CENTURY BANCOPR, INC.

(Title of class)

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. þYes oNo

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). þYes oNo

State the aggregate market value of the registrant’s voting and nonvoting stock held by nonaffiliates, computed using the closing price as reported on Nasdaq as of June 30, 2003 was $103,790,834.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of February 29, 2004:

Class A Common Stock, $1.00 par value 3,409,663 Shares
Class B Common Stock, $1.00 par value 2,115,100 Shares

PART I

ITEM 1. BUSINESS

The Company

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”), is a holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary, Century Bank and Trust Company, A Massachusetts state chartered trust company formed in 1969 (the “Bank”). The Company had total assets of approximately $1.7 billion on December 31, 2003. The Company presently operates 21 banking offices in 16 cities and towns in Massachusetts ranging from Braintree, south of Boston, to Peabody, north of Boston. 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 throughout Massachusetts.

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, 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, consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate 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 subsidiary, Century Financial Services, Inc. in conjunction with Commonwealth Equity Services, Inc., a full service securities brokerage business.

The Company is also a provider of financial services including cash management, transaction processing, short term financing and intermediate term leasing to municipalities in Massachusetts. The Company has deposit relationships with approximately 30% of the 351 cities and towns in Massachusetts.

During February 2003 the Company began construction of an addition to its corporate headquarters building. The property is located adjacent to its current headquarters in Medford, Massachusetts and will provide additional corporate office space and an expanded branch banking floor. The building is scheduled to be completed during the first quarter of 2004 and the current cost estimate including land costs is $12 million. As of December 31, 2003, $9.4 million has been expended. The capital expenditure will provide a five story addition containing approximately 50 thousand square feet of office and branch space. The Company’s current plan is to sublease approximately 20 to 30 thousand feet of the building.

On March 21, 2003, the Company completed the acquisition of Capital Crossing Bank’s branch office at 1220 Boylston Street, Chestnut Hill, Massachusetts, and substantially all of the retail deposits at Capital Crossing’s main office at 101 Summer Street, Boston, Massachusetts. The Bank closed the Chestnut Hill branch and transferred all customers of the branch to its nearby branch office at 1184 Boylston Street, Brookline, Massachusetts. In addition, The Bank transferred all of the retail deposits from Capital Crossing’s Summer Street branch to its branch at 24 Federal Street, Boston, Massachusetts. The acquisition included $192.7 million in deposits. The acquisition also included a premium paid to Capital Crossing of approximately $3.9 million. This premium was subsequently reduced by a gain of $395 thousand from the sale of the acquired Chestnut Hill branch and a rebate of $282 thousand for closed accounts at the Boston office.

During the third quarter of 2003, the Company announced plans to continue its stock repurchase plan. Under the program, the Company is authorized to repurchase up to 300,000 shares, or less than 9%, of Century Bancorp Class A Common Stock. The program expires on July 15, 2004.

During 2003, the Company opened two new branch locations in Boston, Massachusetts. Both branches were opened during August 2003. In 2002, the Company opened one new branch location on Boston, Massachusetts.

Securities and Exchange Commission Availability of Filings on Company Web Site

Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission (SEC). The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 11-K (Annual Report for Employees’ Stock Purchase and Savings Plans), Form 8-K (Report of Unscheduled Material Events), Form S-4, S-3 and 8-A (Registration Statements), and Form DEF 14A (Proxy Statement). The Company may file additional forms. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at www.sec.gov, in which all forms filed electronically may be accessed. Additionally, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the SEC and additional shareholder information is available free of charge on the Company’s website: www.century-bank.com.

Employees

As of December 31, 2003, the Company had 280 full-time and 105 part-time employees. The Company’s employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good.

Financial Services Modernization

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

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

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

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

Holding Company Regulation

The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”) and is registered as such with the Board of Governors of the Federal Reserve System (the “FRB”), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (i) acquiring

direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth.

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

The Company and its subsidiaries are examined by federal and state regulators. The FRB has responsibility for holding company activities and performed a review in 2001.

Federal Deposit Insurance Corporation Improvement Act of 1991

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

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

Interstate Banking

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

USA Patriot Act

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

Sarbanes-Oxley Act

The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection and enhanced and timely disclosure of corporate information. The SEC has adopted or proposed several implementing rules and the New York Stock Exchange, and the National Association of Securities Dealers, Inc. has proposed corporate governance rules that have been presented to the SEC for review and approval. The proposed changes are intended to allow stockholders to monitor more effectively the performance of companies and management. Effective August 29, 2002, as directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal controls; that they have made certain disclosures to the Company’s auditors and the Board of Directors about the Company’s internal controls and that they have included information in the Company’s quarterly and annual reports about their evaluation of the Company’s internal controls and whether there have been significant changes in the Company’s internal controls or in other factors that could significantly affect controls subsequent to the evaluation.

Competition

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

ITEM 2. PROPERTIES

The Company owns its main banking office, headquarters, and operations center in Medford, which is currently being expanded, and 12 of the 20 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2004 to 2026.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s Stockholders during the fourth quarter of the fiscal year ended December 31,2003.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) The Class A Common Stock of the Company is traded on the NASDAQ National Market system under the symbol “CNBKA.” The price range of the Company’s Class A common stock since January 1,2001 is shown on page 6. The Company’s Class B Common Stock is not traded on NASDAQ or any other national securities exchange.

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

(b) Approximate number of equity security holders as of December 31, 2003.


	Approximate Number
Title of Class	of Record Holders
Class A Common Stock		387
Class B Common Stock		50

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

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


	Dividends Per Share
	Class A		Class B
2001
First quarter	$	.090	$	.0450
Second quarter		.090		.0450
Third quarter		.090		.0450
Fourth quarter		.100		.0500
2002
First quarter	$	.100	$	.0500
Second quarter		.100		.0500
Third quarter		.110		.0550
Fourth quarter		.110		.0550
2003
First quarter	$	.110	$	.0550
Second quarter		.110		.0550
Third quarter		.110		.0550
Fourth quarter		.120		.0600

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

ITEM 6. SELECTED FINANCIAL DATA

The information required herein is shown on page 7 and 8.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The information required herein is shown on pages 9 through 15.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required herein is shown on page 13 and 14.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required herein is shown on pages 16 through 38.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

The principal Executive Officer and principal Financial Officer have evaluated the disclosure controls and procedures as of a date within 90 days before the filing date of this annual report. Based on this evaluation, the principal Executive Officer and principal Financial Officer have concluded that the disclosure controls and procedures effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act, is accumulated and reported to Management (including the principal Executive Officer and the principal Financial Officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal controls and there have been no significant changes in its internal controls or in other factors that could significantly affect those controls subsequent to the date of its last evaluation.

Financial Highlights


	2003			2002			2001
(dollars in thousands, except share data)
YEAR-END
Total assets	$	1,688,911		$	1,557,201		$	1,271,022
Total loans		512,314			514,249			462,772
Total deposits		1,338,853			1,146,284			888,408
Total stockholders’ equity		103,728			100,256			84,599
YEARLY AVERAGES
Total assets	$	1,577,363		$	1,321,593		$	1,058,924
Total earning assets		1,471,345			1,231,440			978,371
Total securities available-for-sale		782,874			571,027			330,217
Total securities held-to-maturity		162,988			126,675			151,975
Total loans		500,723			488,465			443,395
Total deposits		1,238,255			965,112			767,574
Total borrowed funds and long-term debt		221,746			248,249			194,833
Total stockholders’ equity		100,933			92,248			79,279
EARNINGS
Net income	$	11,680		$	13,504		$	10,859
Net interest income, taxable equivalent		45,356			46,420			39,800
Other operating income		9,556			10,266			8,863
Operating expenses		33,819			34,089			30,025
PERFORMANCE MEASURES
Earnings per share, basic	$	2.12		$	2.45		$	1.96
Earnings per share, diluted	$	2.11		$	2.44		$	1.96
Return on average stockholders’ equity		11.57	%		14.64	%		13.70	%
Book value per share at December 31	$	18.78		$	18.17		$	15.34
Return on average assets		.74	%		1.02	%		1.03	%
Efficiency ratio		61.6	%		60.1	%		61.7	%
COMMON SHARE DATA
Average shares outstanding, basic		5,519,800			5,516,590			5,535,309
Average shares outstanding, diluted		5,548,615			5,534,059			5,541,745
Shares outstanding at year-end		5,524,438			5,517,425			5,515,350

