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

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

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 No.)

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

(781) 391-4000

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 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 Regulation 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).
o Yes o No

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

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 April 30, 2010, the Registrant had outstanding:

Class A Common Stock, $1.00 par value		3,518,917 Shares
Class B Common Stock, $1.00 par value		2,011,380 Shares

 

 

Century Bancorp, Inc.

		Page
Index		Number
Part I Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets: March 31, 2010 and December 31, 2009		3
Consolidated Statements of Income: Three (3) months ended March 31, 2010 and 2009		4
Consolidated Statements of Changes in Stockholders’ Equity: Three (3) months ended March 31, 2010 and 2009		5
Consolidated Statements of Cash Flows: Three (3) months ended March 31, 2010 and 2009		6
Notes to Consolidated Financial Statements		7-20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20-30
Item 3. Quantitative and Qualitative Disclosure About Market Risk		30
Item 4. Controls and Procedures		31
Part II. Other Information
Item 1. Legal Proceedings		31
Item 1A. Risk Factors		31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3. Defaults Upon Senior Securities		32
Item 5. Other Information		32
Item 6. Exhibits		32
Signatures		33
Exhibits
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — Item 1

Century Bancorp, Inc.
Consolidated Balance Sheets (unaudited)
(In thousands, except share data)

		March 31,				December 31,
		2010				2009
Assets
Cash and due from banks		$	38,127			$	42,627
Federal funds sold and interest-bearing deposits in other banks			181,461				356,015
Total cash and cash equivalents			219,588				398,642
Short-term investments			135,975				18,518
Securities available-for-sale, amortized cost $787,568 and $641,010, respectively			798,128				647,796
Securities held-to-maturity, fair value $235,039 and $221,413, respectively			229,502				217,643
Federal Home Loan Bank of Boston stock, at cost			15,531				15,531
Loans, net:
Commercial and industrial			138,656				141,061
Construction and land development			56,541				60,349
Commercial real estate			371,504				361,823
Residential real estate			189,428				188,096
Home equity			117,698				118,076
Consumer and other			7,296				7,720
Total loans, net			881,123				877,125
Less: allowance for loan losses			13,229				12,373
Net loans			867,894				864,752
Bank premises and equipment			21,176				21,015
Accrued interest receivable			6,372				5,806
Goodwill			2,714				2,714
Core deposit intangible			799				896
Other assets			58,788				60,722
Total assets		$	2,356,467			$	2,254,035
Liabilities
Deposits:
Demand deposits		$	278,338			$	279,874
Savings and NOW deposits			629,115				575,592
Money market accounts			515,740				553,883
Time deposits			399,657				292,638
Total deposits			1,822,850				1,701,987
Securities sold under agreements to repurchase			113,460				118,745
Other borrowed funds			211,968				234,024
Subordinated debentures			36,083				36,083
Due to broker			4,546				—
Other liabilities			29,582				30,466
Total liabilities			2,218,489				2,121,305
Stockholders’ Equity
Preferred stock — $1.00 par value; 100,000 shares authorized; no shares issued and outstanding			—				—
Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,515,917 shares and 3,515,767 shares, respectively			3,516				3,516
Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 2,014,380 and 2,014,530 shares, respectively			2,014				2,014
Additional paid-in capital			11,376				11,376
Retained earnings			123,004				120,125
			139,910				137,031
Unrealized gains on securities available-for-sale, net of taxes			6,376				4,129
Pension liability, net of taxes			(8,308	)			(8,430	)
Total accumulated other comprehensive loss, net of taxes			(1,932	)			(4,301	)
Total stockholders’ equity			137,978				132,730
Total liabilities and stockholders’ equity		$	2,356,467			$	2,254,035

See accompanying notes to unaudited consolidated interim financial statements.

