UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008.

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 No.)
400 MYSTIC AVENUE, MEDFORD, MA		02155
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code)

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. þ Yes o  No

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

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

As of July 31, 2008, the Registrant had outstanding:

Class A Common Stock, $1.00 par value Class B Common Stock, $1.00 par value		3,514,107 Shares 2,027,100 Shares

 

 

Century Bancorp, Inc.

				Page
		Index		Number
Part I		Financial Information
Item 1.		Financial Statements (unaudited)
		Consolidated Balance Sheets: June 30, 2008 and December 31, 2007		3
		Consolidated Statements of Income: Three (3) months and Six (6) months ended June 30, 2008 and 2007		4
		Consolidated Statements of Changes in Stockholders' Equity: Six (6) months ended June 30, 2008 and 2007		5
		Consolidated Statements of Cash Flows: Six (6) months ended June 30, 2008 and 2007		6
		Notes to Consolidated Financial Statements		7-12
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		12-22
Item 3.		Quantitative and Qualitative Disclosure About Market Risk		22
Item 4.		Controls and Procedures		22-23
Part II.		Other Information
Item 1.		Legal Proceedings		23
Item 1A.		Risk Factors		23
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3.		Defaults Upon Senior Securities		23
Item 4.		Submission of Matters to a Vote of Securities Holders		24
Item 5.		Other Information		24
Item 6.		Exhibits		25
Signatures				26
Exhibits
EX-31.1 Section 302 Co-President and Co-Chief Executive Officer
EX-31.2 Section 302 Co-President and Co-Chief Executive Officer
EX-31.3 Section 302 Chief Financial Officer and Treasurer
EX-32.1 Section 906 Co-President and Co-Chief Executive Officer
EX-32.2 Section 906 Co-President and Co-Chief Executive Officer
EX-32.3 Section 906 Chief Financial Officer and Treasurer

Page 2 of 26

PART I — Item 1

Century Bancorp, Inc.

		June 30,				December 31,
		2008				2007
Assets
Cash and due from banks		$	78,641			$	66,974
Federal funds sold and interest-bearing deposits in other banks			93,003				232,927
Total cash and cash equivalents			171,644				299,901
Securities available-for-sale, amortized cost $470,071 and $388,453, respectively			468,827				388,104
Securities held-to-maturity, market value $200,567 and $181,704, respectively			203,693				183,710
Federal Home Loan Bank of Boston stock, at cost			15,531				15,531
Loans, net:
Commercial & industrial			124,996				117,332
Construction & land development			55,519				62,412
Commercial real estate			311,550				299,920
Residential real estate			179,053				168,204
Home equity			83,113				67,434
Consumer & other			10,258				10,949
Total loans, net			764,489				726,251
Less: allowance for loan losses			9,469				9,633
Net loans			755,020				716,618
Bank premises and equipment			22,497				21,985
Accrued interest receivable			6,356				6,590
Goodwill			2,714				2,714
Core deposit intangible			1,477				1,671
Other assets			66,499				43,457
Total assets		$	1,714,258			$	1,680,281
Liabilities
Deposits:
Demand deposits		$	284,942			$	289,526
Savings and NOW deposits			335,608				310,858
Money market accounts			306,194				234,099
Time deposits			247,304				295,578
Total deposits			1,174,048				1,130,061
Securities sold under agreements to repurchase			99,150				85,990
Other borrowed funds			257,585				289,885
Subordinated debentures			36,083				36,083
Other liabilities			26,772				19,456
Total liabilities			1,593,638				1,561,475
Stockholders’ Equity
Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,516,304 shares and 3,516,704 shares, respectively			3,516				3,517
Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 2,027,100 shares			2,027				2,027
Additional paid-in capital			11,547				11,553
Retained earnings			107,852				105,550
			124,942				122,647
Unrealized losses on securities available-for-sale, net of taxes			(786	)			(211	)
Additional pension liability, net of taxes			(3,536	)			(3,630	)
Total accumulated other comprehensive loss, net of taxes			(4,322	)			(3,841	)
Total stockholders’ equity			120,620				118,806
Total liabilities and stockholders’ equity		$	1,714,258			$	1,680,281

See accompanying notes to unaudited consolidated interim financial statements.

Page 3 of 26

Century Bancorp, Inc.