Per Share Data

2003, Quarter Ended

December 31,

September 30,

June 30,

March 31,

Market price range (Class A)

High

38.11

37.30

31.51

28.47

Low

32.40

28.55

25.75

26.40

Dividends Class A

0.12

0.11

Dividends Class B

0.06

0.055


2002, Quarter Ended	December 31,		September 30,		June 30,		March 31,
Market price range (Class A)
High	$	28.78	$	28.85	$	27.99	$	23.30
Low		26.20		23.65		22.50		20.00
Dividends Class A		0.11		0.11		0.10		0.10
Dividends Class B		0.055		0.055		0.050		0.050

Financial Highlights


	2003			2002			2001			2000			1999
(dollars in thousands, except share data)
FOR THE YEAR
Interest income	$	69,298		$	71,124		$	67,459		$	66,554		$	58,819
Interest expense		23,942			24,718			27,701			31,092			26,284

Net interest income		45,356			46,406			39,758			35,462			32,535
Provision for loan losses		450			1,200			1,500			1,425			1,475

Net interest income after provision for loan losses		44,906			45,206			38,258			34,037			31,060
Other operating income		9,556			10,266			8,863			7,234			5,603
Operating expenses		33,819			34,089			30,025			25,638			22,655

Income before income taxes		20,643			21,383			17,096			15,633			14,008
Provision for income taxes		8,963			7,879			6,237			5,428			4,903

Net income	$	11,680		$	13,504		$	10,859		$	10,205		$	9,105

Average shares outstanding, basic		5,519,800			5,516,590			5,535,309			5,597,136			5,791,858
Average shares outstanding, diluted		5,548,615			5,534,059			5,541,745			5,597,629			5,818,633
Earnings per share:
Basic	$	2.12		$	2.45		$	1.96		$	1.82		$	1.57
Diluted	$	2.11		$	2.44		$	1.96		$	1.82		$	1.56
Dividend payout ratio		17.2	%		13.9	%		15.2	%		14.5	%		15.0	%
AT YEAR-END
Assets	$	1,688,911		$	1,557,201		$	1,271,022		$	1,083,830		$	925,533
Loans		512,314			514,249			462,772			439,563			422,725
Deposits		1,338,853			1,146,284			888,408			793,796			643,673
Stockholders’ equity		103,728			100,256			84,599			71,506			60,296
Book value per share	$	18.78		$	18.17		$	15.34		$	12.88		$	10.63
SELECTED FINANCIAL PERCENTAGES
Return on average assets		.74	%		1.02	%		1.03	%		1.08	%		1.06	%
Return on average stockholders’ equity		11.57	%		14.64	%		13.70	%		16.09	%		14.78	%
Net interest margin, taxable equivalent		3.08	%		3.77	%		4.06	%		4.02	%		4.07	%
Net (recoveries) charge-offs as a percent of average loans		0.04	%		(0.04	)%		0.01	%		0.78	%		(0.04	)%
Average stockholders’ equity to average assets		6.40	%		6.98	%		7.49	%		6.68	%		7.16	%

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

Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”), is a 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, a Massachusetts trust company, formed in 1969. The Company had total assets of $1.7 billion on December 31, 2003. The Company presently operates 21 banking offices in 16 cities and towns in Massachusetts ranging from Braintree to Peabody. 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 throughout Massachusetts.

Century Bancorp, Inc. (the “Company”) had net income of $11,680,000 for the year ended December 31, 2003, compared with net income of $13,504,000 for year ended December 31, 2002 and net income of $10,859,000 for the year ended December 31, 2001. Basic earnings per share were $2.12 in 2003 compared to $2.45 in 2002 and $1.96 in 2001. Diluted earnings per share were $2.11 in 2003 compared to $2.44 in 2002 and $1.96 in 2001. The Company’s earnings in 2003 were negatively affected by the historically low interest rate environment. Assets have continued to reprice at lower interest rates while interest rates paid on deposits have not had a corresponding decrease. The Company believes that the net interest margin will continue to be challenged. The Company’s earnings were also negatively affected by a net tax charge of $1,183,000 associated with the Real Estate Investment Trust (“REIT”) settlement. This charge was the result of an agreement with the Massachusetts Department of Revenue (“DOR”) settling a dispute related to taxes that the DOR claimed were owed from the Company’s REIT.

Total assets were $1,688,911,000 at December 31, 2003, an increase of 8.5% from total assets of $1,557,201,000 on December 31, 2002, which, in turn, were 22.5% higher than total assets of $1,271,022,000 on December 31, 2001.

On December 31, 2003, stockholders’ equity totaled $103,728,000 compared with $100,256,000 on December 31, 2002, and $84,599,000 on December 31, 2001. Book value per share increased to $18.78 at December 31, 2003 from $18.17 on December 31, 2002, which had increased from $15.34 on December 31, 2001.

During February 2003, the Company began construction of an addition to its corporate headquarters building. The property is located adjacent to its current headquarters in Medford, Massachusetts and will provide additional corporate office space and an expanded branch banking floor. The building is scheduled to be completed during the first quarter of 2004 and the current cost estimate including land costs is $12 million. As of December 31, 2003, $9.4 million has been expended. The capital expenditure will provide a five story addition containing approximately 50 thousand square feet of office and branch banking space. The Company’s current plan is to sublease approximately 20 to 30 thousand square feet of the building.

On March 21, 2003, the Company completed the acquisition of Capital Crossing Bank’s branch office at 1220 Boylston Street, Chestnut Hill, Massachusetts, and substantially all of the retail deposits at Capital Crossing’s main office at 101 Summer Street, Boston, Massachusetts. Century closed the Chestnut Hill branch and transferred all customers of the branch to its nearby branch office at 1184 Boylston Street, Brookline, Massachusetts. In addition, Century transferred all of the retail deposits from Capital Crossing’s Summer Street branch to its branch at 24 Federal Street, Boston, Massachusetts. The acquisition included $192.7 million in deposits. The acquisition also included a premium paid to Capital Crossing of approximately $3.9 million. This premium was subsequently reduced by a gain of $395 thousand from the sale of the acquired Chestnut Hill branch and a rebate of $282 thousand for closed accounts at the Boston office.

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

Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. The Company considers the following to be its critical accounting policies: allowance for loan losses, impaired investment securities and deferred income taxes. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions.

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

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

Specific allowances are established in cases where management has identified significant conditions related to a credit that management believes that the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance.

The unallocated allowance recognizes the model and estimation risk associated with the formula allowance and specific allowances as well as management’s evaluation of various conditions, including business and economic conditions, delinquency trends, charge-off experience and other quality factors, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits.

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

If a material decline in fair value below the amortized cost basis of an investment security is judged to be “other than temporary,” generally six-months or longer, the cost basis of the investment is written down to fair value. The amount of the write down is included as a charge to earnings. An “other than temporary” impairment exists for debt securities if it is probable that the Company will be unable to collect all amounts due according to contractual terms of the security. Some factors considered for “other than temporary” impairment related to a debt security include an analysis of yield which results in a decrease in expected cash flows, whether an unrealized loss is issuer specific, whether the issuer has defaulted on scheduled interest and principal payments, whether the issuer’s current financial condition hinder its ability to make future scheduled interest and principal payments on a timely basis or whether there was downgrade in ratings by rating agencies.

