UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended December 31, 2009

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

For the transition period from ___________ to ___________

CENTRAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Massachusetts		04-3447594
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
399 Highland Avenue, Somerville, Massachusetts		02144
(Address of principal executive offices)		(Zip Code)

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

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

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

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

Common Stock, $1.00 par value		1,637,151
Class		Outstanding at February 5, 2010

 

 

CENTRAL BANCORP, INC.

FORM 10-Q

Table of Contents

				Page No.
Part I.		Financial Information
Item 1.		Financial Statements (Unaudited)
		Consolidated Statements of Financial Condition at December 31, 2009 and March 31, 2009			1
		Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2009 and 2008			2
		Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended December 31, 2009			3
		Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2009 and 2008			4
		Notes to Unaudited Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations Operations			20
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			32
Item 4(T).		Controls and Procedures			32
Part II.		Other Information			33
Item 1.		Legal Proceedings			33
Item 1A.		Risk Factors			33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3.		Defaults Upon Senior Securities			33
Item 4.		Submission of Matters to a Vote of Security Holders			33
Item 5.		Other Information			33
Item 6.		Exhibits			33
Signatures					34
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)

(Dollars in Thousands, Except Share and Per Share Data)		December 31, 2009				March 31, 2009
ASSETS
Cash and due from banks		$	5,054			$	5,099
Short-term investments			13,420				37,323
Cash and cash equivalents			18,474				42,422
Investment securities available for sale (Note 2)			37,805				35,215
Stock in Federal Home Loan Bank of Boston, at cost			8,518				8,518
The Co-operative Central Bank Reserve Fund, at cost			1,576				1,576
Total investments			47,899				45,309
Loans held for sale			3,212				3,208
Loans (Note 3)			467,599				460,670
Less allowance for loan losses			(2,788	)			(3,191	)
Loans, net			464,811				457,479
Accrued interest receivable			1,766				1,859
Banking premises and equipment, net			2,807				3,323
Deferred tax asset, net			5,987				7,585
Other real estate owned			77				2,986
Goodwill, net			2,232				2,232
Bank owned life insurance (Note 11)			6,616				6,391
Other assets			4,530				3,033
Total assets		$	558,411			$	575,827
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits (Note 4)		$	344,481			$	375,074
Short-term borrowings			—				1,014
Federal Home Loan Bank advances			155,498				144,583
Subordinated debentures (Note 5)			11,341				11,341
Advanced payments by borrowers for taxes and insurance			1,659				1,532
Accrued expenses and other liabilities			1,860				2,044
Total liabilities			514,839				535,588
Commitments and Contingencies (Note 7)
Stockholders’ equity:
Preferred stock — Series A Cumulative Perpetual, $1.00 par value; 5,000,000 shares authorized; 10,000 shares issued and outstanding, with a liquidation preference and redemption value of $10,063,889 at December 31, 2009 and March 31, 2009			9,559				9,476
Common stock $1.00 par value; 15,000,000 shares authorized; 1,637,151 and 1,639,951 shares issued and outstanding at December 31, 2009 and March 31, 2009, respectively			1,637				1,640
Additional paid-in capital			4,214				4,371
Retained income			33,984				33,393
Accumulated other comprehensive income (loss) (Note 6)			76				(2,226	)
Unearned compensation — ESOP			(5,898	)			(6,415	)
Total stockholders’ equity			43,572				40,239
Total liabilities and stockholders’ equity		$	558,411			$	575,827

See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
(In Thousands, Except Share and Per Share Data)		2009				2008				2009				2008
Interest and dividend income:
Mortgage loans		$	6,689			$	6,836			$	20,101			$	20,573
Other loans			74				105				249				435
Investments			317				454				1,109				1,942
Short-term investments			8				23				41				132
Total interest and dividend income			7,088				7,418				21,500				23,082
Interest expense:
Deposits			896				1,656				3,696				5,400
Advances from Federal Home Loan Bank of Boston			1,675				1,670				4,954				5,124
Other borrowings			140				177				440				520
Total interest expense			2,711				3,503				9,090				11,044
Net interest and dividend income			4,377				3,915				12,410				12,038
Provision for loan losses			100				—				350				1,100
Net interest and dividend income after provision for loan losses			4,277				3,915				12,060				10,938
Noninterest income:
Deposit service charges			265				259				752				758
Net loss from sales and write-downs of investment securities other than FNMA and FHLMC			(81	)			—				(81	)			(144	)
Net loss from sales and write-downs of FNMA and FHLMC securities			—				—				—				(9,394	)
Net gains on sales of loans			63				30				244				45
Bank owned life insurance income			76				78				228				236
Other income			56				65				181				265
Total noninterest income			379				432				1,324				(8,234	)
Noninterest expenses:
Salaries and employee benefits			2,021				1,995				5,969				6,293
Occupancy and equipment			552				579				1,639				1,704
Data processing fees			222				196				637				596
Professional fees			201				211				569				595
FDIC deposit premiums			489				16				969				43
Advertising and marketing			70				158				154				247
Other expenses			428				636				1,453				1,527
Total noninterest expenses			3,983				3,791				11,390				11,005
Income (loss) before income taxes			673				556				1,994				(8,301	)
Provision (benefit) for income taxes			307				(3,361	)			726				(3,153	)
Net income (loss)		$	366			$	3,917			$	1,268			$	(5,148	)
Net income (loss) available to common shareholders		$	213			$	3,872			$	809			$	(5,193	)
Earnings (loss) per common share — basic (Note 9)		$	0.15			$	2.76			$	0.56			$	(3.73	)
Earnings (loss) per common share — diluted (Note 9)		$	0.14			$	2.76			$	0.54			$	(3.73	)
Weighted average common shares outstanding — basic			1,457,136				1,404,342				1,451,780				1,393,720
Weighted average common and equivalent shares outstanding — diluted			1,511,806				1,404,342				1,487,318				1,393,720

See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

																		Accumulated
		Series A								Additional								Other				Unearned				Total
		Preferred				Common				Paid-In				Retained				Comprehensive				Compensation				Stockholders’
(In Thousands, Except Per Share Data)		Stock				Stock				Capital				Income				Loss				ESOP				Equity
Nine Months Ended December 31, 2009
Balance at March 31, 2009		$	9,476			$	1,640			$	4,371			$	33,393			$	(2,226	)		$	(6,415	)		$	40,239
Net income															1,268												1,268
Other comprehensive income, net of taxes of $1,503:
Unrealized gain on securities, net of reclassification adjustment (Note 6)																			2,302								2,302
Comprehensive income																											3,570
Dividends paid to common stockholders ($0.15 per share)															(219	)											(219	)
Preferred stock accretion of discount and issuance costs			83												(83	)											—
Dividends paid on preferred stock															(375	)											(375	)
Forfeiture of restricted common stock							(3	)			3																—
Stock-based compensation (Note 10)											237																237
Amortization of unearned compensation — ESOP											(397	)											517				120
Balance at December 31, 2009		$	9,559			$	1,637			$	4,214			$	33,984			$	76			$	(5,898	)		$	43,572

