accounting for the decrease in the net interest margin for the fourth quarter of 2012 was an additional large influx of deposits, primarily from municipalities. Management invested the funds in shorter term securities.

While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin.

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

Historical U.S. Treasury Yield Curve

A yield curve is a line that typically plots the interest rates of U.S. Treasury Debt, which have different maturity dates but the same credit quality, at a specific point in time. The three main types of yield curve shapes are normal, inverted and flat. Over the past three years, the U.S. economy has experienced low short-term rates. Since December 31, 2010, longer-term rates have declined resulting in a flatter yield curve.

During 2012, the Company’s earnings were positively impacted primarily by an increase in net interest income. This increase was primarily due to an increase in earning assets. During 2012, 2011 and 2010, the U.S. economy experienced a lower short-term rate environment. The lower short-term rates negatively impacted the net interest margin for 2011 and 2010 as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits. The net interest margin also increased in 2012 as a result of prepayment penalties that were collected during the year.

Total assets were $3,086,209,000 at December 31, 2012, an increase of 12.5% from total assets of $2,743,225,000 on December 31, 2011.

On December 31, 2012, stockholders’ equity totaled $179,990,000, compared with $160,649,000 on December 31, 2011. Book value per share increased to $32.40 at December 31, 2012, from $28.98 on December 31, 2011.

During July 2010, the Company entered into a lease agreement to open a branch located at Newton Centre in Newton, Massachusetts. The branch opened on June 20, 2011.

During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch opened on July 16, 2012.

During June 2012, the Company entered into a lease agreement to open a branch located in Wellesley, Massachusetts. The branch opened on November 26, 2012.

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

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

CRITICAL ACCOUNTING POLICIES

Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies.

The Company considers impairment of investment securities and allowance for loan losses to be its critical accounting policies. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions.

Impaired Investment Securities

If a decline in fair value below the amortized cost basis of an investment security is judged to be “other-than-temporary,” the cost basis of the investment is written down to fair value. The amount of the writedown is included as a charge to earnings. The amount of the impairment charge is recognized in earnings with an offset for the noncredit component which is recognized through other comprehensive income. Some factors considered for other-than-temporary impairment related to a debt security include an analysis of yield which results in a decrease in expected cash flows, whether an unrealized loss is issuer specific, whether the issuer has defaulted on scheduled interest and principal payments, whether the issuer’s current financial condition hinders its ability to make future scheduled interest and principal payments on a timely basis or whether there was a downgrade in ratings by rating agencies.

The Company does not intend to sell any of its debt securities with an unrealized loss, and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, which may be maturity.

Allowance for Loan Losses

Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances for identified problem loans.

The formula allowance evaluates groups of loans to determine the allocation appropriate within each portfolio segment. Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. The formula allowance and specific allowances also include management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors. Further information regarding the Company’s methodology for assessing the appropriateness of the allowance is contained within Note 1 of the “Notes to Consolidated Financial Statements.”

Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

FINANCIAL CONDITION

Investment Securities

The Company’s securities portfolio consists of securities available-for-sale (“AFS”) and securities held-to-maturity (“HTM”).

Securities available-for-sale consist of certain U.S. Treasury and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; other debt securities; and other marketable equities.

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

These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders’ equity. The fair value of securities available-for-sale at December 31, 2012 totaled $1,434,801,000 and included gross unrealized gains of $21,477,000 and gross unrealized losses of $1,271,000. A year earlier, the fair value of securities available-for-sale was $1,258,676,000 including gross unrealized gains of $16,842,000 and gross unrealized losses of $3,138,000. In 2012, the Company recognized gains of $1,843,000 on the sale of available-for-sale securities. In 2011 and 2010, the Company recognized gains of $1,940,000 and $1,851,000, respectively.

Securities which management intends to hold until maturity consist of U.S. Government Sponsored Enterprises and mortgage-backed securities. Securities held-to-maturity as of December 31, 2012 are carried at their amortized cost of $275,507,000 and exclude gross unrealized gains of $6,499,000 and gross unrealized losses of $82,000. A year earlier, securities held-to-maturity totaled $179,368,000, excluding gross unrealized gains of $5,471,000 and gross unrealized losses of $17,000.

The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated.

Fair Value of Securities Available-for-Sale


	2012					2011					2010
At December 31,	Amount		Percent			Amount		Percent			Amount		Percent
	(dollars in thousands)
U.S. Treasury	$	2,004		0.1	%	$	2,012		0.2	%	$	2,005		0.2	%
U.S. Government Sponsored Enterprises		130,340		9.1	%		174,957		13.9	%		175,663		19.3	%
SBA Backed Securities		8,156		0.6	%		8,801		0.7	%		9,732		1.1	%
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities		1,233,357		86.0	%		1,035,838		82.3	%		680,898		74.9	%
Privately Issued Residential Mortgage-Backed Securities		2,947		0.2	%		3,198		0.3	%		3,968		0.4	%
Obligations Issued by States and Political Subdivisions		55,174		3.8	%		20,642		1.6	%		34,074		3.7	%
Other Debt Securities		2,253		0.2	%		12,610		1.0	%		2,253		0.2	%
Equity Securities		570		0.0	%		618		0.0	%		798		0.2	%

Total	$	1,434,801		100.0	%	$	1,258,676		100.0	%	$	909,391		100.0	%

Included in Obligations Issued by States and Political Subdivisions as of December 31, 2012, is $3,963,000 of an auction rate municipal obligation (“ARS”) with an unrealized loss of $722,000. This debt security was issued by a governmental entity but is not a debt obligation of the issuing entity. This ARS is the obligation of a large nonprofit entity. This obligation is a variable rate security with long-term maturity whose interest rate is set periodically through an auction process for ARS. As the auctions have not attracted sufficient bidders, i.e., failed, the interest rate adjusts to the default rate defined in the obligation’s underlying documents. Although many of these issuers have bond insurance, the Company purchased the security based on the creditworthiness of the underlying obligor.

In the case of a failed auction, the Company may not have access to funds as only a limited market exists for the failed ARS. As of December 31, 2012, the Company’s ARS was purchased subsequent to its failure with a fair value of $3,963,000 and an amortized cost of $4,685,000. As of December 31, 2012, the taxable equivalent yield on this security was 0.36%.

The majority of the Company’s securities AFS are classified as Level 2, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These

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

inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Management’s understanding of a pricing service’s pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing controls. Management’s validation of a vendor’s pricing methodology includes establishing internal controls to determine that the pricing information received by a pricing service and used by management in the valuation process is relevant and reliable. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2012.

Securities available-for-sale totaling $53,782,000, or 1.74% of assets, are classified as Level 3, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” These securities are generally equity investments or municipal securities with no readily determinable fair value. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.

Debt securities of Government Sponsored Enterprises refer primarily to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the third quarter of 2008.

The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated.

Amortized Cost of Securities Held-to-Maturity


	2012					2011					2010
At December 31,	Amount		Percent			Amount		Percent			Amount		Percent
	(dollars in thousands)
U.S. Government Sponsored Enterprises	$	17,747		6.4	%	$	26,979		15.0	%	$	84,534	36.7%
U.S. Government Sponsored Enterprise Mortgage-Backed Securities		257,760		93.6	%		152,389		85.0	%		145,582	63.3%

Total	$	275,507		100.0	%	$	179,368		100.0	%	$	230,116		100.0	%

The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2012. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

Fair Value of Securities Available-for-Sale Amounts Maturing

Within
One
Year

% of
Total

Weighted
Average
Yield

One Year
to Five
Years

% of
Total

Weighted
Average
Yield

Five Years
to Ten
Years

% of
Total

Weighted
Average
Yield

Over
Ten
Years

% of
Total

Weighted
Average
Yield

(dollars in thousands)

U.S. Treasury

2,004

0.1

0.63

—

0.0

0.00

—

0.0

0.00

—

0.0

0.00

U.S. Government Sponsored Enterprises

—

0.0

0.00

30,077

2.1

0.92

100,263

7.0

1.63

—

0.0

0.00

SBA Backed Securities

—

0.0

0.00

—

0.0

0.00

4,548

0.3

0.81

3,608

0.3

0.93

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

17,027

1.2

3.36

1,057,605

73.7

1.76

155,757

10.8

1.66

2,968

0.2

4.14

Privately Issued Residential Mortgage-Backed Securities

—

0.0

0.00

2,144

0.1

2.56

803

0.1

3.14

—

0.0

0.00

Obligations of States and Political Subdivisions

50,083

3.4

0.98

1,128

0.1

3.82

—

0.0

0.00

3,963

0.3

0.36

Other Debt Securities

200

0.0

1.32

600

0.1

1.71

—

0.0

0.00

—

0.0

0.00

Equity Securities

—

0.0

0.00

—

0.0

0.00

—

0.0

0.00

—

0.0

0.00

Total

69,314

4.7

1.55

1,091,554

76.1

1.74

261,371

18.2

1.64

10,539

0.8

1.72

Non-
Maturing

% of
Total

Weighted
Average
Yield

Total

% of
Total

Weighted
Average
Yield

(dollars in thousands)

U.S. Treasury

—

0.0

0.00

2,004

0.1

0.63

U.S. Government Sponsored Enterprises

—

0.0

0.00

130,340

9.1

1.46

SBA Backed Securities

—

0.0

0.00

8,156

0.6

0.86

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

—

0.0

0.00

1,233,357

85.9

1.78

Privately Issued Residential Mortgage-Backed Securities

—

0.0

0.00

2,947

0.2

2.72

Obligations of States and Political Subdivisions

—

0.0

0.00

55,174

3.8

0.98

Other Debt Securities

1,453

0.1

4.16

2,253

0.2

3.27

Equity Securities

570

0.1

1.47

570

0.1

1.47

Total

2,023

0.2

3.40

1,434,801

100.0

1.72

Amortized Cost of Securities Held-to-Maturity Amounts Maturing

Within
One
Year

% of
Total

Weighted
Average
Yield

One Year
to Five
Years

% of
Total

Weighted
Average
Yield

Five Years
to Ten
Years

% of
Total

Weighted
Average
Yield

Over
Ten
Years

% of
Total

Weighted
Average
Yield

Total

% of
Total

Weighted
Average
Yield

(dollars in thousands)

U.S. Government Sponsored Enterprises

—

0.0

0.00

—

0.0

0.00

17,747

6.4

2.13

—

0.0

0.00

17,747

6.4

2.13

U.S. Government Sponsored Enterprise Mortgage-Backed Securities

6,780

2.5

3.80

205,981

74.8

2.44

44,725

16.2

2.38

274

0.1

2.60

257,760

93.6

2.47

Total

6,780

2.5

3.80

205,981

74.8

2.44

62,472

22.6

2.31

274

0.1

2.60

275,507

100.0

2.44

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

At December 31, 2012 and 2011, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2012, sales of securities totaling $294,881,000 in gross proceeds resulted in a net realized gain of $1,843,000. There were no sales of state, county or municipal securities during 2012 and 2011. In 2011, sales of securities totaling $75,615,000 in gross proceeds resulted in net realized gains of $1,940,000. In 2010, sales of securities totaling $41,251,000 in gross proceeds resulted in net realized gains of $1,851,000.

Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are dependent upon general market conditions and specific conditions related to the issuers of our securities.

Loans

The Company’s lending activities are conducted principally in Massachusetts. The Company grants single-family and multi-family residential loans, commercial and commercial real estate loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers’ geographic areas and of the general economy.

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


	2012					2011					2010					2009					2008
December 31,	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
	(dollars in thousands)
Construction and land development	$	38,618		3.5	%	$	56,819		5.7	%	$	53,583		5.9	%	$	60,349		6.9	%	$	59,511		7.1	%
Commercial andindustrial		88,475		8.0	%		82,404		8.4	%		90,654		10.0	%		141,061		16.1	%		141,373		16.9	%
Commercial real estate		576,465		51.8	%		487,495		49.5	%		433,337		47.8	%		361,823		41.2	%		332,325		39.8	%
Residential real estate		281,857		25.3	%		239,307		24.3	%		207,787		22.9	%		188,096		21.4	%		194,644		23.3	%
Consumer		6,823		0.6	%		6,197		0.6	%		5,957		0.7	%		7,105		0.8	%		8,246		1.0	%
Home equity		118,923		10.7	%		110,786		11.3	%		114,209		12.6	%		118,076		13.5	%		98,954		11.8	%
Overdrafts		627		0.1	%		1,484		0.2	%		637		0.1	%		615		0.1	%		1,012		0.1	%

Total	$	1,111,788		100.0	%	$	984,492		100.0	%	$	906,164		100.0	%	$	877,125		100.0	%	$	836,065		100.0	%

At December 31, 2012, 2011, 2010, 2009 and 2008, loans were carried net of discounts of $498,000, $550,000, $598,000, $645,000 and $692,000, respectively. Net deferred loan fees of $369,000, $666,000, $186,000, $71,000 and $81,000 were carried in 2012, 2011, 2010, 2009 and 2008, respectively.

The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2012. The table excludes loans secured by 1–4 family residential real estate and loans for household and family personal expenditures. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.

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

Remaining Maturities of Selected Loans at December 31, 2012

One Year
or Less

One to Five
Years

Over
Five Years

Total

(dollars in thousands)

Construction and land development

8,899

4,786

24,933

38,618

Commercial and industrial

16,098

24,872

47,505

88,475

Commercial real estate

23,935

127,480

425,050

576,465

Total

48,932

157,138

497,488

703,558

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

December 31, 2012

One to Five
Years

Over
Five Years

Total

(dollars in thousands)

Predetermined interest rates

92,616

125,554

218,170

Floating or adjustable interest rates

64,522

371,934

436,456

Total

157,138

497,488

654,626

The Company’s commercial and industrial (“C&I”) loan customers represent various small and middle-market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.

Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s market area, which generally includes Eastern Massachusetts, Southern New Hampshire, and Rhode Island. Also included are loans to educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and ten years. Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized nonresidential-type owner-occupied properties. This complements our C&I emphasis placed on the operating business entities and will continue. The regional economic environment affects the risk of both nonresidential and residential mortgages.

Residential real estate (1–4 family) includes two categories of loans. Included in residential real estate are approximately $12,460,000 of C&I type loans secured by 1–4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the collateral position.

The other category of residential real estate loans is mostly 1–4 family residential properties located in the Bank’s market area. General underwriting criteria are largely the same as those used by Fannie Mae. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a “First Time Homebuyer” product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category.

Home equity loans are extended as both first and second mortgages on owner-occupied residential properties in the Bank’s market area. Loans are underwritten to a maximum loan to property value of 75%.

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

Bank officers evaluate the feasibility of construction projects based on independent appraisals of the project, architects’ or engineers’ evaluations of the cost of construction and other relevant data. As of December 31, 2012, the Company was obligated to advance a total of $17,609,000 to complete projects under construction.

The composition of nonperforming assets is as follows:


December 31,	2012			2011			2010			2009			2008
	(dollars in thousands)
Total nonperforming loans	$	4,471		$	5,827		$	8,068		$	12,311		$	3,661
Other real estate owned		—			1,182			—			—			—

Total nonperforming assets	$	4,471		$	7,009		$	8,068		$	12,311		$	3,661

Accruing troubled debt restructured loans	$	3,048		$	4,634		$	1,248		$	521		$	—
Loans past due 90 and still accruing		—			18			50			—			89
Nonperforming loans as a percent of gross loans		0.40	%		0.59	%		0.89	%		1.40	%		0.44	%

Nonperforming assets as a percent of total assets		0.14	%		0.26	%		0.33	%		0.55	%		0.20	%

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


	2012		2011		2010		2009		2008
Residential real estate, multi-family	$	862	$	516	$	—	$	—	$	194
Commercial real estate		2,281		4,561		2,492		4,260		1,175
Construction and land development		1,500		1,500		4,000		4,900		—
Commercial and industrial		1,282		1,525		1,471		1,356		1,329

Total impaired loans	$	5,925	$	8,102	$	7,963	$	10,516	$	2,698

At December 31, 2012, 2011, 2010, 2009 and 2008, impaired loans had specific reserves of $1,732,000, $741,000, $317,000, $745,000 and $600,000 respectively.

The Company was servicing mortgage loans sold to others without recourse of approximately $26,786,000, $18,196,000, $983,000, $1,127,000 and $768,000 at December 31, 2012, 2011, 2010, 2009, and 2008, respectively. The Company had $9,378,000 of loans held for sale at December 31, 2012, $3,389,000 at December 31, 2011, and $0 for December 31, 2008, through December 31, 2010.

Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage servicing assets (“MSA”) are amortized into non-interest income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets and are amortized in proportion to, and over the period of estimated net servicing income and are assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $137,000 at December 31, 2012, $123,000 for December 31, 2011, and $0 for December 31, 2008, through December 31, 2010.

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

for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company’s commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank.

Nonaccrual loans decreased during 2012, primarily as a result of a decrease in home equity and residential real estate nonperforming loans.

Nonaccrual loans decreased during 2011, primarily as a result of $1,200,000 in charge-offs from two construction loans as well as the subsequent foreclosure of $1,300,000 of one of the construction loans. Nonaccrual loans decreased during 2010, primarily as a result of resolution of a $2,479,000 commercial real estate loan as well as $900,000 in charge-offs from two construction loans during 2010. Nonaccrual loans increased from 2008 to 2009, primarily as a result of three loan relationships, one primarily commercial real estate and two construction totaling $7,379,000.

The Company continues to monitor closely $18,645,000 and $20,906,000 at December 31, 2012 and 2011, respectively, of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2012, although such values may fluctuate with changes in the economy and the real estate market.

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

Allowance for Loan Losses

The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Company’s allowance for loan losses for the years indicated.


Year Ended December 31,	2012			2011			2010			2009			2008
	(dollars in thousands)
Year-end loans outstanding (net of unearned discount and deferred loan fees)	$	1,111,788		$	984,492		$	906,164		$	877,125		$	836,065

Average loans outstanding (net of unearned discount and deferred loan fees)	$	1,036,296		$	948,883		$	877,858		$	853,422		$	775,337

Balance of allowance for loan losses at the beginning of year	$	16,574		$	14,053		$	12,373		$	11,119		$	9,633

Loans charged-off:
Commercial		1,253			676			1,559			1,498			2,869
Construction		—			1,200			900			3,639			15
Commercial real estate		—			—			922			—			—
Residential real estate		351			341			515			490			—
Consumer		697			607			547			443			489

Total loans charged-off		2,301			2,824			4,443			6,070			3,373

Recovery of loans previously charged-off:
Commercial		307			293			172			352			159
Construction		—			—			—			25			—
Real estate		45			35			8			4			5
Consumer		422			467			368			318			270

Total recoveries of loans previously charged-off:		774			795			548			699			434

Net loan charge-offs		1,527			2,029			3,895			5,371			2,939
Provision charged to operating expense		4,150			4,550			5,575			6,625			4,425

Balance at end of year	$	19,197		$	16,574		$	14,053		$	12,373		$	11,119

Ratio of net charge-offs during the year to average loans outstanding		0.15	%		0.21	%		0.44	%		0.63	%		0.38	%

Ratio of allowance for loan losses to loans outstanding		1.73	%		1.68	%		1.55	%		1.41	%		1.33	%

The amount of the allowance for loan losses results from management’s evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The pace of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge-offs increased during 2009 due to an increase in commercial loan charge-offs and construction loan charge-offs as a result of the weakening of the overall economy and real estate market. Charge-offs declined in 2010, 2011, and 2012 as a result of the overall decrease in the level of nonaccrual loans. The dollar amount of the allowance for loan losses and the level of the allowance for loan losses to total loans increased primarily as a result of a lower level of charge-off activity combined with changes in the portfolio composition.

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

In evaluating the allowance for loan losses, the Company considered the following categories to be higher risk:

Construction loans — The outstanding loan balance of construction loans at December 31, 2012 is $38,618,000. A major portion in nonaccrual loans is one construction loan. Based on this fact, and the general local construction conditions, management closely monitors all construction loans and considers this type of loan to be higher risk.

Higher-balance loans — Loans greater than $1.0 million are considered “high-balance loans.” The balance of these loans is $567,306,000 at December 31, 2012, as compared to $489,114,000 at December 31, 2011. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high-balance loans. Included in high-balance loans are loans greater than $10.0 million. The balance of these loans is $245,198,000 at December 31, 2012, as compared to $189,222,000 at December 31, 2011. Additional allowance allocations are made based upon the level of this type of high balance loans that is separate and greater than the $1.0 million allocation.

Small business loans — The outstanding loan balances of small business loans is $42,032,000 at December 31, 2012. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion.

The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At December 31 of each year listed below, the allowance is comprised of the following:


	2012					2011					2010					2009					2008
	Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans
	(dollars in thousands)
Construction and land development	$	3,041		3.5	%	$	2,893		5.7	%	$	1,752		5.9	%	$	362		6.9	%	$	677		7.1	%
Commercial and industrial		3,118		8.0			3,139		8.4			3,163		10.0			4,972		16.1			5,125		16.9
Commercial real estate		9,065		51.8			6,566		49.5			5,671		47.8			2,983		41.2			2,620		39.8
Residential real estate		1,994		25.3			1,886		24.3			1,718		22.9			1,304		21.4			778		23.3
Consumer and other		333		0.7			356		0.8			298		0.8			1,753		0.9			342		1.1
Home equity		886		10.7			704		11.3			725		12.6			761		13.5			1,527		11.8
Unallocated		760					1,030					726					238					50

Total	$	19,197		100.0	%	$	16,574		100.0	%	$	14,053		100.0	%	$	12,373		100.0	%	$	11,119		100.0	%

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

Deposits

The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. Additionally, the Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customer’s checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a computerized report balancing the customer’s checking account.

Interest rates on deposits are set bi-monthly by the Bank’s rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee.