Century Bancorp, Inc.
Consolidated Statements of Income (unaudited)
(In thousands, except share data)

		Three months ended March 31,
		2010				2009
Interest income
Loans		$	12,112			$	11,789
Securities held-to-maturity			1,985				2,223
Securities available-for-sale			5,033				5,029
Federal funds sold and interest-bearing deposits in other banks			378				542
Total interest income			19,508				19,583
Interest expense
Savings and NOW deposits			1,221				1,396
Money market accounts			1,224				1,935
Time deposits			1,708				2,607
Securities sold under agreements to repurchase			219				208
Other borrowed funds and subordinated debentures			2,411				2,645
Total interest expense			6,783				8,791
Net interest income			12,725				10,792
Provision for loan losses			1,575				1,850
Net interest income after provision for loan losses			11,150				8,942
Other operating income
Service charges on deposit accounts			1,923				2,022
Lockbox fees			700				741
Net gain on sales of investments			378				978
Other income			1,258				929
Total other operating income			4,259				4,670
Operating expenses
Salaries and employee benefits			6,925				6,888
Occupancy			1,068				1,145
Equipment			550				628
FDIC assessments			650				493
Other			2,373				2,296
Total operating expenses			11,566				11,450
Income before income taxes			3,843				2,162
Provision for income taxes			421				276
Net income		$	3,422			$	1,886
Share data:
Weighted average number of shares outstanding, basic			5,530,297				5,537,781
Weighted average number of shares outstanding, diluted			5,533,070				5,537,781
Net income per share, basic		$	0.62			$	0.34
Net income per share, diluted		$	0.62			$	0.34
Cash dividends paid:
Class A common stock		$	0.12			$	0.12
Class B common stock		$	0.06			$	0.06

See accompanying notes to unaudited consolidated interim financial statements.

Century Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Three Months Ended March 31, 2010 and 2009

																		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, 2008		$	3,511			$	2,027			$	11,475			$	112,135			$	(8,645	)		$	120,503
Net income			—				—				—				1,886				—				1,886
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net of $745 in taxes and $978 in realized net gains			—				—				—				—				1,159				1,159
Pension liability adjustment, net of $82 in taxes			—				—				—				—				123				123
Comprehensive income																							3,168
Stock repurchased, 3,800 shares			(3	)			—				(41	)			—				—				(44	)
Cash dividends paid, Class A common stock, $.12 per share			—				—				—				(421	)			—				(421	)
Cash dividends paid, Class B common stock, $.06 per share			—				—				—				(122	)			—				(122	)
Balance at March 31, 2009		$	3,508			$	2,027			$	11,434			$	113,478			$	(7,363	)		$	123,084
Balance at December 31, 2009		$	3,516			$	2,014			$	11,376			$	120,125			$	(4,301	)		$	132,730
Net income			—				—				—				3,422				—				3,422
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $1,527 in taxes and $378 in realized net gains			—				—				—				—				2,247				2,247
Pension liability adjustment, net of $81 in taxes			—				—				—				—				122				122
Comprehensive income																							5,791
Conversion of class B common stock to class A common stock, 150 shares			—				—				—				—				—				—
Cash dividends paid, Class A common stock, $.12 per share			—				—				—				(421	)			—				(421	)
Cash dividends paid, Class B common stock, $.06 per share			—				—				—				(122	)			—				(122	)
Balance at March 31, 2010		$	3,516			$	2,014			$	11,376			$	123,004			$	(1,932	)		$	137,978

See accompanying notes to unaudited consolidated interim financial statements.

Century Bancorp, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)

