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, 2007

OR

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

For the transition period from                      to                     

Commission file number: 0-25251

CENTRAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Massachusetts		04-3447594
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)
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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Common Stock, $1.00 par value		1,639,951
Class		Outstanding at February 11, 2008

 

 

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, 2007 and March 31, 2007			1
Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2007 and 2006			2
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended December 31, 2007			3
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2007 and 2006			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations			11
Item 3. Quantitative and Qualitative Disclosures About Market Risk			20
Item 4. Controls and Procedures			20
Part II. Other Information
Item 1. Legal Proceedings			21
Item 1A. Risk Factors			21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 3. Defaults Upon Senior Securities			21
Item 4. Submission of Matters to a Vote of Security Holders			21
Item 5. Other Information			21
Item 6. Exhibits			21
Signatures
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in Thousands, Except Share Data)		December 31, 2007				March 31, 2007
ASSETS
Cash and due from banks		$	5,916			$	6,147
Short-term investments			1,893				14,470
Cash and cash equivalents			7,809				20,617
Investment securities available for sale (amortized cost of $54,414 at December 31, 2007 and $66,033 at March 31, 2007)			54,520				65,763
Stock in Federal Home Loan Bank of Boston, at cost			7,786				7,366
The Co-operative Central Bank Reserve Fund, at cost			1,576				1,576
Total investments			63,882				74,705
Loans held for sale			—				575
Loans (Note 2)			467,820				460,542
Less allowance for loan losses			3,379				3,881
Loans, net			464,441				456,661
Accrued interest receivable			2,044				2,415
Banking premises and equipment, net			4,160				4,756
Deferred tax asset, net			1,983				2,212
Goodwill, net			2,232				2,232
Bank owned life insurance (Note 10)			6,049				—
Other assets			2,071				1,967
Total assets		$	554,671			$	566,140
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits (Note 3)		$	354,867			$	388,573
Short-term borrowings			443				712
Federal Home Loan Bank advances			145,800				125,000
Subordinated debenture (Note 4)			11,341				11,341
Advanced payments by borrowers for taxes and insurance			1,341				1,229
Accrued expenses and other liabilities			1,702				1,583
Total liabilities			515,494				528,438
Commitments and Contingencies (Note 6)
Stockholders’ equity (Note 7):
Preferred stock $1.00 par value; 5,000,000 shares authorized; none issued or outstanding			—				—
Common stock $1.00 par value; 15,000,000 shares authorized; and 1,639,951 shares issued at December 31, 2007 and March 31, 2007			1,640				1,640
Additional paid-in capital			3,602				3,479
Retained income			40,979				40,394
Accumulated other comprehensive income (loss) (Note 5)			231				(20	)
Unearned compensation — ESOP			(7,275	)			(7,791	)
Total stockholders’ equity			39,177				37,702
Total liabilities and stockholders’ equity		$	554,671			$	566,140

See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(In Thousands, Except Per Share Data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Interest and dividend income:
Mortgage loans		$	6,798			$	6,904			$	20,360			$	19,680
Other loans			252				154				637				427
Short-term investments			62				26				321				242
Investments			950				1,268				2,715				3,738
Total interest and dividend income			8,062				8,352				24,033				24,087
Interest expense:
Deposits			2,664				2,881				8,263				8,289
Advances from Federal Home Loan Bank of Boston			1,726				1,695				5,077				4,257
Other borrowings			215				156				643				461
Total interest expense			4,605				4,732				13,983				13,007
Net interest and dividend income			3,457				3,620				10,050				11,080
Provision for (reduction of provision for) loan losses			—				—				(300	)			50
Net interest and dividend income after provision for loan losses			3,457				3,620				10,350				11,030
Non-interest income:
Deposit service charges			263				281				766				786
Net gains from sales of investment securities			359				131				647				359
Net gains on sales of loans			41				—				118				59
Bank owned life insurance income			23				—				23				—
Other income			100				63				291				203
Total non-interest income			786				475				1,845				1,407
Non-interest expenses:
Salaries and employee benefits			1,983				1,917				6,021				6,273
Occupancy and equipment			533				518				1,609				1,565
Data processing fees			219				232				661				720
Professional fees			186				203				588				660
Advertising and marketing			1				58				8				380
Other expenses			418				382				1,352				1,346
Total non-interest expenses			3,340				3,310				10,239				10,944
Income before income taxes			903				785				1,956				1,493
Provision for income taxes			247				271				610			$	515
Net income		$	656			$	514			$	1,346				978
Earnings per common share — basic (Note 8)		$	0.48			$	0.36			$	1.00			$	0.68
Earnings per common share — diluted (Note 8)		$	0.48			$	0.35			$	0.99			$	0.67
Weighted average common shares outstanding — basic			1,354				1,448				1,347				1,445
Weighted average common and equivalent shares outstanding — diluted			1,358				1,463				1,354				1,459

     See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

														Accumulated
						Additional								Other				Unearned				Total
		Common				Paid-In				Retained				Comprehensive				Compensation				Stockholders’
(In Thousands)		Stock				Capital				Income				Income/(Loss)				ESOP				Equity
Nine Months Ended December 31, 2007
Balance at March 31, 2007		$	1,640			$	3,479			$	40,394			$	(20	)		$	(7,791	)		$	37,702
Net income											1,346												1,346
Other comprehensive income net of tax:
Unrealized gain on securities, net of reclassification adjustment (Note 5)															251								251
Comprehensive income																							1,597
Dividends paid ($0.54 per share)											(761	)											(761	)
Stock-based compensation (Note 9)							242																242
Amortization of unearned compensation — ESOP							(119	)											516				397
Balance at December 31, 2007		$	1,640			$	3,602			$	40,979			$	231			$	(7,275	)		$	39,177

