Central Bancorp (CEBK) 10-Q 2006 Q1 Quarterly report

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 endedJune 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND 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)

(617) 628-4000

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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.
Yesþ           Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yeso           Noþ

Common Stock, $1.00 par value	1,590,181
Class	Outstanding at August 9, 2005

CENTRAL BANCORP, INC.

Table of Contents

	Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at June 30, 2005 and March 31, 2005		1
Consolidated Statements of Income for the three months ended June 30, 2005 and 2004		2
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended June 30, 2005		3
Consolidated Statements of Cash Flows for the three months ended June 30, 2005 and 2004		4
Notes to Unaudited Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Quantitative and Qualitative Disclosures about Market Risk		14
Item 4. Controls and Procedures		15
Part II. Other Information
Item 1. Legal Proceedings		15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		15
Item 3. Defaults Upon Senior Securities		15
Item 4. Submission of Matters to a Vote of Security Holders		15
Item 5. Other Information		15
Item 6. Exhibits		15
Signatures
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32 SECTION 902 CERTIFICATION OF CEO AND CFO

Part I. Financial Information

Item 1. Financial Statements

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition
(Unaudited)

	June 30,			March 31,
(Dollars in Thousands)	2005			2005
ASSETS
Cash and due from banks	$	5,631		$	6,158
Short-term investments		678			225
Cash and cash equivalents		6,309			6,383
Certificate of deposit		606			606
Investment securities available for sale (amortized cost of $105,115 at June 30, 2005 and $108,690 at March 31, 2005)		105,518			108,616
Stock in Federal Home Loan Bank of Boston, at cost		8,300			8,300
The Co-operative Central Bank Reserve Fund		1,576			1,576
Total investments		115,394			118,492
Loans held for sale		2,935			2,221
Loans (Note 2)		399,746			386,382
Less allowance for loan losses		3,731			3,681
Net loans		396,015			382,701
Accrued interest receivable		2,324			2,444
Banking premises and equipment, net		2,975			2,807
Deferred tax asset, net		1,475			1,639
Goodwill, net		2,232			2,232
Other assets		1,598			1,546
Total assets	$	531,863		$	521,071
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits (Note 3)	$	339,488		$	333,215
Short-term borrowings		—			141
Federal Home Loan Bank advances (Note 4)		141,800			138,135
Subordinated debenture		5,258			5,258
ESOP Loan		2,824			2,921
Advance payments by borrowers for taxes and insurance		1,183			1,168
Accrued expenses and other liabilities		2,087			1,994
Total liabilities		492,640			482,832
Commitments and Contingencies (Note 6)
Stockholders’ equity (Note 7):
Preferred stock $1.00 par value; authorized 5,000,000 shares; none issued or outstanding		—			—
Common stock $1.00 par value; authorized 15,000,000 shares; 2,032,609 shares issued at June 30, 2005 and 2,031,026 shares issued at March 31, 2005		2,033			2,031
Additional paid-in capital		12,905			12,883
Retained income		39,265			38,728
Treasury stock (442,428 shares at June 30, 2005 and at March 31, 2005), at cost		(9,924	)		(9,907	)
Accumulated other comprehensive income (loss) (Note 5)		255			(56	)
Unearned compensation — ESOP		(5,311	)		(5,440	)
Total stockholders’ equity		39,223			38,239
Total liabilities and stockholders’ equity	$	531,863		$	521,071

See accompanying notes to unaudited consolidated financial statements.