		Three months ended March 31,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,422			$	1,886
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sales of investments			(378	)			(978	)
Provision for loan losses			1,575				1,850
Deferred income taxes			(471	)			(675	)
Net depreciation and amortization			1,474				1,056
Increase in accrued interest receivable			(566	)			(175	)
Decrease (increase) in other assets			781				(1,605	)
(Decrease) increase in other liabilities			(669	)			1,381
Net cash provided by operating activities			5,168				2,740
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments			5,633				6,435
Purchase of short-term investments			(123,090	)			(72,272	)
Proceeds from maturities of securities available-for-sale			121,737				101,798
Proceeds from sales of securities available-for-sale			14,229				30,973
Purchase of securities available-for-sale			(278,267	)			(149,896	)
Proceeds from maturities of securities held-to-maturity			22,360				20,122
Purchase of securities held-to-maturity			(34,389	)			(67,818	)
Net increase in loans			(4,705	)			(6,471	)
Capital expenditures			(709	)			(181	)
Net cash used in investing activities			(277,201	)			(137,310	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposits			107,019				5,606
Net increase in demand, savings, money market and NOW deposits			13,844				201,058
Net payments for the repurchase of stock			—				(44	)
Cash dividends			(543	)			(543	)
Net decrease in securities sold under agreements to repurchase			(5,285	)			(1,718	)
Net decrease in other borrowed funds			(22,056	)			(75,136	)
Net cash provided by financing activities			92,979				129,223
Net decrease in cash and cash equivalents			(179,054	)			(5,347	)
Cash and cash equivalents at beginning of period			398,642				156,168
Cash and cash equivalents at end of period		$	219,588			$	150,821
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	6,768			$	8,918
Income taxes			860				108
Change in unrealized gains on securities available-for-sale, net of taxes			2,247				1,159
Pension liability adjustment, net of taxes			122				123
Due to broker			4,546				23,101

See accompanying notes to unaudited consolidated interim financial statements.

Century Bancorp, Inc.
Notes to Unaudited Consolidated Interim Financial Statements
Three Months Ended March 31, 2010 and 2009

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”). 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 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, 2009, as 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. Recent Market Developments

The financial services industry is facing unprecedented challenges in the face of the current national and global economic crisis. The global and U. S. economies are experiencing significantly reduced business activity. Dramatic declines in the housing market during the past two years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital; to merge with larger and stronger institutions; and, in some cases, to fail. The Company is fortunate that the markets it serves have been impacted to a lesser extent than many areas around the country.

In response to the financial crises affecting the banking system and financial markets, there have been several announcements of federal programs designed to purchase assets from, provide equity capital to, and guarantee the liquidity of the industry.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. The EESA authorizes the U.S. Treasury to, among other things, purchase up to $750 billion of mortgages, mortgage-backed securities, and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Company does not expect to participate in the sale of any of our assets into these programs. EESA, as amended, also increases the FDIC deposit insurance limit from $100,000 to $250,000 through December 31, 2013.

On October 14, 2008, the U.S. Treasury announced that it would purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Assets Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), the U.S. Treasury made $250 billion of capital available (from the $750 billion authorized by the EESA) to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the U.S. Treasury received warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions were required to adopt the U. S. Treasury’s standards for executive compensation, dividend restrictions and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program. The U.S. Treasury also announced that nine large financial institutions had already agreed to participate in the TARP Capital Purchase Program. Subsequently, a number of smaller institutions had participated in the TARP Capital Purchase Program. On December 18, 2008, the Company announced in a press release, it had received preliminary approval from the U.S. Treasury to participate in the TARP Capital Purchase Program, in an amount up to $30 million in the form of Century Bancorp, Inc. preferred stock and warrants to purchase Class A common stock. In light of uncertainty surrounding additional restrictions that may be imposed on participants under pending legislation, the Company, on January 14, 2009, informed the U.S. Treasury that it would not be closing on the transaction on January 16, 2009, as originally scheduled. The Company subsequently withdrew its application.

On October 14, 2008, the U. S. Treasury and the FDIC jointly announced a new program, known as the Temporary Liquidity Guarantee Program (“TLGP”), to strengthen confidence and encourage liquidity in the nation’s banking system. The TLGP consists of two programs: the Debt Guarantee Program (“DGP”) and the Transaction Account Guarantee Program (“TAGP”). Under the DGP, as amended, the FDIC will guarantee certain newly issued senior unsecured debt of participating banks, thrifts and certain holding companies issued from October 14, 2008 through October 31, 2009, which debt matures on or prior to December 31, 2012, up to a fixed maximum amount per participant. In addition, under the TAGP, the FDIC will fully guarantee deposits in