See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended
		December 31,
(In thousands)		2009				2008
Cash flows from operating activities:
Net income (loss)		$	1,268			$	(5,148	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			597				685
Amortization of premiums			250				38
Provision for loan losses			350				1,100
Stock-based compensation and amortization of unearned compensation — ESOP			357				430
Decrease (increase) in deferred tax asset			92				(3,830	)
Net losses from sales and write-downs of investment securities			81				9,538
Bank-owned life insurance income			(228	)			(236	)
Loss on sale of OREO			60				—
Gains on sales of loans held for sale			(244	)			(45	)
Originations of loans held for sale			(31,673	)			(4,683	)
Proceeds from sale of loans originated for sale			31,913				4,573
Decrease in accrued interest receivable			93				136
Increase in other assets, net			(1,494	)			(306	)
Increase in advance payments by borrowers for taxes and insurance			127				159
(Decrease) increase in accrued expenses and other liabilities, net			(184	)			233
Net cash provided by operating activities			1,365				2,178
Cash flows from investing activities:
Loan principal collections (originations), net			(7,758	)			18,703
Principal payments on mortgage-backed securities			10,412				3,965
Proceeds from sales of investment securities			—				3,616
Purchases of investment securities			(11,026	)			(9,017	)
Maturities and calls of investment securities			1,500				6,000
Proceeds from sales of OREO			2,926				—
Purchase of banking premises and equipment			(81	)			(246	)
Net cash (used in) provided by investing activities			(4,027	)			23,021
Cash flows from financing activities:
Net decrease in deposits			(30,593	)			(11,547	)
Proceeds from advances from FHLB of Boston			20,000				—
Repayment of advances from FHLB of Boston			(9,085	)			(12,081	)
(Repayments) net proceeds (of) from short-term borrowings			(1,014	)			1,504
Cash dividends paid			(594	)			(771	)
Issuance of Series A preferred stock and warrants			—				9,970
Net cash used in financing activities			(21,286	)			(12,925	)
Net (decrease) increase in cash and cash equivalents			(23,948	)			12,274
Cash and cash equivalents at beginning of period			42,422				17,725
Cash and cash equivalents at end of period		$	18,474			$	29,999
Cash paid during the period for:
Interest		$	9,097			$	11,091
Income taxes			—				935
Supplemental disclosure of non-cash investing and financing activities:
Loans transferred to other real estate owned			77				191
Accretion of Series A preferred stock issuance costs			83				9

See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
December 31, 2009

(1) Basis of Presentation

     The unaudited consolidated financial statements of Central Bancorp, Inc. and its wholly owned subsidiary, Central Co-operative Bank (the “Bank”) (collectively referred to as “the Company”), presented herein should be read in conjunction with the consolidated financial statements of the Company as of and for the year ended March 31, 2009, included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 23, 2009. The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations, changes in stockholders’ equity or cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, the accompanying unaudited consolidated financial statements reflect all normal recurring adjustments that are necessary for a fair presentation. The results for the nine months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2010 or any other period.

     The Company owns 100% of the common stock of Central Bancorp Capital Trust I (“Trust I”) and Central Bancorp Statutory Trust II (“Trust II”), which have issued trust preferred securities to the public in private placement offerings. In December 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation 46R, a revision of Interpretation No. 46 “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin No. 51”, which is now codified as part of FASB Accounting Standards Codification (“ASC”) 860 Transfers and Servicing (“ASC 860”), discussed as follows. In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”), (the “Codification”), and, in doing so, authorized the Codification as the sole source for authoritative Generally Accepted Accounting Principles, or GAAP. Therefore, in accordance with ASC 860, neither Trust I nor Trust II are included in the Company’s consolidated financial statements (See Note 5).

     The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended March 31, 2009. For interim reporting purposes, the Company follows the same significant accounting policies (see Note 12).

(2) Investments

     The amortized cost and fair value of investment securities available for sale at December 31, 2009, are summarized as follows:

		December 31, 2009
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
		( In Thousands)
Corporate bonds		$	1,986			$	—			$	(597	)		$	1,389
Mortgage-backed securities			28,183				800				(20	)			28,963
Trust preferred securities			1,003				24				—				1,027
Total debt securities			31,172				824				(617	)			31,379
Preferred stock			3,769				18				(567	)			3,220
Common stock			3,077				335				(206	)			3,206
Total		$	38,018			$	1,177			$	(1,390	)		$	37,805

     The amortized cost and fair value of investment securities available for sale at March 31, 2009 are as follows:

		March 31, 2009
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
		(In Thousands)
U.S. Government and agency obligations		$	1,500			$	3			$	—			$	1,503
Corporate bonds			1,984				—				(1,283	)			701
Mortgage-backed securities			27,813				572				(32	)			28,353
Trust preferred securities			1,003				—				(253	)			750
Total debt securities			32,300				575				(1,568	)			31,307
Preferred stock			3,775				—				(2,125	)			1,650
Common stock			3,158				3				(903	)			2,258
Total		$	39,233			$	578			$	(4,596	)		$	35,215

     During the three and nine month periods ended December 31, 2009, one common stock holding was determined to be other than temporarily impaired and its book value was reduced to its market value of $133 thousand through an impairment charge of $81 thousand on December 31, 2009.

     Temporarily impaired securities as of December 31, 2009 are presented in the following table and are aggregated by investment category and length of time that individual securities have been in a continuous loss position.

		Less Than or Equal to								Greater Than
		12 Months								12 Months
		Fair				Unrealized								Unrealized
		Value				Losses				Fair Value				Losses
		(In Thousands)
Corporate bonds		$	—			$	—			$	1,389			$	(597	)
Mortgage-backed securities			3,322				(6	)			633				(14	)
Preferred stock			266				(160	)			1,903				(407	)
Common stock			—				—				1,713				(206	)
Total temporarily impaired securities		$	3,588			$	(166	)		$	5,638			$	(1,224	)

     During the quarter ended September 30, 2008, impairment charges of $9.4 million were recognized on five Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) preferred stock investments that were deemed to be other-than-temporarily impaired based on management’s periodic analysis of the investment portfolio. The preferred stock write-downs resulted from the September 2008 conservatorship of Fannie Mae and Freddie Mac. The conservatorship and elimination of Fannie Mae and Freddie Mac dividends significantly reduced the value of the Company’s preferred stock investment in these companies, resulting in the impairment write-downs to market value. Subsequently, there were additional declines in the market values of these securities due to recessionary economic conditions which created turbulence in the financial markets, in particular the financial services industry and the real estate markets. The unrealized losses on these securities have decreased to $290 thousand at December 31, 2009, compared to unrealized losses of $472 thousand at March 31, 2009. Management currently does not have the intent to sell these securities and it is more likely than not that it will not have to sell these securities before recovery of their cost basis. Based on available information, management has determined that the unrealized losses on the Company’s investment in Fannie Mae and Freddie Mac preferred stock are not other than temporary.

     The Company also has two other preferred stock investments currently in unrealized loss positions for which the fair values have increased during the quarter ended December 31, 2009. The fair value of these securities

totaled $1.8 million with unrealized losses of $277 thousand at December 31, 2009, compared to a fair value of $773 thousand and unrealized losses of $1.3 million at March 31, 2009. Based on management’s analysis of these preferred stock investments, management has determined that the unrealized losses associated with these securities are not considered to be other than temporary at December 31, 2009.

