Central Bancorp (CEBK) 10-Q 2009 Q3 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 endedDecember 31, 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. Yesx Noo

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

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

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

Common Stock, $1.00 par value	1,639,951
Class	Outstanding at February 12, 2009

CENTRAL BANCORP, INC.

Form 10-Q

Table of Contents

		Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition at December 31, 2008 and March 31, 2008		1
	Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2008 and 2007		2
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended December 31, 2008 and 2007		3
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2008 and 2007		4
	Notes to Unaudited Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4(T).	Controls and Procedures		27
Part II. Other Information
Item 1.	Legal Proceedings		27
Item 1A.	Risk Factors		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3.	Defaults Upon Senior Securities		28
Item 4.	Submission of Matters to a Vote of Security Holders		28
Item 5.	Other Information		28
Item 6.	Exhibits		28
Signatures
EX-10.1
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

(Dollars in Thousands, Except Share Data)	December 31, 2008			March 31, 2008
ASSETS
Cash and due from banks	$	5,322		$	5,837
Short-term investments		24,677			11,888
Cash and cash equivalents		29,999			17,725
Investment securities available for sale (Note 2)		36,266			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		46,360			63,054
Loans held for sale		350			195
Loans (Note 3)		455,935			474,942
Less allowance for loan losses		4,600			3,613
Loans, net		451,335			471,329
Accrued interest receivable		1,845			1,981
Banking premises and equipment, net		3,530			3,969
Deferred tax asset, net		7,431			2,557
Other real estate owned		191			—
Goodwill, net		2,232			2,232
Bank owned life insurance (Note 11)		6,319			6,084
Other assets		2,427			2,119
Total assets	$	552,019		$	571,245
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits (Note 4)	$	349,542		$	361,089
Short-term borrowings		1,645			141
Federal Home Loan Bank advances		144,610			156,691
Subordinated debenture (Note 5)		11,341			11,341
Advanced payments by borrowers for taxes and insurance		1,467			1,308
Accrued expenses and other liabilities		1,626			1,859
Total liabilities		510,231			532,429
Commitments and Contingencies (Note 7)
Stockholders’ equity:
Preferred stock — Series A Cumulative Perpetual, $1.00 par value; 5,000,000 shares authorized; 10,000 shares issued and outstanding at December 31, 2008, and no shares issued at March 31, 2008, with a liquidation preference and redemption value of $10,000,000		9,421			—
Common stock $1.00 par value; 15,000,000 shares authorized; 1,639,951 shares issued and outstanding at December 31, 2008 and March 31, 2008, respectively		1,640			1,640
Additional paid-in capital		4,198			3,690
Retained income		34,861			40,825
Accumulated other comprehensive loss (Note 6)		(1,745	)		(236	)
Unearned compensation — ESOP		(6,587	)		(7,103	)
Total stockholders’ equity		41,788			38,816
Total liabilities and stockholders’ equity	$	552,019		$	571,245

See accompanying notes to unaudited consolidated financial statements.