noninterest bearing transaction accounts without dollar limitation through December 31, 2009. Institutions opting to participate in the DGP will be charged a 50-, 75- or 100-basis point fee (depending on maturity) for the guarantee of eligible debt, and a 10-basis point assessment will be applicable to deposits in noninterest bearing transaction accounts at institutions participating in the TAGP that exceed the existing deposit insurance limit of $250,000. The Company opted to participate in both the DGP and the TAGP. The TAGP has been extended through June 30, 2010. The annual assessment rate that will apply during the extension period will be either 15, 20 or 25 basis points, depending on the risk category assigned to the institution under the FDIC’s risk-based premium system. On April 13, 2010 the FDIC approved an interim rule to extend the TAGP to December 31, 2010. The Company anticipates that it will continue to participate in the TAGP through December 31, 2010. The interim rule gives the FDIC discretion to extend the program to the end of 2011, without additional rulemaking, if it determines that economic conditions warrant such an extension.

On 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 $8.2 million as of March 31, 2010. The Company’s quarterly risk-based deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Company.

Note 3. Stock Option Accounting

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

		March 31, 2010
						Weighted
						Average
		Amount				Exercise Price
Shares under option:
Outstanding at beginning of year			68,637				$26.09
Cancelled			(975	)			25.70
Outstanding at end of period			67,662				$26.09
Exercisable at end of period			67,662				$26.09
Available to be granted at end of period			203,884

On March 31, 2010, the outstanding options to purchase 67,662 shares of Class A common stock have exercise prices between $15.06 and $35.01, with a weighted average exercise price of $26.09 and a weighted average remaining contractual life of 3.0 years. The intrinsic value of options exercisable at March 31, 2010 had an aggregate value of $73,200.

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 three months of 2010.

Note 4. Securities Available-for-Sale

		March 31, 2010																December 31, 2009
						Gross				Gross												Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
		(In thousands)
U.S. Treasury		$	1,998			$	10			$	—			$	2,008			$	1,998			$	5			$	—			$	2,003
U.S. Government Sponsored Enterprises			268,057				525				222				268,360				192,942				374				952				192,364
Small Business Administration			10,485				—				105				10,380				—				—				—				—
U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities			466,160				11,148				244				477,064				410,181				8,855				524				418,512
Privately Issued Residential Mortgage Backed Securities			5,088				—				234				4,854				5,383				—				473				4,910
Privately Issued Commercial Mortgage Backed Securities			398				7				—				405				537				7				—				544
Obligations Issued by States and Political Subdivisions			32,040				125				470				31,695				26,627				130				468				26,289
Other Debt Securities			2,300				—				37				2,263				2,300				—				41				2,259
Equity Securities			1,042				100				43				1,099				1,042				71				198				915
Total		$	787,568			$	11,915			$	1,355			$	798,128			$	641,010			$	9,442			$	2,656			$	647,796

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 $364,488,000 and $322,064,000 at March 31, 2010 and December 31, 2009, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank amounting to $165,349,000 and $172,497,000 at March 31, 2010 and December 31, 2009 respectively. The Company realized gross gains of $378,000 from the proceeds of $14,229,000 from the sales of available-for-sale securities for the three months ended March 31, 2010. The Company realized gross gains of $978,000 from the proceeds of $30,973,000 from the sales of available-for-sale securities for the three months ended March 31, 2009.

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 3^rd quarter of 2008.

The following table shows the maturity distribution of the Company’s securities available-for-sale at March 31, 2010.

		Amortized				Fair
		Cost				Value
		(In thousands)
Within one year		$	38,639			$	39,447
After one but within five years			615,358				624,721
After five but within ten years			108,450				109,190
More than 10 years			22,580				22,208
Non-maturing			2,542				2,562
Total		$	787,569			$	798,128

The weighted average remaining life of investment securities available-for-sale at March 31, 2010 was 3.8 years. Included in the weighted average remaining life calculation at March 31, 2010 was $259,407,000 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 March 31, 2010. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 33 and 15 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 304 holdings at March 31, 2010.

As of March 31, 2010, management has 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 with unrealized losses 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 were 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 concentrations 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.