		Three months ended June 30,								Six months ended June 30,
		2008				2007				2008				2007
Interest income
Loans		$	11,882			$	13,132			$	24,144			$	26,103
Securities held-to-maturity			2,094				2,350				3,999				4,746
Securities available-for-sale			4,757				3,451				9,136				7,003
Federal funds sold and interest-bearing deposits in other banks			737				1,904				1,953				3,731
Total interest income			19,470				20,837				39,232				41,583
Interest expense
Savings and NOW deposits			1,458				1,590				3,072				3,182
Money market accounts			1,829				2,436				3,419				4,822
Time deposits			2,271				4,047				5,187				8,657
Securities sold under agreements to repurchase			359				771				875				1,544
Other borrowed funds and subordinated debentures			2,897				2,204				5,791				4,387
Total interest expense			8,814				11,048				18,344				22,592
Net interest income			10,656				9,789				20,888				18,991
Provision for loan losses			925				300				1,625				600
Net interest income after provision for loan losses			9,731				9,489				19,263				18,391
Other operating income
Service charges on deposit accounts			2,028				1,863				4,009				3,649
Lockbox fees			827				823				1,599				1,557
Net gain on sales of investments			2				—				102				—
Other income			620				406				1,189				735
Total other operating income			3,477				3,092				6,899				5,941
Operating expenses
Salaries and employee benefits			6,315				6,287				12,605				12,500
Occupancy			1,079				918				2,143				1,914
Equipment			742				773				1,472				1,506
Other			2,607				2,269				4,907				4,629
Total operating expenses			10,743				10,247				21,127				20,549
Income before income taxes			2,465				2,334				5,035				3,783
Provision for income taxes			589				711				1,359				1,156
Net income		$	1,876			$	1,623			$	3,676			$	2,627
Share data:
Weighted average number of shares outstanding, basic			5,543,781				5,542,304				5,543,792				5,541,768
Weighted average number of shares outstanding, diluted			5,546,128				5,548,105				5,546,423				5,549,651
Net income per share, basic		$	0.34			$	0.29			$	0.66			$	0.47
Net income per share, diluted		$	0.34			$	0.29			$	0.66			$	0.47
Cash dividends paid:
Class A common stock		$	0.12			$	0.12			$	0.24			$	0.24
Class B common stock		$	0.06			$	0.06			$	0.12			$	0.12

See accompanying notes to unaudited consolidated interim financial statements.

Page 4 of 26

Century Bancorp, Inc.

																		Accumulated
		Class A				Class B				Additional								Other				Total
		Common				Common				Paid-In				Retained				Comprehensive				Stockholders’
		Stock				Stock				Capital				Earnings				Loss				Equity
		(In thousands)
Balance at December 31, 2006		$	3,499			$	2,042			$	11,505			$	99,859			$	(10,087	)		$	106,818
Net income			—				—				—				2,627				—				2,627
Other comprehensive income, net of tax:
Unrealized holding gains arising during period net of $721 in taxes			—				—				—				—				1,137				1,137
Pension liability adjustment, net of $88 in taxes			—				—				—				—				126				126
Comprehensive income																							3,890
Conversion of Class B common stock to
Class A common stock, 13,850 shares			14				(14	)			—				—				—				—
Stock options exercised, 1,116 shares			1				—				27				—				—				28
Cash dividends paid, Class A common stock, $.24 per share			—				—				—				(840	)			—				(840	)
Cash dividends paid, Class B common stock, $.12 per share			—				—				—				(246	)			—				(246	)
Balance at June 30, 2007		$	3,514			$	2,028			$	11,532			$	101,400			$	(8,824	)		$	109,650
Balance at December 31, 2007		$	3,517			$	2,027			$	11,553			$	105,550			$	(3,841	)		$	118,806
Net income			—				—				—				3,676				—				3,676
Other comprehensive income, net of tax:
Unrealized holding losses arising during period net of $358 in taxes and realized gains			—				—				—				—				(575	)			(575	)
Pension liability adjustment, net of $44 in taxes			—				—				—				—				63				63
Comprehensive income																							3,164
Effects of changing pension plans measurement date pursuant to SFAS 158, net of $177 in taxes			—				—				—				(287	)			31				(256	)
Stock repurchased, 400 shares			(1	)			—				(6	)											(7	)
Cash dividends paid, Class A common stock, $.24 per share			—				—				—				(843	)			—				(843	)
Cash dividends paid, Class B common stock, $.12 per share			—				—				—				(244	)			—				(244	)
Balance at June 30, 2008		$	3,516			$	2,027			$	11,547			$	107,852			$	(4,322	)		$	120,620

See accompanying notes to unaudited consolidated interim financial statements.