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)		2007				2006
Cash flows from operating activities:
Net income		$	1,346			$	978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			721				595
Amortization of premiums			44				63
Provision for loan losses			(300	)			50
Stock-based compensation			639				443
Net gains from sales of investment securities			(647	)			(359	)
Bank owned life insurance income			(23	)			—
Gain on sales of loans held for sale			(118	)			(59	)
Originations of loans held for sale			(9,713	)			(6,021	)
Proceeds from sale of loans originated for sale			10,406				5,370
Decrease in accrued interest receivable			371				117
Increase in other assets, net			(103	)			(78	)
Increase in advance payments by borrowers for taxes and insurance			112				34
Increase (decrease) in accrued expenses and other liabilities, net			223				(72	)
Net cash provided by operating activities			2,958				1,061
Cash flows from investing activities:
Loan principal (originations) collections, net			(7,480	)			(40,731	)
Principal payments on mortgage-backed securities			4,320				6,349
Decrease in certificate of deposit			—				627
Purchases of restricted equity-FHLB			(420	)			—
Proceeds from sales of restricted equity-FHLB			—				1,391
Proceeds from sales of investment securities			17,406				5,266
Purchases of investment securities			(11,503	)			(11,549	)
Maturities and calls of investment securities			1,999				13,900
Purchase of bank owned life insurance			(6,027	)			—
Purchase of banking premises and equipment			(125	)			(1,648	)
Net cash used in investing activities			(1,830	)			(26,395	)
Cash flows from financing activities:
Net decrease in deposits			(33,706	)			(6,239	)
Proceeds from advances from FHLB of Boston			117,800				85,000
Repayment of advances from FHLB of Boston			(97,000	)			(65,500	)
Net short-term borrowings (repayments)			(269	)			3,702
Repayment of ESOP loan			—				(292	)
Proceeds from exercise of stock options			—				13
Tax benefit from exercise of stock options			—				4
Cash dividends paid			(761	)			(814	)
Net cash (used in) provided by financing activities			(13,936	)			15,874
Net (decrease) increase in cash and cash equivalents			(12,808	)			9,460
Cash and cash equivalents at beginning of period			20,617			$	15,263
Cash and cash equivalents at end of period		$	7,809			$	5,803
Supplementary disclosure of cash flows information:
Cash paid during the period for:
Interest		$	13,249			$	13,077
Income taxes			470				645

     See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP AND SUBSIDIARY

(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, 2007, included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 22, 2007. The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include 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, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2008 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 accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46 “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin No. 51,” as revised by FIN No. 46R (“FIN 46R”), issued in December 2002, neither Trust I nor Trust II are included in the Company’s consolidated financial statements (See Note 4).

     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, 2007. For interim reporting purposes, the Company follows the same significant accounting policies.

(2) Loans

     Loans, excluding loans held for sale, as of December 31, 2007 and March 31, 2007 are summarized below (unaudited, in thousands):

		December 31,				March 31,
		2007				2007
Real estate loans:
Residential real estate (1-4 family)			$172,170			$	175,259
Commercial real estate			244,899				235,535
Construction			29,094				35,011
Home equity lines of credit			6,740				6,901
Total real estate loans			452,903				452,706
Commercial loans			13,840				6,605
Consumer loans			1,077				1,231
Total loans			467,820				460,542
Less: allowance for loan losses			(3,379	)			(3,881	)
Total loans, net			$464,441			$	456,661

     There were six loans to four borrowers on non-accrual status totaling $9.3 million as of December 31, 2007 and one loan on non-accrual status totaling $330,000 as of March 31, 2007 (See Comparison of Operating Results for the Quarters Ended December 31, 2007 and 2006 — Provision for Loan Losses).

     At December 31, 2007, and March 31, 2007, there were no impaired loans other than non-accrual loans. Impaired loans are measured using the fair value of collateral.

     A summary of changes in the allowance for loan losses for the three and nine months ended December 31, 2007 and 2006 follows. Included in charge-offs for the nine months ended December 31, 2007 is a $173,000 transfer to establish a reserve for unfunded loan commitments, which is included the other liabilities section of the balance sheet. (The data in the following tables are unaudited, in thousands):

		Three Months Ended
		December 31,
		2007				2006
Balance at beginning of period		$	3,378			$	3,850
Provision charged to expense			—				—
Less: charge-offs			(11	)			(19	)
Add: recoveries			12				16
Balance at end of period		$	3,379			$	3,847

		Nine Months Ended
		December 31,
		2007				2006
Balance at beginning of period		$	3,881			$	3,788
(Reduction of provision) provision charged to expense			(300	)			50
Less: charge-offs			(244	)			(39	)
Add: recoveries			42				48
Balance at end of period		$	3,379			$	3,847

(3) Deposits

     Deposits at December 31, 2007 and March 31, 2007 are summarized as follows (unaudited, in thousands):

		December 31,				March 31,
		2007				2007
Demand deposit accounts			$  35,697			$	40,026
NOW accounts			28,349				28,591
Passbook and other savings accounts			49,793				56,495
Money market deposit accounts			61,969				45,586
Total non-certificate accounts			175,808				170,698
Term deposit certificates:
Certificates of $100,000 and above			72,458				82,159
Certificates of less than $100,000			106,601				135,716
Total term deposit certificates			179,059				217,875
Total deposits			$354,867			$	388,573

(4) 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, 2007, the interest rate

was 7.43%. 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.