		March 31, 2010
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
Temporarily Impaired Investments*
U.S. Government Sponsored Enterprises		$	100,210			$	222			$	—			$	—			$	100,210			$	222
U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities			32,719				227				10,768				17				43,487				244
Privately Issued Residential Mortgage Backed Securities			—				—				4,854				234				4,854				234
Privately Issued Commercial Mortgage Backed Securities			—				—				—				—				—				—
Obligations Issued by States and Political Subdivisions			3,578				189				4,393				281				7,971				470
SBA Backed Securities			10,380				105				—				—				10,380				105
Other Debt Securities			—				—				1,463				37				1,463				37
Equity Securities			—				—				578				43				578				43
Total temporarily impaired securities		$	146,887			$	743			$	22,056			$	612			$	168,943			$	1,355

*		At March 31, 2010, the Company does not intend to sell any of its debt securities and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost. The unrealized losses on Obligations Issued by States and Political Subdivisions were considered by management to be temporary in nature. Full collection of those debt securities is expected because the financial condition of the obligors is considered to be sound, there has been no default in scheduled payment and the debt securities are rated investment grade. The unrealized loss on U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprises Mortgage Backed Securities related primarily to interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010. Excluded from the table above are two equity securities that were written down by $76,000. The fair value is $131,000 with an unrealized gain of $22,000. These stocks were deemed to be other than temporarily impaired based on the extent of the decline in value and the length of time the stocks had been trading below cost.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2009. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 41 and 17 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 287 holdings at December 31, 2009. The Company believes that the investments are temporarily impaired.

		December 31, 2009
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
Temporarily Impaired Investments*
U.S. Government Sponsored Enterprises		$	127,259			$	952			$	—			$	—			$	127,259			$	952
U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities			51,903				428				11,752				96				63,655				524
Privately Issued Residential Mortgage Backed Securities			—				—				4,910				473				4,910				473
Obligations Issued by States and Political Subdivisions			3,427				187				4,393				281				7,820				468
Other Debt Securities			—				—				1,459				41				1,459				41
Equity Securities			—				—				495				198				495				198
Total temporarily impaired securities		$	182,589			$	1,567			$	23,009			$	1,089			$	205,598			$	2,656

*		At December 31, 2009, 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, 2009. Excluded from the table above are two equity securities that were written down by $76,000. The fair value is $121,000 with an unrealized gain of $12,000. 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.

Note 5. Investment Securities Held-to-Maturity

		March 31, 2010																December 31, 2009
						Gross				Gross												Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
														(In thousands)
U.S. Government Sponsored Enterprises		$	89,599			$	123			$	202			$	89,520			$	69,555			$	36			$	707			$	68,884
U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities			139,903				5,616				—				145,519				148,088				4,490				49				152,529
Total		$	229,502			$	5,739			$	202			$	235,039			$	217,643			$	4,526			$	756			$	221,413

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $19,994,000 and $9,036,000 at March 31, 2010 and December 31, 2009, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $107,963,000 and $83,693,000 at March 31, 2010 and December 31, 2009, respectively.

At March 31, 2010 and December 31, 2009, all mortgage-backed securities are obligations of U.S. Government Agencies and Government Sponsored Enterprises. Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the maturity distribution of the Company’s securities held-to-maturity at March 31, 2010.

		Amortized				Fair
		Cost				Value
		(In thousands)
Within one year		$	6,559			$	6,635
After one but within five years			177,630				183,204
After five but within ten years			45,313				45,200
Total		$	229,502			$	235,039

The weighted average remaining life of investment securities held-to-maturity at March 31, 2010 was 3.9 years. Included in the weighted average remaining life calculation at March 31, 2010 were $89,599,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at March 31, 2010. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 5 and 0 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 97 holdings at March 31, 2010.

As of March 31, 2010, management has 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 notary of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary.

		March 31, 2010
		Less Than 12 Months								12 Months or Longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
Temporarily Impaired Investments*
U.S. Government Sponsored Enterprises		$	34,783			$	202			$	—			$	—			$	34,783			$	202
Total temporarily impaired securities		$	34,783			$	202			$	—			$	—			$	34,783			$	202

*		The unrealized loss on U.S. Government Agency and Sponsored Enterprises related primarily to interest rates and not credit quality and because the Company does not intend to sell any of these securities and it is not likely that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010.

