Central Bancorp (CEBK) 10-Q 2009 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, 2008

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 organization)	(I.R.S. Employer Identification No.)
399 Highland Avenue, Somerville, Massachusetts	02144
(Address of principal executive offices)	(Zip Code)

(617) 628-4000

(Registrant’s telephone number, including area code)

Not applicable

(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. 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 filero	Accelerated filero
Non-accelerated filero	Smaller Reporting Companyþ
(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 August 13, 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 June 30, 2008 and March 31, 2008		3
		Consolidated Statements of Income for the Three Months Ended June 30, 2008 and 2007		4
		Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended June 30, 2008 and 2007		5
		Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2008 and 2007		6
		Notes to Unaudited Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results Of Operations		15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
	Item 4.	Controls and Procedures		22
Part II. Other Information
	Item 1.	Legal Proceedings		23
	Item 1A.	Risk Factors		23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23
	Item 3.	Defaults Upon Senior Securities		23
	Item 4.	Submission of Matters to a Vote of Security Holders		24
	Item 5.	Other Information		24
	Item 6.	Exhibits		24
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

2

Part I. Financial Information

Item 1. Financial Statements

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

(Dollars in Thousands, Except Share Data)	June 30, 2008			March 31, 2008
ASSETS
Cash and due from banks	$	6,388		$	5,837
Short-term investments		6,125			11,888
Cash and cash equivalents		12,513			17,725
Investment securities available for sale (amortized cost of $52,140 at June 30, 2008 and $53,612 at March 31, 2008)		49,922			52,960
Stock in Federal Home Loan Bank of Boston, at cost		8,518			8,518
The Co-operative Central Bank Reserve Fund, at cost		1,576			1,576
Total investments		60,016			63,054
Loans held for sale		—			195
Loans (Note 2)		476,123			474,942
Less allowance for loan losses		3,809			3,613
Loans, net		472,314			471,329
Accrued interest receivable		1,885			1,981
Banking premises and equipment, net		3,865			3,969
Deferred tax asset, net		3,159			2,557
Goodwill, net		2,232			2,232
Bank owned life insurance (Note 10)		6,162			6,084
Other assets		2,133			2,119
Total assets	$	564,279		$	571,245
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits (Note 3)	$	361,941		$	361,089
Short-term borrowings		—			141
Federal Home Loan Bank advances		149,665			156,691
Subordinated debenture (Note 4)		11,341			11,341
Advanced payments by borrowers for taxes and insurance		1,256			1,308
Accrued expenses and other liabilities		1,946			1,859
Total liabilities		526,149			532,429
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 June 30, 2008 and March 31, 2008		1,640			1,640
Additional paid-in capital		3,690			3,690
Retained income		40,931			40,825
Accumulated other comprehensive loss (Note 5)		(1,200	)		(236	)
Unearned compensation — ESOP		(6,931	)		(7,103	)
Total stockholders’ equity		38,130			38,816
Total liabilities and stockholders’ equity	$	564,279		$	571,245

See accompanying notes to unaudited consolidated financial statements.

3

CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)

	Three Months Ended
	June 30,
	2008			2007
Interest and dividend income:
Mortgage loans	$	6,853		$	6,809
Other loans		190			150
Short-term investments		57			193
Investments		765			886
Total interest and dividend income		7,865			8,038
Interest expense:
Deposits		2,007			2,853
Advances from Federal Home Loan Bank of Boston		1,763			1,634
Other borrowings		170			211
Total interest expense		3,940			4,698
Net interest and dividend income		3,925			3,340
Provision for loan losses		200			—
Net interest and dividend income after provision for loan losses		3,725			3,340
Noninterest income:
Deposit service charges		246			252
Net (losses) gains from sales and write-downs of investment securities		(29	)		116
Net gains on sales of loans		13			52
Bank owned life insurance income		78			—
Other income		120			105
Total noninterest income		428			525
Noninterest expenses:
Salaries and employee benefits		2,218			2,099
Occupancy and equipment		553			550
Data processing fees		201			223
Professional fees		180			204
Advertising and marketing		30			4
Other expenses		426			436
Total noninterest expenses		3,608			3,516
Income before income taxes		545			349
Provision for income taxes		144			124
Net income	$	401		$	225
Earnings per common share — basic (Note 8)	$	0.29		$	0.16
Earnings per common share — diluted (Note 8)	$	0.29		$	0.16
Weighted average common shares outstanding — basic		1,386			1,392
Weighted average common and equivalent shares outstanding — diluted		1,386			1,401

See accompanying notes to unaudited consolidated financial statements.