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

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

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


Year Ended December 31,				2003								2002								2001

				Interest		Rate						Interest		Rate						Interest		Rate
	Average			Income/		Earned/			Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense⁽¹⁾		Paid⁽¹⁾			Balance			Expense⁽¹⁾		Paid⁽¹⁾			Balance			Expense⁽¹⁾		Paid⁽¹⁾
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans⁽²⁾	$	500,723		$	33,134		6.62	%	$	488,465		$	35,954		7.36	%	$	443,395		$	36,853		8.31	%
Securities available-for-sale:
Taxable		782,782			28,736		3.67			570,067			27,285		4.79			328,351			19,040		5.80
Tax-exempt		92			3		3.26			960			39		4.06			1,866			111		5.95
Securities held-to-maturity:
Taxable		162,988			7,152		4.39			126,675			7,150		5.64			151,975			9,381		6.17
Federal funds sold		24,730			274		1.11			45,253			710		1.57			52,768			2,116		4.01
Interest bearing deposits in other banks		30			—		0.58			20			—		2.50			16			—		3.12

Total interest-earning assets		1,471,345			69,299		4.71	%		1,231,440			71,138		5.78	%		978,371			67,501		6.90	%
Noninterest-earning assets		114,919								97,981								87,135
Allowance for loan losses		(8,901	)							(7,828	)							(6,582	)

Total Assets	$	1,577,363							$	1,321,593							$	1,058,924

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts	$	260,383		$	2,267		0.87	%	$	202,060		$	2,588		1.28	%	$	144,626		$	2,980		2.06	%
Savings accounts		79,333			319		0.40			72,780			595		0.82			63,064			882		1.40
Money market accounts		392,066			5,111		1.30			268,504			4,730		1.76			130,717			3,334		2.55
Time deposits		239,189			7,246		3.03			189,395			6,841		3.61			219,979			11,278		5.13

Total interest-bearing deposits		970,971			14,943		1.54			732,739			14,754		2.01			558,386			18,474		3.31
Securities sold under agreements to repurchase		51,402			457		0.89			61,718			696		1.13			71,826			1,647		2.29
Other borrowed funds and long term debt		170,344			8,542		5.01			186,531			9,268		4.97			123,007			7,580		6.16

Total interest-bearing liabilities		1,192,717			23,942		2.01	%		980,989			24,718		2.52	%		753,219			27,701		3.68	%
Non Interest-bearing liabilities Demand deposits		267,284								232,372								209,188
Other liabilities		16,429								15,984								17,238

Total liabilities		1,476,430								1,229,345								979,645

Stockholders equity		100,933								92,248								79,279
Total liabilities & stockholders equity	$	1,577,363							$	1,321,593							$	1,058,924

Net interest income⁽¹⁾				$	45,357							$	46,420							$	39,800

Net interest spread							2.70	%							3.26	%							3.22	%

Net interest margin							3.08	%							3.77	%							4.06	%

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

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

The Company’s operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis decreased 2.3% in 2003 to $45,357,000 compared with $46,420,000 in 2002. The decrease in net interest income for 2003 was mainly due to a sixty-nine basis point decrease in the net interest margin. The decrease in the net interest margin was mostly offset by a 19.5% increase in the average balances of earning assets, combined with a similar increase in deposits and borrowed funds. The increase in average volume was mainly the result of an acquisition of $192.7 million of deposits from Capital Crossing Bank during the first quarter of 2003 as well as internal growth during the year. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis decreased to 3.08% in 2003 from 3.77% in 2002, which had decreased from 4.06% in 2001. The decrease in the net interest margin, for both years, was mainly attributable to assets continuing to reprice at historically low levels without a corresponding decrease in rates paid on deposits. The Company believes that the net interest margin will continue to be challenged.

Average earning assets were $1,471,345,000 in 2003, an increase of $239,905,000 or 19.5% from the average in 2002, which was 25.9% higher than the average in 2001. Total average securities, including securities available for sale and securities held to maturity, increased 35.6% to $945,862,000. The increase in securities volume was mainly attributable to deposit growth. This increase in securities volume, which was partially offset by a lower level of interest rates resulted in higher securities income, which increased 4.1% to $35,890,000. Total average loans increased 2.5% to $500,723,000 in 2003 after increasing $45,070,000 in 2002. Total loans increased primarily as a result of internal loan growth. The increase in loan volume was more than offset by a lower level of interest rates resulting in lower loan income, which decreased by 7.8% or $2,820,000 to $33,134,000. Total loan income was $36,853,000 in 2001.

The Company’s sources of funds include deposits and borrowed funds. On average, deposits showed an increase of 28.3% or $273,143,000 in 2003 after increasing by 25.7% or $197,538,000 in 2002. Deposits increased in 2003 primarily as a result of the acquisition of deposits acquired from Capital Crossing Bank and internal deposit growth and were mainly concentrated in NOW, savings and money market accounts, which increased by $188,437,000. Borrowed funds decreased by 12.1% in 2003 following an increase of 32.2% in 2002. The majority of the Company’s borrowed funds are borrowings from the Federal Home Loan Bank (FHLB) and retail repurchase agreements. Average borrowings from the FHLB decreased by approximately $16,187,000 and retail repurchase agreements decreased by $10,316,000. Interest expense totaled $23,942,000 in 2003, a decrease of $776,000 or 3.1 % from 2002 when interest expense decreased 10.8% from 2001. This decrease in interest expense is due to decreases in deposit rates, partially offset by an increase in the average balance of deposits.

The provision for loan losses was $450,000 in 2003 compared with $1,200,000 in 2002 and $1,500,000 in 2001. These provisions are the result of management’s evaluation of the quality of the loan port-

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

folio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information.

The allowance for loan losses was $8,769,000 at December 31, 2003 compared with $8,506,000 at December 31, 2002 and $7,112,000 at December 31, 2001. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.71 % in 2003, 1.65% in 2002 and 1.54% in 2001.

The Company experienced net charge-offs in 2003 with net charge-offs as a percent of average loans outstanding at 0.04%. The comparable figures for 2002 and 2001 were net recoveries of 0.04% and net charge-offs of 0.01% respectively. Non-performing loans, which include all non-accruing loans and certain restructured, accruing loans, totaled $1,175,000 on December 31, 2003, compared with $511,000 on December 31, 2002.

The Company continued to experience good results in its fee-based services in 2003. The fee-based services include fees derived from traditional banking activities such as deposit related services as well as revenues from its automated lock box collection system and full service securities brokerage offered through Commonwealth Equity Services, Inc., an unaffiliated registered securities broker-dealer and investment adviser.

Under the lock-box program, which is not tied to extensions of credit by the Company, the Company’s customer arranges for payments of its accounts receivable to be made directly to the Company. The Company records on its computer the amounts paid to its customers, deposits the funds to the customer’s account with the Company and provides computerized records of the amounts received to the Company’s customers. Typical customers for the lock box service are municipalities, who use it to automate tax collections, cable TV companies, and other commercial enterprises.

Through Commonwealth Equity Services, Inc., the Bank provides full service securities brokerage services. Registered representatives employed by the Bank offer investment advice, execute transactions and assist customers in financial and retirement planning. Commonwealth Equity Services, Inc. provides research and supervises representatives in exchange for payment by the Bank for a fixed fee and a share in the commission revenues.

Total other operating income in 2003 was $9,556,000, a decrease of $710,000, or 7.4% compared to 2002. This decrease followed an increase of $1,403,000 or 15.8% in 2002, compared to 2001. Service charge income, which continues to be a major area of other operating income with $4,782,000 in 2003, saw an increase of $364,000 compared to 2002. Service charges on deposit accounts increased mainly because of an increase in deposits accounts. Lock-box revenues totaled $3,186,000, down $277,000 in 2003. This decrease was mainly attributable to a decrease in volume that was due to increased competition. Brokerage commissions decreased to $579,000 in 2003 from $1,038,000 in 2002, primarily as a result of decreased transaction volume. Also included in other operating income for 2002 is a pretax realized gain of $359,000 associated with the sale of bank premises.

Total operating expenses were $33,819,000 in 2003 compared to $34,089,000 in 2002 and $30,025,000 in 2001.

Salaries and employee benefits expenses decreased by $399,000, or 1.9% in 2003 after increasing by 15.7% in 2002. The decrease in 2003 was mainly attributable to a decrease in incentive compensation accruals, which was partially offset by increased retirement and healthcare costs. Most of the increase for 2002 was in compensation expense associated with increased staff levels as well as merit increases in salaries and employee benefits.