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


	2012					2011					2010
	Amount		Percent			Amount		Percent			Amount		Percent
	(dollars in thousands)
Demand Deposits	$	386,863		16.5	%	$	326,102		15.3	%	$	298,825		15.8	%
Savings and Interest Checking		870,046		37.1	%		735,022		34.6	%		696,232		36.7	%
Money Market		666,949		28.5	%		584,059		27.4	%		543,432		28.7	%
Time Certificates of Deposit		418,789		17.9	%		484,142		22.7	%		356,457		18.8	%

Total	$	2,342,647		100.0	%	$	2,129,325		100.0	%	$	1,894,946		100.0	%

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


	2012
	(dollars in thousands)
Three months or less	$	99,957
Three months through six months		57,643
Six months through twelve months		59,972
Over twelve months		69,476

Total	$	287,048

Borrowings

The Bank’s borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLBB”) borrowings collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowings from the FHLBB totaled $195,000,000, a decrease of $49,000,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2012, was approximately $280,598,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12, “Other Borrowed Funds and Subordinated Debentures,” for a schedule, their interest rates and other information.

Subordinated Debentures

In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II.

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

ten years and then convert to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The Company is using the proceeds primarily for general business purposes.

Securities Sold Under Agreements to Repurchase

The Bank’s remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled $191,390,000, an increase of $48,070,000 from the prior year. See Note 11, “Securities Sold Under Agreements to Repurchase,” for a schedule, including their interest rates and other information.

RESULTS OF OPERATIONS

Net Interest Income

The Company’s operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 12.6% in 2012 to $69,918,000, compared with $62,081,000 in 2011. The increase in net interest income for 2012 was mainly due to an 11.5% increase in the average balances of earning assets, combined with a similar increase in deposits. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis increased to 2.51% in 2012 from 2.48% in 2011 and decreased from 2.52% in 2010. The Company collected approximately $3,253,000, $158,000, and $102,000, respectively, of prepayment penalties, which are included in interest income on loans, for 2012, 2011, and 2010, respectively.

Additional information about the net interest margin is contained in the “Overview” section of this report. Also, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories.

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

The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the years indicated.


Year Ended December 31,	Average Balance			2012 Interest Income/ Expense⁽¹⁾			Rate Earned/ Paid⁽¹⁾			Average Balance			2011 Interest Income/ Expense⁽¹⁾			Rate Earned/ Paid⁽¹⁾			Average Balance			2010 Interest Income/ Expense⁽¹⁾			Rate Earned/ Paid⁽¹⁾
	(dollars in thousands)
								ASSETS
Interest-earning assets:
Loans⁽²⁾
Taxable	$	715,553		$	34,983			4.89	%	$	703,491		$	36,772			5.23	%	$	711,422		$	40,163			5.65	%
Tax-exempt		320,743			24,220			7.55			245,392			17,996			7.33			166,436			13,193			7.93
Securities available-for-sale:⁽³⁾
Taxable		1,214,352			22,363			1.84			1,076,689			22,828			2.12			756,544			18,958			2.51
Tax-exempt		49,023			516			1.05			22,410			321			1.43			32,407			596			1.84
Securities held-to-maturity:
Taxable		270,525			6,746			2.49			178,659			5,816			3.26			222,154			7,158			3.22
Interest-bearing deposits in other banks		219,540			630			0.29			276,413			1,114			0.40			371,665			1,642			0.44

Total interest-earning assets		2,789,736		$	89,458			3.21	%		2,503,054		$	84,847			3.39	%		2,260,628		$	81,710			3.61	%
Noninterest-earning assets		172,748									158,297									155,956
Allowance for loan losses		(18,039	)								(15,767	)								(13,686	)

Total assets	$	2,944,445								$	2,645,584								$	2,402,898


		LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing deposits:
NOW accounts	$	588,500		$	1,561			0.27	%	$	476,807		$	1,715			0.36	%	$	423,693		$	2,504			0.59	%
Savings accounts		281,546			689			0.24			258,215			824			0.32			272,539			1,568			0.58
Money market accounts		666,949			2,373			0.36			584,059			2,706			0.46			543,432			3,942			0.73
Time deposits		418,789			6,250			1.49			484,142			9,356			1.93			356,457			7,914			2.22

Total interest-bearing deposits		1,955,784			10,873			0.56			1,803,223			14,601			0.81			1,596,121			15,928			1.00
Securities sold under agreements to repurchase		174,624			367			0.21			129,137			379			0.29			133,080			573			0.43
Other borrowed funds and subordinated debentures		217,542			8,300			3.82			202,209			7,786			3.85			201,273			8,316			4.13

Total interest-bearing liabilities		2,347,950		$	19,540			0.83	%		2,134,569		$	22,766			1.07	%		1,930,474		$	24,817			1.29	%
Noninterest-bearing liabilities
Demand deposits		386,863									326,102									298,825
Other liabilities		37,497									29,253									31,074

Total liabilities		2,772,310									2,489,924									2,260,373

Stockholders’ equity		172,135									155,660									142,525
Total liabilities and stockholders’ equity	$	2,944,445								$	2,645,584								$	2,402,898

Net interest income on a fully taxable equivalent basis				$	69,918								$	62,081								$	56,893

Less taxable equivalent adjustment					(7,964	)								(6,782	)								(5,127	)

Net interest income				$	61,954								$	55,299								$	51,766

Net interest spread								2.38	%								2.32	%								2.32	%

Net interest margin								2.51	%								2.48	%								2.52	%

(1)	On a fully taxable equivalent basis calculated using a federal tax rate of 34%.

(2)	Nonaccrual loans are included in average amounts outstanding.

(3)	At amortized cost.

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

The following table summarizes the year-to-year changes in the Company’s net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest-bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior year’s volume. Changes due to volume are computed by multiplying the change in volume by the prior year’s rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change.


	2012 Compared with 2011									2011 Compared with 2010
				Increase/(Decrease)									Increase/(Decrease)
	Due to Change in									Due to Change in
Year Ended December 31,	Volume			Rate			Total			Volume			Rate			Total
	(dollars in thousands)
Interest income:
Loans
Taxable	$	622		$	(2,411	)	$	(1,789	)	$	(443	)	$	(2,948	)	$	(3,391	)
Tax-exempt		5,675			549			6,224			5,854			(1,051	)		4,803
Securities available-for-sale:
Taxable		2,730			(3,195	)		(465	)		7,117			(3,247	)		3,870
Tax-exempt		299			(104	)		195			(160	)		(115	)		(275	)
Securities held-to-maturity:
Taxable		2,510			(1,580	)		930			(1,415	)		73			(1,342	)
Interest-bearing deposits in other banks		(202	)		(282	)		(484	)		(393	)		(135	)		(528	)

Total interest income		11,634			(7,023	)		4,611			10,560			(7,423	)		3,137

Interest expense:
Deposits:
NOW accounts		352			(506	)		(154	)		284			(1,073	)		(789	)
Savings accounts		70			(205	)		(135	)		(79	)		(665	)		(744	)
Money market accounts		350			(683	)		(333	)		276			(1,512	)		(1,236	)
Time deposits		(1,156	)		(1,950	)		(3,106	)		2,565			(1,123	)		1,442

Total interest-bearing deposits		(384	)		(3,344	)		(3,728	)		3,046			(4,373	)		(1,327	)
Securities sold under agreements to repurchase		113			(125	)		(12	)		(17	)		(177	)		(194	)
Other borrowed funds and subordinated debentures		586			(72	)		514			40			(570	)		(530	)

Total interest expense		315			(3,541	)		(3,226	)		3,069			(5,120	)		(2,051	)

Change in net interest income	$	11,319		$	(3,482	)	$	7,837		$	7,491		$	(2,303	)	$	5,188

Average earning assets were $2,789,736,000 in 2012, an increase of $286,682,000 or 11.5% from the average in 2011, which was 10.7% higher than the average in 2010. Total average securities, including securities available-for-sale and securities held-to-maturity, were $1,533,900,000, an increase of 20.0% from the average in 2011. The increase in securities volume was mainly attributable to an increase in taxable securities. An increase in securities balances offset, somewhat, by lower securities returns resulted in higher securities income, which increased 2.3% to $29,625,000 on a fully tax equivalent basis. Total average loans increased 9.2% to $1,036,296,000 after increasing $71,025,000 in 2011. The primary reason for the increase in loans was due in large part to an increase in tax-exempt commercial real estate lending as well as residential first mortgage

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

lending. The increase in loan volume was offset, somewhat, by a decrease in loan rates resulted in higher loan income, which increased by 8.1% or $4,435,000 to $59,203,000. Total loan income was $53,356,000 in 2010.

The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 10.0%, or $213,322,000, in 2012 after increasing by 12.4%, or $234,379,000, in 2011. Deposits increased in 2012, primarily as a result of increases in demand deposits, savings, money market, NOW and time deposit accounts. Deposits increased in 2011, primarily as a result of increases in demand deposits, money market savings and NOW accounts. Borrowed funds and subordinated debentures increased by 18.4% in 2012, following a decrease of 0.9% in 2011. The majority of the Company’s borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB increased by approximately $15,633,000, and average retail repurchase agreements increased by $45,487,000 in 2012. Interest expense totaled $19,540,000 in 2012, a decrease of $3,226,000, or 14.2%, from 2011 when interest expense decreased 8.3% from 2010. The decrease in interest expense is primarily due to market decreases in deposit rates and continued deposit pricing discipline. Interest expense on time deposits accounted for a majority of this decrease.

Provision for Loan Losses

The provision for loan losses was $4,150,000 in 2012, compared with $4,550,000 in 2011 and $5,575,000 in 2010. These provisions are the result of management’s evaluation of the amounts and quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses decreased during 2012 and 2011, primarily as a result of decreased provisions related to nonaccrual loans as well as management’s quantitative analysis of the loan portfolio.

The allowance for loan losses was $19,197,000 at December 31, 2012, compared with $16,574,000 at December 31, 2011. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.73% in 2012 and 1.68% in 2011. The allowance for loan losses increased despite a decrease in the provision for loan losses due to a lower level of charge-off activity combined with changes in the portfolio composition.

Nonperforming loans, which include all non-accruing loans, totaled $4,471,000 on December 31, 2012, compared with $5,827,000 on December 31, 2011. Nonperforming loans decreased primarily as a result of a decrease in home equity and residential real estate nonperforming loans.

Other Operating Income

During 2012, the Company continued to experience positive results in its fee-based services, including fees derived from traditional banking activities such as deposit-related services, its automated lockbox collection system and full-service securities brokerage supported by LPL Financial, a full-service securities brokerage business.

Under the lockbox program, which is not tied to extensions of credit by the Company, the Company’s customers arrange for payments of their accounts receivable to be made directly to the Company. The Company records the amounts paid to its customers, deposits the funds to the customer’s account and provides automated records of the transactions to customers. Typical customers for the lockbox service are municipalities that use it to automate tax collections, cable TV companies and other commercial enterprises.

Through a program called Investment Services at Century Bank, the Bank provides full-service securities brokerage services supported by LPL Financial, a full-service securities brokerage business. Registered representatives employed by Century Bank offer limited investment advice, execute transactions and assist customers in financial and retirement planning. LPL Financial provides research to the Bank’s representatives. The Bank receives a share in the commission revenues.

Total other operating income in 2012 was $15,865,000, a decrease of $375,000, or 2.3%, compared to 2011. This decrease followed an increase of $241,000, or 1.5%, in 2011, compared to 2010. Included in other operating income are net gains on sales of securities of $1,843,000, $1,940,000 and $1,851,000 in 2012, 2011 and 2010,

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

respectively. Service charge income, which continues to be a major area of other operating income, totaling $7,880,000 in 2012, decreased $5,000 compared to 2011. This followed an increase of $9,000 compared to 2010. The decrease in fees was mainly attributable to a decrease in overdraft fees, which was offset, somewhat, by an increase in debit card fees and fees collected from processing activities. Service charges on deposit accounts increased during 2011. The increase in fees was mainly attributable to an increase in overdraft fees and debit card fees, which was offset, somewhat, by a decrease in fees collected from processing activities. Lockbox revenues totaled $2,930,000, up $160,000 in 2012 following a decrease of $141,000 in 2011. Other income totaled $3,212,000, down $433,000 in 2012 following an increase of $284,000 in 2011. The decrease in 2012 was mainly attributable to a decrease in net gains on sales of loans of $363,000 as well as a decrease in brokerage commissions. The increase in 2011 was mainly attributable to net gains on sales of loans of $660,000 and an increase in brokerage commissions. This was offset, somewhat, by a decrease of $514,000 in the growth of cash surrender values on life insurance policies, which was attributable to lower returns on life insurance policies.

Operating Expenses

Total operating expenses were $53,238,000 in 2012, compared to $48,742,000 in 2011 and $47,372,000 in 2010.

Salaries and employee benefits expenses increased by $3,313,000 or 11.2% in 2012, after increasing by 4.3% in 2011. The increase in 2012 was mainly attributable to increases in pension costs, staff levels, merit increases in salaries and increases in health insurance costs. The increase in pension costs was mainly attributable to a decrease in the discount rate. The increase in 2011 was mainly attributable to increases in staff levels, merit increases in salaries and increases health insurance costs.

Occupancy expense increased by $284,000, or 6.4%, in 2012, following an increase of $374,000, or 9.3%, in 2011. The increase in 2012 was primarily attributable to an increase in rent expense and depreciation expense associated with branch expansion. The increase in 2011 was primarily attributable to an increase in rent expense, depreciation expense and building maintenance costs associated with branch expansion.

Equipment expense increased by $20,000, or 0.9%, in 2012, following an increase of $103,000, or 4.8%, in 2011. The increase in 2012 was primarily attributable to an increase in service contracts. The increase in 2011 was primarily attributable to an increase in service contracts and depreciation expense.

FDIC assessments decreased by $288,000, or 14.2%, in 2012, following a decrease of $940,000, or 31.7%, in 2011. FDIC assessments decreased in 2012 and 2011 mainly as a result of a decrease in the assessment rate.

Other operating expenses increased by $1,167,000 in 2012, which followed a $601,000 increase in 2011. The increase in 2012 was primarily attributable to an increase in contributions, software maintenance and marketing expense offset somewhat by a decrease in core deposit intangible amortization. The increase in 2011 was primarily attributable to an increase in customer expenses, other real estate owned expense and contributions offset somewhat by decreases in marketing expense.

Provision for Income Taxes

Income tax expense was $1,392,000 in 2012, $1,554,000 in 2011 and $1,244,000 in 2010. The effective tax rate was 6.8% in 2012, 8.5% in 2011 and 8.4% in 2010. The decrease in the effective tax rate for 2012 was mainly attributable to an increase in tax-exempt interest income and tax credits as a percentage of taxable income. The federal tax rate was 34% in 2012, 2011 and 2010.

Market Risk and Asset Liability Management

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. To that end, management actively monitors and manages its interest rate risk exposure.

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

The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company’s exposure to differential changes in interest rates between assets and liabilities is an interest rate risk management test.

This test measures the impact on net interest income of an immediate change in interest rates in 100-basis point increments as set forth in the following table:


Change in Interest Rates (in Basis Points)		Percentage Change in Net Interest Income⁽¹⁾
+400		(17.0)%
+300		(12.4)%
+200		(8.4)%
+100		(4.1)%
–100		1.0%
–200		4.4%

(1)	The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment.

The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk.

Liquidity and Capital Resources

Liquidity is provided by maintaining an adequate level of liquid assets that include cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $169,650,000 on December 31, 2012, compared with $226,117,000 on December 31, 2011. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity.

The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.

Capital Adequacy

Total stockholders’ equity was $179,990,000 at December 31, 2012, compared with $160,649,000 at December 31, 2011. The increase in 2012 was primarily the result of earnings and a decrease in accumulated other comprehensive loss, net of taxes, offset by dividends paid. The decrease in accumulated other comprehensive loss was mainly attributable to an increase of $4,011,000 in the net unrealized gains on the Company’s available-for-sale portfolio, net of taxes, offset by an increase of $1,839,000 in the additional pension liability, net of taxes.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The current guidelines require a Tier 1 capital-to-risk assets ratio of at least 4.00% and a total capital-to-risk assets ratio of at least 8.00%. The Company and the Bank exceeded these requirements with a Tier 1 capital-to-risk assets ratio of 14.34% and 12.90%, respectively, and total capital-to-risk assets ratio of 15.59% and 14.15%, respectively, at December 31, 2012. Additionally, federal banking

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

regulators have issued leverage ratio guidelines, which supplement the risk-based capital guidelines. The minimum leverage ratio requirement applicable to the Company is 4.00%; and at December 31, 2012, the Company and the Bank exceeded this requirement with leverage ratios of 6.80% and 6.11%, respectively.

Contractual Obligations, Commitments, and Contingencies

The Company has entered into contractual obligations and commitments. The following tables summarize the Company’s contractual cash obligations and other commitments at December 31, 2012.

Contractual Obligations and Commitments by Maturity (dollars in thousands)

Payments Due — By Period

Less Than

One to

Three to

After Five

CONTRACTUAL OBLIGATIONS

Total

One Year

Three Years

Five Years

Years

FHLBB advances

195,000

46,000

37,000

90,000

22,000

Subordinated debentures

36,083

—

36,083

Retirement benefit obligations

29,238

2,089

4,315

5,836

16,998

Lease obligations

12,340

1,858

3,606

2,645

4,231

Customer repurchase agreements

191,390

—

Total contractual cash obligations

464,051

241,337

44,921

98,481

79,312

Amount of Commitment Expiring — By Period

Less Than

One to

Three to

After Five

OTHER COMMITMENTS

Total

One Year

Three Years

Five Years

Years

Lines of credit

217,246

123,324

4,159

4,705

85,058

Standby and commercial letters of credit

8,411

7,120

1,011

205

Other commitments

36,061

14,793

2,920

1,244

17,104

Total commitments

261,718

145,237

8,090

6,024

102,367

Financial Instruments with Off-Balance-Sheet Risk

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments with off-balance-sheet risk at December 31 are as follows:


Contract or Notional Amount	2012		2011
	(dollars in thousands)
Financial instruments whose contract amount represents credit risk:
Commitments to originate 1–4 family mortgages	$	13,580	$	12,638
Standby and commercial letters of credit		8,411		4,645
Unused lines of credit		217,246		195,181
Unadvanced portions of construction loans		17,609		16,819
Unadvanced portions of other loans		4,872		4,605

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

Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit was $36,000 and $39,000 for 2012 and 2011, respectively.

Recent Accounting Developments

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. This update revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. This update removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in this update were effective for interim and annual reporting periods beginning on or after December 15, 2011. The amendments were applied prospectively to transactions or modifications of existing transactions that occurred on or after the effective date and early adoption was permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires, for public entities, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this update are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application was permitted. The Company has presented the requirements for this amendment in Note 9.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the consolidated statement of changes in stockholders’ equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes were effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with retrospective application required. Early application was permitted. There was no impact on the Company’s consolidated financial results as the amendments relate only to changes in financial statement presentation. In December 2011, the FASB elected to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive

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

Income in Accounting Standards Update No. 2011-05. The Company has presented a separate financial statement as a result of this pronouncement.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment. This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill. Under the new guidance, an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. The Company implemented the provisions of ASU 2011-08 as of January 1, 2012. The adoption of this pronouncement did not have a material effect on the consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures About Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company is currently assessing the impact on the Company’s financial statements and will implement the provisions of ASU 2011-11 as of January 1, 2013.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles — Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment. This ASU permits an entity to make a qualitative assessment to determine whether it is more likely than not than an indefinite-lived intangible asset, other than goodwill, is impaired. Entities are required to test indefinite-lived intangible assets for impairment at least annually and more frequently if indicators of impairment exist. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it is not required to perform the quantitative impairment test for that asset. The ASU applies to both public and nonpublic entities and is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company evaluated for goodwill impairment under this standard as of December 31, 2012, and determined no impairment existed.

Consolidated Balance Sheets


	December 31,
	2012			2011
	(dollars in thousands except share data)
ASSETS
Cash and due from banks (Note 2)	$	53,646		$	50,187
Federal funds sold and interest-bearing deposits in other banks		98,637			157,579

Total cash and cash equivalents		152,283			207,766
Short-term investments		17,367			18,351
Securities available-for-sale, amortized cost $1,414,595 in 2012 and $1,244,972 in 2011 (Notes 3, 9 and 11)		1,434,801			1,258,676
Securities held-to-maturity, fair value $281,924 in 2012 and $184,822 in 2011 (Notes 4 and 11)		275,507			179,368
Federal Home Loan Bank of Boston, stock at cost		15,146			15,531
Loans, net (Note 5)		1,111,788			984,492
Less: allowance for loan losses (Note 6)		19,197			16,574

Net loans		1,092,591			967,918
Bank premises and equipment (Note 7)		23,899			21,757
Accrued interest receivable		5,811			6,022
Prepaid FDIC assessments		2,773			4,335
Other assets (Notes 5, 8 and 15)		66,031			63,501

Total assets	$	3,086,209		$	2,743,225


LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits	$	438,429		$	365,854
Savings and NOW deposits		933,316			708,988
Money market accounts		653,345			616,241
Time deposits (Note 10)		419,983			433,501

Total deposits		2,445,073			2,124,584
Securities sold under agreements to repurchase (Note 11)		191,390			143,320
Other borrowed funds (Note 12)		195,144			244,143
Subordinated debentures (Note 12)		36,083			36,083
Other liabilities		38,529			34,446

Total liabilities		2,906,219			2,582,576
Commitments and contingencies (Notes 7, 17 and 18)
Stockholders’ equity (Note 14):
Preferred Stock – $1.00 par value; 100,000 shares authorized; no shares issued and outstanding		—			—
Common stock, Class A,
$1.00 par value per share; authorized 10,000,000 shares; issued 3,568,079 shares in 2012 and 3,548,317 shares in 2011		3,568			3,548
Common stock, Class B,
$1.00 par value per share; authorized 5,000,000 shares; issued 1,986,880 shares in 2012 and 1,994,380 shares in 2011		1,986			1,994
Additional paid-in capital		11,891			11,587
Retained earnings		162,892			146,039

		180,337			163,168
Unrealized gains on securities available-for-sale, net of taxes		12,330			8,319
Pension liability, net of taxes		(12,677	)		(10,838	)

Total accumulated other comprehensive loss, net of taxes (Notes 3 and 14)		(347	)		(2,519	)

Total stockholders’ equity		179,990			160,649

Total liabilities and stockholders’ equity	$	3,086,209		$	2,743,225

See accompanying “Notes to Consolidated Financial Statements.”