     The Company has a corporate bond with a fair value of $1.4 million and an unrealized loss of $597 thousand at December 31, 2009, compared to a fair value of $701 thousand and an unrealized loss of $1.3 million at March 31, 2009. This security matures in December 2017. Management currently does not have the intent to sell this security and it is more likely than not that it will not have to sell this security before recovery of its cost basis. Based upon available information, management has determined that the unrealized loss on this security is not considered to be other than temporary at December 31, 2009.

     The Company has one trust preferred investment which had been in an unrealized loss position greater than twelve months as of June 30, 2009. The fair value of this security has increased from $750 thousand at March 31, 2009 to an unrealized gain position with a fair value of $1.0 million at December 31, 2009.

     The Company has two debt securities in loss positions as of December 31, 2009 which have been in continuous loss positions for a period of less than twelve months. These debt securities have a total fair value of $3.3 million and unrealized losses of $6 thousand as of December 31, 2009. The Company has a total of fifteen other debt securities in loss positions as of December 31, 2009, all of which have been in a continuous loss position for a period greater than twelve months. These debt securities have a total fair value of $633 thousand and unrealized losses of $14 thousand as of December 31, 2009. These debt securities consist of government agency mortgage—backed securities. Management currently does not have the intent to sell these securities and it is more likely than not that it will not have to sell these securities before recovery of their cost basis. Based on management’s analysis of these securities, it has been determined that none of the securities are other than temporarily impaired as of December 31, 2009.

     The Company has sixteen equity securities with a fair value of $1.7 million and unrealized losses of $206 thousand which were temporarily impaired at December 31, 2009. The total unrealized losses relating to these securities represent 10.75% of book value. This is an improvement when compared to the ratio of unrealized losses to book value of 48.7% at March 31, 2009. Of these sixteen securities, all have been in a continuous loss position for greater than twelve months. Data indicates that, due to current economic conditions, the time for many stocks to recover may be substantially lengthened. Management’s investment approach is to be a long-term investor. The Company currently does not have the intent to sell these securities and it is more likely than not that it will not have to sell these securities before recovery of their cost basis. The Company has determined that the unrealized losses associated with these securities are not indicative of other than temporary impairment as of December 31, 2009.

     The maturity distribution (based on contractual maturities) and annual yields of debt securities at December 31, 2009 are as follows:

		Amortized				Fair				Annual
		Cost				Value				Yield
		(Dollars in Thousands)
Due after one year but within five years		$	5,651			$	5,799				4.20	%
Due after five years but within ten years			1,998				1,401				7.00
Due after ten years			23,523				24,179				5.46
Total		$	31,172			$	31,379

     Mortgage-backed securities are shown at their contractual maturity dates but actual maturities may differ as borrowers have the right to prepay obligations without incurring prepayment penalties.

(3) Loans

     Loans, excluding loans held for sale, as of December 31, 2009 and March 31, 2009 are summarized below (unaudited, in thousands):

		December 31,				March 31,
		2009				2009
Real estate loans:
Residential real estate (1- 4 family)		$	220,744			$	183,327
Commercial real estate			229,900				249,941
Construction			3,656				14,089
Home equity lines of credit			8,533				7,347
Total real estate loans			462,833				454,704
Commercial loans			3,848				4,834
Consumer loans			918				1,132
Total loans			467,599				460,670
Less: allowance for loan losses			(2,788	)			(3,191	)
Total loans, net		$	464,811			$	457,479

     There were eleven loans to eleven borrowers on nonaccrual status totaling $5.1 million as of December 31, 2009, and eight loans to seven borrowers on nonaccrual status totaling $4.8 million as of March 31, 2009.

     At December 31, 2009 there were eleven impaired loans totaling $6.3 million which were accruing interest. At March 31, 2009, there were no impaired loans other than nonaccrual loans. Impaired loans are evaluated separately and measured utilizing guidance as set forth by ASC 310 Receivables (“ASC 310”).

     A summary of changes in the allowance for loan losses for the three and nine months ended December 31, 2009 and 2008 follows (unaudited, in thousands):

		Three Months Ended
		December 31,
		2009				2008
Balance at beginning of period		$	2,719			$	4,674
Provision charged to expense			100				—
Less: charge-offs			(44	)			(77	)
Add: recoveries			13				3
Balance at end of period		$	2,788			$	4,600

		Nine Months Ended
		December 31,
		2009				2008
Balance at beginning of period		$	3,191			$	3,613
Provision charged to expense			350				1,100
Less: charge-offs			(770	)			(124	)
Add: recoveries			17				—
Balance at end of period		$	2,788			$	4,600

(4) Deposits

     Deposits at December 31, 2009 and March 31, 2009 are summarized as follows (unaudited, in thousands):

		December 31,				March 31,
		2009				2009
Demand deposit accounts		$	42,810			$	46,259
NOW accounts			28,963				30,976
Passbook and other savings accounts			52,127				50,737
Money market deposit accounts			81,020				67,398
Total non-certificate accounts			204,920				195,370
Term deposit certificates:
Certificates of $100,000 and above			54,855				85,497
Certificates of less than $100,000			84,706				94,207
Total term deposit certificates			139,561				179,704
Total deposits		$	344,481			$	375,074

(5) Subordinated Debentures

     On September 16, 2004, the Company completed a trust preferred securities financing in the amount of $5.1 million. In connection with the transaction, the Company formed a Delaware statutory trust, known as Central Bancorp Capital Trust I (“Trust I”). Trust I issued and sold $5.1 million of trust preferred securities in a private placement and issued $158,000 of trust common securities to the Company. Trust I used the proceeds of these issuances to purchase $5.3 million of the Company’s floating rate junior subordinated debentures due September 16, 2034 (the “Trust I Debentures”). The interest rate on the Trust I Debentures and the trust preferred securities is variable and adjustable quarterly at 2.44% over three-month LIBOR. At December 31, 2009, the interest rate was 2.69%. The Trust I Debentures are the sole assets of Trust I and are subordinate to all of the Company’s existing and future obligations for borrowed money.

     On January 31, 2007, the Company completed a second trust preferred securities financing in the amount of $5.9 million. In connection with the transaction, the Company formed a Connecticut statutory trust, known as Central Bancorp Statutory Trust II (“Trust II”). Trust II issued and sold $5.9 million of trust preferred securities in a private placement and issued $183,000 of trust common securities to the Company. Trust II used the proceeds of these issuances to purchase $6.1 million of the Company’s floating rate junior subordinated debentures due March 15, 2037 (the “Trust II Debentures”). From January 31, 2007 until March 15, 2017 (the “Fixed Rate Period”), the interest rate on the Trust II Debentures and the trust preferred securities is fixed at 7.015% per annum. Upon the expiration of the Fixed Rate Period, the interest rate on the Trust II Debentures and the trust preferred securities will be at a variable per annum rate, reset quarterly, equal to three month LIBOR plus 1.65%. The Trust II Debentures are the sole assets of Trust II. The Trust II Debentures and the trust preferred securities each have 30-year lives. The trust preferred securities and the Trust II Debentures will each be callable by the Company or Trust II, at their respective option, after ten years, and sooner in certain specific events, including the event that the securities are not eligible for treatment as Tier 1 capital, subject to prior approval by the Federal Reserve Board, if then required. Interest on the trust preferred securities and the Trust II Debentures may be deferred at any time or from time to time for a period not exceeding 20 consecutive quarterly payments (five years), provided there is no event of default.