Occupancy expense increased by $347,000, or 15.1%, in 2003. This followed an increase of $180,000, or 8.5%, in 2002. The increase in 2003 was mainly attributable to full-year costs associated with the opening of a new branch and partial year costs associated with opening two new branches. The increase in 2002 was mainly attributable to full-year costs associated with the opening of one new branch. Equipment expense decreased by $431,000 or 20.2% in 2003. This followed an increase of $236,000 or 14.4% in 2002. The decrease in 2003 was mainly the result of a decrease in equipment depreciation expense as well as a reduction in service contract expense. Service contract expense decreased as a result of decreases in lockbox activity. The increase in 2002 was mainly the result of an increase in depreciation expense as well as an increase in service contract expense. Service contract expense increased as a result of increases in lockbox activity.

Other operating expenses increased by $213,000 in 2003, which followed a $682,000 increase in 2002. The increase for 2003 was primarily the result of increased core deposit intangible amortization, telephone and software maintenance expense. The increase for 2002 was primarily the result of increased marketing, check processing charges, software maintenance expense and legal expense, which was partially offset by a reduction in the amortization of goodwill.

Income tax expense was $8,963,000 in 2003, $7,879,000 in 2002 and $6,237,000 in 2001. The effective tax rate was 43.4% (37.7%, excluding REIT settlement) in 2003, 36.8% in 2002 and 36.5% in 2001. Included in tax expense for 2003 is a net tax charge of $1,183,000 associated with the REIT settlement. This change was the result of an agreement with the Massachusetts DOR settling a dispute related to taxes that the DOR claimed were owed from the Company’s REIT. The elimination of the REIT will increase the effective tax rate in the future.

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

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

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

rate risk management test. This test measures the impact on net interest income of an immediate change in interest rates in 100 basis point increments. Percentage Change in Net Interest Income’”

The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. The Company monitors and controls interest rate risk exposure with the interest rate risk management test. Simulated results outside of predetermined policy levels could prompt a modification in the balance sheet structure of the Company.

Liquidity is managed to ensure that the Company has access to sufficient reasonably priced funding to conduct its business. The Company’s Asset Liability Committee monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change.

Primary liquidity is provided by maintaining an adequate level of liquid assets that include cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $225,321,000 on December 31, 2003 compared with $122,205,000 on December 31, 2001 and $177,833,000 on December 31, 2001. In each of these three years, deposit activity has generally been adequate to support asset activity.

Additionally, the Company actively manages both the asset and liability sides of the balance sheet to ensure that its liquidity needs are met.

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

Total stockholders’ equity was $103,728,000 at December 31, 2003, compared with $100,256,000 at December 31, 2002 and $84,599,000 at December 31, 2001. The increase in 2003 was primarily the result of retained earnings less dividends paid and a decrease in net unrealized gains on securities available-for-sale. The increase in 2002 was primarily the result of retained earnings less dividends paid and an increase in net unrealized gains on securities available-for-sale. Also, there was a $111,000 increase in 2003 and a $31,000 increase in 2002 from the execution of certain stock options.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance sheet items. The current guidelines require a Tier 1 capital-to-risk assets ratio of 4.00% and a total capital-to-risk assets ratio of 8.00%. The Company and the Bank exceeded these requirements with a Tier 1 capital-to-risk assets ratio of 16.91% and 14.08% respectively, and total capital-to-risk assets ratio of 18.09% and 15.26%, respectively at December 31, 2003. Additionally, federal banking regulators have issued leverage ratio guidelines, which supplement the risk-based capital guidelines. The minimum leverage ratio requirement applicable to the Company is 4.00% and at December 31, 2003, the Company and the Bank exceeded this requirement with leverage ratios of 8.05% and 6.70%, respectively.

The Company has entered into contractual obligations and commitments. The following tables summarize the Company’s contractual cash obligations and other commitments at December 31, 2003.

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

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

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

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

In addition to general commitments, the Company has originated 1-4 family mortgages for sale in the secondary markets. These loans were sold with and without recourse and no loan was originated without its sale having been pre-arranged. The company was servicing mortgage loans sold to others with a maximum recourse provision of 10% of the outstanding balance of approximately $183,000 at December 31, 2003 and $193,000 at December 31, 2002.

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

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

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”). FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. FIN 46 is effective immediately for VIEs created after January 31, 2003; this has had no significant impact on our financial condition, results of operations, earnings per share or cash flows. In December 2003, the FASB issued a revised FIN 46, FIN 46R, which, in part, specifically addresses limited purpose trusts formed to issue trust preferred securities. This guidance requires the Company to deconsolidate its investment in Century Bancorp Capital Trust. For VIEs created prior to January 31, 2003, we have applied the provisions of FIN 46 on the December 31, 2003 financial statements and as a result, deconsolidated Century Bancorp Capital Trust.

Consolidated Balance Sheets


December 31,	2003			2002
(dollars in thousands except share data)
ASSETS
Cash and due from banks (note 2)	$	64,299		$	63,188
Federal funds sold and interest-bearing deposits in other banks		161,022			59,017

Total cash and cash equivalents		225,321			122,205
Securities available-for-sale, amortized cost $701,444 in 2003 and $750,129 in 2002 (notes 3 and 9)		703,335			761,531
Securities held-to-maturity, market value $198,790 in 2003 and $130,014 in 2002 (notes 4 and 9)		197,872			127,209
Loans, net (note 5)		512,314			514,249
Less: allowance for loan losses (note 6)		8,769			8,506

Net loans		503,545			505,743
Bank premises and equipment (note 7)		21,589			12,928
Accrued interest receivable		8,450			9,370
Other assets (note 12)		28,799			18,215

Total assets	$	1,688,911		$	1,557,201

LIABILITIES AND STOCKHOLDERS EQUITY
Demand deposits	$	270,115		$	248,340
Savings and NOW deposits		291,950			317,698
Money market accounts		417,171			357,921
Time deposits (note 8)		359,617			222,325

Total deposits		1,338,853			1,146,284
Securities sold under agreements to repurchase (note 9)		40,050			51,800
Other borrowed funds (note 10)		136,329			169,420
Investments purchased payable		29,330			43,069
Other liabilities		10,982			17,622
Long term debt (note 10)		29,639			28,750
Total liabilities		1,585,183			1,456,945

Commitments and contingencies (notes 7, 14 and 15)
Stockholders equity (note 11):
Common stock, Class A, $1.00 par value per share; authorized 10,000,000 shares; issued 3,792,938 shares in 2003 and 3,780,915 shares in 2002		3,793			3,781
Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 2,162,650 shares in 2003 and 2,167,660 shares in 2002		2,163			2,168
Additional paid-in-capital		11,227			11,123
Retained earnings		91,427			81,755
Treasury stock, Class A, 383,600 shares in 2003 and 2002, at cost		(5,941	)		(5,941	)
Treasury stock, Class B, 47,550 shares in 2003 and 2002, at cost		(41	)		(41	)

		102,628			92,845
Accumulated other comprehensive income, net of taxes (note 3)		1,100			7,411

Total stockholders equity		103,728			100,256

Total liabilities and stockholders equity	$	1,688,911		$	1,557,201

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Income


Year Ended December 31,	2003		2002		2001
(dollars in thousands except share data)
INTEREST INCOME
Loans	$	33,134	$	35,953	$	36,849
Securities available-for-sale		28,738		27,311		19,113
Securities held-to-maturity		7,152		7,150		9,381
Federal funds sold and interest-bearing deposits in other banks		274		710		2,116

Total interest income		69,298		71,124		67,459
INTEREST EXPENSE
Savings and NOW deposits		2,586		3,183		3,862
Money market accounts		5,111		4,730		3,334
Time deposits (note 8)		7,246		6,841		11,278
Securities sold under agreements to repurchase		457		696		1,647
Other borrowed funds and long term debt		8,542		9,268		7,580

Total interest expense		23,942		24,718		27,701

Net interest income		45,356		46,406		39,758
Provision for loan losses (note 6)		450		1,200		1,500

Net interest income after provision for loan losses		44,906		45,206		38,258
OTHER OPERATING INCOME
Service charges on deposit accounts		4,782		4,418		3,379
Lockbox fees		3,186		3,463		3,439
Brokerage commissions		579		1,038		1,248
Other income		1,009		1,347		797

Total other operating income		9,556		10,266		8,863
OPERATING EXPENSES
Salaries and employee benefits (note 13)		21,310		21,709		18,770
Occupancy		2,648		2,301		2,121
Equipment		1,703		2,134		1,871
Other (note 16)		8,158		7,945		7,263

Total operating expenses		33,819		34,089		30,025

Income before income taxes		20,643		21,383		17,096
Provision for income taxes (note 12)		7,780		7,879		6,237
Retroactive REIT settlement (note 12)						1,183

Net income	$	11,680	$	13,504	$	10,859

SHARE DATA (NOTE						11	)
Weighted average number of shares outstanding, basic		5,519,800		5,516,590		5,535,309
Weighted average number of shares outstanding, diluted		5,548,615		5,534,059		5,541,745
Net income per share, basic	$	2.12	$	2.45	$	1.96
Net income per share, diluted		2.11		2.44		1.96

See accompanying Notes to Consolidated Financial Statements.