1

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)

	Three Months Ended
	June 30, 2005,
	2005		2004
Interest and dividend income:
Mortgage loans	$	5,885	$	5,383
Other loans		103		79
Short-term investments		13		64
Investments		1,367		1,088
Total interest and dividend income		7,368		6,614
Interest expense:
Deposits		1,352		1,150
Advances from Federal Home Loan Bank of Boston		1,724		1,718
Other borrowings		133		39
Total interest expense		3,209		2,907
Net interest and dividend income		4,159		3,707
Provision for loan losses		50		50
Net interest and dividend income after provision for loan losses		4,109		3,657
Non-interest income:
Deposit service charges		232		145
Net gains from sales of investment securities		117		134
Gain on sales of loans		55		63
Other income		90		106
Total non-interest income		494		448
Non-interest expenses:
Salaries and employee benefits		2,066		1,903
Occupancy and equipment		382		322
Data processing service fees		238		280
Professional fees		207		268
Advertising and marketing		183		138
Other expenses		439		483
Total non-interest expenses		3,515		3,394
Income before income taxes		1,088		711
Provision for income taxes (Note 6)		382		257
Net income	$	706	$	454
Earnings per common share — basic (Note 8)	$	0.50	$	0.29
Earnings per common share — diluted (Note 8)	$	0.49	$	0.29
Weighted average common shares outstanding — basic		1,423		1,559
Weighted average common and equivalent shares outstanding — diluted		1,431		1,573

See accompanying notes to unaudited consolidated financial statements.

2

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

												Accumulated
			Additional									Other			Unearned			Total
	Common		Paid-In			Retained			Treasury			Comprehensive			Compensation			Stockholders’
(In Thousands)	Stock		Capital			Income			Stock			Income			ESOP			Equity
Three Months Ended June 30, 2005
Balance at March 31, 2005	$	2,031	$	12,883		$	38,728		$	(9,907	)	$	(56	)	$	(5,440	)	$	38,239
Net income							706												706
Other comprehensive income net of tax:
Unrealized gain on securities, net of reclassification adjustment(Note 5)													311						311
Comprehensive income																			1,017
Proceeds from exercise of stock options (1,583 shares)		2		23															25
Tax benefit of stock option exercises				5															5
Director deferred compensation transactions				15						(17	)								(2	)
Dividends paid ($0.12 per share)							(169	)											(169	)
Amortization of unearned compensation — ESOP				(21	)											129			108
Balance at June 30, 2005	$	2,033	$	12,905		$	39,265		$	(9,924	)	$	255		$	(5,311	)	$	39,223

See accompanying notes to unaudited consolidated financial statements.

3

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows
(Unaudited)

	Three Months Ended
	June 30,
(In thousands)	2005			2004
Cash flows from operating activities:
Net income	$	706		$	454
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		137			92
Amortization of premiums		38			51
Provision for loan losses		50			50
Stock-based compensation		108			112
Net gains from sales and write-downs of investment securities		(117	)		(134	)
Gain on sales of loans held for sale		(55	)		(63	)
Originations of loans held for sale		(5,474	)		(5,818	)
Proceeds from sale of loans originated for sale		4,815			5,755
Decrease in accrued interest receivable		120			95
(Increase) decrease in other assets, net		(53	)		87
Increase (decrease) in advance payments by borrowers for taxes and insurance		15			(87	)
Increase in accrued expenses and other liabilities, net		93			140
Net cash provided by operating activities		383			734
Cash flows from investing activities:
(Increase) decrease in loans		(13,364	)		1,769
Principal payments on mortgage-backed securities		2,510			1,516
Purchases of investment securities		(1,695	)		(26,844	)
Maturities and calls of investment securities		1,000			2,971
Proceeds from sales of investment securities		1,838			593
Purchase of banking premises and equipment		(305	)		(125	)
Net cash used in investing activities		(10,016	)		(20,120	)
Cash flows from financing activities:
Increase in deposits		6,273			18,247
Proceeds from advances from FHLB of Boston		49,000			—
Repayment of advances from FHLB of Boston		(41,000	)		(3,000	)
Increase (decrease) in short-term borrowings		(4,476	)		83
Repayment of ESOP loan		(97	)		(97	)
Proceeds from exercise of stock options		25			—
Tax benefit from exercise of stock option		5			—
Dividends paid		(169	)		(186	)
Net directors deferred compensation		(2	)		11
Net cash provided by financing activities		9,559			15,058
Net decrease in cash and cash equivalents		(74	)		(4,328	)
Cash and cash equivalents at beginning of year		6,383			34,337
Cash and cash equivalents at end of period	$	6,309		$	30,009
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	3,218		$	2,901
Income taxes	$	278		$	25

See accompanying notes to unaudited consolidated financial statements.