(5) Other Comprehensive Income (Loss)

     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, shareholders. 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 (loss) and related tax effect for the nine months ended December 31, 2007 and 2006 are as follows (unaudited, in thousands):

		For the Nine Months Ended
		December 31, 2007
		Before-Tax				Tax				After-Tax
		Amount				Effect				Amount
Unrealized gains (losses) on securities:
Unrealized net holding gains during period		$	1,023			$	330			$	693
Less: reclassification adjustment for net gains included in net income			647				205				442
Other comprehensive gain		$	376			$	125			$	251

		For the Nine Months Ended
		December 31, 2006
		Before-Tax				Tax				After-Tax
		Amount				Effect				Amount
Unrealized losses on securities:
Unrealized net holding losses during period		$	1,864			$	679			$	1,185
Less: reclassification adjustment for net gains included in net income			359				125				234
Other comprehensive loss		$	1,505			$	554			$	951

(6) Contingencies

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

(7) Subsequent Events

     On January 17, 2008, the Company’s Board of Directors approved the payment of a quarterly cash dividend of $0.18 per share. The dividend is payable on February 15, 2008 to stockholders of record as of February 1, 2008.

(8) Earnings 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, 2007 and 2006, there were approximately 245,000 and 141,000 unallocated ESOP shares, respectively.

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
		(Amounts in thousands, except per share amounts)
Net income available to common shareholders		$	656			$	514			$	1,346			$	978
Weighted average number of common shares outstanding			1,599				1,590				1,593				1,590
Weighted average number of unallocated ESOP shares			(245	)			(142	)			(246	)			(145	)
Weighted average number of common shares outstanding used in calculation of basic earnings per share			1,354				1,448				1,347				1,445
Incremental shares from the assumed exercise of dilutive stock options			4				15				7				14
Weighted average number of common shares outstanding used in calculating diluted earnings per share			1,358				1,463				1,354				1,459
Earnings per share
Basic		$	0.48			$	0.36			$	1.00			$	0.68
Diluted		$	0.48			$	0.35			$	0.99			$	0.67

     At December 31, 2007 and 2006, respectively, 91,396 and 59,000 stock option and restricted stock shares were anti-dilutive and were excluded from the above calculation for both the quarter and nine-month periods.

(9) Stock-Based Compensation

     Effective April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), Share-Based Payment, (“SFAS 123R”), using the statement’s modified prospective application method. Prior to April 1, 2006, the Company followed SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment to FASB Statement No. 123, which required entities to recognize as expense over the vesting period the fair value of stock-based awards on the date of grant or measurement date. For employee stock-based awards, however, SFAS Nos. 123 and 148 allowed entities to continue to apply the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and provide pro forma

net earnings disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS Nos. 123 and 148 for periods as required prior to April 1, 2006.

     The Company uses the Black-Scholes option pricing model as its method for the determining fair value of stock option grants, which was also used by the Company for its pro forma information disclosures of the stock-based compensation expense prior to the adoption of SFAS No. 123. 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 expires in 2009. All awards under the plan that expires in 2009 were granted by the end of 2005. However, awards may become available again if any participants forfeit awards under the plan prior to its expiration in 2009. As of December 31, 2007, a total of 903 shares had been forfeited and were available for reissue. However, 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. As of December 31, 2007, 91,000 shares remained unissued under the Incentive Plan.

     SFAS 123(R) requires forfeitures to be 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 its SFAS 123(R) stock compensation expense for the year ended March 31, 2007, which it believes is a reasonable forfeiture estimate for the period. In the Company’s pro forma information required under SFAS 123(R) for the periods prior to 2006, the Company accounted for forfeitures as they occurred.

     Under the provisions of SFAS 123R, 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 of SFAS 123R, the Company applies the provisions of SFAS 123R to all awards granted or modified after April 1, 2006 as well as unvested awards issued in a prior period. The Company had no unvested stock options outstanding at March 31, 2006 and awarded options to purchase 10,000 shares and stock grants for 49,000 restricted shares in the year ended March 31, 2007. The options and restricted shares granted in fiscal 2007 vest over a five-year life. Compensation expense recorded for the year ended March 31, 2007 totaled $134,000. The fair value of the options granted in fiscal 2007 was $9.04 per share and the fair value of the restricted stock granted in fiscal 2007 was $31.20 per share. Total compensation expense for stock based compensation was $81,000 and $54,000 for the three months ended December 31, 2007 and December 31, 2006, respectively, and $242,000 and $54,000 for the nine months ended December 31, 2007 and December 31, 2006, respectively.

     Stock option activity was as follows for the nine months ended December 31, 2007:

		Number of				Weighted
		Shares				Average
		Shares				Exercise Price
Balance at March 31, 2007			69,121			$	25.411
Exercised			—				—
Cancelled			(903	)			28.990
Granted			—				—
Balance at December 31, 2007			68,218				25.364

     The range of exercise prices, weighted average remaining contractual lives of outstanding stock options and aggregate intrinsic value at December 31, 2007 were as follows:

										Weighted
										Average
										Remaining				Weighted
						Number				Contractual				Average				Aggregate
		Exercise				of Shares				Life				Exercise				Intrinsic
		Price				Outstanding				(Years)				Price				Value (1)
		$	16.625				12,077	(2)			2.9			$	16.625			$	42,571
			20.250				13,745	(2)			1.8				20.250				—
			28.990				32,396	(2)			7.1				28.990				—
			31.200				10,000	(3)			8.7				31.200				—
Average/Total		$	25.364				68,218				5.6			$	25.364			$	42,571

     A summary of restricted stock activity under all Company plans for the nine months ended December 31, 2007 is as follows:

						Weighted Average
		Number of				Grant Date
		Shares				Fair Value
Balance at March 31, 2007			49,000			$	31.20
Granted			—				—
Vested			9,800				31.20
Forfeited			—				—
Non-vested at December 31, 2007			39,200			$	31.20

(10) Bank-Owned Life Insurance

     During the quarter ended December 31, 2007, the Bank purchased life insurance policies on two executives which totaled $6,027. The Bank follows FASB Technical Bulletin 85-4 “Accounting for Purchases of Life Insurance”.