Page 5 of 26

Century Bancorp, Inc.

		Six months ended June 30,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,676			$	2,627
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loans originated for sale			(341	)			—
Proceeds from mortgage loans sold			343				—
Gain on sales of loans			(2	)			—
Net gain on sales of investments			(102	)			—
Provision for loan losses			1,625				600
Deferred income taxes			(108	)			(357	)
Net depreciation and amortization			1,748				1,788
Decrease in accrued interest receivable			234				413
Increase in other assets			(2,654	)			(3,243	)
Increase in other liabilities			553				198
Net cash provided by operating activities			4,972				2,026
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale			181,724				99,889
Proceeds from sales of securities available-for-sale			68,736				—
Purchase of securities available-for-sale			(345,491	)			(49,721	)
Proceeds from maturities of securities held-to-maturity			71,498				9,008
Purchase of securities held-to-maturity			(91,431	)			—
Loan acquired, net of discount			(4,099	)			—
Net (increase) decrease in loans			(35,928	)			13,541
Capital expenditures			(1,994	)			(1,751	)
Net cash (used in) provided by investing activities			(156,985	)			70,966
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in time deposits			(48,274	)			(96,690	)
Net increase (decrease) in demand, savings, money market and NOW deposits			92,261				(38,221	)
Net proceeds from the exercise of stock options			—				28
Net payments for the repurchase of stock			(4	)			—
Cash dividends			(1,087	)			(1,086	)
Net increase (decrease) in securities sold under agreements to repurchase			13,160				(1,370	)
Net (decrease) increase in other borrowed funds			(32,300	)			12,160
Net cash provided by (used in) financing activities			23,756				(125,179	)
Net decrease in cash and cash equivalents			(128,257	)			(52,187	)
Cash and cash equivalents at beginning of period			299,901				159,668
Cash and cash equivalents at end of period		$	171,644			$	107,481
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	18,454			$	23,497
Income taxes			2,023				1,472
Change in unrealized (losses) gains on securities available-for-sale, net of taxes			(575	)			1,137
Pension liability adjustment, net of taxes			63				126
Effects of changing pension plans measurement date pursuant to SFAS 158, net of taxes			(256	)			—
Due to broker			6,459				—
Due from broker			19,865				—

See accompanying notes to unaudited consolidated interim financial statements.

Page 6 of 26

Century Bancorp, Inc.

Note 1. 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”); and Century Subsidiary Investments, Inc. III (“CSII III”). CSII, CSII II, CSII III are engaged in buying, selling and holding investment securities. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). CBCT II 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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and to 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. The Company’s Quarterly report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the Securities and Exchange Commission.

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

Whenever necessary prior period amounts were reclassified to conform with the current period presentation.

Note 2. Stock Option Accounting

Stock option activity under the Company’s stock option plan is as follows:

		June 30, 2008
						Weighted
						Average
		Amount				Exercise Price
Shares under option:
Outstanding at beginning of year			94,787			$	27.66
Cancelled			(12,050	)			29.36
Outstanding at end of period			82,737			$	27.41
Exercisable at end of period			82,737			$	27.41
Available to be granted at end of period			188,809

On June 30, 2008, the outstanding options to purchase 82,737 shares of Class A common stock have exercise prices between $15.063 and $35.010, with a weighted average exercise price of $27.41 and a weighted average remaining contractual life of 4.2 years. The average intrinsic value of options exercisable at June 30, 2008 had an aggregate value of $29,000.

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 the first six months of 2008.