4

CENTRAL BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements
June 30, 2005

(1) Basis of Presentation

     The unaudited consolidated financial statements of Central Bancorp, Inc. and its wholly-owned subsidiary Central Co-operative 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, 2005, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation. Interim results are not necessarily indicative of results to be expected for the entire year.

     The Company owns 100% of the common stock of Central Bancorp Capital Trust I (the “Trust”) which has issued trust preferred securities to the public. 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, the Trust is not 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 Form 10-K for the year ended March 31, 2005. For interim reporting purposes, the Company follows the same significant accounting policies.

(2) Loans

     Loans, excluding loans held for sale, as of June 30, 2005 and March 31, 2005 are summarized below (in thousands):

	June 30,			March 31,
	2005			2005
Real estate loans:
Residential real estate	$	163,198		$	159,838
Commercial real estate		200,640			194,326
Construction		20,047			17,187
Home equity lines of credit		9,278			9,194
Total real estate loans		393,163			380,545
Commercial loans		5,578			4,786
Consumer loans		1,005			1,051
Total loans		399,746			386,382
Less: allowance for loan losses		(3,731	)		(3,681	)
Total loans, net	$	396,015		$	382,701

     There was one loan on nonaccrual status totaling $120,000 as of June 30, 2005 and two loans on nonaccrual status totaling $190,000 as of March 31, 2005. Net interest income not recognized on non accrual loans amounted to $1,215 for the quarter ending June 30, 2005 and $ 5,027 for the fiscal year ending March 31, 2005.

     At June 30, 2005 and March 31, 2005, there were no impaired loans. Impaired loans are measured using the fair value of collateral. During the quarter ending June 30, 2005 and for the year ending March 31, 2005, there were no impaired loans. The Bank follows the same policy for recognition of income on impaired loans as it does for all other loans. Throughout the quarter ended June 30, 2005 and fiscal year 2005, there was no interest forgone on impaired loans that were not non-accrual loans.

5

CENTRAL BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements
June 30, 2005

A summary of changes in the allowance for loan losses for the quarters ended June 30, 2005 and 2004 follows (in thousands):

	Three Months Ended
	June 30,
	2005			2004
Balance at beginning of period	$	3,681		$	3,537
Provision charged to expense		50			50
Less: charge-offs		(10	)		—
Add: recoveries		10			12
Balance at end of period	$	3,731		$	3,599

(3) Deposits

     Deposits at June 30, 2005 and March 31, 2005 are summarized as follows (in thousands):

	June 30, 2005		March 31, 2005
Demand deposit accounts	$	39,622	$	33,982
NOW accounts		39,169		39,205
Passbook and other savings accounts		72,390		74,316
Money market deposit accounts		48,473		50,051
Total non certificate accounts		199,654		197,554
Term deposit certificates
Certificates of $100,000 and above		47,892		47,270
Certificates less than $100,000		91,942		88,391
Total term deposit certificates		139,834		135,661
Total deposits	$	339,488	$	333,215

(4) Subordinated Debenture

     On September 16, 2004, Central Bancorp, Inc. (the “Company”) completed a trust preferred securities financing in the amount of $5.1 million. In the transaction, the Company formed a Delaware statutory trust, known as Central Bancorp Capital Trust I (the “Trust”). The Trust 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. The Trust used the proceeds of these issuances to purchase $5,258,000 of the Company’s floating rate junior subordinated debentures due September 16, 2034 (the “Debentures”). The interest rate on the Debentures and the trust preferred securities is variable and adjustable quarterly at 2.44% over three-month LIBOR. At June 30, 2005 the interest rate was 5.85%. The Debentures are the sole assets of the Trust and are subordinate to all of the Company’s existing and future obligations for borrowed money. 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 Debentures. Concurrently with the issuance of the Debentures and the trust preferred securities, the Company issued a guarantee related to the trust securities for the benefit of the holders.