     The trust preferred securities generally rank equal to the trust common securities in priority of payment, but will rank prior to the trust common securities if and so long as the Company fails to make principal or interest payments on the Trust I and the Trust II Debentures. Concurrently with the issuance of the Trust I and Trust II Debentures and the trust preferred securities, the Company issued a guarantee related to the trust securities for the benefit of the holders and pursuant to which the Company unconditionally guarantees the financial obligations of Trust I and Trust II.

(6) Other Comprehensive Income

     The Company has established standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by, and distributions to, stockholders. Net income is a component of comprehensive income, with all other components referred to, in the aggregate, as other comprehensive income.

     The Company’s other comprehensive income and related tax effect for the nine months ended December 31, 2009 and 2008 are as follows (unaudited, in thousands):

		For the Nine Months Ended
		December 31, 2009
		Before-Tax				Tax				After-Tax
		Amount				Effect				Amount
Unrealized gains on securities:
Unrealized net holding gains during period		$	3,724			$	1,470			$	2,254
Less: reclassification adjustment for net losses included in net income			(81	)			(33	)			(48	)
Other comprehensive income		$	3,805			$	1,503			$	2,302

		For the Nine Months Ended
		December 31, 2008
		Before-Tax				Tax				After-Tax
		Amount				Effect				Amount
Unrealized losses on securities:
Unrealized net holding losses during period		$	(12,093	)		$	(4,410	)		$	(7,683	)
Less: reclassification adjustment for net losses included in net loss			(9,538	)			(3,364	)			(6,174	)
Other comprehensive loss		$	(2,555	)		$	(1,046	)		$	(1,509	)

(7) Contingencies

     Legal Proceedings. The Company from time to time is involved in various legal actions incident to its business. At December 31, 2009, none of these actions are believed to be material, either individually or collectively, to the results of operations and financial condition of the Company.

(8) Subsequent Events

     On January 21, 2010, the Company’s Board of Directors approved the payment of a quarterly cash dividend of $0.05 per common share. The dividend is payable on or about February 19, 2010 to common stockholders of record as of February 5, 2010. Also on January 21, 2010, the Company’s Board of Directors approved the payment of a quarterly cash dividend of $125,000 to the U.S. Department of Treasury, as the Company’s sole preferred stockholder, in connection with the Company’s participation in the federal government’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program. See Note 14 below for additional information.

     Management has reviewed events occurring through February 12, 2010, the date the interim financial statements, included in this quarterly report on Form 10-Q, were issued and no subsequent events occurred requiring accrual or disclosure other than those disclosed in the notes included in this Quarterly Report on Form 10-Q.

(9) Earnings (Loss) Per Share (EPS)

     Unallocated shares of Company common stock held by the Central Co-operative Bank Employee Stock Ownership Plan Trust (the “ESOP”) are not treated as being outstanding in the computation of either basic or diluted

earnings per share (“EPS”). At December 31, 2009 and 2008, there were approximately 181,000 and 202,500 unallocated ESOP shares, respectively.

     The following depicts a reconciliation of earnings per share (unaudited):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
		(Amounts in thousands, except per share amounts)
Net income (loss) as reported		$	366			$	3,917			$	1,268			$	(5,148	)
Less preferred dividends and accretion			(153	)			(45	)			(459	)			(45	)
Net income (loss) available to common stockholders		$	213			$	3,872			$	809			$	(5,193	)
Weighted average number of common shares outstanding			1,640				1,640				1,640				1,640
Weighted average number of unallocated ESOP and unvested restricted shares			(183	)			(236	)			(188	)			(246	)
Weighted average number of common shares outstanding used in calculation of basic earnings per share			1,457				1,404				1,452				1,394
Incremental shares from the assumed exercise of dilutive securities			55				—				35				—
Weighted average number of common shares outstanding used in calculating diluted earnings per share			1,512				1,404				1,487				1,394
Earnings (loss) per common share
Basic		$	0.15			$	2.76			$	0.56			$	(3.73	)
Diluted		$	0.14			$	2.76			$	0.54			$	(3.73	)

     At December 31, 2009, 53,608 stock options were anti-dilutive and therefore excluded from the above calculation for the three and nine month period. At December 31, 2008, 68,218 and 29,400 stock options and restricted stock shares, respectively, were anti-dilutive and therefore excluded from the above calculation for the three and nine month period.

(10) Stock-Based Compensation

     The Company uses the Black-Scholes option pricing model as its method for determining the fair value of stock option grants. The Company has previously adopted two qualified stock option plans for the benefit of officers and other employees under which an aggregate of 281,500 shares have been reserved for issuance. One of these plans expired in 1997 and the other plan expired in 2009. All awards under the plan that expired in 2009 were granted by the end of 2005. Awards outstanding at the time the plans expire will continue to remain outstanding according to their terms.

     On July 31, 2006, the Company’s stockholders approved the Central Bancorp, Inc. 2006 Long-Term Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, 150,000 shares have been reserved for issuance as options to purchase stock, restricted stock, or other stock awards. The exercise price of an option may not be less than the fair market value of the Company’s common stock on the date of grant of the option and may not be exercisable more than ten years after the date of grant. However, awards may become available again if participants forfeit awards under the plan prior to its expiration. As of December 31, 2009, 93,800 shares remained unissued under the Incentive Plan.

     Forfeitures of awards granted under the incentive plan are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately expected to vest. Forfeitures represent only the unvested portion of a surrendered option and are typically estimated based on historical experience. Based on an analysis of the Company’s historical data, the Company applied a forfeiture rate of 0% to stock options outstanding in determining stock compensation expense for the year ended March 31, 2009, which it believes is a reasonable forfeiture estimate for the current period.

     The Company recognizes the estimated fair value of stock-based compensation in the consolidated statement of operations over the requisite service period of each option granted. Under the modified prospective application method, the Company applies the provisions of ASC 718 Compensation — Stock Compensation, to all awards granted or modified after April 1, 2006 as well as unvested awards issued in a prior period. The Company awarded options to purchase 10,000 shares and stock grants for 49,000 restricted shares in the year ended March 31, 2007 and granted no stock options or stock grants in the years ended March 31, 2008 and 2009. Additionally, the Company did not grant any stock options or stock grants during the nine months ended December 31, 2009; however, 2,800 unvested restricted shares were forfeited during the period. The options and restricted shares granted in fiscal 2007 vest over a five-year life. Stock-based compensation totaled $73,000 and $81,000 for the three months ended December 31, 2009 and 2008, respectively, and $234,000 and $242,000 for the nine months ended December 31, 2009 and 2008, respectively.