4

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			Loss			ESOP			Equity
Three Months Ended June 30, 2008
Balance at March 31, 2008	$	1,640	$	3,690		$	40,825		$	(236	)	$	(7,103	)	$	38,816
Net income							401									401
Other comprehensive loss, net of tax benefit:
Unrealized loss on securities, net of reclassification adjustment (Note 5)										(964	)					(964	)
Comprehensive loss																(563	)
Dividends paid ($0.18 per share)							(295	)								(295	)
Stock-based compensation (Note 9)				81												81
Amortization of unearned compensation — ESOP				(81	)								172			91
Balance at June 30, 2008	$	1,640	$	3,690		$	40,931		$	(1,200	)	$	(6,931	)	$	38,130

See accompanying notes to unaudited consolidated financial statements.

5

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

	Three Months Ended
	June 30,
(In thousands)	2008			2007
Cash flows from operating activities:
Net income	$	401		$	225
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		232			243
Amortization of premiums		17			14
Provision for loan losses		200			—
Stock-based compensation and amortization of unearned compensation — ESOP		172			229
Net losses (gains) from sales and write-downs of investment securities		29			(116	)
Bank owned life insurance income		(78	)		—
Gain on sales of loans held for sale		(13	)		(52	)
Originations of loans held for sale		(1,628	)		(4,378	)
Proceeds from sale of loans originated for sale		1,837			4,365
Decrease in accrued interest receivable		96			209
Increase in other assets, net		(14	)		(2	)
Decrease in advance payments by borrowers for taxes and insurance		(52	)		(28	)
Increase in accrued expenses and other liabilities, net		87			2
Net cash provided by operating activities		1,286			711
Cash flows from investing activities:
Loan principal (originations) collections, net		(1,185	)		2,006
Principal payments on mortgage-backed securities		1,358			1,343
Purchases of restricted equity-FHLB		—			(35	)
Proceeds from sales of investment securities		1,070			1,064
Purchases of investment securities		(3,002	)		(1,133	)
Maturities and calls of investment securities		2,000			—
Purchase of banking premises and equipment		(128	)		(23	)
Net cash provided by investing activities		113			3,222
Cash flows from financing activities:
Net increase (decrease) in deposits		852			(13,942	)
Proceeds from advances from FHLB of Boston		—			43,000
Repayment of advances from FHLB of Boston		(7,027	)		(49,000	)
Net short-term repayments		(141	)		—
Cash dividends paid		(295	)		(253	)
Net cash used in financing activities		(6,611	)		(17,535	)
Net decrease in cash and cash equivalents		(5,212	)		(13,602	)
Cash and cash equivalents at beginning of period		17,725			20,617
Cash and cash equivalents at end of period	$	12,513		$	7,015
Cash paid during the period for:
Interest	$	3,836		$	4,729
Income taxes		115			10

See accompanying notes to unaudited consolidated financial statements.

6

CENTRAL BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
June 30, 2008

(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, 2008, included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 20, 2008. 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 three months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2009 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, 2008. For interim reporting purposes, the Company follows the same significant accounting policies.

(2) Loans

     Loans, excluding loans held for sale, as of June 30, 2008 and March 31, 2008 are summarized below (unaudited, in thousands):

	June 30,			March 31,
	2008			2008
Real estate loans:
Residential real estate (1-4 family)	$	183,070		$	178,727
Commercial real estate		251,107			244,496
Construction		23,924			30,950
Home equity lines of credit		6,779			6,559
Total real estate loans		464,880			460,732
Commercial loans		10,177			13,173
Consumer loans		1,066			1,037
Total loans		476,123			474,942
Less: allowance for loan losses		(3,809	)		(3,613	)
Total loans, net	$	472,314		$	471,329

     There were eight loans to six borrowers on nonaccrual status totaling $10.1 million as of June 30, 2008 and seven loans to five borrowers on nonaccrual status totaling $9.6 million as of March 31, 2008. (SeeComparison of Operating Results for the Quarters Ended June 30, 2008 and 2007 — Provision for Loan Losses).

7

     At June 30, 2008, and March 31, 2008, there were no impaired loans other than nonaccrual loans. Impaired loans are measured using the fair value of collateral.

     A summary of changes in the allowance for loan losses for the three months ended June 30, 2008 and 2007 follows. (The data in the following tables are unaudited, in thousands):

	Three Months Ended
	June 30,
	2008			2007
Balance at beginning of period	$	3,613		$	3,881
Provision charged to expense		200			—
Less: charge-offs		(6	)		(46	)
Add: recoveries		2			13
Balance at end of period	$	3,809		$	3,848

(3) Deposits

     Deposits at June 30, 2008 and March 31, 2008 are summarized as follows (unaudited, in thousands):

	June 30,		March 31,
	2008		2008
Demand deposit accounts	$	39,313	$	38,250
NOW accounts		28,735		27,065
Passbook and other savings accounts		51,367		50,252
Money market deposit accounts		69,696		67,243
Total non-certificate accounts		189,111		182,810
Term deposit certificates:
Certificates of $100,000 and above		74,527		74,052
Certificates of less than $100,000		98,303		104,227
Total term deposit certificates		172,830		178,279
Total deposits	$	361,941	$	361,089

(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 June 30, 2008, the interest rate was 5.22%. 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.