																	Accumulated
	Class A		Class B			Additional					Treasury			Treasury			Other			Total
	Common		Common			Paid-In		Retained			Stock			Stock			Comprehensive			Stockholders’
	Stock		Stock			Capital		Earnings			Class A			Class B			Income (Loss)			Equity
(dollars in thousands except share data)
BALANCE, DECEMBER 31, 2000	$	3,755	$	2,192		$	11,093	$	60,916		$	(5,242	)	$	(41	)	$	(1,167	)	$	71,506
Net income		—		—			—		10,859			—			—			—			10,859
Other comprehensive income, net of tax:
Increase in unrealized gains on securities available-for-sale net of $1,840 in taxes		—		—			—		—			—			—			4,585			4,585

Comprehensive income																					15,444
Conversion of Class B Common Stock to Class A Common Stock, 6,420 shares		6		(6	)		—		—			—			—			—			—
Treasury stock repurchases, 35,000 shares		—		—			—		—			(698	)		—			—			(698	)
Cash dividends paid, Class A Common Stock, $0.37 per share		—		—			—		(1,257	)		—			—			—			(1,257	)
Cash dividends paid, Class B Common Stock, $0.185 per share		—		—			—		(396	)		—			—			—			(396	)
BALANCE, DECEMBER 31, 2001		3,761		2,186			11,093		70,123			(5,941	)		(41	)		3,418			84,599
Net income		—		—			—		13,504			—			—			—			13,504
Other comprehensive income, net of tax:
Increase in unrealized gains on securities available-for-sale net of $2,150 in taxes		—		—			—		—			—			—			3,993			3,993

Comprehensive income																					17,497
Conversion of Class B Common Stock to Class A Common Stock, 17,820 shares		18		(18	)		—		—			—			—			—			—
Stock options exercised, 2,075 shares		2		—			29		—			—			—			—			31
Cash dividends paid, Class A Common Stock, $0.42 per share		—		—			—		(1,426	)		—			—			—			(1,426	)
Cash dividends paid, Class B Common Stock, $0.21 per share		—		—			—		(445	)		—			—			—			(445	)

BALANCE, DECEMBER 31, 2002		3,781		2,168			11,123		81,755			(5,941	)		(41	)		7,411			100,256
Net income		—		—			—		11,680			—			—			—			11,680
Other comprehensive income, net of tax:
Decrease in unrealized gains on securities available-for-sale net of $3,200 in taxes		—		—			—		—			—			—			(6,311	)		(6,311	)

Comprehensive income																					5,369
Conversion of Class B Common Stock to Class A Common Stock, 5,010 shares		5		(5	)		—		—			—			—			—			—
Stock options exercised, 7,013 shares		7		—			104		—			—			—			—			111
Cash dividends paid, Class A Common Stock, $0.45 per share		—		—			—		(1,532	)		—			—			—			(1,532	)
Cash dividends paid, Class B Common Stock, $0.225 per share		—		—			—		(476	)		—			—			—			(476	)

BALANCE, DECEMBER 31, 2003	$	3,793	$	2,163		$	11,227	$	91,427		$	(5,941	)	$	(41	)	$	1,100		$	103,728


Year Ended December 31,	2003			2002			2001
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,680		$	13,504		$	10,859
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		450			1,200			1,500
Deferred income taxes		(1,416	)		(5,690	)		(133	)
Net depreciation and amortization		1,754			1,822			2,066
Decrease (increase) in accrued interest receivable		920			(1,809	)		51
Increase in other assets		(6,639	)		(4,318	)		(948	)
Loans originated for sale		(267	)		—			—
Proceeds from sales of loans		270			73			89
Gain on sales of loans		(3	)		(1	)		(1	)
Gain on calls of securities		—			—			(47	)
Gain on sale of building		—			(359	)		—
(Decrease) increase in other liabilities		(6,615	)		6,702			(8,739	)

Net cash provided by operating activities		134			11,124			4,697
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from calls/maturities of securities available-for-sale		665,635			324,502			215,708
Purchase of securities available-for-sale		(616,783	)		(618,946	)		(396,285	)
Proceeds from calls/maturities of securities held-to-maturity		125,254			63,494			95,904
Purchase of securities held-to-maturity		(195,991	)		(48,113	)		(69,340	)
(Decrease) increase in investments purchased payable		(13,739	)		4,093			38,976
Net decrease (increase) in loans		2,102			(50,883	)		(22,875	)
Proceeds from sale of building		—			1,020			—
Capital expenditures		(10,217	)		(2,854	)		(4,558	)

Net cash used in investing activities		(43,739	)		(327,687	)		(142,470	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposit accounts		137,293			3,049			(57,320	)
Net increase in demand, savings, money market and NOW deposits		55,277			254,827			151,932
Net proceeds from the exercise of stock options		111			31			—
Treasury stock repurchases		—			—			(698	)
Cash dividends paid		(2,008	)		(1,871	)		(1,653	)
Net (decrease) increase in securities sold under agreements to repurchase		(11,750	)		(21,040	)		1,390
Net (decrease) increase in other borrowed funds		(33,091	)		25,939			46,153
Increase in long term debt from deconsolidation of subsidiary		889			—			—

Net cash provided by financing activities		146,721			260,935			139,804

Net (decrease) increase in cash and cash equivalents		103,116			(55,628	)		2,031
Cash and cash equivalents at beginning of year		122,205			177,833			175,802

Cash and cash equivalents at end of year	$	225,321		$	122,205		$	177,833

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	24,102		$	24,668		$	29,755
Income taxes		15,632			8,367			5,588
Change in unrealized gains on securities available-for-sale, net of taxes	$	(6,311	)	$	3,993		$	4,585

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

BASIS OF FINANCIAL STATEMENT PRESENTATION

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

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

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and 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.

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

INVESTMENT SECURITIES

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

Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method, which approximates the effective method. If a decline in fair value below the amortized cost basis of an investment is judged to be other than temporary, the cost basis of the investment is written down to fair value. The amount of the writedown is included as a charge to earnings. Gains and losses on the sale of investment securities are recognized at the time of sale on a specific identification basis.

LOANS

Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become 90 days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Loans, including impaired loans, on which the accrual of interest has been discontinued are designated non-accrual loans. When a loan is placed on non-accrual, all income which has been accrued but remains unpaid is reversed against current period income and all amortization of deferred loan fees is discontinued. Non-accrual loans may be returned to an accrual status when principal and interest payments are not delinquent and the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and income. Income received on non-accrual loans is either recorded in income or applied to the principal balance of the loan depending on management’s evaluation as to the collectibility of principal.

Loan origination fees and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method.

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

Notes to Consolidated Financial Statements

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans which ultimately prove uncollectible. In determining the level of the allowance, periodic evaluations are made of the loan portfolio which take into account such factors as the character of the loans, loan status, financial posture of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgement. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries.

Management maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans and the unallocated allowance.

The formula allowance is calculated by applying loss factors to outstanding loans, in each case based on the internal risk grade of such loans. Changes in risk grades affect the amount of the formula allowance. Loss factors are based on the Company’s historical loss experience as well as regulatory guidelines.

Specific allowances are established in cases where management has identified significant conditions related to a credit that management believes that the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance.

The unallocated allowance recognizes the model and estimation risk associated with the formula allowance and specific allowances as well as management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits.