Note 3. Employee Benefits

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

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

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

     Components of Net Periodic Benefit Cost for the Three Months Ending June 30,

										Supplemental Insurance/
		Pension Benefits								Retirement Plan
		2008				2007				2008				2007
		(In thousands)
Service cost		$	205			$	217			$	28			$	27
Interest			287				270				193				190
Expected return on plan assets			(333	)			(278	)			—				—
Recognized prior service (cost) benefit			(29	)			(29	)			16				16
Recognized net actuarial losses			53				100				13				20
Net periodic benefit cost		$	183			$	280			$	250			$	253

Components of Net Periodic Benefit Cost for the Six Months Ending June 30,

										Supplemental Insurance/
		Pension Benefits								Retirement Plan
		2008				2007				2008				2007
		(In thousands)
Service cost		$	410			$	434			$	56			$	54
Interest			574				540				387				379
Expected return on plan assets			(666	)			(555	)			—				—
Recognized prior service (cost) benefit			(58	)			(58	)			32				32
Recognized net actuarial losses			106				200				26				40
Net periodic benefit cost		$	366			$	561			$	501			$	505

Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2007 that it expected to contribute $1,387,000 to the Pension Plan in 2008. As of June 30, 2008, $693,000 of the contribution had been made. The Company expects to contribute an additional $694,000 by the end of the year.

Effective December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R),” which requires the Company to recognize the overfunded or underfunded status of a single employer defined benefit pension or postretirement plan as an asset or liability on its balance sheet and to recognize changes in the funded status in comprehensive income in the year in which the change occurred. However, gains or losses, prior service costs or credits, and transition assets or obligations that have not yet been included in net periodic benefit cost as of the end of 2006, the fiscal year in which the Statement is initially applied are to be recognized as components of the ending balance of accumulated other comprehensive income, net of tax. During 2006, the Company recorded an additional $2,158,000 pension liability adjustment, net of tax, through stockholders’ equity, as a result of the adoption of SFAS 158. The Company recognized $63,000, net of tax during the first six months of 2008, as amortization of amounts previously recognized in accumulated other comprehensive income. SFAS 158 also requires the Company to measure plan assets and benefit obligations as of the date of the Company’s fiscal year end effective for fiscal years ending after December 15, 2008. As a result of the change in the measurement date, the Company recorded an additional $433,000 pension liability adjustment as of January 1, 2008.

Note 4. Fair Value Measurements

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007. FASB Staff Position 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. SFAS 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels defined by the SFAS 157 hierarchy are as follows:

Level I — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly

liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.

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

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

The Company has evaluated SFAS 157 and the results of the fair value hierarchy required by SFAS 157 as of June 30, 2008 are as follows:

Fair Value Measurements Using

Quoted Prices

Significant

in Active Markets

Significant

Other Unobservable

Carrying

for Identical Assets

Observable Inputs

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

(In thousands)

Financial Instruments Measured at Fair Value on a Recurring Basis:

Securities AFS

$

468,827

$

861

$

465,293

$

2,673

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

Impaired Loans

728

—

728

—

Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral, in accordance with SFAS 114 (as amended). Specific provisions related to impaired loans recognized during the quarter and the year-to-date period for the estimated credit loss amounted to $274,000.

There were purchases of $2,520,000 and maturities of $753,000 for a net increase of $1,767,000 in the fair value to $2,673,000 of available-for-sale securities valued using significant unobservable inputs (Level 3), between April 1, 2008 and June 30, 2008. The increase was attributable to an increase in certain municipal securities without readily available market values. The securities in this category are generally equity investments or municipal securities with no readily determinable fair value. In the judgment of management, the fair value of these securities was considered to approximate their carrying value because they were deemed to be fully collectible and the rates paid on the securities were at least equal to rates paid on securities with similar maturities.

Note 5. Acquired Loans

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 accretable discount. The Company accreted $11,000 of the discount during the first six months of the year.

In accordance with Statement of Position (“SOP”) No. 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”, the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loan’s contractually required payments receivable in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. SOP No. 03-3 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.

The loan acquired during the first quarter of 2008 was not within the scope of the SOP.

Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of SOP No. 03-3. 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 non-performing 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 also include interest owed by the borrower prior to the Company’s acquisition of the loan, interest collected if on non-performing status, prepayment fees and other loan fees.

Accrual of discount accretion are discontinued when loan payments are ninety days or more past due or the collectibility of principal and interest is not probable or estimable.

Loans are returned to accrual status when the loan is brought current in accordance with management’s anticipated cash flows at the time of loan acquisition.

Note 6. Recent Accounting Developments

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities,” which gives entities the option to measure eligible financial assets, and
financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement is effective as of the beginning of a company’s first fiscal year after November 15, 2007. The Company adopted SFAS 159 on January 1, 2008 and did not elect to apply the fair value to any existing financial instruments.