1

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

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
(In Thousands, Except Per Share Data)	2008			2007		2008			2007
Interest and dividend income:
Mortgage loans	$	6,836		$	6,798	$	20,573		$	20,360
Other loans		105			252		435			637
Investments		454			950		1,942			2,715
Short-term investments		23			62		132			321
Total interest and dividend income		7,418			8,062		23,082			24,033
Interest expense:
Deposits		1,656			2,664		5,400			8,263
Advances from Federal Home Loan Bank of Boston		1,670			1,726		5,124			5,077
Other borrowings		177			215		520			643
Total interest expense		3,503			4,605		11,044			13,983
Net interest and dividend income		3,915			3,457		12,038			10,050
Provision (credit) for loan losses		—			—		1,100			(300	)
Net interest and dividend income after provision (credit) for loan losses		3,915			3,457		10,938			10,350
Noninterest income:
Deposit service charges		259			263		758			766
Loss on write-down of Fannie Mae and Freddie Mac preferred stock		—			—		(9,394	)		—
Net gains (losses) from sales and write-downs of other investment securities		—			359		(144	)		647
Net gains on sales of loans		30			41		45			118
Bank owned life insurance income		78			23		236			23
Other income		65			100		265			291
Total noninterest income (loss)		432			786		(8,234	)		1,845
Noninterest expenses:
Salaries and employee benefits		1,995			1,983		6,293			6,021
Occupancy and equipment		579			533		1,704			1,609
Data processing fees		196			219		596			661
Professional fees		211			186		595			588
Advertising and marketing		158			1		247			8
Other expenses		652			418		1,570			1,352
Total noninterest expenses		3,791			3,340		11,005			10,239
Income (loss) before income taxes		556			903		(8,301	)		1,956
Provision (benefit) for income taxes		(3,361	)		247		(3,153	)		610
Net income (loss)	$	3,917		$	656	$	(5,148	)	$	1,346
Net income (loss) available to common shareholders	$	3,872		$	656	$	(5,193	)	$	1,346
Earnings (loss) per common share — basic (Note 9)	$	2.76		$	0.48	$	(3.73	)	$	1.00
Earnings (loss) per common share — diluted (Note 9)	$	2.76		$	0.48	$	(3.73	)	$	0.99
Weighted average common shares outstanding — basic		1,404			1,354		1,394			1,347
Weighted average common and equivalent shares outstanding — diluted		1,404			1,358		1,394			1,354

See accompanying notes to unaudited consolidated financial statements.

2

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

											Accumulated
	Series A				Additional						Other			Unearned			Total
	Preferred		Common		Paid-In			Retained			Comprehensive			Compensation			Stockholders’
(In Thousands)	Stock		Stock		Capital			Income			Loss			ESOP			Equity
Nine Months Ended December 31, 2008
Balance at March 31, 2008	$	—	$	1,640	$	3,690		$	40,825		$	(236	)	$	(7,103	)	$	38,816
Net loss									(5,148	)								(5,148	)
Other comprehensive loss, net of $1.0 million tax benefit:
Unrealized loss on securities, net of reclassification adjustment (Note 6)												(1,509	)					(1,509	)
Comprehensive loss																		(6,657	)
Dividends paid to common shareholders ($0.54 per share)									(771	)								(771	)
Issuance of preferred stock and warrants, net		9,376				594												9,970
Preferred stock accretion of discount and issuance costs		9							(9	)
Dividends accrued on preferred stock		36							(36	)
Stock-based compensation (Note 10)						242												242
Amortization of unearned compensation — ESOP						(328	)								516			188
Balance at December 31, 2008	$	9,421	$	1,640	$	4,198		$	34,861		$	(1,745	)	$	(6,587	)	$	41,788

See accompanying notes to unaudited consolidated financial statements.

3

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

	Nine Months Ended
	December 31,
Dollars in thousands	2008			2007
Cash flows from operating activities:
Net (loss) income	$	(5,148	)	$	1,346
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		685			721
Amortization of premiums		38			44
Provision (credit) for loan losses		1,100			(300	)
Stock-based compensation and amortization of unearned compensation — ESOP		430			639
Increase in deferred tax asset		(3,830	)		—
Net losses (gains) from sales and write-downs of investment securities		9,538			(647	)
Bank-owned life insurance income		(236	)		(23	)
Gain on sales of loans held for sale		(45	)		(118	)
Originations of loans held for sale		(4,683	)		(9,713	)
Proceeds from sale of loans originated for sale		4,573			10,406
Decrease in accrued interest receivable		136			371
Increase in other assets, net		(306	)		(103	)
Increase in advance payments by borrowers for taxes and insurance		159			112
(Decrease) increase in accrued expenses and other liabilities, net		(233	)		223
Net cash provided by operating activities		2,178			2,958
Cash flows from investing activities:
Loan principal collections (originations), net		18,703			(7,480	)
Principal payments on mortgage-backed securities		3,965			4,320
Purchases of restricted equity-FHLB		—			(420	)
Proceeds from sales of investment securities		3,616			17,406
Purchases of investment securities		(9,017	)		(11,503	)
Maturities and calls of investment securities		6,000			1,999
Purchase of bank-owned life insurance		—			(6,027	)
Purchase of banking premises and equipment		(246	)		(125	)
Net cash provided by (used in) investing activities		23,021			(1,830	)
Cash flows from financing activities:
Net decrease in deposits		(11,547	)		(33,706	)
Proceeds from advances from FHLB of Boston		—			117,800
Repayment of advances from FHLB of Boston		(12,081	)		(97,000	)
Net proceeds from short-term borrowings		1,504			(269	)
Cash dividends paid		(771	)		(761	)
Issuance of Series A preferred stock and warrants		9,970			—
Net cash used in financing activities		(12,925	)		(13,936	)
Net increase (decrease) in cash and cash equivalents		12,274			(12,808	)
Cash and cash equivalents at beginning of period		17,725			20,617
Cash and cash equivalents at end of period	$	29,999		$	7,809
Cash paid during the period for:
Interest	$	11,091		$	13,249
Income taxes	$	935		$	470
Supplemental disclosure of non-cash investing and financing activities:
Loans transferred to other real estate owned	$	191		$	—
Accretion of Series A preferred stock issuance costs	$	9		$	—