Increases in the cash value are recognized in other noninterest income and are not subject to income taxes. The cash value is included in assets. The Bank reviewed the financial strength of the insurance carrier prior to the purchase of the policies, and such reviews will be performed annually thereafter.

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, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank’s market area, changes in real estate market values in the Bank’s market area, and changes in relevant accounting principles and guidelines. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on June 22, 2007, 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 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 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, 2007 and 2006 and its financial condition at December 31, 2007 compared to March 31, 2007. 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 to be its critical accounting policy. 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 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. The Company evaluates specific loan status reports on commercial and commercial real estate loans rated “substandard” or worse. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends 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, 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. 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. 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.

Comparison of Financial Condition at December 31, 2007 and March 31, 2007

     Total assets were $554.7 million at December 31, 2007 compared to $566.1 million at March 31, 2007, representing a decrease of $11.5 million or 2.0%. Total loans (excluding loans held for sale) were $467.8 million at December 31, 2007 compared to $460.5 million at March 31, 2007, representing an increase of $7.3 million or 1.6%. This increase was the net effect of an increase in commercial real estate loans of $9.4 million and an increase in commercial loans of $7.2 million offset by decreases in construction loans of $5.9 million and residential loans and home equity loans of $3.3 million. The increase in commercial real estate loans represents the Bank’s continuing emphasis on this type of lending. Commercial loans increased during the period primarily as a result of the addition of $7.0 million in loans secured by taxi medallions, a new line of business for the Bank. Construction loans declined because of a decision to limit this type of lending in the current economic environment. Residential real estate loans declined because of the Bank’s decision to sell most newly originated residential loans in the secondary market. The Bank purchases loans from time to time to supplement its loan originations, especially during times of decreased demand for such loans and to assist in meeting Community Reinvestment Act targets. 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 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 nine months ended December 31, 2007 should be sold in the secondary market. The decision to sell or hold loans is made at the time the loan commitment is issued and 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 $7.8 million at December 31, 2007 compared to $20.6 million at March 31, 2007, representing a decrease of $12.8 million, or 62.1%, comprised of a $12.6 million decrease in short-term investments and a $230,000 decrease in cash and due from banks. Investment securities totaled $63.9 million at December 31, 2007 compared to $74.7 million at March 31, 2007, representing a decrease of $10.8 million, or 14.5%. Cash and cash equivalents and investment securities decreased as the result of the redeployment of these funds to offset the impact of a deposit decline of $33.7 million during this period. Stock in the Federal Home Loan Bank of Boston totaled $7.8 million at December 31, 2007 compared to $7.4 million at March 31, 2007, representing an increase of $420,000, or 5.7%, due to increased capital stock requirements for outstanding advances. The allowance for loan losses totaled $3.4 million at December 31, 2007 compared to $3.9 million at March 31, 2007, representing a decrease of $502,000, or 12.9%. This decrease was due to net charge-offs of $27,000, a $173,000 transfer to establish a reserve for unfunded loan commitments, and a negative provision for loan losses of $300,000 (see “Provision for Loan Losses”). Management considered the allowance for loan losses to be adequate at both December 31, 2007 and March 31, 2007. Accrued interest receivable totaled $2.0 million and $2.4 million at December 31, 2007 and March 31, 2007, respectively. Banking premises and equipment, net, totaled $4.2 million at December 31, 2007 compared to $4.8 million at March 31, 2007, representing a decrease of $596,000, or 12.5%, primarily reflecting depreciation for the period.

     During the quarter ended December 31, 2007, the Bank purchased life insurance policies on two executives which totaled $6.03 million. The cash surrender value of these policies is carried as an asset titled “Bank-Owned Life Insurance” and totaled $6.05 million at December 31, 2007 as compared to $0 as of December 31, 2006.

     Total deposits amounted to $354.9 million at December 31, 2007 compared to $388.6 million at March 31, 2007, representing a decrease of $33.7, million or 8.7%, reflecting the combined effect of a $5.1 million, or 3.0%, increase in core deposits (consisting of all non-certificate accounts) and a $38.8 million, or 17.8%, decrease in certificates of deposit. Overall, deposits declined primarily because of continuing strong competition for deposits in our local market area. The increase in core deposits was primarily related to an increase in money market deposit account balances as the Bank more aggressively priced this type of deposit. The decrease in term deposits was the result of the Bank’s strategy to reduce the rate on premium certificates of deposit and to instead elect to utilize more cost-effective Federal Home Loan Bank advances as a funding source.

     Total borrowings (exclusive of subordinated debentures) amounted to $146.2 million at December 31, 2007 compared to $125.7 million at March 31, 2007, representing an increase of $20.5 million, or 16.3%, due to the increased utilization of FHLB advances as a funding source.

     Accrued expenses and other liabilities remained basically unchanged and totaled $1.7 million and $1.6 million at December 31, 2007 and March 31, 2007, respectively. Included in the balance at December 31, 2007 is a $173,000 reserve for unfunded loan commitments, which was established during the quarter ended September 30, 2007. This reserve represents a nonperforming loan’s undisbursed balance. When the undisbursed funds are disbursed, the reserve will be transferred to the loan category to offset the increased loan balance.