     On September 17, 2004, the Company completed the repurchase of 77,134 shares of its outstanding common stock, reducing the Company’s outstanding common stock to 1,588,598 shares. In addition, the Central Co-operative Bank Employee Stock Ownership Trust (the “ESOP”) completed the purchase of another 77,134 shares of the Company’s common stock. The Company and the ESOP purchased the shares pursuant to the terms of the Stock

6

CENTRAL BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements
June 30, 2005

Purchase Agreement, dated September 13, 2004, by and among the Company and the ESOP and PL Capital, LLC, Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Richard Lashley, John W. Palmer and Richard J. Fates.

(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 three months ended June 30, 2005 and 2004 are as follows (in thousands):

	For the Three Months Ended
	June 30, 2005
	Before-Tax		Tax		After-Tax
	Amount		Effect		Amount
Unrealized gains on securities:
Unrealized net holding gains during period	$	360	$	123	$	237
Add: reclassification adjustment for net gains included in net income		117		43		74
Other comprehensive income	$	477	$	166	$	311

	For the Three Months Ended
	June 30, 2004
	Before-Tax			Tax			After-Tax
	Amount			Effect			Amount
Unrealized gains on securities:
Unrealized net holding losses during period	$	(1,755	)	$	(632	)	$	(1,123	)
Less: reclassification adjustment for net gains included in net income		134			46			88
Other comprehensive loss	$	(1,889	)	$	(678	)	$	(1,211	)

(6) Contingencies

Legal Proceedings

     The Company from time to time is involved as plaintiff or defendant 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

CENTRAL BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements
June 30, 2005

(7) Subsequent Event

     On July 21, 2005, the Board of Directors voted the payment of a quarterly cash dividend of $0.18 per share. The dividend is payable on August 19, 2005 to stockholders of record as of August 5, 2005. This represents an increase of 50% over the previous dividend level.

(8) Earnings per Share (EPS)

     Unallocated ESOP shares are not treated as being outstanding in the computation of either basic or diluted EPS. At June 30, 2005 and June 30, 2004 there were approximately 166,000 and 104,000 unallocated ESOP shares, respectively.

     The following depicts a reconciliation of earnings per share:

	2005			2004
	(Amounts in thousands, except per share amounts)
Net income available to common shareholders	$	706		$	454
Weighted average number of common shares outstanding		1,590			1,665
Weighted average number of unallocated ESOP shares		(167	)		(106	)
Weighted average number of common shares outstanding used in calculation of basic earnings per share		1,423			1,559
Incremental shares from the assumed exercise of dilutive stock options		8			14
Weighted average number of common shares outstanding used in calculating diluted earnings per share		1,431			1,573
Earnings per share
Basic	$	.50		$	.29
Diluted	$	.49		$	.29

(9) Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R) replaces FASB No. 123 “Accounting for Stock-Based Compensation” and supersedes APB opinion No. 25 “Accounting for Stock Issued to Employees” and requires entities to recognize a compensation cost on the financial statements relating to share-based transactions. Previously, companies had the option of adopting a fair value measurement of the equity or liability instruments issued or disclosing the impact in the footnotes. Under SFAS No. 123(R), companies will be required to adopt the fair value method of measurement over a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, stock appreciation rights and employee stock purchase plans. Application of SFAS No. 123(R) as amended by SAB 107 is required the first fiscal quarter for the next fiscal year beginning after June 15, 2005. The Company does not

8

believe that the application of SFAS No. 123(R) will have a material impact on the Company’s financial position or results of operations.

     In March 2004, the FASB ratified the consensus reached by the EITF in Issue 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. In September 2004, the FASB issued FASB Staff Position (FSP) 03-1-1, which delayed the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of Issue 03-1 due to additional proposed guidance. On June 29, 2005, the FASB decided to keep the accounting for certain debt securities as is and not to make the changes suggested in the proposed FSP. The FASB is expected to issue a final FSP, which will supersede EITF 03-1 and will codify existing accounting guidance. Under existing accounting rules, such securities are currently marked to market, and the market changes are reflected in the other comprehensive income (loss) component of shareholders’ equity. The revised FSP will apply to evaluations made after September 15, 2005. The Company does not anticipate that the guidance will have a material impact on its financial position or results of operations.