8

     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 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 loss and related tax effect for the three months ended June 30, 2008 and 2007 are as follows (unaudited, in thousands):

	For the Three Months Ended
	June 30, 2008
	Before-Tax			Tax			After-Tax
	Amount			Effect			Amount
Unrealized losses on securities:
Unrealized net holding losses during period	$	(1,595	)	$	(610	)	$	(985	)
Less: reclassification adjustment for net losses included in net income		(29	)		(8	)		(21	)
Other comprehensive loss	$	(1,566	)	$	(602	)	$	(964	)

	For the Three Months Ended
	June 30, 2007
	Before-Tax			Tax			After-Tax
	Amount			Effect			Amount
Unrealized losses on securities:
Unrealized net holding losses during period	$	(160	)	$	(52	)	$	(108	)
Less: reclassification adjustment for net gains included in net income		116			41			75
Other comprehensive loss	$	(276	)	$	(93	)	$	(183	)

9

(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 July 18, 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 or about August 15, 2008 to stockholders of record as of August 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 June 30, 2008 and 2007, there were approximately 213,000 and 248,000 unallocated ESOP shares, respectively.

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

	Three Months Ended
	June 30,
	2008			2007
	(Amounts in thousands, except per
	share amounts)
Net income available to common shareholders	$	401		$	225
Weighted average number of common shares outstanding		1,640			1,640
Weighted average number of unallocated ESOP and unvested restricted shares		(254	)		(248	)
Weighted average number of common shares outstanding used in calculation of basic earnings per share		1,386			1,392
Incremental shares from the assumed exercise of dilutive stock options		—			9
Weighted average number of common shares outstanding used in calculating diluted earnings per share		1,386			1,401
Earnings per share
Basic	$	0.29		$	0.16
Diluted	$	0.29		$	0.16

     At June 30, 2008 and 2007, respectively, 105,141 and 91,396 stock option and restricted stock shares were anti-dilutive and were excluded from the above calculation.

(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.

10

     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 June 30, 2008, a total of 1,702 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 June 30, 2008, 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, 2008, which it believes is a reasonable forfeiture estimate for the period.

     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 awarded options to purchase 10,000 shares and stock grants for 49,000 restricted shares in the year ended March 31, 2007 and granted no stock options or stock grants in the year ended March 31, 2008. The options and restricted shares granted in fiscal 2007 vest over a five-year life.. The fair value of the options granted in fiscal 2007 was $8.12 per share and the fair value of the restricted stock granted in fiscal 2007 was $31.20 per share. Stock-based compensation totaled $81,000 and $80,000 for the three months ended June 30, 2008 and 2007, respectively.

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     Stock option activity was as follows for the three months ended June 30, 2008:

	Number of		Weighted
	Shares		Exercise Price
Outstanding at March 31, 2008		68,218	$	25.364
Exercised		—		—
Cancelled		—		—
Granted		—		—
Outstanding at June 30, 2008		68,218	$	25.364
Exercisable at June 30, 2008		60,218	$	21.705

     The range of exercise prices, weighted average remaining contractual lives of outstanding stock options and aggregate intrinsic value at June 30, 2008 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)		2.4	$	16.625	$	—
		20.250		13,745	(2)		1.3		20.250		—
		28.990		32,396	(2)		6.6		28.990		—
		31.200		10,000	(3)		8.2		31.200		—
Average/Total	$	25.364		68,218			5.1	$	25.364	$	—

(1)	Represents the total intrinsic value, based on the Company’s closing stock price of $11.00 on June 30, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. As of June 30, 2008, the intrinsic value of outstanding stock options and exercisable stock options was zero.
(2)	Fully vested and exercisable at the time of grant.
(3)	Subject to vesting over five years, 20% vested at June 30, 2008.

     A summary of restricted stock activity under all Company plans for the three months ended June 30, 2008 is as follows:

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
Balance at March 31, 2008		39,200	$	31.20
Granted		—		—
Vested		—		—
Forfeited		—		—
Non-vested at June 30, 2008		39,200	$	31.20

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(10) Bank-Owned Life Insurance

     During the quarter ended December 31, 2007, the Bank purchased a life insurance policy on one executive which totaled $6.0 million. 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 the other assets category. The Bank reviewed the financial strength of the insurance carriers prior to the purchase of the policies, and such reviews will be performed annually. Bank-owned life insurance totaled $6.2 million at June 30, 2008.