     Stock option activity was as follows for the nine months ended December 31, 2009:

		Number of				Weighted Average
		Shares				Exercise Price
Outstanding at March 31, 2009			68,218			$	25.364
Exercised			—				—
Forfeited			(865	)			28.990
Expired			(13,745	)			20.250
Outstanding at December 31, 2009			53,608			$	26.617
Exercisable at December 31, 2009			49,608			$	26.247

     As of December 31, 2009, the unrecognized compensation costs related to options and restricted stock vesting will be recognized over the following periods: $70 thousand during the period of January 1, 2010 through March 31, 2010; $278 thousand during the fiscal year ending March 31, 2011; and $162 thousand during the first seven months of the fiscal year ending March 31, 2012.

     The range of exercise prices, weighted average remaining contractual lives of outstanding stock options and aggregate intrinsic value at December 31, 2009 were as follows:

										Weighted
										Average
										Remaining
						Number				Contractual				Aggregate
		Exercise				of Shares				Life				Intrinsic
		Price				Outstanding				(Years)				Value (1)
		$	16.625				12,077	(2)			0.9				—
			28.990				31,531	(2)			5.1				—
			31.200				10,000	(3)			6.7				—
Average/Total		$	26.617				53,608				4.6			$	—

     A summary of restricted stock activity under all Company plans for the nine months ended December 31, 2009 is as follows:

		Number				Weighted Average
		of Restricted				Grant Date
		Shares				Fair Value
Non-vested at March 31, 2009			29,400			$	31.20
Granted
Vested			(9,800	)			31.20
Forfeited			(2,800	)			31.20
Non-vested at December 31, 2009			16,800			$	31.20

(11) Bank-Owned Life Insurance

     During the quarter ended December 31, 2007, the Bank purchased life insurance policies on one executive which totaled $6.0 million. The Bank follows FASB ASC 325-30 Investments- Other (“ASC 325-30”). Increases in the cash value are recognized in other noninterest income and are not subject to income taxes. The Bank reviewed the financial strength of the insurance carriers prior to the purchase of the policies, and continues to conduct such reviews on an annual basis. Bank-owned life insurance totaled $6.6 million at December 31, 2009.

(12) Recent Accounting Pronouncements

     FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”) became effective for the Company for annual and interim reporting periods beginning April 1, 2009. This Standard

is now included in the Codification as part of ASC 820-10 Financial Instruments (“ASC 820-10”). This Standard amended FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), to delay the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company’s non-financial asset within the scope of SFAS 157, goodwill, is reported at fair value on a nonrecurring basis (generally as the result of an impairment assessment) during the period in which the fair value measurement is recorded. The Company currently has no non-financial liabilities required to be reported at fair value on a recurring basis. The adoption of ASC 820-10 did not have a material effect on the Company’s financial position or results of operations.

     FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”) became effective for the Company for annual and interim reporting periods beginning April 1, 2009. This Standard is now included in the Codification as part of ASC 815-10 Derivatives and Hedging (“ASC 815-10”). The Statement expands disclosure requirements for derivative instruments and hedging activities. The new disclosures address how derivative instruments are used, how derivatives and the related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. In addition, companies are required to disclose the fair values of derivative instruments and their gains and losses in a tabular format. The adoption of ASC 815-10 did not have a material effect on the Company’s financial position or results of operations.

     FSP Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP 03-6-1”) became effective for the Company for annual and interim reporting periods beginning April 1, 2009. This Standard is now included in the Codification as part of ASC 260-10 Earnings Per Share (“ASC 260-10”). The Standard states that all outstanding unvested share-based payment awards that contain nonforfeitable rights to dividends (whether paid or unpaid) are considered participating securities under EITF 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share (“EITF 03-6”). As such, the issuing entity is required to apply the two-class method of computing basic and diluted earnings per share. The Company grants restricted shares under a share-based compensation plan that qualifies as participating securities. The adoption of ASC 260-10 did not have a material effect on the Company’s financial position, results of operations, or the computation of earnings per share.

     On April 9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”), now included in the Codification as part of ASC 825-10 Financial Instruments (“ASC 825-10”). FSP 107-1 amended FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements of publicly traded companies as well as in annual financial statements. The FSP also amends APB opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. In periods after initial adoption, the FSP requires comparative disclosures only for periods ending after initial adoption. Adoption of ASC 825-10 did not have a material effect on the Company’s financial position or results of operations, and the required disclosures have been included in Note 13 of this Quarterly Report on Form 10-Q.

     On April 9, 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation of Other- Than-Temporary Impairments (“FSP 115-2”), now included in the Codification as part of ASC 320-10 Investments-Debt and Equity Securities (“ASC 320-10”). This Standard amends the other-than-temporary impairment guidance for debt securities as it modifies the “intent and ability” indicator for recognizing other-than-temporary impairment, and changes the trigger used to assess the collectability of cash flows from “probable that the investor will be unable to collect all amounts due” to “the entity does not expect to recover the entire amortized cost basis of the security.” ASC 320-10 changes the total amount recognized in earnings when there are credit losses associated with an impaired debt security and management asserts that it does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis. In those situations, impairment shall be separated into (a) the amount representing a credit loss and (b) the amount related to non-credit factors. The amount of impairment related to credit losses should be recognized in earnings. The credit loss component of an other-than-temporary impairment, representing an increase in credit risk, shall be determined by the reporting entity using its best estimate of the present value of cash flows expected to be collected from the

debt security. The amount of impairment related to non-credit factors shall be recognized in other comprehensive income. The previous cost basis less impairment recognized in earnings becomes the new cost basis of the security and shall not be adjusted for subsequent recoveries in fair value. However, the cost basis shall be adjusted for accretion of the difference between the new cost basis and the present value of cash flows expected to be collected (portion of impairment in other comprehensive income). The total other-than-temporary impairment is presented in the consolidated statements of income with a reduction for the amount of the other-than-temporary impairment that is recognized in other comprehensive income, if any. ASC 320-10 requires the Company to account for prior period impairment losses as a cumulative effect; however, no cumulative effects are necessary as the impairment losses were considered the result of credit deteriorations. These pronouncements were effective for the Company as of April 1, 2009. The adoption of this ASC 320-10 did not have a material effect on the Company’s financial position or results of operations.

     On April 9, 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly (“FSP 157-4”), now included in the Codification as part of ASC 820-10 Fair Value Measurements and Disclosures (“ASC 820-10”). The Standard identifies several factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for an asset or liability. If the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity, transactions or quoted prices may not be determinative of fair value (for example, there may be increased instances of transactions that are not orderly), further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. The Standard reiterates that even in circumstances where there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company has adopted ASC 820-10 and it did not have a material effect on the Company’s financial position or results of operations.

     In May 2009, the FASB issued Statement No. 165, Subsequent Events (“SFAS 165”), now included in the Codification as part of ASC 855-10 Subsequent Events (“ASC 855-10”). This Statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. The Statement is effective for interim and annual fiscal periods ending after June 15, 2009. The Company has evaluated the effect of the adoption of this standard and has concluded it has no material effect on the Company’s financial position or results of operations. Management has reviewed events occurring through January 12, 2010, the date the interim financial statements were issued and no subsequent events occurred requiring accrual or disclosure other than those disclosed in the notes included in this Quarterly Report on Form 10-Q.