9

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

Forward-Looking Statements

     When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including changes in regional and national economic conditions, unfavorable judicial decisions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

     The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

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 loans trends, charge-off experience and other asset quality factors. The Company evaluates specific loan status reports on certain commercial and commercial real estate loans rated “substandard” or worse in excess of a specified dollar amount. 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 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 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 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 June 30, 2005 and March 31, 2005

     Total assets increased by $10.8 million, or 2.07%, from $521.1 million at March 31, 2005 to $531.9 million at June 30, 2005. During the three months ended June 30, 2005, loans (excluding loans held for sale) increased by $13.4 million due primarily to increases in almost every loan category including residential loans ($3.4 million), commercial real estate loans ($6.3 million), construction loans ($2.9 million) and commercial loans ($792 thousand). There was a modest decline of $46,000 in other consumer loans. Management regularly assesses the desirability of holding newly originated long-term fixed-rate residential mortgage loans in 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 fixed-rate residential mortgage loans originated during the current quarter

10

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. Additionally, the Company redeployed most of its short-term investments into higher yielding investment securities to take advantage of higher yields available on such instruments.

     The Company experienced growth of $2.1 million in core deposits and $4.2 million in term deposits resulting in an increase in total deposits of $6.3 million, or 1.9%. The growth in core deposits was principally related to the increase of $5.6 million in small business demand deposit accounts, offset by declines in NOW accounts, savings accounts and money market deposit accounts. The increase in small business demand deposits reflects the successful marketing efforts in expanding the promotion of the Bank’s free checking product to business customers during the early part of 2005. The significant increase in term deposits is the result of special promotional rates offered on shorter term deposits (8-months or 13-months) in anticipation of increasing interest rates in the market place. These shorter-term deposits have been marketed to a larger target base to solicit new customers and new balances to the Bank and not just to minimize outflows.

     Total borrowings increased $3.7 million from $138.1 million at March 31, 2005 to $141.8 million at June 30, 2005. The increase in borrowed funds helped to fund the growth in total assets experienced during the first quarter of fiscal year 2006.

     Total stockholders’ equity increased during the first quarter of fiscal 2006 by $984,000 primarily due to net income earned during the quarter and an increase in the fair value on the investments available for sale (accumulated other comprehensive income) offset by the payment of dividends to shareholders.

Comparison of Operating Results for the Quarters Ended June 30, 2005 and 2004

     Net income increased by $252,000 to $706,000, or $0.49 per diluted share, for the quarter ended June 30, 2005, compared to $454,000, or $0.29 per diluted share, for the corresponding quarter in the prior year. The increase in the net interest income received by the Company is the most significant reason for the increase in net income.

Net Interest Income.Total average-earning assets have increased $37.8 million during the first quarter of fiscal 2006 as compared to the corresponding quarter in fiscal 2005.

     The Company’s net interest margin increased 13 basis points from 3.10% in the prior year’s quarter to 3.23% in the current quarter. The 13 basis point increase in net interest margin is attributable to the shift in the mix of interest-earning assets from short-term investments that carry a lower interest yield to loans and investment securities which typically have higher yields. In addition the Company continued to hold its deposit rates at a static level in spite of the increasing short term market interest rates. By continuing to keep its overall core deposit rates from rising in conjunction with market interest rate increases, the Company will continue to benefit from maintaining its net interest spread. By offering the aforementioned 8-month and 13-month promotional term deposits, the Company hopes to maintain the overall deposit balances.

Interest Income.Interest income for the quarter ended June 30, 2005 increased approximately $754,000 to $7.4 million as compared to $6.6 million in the prior year quarter. This increase was a result of the yield on interest-earning assets increasing from 5.54% in the quarter ended June 30, 2004 to 5.72% in the current quarter. In addition, average interest earning assets increased by $37.8 million during the corresponding period.