See accompanying notes to unaudited consolidated financial statements.

4

CENTRAL BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
December 31, 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 nine months ended December 31, 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 5).

     The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended March 31, 2008. For interim reporting purposes, the Company follows the same significant accounting policies.

(2) Investments

     The amortized cost and fair value of investment securities available for sale at December 31, 2008 are summarized as follows:

	December 31, 2008
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
U.S. Government and agency obligations	$	1,500	$	16	$	—		$	1,516
Corporate bonds		4,484		—		(1,126	)		3,358
Mortgage-backed securities		25,287		351		(101	)		25,537
Trust preferred securities		1,003		1		—			1,004
Total debt securities		32,274		368		(1,227	)		31,415
Preferred stock		3,777		—		(1,362	)		2,415
Common stock		3,422		20		(1,006	)		2,436
Total	$	39,473	$	388	$	(3,595	)	$	36,266

5

     The amortized cost and fair value of investment securities available for sale at March 31, 2008 are as follows:

	March 31, 2008
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
			(Dollars in Thousands)
U.S. Government and agency obligations	$	3,495	$	52	$	—		$	3,547
Corporate bonds		8,496		8		(192	)		8,312
Mortgage-backed securities		22,235		257		(42	)		22,450
Trust preferred securities		1,004		8		—			1,012
Total debt securities		35,230		325		(234	)		35,321
Preferred stock		12,173		—		(751	)		11,422
Common stock		6,209		384		(376	)		6,217
Total	$	53,612	$	709	$	(1,361	)	$	52,960

     During the quarter ended September 30, 2008, impairment charges of $477 thousand were recognized on eight common stocks and impairment charges of $9.4 million were recognized on five Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) preferred stock investments that were deemed to be other-than-temporarily impaired based on management’s periodic analysis of the investment portfolio. The preferred stock write-downs resulted from the September 2008 conservatorship of Fannie Mae and Freddie Mac. The conservatorship and elimination of Fannie Mae and Freddie Mac dividends significantly reduced the value of the Company’s preferred stock investment in these companies, resulting in the impairment write-downs (see“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Events”for additional information regarding the impairment of the Company’s Fannie Mae and Freddie Mac preferred stock investments). The remaining gross unrealized losses in the investment portfolio at December 31, 2008 were considered to be temporary and primarily due to changes in market conditions and interest rates.

(3) Loans

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

	December 31,			March 31,
	2008			2008
Real estate loans:
Residential real estate (1-4 family)	$	178,879		$	178,727
Commercial real estate		243,933			244,496
Construction		18,652			30,950
Home equity lines of credit		7,225			6,559
Total real estate loans		448,689			460,732
Commercial loans		6,104			13,173
Consumer loans		1,142			1,037
Total loans		445,935			474,942
Less: allowance for loan losses		(4,600	)		(3,613	)
Total loans, net	$	451,335		$	471,329

     There were nine loans to seven borrowers on nonaccrual status totaling $9.2 million as of December 31, 2008 and seven loans to five borrowers on nonaccrual status totaling $9.6 million as of March 31, 2008.