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2009. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 12 and 0

securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 94 holdings at December 31, 2009.

		December 31, 2009
		Less Than 12 Months								12 Months or Longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
Temporarily Impaired Investments*
U.S. Government Sponsored Enterprises		$	49,848			$	707			$	—			$	—			$	49,848			$	707
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities			11,152				49				—				—				11,152				49
Total temporarily impaired securities		$	61,000			$	756			$	—			$	—			$	61,000			$	756

*		The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities related primarily to interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2009.

Note 6. 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 Ended March 31,

										Supplemental Insurance/
		Pension Benefits								Retirement Plan
		2010				2009				2010				2009
		(In thousands)
Service cost		$	213			$	196			$	147			$	113
Interest			333				308				233				233
Expected return on plan assets			(342	)			(281	)			—				—
Recognized prior service cost (benefit)			(26	)			(29	)			27				27
Recognized net actuarial losses			159				171				43				35
Net periodic benefit cost		$	337			$	365			$	450			$	408

Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2009 that it expected to contribute $1,275,000 to the Pension Plan in 2010. As of March 31, 2010, $318,750 of the contribution had been made. The Company expects to contribute an additional $956,250 by the end of the year.

Note 7. Fair Value Measurements

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

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

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

Level III — 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 results of the fair value hierarchy as of March 31, 2010 are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

Securities AFS :

		Fair Value Measurements Using
						Quoted Prices
						In Active								Significant
						Markets for				Significant				Other
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		Carrying Value				(Level 1)				(Level 2)				(Level 3)
		(In thousands)
U.S. Treasury		$	2,008			$	—			$	2,008			$	—
U.S. Government Sponsored Enterprises			268,360				—				268,360				—
SBA Backed Securities			10,380				—				10,380				—
U.S. Government Agency and Sponsored Mortgage Backed Securities			477,064				—				477,064				—
Privately Issued Residential Mortgage Backed Securities			4,854				—				4,854				—
Privately Issued Commercial Mortgage Backed Securities			405				—				405				—
Obligations Issued by States and Political Subdivisions			31,695				—				16,817				14,878
Other Debt Securities			2,263				—				2,263				—
Equity Securities			1,099				865				—				234
Total		$	798,128			$	865			$	782,151			$	15,112

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

Impaired Loans			1,879				—				—				1,879

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. Specific provisions relates to impaired loans recognized for the three month period ended March 31, 2010 for the estimated credit loss amounted to $443,000. The Company uses discounts to appraisals based on management’s observations of the local real estate market for loans in this category. There were no transfers of financial instruments to or from Level 1 and Level 2 classifications.

The changes in Level 3 securities for the three month period ended March 31, 2010 are shown in the table below:

						Obligations
						Issued by
						States &
		Auction Rate				Political				Equity
		Securities				Subdivisions				Securities				Total
		(In thousands)
Balance at December 31, 2009		$	7,820			$	5,623			$	234			$	13,677
Purchases			—				3,053				—				3,053
Maturities			—				(1,618	)			—				(1,618	)
Balance at March 31, 2010		$	7,820			$	7,058			$	234			$	15,112

The amortized cost of Level 3 securities was $15.6 million with an unrealized loss of $500,000. 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 changes in Level 3 securities for the three month period ended March 31, 2009 are shown in the table below:

						Obligations
						Issued by
						States &
		Auction Rate				Political				Equity
		Securities				Subdivisions				Securities				Total
		(In thousands)
Balance at December 31, 2008		$	—			$	3,300			$	170			$	3,470
Purchases			—				957				—				957
Maturities			—				(450	)			—				(450	)
Reclassification			21,061				—				—				21,061
Balance at March 31, 2009		$	21,061			$	3,807			$	170			$	25,038

There was a $21.1 million reclassification of failed auction rate securities to Level 3 during the first quarter of 2009 due to the lack of an active market.

Note 8. Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating fair values of its financial instruments.