     In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A replacement of FASB Statement No. 162. The change initiated by this statement is now included in the Codification as FASB ASC 105-10 Generally Accepted Accounting Principles (“ASC 105-10”) and establishes the Financial Accounting Standards Board Accounting Standards Codification (“Codification”) as the source for authoritative principles and standards recognized by the FASB to be applied to nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles, or GAAP. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this standard, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted FASB ASC 105-10 effective for the quarter ended September 30, 2009 and concluded it did not have a material effect on the Company’s financial position or results of operations.

     In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-6, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value

measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. We do not expect the adoption of ASU 2010-6 to have a material impact on our consolidated financial statements.

(13) Fair Value Disclosures

     The Company follows ASC 820 which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In addition, ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have the following fair value hierarchy:

Level 1 —		Quoted prices for identical instruments in active markets
Level 2 —		Quoted prices for similar instruments in active or non-active markets and model-derived valuations in which all significant inputs and value drivers are observable in active markets
Level 3 —		Valuation derived from significant unobservable inputs

     The Company uses fair value measurements to record certain assets at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or market value accounting or write-downs of individual assets.

     The assets of the Company recorded at fair value on a recurring basis at December 31, 2009 were securities available for sale. The assets of the Company recorded at fair value on a nonrecurring basis at December 31, 2009 were impaired loans and other real estate owned (“OREO”). The following table presents the level of valuation assumptions used to determine the fair values of such securities and loans:

		Carrying Value (In Thousands)
		Level 1				Level 2				Level 3				Total
Assets recorded at fair value on a recurring basis:
Securities available for sale		$	3,206			$	34,599				—			$	37,805
Assets recorded at fair value on a nonrecurring basis:
Impaired loans carried at fair value			—				—			$	6,874			$	6,874
OREO			—				—			$	77			$	77

     There were no Level 3 securities at December 31, 2009. The three securities classified at March 31, 2009 as Level 3 were transferred to Level 2 during the quarter ended June 30, 2009. The Company did not have any sales or purchases of Level 3 available for sale securities during the period.

     The Company measures the fair value of impaired loans on a periodic basis in periods subsequent to its initial recognition. At December 31, 2009, impaired loans measured at fair value using Level 3 inputs amounted to $6.9 million, which represents ten customer relationships. There were no impaired loans measured at fair value using Level 2 inputs at December 31, 2009. Level 3 inputs utilized to determine the fair value of the impaired loan relationships consist of appraisals and expected cash flows.

     OREO is measured at fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. At December 31, 2009, OREO was comprised of one residential condominium totaling $77 thousand.

     The changes in Level 3 investment securities measured at fair value on a recurring basis were (in thousands):

		Investment
		Securities
		Available for Sale
Balance at March 31, 2009		$	1,012
Total realized and unrealized gains (losses) included in income			—
Total unrealized losses included in other comprehensive income			—
Net accretion of discount and repayment of principal			—
Net transfers in/out of Level 3			(1,012	)
Balance at December 31, 2009		$	—

     Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets. As a result, the unrealized gains and losses for these assets presented in the table above may include changes in fair value that were attributable to both observable and unobservable inputs.

     The following methods and assumptions were used by the Bank in estimating fair values of certain assets and liabilities:

     Cash and Due from Banks — The carrying values reported in the balance sheet for cash and due from banks approximate their fair value because of the short maturity of these instruments.

     Short-Term Investments — The carrying values reported in the balance sheet for short-term investments approximate fair value because of the short maturity of these investments.

     Investments and Mortgage-Backed Securities — The fair values presented for investment and mortgage-backed securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

     Loans and Loans Held for Sale — The fair values of loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The incremental credit risk for nonperforming loans has been considered in the determination of the fair value of loans. The fair value of loans held for sale is determined based on the unrealized gain or loss on such loans. Regular reviews of the loan portfolio are performed to identify impaired loans for which specific allowance allocations are considered prudent. Valuations of impaired loans are made based on evaluations that we believe to be appropriate in accordance with ASC 310, and such valuations are determined by reviewing current collateral values, financial information, cash flows, payment histories and trends and other relevant facts surrounding the particular credits. Level 3 inputs utilized to determine the fair value of the impaired loan relationships at December 31, 2009 and March 31, 2009 consists of appraisals and expected cash flows.

     Goodwill — Goodwill is subject to impairment testing. The bank accounts for goodwill and impairment in accordance with ASC 350 Intangibles-Goodwill and Other, which addresses the method of identifying and measuring goodwill and other intangible assets having indefinite lives acquired in a business combination, eliminates further amortization of goodwill and requires periodic impairment evaluations of goodwill using a fair value methodology prescribed in the statement. Impairment testing is performed at least annually or more frequently as a result of an event or change in circumstances (e.g., recurring operating losses by the acquired entity) that would indicate an impairment adjustment may be necessary. The Company adopted December 31 as its assessment date. The most recent testing was performed as of December 31, 2009 utilizing average earnings and average book multiples of bank sale transactions, and management determined that no impairment existed. No events have occurred subsequent to December 31, 2009 which indicate that the impairment test would need to be re-performed.

     Accrued Interest Receivable — The carrying amount reported in the balance sheet for accrued interest receivable approximates its fair value due to the short maturity of these accounts.

     Stock in FHLB of Boston — The carrying amount reported in the balance sheet for FHLB stock approximates its fair value. If redeemed, the Bank will receive an amount equal to the par value of the stock.

     The Co-operative Central Bank Reserve Fund — The carrying amount reported in the balance sheet for the Co-operative Central Bank Reserve Fund approximates its fair value.

     Deposits — The fair values of deposits (excluding term deposit certificates) are, by definition, equal to the amount payable on demand at the reporting date. Fair values for term deposit certificates are estimated using a discounted cash flow technique that applies interest rates currently being offered on certificates to a schedule of aggregated monthly maturities on time deposits with similar remaining maturities.

     Advances from FHLB of Boston — Fair values of non-callable advances from the FHLB of Boston are estimated based on the discounted cash flows of scheduled future payments using the respective year-end published rates for advances with similar terms and remaining maturities. Fair values of callable advances from the FHLB of Boston are estimated using indicative pricing provided by the FHLB of Boston.

     Subordinated Debentures — One subordinated debenture totaling $5.2 million is adjustable quarterly and its fair value is estimated to be equal to its book value. The other subordinated debenture totaling $6.1 million has a fixed rate until March 15, 2017, at which time it will convert to an adjustable rate which will adjust quarterly. The maturity date is March 15, 2037. The fair value of this subordinated debenture is estimated based on the discounted cash flows of scheduled future payments utilizing a discount rate derived from instruments with similar terms and remaining maturities.

     Short-Term Borrowings, Advance Payments by Borrowers for Taxes and Insurance and Accrued Interest Payable — The carrying values reported in the balance sheet for short-term borrowings, advance payments by borrowers for taxes and insurance and accrued interest payable approximate their fair value because of the short maturity of these accounts.