     Total stockholders’ equity amounted to $39.2 million at December 31, 2007 compared to $37.7 million at March 31, 2007, representing an increase of $1.5, or 3.9%. Increases due to net income of $1.3 million, other comprehensive income of $251,000, stock option expense of $242,000 and the net amortization of unearned compensation regarding the ESOP of $397,000, were reduced by dividends paid to stockholders of $761,000.

Comparison of Operating Results for the Quarters Ended December 31, 2007 and 2006

     Net income increased from $514,000, or $0.35 per diluted share, for the quarter ended December 31, 2006 to $656,000, or $0.48 per diluted share, for the quarter ended December 31, 2007. The increase in net income for the quarter ended December 31, 2007 compared to the quarter ended December 31, 2006 consists of a decrease in net interest and dividend income from $3.6 million for the 2006 quarter to $3.5 million for the 2007 quarter, a $311,000 increase in non-interest income, a decrease in non-interest expenses of $30,000 and a decrease of $24,000 in the provision for income taxes.

     Net Interest Income. Net interest income, which decreased by $163,000, or 4.5%, for the three months ended December 31, 2007 compared to the same period of 2006, has been adversely affected by strong local competition for the products and services we offer, and the effect of the increase in loans placed on non-accrual status. At December 31, 2007 non-accrual loans totaled $9.3 million as compared to $332,000 at December 31, 2006. Strong competition has required that the Bank decrease the rates it earns on its loans to a greater extent than it was able to decrease the rates it pays on its deposits, which has adversely affected the margin. Additionally, non-accrual loans have reduced loan interest income by $131,000. As a result, there were decreases in the net interest spread and net interest margin from 2.16% and 2.66%, respectively, for the quarter ended December 31, 2006 to 2.11% and 2.58%, respectively, for the quarter ended December 31, 2007. The yield on interest-earning assets decreased by 12 basis points from 6.14% in the third quarter of 2006 to 6.02% for the same period in 2007. However, during the same period, the average cost of interest-bearing liabilities decreased by only 7 basis points from 3.98% to 3.91%, respectively.

     Interest and Dividend Income. Interest and dividend income decreased by $290,000, or 3.5%, to $8.1 million for the quarter ended December 31, 2007 as compared to $8.4 million during the same period of 2006. Despite the $22.4 million, or 5.1%, increase in the average balance of loans from the quarter ended December 31, 2006 to December 31, 2007, interest income on loans remained relatively unchanged at $7.1 million during both periods. The average balance of loans increased primarily due to an increase in the average balances of commercial real estate and commercial loans as the Bank continued to focus on originating these types of loans during the period. Interest income for the quarter ended December 31, 2007 was negatively impacted as interest income not recognized on non-accrual loans totaled $131,000. The average balance on investment securities declined as maturities and principal repayments were used to fund loan growth. The effect of interest income not recognized on non-accrual loans during the quarter ended December 31, 2007 was to reduce the yield on average earning assets by 10 basis points.

     Interest Expense. Interest expense decreased by $127,000, or 2.7%, to $4.6 million for the quarter ended December 31, 2007 as compared to $4.7 million during the same period of 2006 as increases in interest expense on borrowings were offset by a decrease in interest expense on deposits. The cost of funds decreased by 7 basis points from 3.98% during quarter ended December 31, 2006 to 3.91% during the quarter ended December 31, 2007, as some high-cost certificates of deposit were replaced by more cost-effective Federal Home Loan Bank borrowings and lower-costing deposits. The average balance of certificates of deposit totaled $181.1 million during the quarter ended December 31, 2007, compared to $222.1 million for the same period in 2006, a decline of $41.0 million. The average balance of FHLB borrowings increased by $14.9 million, from $123.8 million during the quarter ended December 31, 2006 to $138.7 million during the same period of 2007. The decrease in the average cost of these funds was the result of a decrease in market interest rates. The average balance of lower-costing non-maturity deposits increased by $17.3 million to $139.6 million for the quarter ended December 31, 2007, as compared to an average balance of $122.3 million during the same period of 2006.

     The following table presents average balances and average rates earned/paid by the Company for the quarter ended December 31, 2007 compared to the quarter ended December 31, 2006:

		Three Months Ended December 31,
		2007												2006
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
		(Dollars in thousands)
Interest-earning assets:
Mortgage loans		$	449,420			$	6,798				6.05	%		$	433,571			$	6,904				6.37	%
Other loans			14,024				252				7.19				7,515				154				8.20
Investment securities			67,508				950				5.63				101,047				1,268				5.02
Short-term investments			4,622				62				5.37				2,306				26				4.51
Total interest-earning assets			535,574				8,062				6.02				544,439				8,352				6.14
Allowance for loan losses			(3,375	)											(3,851	)
Non-interest-earning assets			18,771												17,414
Total assets		$	550,970											$	558,002
Interest-bearing liabilities:
Deposits		$	320,709				2,664				3.32			$	344,443				2,881				3.35
Advances from FHLB of Boston			138,666				1,726				4.98				123,812				1,695				5.48
Other borrowings			11,801				215				7.29				7.729				156				8.07
Total interest-bearing liabilities			471,176				4,605				3.91				475,984				4,732				3.98
Non-interest-bearing liabilities			40,953												41,586
Total liabilities
Stockholders’ equity			38,841												40,432
Total liabilities and stockholders’ equity		$	550,970											$	558,002
Net interest and dividend income						$	3,457											$	3,620
Net interest spread											2.11	%											2.16	%
Net interest margin											2.58	%											2.66	%

     Provision for Loan Losses. The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management estimates is adequate to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of underlying collateral, financial condition of the borrower, prevailing economic conditions, the nature and volume of the loan portfolio and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for loan losses monthly when appropriate to maintain the adequacy of the allowance. The Company uses a process of portfolio segmentation to calculate the appropriate reserve level at the end of each quarter. Periodically, the Company evaluates the allocations used in these calculations. During the quarter ended December 31, 2007, management performed a thorough analysis of the loan portfolio as well as the required reserve allocations for loans considered impaired under SFAS No 114 and the allocation percentages used when calculating potential losses under FAS No. 5. Based on this analysis, the Company made no provision for loan losses during the quarter ended December 31, 2007.