(11) Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under other accounting pronouncements that permit or require fair value measurements, changes the methods used to measure fair value and expands disclosures about fair value measurements. In particular, disclosures are required to provide information on the extent to which fair value is used to measure assets and liabilities; the inputs used to develop measurements; and the effect of certain of the measurements on earnings (or changes in net assets). SFAS 157 also nullifies the specific guidance in EITF Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” which prohibited the recognition of gains and losses at the inception of a derivative transaction in the absence of observable market data. SFAS 157 eliminates the use of a blockage factor for fair value measurements of financial instruments trading in an active market. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. On February 12, 2008, the FASB issued FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis; the statement is effective for fiscal years beginning after December 31, 2008. The Company adopted SFAS 157 on April 1, 2008 and it did not have a material effect on the Company’s consolidated financial statements. For additional information on the fair value of certain financial assets and liabilities, see Note 12 — Fair Value Disclosures.

In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115” which provides entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 permits fair value to be used for both the initial and subsequent measurements on a contract-by-contract election, with changes in fair value to be recognized in earnings as those changes occur, and the option is irrevocable. This statement is effective for fiscal years beginning after November 15, 2007. The Company adopted this standard effective April 1, 2008 and has not elected the option to report financial assets and liabilities at fair value.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133.” This Statement establishes the disclosure requirements for derivative instruments and for hedging activities. It amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of derivative instruments and hedging activities. This Statement is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company does not expect that the adoption of this standard will have a material impact on the Company’s 2009 consolidated financial statements.

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendment to AU 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Bank does not expect the implementation of this standard will have a material impact on its consolidated financial statements.

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In May 2008, the FASB issued Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60.” It requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (1) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations and (2) the insurance enterprise’s surveillance or watch list. This Statement will become effective for fiscal years beginning after December 15, 2008. The Bank does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

(12) Fair Value Disclosures

Effective April 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, which provides a framework for measuring fair value under U.S. generally accepted accounting principles. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In addition, SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have the following fair value hierarchy:

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

The Company uses fair value measurements to record certain assets at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or market value accounting or write-downs of individual assets. In accordance with Financial Accounting Standards Board (“FASB”) Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”,we have delayed the application of SFAS 157 for nonfinancial assets, such as goodwill and real property held for sale, and nonfinancial liabilities until April 1, 2009.

The only assets of the Company recorded at fair value on a recurring basis at June 30, 2008 were securities available for sale. The following table presents the level of valuation assumptions used to determine the fair value of such securities:

	Carrying Value (in thousands)
	Level 1		Level 2		Level 3		Total
Securities available for sale	$	5,576	$	43,657	$	689	$	49,922

The securities comprising the balance at June 30, 2008 in the level 3 column included a collateralized mortgage obligation totaling $682,000 and asset-backed securities totaling $7,000 both of which lacked quoted prices in active markets.

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     The changes in Level 3 assets measured at fair value on a recurring basis were (000’s omitted):

	Investment
	Securities
	Available for Sale
Balance at March 31, 2008	$	717
Total realized and unrealized gains (losses) included in income		—
Total unrealized gains (losses) included in other comprehensive income		2
Net accretion of discount and repayment of principal		(30	)
Net transfers in/out of Level 3		—
Balance at June 30, 2008	$	689

Of the Level 3 assets that were still held by the Company at June 30, 2008, the unrealized gain for the three months ended June 30, 2008 was $2,000, which is recognized in other comprehensive income in the consolidated statements of financial condition. The Company did not have any sales or purchases of Level 3 available for sale securities during the period.

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

The Company measures the fair value of impaired loans on a periodic basis in periods subsequent to its initial recognition. At June 30, 2008, the fair value of impaired loans measured using Level 2 and Level 3 inputs amounted to $5.6 million and $3.5 million, respectively. Level 2 inputs on the fair value of impaired loans are generally appraisal prices for collateral-dependent assets that may not be immediately current but observable market data allow our expectations to not vary substantially. Level 3 inputs utilized to determine the fair value of the one impaired loan in this category consists of the net present value of the expected cash flows.