Consolidated Statements of Income


	Year Ended December 31,
	2012		2011		2010
	(dollars in thousands except share data)
INTEREST INCOME
Loans, taxable	$	34,983	$	36,772	$	40,163
Loans, non-taxable		16,432		11,324		8,271
Securities available-for-sale, taxable		22,286		22,782		18,958
Securities available-for-sale, non-taxable		340		211		391
Federal Home Loan Bank of Boston dividends		77		46		—
Securities held-to-maturity		6,746		5,816		7,158
Federal funds sold, interest-bearing deposits in other banks and short-term investments		630		1,114		1,642

Total interest income		81,494		78,065		76,583
INTEREST EXPENSE
Savings and NOW deposits		2,250		2,539		4,072
Money market accounts		2,373		2,706		3,942
Time deposits		6,250		9,356		7,914
Securities sold under agreements to repurchase		367		379		573
Other borrowed funds and subordinated debentures		8,300		7,786		8,316

Total interest expense		19,540		22,766		24,817

Net interest income		61,954		55,299		51,766
Provision for loan losses (Note 6)		4,150		4,550		5,575

Net interest income after provision for loan losses		57,804		50,749		46,191
OTHER OPERATING INCOME
Service charges on deposit accounts		7,880		7,885		7,876
Lockbox fees		2,930		2,770		2,911
Brokerage commissions		364		441		230
Net gains on sales of securities		1,843		1,940		1,851
Other income		2,848		3,204		3,131

Total other operating income		15,865		16,240		15,999
OPERATING EXPENSES
Salaries and employee benefits (Note 16)		32,943		29,630		28,398
Occupancy		4,695		4,411		4,037
Equipment		2,255		2,235		2,132
FDIC assessments		1,737		2,025		2,965
Other (Note 19)		11,608		10,441		9,840

Total operating expenses		53,238		48,742		47,372

Income before income taxes		20,431		18,247		14,818
Provision for income taxes (Note 15)		1,392		1,554		1,244

Net income	$	19,039	$	16,693	$	13,574

SHARE DATA (Note 13)
Weighted average number of shares outstanding, basic
Class A		3,557,693		3,543,233		3,521,179
Class B		1,990,474		1,997,411		2,012,327
Weighted average number of shares outstanding, diluted
Class A		5,549,191		5,541,794		5,535,742
Class B		1,990,474		1,997,411		2,012,327
Basic earnings per share
Class A	$	4.18	$	3.68	$	3.00
Class B	$	2.09	$	1.84	$	1.50
Diluted earnings per share
Class A	$	3.43	$	3.01	$	2.45
Class B	$	2.09	$	1.84	$	1.50

See accompanying “Notes to Consolidated Financial Statements.”

Consolidated Statements of Comprehensive Income


	Year Ended December 31,
	2012			2011			2010
	(dollars in thousands)
NET INCOME	$	19,039		$	16,693		$	13,574
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period		5,854			6,666			1,315
Less: reclassification adjustment for gains included in net income		(1,843	)		(1,940	)		(1,851	)

Total unrealized gains on securities		4,011			4,726			(536	)
Defined benefit pension plans:
Pension liability adjustment:
Net gain (loss)		(2,488	)		(4,047	)		771
Amortization of prior service cost and loss included in net periodic benefit cost		649			380			488

Total pension liability adjustment		(1,839	)		(3,667	)		1,259
Other comprehensive income		2,172			1,059			723

Comprehensive income	$	21,211		$	17,752		$	14,297

See accompanying “Notes to Consolidated Financial Statements.”

Consolidated Statements of Changes in Stockholders’ Equity


	Class A Common Stock		Class B Common Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	(dollars in thousands except share data)
BALANCE, DECEMBER 31, 2009	$	3,516	$	2,014		$	11,376	$	120,125		$	(4,301	)	$	132,730
Net income		—		—			—		13,574			—			13,574
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net of $415 in taxes and $1,851 in realized net gains		—		—			—		—			(536	)		(536	)
Pension liability adjustment, net of $836 in taxes		—		—			—		—			1,259			1,259
Conversion of Class B Common Stock to Class A Common Stock, 3,150 shares		3		(3	)		—		—			—			—
Stock options exercised, 9,950 shares		10		—			140		—			—			150
Tax benefit of stock option exercises		—		—			21		—			—			21
Cash dividends, Class A Common Stock, $0.48 per share		—		—			—		(1,690	)		—			(1,690	)
Cash dividends, Class B Common Stock, $0.24 per share		—		—			—		(483	)		—			(483	)

BALANCE, DECEMBER 31, 2010	$	3,529	$	2,011		$	11,537	$	131,526		$	(3,578	)	$	145,025
Net income		—		—			—		16,693			—			16,693
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $3,143 in taxes and $1,940 in realized net gains		—		—			—		—			4,726			4,726
Pension liability adjustment, net of $2,439 in taxes		—		—			—		—			(3,667	)		(3,667	)
Conversion of Class B Common Stock to Class A Common Stock, 17,000 shares		17		(17	)		—		—			—			—
Stock options exercised, 2,450 shares		2		—			50		—			—			52
Cash dividends, Class A Common Stock, $0.48 per share		—		—			—		(1,701	)		—			(1,701	)
Cash dividends, Class B Common Stock, $0.24 per share		—		—			—		(479	)		—			(479	)

BALANCE, DECEMBER 31, 2011	$	3,548	$	1,994		$	11,587	$	146,039		$	(2,519	)	$	160,649
Net income		—		—			—		19,039			—			19,039
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $2,491 in taxes and $1,843 in realized net gains		—		—			—		—			4,011			4,011
Pension liability adjustment, net of $1,223 in taxes		—		—			—		—			(1,839	)		(1,839	)
Conversion of Class B Common Stock to Class A Common Stock, 7,500 shares		8		(8	)		—		—			—			—
Stock options exercised, 12,262 shares		12		—			292		—			—			304
Tax benefit of stock option exercises		—		—			12		—			—			12
Cash dividends, Class A Common Stock, $0.48 per share		—		—			—		(1,708	)		—			(1,708	)
Cash dividends, Class B Common Stock, $0.24 per share		—		—			—		(478	)		—			(478	)

BALANCE, DECEMBER 31, 2012	$	3,568	$	1,986		$	11,891	$	162,892		$	(347	)	$	179,990

See accompanying “Notes to Consolidated Financial Statements.”

Consolidated Statements of Cash Flows


	Year Ended December 31,
	2012			2011			2010
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	19,039		$	16,693		$	13,574
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loans originated for sale		(20,149	)		(22,664	)		—
Proceeds from mortgage loans sold		14,457			19,697			—
Gain on sales of mortgage loans held for sale		(297	)		(422	)		—
Gain on sale of loans		—			(238	)		—
Gain on sale of fixed assets		(1	)		—			(7	)
Net gains on sales of securities		(1,843	)		(1,940	)		(1,851	)
Provision for loan losses		4,150			4,550			5,575
Deferred tax benefit		(2,104	)		(953	)		(1,546	)
Net depreciation and amortization		6,445			5,558			4,955
Decrease (increase) in accrued interest receivable		211			579			(795	)
Decrease in prepaid FDIC assessments		1,562			1,794			2,629
(Gain) loss on sales of other real estate owned		(1	)		8			(127	)
Write down of other real estate owned		—			117			—
Increase in other assets		(3,113	)		(4,456	)		(1,417	)
Increase (decrease) in other liabilities		1,070			503			(849	)

Net cash provided by operating activities		19,426			18,826			20,141
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments		38,397			121,106			131,762
Purchase of short-term investments		(37,413	)		(25,539	)		(227,162	)
Proceeds from redemption of Federal Home Loan Bank of Boston stock		385			—			—
Proceeds from calls/maturities of securities available-for-sale		532,734			722,403			610,975
Proceeds from sales of securities available-for-sale		294,881			75,615			41,251
Purchase of securities available-for-sale		(998,955	)		(1,140,194	)		(914,944	)
Proceeds from calls/maturities of securities held-to-maturity		88,628			119,315			154,445
Purchase of securities held-to-maturity		(185,346	)		(68,863	)		(167,442	)
Proceeds from sales of loans		—			4,000			—
Net increase in loans		(123,183	)		(82,793	)		(33,315	)
Proceeds from sales of other real estate owned		1,584			802			555
Proceeds from sales of fixed assets		1			—			13
Capital expenditures		(4,300	)		(2,692	)		(2,281	)

Net cash used in investing activities		(392,587	)		(276,840	)		(406,143	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in time deposit accounts		(13,518	)		16,241			124,622
Net increase in demand, savings, money market and NOW deposits		334,007			206,320			75,414
Net proceeds from the exercise of stock options		304			52			150
Cash dividends		(2,186	)		(2,180	)		(2,173	)
Net increase (decrease) in securities sold under agreements to repurchase		48,070			34,770			(10,195	)
Net (decrease) increase in other borrowed funds		(48,999	)		22,025			(11,906	)

Net cash provided by financing activities		317,678			277,228			175,912

Net (decrease) increase in cash and cash equivalents		(55,483	)		19,214			(210,090	)
Cash and cash equivalents at beginning of year		207,766			188,552			398,642

Cash and cash equivalents at end of year	$	152,283		$	207,766		$	188,552

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	19,597		$	22,799		$	24,930
Income taxes		3,348			3,109			3,580
Change in unrealized gains on securities available-for-sale, net of taxes	$	4,011		$	4,726		$	(536	)
Pension liability adjustment, net of taxes		(1,839	)		(3,667	)		1,259
Transfer of loans to other real estate owned		400			2,110			428

See accompanying “Notes to Consolidated Financial Statements.”

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

BASIS OF FINANCIAL STATEMENT PRESENTATION

The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly owned subsidiaries, Century Subsidiary Investments, Inc. (“CSII”), Century Subsidiary Investments, Inc. II (“CSII II”), Century Subsidiary Investments, Inc. III (“CSII III”) and Century Financial Services Inc. (“CFSI”). CSII, CSII II, and CSII III are engaged in buying, selling and holding investment securities. CFSI has the power to engage in financial agency, securities brokerage, and investment and financial advisory services and related securities credit. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company.

All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”) and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company’s business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.

Material estimates that are susceptible to change in the near term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on independent appraisals and review of other factors, including historical charge-off rates with additional allocations based on risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.

FAIR VALUE MEASUREMENTS

In determining fair values a hierarchal disclosure framework is used associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the FASB ASC 820 hierarchy are as follows:

Notes to Consolidated Financial Statements — (Continued)

such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.

Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments that are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds and over the counter (“OTC”) derivatives.

Level III — These instruments have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, and noninvestment grade residual interests in securitizations as well as certain highly structured OTC derivative contracts.

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, federal funds sold and certificates of deposit.

SHORT-TERM INVESTMENTS

As of December 31, 2012 and 2011, short-term investments include highly liquid certificates of deposit with original maturities of more than 90 days but less than one year.

INVESTMENT SECURITIES

Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated related income taxes. The Company has no securities held for trading.

Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value. The total amount of the impairment charge is recognized in earnings, with an offset for the noncredit component, which is recognized as other comprehensive income. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis.

FEDERAL HOME LOAN BANK STOCK

The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”) system, is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis of the stock. For the year ended December 31, 2012, the FHLBB reported preliminary net income of $207.1 million. The FHLBB also

Notes to Consolidated Financial Statements — (Continued)

declared a dividend equal to an annual yield of 0.37%. As of December 31, 2012, no impairment has been recognized.

LOANS HELD FOR SALE

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

LOANS

Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become ninety days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Past-due status is based on contractual terms of the loan. Loans, including impaired loans, on which the accrual of interest has been discontinued, are designated nonaccrual loans. When a loan is placed on nonaccrual, all income that has been accrued but remains unpaid is reversed against current period income, and all amortization of deferred loan costs and fees is discontinued. Nonaccrual loans may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. Income received on nonaccrual loans is either recorded in income or applied to the principal balance of the loan, depending on management’s evaluation as to the collectibility of principal.

Loan origination fees and related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. Prepayments are not initially considered when amortizing premiums and discounts.

The Bank measures impairment for impaired loans at either the fair value of the loan, the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. This method applies to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans such as residential real estate and consumer loans that are collectively evaluated for impairment and loans that are measured at fair value. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Loans are charged-off when management believes that the collectibility of the loan’s principal is not probable. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification rate of interest.

TRANSFERS OF FINANCIAL ASSETS

Transfers of financial assets, typically residential mortgages and loan participations for the Company, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.

ACQUIRED LOANS

In accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”) the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in the acquired loans to determine if

Notes to Consolidated Financial Statements — (Continued)

those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loan’s contractually required payments received in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30 requires that the Company recognize the excess of all cash flows expected at acquisition over the Company’s initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a reduction of the loan balance.

Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of FASB ASC 310-30. For such loans, the discount, if any, representing the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the interest method over the term of the loan. Prepayments are not considered in the calculation of accretion income. Additionally, discount is not accreted on nonperforming loans.

When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the Company’s acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees.

NONPERFORMING ASSETS

In addition to nonperforming loans, nonperforming assets include other real estate owned. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned is recorded initially at estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred. Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations, while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans that ultimately prove uncollectible. In determining the level of the allowance, periodic evaluations are made of the loan portfolio, which takes into account such factors as the character of the loans, loan status, financial posture of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgment. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances, if appropriate, for identified problem loans and the unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.

While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in management’s opinion, collectibility is not probable.

The formula allowance evaluates groups of loans to determine the allocation appropriate within each portfolio segment. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect the amount of the formula allowance. Risk grades are

Notes to Consolidated Financial Statements — (Continued)

determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical net loss experience and qualitative adjustments. For the residential real estate and consumer loan portfolios, the reserves are calculated by applying historical charge-off and recovery experience and qualitative adjustments to the current outstanding balance in each loan category. Loss factors are based on the Company’s historical net loss experience as well as regulatory guidelines.

Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a) present value of anticipated future cash flows, (b) the loan’s observable fair market price or (c) fair value of collateral if the loan is collateral dependent.

The formula allowance and specific allowances also include management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: (a) market risk factors, such as the effects of economic variability on the entire portfolio and (b) unique portfolio risk factors that are inherent characteristics of the Company’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Company’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include industry concentrations and geographic concentrations or trends that may exacerbate losses resulting from economic events which the Company may not be able to fully diversify out of its portfolio.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate — The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates, will have an effect on the credit quality in the segment.

Commercial real estate — Loans in this segment are primarily income-producing properties. Also included are loans to educational institutions, hospitals and other non-profit organizations. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans.

Construction loans — Loans in this segment primarily include real estate development loans for which payment is derived from sale of the property as well as construction projects in which the property will ultimately be used by the borrower. Credit risk is affected by cost overruns, time to sell at an adequate price and market conditions.

Commercial and industrial loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Notes to Consolidated Financial Statements — (Continued)

BANK PREMISES AND EQUIPMENT

Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Land is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated.

GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization. Identifiable intangible assets consist of core deposit intangibles and are assets resulting from acquisitions that are being amortized over their estimated useful lives. Goodwill and identifiable intangible assets are included in other assets on the consolidated balance sheets. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Currently, the Company’s goodwill is evaluated at the entity level as there is only one reporting unit. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

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 its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.

SERVICING

The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in loan servicing fee income.

STOCK OPTION ACCOUNTING

The Company follows the fair value recognition provisions of FASB ASC 718, Compensation – Stock Compensation (formerly SFAS 123R) for all share-based payments, using the modified-prospective transition method. The Company’s method of valuation for share-based awards granted utilizes the Black-Scholes option-pricing model, which was also previously used for the Company’s pro forma information required under FASB ASC 718. The Company will recognize compensation expense for its awards on a straight-line basis over the

Notes to Consolidated Financial Statements — (Continued)

requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.

During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) that provide for granting of options to purchase up to 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive nonqualified or incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were options to purchase an aggregate of 23,350 shares of Class A common stock exercisable at December 31, 2012.

On December 30, 2005, the Board of Directors approved the acceleration and immediate vesting of all unvested options with an exercise price of $31.60 or greater per share. As a consequence, options to purchase 23,950 shares of Class A common stock became exercisable immediately. The average of the high and low price at which the Class A common stock traded on December 30, 2005, the date of the acceleration and vesting, was $29.28 per share. In connection with this acceleration, the Board of Directors approved a technical amendment to each of the Option Plans to eliminate the possibility that the terms of any outstanding or future stock option would require a cash settlement on the occurrence of any circumstance outside the control of the Company. Effective as of January 1, 2006, the Company adopted FASB ASC 718 for all share-based payments. The Company estimates that, as a result of this accelerated vesting, approximately $190,000 of 2006 noncash compensation expense was eliminated that would otherwise have been recognized in the Company’s earnings.

The Company decided to accelerate the vesting of certain stock options primarily to reduce the noncash compensation expense that would otherwise be expected to be recorded in conjunction with the Company’s required adoption of FASB ASC 718 in 2006. There was no earnings impact for 2006 due to the Company’s adoption of FASB ASC 718.

The Company uses the fair value method to account for stock options. All of the Company’s stock options are vested, and there were no options granted during 2012 and 2011.

INCOME TAXES

The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company accounts for uncertain tax positions in accordance with FASB ASC 740.

The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law.

The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgment changes regarding an uncertain tax position.

Notes to Consolidated Financial Statements — (Continued)

TREASURY STOCK

Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act, provisions of which eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares.

PENSION

The Company provides pension benefits to its employees under a noncontributory, defined benefit plan, which is funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and recognizes costs over the estimated employee service period.

The Company also has a Supplemental Executive Insurance/Retirement Plan (“the Supplemental Plan”), which is limited to certain officers and employees of the Company. The Supplemental Plan is accrued on a current basis and recognizes costs over the estimated employee service period.

Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary. Individual life insurance policies, which are owned by the Company, are purchased covering the life of each participant.

REVISION OF EPS PRESENTATION

The Company has determined that although the Class A and Class B common stock have different dividend rates, the Company had not applied the two-class method when calculating earnings per share (“EPS”) separately for the Class A and Class B common stock. This resulted in immaterial revisions to previously reported basic EPS for Class A and Class B common stock and diluted EPS for the Class B common stock as summarized below:


For the year ended December 31, 2011:	As previously reported		As revised
Basic EPS – Class A common	$	3.01	$	3.68
Basic EPS – Class B common	$	3.01	$	1.84
Diluted EPS – Class A common	$	3.01	$	3.01
Diluted EPS – Class B common	$	3.01	$	1.84

For the year ended December 31, 2010:	As previously reported		As revised
Basic EPS – Class A common	$	2.45	$	3.00
Basic EPS – Class B common	$	2.45	$	1.50
Diluted EPS – Class A common	$	2.45	$	2.45
Diluted EPS – Class B common	$	2.45	$	1.50

RECENT ACCOUNTING DEVELOPMENTS

Notes to Consolidated Financial Statements — (Continued)

adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in this update will be effective for interim and annual reporting periods beginning on or after December 15, 2011. The amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date and early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the consolidated statement of changes in stockholders’ equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with retrospective application required. Early application is permitted. There was no impact on the Company’s consolidated financial results as the amendments relate only to changes in financial statement presentation. In December 2011, the FASB elected to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The Company has presented a separate financial statement as a result of this pronouncement.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment. This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill. Under the new guidance, an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary. The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company implemented the provisions of ASU 2011-08 as of January 1, 2012. The adoption of this pronouncement did not have a material effect on the consolidated financial statements.

Notes to Consolidated Financial Statements — (Continued)

In July 2012, the FASB issued ASU No. 2012-02, Intangibles — Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment. This ASU permits an entity to make a qualitative assessment to determine whether it is more likely than not than an indefinite-lived intangible asset, other than goodwill, is impaired. Entities are required to test indefinite-lived intangible assets for impairment at least annually and more frequently if indicators of impairment exist. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it is not required to perform the quantitative impairment test for that asset. The ASU applies to both public and nonpublic entities and is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company is currently assessing the impact on the Company’s financial statements and will implement the provisions of ASU No. 2012-02 as of January 1, 2013.

2. Cash and Due from Banks

The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $9,608,000 at December 31, 2012, and $4,684,000 at December 31, 2011.

3. Securities Available-for-Sale


	December 31, 2012								December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(dollars in thousands)
U.S. Treasury	$	2,000	$	4	$	—	$	2,004	$	1,999	$	13	$	—	$	2,012
U.S. Government Sponsored Enterprises		130,048		360		68		130,340		174,657		311		11		174,957
SBA Backed Securities		8,043		113		—		8,156		8,714		87		—		8,801
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities		1,212,953		20,816		412		1,233,357		1,020,752		16,262		1,176		1,035,838
Privately Issued Residential Mortgage-Backed Securities		2,938		31		22		2,947		3,509		—		311		3,198
Obligations Issued by States and Political Subdivisions		55,855		41		722		55,174		21,515		84		957		20,642
Other Debt Securities		2,300		—		47		2,253		13,293		—		683		12,610
Equity Securities		458		112		—		570		533		85		—		618

Total	$	1,414,595	$	21,477	$	1,271	$	1,434,801	$	1,244,972	$	16,842	$	3,138	$	1,258,676

Included in U.S. Government Sponsored Enterprise Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $665,028,000 and $488,690,000 at December 31, 2012 and 2011, respectively. Also included in securities available-for-sale at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $220,313,000 and $246,036,000 at December 31, 2012 and 2011, respectively. The Company realized gains on sales of securities of $1,843,000, $1,940,000 and $1,851,000 from the proceeds of sales of available-for-sale securities of $294,881,000, $75,615,000 and $41,251,000 for the years ended December 31, 2012, 2011, and 2010, respectively.

Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the third quarter of 2008.

Notes to Consolidated Financial Statements — (Continued)

The following table shows the estimated maturity distribution of the Company’s securities available-for-sale at December 31, 2012.


	Amortized		Fair
	Cost		Value
	(dollars in thousands)
Within one year	$	69,122	$	69,314
After one but within five years		1,073,778		1,091,554
After five but within ten years		258,646		261,371
More than ten years		11,092		10,539
Nonmaturing		1,957		2,023

Total	$	1,414,595	$	1,434,801

The weighted average remaining life of investment securities available-for-sale at December 31, 2012, was 4.0 years. An auction rate municipal obligation (“ARS”) is included in Obligations Issued by States and Political Subdivisions. Included in the weighted average remaining life calculation at December 31, 2012, was $105,050,000 of U.S. Government Sponsored Enterprise obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities due to the ability of the issuers to prepay underlying obligations.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2012. This table shows the unrealized loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 20 and 7 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 458 holdings at December 31, 2012.

As of December 31, 2012, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade. The change in the unrealized losses on the state and municipal securities and the nonagency mortgage-backed securities was primarily caused by changes in credit spreads and liquidity issues in the marketplace.

In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrates and origination dates of underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuer’s financial performance are considered.

Notes to Consolidated Financial Statements — (Continued)

December 31, 2012

Less Than 12 Months

12 Months or Longer

Total

Unrealized

Temporarily Impaired Investments

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(dollars in thousands)

U.S. Government Sponsored Enterprise

34,967

—

34,967

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

93,006

383

10,169

103,175

412

Privately Issued Residential Mortgage-Backed Securities

—

1,863

Obligations Issued by States and Political Subdivisions

—

3,963

722

3,963

722

Other Debt Securities

—

1,453

Total temporarily impaired securities

127,973

451

17,448

820

145,421

1,271

At December 31, 2012, the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost. The unrealized losses on Obligations Issued by States and Political Subdivisions were considered by management to be temporary in nature. Full collection of those debt securities is expected because the financial condition of the obligors is considered to be sound, there has been no default in scheduled payment and the debt securities are rated investment grade. The unrealized loss on U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2012. Excluded from the table above are two equity securities that were written down in 2008 by $76,000. The fair value is $158,000 with an unrealized gain of $49,000 at December 31, 2012. In 2008, these stocks were deemed to be other-than-temporarily impaired based on the extent of the decline in value and the length of time the stocks had been trading below cost.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2011. This table shows the unrealized loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 60 and 6 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 393 holdings at December 31, 2011.


	December 31, 2011
	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized				Unrealized
Temporarily Impaired Investments	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(dollars in thousands)
U.S. Government Sponsored Enterprise	$	14,989	$	11	$	—	$	—	$	14,989	$	11
U.S. Government Agency and Sponsored
Enterprise Mortgage-Backed Securities		331,469		1,176		—		—		331,469		1,176
Privately Issued Residential Mortgage-Backed Securities		—		—		3,198		311		3,198		311
Obligations Issued by States and Political Subdivisions		—		—		3,725		957		3,725		957
Other Debt Securities		10,542		652		1,468		31		12,010		683

Total temporarily impaired securities	$	357,000	$	1,839	$	8,391	$	1,299	$	365,391	$	3,138

Notes to Consolidated Financial Statements — (Continued)

At December 31, 2011, the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost. The unrealized losses on Obligations Issued by States and Political Subdivisions were considered by management to be temporary in nature. Full collection of those debt securities is expected because the financial condition of the obligors is considered to be sound, there has been no default in scheduled payment and the debt securities are rated investment grade. The unrealized loss on U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2011. Excluded from the table above are two equity securities that were written down in 2008 by $76,000. The fair value is $141,000 with an unrealized gain of $32,000 at December 31, 2011. In 2008, these stocks were deemed to be other-than-temporarily impaired based on the extent of the decline in value and the length of time the stocks had been trading below cost.

4. Investment Securities Held-to-Maturity


	December 31, 2012								December 31, 2011
			Gross		Gross		Estimated				Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
	(dollars in thousands)
U.S. Government Sponsored Enterprise	$	17,747	$	19	$	8	$	17,758	$	26,979	$	36	$	2	$	27,013
U.S. Government Sponsored Enterprise Mortgage-Backed Securities		257,760		6,480		74		264,166		152,389		5,435		15		157,809

Total	$	275,507	$	6,499	$	82	$	281,924	$	179,368	$	5,471	$	17	$	184,822

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $149,366,000 and $8,885,000 at December 31, 2012, and 2011, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $103,617,000 and $49,345,000 at December 31, 2012, and 2011, respectively.

At December 31, 2012 and 2011, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Control of these enterprises was directly taken over by the U.S. Government in the third quarter of 2008.

The following table shows the maturity distribution of the Company’s securities held-to-maturity at December 31, 2012.


	Amortized		Fair
	Cost		Value
	(dollars in thousands)
Within one year	$	6,780	$	6,865
After one but within five years		205,981		210,897
After five but within ten years		62,472		63,880
More than ten years		274		282

Total	$	275,507	$	281,924

The weighted average remaining life of investment securities held-to-maturity at December 31, 2012, was 3.9 years. Included in the weighted average remaining life calculation at December 31, 2012, were $17,747,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual

Notes to Consolidated Financial Statements — (Continued)

maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities due to the ability of the issuers to prepay underlying obligations.

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2012. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 3 and 1 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 96 holdings at December 31, 2012.

As of December 31, 2012, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell this debt security and it is not likely that it will be required to sell this debt security before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on this security are from an issuer that is investment grade.

In evaluating the underlying credit quality of a security, management considers several factors such as the credit quality of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary.


	December 31, 2012
	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized				Unrealized
Temporarily Impaired Investments	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(dollars in thousands)
U.S. Government Sponsored Enterprises	$	9,994	$	8	$	—	$	—	$	9,994	$	8
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities		8,936		50		5,371		24		14,307		74

Total temporarily impaired securities	$	18,930	$	58	$	5,371	$	24	$	24,301	$	82

The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these investments and it is not likely that it will be required to sell these investments before the anticipated recovery of the remaining amortized cost, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2012.

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2011. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 2 and 0 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 92 holdings at December 31, 2011.


	December 31, 2011
	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized				Unrealized
Temporarily Impaired Investments	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(dollars in thousands)
U.S. Government Sponsored Enterprises	$	4,994	$	2	$	—	$	—	$	4,994	$	2
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities		5,367		15		—		—		5,367		15

Total temporarily impaired securities	$	10,361	$	17	$	—	$	—	$	10,361	$	17

Notes to Consolidated Financial Statements — (Continued)

The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these investments and it is not likely that it will be required to sell these investments before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2011.

5. Loans

The majority of the Bank’s lending activities are conducted in Massachusetts. The Bank originates construction, commercial and residential real estate loans, commercial and industrial loans, consumer, home equity and other loans for its portfolio.

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


	December 31,
	2012		2011
	(dollars in thousands)
Construction and land development	$	38,618	$	56,819
Commercial and industrial		88,475		82,404
Commercial real estate		576,465		487,495
Residential real estate		281,857		239,307
Consumer		6,823		6,197
Home equity		118,923		110,786
Overdrafts		627		1,484

Total	$	1,111,788	$	984,492

At December 31, 2012, and December 31, 2011, loans were carried net of discounts of $498,000 and $550,000, respectively. Net deferred fees included in loans at December 31, 2012, and December 31, 2011, were $369,000 and $666,000, respectively.

The Company was servicing mortgage loans sold to others without recourse of approximately $26,786,000 and $18,196,000 at December 31, 2012, and December 31, 2011, respectively. The Company had $9,378,000 of residential real estate loans held for sale at December 31, 2012 and $3,389,000 at December 31, 2011.

As of December 31, 2012 and 2011, the Company’s recorded investment in impaired loans was $5,925,000 and $8,102,000, respectively. If an impaired loan is placed on nonaccrual, the loan may be returned to an accrual status when principal and interest payments are not delinquent and the risk characteristics have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. At December 31, 2012, there were $5,223,000 of impaired loans with a specific reserve of $1,732,000. At December 31, 2011, there were $6,073,000 of impaired loans with a specific reserve of $741,000.

Loans are designated as troubled debt restructures when a concession is made on a credit as a result of financial difficulties of the borrower. Typically, such concessions consist of a reduction in interest rate to a below-market rate, taking into account the credit quality of the note, or a deferment of payments, principal or interest, which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination. Restructured loans are included in the impaired loan category.

Notes to Consolidated Financial Statements — (Continued)

The composition of nonaccrual loans and impaired loans is as follows:


	December 31,
	2012		2011		2010
	(dollars in thousands)
Loans on nonaccrual	$	4,471		5,827	$	8,068
Loans 90 days past due and still accruing		—		18		50
Impaired loans on nonaccrual included above		2,878		3,468		5,353
Total recorded investment in impaired loans		5,925		8,102		7,963
Average recorded investment of impaired loans		7,043		10,284		9,606
Accruing troubled debt restructures		3,048		4,634		1,248
Interest income not recorded on nonaccrual loans according to their original terms		753		846		1,313
Interest income on nonaccrual loans actually recorded		—		—		—
Interest income recognized on impaired loans		180		155		256

During the first quarter of 2008, the Company purchased a loan for $4,823,000 with a discount of $724,000. The entire discount is classified as an accretable discount. The Company accreted $51,000, $47,000 and $47,000 of the discount during 2012, 2011 and 2010, respectively.

Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2012.

Balance at
December 31, 2011

Additions

Repayments
and Deletions

Balance at
December 31, 2012

(dollars in thousands)

$4,226

1,452

1,015

4,663

6. Allowance for Loan Losses

An analysis of the allowance for loan losses for each of the three years ending December 31, 2012, 2011 and 2010 is as follows:


	2012			2011			2010
	(dollars in thousands)
Allowance for loan losses, beginning of year	$	16,574		$	14,053		$	12,373
Loans charged-off		(2,301	)		(2,824	)		(4,443	)
Recoveries on loans previously charged-off		774			795			548

Net charge-offs		(1,527	)		(2,029	)		(3,895	)
Provision charged to expense		4,150			4,550			5,575

Allowance for loan losses, end of year	$	19,197		$	16,574		$	14,053

Notes to Consolidated Financial Statements — (Continued)

ALLOWANCE FOR LOAN LOSSES AND AMOUNT OF INVESTMENTS IN LOANS

Further information pertaining to the allowance for loan losses at December 31, 2012 follows:


	Construction and Land Development		Commercial and Industrial			Commercial Real Estate		Residential Real Estate			Consumer			Home Equity			Unallocated			Total
	(dollars in thousands)
Allowance for Loan Losses:
Balance at December 31, 2011	$	2,893	$	3,139		$	6,566	$	1,886		$	356		$	704		$	1,030		$	16,574
Charge-offs		—		(1,253	)		—		(192	)		(697	)		(159	)		—			(2,301	)
Recoveries		—		307			9		17			422			19			—			774
Provision		148		925			2,490		283			252			322			(270	)		4,150

Ending balance at December 31, 2012	$	3,041	$	3,118		$	9,065	$	1,994		$	333		$	886		$	760		$	19,197

Amount of allowance for loan losses for loans deemed to be impaired	$	1,000	$	104		$	415	$	117		$	—		$	96		$	—		$	1,732

Amount of allowance for loan losses for loans not deemed to be impaired	$	2,041	$	3,014		$	8,650	$	1,877		$	333		$	790		$	760		$	17,465
Loans:
Ending balance	$	38,618	$	88,475		$	576,465	$	281,857		$	7,450		$	118,923		$	—		$	1,111,788
Loans deemed to be impaired	$	1,500	$	1,282		$	2,281	$	766		$	—		$	96		$	—		$	5,925
Loans not deemed to be impaired	$	37,118	$	87,193		$	574,184	$	281,091		$	7,450		$	118,827		$	—		$	1,105,863

Further information pertaining to the allowance for loan losses at December 31, 2011 follows:


	Construction and Land Development			Commercial and Industrial			Commercial Real Estate		Residential Real Estate			Consumer			Home Equity			Unallocated		Total
	(dollars in thousands)
Allowance for Loan Losses:
Balance at December 31, 2010	$	1,752		$	3,163		$	5,671	$	1,718		$	298		$	725		$	726	$	14,053
Charge-offs		(1,200	)		(676	)		—		(337	)		(607	)		(4	)		—		(2,824	)
Recoveries		—			293			6		27			467			2			—		795
Provision		2,341			359			889		478			198			(19	)		304		4,550

Ending balance at December 31, 2011	$	2,893		$	3,139		$	6,566	$	1,886		$	356		$	704		$	1,030	$	16,574

Amount of allowance for loan losses for loans deemed to be impaired	$	—		$	335		$	282	$	124		$	—		$	—		$	—	$	741

Amount of allowance for loan losses for loans not deemed to be impaired	$	2,893		$	2,804		$	6,284	$	1,762		$	356		$	704		$	1,030	$	15,833
Loans:
Ending balance	$	56,819		$	82,404		$	487,495	$	239,307		$	7,681		$	110,786		$	—	$	984,492
Loans deemed to be impaired	$	1,500		$	1,525		$	4,561	$	516		$	—		$	—		$	—	$	8,102
Loans not deemed to be impaired	$	55,319		$	80,879		$	482,934	$	238,791		$	7,681		$	110,786		$	—	$	976,390

Notes to Consolidated Financial Statements — (Continued)

CREDIT QUALITY INFORMATION

The Company utilizes a six-grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 1-3 (Pass) — Loans in this category are considered “pass” rated loans with low to average risk.

Loans rated 4 (Monitor) — These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of December 31, 2012.

Loans rated 5 (Substandard) — Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of December 31, 2012.

Loans rated 6 (Doubtful) — Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of December 31, 2012, and are doubtful for full collection.

Impaired — Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.

The percentage of the allowance for loan losses allocated to construction and land development loans to total construction and land development loans increased from 5.1%, at December 31, 2011, to 7.9%, at December 31, 2012, mainly as a result of an increase in the historical loss factor. This factor was increased to account for the incremental risk in the portfolio.

The following table presents the Company’s loans by risk rating at December 31, 2012.

Construction
and Land
Development

Commercial
and
Industrial

Commercial
Real Estate

(dollars in thousands)

Grade:

1-3 (Pass)

29,719

86,587

569,760

4 (Monitor)

7,399

606

4,424

5 (Substandard)

—

6 (Doubtful)

—

Impaired

1,500

1,282

2,281

Total

38,618

88,475

576,465

Notes to Consolidated Financial Statements — (Continued)

The following table presents the Company’s loans by risk rating at December 31, 2011.


	Construction and Land Development		Commercial and Industrial		Commercial Real Estate
	(dollars in thousands)
Grade:
1-3 (Pass)	$	48,298	$	80,140	$	478,186
4 (Monitor)		7,021		739		4,748
5 (Substandard)		—		—		—
6 (Doubtful)		—		—		—
Impaired		1,500		1,525		4,561

Total	$	56,819	$	82,404	$	487,495

The Company utilized payment performance as credit quality indicators for residential real state, consumer and overdrafts, and the home equity portfolio. The indicators are depicted in the table “aging of past-due loans,” below.

AGING OF PAST-DUE LOANS

Further information pertaining to the allowance for loan losses at December 31, 2012 follows:

Accruing
30-89 Days
Past Due

Non Accrual

Accruing
Greater
Than
90 Days

Total
Past Due

Current
Loans

Total

(dollars in thousands)

Construction and land development

—

1,500

—

1,500

37,118

38,618

Commercial and industrial

1,256

676

—

1,932

86,543

88,475

Commercial real estate

3,450

674

—

4,124

572,341

576,465

Residential real estate

864

1,597

—

2,461

279,396

281,857

Consumer and overdrafts

—

7,394

7,450

Home equity

1,088

—

1,088

117,835

118,923

Total

6,690

4,471

—

11,161

1,100,627

1,111,788

Further information pertaining to the allowance for loan losses at December 31, 2011 follows:


	Accruing 30-89 Days Past Due		Non Accrual		Accruing Greater Than 90 Days		Total Past Due		Current Loans		Total
	(dollars in thousands)
Construction and land development	$	—	$	1,500	$	—	$	1,500	$	55,319	$	56,819
Commercial and industrial		1,417		763		18		2,198		80,206		82,404
Commercial real estate		2,528		736		—		3,264		484,231		487,495
Residential real estate		2,635		2,324		—		4,959		234,348		239,307
Consumer and overdrafts		519		9		—		528		7,153		7,681
Home equity		171		495		—		666		110,120		110,786

Total	$	7,270	$	5,827	$	18	$	13,115	$	971,377	$	984,492

Notes to Consolidated Financial Statements — (Continued)

IMPAIRED LOANS

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the “Notes to Consolidated Financial Statements.”

The following is information pertaining to impaired loans at December 31, 2012:


	Carrying Value		Unpaid Balance Principal		Required Reserve		Average Carrying Value		Interest Income Recognized
	(dollars in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	346	$	—
Commercial and industrial		503		994		—		425		1
Commercial real estate		169		199		—		176		—
Residential real estate		30		31		—		124		—
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—

Total	$	702	$	1,224	$	—	$	1,071	$	1

With required reserve recorded:
Construction and land development	$	1,500	$	3,292	$	1,000	$	1,154	$	—
Commercial and industrial		779		995		104		1,317		40
Commercial real estate		2,112		2,158		415		2,817		138
Residential real estate		736		736		117		640		1
Consumer		—		—		—		—		—
Home equity		96		96		96		44		—

Total	$	5,223	$	7,277	$	1,732	$	5,972	$	179

Total
Construction and land development	$	1,500	$	3,292	$	1,000	$	1,500	$	—
Commercial and industrial		1,282		1,989		104		1,742		41
Commercial real estate		2,281		2,357		415		2,993		138
Residential real estate		766		767		117		764		1
Consumer		—		—		—		—		—
Home equity		96		96		96		44		—

Total	$	5,925	$	8,501	$	1,732	$	7,043	$	180

Notes to Consolidated Financial Statements — (Continued)

The following is information pertaining to impaired loans at December 31, 2011:


	Carrying Value		Unpaid Balance Principal		Required Reserve		Average Carrying Value		Interest Income Recognized
	(dollars in thousands)
With no required reserve recorded:
Construction and land development	$	1,500	$	3,292	$	—	$	2,377	$	—
Commercial and industrial		313		537		—		404		3
Commercial real estate		183		203		—		368		—
Residential real estate		33		33		—		3		—
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—

Total	$	2,029	$	4,065	$	—	$	3,152	$	3

With required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	926	$	—
Commercial and industrial		1,212		1,240		335		1,105		18
Commercial real estate		4,378		4,409		282		4,894		133
Residential real estate		483		483		124		207		1
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—

Total	$	6,073	$	6,132	$	741	$	7,132	$	152

Total
Construction and land development	$	1,500	$	3,292	$	—	$	3,303	$	—
Commercial and industrial		1,525		1,777		335		1,509		21
Commercial real estate		4,561		4,612		282		5,262		133
Residential real estate		516		516		124		210		1
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—

Total	$	8,102	$	10,197	$	741	$	10,284	$	155

Troubled Debt Restructurings were identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations.

Notes to Consolidated Financial Statements — (Continued)

The following is information pertaining to troubled debt restructurings occurring during the year ended December 31, 2012:


	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(dollars in thousands)
Commercial and industrial		1	$	750	$	736
Residential real estate		1		6		6
Home equity		1		98		96

Total		3	$	854	$	838

There were no troubled debt restructurings, that subsequently defaulted, during 2012. The loans were modified during 2012, for the commercial and industrial, and residential real estate loans, by reducing interest rates as well as extending the terms of the loans. The financial impact of the modification for the performing commercial and industrial loan was a $6,000 reduction in principal payments for the year ended December 31, 2012. The financial impact of the modification for performing residential real estate loan was an $8,000 reduction in interest payments for the year ended December 31, 2012.

The following is information pertaining to troubled debt restructurings occurring during the year ended December 31, 2011:


	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(dollars in thousands)
Construction and land development		1	$	39	$	—
Commercial and industrial		13		960		909
Commercial real estate		6		3,199		3,195

Total		20	$	4,198	$	4,104

There was one troubled debt restructuring, totaling $11,000, during the year ended December 31, 2011, that subsequently defaulted.

The loans were modified during 2011, for the construction, commercial and industrial, and commercial real estate loans, by reducing interest rates as well as extending the terms of the loans. The financial impact of the modifications for performing commercial and industrial loans was a $38,000 reduction in principal and a $1,000 reduction in interest payments for the year ended December 31, 2011. The financial impact of the modifications for performing commercial real estate loans was a $30,000 reduction in principal and a $44,000 reduction in interest payments for the year ended December 31, 2011. The financial impact of the modifications for nonperforming loans was an $11,000 reduction in the carrying value of the loans as a result of payments received under the modified terms of the loans.

Notes to Consolidated Financial Statements — (Continued)

7. Bank Premises and Equipment


	December 31,
	2012			2011			Estimated Useful Life
(dollars in thousands)
Land	$	3,478		$	3,478		—
Bank premises		18,353			18,349		30-39 years
Furniture and equipment		31,319			28,874		3-10 years
Leasehold improvements		9,930			8,079		30-39 years or lease term

		63,080			58,780
Accumulated depreciation and amortization		(39,181	)		(37,023	)

Total	$	23,899		$	21,757

The Company and its subsidiaries are obligated under a number of non-cancelable operating leases for premises and equipment expiring in various years through 2026. Total lease expense approximated $2,055,000, $2,007,000 and $1,730,000 for the years ended December 31, 2012, 2011 and 2010, respectively. Rental income approximated $329,000, $455,000 and $438,000 in 2012, 2011 and 2010, respectively.