Excluded from this disclosure are all nonfinancial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair values of these assets because of the short-term nature of these financial instruments.

Short-term Investments

The fair value of short-term investments is estimated using the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for short-term investments of similar remaining maturities.

Securities Held-to-Maturity and Securities Available-for-Sale

The 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 inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored.

Securities available-for-sale totaling $15.1 million, or 0.64% of assets are classified as Level 3. These securities are generally failed auction rate securities, equity investments or obligations of states and political subdivisions with no readily determinable fair

value. Failed auction rate securities were reclassified from Level 2 to Level 3 at the end of the first quarter of 2009 due to the lack of an active market. Fair values for Level 3 securities are generally arrived at based upon a review of market trades, if any, as well as an analysis of the security based upon market liquidity and prevailing market interest rates.

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.

Accrued Interest Receivable and Payable

The carrying amounts for accrued interest receivable and payable approximate fair values because of the short-term nature of these financial instruments.

Deposits

The fair value of deposits, with no stated maturity, is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on the deposit products of similar maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding (“deposit base intangibles”).

Repurchase Agreements and Other Borrowed Funds

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

Subordinated Debentures

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

Off-Balance Sheets Instruments

The fair values of the Company’s unused lines of credit and unadvanced portions of construction loans, commitments to originate and sell loans and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The carrying amounts and fair values of the Company’s financial instruments are as follows:

		March 31, 2010								December 31, 2009
		Carrying								Carrying
		Amounts				Fair Value				Amounts				Fair Value
		(In thousands)
Financial assets:
Cash and cash equivalents		$	219,588			$	219,588			$	398,642			$	398,642
Short-term investments			135,975				135,935				18,518				18,665
Securities available-for-sale			798,128				798,128				647,796				647,796
Securities held-to-maturity			229,502				235,039				217,643				221,413
Net loans			881,123				892,597				877,125				876,197
Accrued interest receivable			6,372				6,372				5,806				5,806
Financial liabilities:
Deposits			1,822,850				1,827,146				1,701,987				1,706,271
Repurchase agreement and other borrowed funds			325,428				332,862				352,769				359,989
Subordinated debentures			36,083				37,236				36,083				36,136
Accrued interest payable			1,051				1,051				1,116				1,116
Standby letters of credit			—				16				—				93

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. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. 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.

Note 9. Recent Accounting Developments

FASB ASC 860, Transfers and Servicing (formerly Statement of Financial Accounting Standards No.166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140”). In June, 2009, the FASB issued FASB ASC 860. FASB ASC 860 was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically to address: (1) practices that have developed since the issuance of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that

have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on or after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. FASB ASC 860 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.

FASB ASC 810, Consolidation (formerly Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”). In June 2009, the FASB issued FASB ASC 810. FASB ASC 810 was issued to improve financial reporting by enterprises involved with variable interest entities, specifically to address: (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in FASB ASC 860 and (2) constituent concerns about the application of certain key provisions of FASB ASC 860, including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FASB ASC 810 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.

In January 2010, the FASB issued an amendment to the Fair Value Measurements and Disclosures topic of the ASC. This amendment requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this Statement did not have a material effect on the Company’s financial statements at the date of adoption, January 1, 2010.

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 $2.4 billion as of March 31, 2010. The Company presently operates 22 banking offices in 17 cities and towns in Massachusetts ranging from Braintree in the south to Beverly in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.

During October 2008, the Company received regulatory approval to close a branch on Albany Street in Boston, Massachusetts. This branch closed in January 2009.

During August 2009, the Company entered into a lease agreement to open a branch located at Coolidge Corner in Brookline, Massachusetts. The branch opened on April 27, 2010.

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 a program called Investment Services at Century Bank, which is supported by LPL Financial, a full-service securities brokerage business.

The Company is also a provider of financial services, including cash management, transaction processing and short term financing to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with approximately 50% of the 351 cities and towns in Massachusetts.

Earnings for the first quarter ended March 31, 2010 were $3,422,000, or $0.62 per share diluted, compared to net income of $1,886,000, or $0.34 per share diluted, for the first quarter ended March 31, 2009.