Interest Expense.Interest expense for the quarter ended June 30, 2005 increased by $302,000 to $3.2 million as compared to $2.9 million in the quarter ended June 30, 2004. An increase of 5 basis points in the cost of funds from 2.79% in the quarter ended June 30, 2004 to 2.84% in the quarter ended June 30, 2005 and the increase in average interest-bearing liabilities of $34.7 million in the corresponding period resulted in this increase.

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     The following table presents average balances and average rates earned/paid by the Company for the quarter ended June 30, 2005 compared to the quarter ended June 30, 2004:

	Three Months Ended June 30,
	2005								2004
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Mortgage loans	$	389,546		$	5,885		6.04	%	$	351,421		$	5,383		6.13	%
Other loans		6,149			103		6.70			4,949			79		6.39
Investment securities		117,287			1,367		4.66			94,092			1,088		4.63
Short-term investments		2,496			13		2.08			27,217			64		0.94
Total interest-earning assets		515,478			7,368		5.72			477,679			6,614		5.54
Allowance for loan losses		(3,697	)							(3,557	)
Noninterest-earning assets		16,628								19,000
Total assets	$	528,409							$	493,122
Interest-bearing liabilities:
Deposits	$	299,158			1,352		1.81		$	272,264			1,150		1.69
Advances from FHLB of Boston		143,053			1,724		4.82			141,067			1,718		4.87
Other borrowings		9,751			133		5.46			3,955			39		3.94
Total interest-bearing liabilities		451,962			3,209		2.84			417,286			2,907		2.79
Noninterest-bearing liabilities		37,793								32,803
Total liabilities		489,755								450,089
Stockholders’ equity		38,654								43,033
Total liabilities and stockholders’ equity	$	528,409							$	493,122
Net interest and dividend income				$	4,159							$	3,707
Net interest spread							2.88	%							2.75	%
Net interest margin							3.23	%							3.10	%

Provisions 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, 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 in order to maintain the adequacy of the allowance.

     During the quarter ended June 30, 2005, the Company provided $50,000 for loan losses and recognized a provision of $50,000 during the corresponding quarter in 2004. The Company’s asset quality, as measured principally by delinquency rates, charge-offs and loan classifications, continues to be outstanding.

Non-interest Income.Total non-interest income was $494,000 for the quarter ended June 30, 2005 compared to $448,000 in the same period of 2004. The primary reason for the $46,000 increase in the current year’s quarter was due to the increased fees earned on the increased deposit accounts. Gains on sales of investments totaled $117,000 during the current quarter, down $17,000 from the $134,000 recognized in the prior year’s quarter. Gains on sales of loans totaled $55,000 during the current quarter, down $8,000 from the $63,000 recognized in the prior year’s quarter.

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Non-interest Expenses.Non-interest expenses increased $121,000, or 3.6%, to $3.5 million during the quarter ended June 30, 2005 as compared to $3.4 million during the same quarter in 2004 due principally to increases in salaries and employee benefits ($163,000), office occupancy and equipment ($60,000) and marketing expenses ($45,000), partially offset by declines in professional fees ($61,000) and other non-operating expenses ($44,000).

     The increase in salaries and employee benefits of $163,000, or 8.6%, to $2.1 million during the quarter ended June 30, 2005, was due to overall salary increases, increases in staffing, as well as increases in pension, ESOP and health care costs.

     Office occupancy and equipment expenses increased $60,000, or 18.6%, to $382,000 during the current quarter ended June 30, 2005 due to higher utility costs and increased depreciation of equipment.

     Data processing costs declined $42,000, or 15.0%, to $238,000 primarily as a result of the renegotiation and extension of our contact with our primary data processing provider during fiscal year 2005.

     Professional fees decreased $61,000, or 22.8%, to $207,000 during the current quarter ended June 30, 2005 due to a decrease of legal expenses of $24,000 and a decrease of $37,000 in professional fees paid to outside consulting services.