     Since March 31, 2007, the Company has experienced an increase in the volume and percentage of loans classified as non-performing. At December 31, 2007, non-performing loans totaled $9.3 million as compared to

$330,000 on March 31, 2007. While the Company has seen increases in its non-performing loans and net loans charged off, such increases are primarily related to three borrowers. There were residential loans to one borrower to construct two homes which totaled $4.7 million, one multifamily loan with a balance of $3.5 million, and one commercial real estate loan with a balance of $779,000. Management has evaluated the financial condition of the borrowers as well as the collateral securing the loans and believes there are adequate allowances and collateral securing these loans to cover losses that may result from these nonperforming loans. Furthermore to management’s knowledge, there are no loans, other than those identified as impaired, which cause management to reasonably believe that the borrowers will not be able to comply with their loan repayment terms. Based on management’s analysis of the allowance for loan losses, the current allowance for loan losses is considered adequate as of December 31, 2007.

     Non-Interest Income. Non-interest income increased by $311,000, or 65.5%, to $786,000 for the quarter ended December 31, 2007 as compared to $475,000 during the same period of 2006 primarily due to increases in gains on investments. Net gains on the sale of investments totaled $359,000 during the 2007 quarter, up $228,000 from the $131,000 recognized in the prior year’s quarter. Other income increased by $83,000 from $344,000 for the quarter ended December 31, 2006 to $427,000 during the same quarter this year as third-party investment fees increased by $42,000, gains on the sale of loans increased by $41,000. Deposit service charges decreased by $18,000 to $263,000 as compared to $281,000 during the same period of 2006. The purchase of life insurance policies during November and December, 2007 resulted in bank-owned life insurance income of $23,000 for the quarter ended December 31, 2007, as compared to $0 during the same period of 2006.

     Non-Interest Expenses. Non-interest expenses remained relatively flat and totaled approximately $3.3 million during the quarters ended December 31, 2007 and December 31, 2006. For the 2007 quarter, increases in salaries and benefits of $66,000, other miscellaneous expenses of $36,000, and occupancy and equipment of $15,000 were partially offset by decreases in data processing fees of $13,000, professional fees of $17,000, and advertising and marketing expenses of $57,000. Overall, management continues to closely monitor expenses throughout the Company.

     Salaries and employee benefits increased by $66,000, or 3.4%, to $2.0 million during the quarter ended December 31, 2007 as compared to $1.9 million during the same quarter of 2006 primarily due to a $27,000 increase in stock-based compensation expense and a $37,000 increase in expense related to lower deferrals of salaries related to loan origination costs. Management continues to closely monitor salary costs. To the extent possible, open positions are not being filled. Additionally, no salary increases that normally would have taken effect as of April 1 were granted this year.

     Office occupancy and equipment expenses increased by $15,000, or 2.9%, to $533,000 during the quarter ended December 31, 2007 as compared to $518,000 during the prior year period primarily due to increases in computer maintenance and depreciation of furniture, fixtures and equipment, primarily as a result of the Bank’s new branch and operations center, partially offset by lower repairs and maintenance costs.

     Professional fees decreased by $17,000, or 8.4%, to $186,000 during the quarter ended December 31, 2007 as compared to $203,000 during the same period of 2006. Included in this category are legal fees, which were $37,000 higher during the quarter ended December 31, 2006 as compared to the same period of 2007 primarily due to costs related to the issuance of trust preferred securities. There were no such expenses incurred during the quarter ended December 31, 2007. Other professional fees increased by $20,000 during the quarter ended December 31, 2007 as compared to the same period of 2006, primarily due to an increase in regulatory consulting fees.

     Marketing expenses declined by $57,000 to $1,000 during the quarter ended December 31, 2007 as compared to $58,000 during the same period of 2006 due to a decision to discontinue most advertising and marketing efforts during the period in an attempt to reduce expenses.

     Other non-interest expenses increased by $36,000, or 9.4%, to $418,000 during the quarter ended December 31, 2007 as compared $382,000 during the same period of 2006, primarily due to increases in appraisal costs of $16,000, CRA donations of $22,000, and telephone expenses of $13,000, partially offset by decreases in office supplies expense of $25,000.

     Income Taxes. The effective tax rates for the quarters ended December 31 2007 and 2006 were 27.4% and 34.5%, respectively. The effective tax rate was reduced because of tax-advantaged preferred stock and bank-owned life insurance transactions during the 2007 quarter which resulted in a $24,000 reduction in the provision for income taxes.

Comparison of Operating Results for the Nine Months Ended December 31, 2007 and 2006

     For the nine months ended December 31, 2007, net income increased by 37.6% to $1.3 million, or $0.99 per diluted share, compared to $978,000, or $0.67 per diluted share, in the year earlier period. This change reflects a $1.0 million decrease in net interest income, a reduction in the provision for loan losses of $300,000, a $438,000 increase in non-interest income, a $705,000 reduction in non-interest expense, and a $95,000 increase in the provision for income taxes.