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

BANK PREMISES AND EQUIPMENT

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

STOCK OPTION ACCOUNTING

The Company currently accounts for employee stock options using the intrinsic value method. Under the intrinsic value method, no compensation cost is recognized related to options if the exercise price of the option is greater than or equal to the fair market value of the underlying stock on the date of grant. Under an alternative method, the fair value method, the “cost” of the option is estimated on the date of grant using an option valuation model and recognized as compensation expense over the vesting period of the option. Any change from the intrinsic value method to the fair value method of accounting for stock options is required to be applied prospectively for options granted after the date of change in method which must be as of the beginning of a fiscal year. The Company generally awards stock options annually with a grant date in January.

Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:


December 31,	2003		2002		2001
(In thousands, except per share data)
Net income:
As reported	$	11,680	$	13,504	$	10,859
Less:
Pro forma stock based compensation cost (net of tax):	$	268	$	149	$	50

Pro forma and diluted	$	11,412	$	13,355	$	10,809
Basic earning per share	$	2.12	$	2.45	$	1.96
Pro forma
As reported	$	2.07	$	2.42	$	1.95
Diluted earnings per share	$	2.11	$	2.44	$	1.96
Pro forma
As reported	$	2.06	$	2.41	$	1.95

In determining the pro forma amounts, the fair value of each option grant was estimated as of the date of grant using Black-Scholes option-pricing model with the following weighted average assumptions:


December 31,	2003			2002			2001
Dividend yields		1.40	%		2.25	%		2.65	%
Expected life	6 years			7 years			7 years
Expected volatility		43	%		25	%		36	%
Risk-free interest rate		3.51	%		4.01	%		4.94	%

INCOME TAXES

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

Notes to Consolidated Financial Statements

2. Cash and Due From Banks

The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $650,000 at December 31, 2003 and $507,000 at December 31, 2002.

3. Securities Available-for-Sale


	December 31 , 2003								December 31 , 2002
			Gross		Gross		Estimated				Gross		Estimated
	Amortized		Unrealized		Unrealized		Market		Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
(in thousands)
U.S. Government and Agencies	$	674,766	$	3,981	$	2,253	$	676,494	$	701,964	$	10,631	$	—	$	712,595
Mortgage-backed securities		8,977		209		145		9,041		29,911		907		—		30,818
Obligations of states and political subdivisions		—		—		—		—		390		—		—		390
FHLB stock		13,084		—		—		13,084		13,084		—		—		13,084
Other		4,617		278		179		4,716		4,780		52		188		4,644

	$	701,444	$	4,468	$	2,577	$	703,335	$	750,129	$	11,590	$	188	$	761,531


	December 31, 2001
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
(In thousands)

U.S. Government and Agencies	$	405,595	$	6,090	$	1,080	$	411,005
Mortgage-backed securities		29,801		369		9		30,161
Obligations of states and political subdivisions		2,005		—		—		2,005
FHLB stock		13,084		—		—		13,084
Other		4,690		48		160		4,578

	$	455,575	$	6,507	$	1,249	$	460,833

Included in U.S. Government and Agency securities are securities pledged to secure public deposits and repurchase agreements amounting to $50,263,000 at December 31, 2003, $60,841,000 at December 31, 2002 and $81,332,000 at December 31, 2001. Also included are securities pledged for borrowing at the Federal Home Loan Bank amounting to $289,731,000.

The following table shows the temporarily impaired securities of the Company’s securities available-for-sale portfolio at December 31, 2003.

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. The number of securities temporarily impaired for less than 12 months and for 12 months or longer are 42 and 2, respectively, out of a total of 195. Most of the available-for-sale securities are invested in U.S. Government and Agencies and, therefore, the Company has determined that the securities listed are temporarily impaired.

Temporarily Impaired Investments

December 31, 2003

Less than 12 months

12 months or longer

Total

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(in thousands)

US Government and Agencies

202,638

2,253

—

202,638

2,253

Mortgage-backed securities

4,727

145

—

4,727

145

Other

1,525

1,369

154

2,894

179

Total temporarily impaired securities

208,890

2,423

1,369

154

210,259

2,577

Notes to Consolidated Financial Statements

The following table shows the maturity distribution of the Company’s securities available-for-sale at December 31, 2003 and the weighted average yields of securities, which are based on the amortized cost, calculated on a fully taxable equivalent basis.

U.S. Government

Obligations

and Agencies

of States

Estimated

and Mortgage-

and Political

Market

Backed Securities

Yield

Subdivisions

Yield

Other

Yield

Total

Yield

Value

(in thousands)

DECEMBER 31, 2003

Within one year

38,995

4.82

—

0.00

400

5.81

39,395

4.83

39,926

After one but within five years

590,849

3.12

—

0.00

400

5.97

591,249

3.12

592,299

After five but within ten years

44,922

4.10

—

0.00

—

0.00

44,922

4.10

45,068

More than ten years

8,977

4.65

—

0.00

—

0.00

8,977

4.65

9,042

Non-maturing

—

0.00

—

0.00

16,901

3.46

16,901

3.46

17,000

683,743

3.30

—

0.00

17,701

3.57

701,444

3.30

703,335

The weighted average maturity of investment securities available-for-sale at December 31, 2003, 2002 and 2001 was 3.5, 2.9 and 3.4 years, respectively. Included in the weighted average remaining life calculation at December 31, 2003 and 2002 there were $545.8 million and $547.7 million, respectively, of U.S. agency obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life.

4. Investment Securities Held-to-Maturity


	December 31 , 2003								December 31 , 2002
			Gross		Gross		Estimated				Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market		Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
(in thousands)
U.S. Government and Agencies	$	6,400	$	278	$	—	$	6,678	$	76,430	$	1,442	$	—	$	77,872
Mortgage-backed securities		191,447		1,548		908		192,087		50,754		1,363		—		52,117
Obligations of states and political subdivisions		—		—		—		—		—		—		—		—
Other		25		—		—		25		25		—		—		25

	$	197,872	$	1,826	$	908	$	198,790	$	127,209	$	2,805	$	—	$	130,014


	December 31 , 2003
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
(in thousands)
U.S. Government and Agencies	$	88,294	$	2,120	$	39	$	90,375
Mortgage-backed securities		54,289		749		201		54,837
Obligations of states and political subdivisions		—		—		—		—
Other		25		—		—		25

	$	142,608	$	2,869	$	240	$	145,237

Included in U.S. Government and Agency securities are securities pledged for borrowing at the Federal Home Loan Bank amounting to $197,847,000.

There were no held-to-maturity securities with an unrealized loss position of 12 months or longer at December 31, 2003.

Notes to Consolidated Financial Statements

The following table shows the maturity distribution of the Company’s securities held-to-maturity at December 31, 2003 and the weighted average yields of securities, which are based on the amortized cost, calculated on a fully taxable equivalent basis.


	U.S. Government					Obligations
	and Agencies					of States															Estimated
	and Mortgage-					and Political															Market
(in thousands)	Backed Securities		Yield			Subdivisions		Yield			Other		Yield			Total		Yield			Value
DECEMBER 31, 2003
Within one year	$	—		0.00	%	$	—		0.00	%	$	25		5.50	%	$	25		5.50	%	$	25
After one but within five years		7,406		5.26			—		0.00			—		0.00			7,406		5.26			7,741
After five but within ten years		—		0.00			—		0.00			—		0.00			—		0.00			—
More than ten years		190,441		4.18			—		0.00			—		0.00			190,441		4.18			191,024
Non-maturing		—		0.00			—		0.00			—		—			—		0.00			—

	$	197,847		4.22	%	$	—		0.00	%	$	25		6.47	%	$	197,872		5.35	%	$	198,790

The weighted average remaining life of investment securities held-to-maturity at December 31, 2003, 2002 and 2001 was 3.5, 3.2 and 3.2 years, respectively. Included in the weighted average remaining life calculation at December 31, 2003 and 2002 were $0 and $44.0 million, respectively, of U.S. agency obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life.