Future minimum rental commitments for non-cancelable operating leases with initial or remaining terms of one year or more at December 31, 2012, were as follows:


Year	Amount
	(dollars in thousands)
2013	$	1,858
2014		1,954
2015		1,652
2016		1,492
2017		1,153
Thereafter		4,231

	$	12,340

8. Goodwill and Identifiable Intangible Assets

At December 31, 2012, the Company concluded that it is not more likely than not that fair value of the reporting unit is less than its carrying value, and goodwill is not considered to be impaired.

During full years of 2010 and 2011, the Company’s Class A common stock traded close to or above book value per share. Accordingly, at December 31, 2010 and 2011, management measured for impairment utilizing the fair value of the reporting unit based on the recent stock price of the Company.

Notes to Consolidated Financial Statements — (Continued)

The changes in goodwill and identifiable intangible assets for the years ended December 31, 2012 and 2011 are shown in the table below.


Carrying Amount of Goodwill and Intangibles	Goodwill		Core Deposit Intangibles			Total
	(dollars in thousands)
Balance at December 31, 2010	$	2,714	$	508		$	3,222
Amortization Expense		—		(388	)		(388	)
Balance at December 31, 2011	$	2,714	$	120		$	2,834
Amortization Expense		—		(120	)		(120	)

Balance at December 31, 2012	$	2,714	$	—		$	2,714

9. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures (formerly SFAS 157, “Fair Value Measurements”), which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:

Level I — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.

Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives.

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.

Notes to Consolidated Financial Statements — (Continued)

The results of the fair value hierarchy as of December 31, 2012, are as follows:

Fair Value Measurements Using

Carrying
Value

Quoted Prices
in Active Markets
for Identical Assets
(Level 1)

Significant
Observable Inputs
(Level 2)

Significant
Other Unobservable
Inputs
(Level 3)

(dollars in thousands)

Financial Instruments Measured at Fair Value on a Recurring Basis — Securities AFS

U.S. Treasury

2,004

—

2,004

—

U.S. Government Sponsored Enterprises

130,340

—

130,340

—

SBA Backed Securities

8,156

—

8,156

—

U.S. Government Agency and Sponsored Enterprises

Mortgage-Backed Securities

1,233,357

—

1,233,357

—

Privately Issued Residential Mortgage-Backed Securities

2,947

—

2,947

—

Obligations Issued by States and Political Subdivisions

55,174

—

1,734

53,440

Other Debt Securities

2,253

—

2,253

—

Equity Securities

570

228

—

342

Total

1,434,801

228

1,380,791

53,782

Financial Instruments Measured at Fair Value on a Non-recurring Basis

Impaired Loans

3,587

—

3,587

Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss during the year by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Specific provisions relate to impaired loans recognized for 2012 for the estimated credit loss amounted to $1,909,000. The Company uses discounts to appraisals, as necessary, based on management’s observations of the local real estate market for loans in this category.

There were no transfers between level 1 and 2 for the year ended December 31, 2012. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2012.

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 inputs to determine fair value (dollars in thousands) at December 31, 2012. Management continues to monitor the assumptions used to value the assets listed below.


					Unobservable Input
Asset	Fair Value		Valuation Technique	Unobservable Input	Value or Range
Securities AFS⁽¹⁾		$53,782	Discounted cash flow	Discount rate	0%-1%⁽²⁾
Impaired Loans		3,587	Appraisal of collateral⁽³⁾	Appraisal adjustments⁽⁴⁾	0%-25% discount

⁽¹⁾	Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.

⁽²⁾	Weighted averages.

⁽³⁾	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

⁽⁴⁾	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.

Notes to Consolidated Financial Statements — (Continued)

The changes in Level 3 securities for the year ended December 31, 2012 are as shown in the table below:

Auction Rate
Securities

Obligations
Issued by States
and Political
Subdivisions

Equity
Securities

Total

(dollars in thousands)

Balance at December 31, 2011

3,725

14,772

417

18,914

Purchases

—

90,960

—

90,960

Maturities

—

(56,214

)

(75

)

(56,289

)

Amortization

—

(41

)

—

(41

)

Change in fair value

238

—

238

Balance at December 31, 2012

3,963

49,477

342

53,782

The amortized cost of Level 3 securities was $54,504,000 with an unrealized loss of $722,000 at December 31, 2012. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The results of the fair value hierarchy as of December 31, 2011, are as follows:


	Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(dollars in thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis — Securities AFS
U.S. Treasury	$	2,012	$	—	$	2,012	$	—
U.S. Government Sponsored Enterprises		174,957		—		174,957		—
SBA Backed Securities		8,801		—		8,801		—
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities		1,035,838		—		1,035,838		—
Privately Issued Residential Mortgage-Backed Securities		3,198		—		3,198		—
Privately Issued Commercial Mortgage-Backed Securities		—		—		—		—
Obligations Issued by States and Political Subdivisions		20,642		—		2,145		18,497
Other Debt Securities		12,610		—		12,610		—
Equity Securities		618		201		—		417

Total	$	1,258,676	$	201	$	1,239,561	$	18,914

Financial Instruments Measured at Fair Value on a Non-recurring Basis
Impaired Loans	$	1,439	$	—	$	—	$	1,439
Other Real Estate Owned	$	1,183	$	—	$	—	$	1,183

Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss during the year by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Specific provisions relates to impaired loans recognized for 2011 for the estimated credit loss amounted to $1,699,000. The Company uses discounts to appraisals, as necessary, based on management’s observations of the local real estate market for loans in this category. Other real estate owned is carried at fair value less costs to sell, based on the expected realizable fair value of collateral.

Notes to Consolidated Financial Statements — (Continued)

There were no transfers between level 1 and 2 for the year ended December 31, 2011. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2011.

The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands) at December 31, 2011. Management continues to monitor the assumptions used to value the assets listed below.


					Unobservable Input
Asset	Fair Value		Valuation Technique	Unobservable Input	Value or Range
Securities AFS⁽¹⁾		$18,914	Discounted cash flow	Discount rate	0%-1%⁽²⁾
Impaired Loans		1,439	Appraisal of collateral⁽³⁾	Appraisal adjustments⁽⁴⁾	0%-25% discount
Other real estate owned		1,183	Appraisal of collateral⁽³⁾	Appraisal adjustments⁽⁴⁾	0%

⁽¹⁾	Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.

⁽²⁾	Weighted averages.

⁽³⁾	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

⁽⁴⁾	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.

The changes in Level 3 securities for the year ended December 31, 2011, are shown in the table below:


	Auction Rate Securities			Obligations Issued by States and Political Subdivisions			Equity Securities			Total
	(dollars in thousands)
Balance at December 31, 2010	$	4,393		$	15,988		$	279		$	20,660
Purchases		—			25,314			145			25,459
Maturities		—			(26,528	)		(7	)		(26,535	)
Amortization		—			(2	)		—			(2	)
Change in fair value		(668	)		—			—			(668	)

Balance at December 31, 2011	$	3,725		$	14,772		$	417		$	18,914

The amortized cost of Level 3 securities was $19,864,000 with an unrealized loss of $950,000 at December 31, 2011. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

10. Deposits

The following is a summary of remaining maturities or re-pricing of time deposits as of December 31,


	2012		Percent			2011		Percent
	(dollars in thousands)
Within one year	$	299,456		71	%	$	231,099		53	%
Over one year to two years		67,918		16	%		111,752		26	%
Over two years to three years		19,834		5	%		48,014		11	%
Over three years to five years		32,775		8	%		42,636		10	%

Total	$	419,983		100	%	$	433,501		100	%

Time deposits of $100,000 or more totaled $287,048,000 and $280,208,000 in 2012 and 2011, respectively.

Notes to Consolidated Financial Statements — (Continued)

11. Securities Sold Under Agreements to Repurchase

The following is a summary of securities sold under agreements to repurchase as of December 31,


	2012			2011			2010
	(dollars in thousands)
Amount outstanding at December 31	$	191,390		$	143,320		$	108,550
Weighted average rate at December 31		0.17	%		0.24	%		0.36	%
Maximum amount outstanding at any month end	$	213,730		$	152,267		$	239,830
Daily average balance outstanding during the year	$	174,624		$	129,137		$	133,080
Weighted average rate during the year		0.21	%		0.29	%		0.43	%

Amounts outstanding at December 31, 2012, 2011 and 2010 carried maturity dates of the next business day. U.S. Government Sponsored Enterprise securities with a total amortized cost of $187,995,000, $140,891,000 and $107,030,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 2012, 2011 and 2010, respectively. The approximate fair value of the collateral at those dates was $191,704,000, $143,212,000 and $108,200,000, respectively.

12. Other Borrowed Funds and Subordinated Debentures

The following is a summary of other borrowed funds and subordinated debentures as of December 31,


	2012			2011			2010
	(dollars in thousands)
Amount outstanding at December 31	$	231,227		$	280,226		$	258,201
Weighted average rate at December 31		3.54	%		2.85	%		2.88	%
Maximum amount outstanding at any month end	$	277,226		$	280,226		$	266,564
Daily average balance outstanding during the year	$	217,542		$	202,209		$	201,273
Weighted average rate during the year		3.82	%		3.85	%		4.13	%

FEDERAL HOME LOAN BANK BORROWINGS

Federal Home Loan Bank of Boston (“FHLBB”) borrowings are collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2012, was approximately $280,598,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. A schedule of the maturity distribution of FHLBB advances with the weighted average interest rates is as follows:


	December 31,
	2012					2011					2010
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(dollars in thousands)
Within one year	$	46,000		1.86	%	$	81,500		0.42	%	$	91,500		0.39	%
Over one year to two years		17,500		3.01	%		23,500		3.34	%		9,000		1.98	%
Over two years to three years		19,500		2.42	%		17,500		3.01	%		41,500		3.82	%
Over three years to five years		90,000		3.33	%		74,500		2.90	%		37,000		2.70	%
Over five years		22,000		4.19	%		47,000		4.38	%		42,000		4.55	%

Total	$	195,000		2.96	%	$	244,000		2.41	%	$	221,000		2.28	%

Notes to Consolidated Financial Statements — (Continued)

Included in the table above are $35,000,000, $35,000,000 and $35,000,000 of FHLBB advances at December 31, 2012, 2011 and 2010, respectively, that are putable at the discretion of FHLBB. These put dates were not utilized in the table above.

During 2011, the Company restructured $18,000,000 of FHLBB advances. Prior to restructure, the weighted average rate on these advances was 4.45% and the weighted average remaining maturity was 25 months. Subsequent to restructure, the weighted average rate was 3.50% and the weighted average maturity was 60 months. The restructures were accounted for as modifications.

During 2010, the Company restructured $12,500,000 of FHLBB advances. Prior to restructure, the weighted average rate on these advances was 2.40% and the weighted average remaining maturity was 21 months. Subsequent to restructure, the weighted average rate was 2.52% and the weighted average maturity was 57 months. The restructures were accounted for as modifications.

SUBORDINATED DEBENTURES

Subordinated debentures totaled $36,083,000 at December 31, 2012 and 2011. In May 1998, the Company consummated the sale of a trust preferred securities offering, in which it issued $29,639,000 of subordinated debt securities due 2029 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust.

Century Bancorp Capital Trust then issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30%. The Company redeemed through its subsidiary, Century Bancorp Capital Trust, its 8.30% Trust Preferred Securities on January 10, 2005.

In December 2004, the Company consummated the sale of a trust preferred securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust II.

Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities pay dividends at an annualized rate of 6.65% for the first ten years and then convert to the three-month LIBOR rate plus 1.87% for the remaining 20 years.

OTHER BORROWED FUNDS

There were no overnight federal funds purchased at December 31, 2012 and 2011.

The Bank also has an outstanding loan in the amount of $144,000 and $143,000 at December 31, 2012 and 2011, respectively, borrowed against the cash value of a whole life insurance policy for a key executive of the Bank.

13. Earnings per share (“EPS”)

Class A and Class B shares participate equally in undistributed earnings. Under the Company’s Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are the stock options discussed below. The dilutive effect of these stock options for 2012, 2011 and 2010 was an increase of 1,024, 1,149 and 2,236 shares, respectively.

Notes to Consolidated Financial Statements — (Continued)

The following table is a reconciliation of basic EPS and diluted EPS:


	Year Ended December 31,
	2012		2011		2010
	(in thousands except share and per share data)
BASIC EPS COMPUTATION
Numerator:
Net income, Class A	$	14,877	$	13,023	$	10,557
Net income, Class B		4,162		3,670		3,017
Denominator:
Weighted average shares outstanding, Class A		3,557,693		3,543,233		3,521,179
Weighted average shares outstanding, Class B		1,990,474		1,997,411		2,012,327
Basic EPS, Class A	$	4.18	$	3.68	$	3.00
Basic EPS, Class B		2.09		1.84		1.50

DILUTED EPS COMPUTATION
Numerator:
Net income, Class A	$	14,877	$	13,023	$	10,557
Net income, Class B		4,162		3,670		3,017

Total net income, for diluted EPS, Class A computation		19,039		16,693		13,574
Denominator:
Weighted average shares outstanding, basic, Class A		3,557,693		3,543,233		3,521,179
Weighted average shares outstanding, Class B		1,990,474		1,997,411		2,012,327
Dilutive effect of Class A stock options		1,024		1,150		2,236

Weighted average shares outstanding diluted, Class A		5,549,191		5,541,794		5,535,742
Weighted average shares outstanding, Class B		1,990,474		1,997,411		2,012,327
Diluted EPS, Class A	$	3.43	$	3.01	$	2.45
Diluted EPS, Class B		2.09		1.84		1.50

14. Stockholders’ Equity

DIVIDENDS

Holders of the Class A common stock may not vote in the election of directors but may vote as a class to approve certain extraordinary corporate transactions. Holders of Class B common stock may vote in the election of directors. Class A common stockholders are entitled to receive dividends per share equal to at least 200% per share of that paid, if any, on each share of Class B common stock. Class A common stock is publicly traded. Class B common stock is not publicly traded; however, it can be converted on a per share basis to Class A common stock at any time at the option of the holder. Dividend payments by the Company are dependent in part on the dividends it receives from the Bank, which are subject to certain regulatory restrictions.

Notes to Consolidated Financial Statements — (Continued)

STOCK REPURCHASE PLAN

During 2012, the Board of Directors of the Company approved a reauthorization of the stock repurchase program. Under the program, the Company is reauthorized to repurchase up to 300,000, or less than 9%, of Century Bancorp Class A Common Stock outstanding. This vote supersedes the previous program voted by the Board of Directors during 2011, which also authorized the Company to repurchase up to 300,000, or less than 9%, of Century Bancorp Class A Common Stock.

The stock buyback is authorized to take place from time-to-time, subject to prevailing market conditions. The purchases are made on the open market and are funded from available cash.

STOCK OPTION PLAN

During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) that provide for granting of options for not more than 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive nonqualified and incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were 23,350 options exercisable at December 31, 2012.

Stock option activity under the plan is as follows:


	December 31, 2012					December 31, 2011					December 31, 2010
	Amount			Weighted Average Exercise Price		Amount			Weighted Average Exercise Price		Amount			Weighted Average Exercise Price
Shares under option:
Outstanding at beginning of year		36,062		$	28.90		38,712		$	28.36		68,637		$	26.09
Forfeited		(450	)		22.50		(200	)		15.06		(19,975	)		27.18
Exercised		(12,262	)		24.82		(2,450	)		21.44		(9,950	)		15.06

Outstanding at end of year		23,350		$	31.17		36,062		$	28.90		38,712		$	28.36

Exercisable at end of year		23,350		$	31.17		36,062		$	28.90		38,712		$	28.36

Available to be granted at end of year		223,534					223,084					222,884

At December 31, 2012, 2011 and 2010, the options outstanding have exercise prices between $15.063 and $31.83, and a weighted average remaining contractual life of two years for 2012 and 2011 and three years for 2010. The weighted average intrinsic value of options exercised for the period ended December 31, 2012, was $8.13 per share with an aggregate value of $99,714. The average intrinsic value of options exercisable at December 31, 2012, 2011 and 2010 had an aggregate value of $41,549, $49,145 and $41,895, respectively.

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

Notes to Consolidated Financial Statements — (Continued)

Company’s financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank and Company must meet specific capital guidelines that involve quantitative measures of the Bank and Company’s assets and liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank and Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2012, that the Bank and the Company meet all capital adequacy requirements to which they are subject.

As of December 31, 2012, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier risk-based, and Tier 1 leverage ratios as set forth in the table below. 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
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2012
Total Capital (to Risk-Weighted Assets)	$	206,464		14.15	%	$	116,726		8.00	%	$	145,907		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		188,226		12.90	%		58,363		4.00	%		87,544		6.00	%
Tier 1 Capital (to 4th Qtr. Average Assets)		188,226		6.11	%		123,202		4.00	%		154,002		5.00	%
As of December 31, 2011
Total Capital (to Risk-Weighted Assets)	$	183,864		14.09	%	$	104,358		8.00	%	$	130,448		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		167,558		12.84	%		52,179		4.00	%		78,269		6.00	%
Tier 1 Capital (to 4th Qtr. Average Assets)		167,558		6.20	%		108,033		4.00	%		135,042		5.00	%

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, 2012
Total Capital (to Risk-Weighted Assets)	$	227,945		15.59	%	$	116,976		8.00	%	$	146,220		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		209,668		14.34	%		58,488		4.00	%		87,732		6.00	%
Tier 1 Capital (to 4th Qtr. Average Assets)		209,668		6.80	%		123,377		4.00	%		154,221		5.00	%
As of December 31, 2011
Total Capital (to Risk-Weighted Assets)	$	208,852		15.98	%	$	104,550		8.00	%	$	130,687		10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		192,516		14.73	%		52,275		4.00	%		78,412		6.00	%
Tier 1 Capital (to 4th Qtr. Average Assets)		192,516		7.12	%		108,179		4.00	%		135,224		5.00	%

Notes to Consolidated Financial Statements — (Continued)

15. Income Taxes

The current and deferred components of income tax expense for the years ended December 31 are as follows:


	2012			2011			2010
	(dollars in thousands)
Current expense:
Federal	$	3,181		$	2,198		$	2,262
State		315			309			528

Total current expense		3,496			2,507			2,790

Deferred (benefit) expense:
Federal		(1,833	)		(961	)		(1,223	)
State		(271	)		8			(323	)

Total deferred benefit		(2,104	)		(953	)		(1,546	)

Provision for income taxes	$	1,392		$	1,554		$	1,244

There were no penalties during 2010, 2011, or 2012. There was approximately $2,000 paid to the Internal Revenue Service for interest during 2012.

Income tax accounts included in other assets/liabilities at December 31 are as follows:


	2012		2011
	(dollars in thousands)
Currently receivable	$	630	$	785
Deferred income tax asset, net		14,551		13,714

Total	$	15,181	$	14,499

Differences between income tax expense at the statutory federal income tax rate and total income tax expense are summarized as follows:


	2012			2011			2010
	(dollars in thousands)
Federal income tax expense at statutory rates	$	6,946		$	6,204		$	5,038
State income tax, net of federal income tax benefit		29			209			135
Insurance income		(396	)		(396	)		(570	)
Effect of tax-exempt interest		(4,628	)		(3,801	)		(2,763	)
Net tax credit		(633	)		(683	)		(622	)
Other		74			21			26

Total	$	1,392		$	1,554		$	1,244

Effective tax rate		6.8	%		8.5	%		8.4	%

Notes to Consolidated Financial Statements — (Continued)

The following table sets forth the Company’s gross deferred income tax assets and gross deferred income tax liabilities at December 31:


	2012			2011
	(dollars in thousands)
Deferred income tax assets:
Allowance for loan losses	$	8,103		$	7,056
Deferred compensation		5,643			5,009
Pension and SERP liability		8,621			7,398
Acquisition premium		541			596
Investments writedown		26			26
Deferred gain		11			31
AMT		1,908			1,049
Other		180			75
Nonaccrual interest		151			727

Gross deferred income tax asset		25,184			21,967

Deferred income tax liabilities:
Depreciation		(36	)		(201	)
Limited partnerships		(2,722	)		(2,667	)
Unrealized gain on securities available-for-sale		(7,875	)		(5,385	)

Gross deferred income tax liability		(10,633	)		(8,253	)

Deferred income tax asset net	$	14,551		$	13,714

Based on the Company’s historical and current pre-tax earnings, management believes it is more likely than not that the Company will realize the deferred income tax asset existing at December 31, 2012. Management believes that existing net deductible temporary differences which give rise to the deferred tax asset will reverse during periods in which the Company generates net taxable income. In addition, gross deductible temporary differences are expected to reverse in periods during which offsetting gross taxable temporary differences are expected to reverse. Factors beyond management’s control, such as the general state of the economy and real estate values, can affect future levels of taxable income, and no assurance can be given that sufficient taxable income will be generated to fully absorb gross deductible temporary differences. The Company is in an Alternative Minimum Tax (“AMT”) position. The AMT is carried as a deferred asset and has an indefinite life. The Company has potential tax planning strategies available which support the deferred AMT and, at this time, no valuation allowance is needed.

The Company and its subsidiaries file a consolidated federal tax return. For the tax year beginning in 2009, the Commonwealth of Massachusetts requires a combined state tax return, except for security corporations, which file separate tax returns. The Company is subject to federal examinations for tax years after December 31, 2009, and state examinations for tax years after December 31, 2008.

16. Employee Benefits

The Company has a Qualified Defined Benefit Pension Plan (the “Plan”), which had been offered to all employees reaching minimum age and service requirements. In 2006, the Bank became a member of the Savings Bank Employees Retirement Association (“SBERA”) within which it then began maintaining the Qualified Defined Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for its retirement plans. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range of 40% to 64% of total portfolio assets. The remainder of the

Notes to Consolidated Financial Statements — (Continued)

portfolio is allocated to fixed income securities with target range of 15% to 25% and other investments including global asset allocation and hedge funds from 20% to 36%.