Net interest income totaled $12.7 million for the first three months of 2010 compared to $10.8 million for 2009. The 17.9% increase in net interest income for the period is mainly due to a 23.7% increase in the average balances of earning assets, combined with a similar increase in deposits. The increased volume was partially offset by a decrease of two basis points in the net interest margin. The net interest margin decreased from 2.57% on a fully taxable equivalent basis in 2009 to 2.55% on the same basis for 2010.

Throughout 2008, the Company had seen improvement in its net interest margin; however, the first quarter of 2009 reflects a decrease in the net interest margin with a modest increase during the second quarter and third quarter of 2009 followed by a decrease during the fourth quarter of 2009 and the first quarter of 2010 as illustrated in the graph below:

The primary factors accounting for the increase in the net interest margin for 2008 are:

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

The primary factor accounting for the general decrease in the net interest margin during 2009 and 2010 was a large influx of deposits, primarily from municipalities, and a corresponding increase in short-term investments.

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

For the three months ended March 31, 2010, the loan loss provision was $1.6 million compared to a provision of $1.9 million for the same period last year for a decrease of $275,000. The decrease in the provision was due to a decrease in loans on nonaccrual.

Nonperforming loans decreased to $11.9 million at March 31, 2010 from $14.7 million on March 31, 2009.

The Company capitalized on favorable market conditions and realized $378,000 of net gains on sales of investments during the quarter ended March 31, 2010. Included in operating expenses for the quarter ended March 31, 2010 are FDIC assessments of $650,000, as compared to $493,000 for 2009. FDIC assessments increased primarily as a result of an increase in the assessment rate as well as an increase in the deposit base.

For the first quarter of 2010, the Company’s effective income tax was 11.0% compared to 12.8% for last year’s corresponding quarter. The effective income tax rate decreased primarily as a result of increased levels of tax-exempt income .

Financial Condition

Loans

On March 31, 2010, total loans outstanding, net, were $881.1 million, an increase of 4.6% from the total on December 31, 2009. At March 31, 2010, commercial real estate loans accounted for 42.2% and residential real estate loans, including home equity loans, accounted for 34.9% of total loans.

Commercial and industrial loans decreased to $138.7 million at March 31, 2010 from $141.1 million on December 31, 2009. Construction loans decreased to $56.5 million at March 31, 2010 from $60.3 million on December 31, 2009.

Allowance for Loan Losses

The allowance for loan loss at March 31, 2010 was $13.2 million as compared to $12.4 million at December 31, 2009. This increase was due to the provision for loan losses exceeding net loan charge offs for the three months ended March 31, 2010 as shown in the table below. The provision for loan losses decreased by $275,000 from $1.9 million to $1.6 million; this decrease in the provision was due to a decrease in nonperforming loans. Also, the level of the allowance for loan losses to total loans increased from 1.49% at December 31, 2009 to 1.50% at March 31, 2010. This increase was due to the provision for loan losses exceeding net loan charge offs for the three months ended March 31, 2010. In evaluating the allowance for loan losses the Company considered the following categories to be higher risk:

	•		Small business loans: The outstanding loan balances of small business loans is $50.2 million at March 31, 2010. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion.
	•		Construction loans: The outstanding loan balance of construction loans at March 31, 2010 is $56.5 million. A major factor in nonaccrual loans is two large construction loans. Based on this fact, and the general local construction conditions facing construction, the management closely monitors all construction loans and considers this type of loans to be higher risk.
	•		Higher balance loans: Loans greater than $1.0 million are considered “high balance loans”. The balance of these loans is $431.2 million at March 31,

2010. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high balance loans.

The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated:

		Three months ended
		March 31,
		(In thousands)
		2010				2009
Allowance for loan losses, beginning of period		$	12,373			$	11,119
Loans charged off			(832	)			(640	)
Recoveries on loans previously charged-off			113				193
Net charge-offs			(719	)			(447	)
Provision charged to expense			1,575				1,850
Allowance for loan losses, end of period		$	13,229			$	12,522