In March 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-10 will require employers to recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement if the employer remains subject to the risks or rewards associated with the underlying insurance contract (in the postretirement period) that collateralizes the employer’s asset. Additionally, an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement by assessing what future cash flows the employer is entitled to,

if any, as well as the employer’s obligation and ability to repay the employer. The employer’s asset should be limited to the amount of the cash surrender value of the insurance policy, unless the arrangement requires the employee (or retiree) to repay the employer irrespective of the amount of the cash surrender value of the insurance policy (and assuming the employee (or retiree) is an adequate credit risk), in which case the employer should recognize the value of the loan including accrued interest, if applicable. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, earlier application permitted. Entities should recognize the effects of applying EITF 06-10 through either a change in accounting principle through a cumulative-effect adjustment to retained earnings in the statement of financial position as of the beginning of the year of adoption or through a change in accounting principle through retrospective application to all prior periods. The adoption of EITF 06-10 had no impact on the Company’s results of operation or its financial position.

Statement of Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”) and Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (“SFAS 160”). In December 2007, the FASB issued SFAS 141R and SFAS 160. These statements require significant changes in the accounting and reporting for business acquisitions and the reporting of noncontrolling interests in subsidiaries. Among many changes under SFAS 141R, an acquirer will record 100% of all assets and liabilities at fair value for partial acquisitions, contingent consideration will be recognized at fair value at the acquisition date with changes possibly recognized in earnings, and acquisition related costs will be expensed rather than capitalized. SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary. Key changes under the standard are that noncontrolling interests in a subsidiary will be reported as part of equity, losses allocated to a noncontrolling interest can result in a deficit balance, and changes in ownership interests that do not result in a change of control are accounted for as equity transactions and, upon a loss of control, gain or loss is recognized and the remaining interest is remeasured at fair value on the date control is lost. SFAS 141R applies prospectively to business combinations for which the acquisition is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The effective date for applying SFAS 160 is also the first annual reporting period beginning on or after December 15, 2008. Adoption of these statements will affect the Company’s accounting for any business acquisitions occurring after the effective date and the reporting of any noncontrolling interests in subsidiaries existing on or after the effective date.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Except for the historical information contained herein, this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, without limitation, (i) the fact that the Company’s success is dependent to a significant extent upon general economic conditions in New England, (ii) the fact that the Company’s earnings depend to a great extent upon the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings) generated by the Bank and thus the Bank’s results of operations may be adversely affected by increases or decreases in interest rates, (iii) the fact that the banking business is highly competitive and the profitability of the Company depends upon the Bank’s ability to attract loans and deposits within its market area, where the

Bank competes with a variety of traditional banking and other institutions such as credit unions and finance companies, and (iv) the fact that a significant portion of the Company’s loan portfolio is comprised of commercial loans, exposing the Company to the risks inherent in loans 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. Accordingly, the Company’s profitability may be negatively impacted by errors in risk analyses, and by loan defaults, and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions. These factors, as well as general economic and market conditions, may materially and adversely affect the market price of shares of the Company’s common stock. Because of these and other factors, past financial performance should not be considered an indicator of future performance. The forward-looking statements contained herein represent the Company’s judgment as of the date of this Form 10-Q, and the Company cautions readers not to place undue reliance on such statements.

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. The Company had total assets of approximately $1.7 billion as of June 30, 2008. The Company presently operates 22 banking offices in 16 cities and towns in Massachusetts ranging from Braintree in the south to Beverly in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.

During the fourth quarter of 2007, the Company sold the assets associated with the Sherman Union branch located on Commonwealth Avenue in Boston, Massachusetts as well as Automated Teller Machines (ATMs) located at or near Boston University. The buyer assumed the leases for the branch and ATMs. The deposits associated with the Sherman Union branch were transferred to Century’s Hotel Commonwealth branch located at 512 Commonwealth Avenue in Boston, Massachusetts. This resulted in a gain of $115,000.

During 2007, the Company entered into a lease agreement to open a branch located on Riverside Avenue in Medford, Massachusetts. The branch opened on April 14, 2008.

On August 17, 2007, the Company sold the building which houses one of its branches located at 55 High Street, Medford, Massachusetts for $1.5 million at market terms. The Bank relocated this branch to 1 Salem Street (formerly 3 Salem Street), Medford, Massachusetts. This sale resulted in a gain of $1,321,000. The branch opened on May 5, 2008.