The Trustees of SBERA, through its Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings. The Company closed the plan to employees hired after March 31, 2006.

The measurement date for the Plan is December 31 for each year. The benefits expected to be paid in each year from 2013 to 2017 are $987,000, $1,032,000, $1,105,000, $1,167,000, and $1,237,000, respectively. The aggregate benefits expected to be paid in the five years from 2018 to 2028 are $7,158,000. The Company plans to contribute $1,000,000 to the Plan in 2013.

The fair value of plan assets and major categories as of December 31, 2012, is as follows:

Asset Category

Percent

Total

Level 1

Level 2

Level 3

(dollars in thousands)

Collective funds

52.5

12,593

767

11,826

—

Equity securities

24.6

5,892

—

Mutual funds

14.1

3,370

3,086

284

—

Hedge funds

7.0

1,691

—

1,691

Short-term investments

1.8

437

375

—

100.0

23,983

9,807

12,485

1,691

The fair value of plan assets and major categories as of December 31, 2011, is as follows:


Asset Category	Percent			Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Collective funds		51.1	%	$	10,491	$	6,657	$	3,834	$	—
Equity securities		24.1	%		4,934		4,934		—		—
Mutual funds		14.2	%		2,918		2,918		—		—
Hedge funds		7.4	%		1,522		—		—		1,522
Short-term investments		3.2	%		652		—		652		—

		100.0	%	$	20,517	$	14,509	$	4,486	$	1,522

LEVEL 1

The plan assets measured at fair value in Level 1 are based on quoted market prices in an active exchange market.

LEVEL 2

Plan assets measured at fair value in Level 2 are based on pricing models that consider standard input factors, such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

LEVEL 3

Plan assets measured at fair value in Level 3 are based on unobservable inputs, which includes SBERA’s assumptions and the best information available under the circumstance. Level 3 assets consist of hedge funds.

Notes to Consolidated Financial Statements — (Continued)

The underlying assets are valued based upon quoted exchange prices, over-the-counter trades, bid/ask prices, relative value assessments based on market conditions, and other information, as available. Further adjustments may be made based on factors impacting liquidity.

The asset or liability’s fair value measurement level within fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Below is a description of the valuation methodologies used for assets measured at fair value.

The Trust reports bonds and other obligations, short-term investments and equity securities at fair values based on published quotations, Collective funds and hedge funds (Funds) are valued in accordance with valuations provided by such Funds, which generally value marketable securities at the last reported sales price on the valuation date and other investments at fair value, as determined by each Fund’s manager.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, although the Trust believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The changes in Level 3 securities are shown in the table below:


Year Ended December 31,	2012		2011
	(dollars in thousands)
Balance at beginning of year	$	1,522	$	1,431
Purchases		152		—
Actual return – assets still being held		17		91

Balance at end of year	$	1,691	$	1,522

The performance of the plan assets is dependent upon general market conditions and specific conditions related to the issuers of the underlying securities.

The Company has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan), which is limited to certain officers and employees of the Company. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.

Notes to Consolidated Financial Statements — (Continued)

The benefits expected to be paid in each year from 2013 to 2017 are $1,102,000, $1,098,000, $1,080,000, $1,494,000 and $1,938,000, respectively. The aggregate benefits expected to be paid in the five years from 2018 to 2022 are $9,840,000.


	Defined Benefit Pension Plan						Supplemental Insurance/ Retirement Plan
	2012			2011			2012			2011
	(dollars in thousands)
Change projected in benefit obligation
Benefit obligation at beginning of year	$	28,784		$	25,793		$	21,097		$	16,853
Service cost		1,097			843			1,425			680
Interest cost		1,295			1,419			923			932
Actuarial (gain)/loss		1,401			1,390			3,482			3,678
Benefits paid		(667	)		(661	)		(1,092	)		(1,046	)

Projected benefit obligation at end of year	$	31,910		$	28,784		$	25,835		$	21,097

Change in plan assets
Fair value of plan assets at beginning of year	$	20,517		$	19,931
Actual (loss) return on plan assets		2,333			(28	)
Employer contributions		1,800			1,275
Benefits paid		(667	)		(661	)

Fair value of plan assets at end of year	$	23,983		$	20,517

(Unfunded) Funded status	$	(7,927	)	$	(8,267	)	$	(25,835	)	$	(21,097	)

Accumulated benefit obligation	$	31,773		$	28,173		$	22,181		$	18,567

Weighted-average assumptions as of December 31
Discount rate — Liability		4.00	%		4.50	%		4.00	%		4.50	%
Discount rate — Expense		4.50	%		5.50	%		4.50	%		5.50	%
Expected return on plan assets		8.00	%		8.00	%		NA			NA
Rate of compensation increase		4.00	%		4.00	%		4.00	%		4.00	%
Components of net periodic benefit cost
Service cost	$	1,097		$	843		$	1,425		$	680
Interest cost		1,295			1,419			923			932
Expected return on plan assets		(1,641	)		(1,595	)		—			—
Recognized prior service cost		(104	)		(104	)		114			111
Recognized net losses		735			494			336			131

Net periodic cost	$	1,382		$	1,057		$	2,798		$	1,854

Other changes in plan assets and benefit obligations recognized in other comprehensive income
Amortization of prior service cost	$	104		$	104		$	(114	)	$	(111	)
Net (gain) loss		(25	)		2,519			3,098			3,546

Total recognized in other comprehensive income		79			2,623			2,984			3,435

Total recognized in net periodic benefit cost and other comprehensive income	$	1,461		$	3,680		$	5,782		$	5,289

Notes to Consolidated Financial Statements — (Continued)


				December 31, 2012									December 31, 2011
	Supplemental									Supplemental
	Plan			Plan			Total			Plan			Plan			Total
	(dollars in thousands)
Prior service cost	$	620		$	(1,105	)	$	(485	)	$	724		$	(1,219	)	$	(495	)
Net actuarial loss		(10,317	)		(10,302	)		(20,619	)		(10,342	)		(7,204	)		(17,546	)

Total	$	(9,697	)	$	(11,407	)	$	(21,104	)	$	(9,618	)	$	(8,423	)	$	(18,041	)

The following table summarizes the amounts included in Accumulated Other Comprehensive Loss at December 31, 2012, expected to be recognized as components of net periodic benefit cost in the next year:


	Plan			Supplemental Plan
Amortization of prior service cost to be recognized in 2013	$	(104	)	$	114
Amortization of loss to be recognized in 2013		630			515

Assumptions for the expected return on plan assets and discount rates in the Company’s Plan and Supplemental Plan are periodically reviewed. As part of the review, management in consultation with independent consulting actuaries performs an analysis of expected returns based on the plan’s asset allocation. This forecast reflects the Company’s and actuarial firm’s expected return on plan assets for each significant asset class or economic indicator. The range of returns developed relies on forecasts and on broad market historical benchmarks for expected return, correlation and volatility for each asset class. Also, as a part of the review, the Company’s management in consultation with independent consulting actuaries performs an analysis of discount rates based on expected returns of high-grade fixed income debt securities.

The Company offers a 401(k) defined contribution plan for all employees reaching minimum age and service requirements. The plan is voluntary and employee contributions are matched by the Company at a rate of 33.3% for the first 6% of compensation contributed by each employee. The Company’s match totaled $308,000 for 2012, $266,000 for 2011 and $244,000 for 2010. Administrative costs associated with the plan are absorbed by the Company.

The Company has a cash incentive plan that is designed to reward our executives and officers for the achievement of annual financial performance goals of the Company as well as business line, department and individual performance. The plan supports the philosophy that management be measured for their performance as a team in the attainment of these goals. Discretionary bonus expense amounted to $1,289,000, $1,100,000 and $600,000 in 2012, 2011, and 2010, respectively.

The Company does not offer any postretirement programs other than pensions.

17. Commitments and Contingencies

A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2012. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

18. Financial Instruments with Off-Balance-Sheet Risk

Notes to Consolidated Financial Statements — (Continued)

Contract or Notional Amount


	2012		2011
	(dollars in thousands)
Financial instruments whose contract amount represents credit risk:
Commitments to originate 1–4 family mortgages	$	13,580	$	12,638
Standby and commercial letters of credit		8,411		4,645
Unused lines of credit		217,246		195,181
Unadvanced portions of construction loans		17,609		16,819
Unadvanced portions of other loans		4,872		4,605

Commitments to originate loans, unadvanced portions of construction loans, unused lines of credit and unused letters of credit are generally agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

19. Other Operating Expenses


	Year ended December 31,
	2012		2011		2010
	(dollars in thousands)
Marketing	$	1,853	$	1,575	$	1,747
Software maintenance/amortization		1,256		951		874
Legal and audit		1,179		1,140		1,042
Contributions		1,074		479		355
Processing services		921		865		884
Consulting		890		796		736
Postage and delivery		877		773		788
Supplies		849		868		656
Telephone		750		742		691
Directors’ fees		330		309		290
Insurance		279		275		294
Core deposit intangible amortization		120		388		388
Other		1,230		1,280		1,095

Total	$	11,608	$	10,441	$	9,840

Notes to Consolidated Financial Statements — (Continued)

20. Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating fair values of its financial instruments. Excluded from this disclosure are all 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-MATURITY

The fair values of these securities were based on quoted market prices, where available, as provided by third-party investment portfolio pricing vendors. If quoted market prices were not available, fair values provided by the vendors were based on quoted market prices of comparable instruments in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association’s standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Management regards the inputs and methods used by third party pricing vendors to be “Level 2 inputs and methods” as defined in the “fair value hierarchy” provided by FASB.

LOANS

For variable-rate loans, that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair value of other loans is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Incremental credit risk for nonperforming loans has been considered.

TIME DEPOSITS

The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

OTHER BORROWED FUNDS

The fair value of other borrowed funds is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other borrowed funds of similar remaining maturities.

SUBORDINATED DEBENTURES

The fair value of subordinated debentures is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other subordinated debentures of similar remaining maturities.

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2012 and December 31, 2011. This

Notes to Consolidated Financial Statements — (Continued)

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.


	Carrying Amount		Estimated Fair Value		Level 1 Inputs		Fair Value Measurements Level 2 Inputs		Level 3 Inputs
(dollars in thousands)
December 31, 2012
Financial assets:
Securities held-to-maturity	$	275,507	$	281,924	$	—	$	281,924	$	—
Loans⁽¹⁾		1,092,591		1,124,716		—		—		1,124,716
Financial liabilities:
\Time deposits		419,983		424,253		—		424,253		—
Other borrowed funds		195,144		205,481		—		205,481		—
Subordinated debentures		36,083		43,423		—		—		43,423
December 31, 2011
Financial assets:
Securities held-to-maturity		179,368		184,822		—		184,822		—
Loans⁽¹⁾		967,918		1,018,822		—		—		1,018,822
Financial liabilities:
Time deposits		433,501		439,711		—		439,711		—
Other borrowed funds		244,143		258,165		—		258,165		—
Subordinated debentures		36,083		43,063		—		—		43,063

(1) Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses.

LIMITATIONS

Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered.

Notes to Consolidated Financial Statements — (Continued)

21. Quarterly Results of Operations (unaudited)

2012 Quarters

Fourth

Third

Second

First

(in thousands, except share data)

Interest income

19,738

22,079

20,312

19,365

Interest expense

4,795

4,859

4,923

4,963

Net interest income

14,943

17,220

15,389

14,402

Provision for loan losses

900

1,250

900

1,100

Net interest income after provision for loan losses

14,043

15,970

14,489

13,302

Other operating income

4,153

4,105

3,988

3,619

Operating expenses

13,279

13,708

13,451

12,800

Income before income taxes

4,917

6,367

5,026

4,121

Provision for income taxes

139

685

255

313

Net income

4,778

5,682

4,771

3,808

Share data:

Average shares outstanding, basic

Class A

3,564,145

3,559,125

3,556,474

3,550,993

Class B

1,986,880

1,989,380

1,991,880

1,993,755

Average shares outstanding, diluted

Class A

5,552,121

5,549,810

5,548,830

5,545,711

Class B

1,986,880

1,989,380

1,991,880

1,993,755

Earnings per share, basic

Class A

1.05

1.25

1.05

0.84

Class B

0.52

0.62

0.52

0.42

Earnings per share, diluted

Class A

0.86

1.02

0.86

0.69

Class B

0.52

0.62

0.52

0.42

Notes to Consolidated Financial Statements — (Continued)


	2011 Quarters
	Fourth		Third		Second		First
	(in thousands, except share data)
Interest income	$	19,252	$	19,638	$	19,597	$	19,578
Interest expense		5,233		5,800		6,082		5,651

Net interest income		14,019		13,838		13,515		13,927
Provision for loan losses		950		1,200		1,200		1,200

Net interest income after provision for loan losses		13,069		12,638		12,315		12,727
Other operating income		4,361		4,503		3,841		3,535
Operating expenses		12,702		12,055		11,775		12,210

Income before income taxes		4,728		5,086		4,381		4,052
Provision for income taxes		539		504		184		327

Net income	$	4,189	$	4,582	$	4,197	$	3,725

Share data:
Average shares outstanding, basic
Class A		3,546,418		3,544,967		3,543,717		3,537,828
Class B		1,994,380		1,995,630		1,996,880		2,002,755
Average shares outstanding, diluted
Class A		5,542,052		5,541,646		5,541,595		5,541,927
Class B		1,994,380		1,995,630		1,996,880		2,002,755
Earnings per share, basic
Class A	$	0.92	$	1.01	$	0.92	$	0.82
Class B	$	0.46	$	0.50	$	0.46	$	0.41
Earnings per share, diluted
Class A	$	0.76	$	0.83	$	0.76	$	0.67
Class B	$	0.46	$	0.50	$	0.46	$	0.41

Notes to Consolidated Financial Statements — (Continued)

22. Parent Company Financial Statements

The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of December 31, 2012 and 2011 and the statements of income and cash flows for each of the years in the three-year period ended December 31, 2012, are presented below. The statements of changes in stockholders’ equity are identical to the consolidated statements of changes in stockholders’ equity and are therefore not presented here.

BALANCE SHEETS


	December 31,
	2012		2011
	(dollars in thousands)
ASSETS:
Cash	$	19,536	$	23,467
Investment in subsidiary, at equity		193,499		170,642
Other assets		3,145		2,730

Total assets	$	216,180	$	196,839

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities	$	107	$	107
Subordinated debentures		36,083		36,083
Stockholders’ equity		179,990		160,649

Total liabilities and stockholders’ equity	$	216,180	$	196,839

STATEMENTS OF INCOME


	Year Ended December 31,
	2012			2011			2010
	(dollars in thousands)
Income:
Interest income from deposits in bank	$	33		$	100		$	156
Other income		72			72			72

Total income		105			172			228
Interest expense		2,400			2,400			2,400
Operating expenses		198			178			172

Income before income taxes and equity in undistributed income of subsidiary		(2,493	)		(2,406	)		(2,344	)
Benefit from income taxes		(848	)		(818	)		(797	)

Income before equity in undistributed income of subsidiary		(1,645	)		(1,588	)		(1,547	)
Equity in undistributed income of subsidiary		20,684			18,281			15,121

Net income	$	19,039		$	16,693		$	13,574

Notes to Consolidated Financial Statements — (Continued)

STATEMENTS OF CASH FLOWS


	December 31,
	2012			2011			2010
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	19,039		$	16,693		$	13,574
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed income of subsidiary		(20,684	)		(18,281	)		(15,121	)
Depreciation and amortization		12			12			12
Increase in other assets		(416	)		(182	)		1,422

Net cash (used in) provided by operating activities		(2,049	)		(1,758	)		(113	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise of stock options		304			53			150
Cash dividends paid		(2,186	)		(2,180	)		(2,173	)

Net cash used in financing activities		(1,882	)		(2,127	)		(2,023	)

Net increase (decrease) in cash		(3,931	)		(3,885	)		(2,136	)

Cash at beginning of year		23,467			27,352			29,488

Cash at end of year	$	19,536		$	23,467		$	27,352

CENTURY BANCORP, INC. AR ‘12

Report of Independent Registered Public Accounting Firm

KPMG LLP

Independent Registered Public Accounting Firm

Two Financial Center

60 South Street

Boston, Massachusetts 02111-2759

The Board of Directors and Stockholders

Century Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and its subsidiary as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Century Bancorp, Inc. and its subsidiary as of December 31, 2012 and 2011 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Century Bancorp, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 21, 2013, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

LOGO

Boston, Massachusetts

February 21, 2013

CENTURY BANCORP, INC. AR ‘12

Report of Independent Registered Public Accounting Firm

KPMG LLP

Independent Registered Public Accounting Firm

Two Financial Center

60 South Street

Boston, Massachusetts 02111-2759

The Board of Directors and Stockholders

Century Bancorp, Inc.:

We have audited Century Bancorp, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Century Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Century Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Century Bancorp, Inc. as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 21, 2013, expressed an unqualified opinion on those consolidated financial statements.

LOGO

Boston, Massachusetts

February 21, 2013

CENTURY BANCORP, INC. AR ‘12

Management’s Report on Internal Control Over Financial Reporting

CENTURY BANCORP, INC.

400 Mystic Avenue

Medford, Massachusetts 02155

We, together with the other members of Century Bancorp, Inc. and our subsidiary (the “Company”), are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31, 2012, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears on page 88.

LOGO

Barry R. Sloane

President & CEO

William P. Hornby, CPA

Chief Financial Officer & Treasurer


February 21, 2013

PART III

ITEM 10. DIRECTORS,

EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The directors of the Company and their ages are as follows:


Name	Age		Position
George R. Baldwin		69	Director, Century Bancorp, Inc., and Century Bank and Trust Company
Marshall I. Goldman, Ph.D.		82	Director, Century Bancorp, Inc., and Century Bank and Trust Company
Russell B. Higley, Esquire		73	Director, Century Bancorp, Inc., and Century Bank and Trust Company
Jackie Jenkins-Scott		63	Director, Century Bancorp, Inc., and Century Bank and Trust Company
Linda Sloane Kay		51	Director, Century Bancorp, Inc.; Director and Executive Vice President, Century Bank and Trust Company
Fraser Lemley		72	Director, Century Bancorp, Inc., and Century Bank and Trust Company
James P. McDonough		62	Director, Century Bancorp, Inc., and Century Bank and Trust Company
Joseph P. Mercurio		64	Director, Century Bancorp, Inc., and Century Bank and Trust Company
Joseph J. Senna, Esquire		73	Director, Century Bancorp, Inc., and Century Bank and Trust Company
Barry R. Sloane		57	Director, President and Chief Executive Officer, Century Bancorp, Inc.; Director, President and Chief Executive Officer, Century Bank and Trust Company
Marshall M. Sloane		86	Chairman of the Board, Century Bancorp, Inc. and Century Bank and Trust Company
Stephanie Sonnabend		59	Director, Century Bancorp, Inc., and Century Bank and Trust Company
George F. Swansburg		70	Director, Century Bancorp, Inc., and Century Bank and Trust Company
Jon Westling		70	Director, Century Bancorp, Inc., and Century Bank and Trust Company

Mr. Baldwin became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1995. Mr. Baldwin is President and CEO of G. Baldwin & Co., a financial service firm. He was formerly CEO, Owner and Director of Kaler Carney Liffler, a multi-state regional insurance agency; and subsequently he became Chairman of New England of Arthur J. Gallagher & Co., America’s third largest insurance broker. Mr. Baldwin’s extensive three-decade background in banking and insurance is relevant to Century’s insurance and financial customers and qualifies him to continue to serve as a director of the Company.

Dr. Goldman has been a director of the Company since its organization in 1972. He was also a founding director of Century Bank and Trust Company in 1969. He is a Professor Emeritus of Economics at Wellesley College and Senior Scholar of the Davis Center for Russian Studies at Harvard University. Dr. Goldman is also a Trustee of Northeast Investors Trust. Dr. Goldman’s experience as a professor and expertise in economics has

qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.

Mr. Higley became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1986. Mr. Higley is an attorney in private practice. Mr. Higley’s experience as an attorney and expertise in the real estate industry, which is relevant to real estate customers of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.

Ms. Jenkins-Scott became a director of the Company and of Century Bank and Trust Company in 2006. Ms. Jenkins-Scott is President of Boston’s Wheelock College. Ms. Jenkins-Scott’s experience as President of a college and expertise in the educational field as well as President and CEO of a non-profit entity, which is relevant to certain customer relationships of the Company, has qualified her to serve as director of the Company.

Ms. Kay became a director of the Company in 2005. Ms. Kay joined Century Bank and Trust Company in 1983 as Assistant Vice President of Marketing and currently serves as Executive Vice President. Ms. Kay’s experience in business development, customer relationships and tenure at Century Bank and Trust Company has qualified her to serve as director of the Company.

Mr. Lemley became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1988. Mr. Lemley is Chairman of the Board and CEO of Sentry Auto Group. Mr. Lemley’s experience as CEO of a company and expertise in the automotive industry, which is relevant to certain other customers in the automotive industry of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.

Mr. McDonough became a director of the Company and of Century Bank and Trust Company in 2012. From 2006 to 2012, Mr. McDonough was Chancellor and Chief Financial Officer of the Roman Catholic Archdiocese of Boston. Prior to that he served as President and Chief Executive Officer of Abington Savings Bank. Mr. McDonough’s experience in finance and banking, which is relevant to certain customer relationships of the Company, has qualified him to serve as a director of the Company.

Mr. Mercurio became a director of the Company in 1990 and a director of Century Bank and Trust Company in 1995 and voluntarily resigned in 2004. He was then re-elected in 2010. In December, 2010, Mr. Mercurio retired as Executive Vice President of Boston University having completed 38 years of service. He currently serves as CEO of TJAC Development and maintains a Higher Education Business Consulting Practice. Mr. Mercurio’s experience in the educational field, which is relevant to certain customer relationships of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.