     Off-Balance Sheet Instruments — The Bank’s commitments for unused lines of credit and unadvanced portions of loans have short remaining disbursement periods or variable interest rates, and, therefore, no fair value adjustment has been made.

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

		December 31, 2009								March 31, 2009
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Assets
Cash and due from banks		$	5,054			$	5,054			$	5,099			$	5,099
Short-term investments			13,420				13,420				37,323				37,323
Investment securities			37,805				37,805				35,215				35,215
Loans held for sale			3,212				3,212				3,208				3,208
Net loans			464,811				460,868				457,479				453,974
Stock in Federal Home Loan Bank of Boston			8,518				8,518				8,518				8,518
The Co-operative Central Bank Reserve Fund			1,576				1,576				1,576				1,576
Accrued interest receivable			1,766				1,766				1,859				1,859
Liabilities
Deposits		$	344,481			$	334,139			$	375,074			$	366,052
Short-term borrowings			—				—				1,014				1,014
Advances from FHLB of Boston			155,498				163,006				144,583				153,318
Subordinated debentures			11,341				8,967				11,341				9,013
Advance payments by borrowers for taxes and insurance			1,659				1,659				1,532				1,532
Accrued interest payable			621				621				619				619
Off-Balance Sheet Instruments		$	28,123			$	28,123			$	43,378			$	43,378

(14) Troubled Asset Relief Program Capital Purchase Program

     On December 5, 2008, the Company sold $10.0 million in preferred shares to the U.S. Department of Treasury (“Treasury”) as a participant in the federal government’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program. This represented approximately 2.6% of the Company’s risk-weighted assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary program for healthy U.S. financial institutions designed to encourage these institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. In connection with the investment, the Company entered into a Letter Agreement and the related Securities Purchase Agreement with the Treasury pursuant to which the Company issued (i) 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (the “Series A Preferred Stock”); and (ii) a warrant (the “Warrant”) to purchase 234,742 shares of the Company’s common stock for an aggregate purchase price of $10.0 million in cash. As a result of the Treasury’s investment, as of December 31, 2009 the Company and the Bank met all regulatory requirements to be considered well capitalized.

     The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A Preferred Stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. The Series A Preferred Stock may be redeemed, in whole or in part, at any time and from time to time, at the option of the Company, subject to consultation with the Company’s primary federal banking regulator, provided that any partial redemption must be for at least 25% of the issue price of the Series A Preferred Stock. Any redemption of a share of Series A Preferred Stock would be at one hundred percent (100%) of its issue price, plus any accrued and unpaid dividends and the Series A Preferred Stock may be redeemed without regard to whether the Company has replaced such funds from any other source or to any waiting period.

     The Warrant is exercisable at $6.39 per share at any time on or before December 5, 2018. The number of shares of the Company’s common stock issuable upon exercise of the Warrant and the exercise price per share will be adjusted if specific events occur. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual restrictions on transfer, except that Treasury may not transfer a portion of the Warrant with respect to, or exercise the Warrant for, more than one-half of the shares of common stock underlying the Warrant prior to the date on which the Company has received aggregate gross proceeds of not less than $10.0 million from one or more qualified equity offerings.

     The Warrant was valued at $594,000 and was recognized as equity under ASC 815 Derivatives and Hedging, and is reported within additional paid-in capital in the accompanying Consolidated Balance Sheets. The Company also performs accounting for the Series A Preferred Stock and Warrant as set forth in ASC 470 Debt. The proceeds from the sale of the Series A Preferred Stock was allocated between the Series A Preferred Stock and Warrant on a relative fair value basis, resulting in the Series A Preferred Stock having a value of $9.4 million and the Warrant having a value of $594,000. Therefore, the fair value of the Warrant has been recognized as a discount to the Series A Preferred Stock and Warrant and such discount is being accreted over five years using the effective yield method as set forth by ASC 505 Equity. The Warrant was valued using the Black-Scholes options pricing model. The assumptions used to compute the fair value of the Warrant at issuance were:

Expected life in years			10.00
Expected volatility			54.76	%
Dividend yield			3.00	%
Risk-free interest rate			2.67	%

     Regarding the above assumptions, the expected term represents the expected period of time the Company believes the Warrant will be outstanding. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock, and the dividend yield is based on management’s estimation of the Company’s common stock dividend yield during the next ten years. The risk-free interest rate is based on the U.S. Treasury 10-year rate.

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

     Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Central Bancorp, Inc. (the “Company” or “Central Bancorp”). The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and footnotes appearing in Part I, Item 1 of this Form 10-Q.

Forward-Looking Statements

     This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to: recent and future bail-out actions by the government; the impact of the Company’s participation in the U.S. Department of Treasury’s TARP Capital Purchase Program; a further slowdown in the national and Massachusetts economies; a further deterioration in asset values locally and nationwide; the volatility of rate-sensitive deposits; changes in the regulatory environment; increasing competitive pressure in the banking industry; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; continued access to liquidity sources; changes in our borrowers’ performance on loans; changes in critical accounting policies and judgments; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; changes in the equity and debt securities markets; governmental action as a result of our inability to comply with regulatory orders and agreements; the effect of additional provision for loan losses; the effect of an impairment charge on our deferred tax asset; fluctuations of our stock price; the success and timing of our business strategies; the impact of reputation risk created by these developments on such matters as business generation and retention, funding and liquidity; the impact of regulatory

restrictions on our ability to receive dividends from our subsidiaries; and political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009, as filed with the Securities and Exchange Commission on June 23, 2009, which is available through the SEC’s website at www.sec.gov, as well as under “Part II—Item 1A. Risk Factors” of this Form 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

     The Company is a Massachusetts holding company established in 1998 to be the holding company for Central Co-operative Bank (the “Bank”). The Company’s primary business activity is the ownership of all of the outstanding capital stock of the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related data, relates primarily to the Bank.

     The Bank is a Massachusetts co-operative bank headquartered in Somerville, Massachusetts with nine full-service facilities, a limited service high school branch in suburban Boston, and a stand-alone 24-hour automated teller machine in Somerville. The Company primarily generates funds in the form of deposits and uses the funds to make mortgage loans for the construction, purchase and refinancing of residential properties and to make loans on commercial real estate in its market area.

     The operations of the Company and its subsidiary are generally influenced by overall economic conditions, the related monetary and fiscal policies of the federal government and the regulatory policies of financial institution regulatory authorities, including the Massachusetts Commissioner of Banks, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Federal Deposit Insurance Corporation (the “FDIC”).

     The Bank monitors its exposure to earnings fluctuations resulting from market interest rate changes. Historically, the Bank’s earnings have been vulnerable to changing interest rates due to differences in the terms to maturity or repricing of its assets and liabilities. For example, in a declining interest rate environment, the Bank’s net interest income and net income could be positively impacted as interest-sensitive liabilities (deposits and borrowings) could adjust more quickly to declining interest rates than the Bank’s interest-sensitive assets (loans and investments). Conversely, in a rising interest rate environment, the Bank’s net interest income and net income could be negatively affected as interest-sensitive liabilities (deposits and borrowings) could adjust more quickly to rising interest rates than the Bank’s interest-sensitive assets (loans and investments).