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

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. 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 lock box

collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through its division, Investment Services at Century Bank, in conjunction with Linsco/Private Ledger Corp. (“LPL”), an unaffiliated registered securities broker-dealer and investment advisor.

The Company is also a provider of financial services, including cash management, transaction processing and short term financing to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with approximately 39% of the 351 cities and towns in Massachusetts.

Earnings for the second quarter ended June 30, 2008 were $1,876,000, or $0.34 per share diluted, compared to net income of $1,623,000, or $0.29 per share diluted, for the second quarter ended June 30, 2007. For the first six months of 2008, net income totaled $3,676,000, or $0.66 per share diluted, an increase of 39.9% when compared to net income of $2,627,000, or $0.47 per share diluted, for the same period a year ago. Throughout 2007 and the second quarter of 2008, the Company has seen improvement in its net interest margin as illustrated in the graph below:

The primary factors accounting for the increase in net interest margin are:

	•		a continuing decline in the cost of funds as a result of increased pricing discipline related to deposits,
	•		an increase in average loans outstanding during 2008,
	•		an increase in the loan yield due to an increase in prepayment fees, particularly in the second quarter of 2007,
	•		the maturity of lower-yielding investment securities,
	•		an increase in the slope of the yield curve, and
	•		an increase in investment yields due, in part, to taking advantage of elevated yields in the municipal auction rate securities market.

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.

In addition, a great deal of emphasis has been placed on cost control during 2008 as demonstrated by the increase of under 3% in operating expenses for the six-month period ended June 30, 2008 compared to the same period last year.

Financial Condition

Loans

On June 30, 2008, total loans outstanding, net, were $764.5 million, an increase of 5.3% from the total on December 31, 2007. At June 30, 2008, commercial real estate loans accounted for 40.8% and residential real estate loans, including home equity loans, accounted for 34.3% of total loans.

Commercial and industrial loans increased to $125.0 million at June 30, 2008 from $117.3 million on December 31, 2007. Construction loans decreased to $55.5 million at June 30, 2008 from $62.4 million on December 31, 2007.

The primary reason for the increase in loans was an increase in loan originations.

Allowance for Loan Losses

The allowance for loan losses was 1.24% of total loans on June 30, 2008 compared with 1.33% on December 31, 2007. The ratio has decreased mainly as a result of an increase in net charge-offs. Net charge-offs for the six months ended June 30, 2008 were $1,789,000 compared to net charge-offs of $999,000 for the same period in 2007. The increase in charge-offs was mainly attributable to small business loans. Increased provision for loan losses in 2008 as compared to 2007 have been made due primarily to an increase in net charge-offs and an increase in nonaccruing loans.

During 2008, the Company has experienced increased levels of charge-offs and nonaccruing loans. Due to current uncertainties in the economy, this trend may continue if borrowers are negatively impacted by future economic conditions. Management continually monitors trends in the loan portfolio to determine the appropriate level of allowance for loan losses.
At the current time, management believes that the allowance for loan losses is adequate.

Nonperforming Assets

The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated:

		June 30, 2008				December 31, 2007
		(Dollars in thousands)
Nonaccruing loans		$	3,382			$	1,312
Loans past due 90 days or more and still accruing		$	—			$	122
Other real estate owned		$	452			$	452
Nonaccruing loans as a percentage of total loans			.44	%			.18	%

As of June 30, 2008, the Company has classified its impaired loans as Level 2 within the fair value hierarchy according to SFAS 157. The fair values of these loans were based upon the estimated fair value of the underlying collateral, if any, which is considered an observable input.

Cash and Cash Equivalents

Cash and cash equivalents decreased mainly as a result of decreases in other borrowed funds. Other borrowed funds decreased mainly because of a repayment of short term borrowings.

Investments

Management continually evaluates its investment alternatives in order to properly manage the overall balance sheet mix. The timing of purchases, sales and reinvestments, if any, will be based on various factors including expectation of

movements in market interest rates, deposit flows and loan demand. Notwithstanding these events, it is the intent of management to grow the earning asset base mainly through loan originations while funding this growth through a mix of retail deposits, FHLB advances, and retail repurchase agreements.