     The changes in Level 3 impaired loans measured at fair value on a periodic basis were (000’s omitted):

	Impaired
	Loans
Balance at March 31, 2008	$	3,461
Total realized and unrealized gains (losses) included in income		—
Net transfers in/out of Level 3		—
Balance at June 30, 2008	$	3,461

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

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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 for the year ended March 31, 2008, as filed with the Securities and Exchange Commission on June 20, 2008, which is available through the SEC’s website atwww.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 months ended June 30, 2008 and 2007 and its financial condition at June 30, 2008 compared to March 31, 2008. 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

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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 June 30, 2008 and March 31, 2008

     Total assets were $564.3 million at June 30, 2008 compared to $571.2 million at March 31, 2008, representing a decrease of $6.9 million or 1.2%. Total loans (excluding loans held for sale) were $476.1 million at June 30, 2008 compared to $474.9 million at March 31, 2008, representing an increase of $1.2 million, or 0.3%. This increase was primarily due to increases in commercial real estate loans of $6.6 million, residential loans of $4.3 million, and home equity loans of $220,000, partially offset by decreases in construction loans of $7.0 million, and commercial and industrial loans of $3.0 million. The increases in commercial real estate and residential loans represent the Bank’s continuing emphasis on these types of lending. Construction loans declined because of a decision to limit this type of lending in the current economic environment.

     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 three months ended June 30, 2008 should be retained, rather than being sold in the secondary market. The decision to sell or hold loans is made at the time the loan commitment is issued 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 $12.5 million at June 30, 2008 compared to $17.7 million at March 31, 2008, representing a decrease of $5.2 million, or 29.4%, comprised of a $5.8 million decrease in short-term investments and a $551,000 decrease in cash and due from banks. Investment securities totaled $60.0 million at June 30, 2008 compared to $63.1 million at March 31, 2008, representing a decrease of $3.1 million, or 4.9%. Cash and cash equivalents and investment securities decreased as the result of the redeployment of these funds to fund loan growth and maturing FHLB advances. Stock in the Federal Home Loan Bank of Boston totaled $8.5 million at both June 30, 2008 and March 31, 2008. The allowance for loan losses totaled $3.8 million at June 30, 2008 compared to $3.6 million at March 31, 2008, representing an increase of $200,000, or 5.6%. This increase was related to one property and such increase was the result of management’s regular analysis of the adequacy of the allowance for loan losses (see“Provision for Loan Losses”). Management considered the allowance for loan losses to be adequate at both June 30, 2008 and March 31, 2008. Accrued interest receivable totaled $1.9 million and $2.0 million at June 30, 2008 and March 31, 2008, respectively. Banking premises and equipment, net, totaled $3.9 million at June 30, 2008 compared to $4.0 million at March 31, 2008, representing a decrease of $100,000, or 2.5%, primarily reflecting depreciation for the period.

     During the quarter ended December 31, 2007, the Bank purchased life insurance policies on one executive which totaled $6.0 million. The cash surrender value of these policies is carried as an asset titled“Bank-Owned Life Insurance”and totaled $6.2 million at June 30, 2008 as compared to $6.1 as of March 31, 2008.

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     Total deposits amounted to $361.9 million at June 30, 2008 compared to $361.1 million at March 31, 2008, representing an increase of $0.8 million or 0.2%, reflecting the combined effect of a $6.3 million, or 3.5%, increase in core deposits (consisting of all noncertificate accounts) and a $5.5 million, or 3.1%, decrease in certificates of deposit. The decrease in term deposits was the result of the Bank’s strategy to reduce the interest rates paid on premium certificates of deposit and, therefore, many certificates of deposit that matured during the quarter ended June 30, 2008 were renewed at lower rates, and a portion of those maturing certificates of deposit were not renewed.

     Federal Home Loan Bank advances amounted to $149.7 million at June 30, 2008 compared to $156.7 million at March 31, 2008, representing a decrease of $7.0 million, or 4.5%, as maturing Federal Home Loan Bank advances were paid with available cash on hand.

     Accrued expenses and other liabilities remained basically unchanged and totaled $1.9 million at both June 30, 2008 and March 31, 2008, respectively.

     Total stockholders’ equity amounted to $38.1 million at June 30, 2008 compared to $38.8 million at March 31, 2008, representing a decrease of $0.7 million, or 1.8%. Increases due to net income of $401,000, stock option expense of $81,000 and the net amortization of unearned compensation regarding the ESOP of $91,000, were reduced by other comprehensive loss of $964,000, and dividends paid to stockholders of $295,000.

Comparison of Operating Results for the Quarters Ended June 30, 2008 and 2007

     Net income increased from $225,000, or $0.16 per diluted share, for the quarter ended June 30, 2007 to $401,000, or $0.29 per diluted share, for the quarter ended June 30, 2008. This increase is the net effect of a $585,000 increase in net interest and dividend income, a $200,000 increase in the provision for loan losses, a $97,000 decrease in noninterest income, an increase in noninterest expenses of $92,000 and an increase of $20,000 in the provision for income taxes.