5. Loans

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

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


December 31,	2003					2002					2001					2000					1999
			Percent					Percent					Percent					Percent					Percent
	Amount		of Total			Amount		of Total			Amount		of Total			Amount		of Total			Amount		of Total
Construction and land development	$	34,121		6.7	%	$	33,155		6.4	%	$	39,256		8.5	%	$	21,840		5.0	%	$	21,682		5.1	%
Commercial and industrial		39,742		7.8			46,044		9.0			59,162		12.8			95,957		21.8			77,166		18.3
Industrial revenue bonds		—		0.0			—		0.0			48		0.0			119		0.0			190		0.0
Commercial real estate		293,781		57.3			291,598		56.7			241,419		52.2			209,233		47.6			209,332		49.5
Residential real estate		86,780		16.9			92,291		17.9			88,450		19.1			81,526		18.5			82,968		19.6
Consumer		8,025		1.6			8,169		1.6			7,701		1.7			9,226		2.1			11,678		2.8
Home equity		49,382		9.6			41,527		8.1			26,016		5.6			21,107		4.8			19,227		4.5
Overdrafts		483		0.1			1,465		0.3			720		0.2			555		0.1			482		0.1

	$	512,314		100.0	%	$	514,249		100.0	%	$	462,772		100.0	%	$	439,563		100.0	%	$	422,725		100.0	%

At December 31, 2003, 2002, 2001, 2000 and 1999 loans were carried net of discounts of $138,000, $492,000, $969,000, $1,446,000 and $1,923,000, respectively. Included in these amounts at December 31, 2003, 2002, 2001, 2000 and 1999, were residential real estate loans that were carried net of discounts of $133,000, $487,000, $959,000, $1,431,000 and $1,903,000, respectively, associated with the acquisition of loans from another financial institution.

Notes to Consolidated Financial Statements

The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2003. The table excludes loans secured by one-to-four family residential real estate and loans for household family and other personal expenditures. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.


	Remaining Maturities of Selected Loans at December 31, 2003
	One Year		One to Five		Over
	or Less		Years		Five Years		Total
(in thousands)
Construction and land development	$	24,114	$	3,617	$	6,390	$	34,121
Commercial and industrial		21,526		11,201		7,015		39,742
Commercial real estate		29,649		125,432		138,700		293,781

Total	$	75,289	$	140,250	$	152,105	$	367,644

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

December 31, 2003


	One to Five		Over
	Years		Five Years		Total
(in thousands)
Predetermined interest rates	$	93,488	$	15,352	$	108,840
Floating or adjustable interest rates		46,762		136,753		183,515

Total	$	140,250	$	152,105	$	292,355

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

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

Residential real estate (1-4 family) includes two categories of loans. Approximately $5 million of loans are classified as “Commercial and Industrial” type loans secured by 1-4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the collateral position.

The other category of residential real estate loans are mostly 1-4 family residential properties located in the Bank’s market area. General underwriting criteria are largely the same as those used by Fannie Mae but normally only one or three year adjustable interest rates are used. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a “First Time Homebuyer” product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category. This year, the economy has deteriorated, and the market has generally been volatile.

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

The Bank intends to maintain a market for construction loans, principally for smaller local residential projects or an owner occupied commercial project. Individual consumer residential home construction loans are also extended on a similar basis.

Bank officers evaluate the feasibility of construction projects, based on independent appraisals of the project, architects or engineers evaluations of the cost of construction, and other relevant data. As of December 31, 2003, the Company was obligated to advance a total of $15.4 million to complete projects under construction.

Notes to Consolidated Financial Statements

The composition of non-accrual Loans, impaired loans & troubled debt restructuring agreements is as follows:


	2003		2002		2001		2000		1999
(in thousands)
Loans on non-accrual	$	1,175	$	511	$	423	$	110	$	4,621
Impaired loans on non-accrual included above	$	1,137	$	487	$	292	$	41	$	4,378
Total recorded investment in impaired loans	$	1,678	$	1,116	$	1,118	$	1,535	$	6,019
Average recorded value of impaired loans	$	2,043	$	1,273	$	2,149	$	2,919	$	4,047
Loans 90 days past due and still accruing	$	—	$	—	$	9	$	19	$	188
Interest income on non-accrual loans according to their original terms	$	100	$	50	$	43	$	19	$	463
Interest income on non-accrual loans actually recorded	$	70	$	—	$	32	$	9	$	331
Interest income recognized on impaired loans	$	116	$	60	$	116	$	160	$	458

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


	2003		2002		2001		2000		1999
Residential real estate:
1-4 family	$	60	$	—	$	29	$	41	$	341
Multi-family		541		629		656		681		702
Commercial real estate		—		487		433		782		950
Commercial and industrial		1,077		—		—		31		4,026

Total impaired loans	$	1,678	$	1,116	$	1,118	$	1,535	$	6,019

There were no impaired loans with specific reserves from December 31, 1999 through December 31, 2003 and in the opinion of management, none of the above listed impaired loans required a specific reserve. All of the impaired loans listed above have been measured using the fair value of the collateral method.

The Company was servicing mortgage loans sold to others without recourse of approximately $2,397,000, $4,444,000, $6,888,000, $10,199,000 and $12,542,000, at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. Additionally, the Company was servicing mortgage loans sold to others with limited recourse. The outstanding balance of these loans with limited recourse was approximately $183,000, $194,000, $338,000, $479,000 and $490,000, at December 31, 2003, 2002, 2001, 2000 and 1999, respectively.

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

The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2003.


Balance at				Repayments		Balance at
December 31, 2002		Additions		and Deletions		December 31, 2003
(in thousands)
$	1,707	$	881	$	1,061	$	1,527

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

In addition to the above, as of December 31, 2003, the Company continues to monitor closely $8.8 million of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2003, although such values can fluctuate with changes in the economy and the real estate market.

Notes to Consolidated Financial Statements

6. Allowance for Loan Losses

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


Year Ended December 31,	2003			2002			2001			2000			1999
(in thousands)
Year end loans outstanding (net of unearned discount)	$	512,314		$	514,249		$	462,772		$	439,563		$	422,725

Average loans outstanding (net of unearned discount)	$	500,723		$	488,465		$	443,395		$	434,780		$	405,794

Balance of allowance for loan losses at beginning of year	$	8,506		$	7,112		$	5,662		$	7,646		$	6,022

Loans charged-off:
Commercial		240			—			27			3,522			81
Commercial real estate		—			58			343			—			61
Residential real estate		—			—			12			—			14
Consumer		125			87			55			139			315

Total loans charged-off		365			145			437			3,661			471

Recovery of loans previously charged-off:
Commercial		127			276			154			26			197
Real estate		29			—			184			195			393
Consumer		22			63			49			31			30

Total recoveries of loans previously charged-off:		178			339			387			252			620

Net loan charge-offs (recoveries)		187			(194	)		50			3,409			(149	)
Additions to allowance charged to operating expense		450			1,200			1,500			1,425			1,475
Acquired allowance		—			—			—			—			—

Balance at end of year	$	8,769		$	8,506		$	7,112		$	5,662		$	7,646

Ratio of net charge-offs during the year to average loans outstanding		0.04	%		(0.04	)%		0.01	%		0.78	%		(0.04	)%

Ratio of allowance for loan losses to loans outstanding		1.71	%		1.65	%		1.54	%		1.29	%		1.81	%


COMMONWEALTH OF MASSACHUSETTS		04-2498617

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification number)

400 MYSTIC AVENUE, MEDFORD, MA		02155

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number including area code: (781) 391-4000


	PAGE
PART I

ITEM 1 BUSINESS		1-4
ITEM 2 PROPERTIES		4
ITEM 3 LEGAL PROCEEDINGS		4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		4

PART II

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS		4-5
ITEM 6 SELECTED FINANCIAL DATA		5
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		6
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		6
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		6
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		6
ITEM 9A CONTROLS AND PROCEDURES		6

PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		39-41
ITEM 11 EXECUTIVE COMPENSATION		41-46
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		46-48
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		48

PART IV

ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES		49
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K		49-50
SIGNATURES		51
CONSENT OF KPMG LLP
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER
SECT. 906 CERTIFICATION OF C.E.O.
SECT. 906 CERTIFICATION OF C.F.O.
AUDIT COMMITTEE CHARTER