		June 30, 2008				December 31, 2007
		(In thousands)
Securities Available-for-Sale (at Fair Market Value)
U.S Treasury		$	2,036			$	2,036
U.S. Government Sponsored Enterprises			187,230				218,729
Mortgage-backed Securities			214,442				162,162
Obligations Issued by States and Political Subdivisions			61,969				1,678
Other Bonds and Equity Securities			3,150				3,499
Total Securities Available-for-Sale		$	468,827			$	388,104

Included in Mortgage-backed securities are securities guaranteed by U.S. Government Sponsored Enterprises totaling $204,349,000 and $148,856,000 at June 30, 2008 and December 31, 2007, respectively. The remainder of the Mortgage-backed securities is issued by non-governmental entities.

Securities Held-to-Maturity (at Amortized Cost)
U.S. Government Sponsored Enterprises		$	53,994			$	94,987
Mortgage-backed Securities			149,699				88,723
Total Securities Held-to-Maturity		$	203,693			$	183,710

At June 30, 2008 and December 31, 2007, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises.

Securities Available-for-Sale

The securities available-for-sale portfolio totaled $468.8 million at June 30, 2008, an increase of 20.8% from December 31, 2007. Purchases of securities available-for-sale totaled $352.0 million for the six months ended June 30, 2008. These purchases were made to take advantage of rising rates and the somewhat steeper yield curve. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 5.9 years. Excluding auction rate municipal obligations (“ARS”) and variable rate demand notes (“VRDN”), which have maturities of up to 30 years, but reprice frequently, the estimated average remaining life is 3.8 years.

Included in Obligations Issued by States and Political Subdivisions as of June 30, 2008, are $44.3 million of ARS’s and $11.6 million of VRDN’s. These debt securities were issued by governmental entities, but are not debt obligations of the issuing entity. The securities are obligations of large non-profit entities. These obligations are variable rate securities with long-term maturities whose interest rates are set periodically through an auction process for ARS’s and by prevailing market rates for VRDN’s. Should the auction not attract sufficient bidders, the interest rate adjusts to the default rate defined in each obligation’s underlying documents. The Company increased its holdings in these types of securities during the second quarter of 2008 to take

advantage of yields available due to market disruption. Although many of these issuers have bond insurance, the Company purchased the securities based on the creditworthiness of the underlying obligor.

In the case of a failed auction, the Company may not have access to funds as only a limited market exists for failed ARS’s. As of June 30, 2008, three of the Company’s ARS’s with a fair value of $12.61 million and an amortized cost of $12.57 million were experiencing unsuccessful auctions. These ARS’s were purchased subsequent to their failure at discounts to their face amount. These securities were issued by governmental entities, and are the debt of non-profit organizations which the Company believes to be creditworthy. As of June 30, 2008 the weighted average taxable equivalent yield on these securities was 4.66%.

The majority of the Company’s securities AFS are classified as Level 2. 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 input include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators, industry and economic events are also monitored.

Securities available-for-sale totaling $2,673,000, or 0.16% of assets are classified as Level 3. These securities are generally equity investments or municipal securities with no readily determinable fair value. The securities are generally carried at cost with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.

Securities Held-to-Maturity

The securities held-to-maturity portfolio totaled $203.7 million on June 30, 2008, an increase of 10.9% from the total on December 31, 2007. These purchases were made to take advantage of rising rates and the somewhat steeper yield curve. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 3.7 years.

Deposits and Borrowed Funds

On June 30, 2008, deposits totaled $1.17 billion, representing a 3.9% increase in total deposits from December 31, 2007. Total deposits increased primarily as a result of increases in money market accounts and savings and NOW deposits, offset somewhat by decreases in time deposits and demand deposits. Money market accounts and savings and NOW deposits increased mainly because the Company competed more aggressively for these types of deposits during the first six months of the year. Time deposits decreased mainly because of decreases in higher rate deposits. The Company competed less aggressively for these types of deposits. Borrowed funds totaled $356.7 million compared to $375.9 million at December 31, 2007. Borrowed funds decreased due to the maturity of short-term borrowings.

Results of Operations

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 three-month periods indicated.