Mr. Senna became a director of the Company in 1986. He has been a director of Century Bank and Trust Company since 1979. Mr. Senna is an attorney and managing partner of C&S Capital Properties, LLC, a real estate management and development firm. Mr. Senna’s experience as an attorney and expertise in the real estate industry, which is relevant to real estate related customers in addition to his years of service as Chairman of the Audit Committee, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.

Mr. Barry R. Sloane has been a director of the Company and Century Bank and Trust Company since 1997. Mr. Sloane is President and CEO of Century Bancorp and President and CEO of Century Bank and Trust Company. Mr. Sloane is also a director of BGC Partners, Inc., and a trustee of the Savings Bank Employee Retirement System (SBERA). Mr. Sloane’s experience at the Company as well as his experience at other financial services companies and expertise in the financial services industry has qualified him to serve as director of the Company.

Mr. Marshall M. Sloane is the founder of the Company and is currently the Chairman of the Board. He founded Century Bank and Trust Company in 1968 and is currently the Chairman of the Board. Mr. Sloane’s extensive banking experience qualifies him to serve as Chairman of the Board.

Ms. Sonnabend became a director of the Company in 1997. She has been a director of Century Bank and Trust Company since 1997. Ms. Sonnabend is President of Sonesta Collection, and formerly CEO, President and

director of Sonesta International Hotels Corporation. Ms. Sonnabend’s experience as CEO of a major hotel company and expertise in the real estate and travel and leisure industry, which is relevant to travel and leisure related customers of the Company, has qualified her to serve as a director of the Company. Also, her tenure and experience as a director of the Company has qualified her to continue to serve.

Mr. Swansburg became a director of the Company in 1986. He has been a director of Century Bank and Trust Company since 1992. From 1992 to 1998 he was President and Chief Operating Officer of Century Bank and Trust Company. He is now retired from Century Bank and Trust Company. Mr. Swansburg’s experience as President and Chief Operating Officer of Century Bank and Trust Company and expertise in the banking industry has qualified him to serve as a director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.

Mr. Westling became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1995. Mr. Westling is President Emeritus and Professor of History and Humanities of Boston University. Mr. Westling’s experience as president of a University and expertise in the educational field, which is relevant to certain customer relationships of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.

All of the Company’s directors are elected annually and hold office until their successors are duly elected and qualified. A majority of the members of the Company’s Board of Directors have been determined by the Company’s Board of Directors to be independent within the meaning of current FINRA listing standards. There are no family relationships between any of the directors or executive officers, except that Barry R. Sloane is the son of Marshall M. Sloane and Linda Sloane Kay is the daughter of Marshall M. Sloane.

Executive officers are elected annually by the Board prior to the Annual Meeting of Shareholders to serve for a one year term and until their successors are elected and qualified. The following table sets forth the name and age of each executive officer of the Company and the principal positions and offices he/she holds with the Company.


Marshall M. Sloane		Chairman of the Board of the Company and Century Bank and Trust Company. Mr. Sloane is 86 years old.
Barry R. Sloane		Director, President and CEO; Director, President and CEO, Century Bank and Trust Company. Mr. Sloane is 57 years old.
William P. Hornby		Chief Financial Officer and Treasurer; Chief Financial Officer and Treasurer, Century Bank and Trust Company. Mr. Hornby is 46 years old. He joined the Company in 2007. Formerly he was Senior Vice President at Capital Crossing Bank.
Paul A. Evangelista		Executive Vice President, Century Bank and Trust Company with responsibility for retail, operations and marketing. Mr. Evangelista is 49 years old. He joined the Company in 1999.
Brian J. Feeney		Executive Vice President, Century Bank and Trust Company, Head of Institutional Services Group. Mr. Feeney is 52 years old. He joined the Company in 1989.
Linda Sloane Kay		Executive Vice President, Century Bank and Trust Company with responsibility for business development. Ms. Kay is 51 years old. She joined the Company in 1983.
David B. Woonton		Executive Vice President, Century Bank and Trust Company with responsibility for lending. Mr. Woonton is 57 years old. He joined the Company in 1999.

The Audit Committee

The Audit Committee meets with KPMG LLP, the Company’s independent registered public accounting firm, in connection with the annual audit and quarterly reviews of the Company’s financial statements. The Audit

Committee is composed of four directors, Joseph J. Senna, Chair, James P. McDonough, Stephanie Sonnabend, and Jon Westling, each of whom the Board of Directors has determined is independent under current FINRA listing standards. The Board of Directors has determined that Mr. Senna qualifies as an “audit committee financial expert”, as that term is defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC. The Audit Committee reviews the findings and recommendations of the FRB, FDIC, and Massachusetts Bank Commissioner’s staff in connection with their examinations and the internal audit reports and procedures for the Company and its subsidiaries. The Audit Committee met five times during 2012.

Audit Committee Report

The Audit Committee of the Company’s Board of Directors is responsible for providing independent, objective oversight of the Company’s accounting functions and internal controls. The Audit Committee operates under a written charter first adopted and approved by the Board of Directors in 2000. The Audit Committee has reviewed and reassessed its Charter. A copy of the Audit Committee Charter was last published in the 10-K for the period ending December 31, 2012.

Management is responsible for the Company’s internal controls and financial reporting process. The independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue their reports thereon. The Audit Committee’s responsibility is to monitor and oversee these processes.

The Audit Committee has reviewed and discussed the audited financial statements with management and the independent registered public accounting firm. The Audit Committee has also discussed with KPMG LLP, the independent registered public accounting firm for the Company, the matters required to be discussed by the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 16, Communication with Audit committees, and PCAOB AU 380, Communication with Audit Committees.

The Audit Committee has also received the written disclosures and the letter from KPMG LLP, the independent registered public accounting firm as required by the PCAOB. The Audit Committee has discussed with KPMG LLP the firm’s independence, including a review of audit and non-audit fees and services, and concluded that KPMG LLP is independent.

Based on the review and discussions referred to in the paragraph above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the last fiscal year for filing with the Securities and Exchange Commission.

/s/ Joseph J. Senna, Chair

/s/ James P. McDonough

/s/ Stephanie Sonnabend

/s/ Jon Westling

Nominating Committee

The Company’s Nominating Committee has three director members, Marshall I. Goldman, Stephanie Sonnabend and Jon Westling, each of whom the Board of Directors has determined to be independent under the NASDAQ current listing standards. The Nominating Committee operates pursuant to a written policy. The nominating committee implements the process by identifying a potential candidate and evaluating whether the candidate is eligible and qualified for service. The Committee has developed criteria for the selection of new directors to the Board, including but not limited to, diversity, age, skills, experience, time availability (including the number of other boards a director candidate sits on), NASDAQ listing standards, applicable federal and state laws and regulations, Board and Company needs and such other criteria as the Committee shall determine to be relevant. The committee’s effectiveness is assessed by reviewing existing Board of Directors attendance and performance; experience, skills and contributions that the existing Director brings to the Board; and independence, prior to nominating an existing director for reelection.

Board Leadership Structure

The Company has implemented a careful succession plan by separating the CEO and Chairman’s position. The positions were separated to retain Marshall M. Sloane, who is a valuable asset given his history with the Company and his experience, as Chairman. Barry R. Sloane is the CEO. Marshall M. Sloane continues as Chairman of the Board.

Oversight of Risk

The Board oversees risk through various Board Committees which report directly to the Board. Also, various committees comprised of Company management report to the Board.

The principal Board Committees responsible for overseeing the various elements of risk are the Audit Committee, the Asset Liability Committee and the Executive Committee. The Audit Committee is responsible for monitoring all elements of risk, primarily through its oversight of the internal audit program. The Asset Liability Committee monitors interest rate risk principally through management’s models and simulations. The Executive Committee monitors credit risk through its review of large originators, classified assets, and the calculation of the allowance for loan losses and concentrations of credits.

The principal committees comprised of management are Management Committee, Corporate Risk Management Committee, Loan Approval Committee and Asset Liability Pricing Committee. Management Committee is comprised of senior management and is responsible for overseeing all elements of risk. The Corporate Risk Management Committee meets quarterly to address specific elements of risk. Loan Approval Committee is responsible for overseeing credit risk. The Asset Liability Committee oversees interest rate risk. The committees comprised of management report to the Board of Directors, as needed, through senior management’s attendance and reporting at Board of Directors meetings.

Code of Ethics

The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions. A copy of the Company’s Code of Ethics may be obtained upon written request to Investor Relations, Century Bancorp, Inc., 400 Mystic Avenue, Medford, Massachusetts 02155.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on a review of the copies of Forms 3, 4 and 5 and amendments thereto, if any, and any written representations furnished to the Company, none of the Company’s officers, Directors or beneficial owners of more than 10% of the Company’s Class A Common Stock failed to file on a timely basis reports required by Section 16 of the Securities Exchange Act of 1934 during the fiscal year ended December 31, 2012, or in prior fiscal years.

ITEM 11.

EXECUTIVE COMPENSATION

The following is a discussion and analysis of our executive compensation policies and practices with respect to compensation reported for fiscal year 2012.

Introduction

The following discussion and analysis includes separate sections on:

•

The Composition and Responsibilities of the Compensation Committee

•

The Company’s Executive Compensation Conclusion

•

Compensation Discussion and Analysis

•

Philosophy and Objectives of the Company

•

Compensation Process

•

Compensation Consultant

•

Compensation Components

•

Post-Employment Compensation

•

Chief Executive Officer Compensation

•

Executive Officer Compensation

•

Consulting Services Agreements

•

Employment Agreements

•

Report of the Compensation Committee

Composition and Responsibilities of the Compensation Committee

The Compensation Committee is a committee of the Board of Directors composed of Fraser Lemley as Chairman, Joseph Mercurio and Jon Westling, each of whom the Board has determined is independent as defined by the FINRA current listing standards.

The Compensation Committee oversees compensation programs applicable to employees at all levels of the Company and makes decisions regarding executive compensation that is intended to align total compensation with business objectives and enable the Company to attract, retain and reward individuals who are contributing to the Company’s success.

The Compensation Committee reviews the Company’s cash incentive, stock incentive, retirement, and benefit plans and makes its recommendations to the Board with respect to these areas.

All decisions with respect to executive and director compensation are approved by the Compensation Committee and recommended to the full Board for ratification.

The Company’s Executive Compensation Conclusion

Based upon review, the Compensation Committee and the Board of Directors found the Company’s Chief Executive Officer’s, the Chief Financial Officer’s and the other Named Executive Officers’ total compensation to be reasonable. In addition to the other factors noted, the Committee and the Board considered that the Company maintains only one change of control provision, one separation agreement and did not award stock incentive awards for fiscal year 2012. It should be noted that when the Committee and the Board considers any component of executive compensation, the mix and aggregate amounts of all components are taken into consideration.

Compensation Discussion and Analysis (CD&A)

Philosophy and Objectives of Company

The Company’s executive compensation philosophy is based on the following principles:

•

Compensation programs should be designed to attract and retain executives, to motivate them to achieve and to reward them appropriately for their performance.

•

Compensation should be competitive and equitable in light of the executive’s responsibilities, experience, and performance.

•

Provide annual compensation that takes into account the Company’s performance with respect to its financial and strategic objectives, the performance of functions and business areas under the executive’s management and the results of established goals;

•

Align the financial interests of the executive with those of shareholders by providing both short-term and long-term incentives;

•

Offer a total compensation program for each executive based on (i) the level of responsibility of the executive’s position, (ii) the experience and skills necessary relative to the other senior management positions, (iii) comparison of compensation to similarly positioned executives of peer financial institutions; and

•

Evaluate the overall compensation of our executives in light of general economic and specific company, industry and competitive considerations.

Compensation Process

The Company maintains governance practices to ensure that it can reach its compensation-related decisions in an informed and appropriate manner.

Base salaries, which are the Company’s major element of compensation, are reviewed for executive officers and employees at the regularly scheduled fall meeting of the Compensation Committee. At this meeting the Committee also reviews and adopts, as appropriate, proposals for the discretionary officer cash incentive plan for the new fiscal year, stock option grants, additions, amendments, modifications or terminations of retirement and benefit programs.

The Compensation Committee’s process incorporates the following:

•

The Committee operates under a written charter which is periodically reviewed.

•

The Committee meets with representatives of management to review and discuss prepared materials and issues.

•

The Committee considers recommendations from the Chief Executive Officer with respect to the compensation of the Company’s Named Executive Officers.

•

Our independent compensation consultant attends Committee meetings as requested.

•

The Committee meets and deliberates privately without management present. Our consultant participates in these sessions as requested.

•

The Committee may consult with the non-management and independent directors regarding decisions affecting Executive compensation.

•

The Committee reports the Committee’s major actions to the entire Board at the Board of Director’s meeting in December or the following January.

•

The Committee recommends for approval to the Board of Directors the fees for our Board and Board Committees.

•

The Board of Directors then considers the report of the Compensation Committee and accepts or amends and approves or ratifies all matters presented for consideration.

To the extent permitted by applicable law, the Committee or the Board may delegate to management certain of its duties and responsibilities, including with respect to the adoption, amendment, modification or termination of benefit plans and with respect to the awards of stock options under certain stock plans.

Compensation Consultant

When making determinations regarding the compensation paid to our executives the Compensation Committee and the Board of Directors rely, in part, on the expertise of our independent compensation consultant, Thomas Warren & Associates, to conduct an assessment of our executive compensation. In addition to conferring with certain executives, the consultant works with internal company support staff to obtain compensation and market data. Thomas Warren & Associates identifies a group of peer companies in consideration of such factors as asset size, geography, type of financial services offered and the complexity and scope of operations and makes use of executive compensation comparisons, published surveys and peer analyses.

The Compensation Committee and the Board of Directors took Thomas Warren & Associates’ recommendations into consideration when setting base salaries for fiscal 2012.

Compensation Components

With respect to Executive compensation, the Company reviews the mix of base salary, cash and stock based incentive plans and benefits for our individual executives, however, there is no specific formula for allocating between cash and non-cash compensation. The competitiveness of total compensation potential for our executives is reviewed against industry practices and the Company’s peers as identified by our independent compensation consultant. The major elements of the Company’s executive compensation package (i.e., base salary, cash and stock based incentive plans) are similar to those found in many companies.

Base Salary Compensation:

When evaluating executive base salary compensation, the Company takes into consideration such factors as:

•

The attainment of business and strategic goals and the financial performance of the Company;

•

The importance, complexity, and level of responsibility of the executive’s position within the organizational structure;

•

The performance of the executive’s business area’s goals and the accomplishment of objectives for the previous year;

•

The difficulty of achieving desired results;

•

The value of the executive’s unique skills, abilities and general management capabilities to support the long-term performance of the Company;

•

The executive’s contribution as a member of the Executive Management Team.

While the Company reviews numerous quantitative and qualitative factors noted above when determining executive base salary compensation, the performance of the Company’s stock is not generally considered a factor in this determination as the price of the Company’s common stock is subject to various factors beyond the Company’s control. The Company believes that the price of the stock in the long-term will reflect the Company’s operating performance and how well our executives manage the Company.

Ultimately, the Compensation Committee and the Board of Directors have the authority to use discretion when making executive compensation determinations after review of all the information that they deem relevant.

Cash Incentive Plan:

The Company has a discretionary 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.

Awards are based upon the attainment of established objectives including profitability, expense control, sales volumes and overall job performance. Awards are generally not granted unless the Company achieves certain financial targets.

Upon recommendation of the Compensation Committee, the Board of Directors determines the aggregate amount, if any, to be awarded. In recognition of the Company’s solid performance, discretionary awards were granted for fiscal 2012. Awards for the Chief Executive Officer and the other Named Executive Officers were reviewed and approved by the Board of Directors and are noted on the Summary Compensation Table.

Stock Option Plans:

During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) to encourage ownership of Class A common stock of the Company by directors, officers and employees of the Company and its Affiliates and to provide additional incentives for them to promote the success of the Company’s business through awards of or relating to shares of the Company’s Class A common stock. Under the Option Plans, all officers and key employees of the Company are eligible to receive non-qualified and incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the stocks trading value for non-qualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of the grant).

The Compensation Committee has complete discretion to make or select the manner of making all necessary determinations with respect to each option to be granted by the committee under the Option Plans including the director, employee, or officer to receive an Option. However, in determining the long-term incentive component (stock incentive plan) of executive compensation, the Committee does consider the Company’s performance and relative shareholder return, the value of similar incentives awards at peer companies and the awards given in past years. The Committee may take into account the nature of the services provided by the respective officers, employees, and directors, their present and potential contributions to the success of the Company, and any other factors that the Compensation Committee, in its discretion, determines are relevant.

Option grants were not awarded in 2012.

Post-Employment Compensation

Defined Benefit Pension Plan:

The Company had a qualified Defined Benefit Pension Plan which had been offered to all employees reaching a minimum age and service requirement. In 2006 the Bank became a member of the Savings Bank Employee Retirement Association (“SBERA”) within which it maintains the qualified Defined Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for pension plans participating in SBERA. The Trustee of SBERA, through SBERA’s Investment Committee, selects investment managers for the common and collective trust portfolio. A professional advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify equity investments across a spectrum of investment types. (e.g. small cap, large cap, international, etc) and styles (e.g. growth, value, etc.). The Company has closed the plan to employees hired after March 31, 2006.

Benefits under the plan are based upon an employee’s years of service and career average compensation. The 2012 increase in the actuarial present value of each Named Executive Officer’s accumulated benefit under the plan is set forth in the Summary Compensation Table which appears on page 101 and the actuarial present value of each Named Executive Officer is set forth in the Pension Benefits Table which appears on page 103.

401(k) Plan:

Our executives are eligible to participate in the Company’s 401(k) contributory defined contribution plan. The Company contributes a matching contribution equal to 33.33% on the first 6% of the participant’s compensation that has been contributed to the plan. The Chief Executive Officer and five of the Named Executive Officers participated in the 401(k) plan during fiscal 2012 and received matching contributions up to a maximum of $5,000.

In fiscal 2007, the Company transferred administration of its 401(k) plan to SBERA who also operates the Company’s Defined Benefit Pension Plan as noted above.

Supplemental Executive Insurance/Retirement Income Plan:

The Company has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan) which is limited to select officers and employees of the Company.

Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Individual life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.

Benefits under the Supplemental Plan are based upon an employee’s years of service and highest three year average compensation. The 2012 increase in the actuarial present value of each Named Executive Officer’s accumulated benefit under the Supplemental Plan is set forth in the Summary Compensation Table which appears below and the actuarial present value of each Named Executive Officer is set forth in the Supplemental Executive Insurance/Retirement Benefits Table which appears on page 104.

Previously, the Company has entered into an agreement with Mr. Marshall Sloane to freeze his Supplemental Executive/Insurance Retirement Income Plan benefit. In consideration of this frozen benefit, the Company has acquired a life insurance policy providing a death benefit of $25,000,000 upon the death of the survivor of Mr. Sloane or Mrs. Sloane. Mr. Sloane has elected 50% joint and survivor annuity. Under this plan he received $523,639 in 2012.

Chief Executive Officer Compensation

The Company granted Chief Executive Officer, Barry R. Sloane, a 5% salary increase in 2012. In recognition of the Company’s solid financial performance in 2012, the Company also granted a $144,150 cash bonus payable to Mr. Barry R. Sloane. Total compensation granted to the Chief Executive Officer for 2012 is described in the Summary Compensation Table in the statement.

Executive Officer Compensation

Consistent with the decisions regarding CEO base compensation, the Company determined that the base salary compensation for each of the Named Executive Officers, Messrs. Paul Evangelista, Brian Feeney William Hornby, David Woonton and Ms. Linda Kay was increased by 5% in 2012. In light of the Company’s financial performance in 2012, cash bonuses were awarded to all of the above Named Executive Officers as noted in the Summary Compensation Table.

The Company based its determinations on its subjective analysis of each individual’s performance and contribution to the corporation’s goals and objectives and considered the quantitative and qualitative factors referenced above.

Executive Benefits

We limit additional executive benefits that we make available to our executive officers. Where such benefits are provided, they are intended to support other business purposes including facilitating business development efforts.

Separation Agreement

On May 11, 2010, the Company accepted the voluntary resignation of Co-President and Co-CEO Jonathan G. Sloane effective May 10, 2010 and entered into a separation agreement with Mr. Jonathan Sloane. Under the terms of the separation agreement, Mr. Jonathan Sloane received his base salary and health insurance benefits for two years through May 10, 2012 on which date the agreement concluded.

Consulting Services Agreement

The Company renewed its consulting agreement with Marshall M. Sloane to provide the Company advice on strategic planning and operational management, assist with business development efforts and clients, participate in public relations and community outreach efforts and provides other services as may be requested by the Board of Directors. The Company agreed to pay Mr. Sloane an annual contract fee of $330,127 per year during 2012 with provisions to reimburse Mr. Sloane for all related business expenses and the expense of obtaining health insurance comparable to that which the Company provided while he was Chief Executive Officer. In recognition of the Company’s financial performance, the Company also awarded Mr. Sloane a special Director’s bonus for 2012 as noted on the Summary Compensation Table.

Employment Agreement

The Company has entered into an employment agreement with Mr. David Woonton. The agreement grants two years of service payable upon a change of control of the Company.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the foregoing Report of the Compensation Committee, including the CD&A, with management. In reliance on the reviews and discussions referred to above, the Compensation Committee recommended to the Board, and the Board has approved, that the CD&A be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for filing with the SEC.

/s/ Fraser Lemley, Chairman

/s/ Joseph Mercurio

/s/ Jon Westling

100

Compensation Paid to Executive Officers

The following table sets forth information for the three year period ended December 31, 2012 concerning the compensation for services in all capacities to Century Bancorp, Inc. and its subsidiaries of our principal executive officers and our principal financial officer as well as our other four most highly compensated executive officers (or executive officers of our subsidiaries). We refer to these individuals throughout this 10-K statement as the “Named Executive Officers”.