Year Ended December 31,	2003 Compared with 2002									2002 Compared with 2001
	Increase/(Decrease)									Increase/(Decrease)
	Due to Change in									Due to Change in
	Volume			Rate			Total			Volume			Rate			Total
(in thousands)
Interest Income:
Loans	$	884		$	(3,704	)	$	(2,820	)	$	3,544		$	(4,443	)	$	(899	)
Securities available-for-sale:
Taxable		8,721			(7,270	)		1,451			12,038			(3,793	)		8,245
Tax-exempt		(30	)		(6	)		(36	)		(44	)		(28	)		(72	)
Securities held-to-maturity:
Taxable		1,793			(1,791	)		2			(1,473	)		(758	)		(2,231	)
Federal funds sold		(265	)		(171	)		(436	)		(267	)		(1,139	)		(1,406	)

Total interest income		11,103			(12,942	)		(1,839	)		13,798			(10,161	)		3,637

Interest expense:
Deposits:
NOW accounts		634			(955	)		(321	)		954			(1,346	)		(392	)
Savings accounts		49			(325	)		(276	)		121			(408	)		(287	)
Money market accounts		1,815			(1,434	)		381			2,674			(1,278	)		1,396
Time deposits		1,619			(1,214	)		405			(1,420	)		(3,017	)		(4,437	)

Total interest-bearing deposits		4,117			(3,928	)		189			2,329			(6,049	)		(3,720	)
Securities sold under agreements to repurchase		(105	)		(134	)		(239	)		(206	)		(745	)		(951	)
Other borrowed funds and long term debt		(811	)		84			(727	)		3,363			(1,675	)		1,688

Total interest expense		3,201			(3,978	)		(777	)		5,486			(8,469	)		(2,983	)

Change in net interest income	$	7,902		$	(8,964	)	$	(1,062	)	$	8,312		$	(1,692	)	$	6,620


Change in Interest Rates	Percentage Change in
(in Basis Points)	Net Interest Income⁽¹⁾
+300		(4.5	)%
+200		(3.1	)%
+100		(1.6	)%
-100		(1.0	)%


	Payments Due - By Period
			Less than		One To		Three To		After
Contractual Obligations	Total		One Year		Three Years		Five Years		Five Years
FHLB advances	$	134,178	$	35,000	$	1,178	$	19,500	$	78,500
Long term debt		29,639		—		—		—		29,639
Lease obligations		6,614		1,043		1,839		1,614		2,118
Other
Treasury, tax and loan		2,151		2,151		—		—		—
Customer repurchase agreements		40,050		40,050		—		—		—

Total contractual cash obligations	$	212,632	$	78,244	$	3,017	$	21,114	$	110,257

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þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003


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


ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

	(b)		Approximate number of equity security holders as of December 31, 2003.

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

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


ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


ITEM 7a.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

		⁽¹⁾ On a fully taxable equivalent basis calculated using a federal tax rate of 35%.

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


	Amount of Commitment Expiring - By Period
			Less than		One To		Three To		After
Other Commitments	Total		One Year		Three Years		Five Years		Five Years
Lines of credit	$	126,825	$	59,487	$	2,049	$	1,056	$	64,233
Standby letters of credit		4,914		4,462		202		—		250
Other commitments		16,014		7,720		8,294		—		—

Total commitments	$	147,753	$	71,669		10,545	$	1,056		64,483


Contract or Notational Amount	2003		2002
(in thousands)
Financial instruments whose contract amount represents credit risk:
Commitments to originate 1-4 family mortgages		600		1,902
Standby letters of credit		4,914		3,467
Unused lines of credit		126,825		97,535
Unadvanced portions of construction loans		15,414		19,234

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

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

		The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and 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.

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

		INVESTMENT SECURITIES

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

		Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method, which approximates the effective method. If a decline in fair value below the amortized cost basis of an investment is judged to be other than temporary, the cost basis of the investment is written down to fair value. The amount of the writedown is included as a charge to earnings. Gains and losses on the sale of investment securities are recognized at the time of sale on a specific identification basis.

		LOANS

		Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become 90 days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Loans, including impaired loans, on which the accrual of interest has been discontinued are designated non-accrual loans. When a loan is placed on non-accrual, all income which has been accrued but remains unpaid is reversed against current period income and all amortization of deferred loan fees is discontinued. Non-accrual loans may be returned to an accrual status when principal and interest payments are not delinquent and the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and income. Income received on non-accrual loans is either recorded in income or applied to the principal balance of the loan depending on management’s evaluation as to the collectibility of principal.

		Loan origination fees and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method.

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

		The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans which ultimately prove uncollectible. In determining the level of the allowance, periodic evaluations are made of the loan portfolio which take into account such factors as the character of the loans, loan status, financial posture of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgement. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries.

		Management maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans and the unallocated allowance.

		The formula allowance is calculated by applying loss factors to outstanding loans, in each case based on the internal risk grade of such loans. Changes in risk grades affect the amount of the formula allowance. Loss factors are based on the Company’s historical loss experience as well as regulatory guidelines.

		Specific allowances are established in cases where management has identified significant conditions related to a credit that management believes that the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance.

		The unallocated allowance recognizes the model and estimation risk associated with the formula allowance and specific allowances as well as management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits.

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

		BANK PREMISES AND EQUIPMENT

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

		STOCK OPTION ACCOUNTING

		The Company currently accounts for employee stock options using the intrinsic value method. Under the intrinsic value method, no compensation cost is recognized related to options if the exercise price of the option is greater than or equal to the fair market value of the underlying stock on the date of grant. Under an alternative method, the fair value method, the “cost” of the option is estimated on the date of grant using an option valuation model and recognized as compensation expense over the vesting period of the option. Any change from the intrinsic value method to the fair value method of accounting for stock options is required to be applied prospectively for options granted after the date of change in method which must be as of the beginning of a fiscal year. The Company generally awards stock options annually with a grant date in January.

		Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

		INCOME TAXES

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

2.		Cash and Due From Banks

		The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $650,000 at December 31, 2003 and $507,000 at December 31, 2002.

3.		Securities Available-for-Sale

		Included in U.S. Government and Agency securities are securities pledged to secure public deposits and repurchase agreements amounting to $50,263,000 at December 31, 2003, $60,841,000 at December 31, 2002 and $81,332,000 at December 31, 2001. Also included are securities pledged for borrowing at the Federal Home Loan Bank amounting to $289,731,000.

		The following table shows the temporarily impaired securities of the Company’s securities available-for-sale portfolio at December 31, 2003.

		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. The number of securities temporarily impaired for less than 12 months and for 12 months or longer are 42 and 2, respectively, out of a total of 195. Most of the available-for-sale securities are invested in U.S. Government and Agencies and, therefore, the Company has determined that the securities listed are temporarily impaired.

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

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

		Residential real estate (1-4 family) includes two categories of loans. Approximately $5 million of loans are classified as “Commercial and Industrial” type loans secured by 1-4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the collateral position.

		The other category of residential real estate loans are mostly 1-4 family residential properties located in the Bank’s market area. General underwriting criteria are largely the same as those used by Fannie Mae but normally only one or three year adjustable interest rates are used. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a “First Time Homebuyer” product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category. This year, the economy has deteriorated, and the market has generally been volatile.

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

		The Bank intends to maintain a market for construction loans, principally for smaller local residential projects or an owner occupied commercial project. Individual consumer residential home construction loans are also extended on a similar basis.

		Bank officers evaluate the feasibility of construction projects, based on independent appraisals of the project, architects or engineers evaluations of the cost of construction, and other relevant data. As of December 31, 2003, the Company was obligated to advance a total of $15.4 million to complete projects under construction.

		There were no impaired loans with specific reserves from December 31, 1999 through December 31, 2003 and in the opinion of management, none of the above listed impaired loans required a specific reserve. All of the impaired loans listed above have been measured using the fair value of the collateral method.

		The Company was servicing mortgage loans sold to others without recourse of approximately $2,397,000, $4,444,000, $6,888,000, $10,199,000 and $12,542,000, at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. Additionally, the Company was servicing mortgage loans sold to others with limited recourse. The outstanding balance of these loans with limited recourse was approximately $183,000, $194,000, $338,000, $479,000 and $490,000, at December 31, 2003, 2002, 2001, 2000 and 1999, respectively.

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

		The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2003.

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

		In addition to the above, as of December 31, 2003, the Company continues to monitor closely $8.8 million of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2003, although such values can fluctuate with changes in the economy and the real estate market.

6.		Allowance for Loan Losses

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