     The following is a discussion and analysis of the Company’s results of operations for the three and nine months ended December 31, 2009 and 2008 and its financial condition at December 31, 2009 compared to March 31, 2009. Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes.

Critical Accounting Policies

     Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. The Company considers the allowance for loan losses, fair value of investments, other real estate owned, income taxes, and accounting for goodwill and impairment to be its critical accounting policies. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions.

     Allowance for Loan Losses. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, delinquency trends, nonperforming loan trends, charge-off experience and other asset quality factors. Regular reviews of the loan portfolio are performed to identify loans for which specific

allowance allocations are considered prudent. Specific allocations are made based upon evaluations that we believe to be appropriate in accordance with ASC 310, and such allocations are determined by reviewing current collateral values, financial information, cash flows, payment histories and trends and other relevant facts surrounding the particular credits. 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, loan to value ratios and qualitative adjustments. For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience and other pertinent data to the current outstanding balance in each loan category. Loans not individually reviewed for impairment in accordance with ASC 310 are analyzed in accordance with ASC 450 Contingencies (“ASC 450”). Although management uses available information to establish the appropriate level of the allowance for loan losses, future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect the Company’s operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

     Other Real Estate Owned. OREO is recorded at the lower of book value, or fair market value less estimated selling costs. Property insurance is obtained for each parcel, and each property is properly maintained and secured during the holding period. Property management vendors may be utilized in those instances when a direct sale does not seem probable during a reasonable period of time, or if the property requires additional oversight. It is the Company’s policy and strategy to sell all OREO as soon as possible consistent with maximizing value and return to the Company.

     Fair Value of Investments. Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at cost, adjusted for amortization of premiums and accretion of discounts, both computed by a method that approximates the effective yield method. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings. 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 and comprehensive income.

     Gains and losses on sales of securities are recognized when realized with the cost basis of investments sold determined on a specific-identification basis. Premiums and discounts on investments and mortgage-backed securities are amortized or accreted to interest income over the actual or expected lives of the securities using the level-yield method.

     If a decline in fair value below the amortized cost basis of an investment is judged to be other-than-temporary, the cost basis of the investment is written down to fair value as a new cost basis and the amount of the write-down is included in the results of operations.

     The Company’s investments in the Federal Home Loan Bank of Boston and the Co-operative Central Bank Reserve Fund are accounted for at cost.

     Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the accounting basis and the tax basis of the Bank’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The Bank’s deferred tax asset is reviewed periodically and adjustments to such asset are recognized as deferred income tax expense or benefit based on management’s judgments relating to the realizability of such asset.

     Accounting for Goodwill and Impairment. ASC 350, Intangibles — Goodwill and Other, addresses the method of identifying and measuring goodwill and other intangible assets having indefinite lives acquired in a business combination, eliminates further amortization of goodwill and requires periodic impairment evaluations of goodwill using a fair value methodology prescribed in the statement. In accordance with ASC 350, the Company

does not amortize the goodwill balance of $2.2 million. Impairment testing is required at least annually or more frequently as a result of an event or change in circumstances (e.g., recurring operating losses by the acquired entity) that would indicate an impairment adjustment may be necessary. The Company adopted December 31 as its assessment date. Annual impairment testing was performed during each year and in each analysis, it was determined that an impairment charge was not required. The most recent testing was performed as of December 31, 2009 and management determined that no impairment existed as of December 31, 2009.

Comparison of Financial Condition at December 31, 2009 and March 31, 2009

     Total assets were $558.4 million at December 31, 2009 compared to $575.8 million at March 31, 2009, representing a decrease of $17.4 million, or 3.0%. Total loans (excluding loans held for sale) were $467.6 million at December 31, 2009, compared to $460.7 million at March 31, 2009, representing an increase of $6.9 million, or 1.5%. This increase was primarily due to increases in residential and home equity loans of $37.4 million and $1.2 million, respectively, substantially offset by decreases in construction and commercial real estate of $30.4 million. Construction and commercial real estate loans declined as management de-emphasized these types of lending in the current economic environment. Residential and home equity loans increased from $190.7 million at March 31, 2009 to $229.3 million at December 31, 2009 due to management’s increased emphasis on these types of lending. Commercial and industrial loans decreased from $4.8 million at March 31, 2009 to $3.8 million at December 31, 2009.

     The allowance for loan losses totaled $2.8 million at December 31, 2009 compared to $3.2 million at March 31, 2009, representing a net decrease of $403 thousand, or 12.6%. This net decrease was primarily due to decreases of $744 thousand related to charge-offs on eleven loans, and increases in the provision of $350 thousand resulting from management’s review of the adequacy of the allowance for loan losses. Of the $744 thousand in charge-offs, $213 thousand was related to a mixed-use condominium loan which was written down to fair value less estimated selling costs, $115 thousand was related to the partial charge-off of a hotel loan, $125 thousand resulted from the sale to a third party of residential apartments which secured a commercial real estate loan, $89 thousand resulted from the sale to a third party a residential property which secured a residential real estate loan, $25 thousand resulted from the charge-off of a commercial and industrial loan, and $21 thousand resulted from a residential condominium loan which was written down to fair value less estimated selling costs immediately prior to its transfer to OREO. The remaining $156 thousand of charge-offs related to five impaired residential loans. Based upon management’s regular analysis of the adequacy of the allowance for loan losses, management considered the allowance for loan losses to be adequate at both December 31, 2009 and March 31, 2009. See -Provision for Loan Losses.

     Management regularly assesses the desirability of holding newly originated residential mortgage loans in the Bank’s portfolio or selling such loans in the secondary market. A number of factors are evaluated to determine whether or not to hold such loans in the Bank’s portfolio including current and projected liquidity, current and projected interest rates, projected growth in other interest-earning assets and the current and projected interest rate risk profile. Based on its consideration of these factors, management determined that most long-term residential mortgage loans originated during the three months ended December 31, 2009 should be retained, rather than being sold in the secondary market. The decision to sell or hold loans is made at the time the loan commitment is issued. Upon making a determination not to retain a loan, the Bank simultaneously enters into a best efforts forward commitment to sell the loan to manage the interest rate risk associated with the decision to sell the loan. Loans are sold servicing released.

     Cash and cash equivalents totaled $18.5 million at December 31, 2009 compared to $42.4 million at March 31, 2009, representing a decrease of $23.9 million, or 56.5%, related to a $23.9 million decrease in short-term investments. Management utilized excess cash and short-term investments to fund certain maturing high-cost certificates of deposit in an effort to improve the Company’s net interest rate spread and net interest margin. Investment securities totaled $47.9 million at December 31, 2009 compared to $45.3 million at March 31, 2009, representing an increase of $2.6 million, or 5.7%. The increase in investment securities is primarily due to the purchase of $11.0 million in mortgage-backed securities during the nine months ended December 31, 2009 and a net increase of $3.8 million in the market value of available for sale securities partially offset by the repayment of $10.4 million in principal on mortgage-backed securities. Stock in the Federal Home Loan Bank of Boston totaled $8.5 million at both December 31, 2009 and March 31, 2009.