     Net Interest Income.Net interest income increased by $585,000, or 17.5%, to $3.9 million for the three months ended June 30, 2008, as compared to $3.3 million during the same period of 2007, primarily due to a decrease in the cost of funds, which declined by 66 basis points mostly due to decreases in the average rates paid on deposits as a result of aggressive liability management, and FHLB advances. During the quarter ended June 30, 2008, interest rates were reduced on many deposit products, and therefore, many certificates of deposit that matured during the quarter were renewed at lower rates. Overall, during the quarter ended June 30, 2008, the Bank was able to decrease the rates it paid on deposits to a greater extent than it was required to decrease the rates it paid on loans, which positively affected the margin. As a result, there were increases in the net interest spread and net interest margin from 1.99% and 2.45%, respectively, for the quarter ended June 30, 2007 to 2.51% and 2.88%, respectively, for the quarter ended June 30, 2008. The yield on interest-earning assets decreased by 14 basis points from 5.90% in the first quarter of 2007 to 5.76% for the same period in 2008. However, during the same period, the average cost of interest-bearing liabilities decreased by 66 basis points from 3.91% to 3.25%, respectively.

     Interest and Dividend Income.Interest and dividend income decreased by $173,000, or 2.2%, to $7.9 million for the quarter ended June 30, 2008 as compared to $8.0 million during the same period of 2007. The average balance of loans from the quarter ended June 30, 2007 to June 30, 2008 increased by $17.2 million or 3.8%. The yield on loans declined from 6.09% to 5.94% during the quarter ended June 30, 2008. The average balance of loans increased primarily due to increases in the average balances of commercial real estate and residential loans as the Bank continued to focus on originating these types of loans during the period. Interest income for the quarter ended June 30, 2008 was negatively impacted primarily due to the increases in interest income not recognized on nonaccrual loans, which increased from $66,000 during the quarter ended June 30, 2007, to $160,000 during the quarter ended June 30, 2008. The average balance on investment securities declined as maturities and principal repayments were used to fund loan growth and maturing FHLB advances. The yield on short-term investments was 2.95% during the quarter ended June 30, 2008 as compared to 5.70% during the quarter ended June 30, 2007 as the average yields on these investments are closely tied to the federal funds target rate, which averaged approximately 2.13% during the quarter ended June 30, 2008, and 5.25% during the quarter ended June 30, 2007. The effect of interest income not recognized on nonaccrual loans during the quarter ended June 30, 2008 was to reduce the yield on average earning assets by 12 basis points.

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     Interest Expense. Interest expense decreased by $758,000, or 16.1%, to $3.9 million for the quarter ended June 30, 2008 as compared to $4.7 million during the same period of 2007 as increases in interest expense on FHLB borrowings were offset by a decrease in interest expense on deposits. The cost of funds decreased by 66 basis points from 3.91% during quarter ended June 30, 2007 to 3.25% during the quarter ended June 30, 2008, 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 $176.4 million during the quarter ended June 30, 2008, compared to $205.6 million for the same period in 2007, a decline of $29.2 million. The average balance of Federal Home Loan Bank borrowings increased by $25.0 million, from $128.0 million during the quarter ended June 30, 2007 to $153.0 million during the same period of 2008. 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 nonmaturity deposits increased by $10.4 million to $144.7 million for the quarter ended June 30, 2008, as compared to an average balance of $134.3 million during the same period of 2007. The average cost of other borrowings decreased as a portion of these borrowings are adjustable and the average rate paid during the quarter ended June 30, 2008 was 5.24%, compared to an average rate of 7.79% during the quarter ended June 30, 2007.

     The following table presents average balances and average rates earned/paid by the Company for the quarter ended June 30, 2008 compared to the quarter ended June 30, 2007:

	Three Months Ended June 30
	2008								2007
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
						(Dollars in thousands)
Interest-earning assets:
Mortgage loans	$	461,936		$	6,853		5.93	%	$	449,084		$	6,809		6.06	%
Other loans		12,041			190		6.31			7,709			150		7.78
Investment securities		64,072			765		4.78			74,632			886		4.75
Short-term investments		7,727			57		2.95			13,546			193		5.70
Total interest-earning assets		545,776			7,865		5.76			544,971			8,038		5.90
Allowance for loan losses		(3,614	)							(3,854	)
Non-interest-earning assets		23,134								18,873
Total assets	$	565,296							$	559,990
Interest-bearing liabilities:
Deposits		321,049			2,007		2.50		$	339,904			2,853		3.36
Advances from FHLB of Boston		153,043			1,763		4.61			128,055			1,621		5.06
Other borrowings		11,374			170		5.98			12,425			224		7.21
Total interest-bearing liabilities		485,466			3,940		3.25			480,384			4,698		3.91
Non-interest-bearing liabilities		41,075								41,932
Total liabilities		526,541								522,315
Stockholders’ equity		38,755								37,674
Total liabilities and stockholders’ equity	$	565,296							$	559,990
Net interest and dividend income				$	3,925							$	3,340
Net interest spread							2.51	%							1.99	%
Net interest margin							2.88	%							2.45	%

     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,

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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 June 30, 2008, 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 a $200,000 provision for loan losses, which relates to one property, during the quarter ended June 30, 2008.