     Marketing expenses increased $45,000, or 32.6%, to $183,000 during the current quarter ended June 30, 2005 primarily due to the increased advertising costs associated with the aforementioned deposit programs.

     Other non-interest expenses decreased $44,000, or 9.1%, to $439,000 during the current quarter ended June 30, 2005 due to increased corporate contributions and other general costs involved in running a larger organization.

Income Taxes.The effective tax rates for the quarters ended June 30, 2005 and 2004 were 35.1% and 36.1%, respectively.

Liquidity and Capital Resources

     The Company’s principal sources of liquidity are customer deposits, short-term investments, loan repayments, advances from the FHLB of Boston and funds from operations. The Bank is a voluntary member of the FHLB 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 FHLB of Boston. At June 30, 2005, the Company had approximately $42.5 million in unused borrowing capacity at the FHLB of Boston.

     At June 30, 2005, the Company had commitments to originate loans, unused outstanding lines of credit and undisbursed proceeds of loans totaling $53.7 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 June 30, 2005 were as follows:

	Company			Bank
Tier 1 Capital (to average assets)		7.95	%		7.29	%
Tier 1 Capital (to risk-weighted assets)		12.04			11.03
Total Capital (to risk-weighted assets)		13.11			12.11

     These ratios placed the Company in excess of regulatory standards and the Bank in the “well capitalized” category as set forth by the FDIC.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company’s earnings are largely dependent on its net interest income, which is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Company seeks to reduce its exposure to changes in interest rate, or market risk, through active monitoring and management of its interest-rate risk exposure. The policies and procedures for managing both on- and off-balance sheet activities are established by the Bank’s asset/liability management committee (“ALCO”). The Board of Directors reviews and approves the ALCO policy annually and monitors related activities on an ongoing basis.

     Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending, borrowing and deposit taking activities.

     The main objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income and preserve capital, while adjusting the asset/liability structure to control interest-rate risk. However, a sudden and substantial increase or decrease in interest rates may adversely impact earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis.

     The Company quantifies its interest-rate risk exposure using a sophisticated simulation model. Simulation analysis is used to measure the exposure of net interest income to changes in interest rates over a specific time horizon. Simulation analysis involves projecting future interest income and expense under various rate scenarios. The simulation is based on both actual and forecasted cash flows and assumptions of management about the future changes in interest rates and levels of activity (loan originations, loan prepayments, deposit flows, etc). The assumptions are inherently uncertain and, therefore, actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and strategies. The net interest income projection resulting from use of actual and forecasted cash flows and management’s assumptions is compared to net interest income projections based on an immediate shift of 300 basis points upward and 100 basis points downward. Internal guidelines on interest rate risk state that for every 100 basis points immediate shift in interest rates, estimated net interest income over the next twelve months should decline by no more than 5%.

     The following table indicates the projected change in net interest income and sets forth such change as a percentage of estimated net interest income, for the twelve month period following the date indicated assuming an immediate and parallel shift for all market rates with other rates adjusting to varying degrees in each scenario based on both historical and expected spread relationships:

	June 30,						March 31,
	2005						2005
	Amount			% Change			Amount			% Change
				(Dollars in thousands)
300 basis point increase in rates	$	(2,196	)		(12.9	)%	$	(2,361	)		(13.8	)%
150 basis point decrease in rates		—			—	%		(455	)		(2.7	)
200 basis point decrease in rates		(136	)		(0.8	)%		—			—

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Item 4. Controls and Procedures

     As of the end of the period covered by this report, management of the Company 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. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

     There have been no changes in the Company’s internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph 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

     Not Applicable.

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

     The Company did not repurchase any of its securities during the quarter ended June 30, 2005.

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

Exhibits
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32	Section 1350 Certifications

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CENTRAL BANCORP, INC.
		Registrant
August 12, 2005	By:	/s/  John D. Doherty
		John D. Doherty
		Chairman, President and Chief Executive Officer
August 12, 2005	By:	/s/  Paul S. Feeley
		Paul S. Feeley
		Senior Vice President, Treasurer and Chief Financial Officer