     Interest and Dividend Income. Interest and dividend income decreased by $54,000, or 0.2%, to $24.0 million for the nine months ended December 31, 2007 compared to $24.1 million for the same period of 2006 due to a decrease in investment income of $1.0 million, partially offset by increases in interest income on loans of $890,000 and interest on short-term investments of $79,000. The yield on interest-earning assets decreased slightly from 6.01% in the first nine months of the prior year to 5.94% in the same period of the current year. Interest income for the nine months ended December 31, 2007 was negatively impacted as interest income not recognized on non-accrual loans totaled $369,000. The effect of the income not recognized on non-accrual loans during the nine months ended December 31, 2007 was to reduce the yield on average earning assets by nine basis points. Average interest-earning assets increased by $4.8 million, or 0.9%, to $539.5 million during the nine months ended December 31, 2007, from $534.7 million for the nine months ended December 31, 2006. During these periods, the average balance of loans increased by $34.2 million, while the average balance of investments decreased by $30.6 million, partly to fund the loan growth.

     Interest Expense. Interest expense increased by $976,000, or 7.5%, to $14.0 million for the nine months ended December 31, 2007 compared to $13.0 million for the same period of 2006. This increase resulted from a 21 basis point increase in the cost of funds from 3.72% in the nine months ended December 31, 2006 to 3.93% in the nine months ended December 31, 2007 and an increase in average interest-bearing liabilities of $8.3 million to $474.8 million from $466.6 million. Interest-bearing liabilities were increased to fund growth in the loan portfolio.

     The increase in the cost of interest-bearing liabilities during the nine months ended December 31, 2007 as compared to the same period of 2006 was primarily due to a 23 basis point increase in the cost of deposits from 3.12% to 3.35%. The cost of deposits increased as the average rates paid on money market deposit accounts and certificates of deposit were 3.79% and 4.40%, respectively, for the nine months ended December 31, 2007, compared to 2.01% and 4.29%, respectively, for the same period in 2006. The average rate paid on Federal Home Loan Bank of Boston advances, the Company’s other primary interest-bearing liability, decreased during the first nine months of the current year to 5.04% from 5.40% in the comparable prior year period as some advances matured and some option advances were called and were replaced with lower rate advances. The decrease in deposits was the result of the Bank’s strategy to replace some high-cost certificates of deposit with more cost-effective FHLB advances. The average rate paid on other borrowings decreased from 7.95% to 7.18% as $6.1 million of trust preferred securities were issued at a rate of 7.015% in January, 2007.

     The following table presents average balances and average rates earned/paid by the Company for the nine months ended December 31, 2007 compared to the nine months ended December 31, 2006:

		Nine Months Ended December 31,
		2007												2006
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
		(Dollars in thousands)
Interest-earning assets:
Mortgage loans		$	448,334			$	20,360				6.06	%		$	418,465			$	19,680				6.27	%
Other loans			11,354				637				7.48				7,057				427				8.07
Investment securities			71,770				2,715				5.04				102,357				3,738				4.87
Short-term investments			8,078				321				5.30				6,817				242				4.73
Total interest-earning assets			539,536				24,033				5.94				534,696				24,087				6.01
Allowance for loan losses			(3,690	)											(3,834	)
Noninterest-earning assets			18,522												17,235
Total assets		$	554,368											$	548,097
Interest-bearing liabilities:
Deposits		$	328,640			$	8,263				3.35				353,790			$	8,289				3.12
Advances from FHLB of Boston			134,235				5,077				5.04				105,046				4,257				5.40
Other borrowings			11,946				643				7.18				7,732				461				7.95
Total interest-bearing liabilities			474,821				13,983				3.93				466,568				13,007				3.72
Non-interest-bearing liabilities			41,080												41,585
Total liabilities			515,901												508,153
Stockholders’ equity			38,467												39,944
Total liabilities and stockholders’ equity		$	554,368											$	548,097
Net interest and dividend income						$	10,050											$	11,080
Net interest spread											2.01	%											2.29	%
Net interest margin											2.48	%											2.76	%

     Provision for Loan Losses. The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management estimates is adequate to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of underlying collateral, financial condition of the borrower, prevailing economic conditions, the nature and volume of the loan portfolio and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for loan losses monthly when appropriate to maintain the adequacy of the allowance. The Company uses a process of portfolio segmentation to calculate the appropriate reserve level at the end of each quarter. Periodically, the Company evaluates the allocations used in these calculations. During the nine-month period ended December 31, 2007, management performed a thorough analysis of the loan portfolio as well as the required reserve allocations for loans considered impaired under SFAS No 114 and the allocation percentages used when calculating potential losses under FAS No. 5. Based on this analysis, the Company recorded a reduction in the provision of $300,000, compared to a provision for loan losses of $50,000 during the corresponding 2006 period. The reduction recorded in the first nine months of fiscal 2008 year reflects the maturation of the Company’s commercial real estate portfolio.

     Since March 31, 2007, the Company has experienced an increase in the volume and percentage of loans classified as non-performing. At December 31, 2007, non-performing loans totaled $9.3 million as compared to $330,000 on March 31, 2007. While the Company has seen increases in its non-performing loans and net loans charged off, such increases are primarily related to three borrowers. There were residential loans to one borrower to construct two homes which totaled $4.7 million, one multifamily loan with a balance of $3.5 million, and one commercial real estate loan with a balance of $779,000. Management has evaluated the financial condition of the borrowers as well as the collateral securing the loans and believes there are adequate allowances and collateral securing these loans to cover losses that may result from these nonperforming loans. Furthermore to management’s knowledge, there are no loans, other than those identified as impaired, which cause management to reasonably believe that the borrowers will not be able to comply with their loan repayment terms. Based on management’s analysis of the allowance for loan losses, the current allowance for loan losses is considered adequate as of December 31, 2007.