Summary Compensation Table


Name and Principal Position	Year		Salary ($)(3)		Bonus ($)		Stock Awards ($)		Option Awards ($)		Change in Pension Value and Nonqualified Deferred Compensation Earnings- December 31, ($)		All Other Compensation ($)(1)		Total ($)
Marshall M. Sloane (2)		2012		—		—		—		—		131,548		770,259		901,807
Chairman of the Board,		2011		—		—		—		—		—		689,205		689,205
Century Bancorp, Inc. and		2010		—		—		—		—		—		545,375		545,375
Century Bank and Trust Company
Barry R. Sloane		2012		531,080		144,150		—		—		925,960		40,677		1,641,867
President and CEO, Century		2011		505,810		126,477		—		—		740,650		35,966		1,408,903
Bancorp, Inc. and Century Bank		2010		455,685		50,000		—		—		347,866		35,302		888,853
and Trust Company
David B. Woonton		2012		315,000		68,400		—		—		630,561		14,942		1,028,903
Executive Vice President,		2011		300,012		60,000		—		—		495,546		12,403		867,961
Century Bank and Trust Company		2010		285,007		30,000		—		—		239,841		11,700		566,548
Paul A. Evangelista		2012		315,000		68,400		—		—		522,433		12,097		917,930
Executive Vice President,		2011		300,012		60,000		—		—		400,656		10,304		770,972
Century Bank and Trust Company		2010		285,007		30,000		—		—		169,197		10,584		494,788
Brian J. Feeney		2012		248,850		59,708		—		—		236,536		14,201		559,295
Executive Vice President,		2011		237,009		47,400		—		—		153,587		6,608		444,604
Century Bank and Trust Company		2010		225,009		30,000		—		—		74,298		7,494		336,801
William P. Hornby		2012		274,969		59,708		—		—		111,857		6,667		453,201
Chief Financial Officer and		2011		261,885		52,375		—		—		76,778		7,048		398,086
Treasurer, Century Bancorp, Inc.		2010		231,759		30,000		—		—		30,451		6,884		299,094
and Century Bank and
Trust Company
Linda Sloane Kay		2012		248,851		59,708		—		—		200,875		9,453		518,887
Executive Vice President		2011		237,010		47,400		—		—		115,732		8,689		408,831
Century Bank and Trust Company		2010		175,007		30,000		—		—		46,600		7,955		259,562

(1)

The amount listed in all other compensation includes amounts attributable to term insurance premiums paid for the Supplemental Executive Insurance/Retirement Plan, matching contribution for the 401(k) plan, excess group life insurance premiums and long-term disability premiums and, as applicable, country club membership dues and taxable expense reimbursements.

(2)

This amount, for 2012, includes $330,127 for consulting services, $230,775 amounts attributable to term insurance premiums for the Supplemental Executive Insurance/Retirement Plan, $34,400 for Director fees, $144,150 for bonus, as well as country club membership dues, health insurance premiums and Medicare reimbursements.

(3)	In addition, Jonathan G. Sloane, who entered into a separation agreement on May 11, 2010, received $442,412 per year under the agreement as further described previously under “Separation Agreement”.

101

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information concerning outstanding equity awards held by each Named Executive Officer as of December 31, 2012. No stock awards are unvested.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE


	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date
Marshall M. Sloane		—		—		—		—		—
Chairman of the Board
Barry R. Sloane		7,000		—		—		31.83		09/17/14
President and CEO
David B. Woonton		2,500		—		—		31.83		09/17/14
Executive Vice President
Century Bank and Trust Company
Paul A. Evangelista		2,500		—		—		31.83		09/17/14
Executive Vice President
Century Bank and Trust Company
Brian J. Feeney		500		—		—		26.68		01/21/13
Executive Vice President		600		—		—		31.83		09/17/14
Century Bank and Trust Company
William P. Hornby		—		—		—		—		—
Chief Financial Officer and Treasurer
Linda Sloane Kay		350		—		—		31.83		09/17/14
Executive Vice President
Century Bank and Trust Company

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Pension Benefits

The following table sets forth information concerning plans that provide for payments or other benefits at, following, or in connection with, retirement for each Named Executive Officer.

PENSION BENEFITS TABLE

Name

Plan Name

Number of Years
Credited Service
(#)

Present
Value of
Accumulated
Benefit
12/31/2012
($)(1)

Payments
During Last
Fiscal Year
12/31/2012
($)

Marshall M. Sloane

Defined Benefit

621,698

94,261

Chairman of the Board

Pension Plan

Barry R. Sloane

Defined Benefit

147,627

—

President and CEO

Pension Plan

David B. Woonton

Defined Benefit

407,650

—

Executive Vice President,

Pension Plan

Century Bank and Trust Company

Paul A. Evangelista

Defined Benefit

302,678

—

Executive Vice President,

Pension Plan

Century Bank and Trust Company

Brian J. Feeney

Defined Benefit

342,079

—

Executive Vice President,

Pension Plan

Century Bank and Trust Company

William P. Hornby (2)

Defined Benefit

—

Chief Financial Officer and Treasurer

Pension Plan

Linda Sloane Kay

Defined Benefit

137,212

—

Executive Vice President

Pension Plan

Century Bank and Trust Company

(1)	The present value of accumulated benefits was calculated with the assumption that retirement occurs at age 65. The benefit is calculated using an interest rate of 4.00% and the Mortality Table used is the 2012 Mortality Table.

(2)	Not a member of the Defined Benefit Pension Plan.

103

SUPPLEMENTAL EXECUTIVE INSURANCE/RETIREMENT BENEFITS

Name

Plan Name

Number of Years
Credited Service
(#)

Present Value of
Accumulated
Benefit-
12/31/2012
($)(1)

Payments
During
Last Fiscal
Year-
12/31/2012
($)

Marshall M. Sloane (2)

Supplemental Executive

3,274,451

523,639

Chairman of the Board

Insurance/Retirement Plan

Barry R. Sloane (2)

Supplemental Executive

2,975,143

—

President and CEO

Insurance/Retirement Plan

David B. Woonton (2)

Supplemental Executive

2,033,084

—

Executive Vice President,

Insurance/Retirement Plan

Century Bank and

Trust Company

Paul A. Evangelista (2)

Supplemental Executive

1,396,150

—

Executive Vice President,

Insurance/Retirement Plan

Century Bank and

Trust Company

Brian J. Feeney (2)

Supplemental Executive

337,190

—

Executive Vice President,

Insurance/Retirement Plan

Century Bank and

Trust Company

William P. Hornby (2)

Supplemental Executive

238,264

—

Chief Financial Officer and

Treasurer

Insurance/Retirement Plan

Linda Sloane Kay (2)

Supplemental Executive

275,047

—

Executive Vice President,

Century Bank and

Trust Company

Insurance/Retirement Plan

(1)	The present value of accumulated benefits was calculated with the assumption that retirement occurs at age 65. The benefit is calculated using an interest rate of 4.00% and the Mortality Table used is the 2012 Mortality Table.

(2)	As of January 1, 2012, Messrs. Marshall M. Sloane, Barry R. Sloane, Paul A. Evangelista, David B. Woonton, Brian J. Feeney, Linda Sloane Kay and William P. Hornby were 100%, 62.5%, 85%, 85%, 25%, 0% and 0% vested, respectively, under the Supplemental Executive Insurance/Retirement Plan.

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Director Compensation

Directors not employed by the Company receive a $12,500 retainer per year, $250 per Company Board meeting attended, $750 per Bank Board meeting attended and $700 per committee meeting attended. Joseph Senna receives $1,500 per Audit Committee meeting as Chairman of the Audit Committee.

DIRECTOR COMPENSATION TABLE 2012


Name	Fees Earned or Paid in Cash ($)		All Other Compensation ($)		Total ($)
George R. Baldwin		34,000		—		34,000
Marshall I. Goldman		23,800		—		23,800
Russell B. Higley		28,800		—		28,800
Jackie Jenkins-Scott		27,650		—		27,650
Linda Sloane Kay		—		—		—
Fraser Lemley		34,400		—		34,400
James P. McDonough		18,300		—		18,300
Joseph P. Mercurio		33,650		—		33,650
Joseph J. Senna		37,650		—		37,650
Barry R. Sloane		—		—		—
Marshall M. Sloane(1)		—		—		—
Stephanie Sonnabend		29,450		—		29,450
George F. Swansburg(2)		36,500		14,500		51,000
Jon Westling		26,600		—		26,600

(1)	Amounts paid are listed in the Summary Compensation Table.

(2)	The amount listed in all other compensation is for serving as Administrator of Century Bancorp Capital Trust II.

105

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information as to the number and percentage of shares of Class A and Class B Common Stock beneficially owned as of December 31, 2012, (i) by each person known by the Company to own beneficially more than 5% of the Company’s outstanding shares of Class A or Class B Common Stock, (ii) by each of the Company’s directors and executive officers; and (iii) by all directors and executive officers as a group. As of December 31, 2012, there were 3,568,079 shares of Class A Common Stock and 1,986,880 shares of Class B Common Stock outstanding.


Name and Address of Beneficial Owner	Class A Owned			% A Owned			Class B Owned			% B Owned
Wellington Management Company, LLP(8)		288,147			8.08	%
280 Congress Street, Boston, MA 02210
Castine Capital Management, LLC(10)		255,270			7.15	%
One International Place, Suite 2401, Boston, MA 02110
Sandler O’Neill Asset Management, LLC(11)		240,714			6.75	%
150 East 52nd Street,30th Floor, New York, NY 10022
Jacobs Asset Management, LLC(9)		209,983			5.89	%
11 East 26th Street, Suite 1900, New York, NY 10010
Marshall M. Sloane(a)		31,089	(1)		0.87	%		1,721,841	(2)		86.66	%
400 Mystic Avenue, Medford, MA 02155
George R. Baldwin(a)		5,819			0.16	%
Paul A. Evangelista(b)		6,636	(11)		0.19	%
Brian J. Feeney(b)		1,274	(12)		0.04	%
Marshall I. Goldman(a)		6,293	(3)		0.18	%		30,000	(4)		1.51	%
Russell B. Higley, Esquire(a)		4,602			0.13	%
William P. Hornby(b)		500			0.01	%
Jackie Jenkins-Scott(a)		40			0.00	%
Linda Sloane Kay(a)(b)		10,060	(5)		0.28	%		60,000			3.02	%
Fraser Lemley(a)		19,144			0.54	%
James P. McDonough(a)		1,000			0.03	%
Joseph P. Mercurio(a)		100			0.00	%
Joseph J. Senna(a)		25,001			0.70	%
Barry R. Sloane(a)(b)		4,199	(6)		0.12	%
Stephanie Sonnabend(a)		4,784			0.13	%
George F. Swansburg(a)		32,251			0.90	%
Jon Westling(a)		7,056			0.20	%
David B. Woonton(b)		800	(13)		0.02	%
All directors and officers as a group (18 in number)		160,648			4.50	%		1,811,841			91.19	%

(a)	Denotes director of the Company.

(b)	Denotes officer of the Company or one of its subsidiaries.

(1)	Includes 2,500 shares owned by Mr. Sloane’s spouse and also includes 16,371 shares held in trust for Mr. Sloane’s grandchildren.

(2)	Includes 1,500 shares owned by Mr. Sloane’s spouse, 1,694,580 shares held by Sloane Family Enterprises LP, and does not include 94,239 shares owned by Mr. Sloane’s children. Mr. Sloane disclaims beneficial ownership of such 94,239 shares and 1,694,580 shares held by Sloane Family Enterprises LP.

106

(3)	Does not include 9,000 shares held of record by Mr. Goldman’s children; Mr. Goldman disclaims beneficial ownership of such shares.

(4)	Does not include 9,000 shares held of record by Mr. Goldman’s children; Mr. Goldman disclaims beneficial ownership of such shares.

(5)	Includes 9,575 shares owned by Ms. Kay’s spouse and 10 shares owned by Ms. Kay’s children. Does not include unexercised stock options of 350 shares.

(6)	Includes 40 shares owned by Mr. Barry Sloane’s children and 72 shares owned by Mr. Barry Sloane’s spouse. Does not include unexercised stock options of 7,000 shares. Includes 3,111 shares pledged.

(7)	The Company has relied upon the information set forth in the Form 13G filed with the SEC by the Wellington Management Company, LLP on February 14, 2013.

(8)	The Company has relied upon the information set forth in the Form 13F filed with the SEC by Sy Jacobs, c/o Jacobs Asset Management, L.L.C. on February 14, 2013.

(9)	The Company has relied upon the information set forth in the Form 13F filed with the SEC by the Castine Capital Management, LLC on February 14, 2013.

(10)	The Company has relied upon the information set forth in the Form 13F filed with the SEC by the Sandler O’Neill Asset Management, LLC on February 14, 2013.

(11)	Does not include unexercised stock options of 2,500 shares.

(12)	Does not include unexercised stock options of 1,100 shares.

(13)	Does not include unexercised stock options of 2,500 shares.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Directors and Officers of the Company and Bank and members of their immediate family are at present, as in the past, customers of the Bank and have transactions with the Bank in the ordinary course of business. In addition, certain of the Directors are at present, as in the past, also Directors, Officers or Stockholders of corporations or members of partnerships that are customers of the Bank and have transactions with the Bank in the ordinary course of business. Such transactions with Directors and Officers of the Company and the Bank and their families and with such corporations and partnerships were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other features unfavorable to the Bank. The Directors annually approve amounts to be paid to related parties for services rendered. The Company reviews related party transactions monthly.

NASDAQ Stock Market (“NASDAQ”) rules, and our governance principles, require that at least a majority of our Board be composed of “independent” directors. All of our directors other than Marshall M. Sloane, Barry R. Sloane, Linda Sloane Kay, George F. Swansburg and Russell B. Higley, Esq. are “independent” within the meaning of both the NASDAQ rules and our own corporate governance principles. Nine of our fourteen directors, therefore, are currently “independent” directors.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The Audit Committee separately pre-approves each of the following services, in compliance with the requirements of the Sarbanes-Oxley Act and SEC regulations, before they are rendered by the auditor: financial statement audit, attestation, preparation of tax returns and audit of 401(k) and pension plans. The Audit Committee’s pre-approval procedures, in compliance with the requirements of the Sarbanes-Oxley Act and SEC regulations, allow the Company’s auditors to perform certain services without specific permission from the Audit Committee, as long as these services comply with the following requirements: (a) the services consist of special projects relating to strategic tax savings initiatives, corporate tax structure engagements or merger and acquisition consulting; (b) aggregate special project services cannot exceed $50,000 during the calendar year;

107

and (c) the Audit Committee must be informed about each service at its next scheduled meeting. All other services provided by the Company’s auditor must be separately pre-approved before they are rendered.


Description of Fees	Fiscal 2012 Amount		Fiscal 2011 Amount
Audit fees(1)	$	375,500	$	363,000
Audit-related fees(2)		—		—
Tax fees(3)		46,305		44,400
Other fees		—		—

	$	421,805	$	407,400

(1)	includes fees for annual audit, renewal of quarterly financial statement, internal control attestations.

(2)	includes fees for the audit of 401K and pension plans.

(3)	includes fees for tax compliance and tax consulting.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements.

The following financial statements of the company and its subsidiaries are presented in Item 8:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets — December 31, 2012 and 2011

Consolidated Statements of Income — Years Ended December 31, 2012, 2011 and 2010

Consolidated Statements of Changes in Stockholders’ Equity -Years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Cash Flows-Years Ended December 31, 2012, 2011, and 2010

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

All schedules are omitted because either the required information is shown in the financial statements or notes incorporated by reference, or they are not applicable, or the data is not significant.

(3) Exhibits


3.1		Certificate of Incorporation of Century Bancorp, Inc., incorporated by reference previously filed with registrant’s initial registration statement on Form S-1 dated May 20, 1987 (Registration No. 33-13281).
3.2		Bylaws of Century Bancorp, Inc., Amended October 9, 2007, incorporated by reference previously filed with the September 30, 2007 10-Q.
3.3		Articles of Amendment of Century Bancorp, Inc. Articles of Organization effective January 9, 2009, incorporated by reference previously filed with an 8-K filed on April 29, 2009.
4.1		Form of Common Stock Certificate of the Company, incorporated by reference previously filed with registrant’s initial registration statement on Form S-1 dated May 20, 1987 (Registration No. 33-13281).
4.2		Century Bancorp, Inc. 401(K) Plan, incorporated by reference previously filed with the registrant’s Form S-8 filed on June 25, 1997.
4.3		Registration Statement relating to the 8.30% Junior Subordinated Debentures issued by Century Bancorp Capital Trust, incorporated by reference previously filed with the registrant’s Form S-2 filed on April 23, 1998.

108


10.1		2000 Stock Option Plan, as amended on December 30, 2005, incorporated by reference previously filed with the registrant’s Annual Report on Form 10-K filed on March 16, 2006.
10.2		Supplemental Executive Retirement Benefit with Marshall M. Sloane, incorporated by reference previously filed with the registrant’s Annual Report on Form 10-K filed on March 26, 2003.
10.3		Supplemental Executive Retirement and Insurance Plan, as amended on December 1, 2008, incorporated by reference previously filed with an 8-K filed on January 21, 2009.
10.4		2004 Stock Option Plan, as amended on December 30, 2005, incorporated by reference previously filed with the registrant’s Annual Report on Form 10-K filed on March 16, 2006.
10.5		Supplemental Executive Retirement and Insurance plan, as amended on July 14, 2009, incorporated by reference previously filed with an 8-K filed on July 16, 2009.
10.6		Century Bancorp Capital Trust II Purchase Agreement dated November 30, 2004, between Century Bancorp Capital Trust II and the Company and Sandler O’Neill Partners, L.P., First Tennessee Bank National Association and Keefe, Bruyette and Woods, Inc., incorporated by reference previously filed with the registrant’s Annual Report on Form 10-K filed on March 15, 2005.
10.7		Century Bancorp Capital Trust II Indenture, dated December 2, 2004, between the Company and Wilmington Trust Company, incorporated by reference previously filed with the registrant’s Annual Report on Form 10-K filed on March 15, 2005.
10.8		Century Bancorp Capital Trust II Amended and Restated Declaration of Trust, dated December 2, 2004, between the Trustees of Century Bancorp Capital Trust II, the Administrator, the Company and Sponsors, incorporated by reference previously filed with the registrant’s Annual Report on Form 10-K filed on March 15, 2005.
10.9		Century Bancorp, Inc. Guarantee Agreement, dated December 2, 2004, between the Century Bancorp, Inc. and Wilmington Trust Company, incorporated by reference previously filed with the registrant’s Annual Report on Form 10-K filed on March 15, 2005.
10.10		Consulting Services Agreement among Century Bancorp, Inc., Century Bank and Trust Company and Marshall M. Sloane dated as of April 14, 2006, incorporated by reference previously filed with an 8-K filed on April 17, 2006.
10.11		Consulting Services Agreement among Century Bancorp, Inc., Century Bank and Trust Company and Paul V. Cusick, Jr. dated as of June 28, 2007, incorporated by reference previously filed with an 8-K filed on June 29, 2007.
10.12		Purchase and Sale Agreement, dated as of August 14, 2007, with C&S Capital Properties, LLC, incorporated by reference previously filed with an 8-K filed on August 17, 2007.
10.13		Commercial Lease, dated as of August 14, 2007, with C&S Capital Properties, LLC, incorporated by reference previously filed with an 8-K filed on August 17, 2007.
10.14		Severance agreement among Century Bancorp, Inc., Century Bank and Trust Company and Jonathan G. Sloane dated April 30, 2010 incorporated by reference previously filed with an 8-K on May 14, 2010.
14		Code of ethics, amended April 13, 2010, incorporated by reference previously filed with an 8-K filed on April 15, 2010.
21		Subsidiaries of the Registrant.
23.1		Consent of Independent Registered Public Accounting Firm.
31.1		Certification of Chief Executive Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14.
31.2		Certification of Chief Financial Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14.
32.1 +		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 +		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1		Audit Committee Charter.
101.INS*		XBRL Instance Document.
101.SCH*		XBRL Taxonomy Extension Schema.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase.
101.LAB*		XBRL Taxonomy Extension Label Linkbase.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase.
101.DEF*		XBRL Taxonomy Definition Linkbase.

109

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

*	As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

(b) Exhibits required by Item 601 of Regulation S-K.

See (a)(3) above for exhibits filed herewith.

Schedules to Consolidated Financial Statements required by Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted.

110

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 12th day of March, 2013.


Century Bancorp, Inc.

By:		/S/ MARSHALL M. SLOANE
		Marshall M. Sloane, Chairman

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.


/S/ GEORGE R. BALDWIN				/S/ JOSEPH SENNA
George R. Baldwin, Director				Joseph Senna, Director
/S/ MARSHALL I. GOLDMAN				/S/ STEPHANIE SONNABEND
Marshall I. Goldman, Ph.D., Director				Stephanie Sonnabend, Director

/S/ RUSSELL B. HIGLEY				/S/ GEORGE F. SWANSBURG
Russell B. Higley, Esquire, Director				George F. Swansburg, Director

/S/ JACKIE JENKINS-SCOTT				/S/ JON WESTLING
Jackie Jenkins-Scott, Director				Jon Westling, Director

/S/ LINDA SLOANE KAY				/S/ MARSHALL M. SLOANE
Linda Sloane Kay, Director				Marshall M. Sloane, Chairman
Executive Vice President, Century Bank and
Trust Company

/S/ FRASER LEMLEY				/S/ BARRY R. SLOANE
Fraser Lemley, Director				Barry R. Sloane, Director,
				President and Chief Executive Officer

/S/ JAMES P. MCDONOUGH				/S/ WILLIAM P. HORNBY
James P. McDonough, Director				William P. Hornby, CPA, Chief Financial
				Officer and Treasurer

/S/ JOSEPH P. MERCURIO				/S/ ANTHONY C. LAROSA
Joseph P. Mercurio, Director				Anthony C. LaRosa, CPA, Senior Vice President,
				Century Bank and Trust
				Company, Principal Accounting Officer

111