		Three Months Ended
		June 30, 2008												June 30, 2007
										Average												Average
		Average								Yield/				Average								Yield/
		Balance				Interest(1)				Rate				Balance				Interest(1)				Rate
ASSETS
Interest-earning assets:
Loans(2)		$	749,238			$	12,002				6.43	%		$	714,082			$	13,151				7.38	%
Securities available-for-sale(5):
Taxable			390,027				4,304				4.41				365,386				3,451				3.78
Tax-exempt			60,562				692				4.53				17				—				5.97
Securities held-to-maturity:
Taxable			195,570				2,094				4.28				259,258				2,349				3.62
Federal funds sold			142,441				733				2.04				144,760				1,903				5.26
Interest-bearing deposits in other banks			464				3				2.43				172				2				4.62
Total interest-earning assets			1,538,302				19,828				5.16				1,483,675				20,856				5.63
Non interest-earning assets			137,080												128,855
Allowance for loan losses			(9,648	)											(9,770	)
Total assets		$	1,665,734											$	1,602,760
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts		$	204,066			$	776				1.53	%		$	208,601			$	1,086				2.09	%
Savings accounts			165,719				682				1.66				102,304				504				1.98
Money market accounts			312,938				1,829				2.35				297,753				2,436				3.28
Time deposits			256,392				2,271				3.56				344,429				4,047				4.71
Total interest-bearing deposits			939,115				5,558				2.38				953,087				8,073				3.40
Securities sold under agreements to repurchase			97,126				359				1.49				83,073				771				3.72
Other borrowed funds and subordinated debentures			226,780				2,897				5.14				156,884				2,204				5.63
Total interest-bearing liabilities			1,263,021				8,814				2.81	%			1,193,044				11,048				3.71	%
Non interest-bearing liabilities
Demand deposits			259,633												276,860
Other liabilities			21,846												23,449
Total liabilities			1,544,500												1,493,353
Stockholders’ equity			121,234												109,407
Total liabilities & stockholders’ equity		$	1,665,734											$	1,602,760
Net interest income on a fully taxable equivalent basis							11,014												9,808
Less taxable equivalent adjustment							(358	)											(19	)
Net interest income						$	10,656											$	9,789
Net interest spread (3)											2.35	%											1.92	%
Net interest margin (4)											2.86	%											2.64	%

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 six-month periods indicated.

		Six Months Ended
		June 30, 2008												June 30, 2007
										Average												Average
		Average								Yield/				Average								Yield/
		Balance				Interest(1)				Rate				Balance				Interest(1)				Rate
ASSETS
Interest-earning assets:
Loans(2)		$	742,168			$	24,385				6.60	%		$	719,945			$	26,136				7.31	%
Securities available-for-sale(5):
Taxable			389,326				8,632				4.43				380,707				7,003				3.68
Tax-exempt			32,166				771				4.74				9				—				5.63
Securities held-to-maturity:
Taxable			192,451				3,999				4.16				261,474				4,746				3.63
Federal funds sold			146,941				1,948				2.62				142,695				3,727				5.22
Interest-bearing deposits in other banks			250				4				3.03				191				4				2.30
Total interest-earning assets			1,503,302				39,739				5.30				1,505,021				41,616				5.55
Non interest-earning assets			136,314												129,157
Allowance for loan losses			(9,710	)											(9,793	)
Total assets		$	1,629,906											$	1,624,385
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts		$	197,872			$	1,590				1.62	%		$	205,119			$	2,175				2.14	%
Savings accounts			158,271				1,483				1.88				103,195				1,007				1.97
Money market accounts			280,652				3,420				2.45				297,938				4,822				3.26
Time deposits			270,144				5,185				3.86				367,396				8,657				4.75
Total interest-bearing deposits			906,939				11,678				2.59				973,648				16,661				3.45
Securities sold under agreements to repurchase			95,100				875				1.86				83,599				1,544				3.72
Other borrowed funds and subordinated debentures			225,739				5,791				5.16				156,814				4,387				5.64
Total interest-bearing liabilities			1,227,778				18,344				3.00	%			1,214,061				22,592				3.75	%
Non interest-bearing liabilities
Demand deposits			259,513												278,371
Other liabilities			21,300												23,338
Total liabilities			1,508,591												1,515,770
Stockholders’ equity			121,315												108,615
Total liabilities & stockholders’ equity		$	1,629,906											$	1,624,385
Net interest income on a fully taxable equivalent basis							21,395												19,024
Less taxable equivalent adjustment							(507	)											(33	)
Net interest income						$	20,888											$	18,991
Net interest spread (3)											2.30	%											1.80	%
Net interest margin (4)											2.85	%											2.52	%