     Non-interest Income. Non-interest income increased by $438,000, or 31.1%, to $1.8 million during the nine months ended December 31, 2007 compared to $1.4 million during the same period of 2006 primarily due to increases in gains on the sale of investments of $288,000, third-party investment fees of $90,000, gains on the sales of loans of $59,000, and bank-owned life insurance income of $23,000. Deposit fee income decreased by $20,000 to $766,000 during the nine months ended December 31, 2007 as compared to $786,000 during the same period of 2006. The purchase of life insurance policies during November and December, 2007 resulted in bank-owned life insurance income of $23,000 for the nine months ended December 31, 2007, as compared to $0 during the same period of 2006.

     Net gains from sales of investment securities were $647,000 for the nine months ended December 31, 2007 compared to net gains of $359,000 in the comparable prior year period. During the nine months ended December 31, 2007 and 2006, the Company did not record any write-downs of equity securities which had experienced a decline in fair value judged to be other than temporary.

     Non-interest Expenses. Non-interest expense decreased by $705,000, or 6.4%, to $10.2 million during the nine months ended December 31, 2007 as compared to $10.9 million during the same period in 2006. This decrease was due to decreases in salaries and benefits of $252,000, marketing costs of $372,000, professional fees of $72,000, and data processing costs of $59,000, and was partially offset by increases in occupancy and equipment costs of $44,000 and other miscellaneous expenses of $6,000.

     Salaries and employee benefits decreased by $252,000, or 4.0%, to $6.0 million during the nine months ended December 31, 2007 as compared $6.3 million during the same period in 2006 primarily due to due to staff cuts in the marketing and loan origination areas and positions not being filled in an effort to reduce salary costs, partially offset by a $188,000 increase in stock-based compensation expense.

     Office occupancy and equipment expenses increased by $44,000, or 2.8%, to $1.61 million during the nine months ended December 31, 2007 as compared $1.57 million during the same period in 2006 primarily due to increases in computer maintenance and security expenses, increases in the amortization of leasehold improvements and depreciation of furniture, fixtures and equipment, partially offset by decreases in utilities, and repairs and maintenance. Such increases were partly as a result of the opening of our new Medford branch and operations center.

     Data processing costs decreased by $59,000, or 8.2%, to $661,000 during the nine months ended December 31, 2007 as compared to $720,000 during the same period of 2006 as certain postage charges, previously included as data processing charges, were reclassified to the other expense category.

     Marketing expenses decreased by $372,000 to $8,000 during the nine months ended December 31, 2007 as compared to $380,000 during the same period of 2006 due to a decision to discontinue most advertising and marketing efforts during the period in an attempt to reduce expenses.

     Other non-interest expenses remained relatively flat and totaled approximately $1.4 million during the nine ended December 31, 2007 as compared to $1.3 million during the same period of 2006.

     Income Taxes. The effective tax rates for both the nine months ended December 31, 2007 and 2006 were 31.2% and 34.5%, respectively. The lower effective tax rate for the nine months ended December 31, 2007 reflects tax-advantaged preferred stock and bank-owned life insurance transactions during the quarter ended December 31, 2007.

Liquidity and Capital Resources

     Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s principal sources of liquidity are customer deposits, short-term investments, loan repayments, and advances from the Federal Home Loan Bank of Boston and funds from operations. The Bank is a voluntary member of the Federal Home Loan Bank of Boston and, as such, is entitled to borrow up to the value of its qualified collateral that has not been pledged to others. Qualified collateral generally consists of residential first mortgage loans, U.S. Government and agencies securities, mortgage-backed securities and funds on deposit at the Federal Home Loan Bank of Boston. At December 31, 2007, the Company had approximately $28.9 million in unused borrowing capacity at the Federal Home Loan Bank of Boston.

     At December 31, 2007, the Company had commitments to originate loans, unused outstanding lines of credit and undisbursed proceeds of loans totaling $27.3 million. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company anticipates that it will have sufficient funds available to meet its current loan commitments.

     The Company’s and the Bank’s capital ratios at December 31, 2007 were as follows:

		Company				Bank
Tier 1 Capital (to average assets)			8.69	%			7.23	%
Tier 1 Capital (to risk-weighted assets)			11.80	%			9.82	%
Total Capital (to risk-weighted assets)			12.67	%			10.70	%

     These ratios place the Company in excess of regulatory standards and the Bank in the “well capitalized” category as set forth by the Federal Deposit Insurance Corporation.

Off-Balance Sheet Arrangements

     In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

     For the year ended March 31, 2007 and for the nine months ended December 31, 2007, the Company engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Not applicable.

Item 4. Controls and Procedures

     The Company’s management has carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that information required

to be disclosed by the Company in reports that it files or submits under the Exchange Act, (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

     In addition, based on that evaluation, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

     Periodically, there have been various claims and lawsuits against the Company, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2007, as filed with the Securities and Exchange Commission on June 22, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The Company did not repurchase any of its securities during the quarter ended December 31, 2007.

Item 3. Defaults Upon Senior Securities

     Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable.

Item 5. Other Information

     None.

Item 6. Exhibits

	3.2		Amended and Restated Bylaws of Central Bancorp, Inc. (1)
	10.1		Employment Agreement by and between Central Cooperative Bank and John D. Doherty (2)
	10.2		Employment Agreement by and between Central Cooperative Bank and William P. Morrissey (2)
	10.3		Executive Salary Continuation Agreement by and between Central Cooperative Bank and John D. Doherty, as amended (2)
	10.4		Executive Salary Continuation Agreement by and between Central Cooperative Bank and William P. Morrissey, as amended (2)
	10.5		Life Insurance Endorsement Method Split Dollar Plan Agreement (2)
	10.6		Executive Health Insurance Plan Agreement by and between Central Cooperative Bank and John D. Doherty (2)