     Senior management continued to give high priority to monitoring and managing the Company’s asset quality. At June 30, 2008, nonperforming loans totaled $10.1 million as compared to $9.6 on March 31, 2008. The eight loans constituting this category are all secured by real estate collateral located almost exclusively in the Greater Boston area. Seven of these loans have an active plan for resolution in place from either the sale of the real estate directly by the borrower or through foreclosure. The other nonperforming loan is expected to enter into a bankruptcy court approved resolution program with the ongoing net cash flow generated from apartment rents from the property collateral being paid to the Bank. While bankruptcy filings have extended the time to resolve some nonperforming assets, management continues to work with borrowers to resolve these situations as soon as possible. The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management believes 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, the Company 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 nonperforming and other classified loans. Management evaluates the level of the loan loss reserve on a regular basis. During the first quarter of fiscal 2009, the Company recorded a provision of $200,000, compared to a provision of $0 during the same quarter of fiscal 2008. Management believes there are adequate reserves and collateral securing these loans to cover losses that may result from 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 June 30, 2008.

     Noninterest Income. Noninterest income decreased by $97,000, or 18.5%, to $428,000 for the quarter ended June 30, 2008 as compared to $525,000 during the same period of 2007. Net loss on the write-down or sale of investments totaled $29,000 during the 2008 quarter, compared to a gain of $116,000 recognized in the prior year’s quarter. This decrease is primarily due to the June 2008 write-down of $121,000 related to one equity security determined to be other than temporarily impaired. Based upon management’s analysis of the investment portfolio as of June 30, 2008, the remaining gross unrealized losses in the investment portfolio were considered to be temporary and primarily due to changes in market conditions and interest rates. Net gains on the sale of loans decreased by $39,000 to $13,000 during the quarter ended June 30, 2008 as compared to $52,000 during the quarter ended June 30, 2007 due to the overall general reduction in activity related to residential loan originations. Deposit service charges decreased by $6,000 to $246,000 during the quarter ended June 30, 2008 as compared to $252,000 during the same period of 2007. The purchases of life insurance policies during November and December, 2007 resulted in bank-owned life insurance income of $78,000 for the quarter ended June 30, 2008, as compared to $0 during the same period of 2007. Other income increased by $15,000 to $120,000 for the quarter ended June 30, 2008 as compared to $105,000 during the same quarter of 2007, primarily due to an $18,000 increase in third party investment fees.

     Noninterest Expenses. Noninterest expenses increased by $92,000 or 2.6%, to $3.6 million for the quarter ended June 30, 2008 as compared to $3.5 million during the quarter ended June 30, 2007. For the 2008 quarter, increases in salaries and benefits of $119,000, marketing expenses of $26,000, and occupancy and equipment of $3,000, were partially offset by decreases in data processing fees of $22,000, professional fees of $24,000, and other miscellaneous expenses of $10,000. Overall, management continues to closely monitor expenses throughout the Company.

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     Salaries and employee benefits increased by $119,000, or 5.7%, to $2.2 million during the quarter ended June 30, 2008 as compared to $2.1 million during the same quarter of 2007 primarily due to open positions being filled and salary increases granted for the first time since April, 2006.

     Marketing expenses increased by $26,000 to $30,000 during the quarter ended June 30, 2008 as compared to $4,000 during the same period of 2007 as the Company strategically decided to increase advertising and marketing efforts on a limited basis.

     Office occupancy and equipment expenses increased by $3,000, or 0.5%, to $553,000 during the quarter ended June 30, 2008 as compared to $550,000 during the prior year period primarily due to increases in computer maintenance, real estate taxes, and rent expense, partially offset by lower depreciation, security costs, and repairs and maintenance costs.

     Professional fees decreased by $24,000, or 11.8%, to $180,000 during the quarter ended June 30, 2008 as compared to $204,000 during the same period of 2007, primarily due to the reduction of contract labor services after certain open positions were filled.

     Other noninterest expenses decreased by $10,000, or 2.3%, to $426,000 during the quarter ended June 30, 2008 as compared $436,000 during the same period of 2007. Increases in appraisal and real estate tax service costs of $16,000, and bank policy losses of $8,000, were partially offset by decreases in severance expenses of $10,000 and courier expenses of $10,000. Various other miscellaneous expenses resulted in a net decrease of $14,000 during the quarter ended June 30, 2008, as compared to the quarter ended June 30, 2007.

     Income Taxes. The effective tax rates for the quarters ended June 30, 2008 and 2007 were 26.4% and 35.5%, respectively. The effective tax rate was reduced because of tax-favored transactions which have occurred since the quarter ended December 2007.

     The state of Massachusetts adopted new legislation on July 3, 2008, which will change the taxation of business entities. Effective for years beginning on or after January 1, 2009, corporations doing business in Massachusetts now will be required to adopt a combined reporting method and abandon the separate reporting method. Corporations doing business in Massachusetts now will be required to file tax returns using the income and apportionment factors of all members of a combined group, consisting of all affiliates engaged in a unitary business, whether or not the affiliates are doing business in the Commonwealth. In addition, the income tax rates on financial institutions is scheduled to be reduced from the current rate of 10.5% to 10% in 2010, 9.5% in 2011, and 9% in 2012 and thereafter.

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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 June 30, 2008, the Company had approximately $41.0 million in unused borrowing capacity at the Federal Home Loan Bank of Boston.

     At June 30, 2008, the Company had commitments to originate loans, unused outstanding lines of credit and undisbursed proceeds of loans totaling $25.1 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, 2008 were as follows:

	Company			Bank
Tier 1 Capital (to average assets)		8.36	%		7.01	%
Tier 1 Capital (to risk-weighted assets)		11.38	%		9.55	%
Total Capital (to risk-weighted assets)		12.30	%		10.47	%

     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, 2008 and for the three months ended June 30, 2008, 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

     For a discussion of the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended March 31, 2008. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity. Based on such reviews, among other factors, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since March 31, 2008.

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.

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     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, 2008, as filed with the Securities and Exchange Commission on June 20, 2008, 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. In addition to the risks in our annual report on Form 10-K, we have identified the following additional risk factor:

     We hold preferred stock issued by Federal National Mortgage Association (“Fannie Mae”) and Federal National Mortgage Corporation (“Freddie Mac”) and other financial institutions in our available-for-sale securities portfolio for which we cannot guarantee that we will not need to record impairment charges if their market values do not recover.

     We have investments in preferred stocks issued by Fannie Mae and Freddie Mac and other financial institutions. At June 30, 2008, these investments had a cost basis of $13.2 million, while the market value was $12.0 million. These investments are held in our available-for-sale securities portfolio. The continued turbulence in the housing markets, and speculation in the market about the future of Fannie Mae and Freddie Mac, have caused these investments to decline further in market value. Although we believe the recent declines in market value are temporary, we cannot guarantee that we will not need to record impairment charges if market values do not recover in the future. Such declines, even if temporary, negatively impact capital levels for as long as the market value of the investments is depressed. If the declines in market values were determined to be other than temporary, then the Company would need to recognize an impairment charge which would negatively impact earnings.

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, 2008.

Item 3. Defaults Upon Senior Securities

     Not applicable.

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

     Not applicable.

Item 5. Other Information

     On June 19, 2008, the Company’s Board of Directors approved a 2009 short-term cash-based incentive program designed to reward senior management with a bonus based on the attainment of certain performance targets, specifically with respect to the Bank’s adjusted return on average assets (“ROAA”). For fiscal 2009, potential incentive distributions under the plan will range from 4% of base salary to 24% of base salary for the Chief Executive Officer and 4% of base salary to 18% of base salary for Executive and Senior Vice Presidents. Pursuant to the plan, the Chief Executive Officer will be eligible to be awarded a 4% bonus if the Bank achieves an adjusted ROAA level of .40% for fiscal 2009, with such bonus increasing 5% for each .05% increase in adjusted ROAA above the .40% threshold, subject to a maximum bonus of 24% of base salary. Executive and Senior Vice Presidents will be eligible to be awarded a 4% bonus if the Bank achieves an adjusted ROAA level of .40% for fiscal 2009, with such bonus increasing .025% for each 5% increase in adjusted ROAA above the .40% threshold, subject to a maximum bonus of 18% of base salary. Distribution of incentive awards will be set by the Company’s Compensation Committee and will be deferred until after the end of the fiscal year.

Item 6. 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 13, 2008	By:	/s/ John D. Doherty
		John D. Doherty
		Chairman, President and Chief Executive Officer
August 13, 2008	By:	/s/ Paul S. Feeley
		Paul S. Feeley
		Senior Vice President, Treasurer and Chief Financial Officer