     At December 31, 2008, and March 31, 2008, there were no impaired loans other than nonaccrual loans. Impaired loans are evaluated separately and measured utilizing guidance as set forth by Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No. 114).

6

     A summary of changes in the allowance for loan losses for the three and nine months ended December 31, 2008 and 2007 follows. Included in the activity for the nine months ended December 31, 2007 is a $173 thousand transfer to establish a reserve for unfunded loan commitments, which was included in the “other liabilities” section of the balance sheet. This unfunded loan commitment balance totaled $0 at December 31, 2008 as the related loan was fully-disbursed as of that date. (Unaudited, in thousands):

	Three Months Ended
	December 31,
	2008			2007
Balance at beginning of period	$	4,674		$	3,378
Provision charged (credited) to expense		—			—
Less: charge-offs		(77	)		(11	)
Add: recoveries		3			12
Balance at end of period	$	4,600		$	3,379

	Nine Months Ended
	December 31,
	2008			2007
Balance at beginning of period	$	3,613		$	3,881
Provision charged (credited) to expense		1,100			(300	)
Less: charge-offs		(124	)		(71	)
Less: transfer		—			(173	)
Add: recoveries		11			42
Balance at end of period	$	4,600		$	3,379

(4) Deposits

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

	December 31,		March 31,
	2008		2008
Demand deposit accounts	$	36,514	$	38,250
NOW accounts		26,950		27,065
Passbook and other savings accounts		49,235		50,252
Money market deposit accounts		62,820		67,243
Total non-certificate accounts		175,519		182,810
Term deposit certificates:
Certificates of $100,000 and above		82,883		74,052
Certificates of less than $100,000		91,140		104,227
Total term deposit certificates		174,023		178,279
Total deposits	$	349,542	$	361,089

(5) Subordinated Debentures

     On September 16, 2004, the Company completed a trust preferred securities financing in the amount of $5.1 million. In connection with the transaction, the Company formed a Delaware statutory trust, known as Central Bancorp Capital Trust I (“Trust I”). Trust I issued and sold $5.1 million of trust preferred securities in a private placement and issued $158,000 of trust common securities to the Company. Trust I used the proceeds of these issuances to purchase $5.3 million of the Company’s floating rate junior subordinated debentures due September 16, 2034 (the “Trust I Debentures”). The interest rate on the Trust I Debentures and the trust preferred securities is variable and adjustable quarterly at 2.44% over three-month LIBOR. At December 31, 2008, the interest rate was 4.436%. 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.

7

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

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

(6) Other Comprehensive 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 nine months ended December 31, 2008 and 2007 are as follows (unaudited, in thousands):

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

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

8

(7) 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.

(8) Subsequent Events

     On January 15, 2009, 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 February 20, 2009 to common stockholders of record as of February 6, 2009. On January 15, 2009, the Company’s Board of Directors also approved the payment of a quarterly cash dividend of $97,222 to the U.S. Department of Treasury, as the Company’s sole preferred stockholder, in connection with the Company’s participation in the federal government’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program. The dividend was paid on February 13, 2009. See Note 14 below for additional information.

(9) Earnings per Share (EPS)

     Unallocated shares of Company common stock held by the Central Co-operative Bank Employee Stock Ownership Plan Trust (the “ESOP”) are not treated as being outstanding in the computation of either basic or diluted earnings per share (“EPS”). At December 31, 2008 and 2007, there were approximately 202,500 and 245,000 unallocated ESOP shares, respectively.

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

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
	(Amounts in thousands, except per share amounts)
Net income (loss) as reported	$	3,917		$	656		$	(5,148	)	$	1,346
Less preferred dividends and accretion		(45	)		—			(45	)		—
Net income (loss) available to common shareholders	$	3,872		$	656		$	(5,193	)	$	1,346
Weighted average number of common shares outstanding		1,640			1,640			1,640			1,640
Weighted average number of unallocated ESOP and unvested restricted shares		(236	)		(286	)		(246	)		(293	)
Weighted average number of common shares outstanding used in calculation of basic earnings per share		1,404			1,354			1,394			1,347
Incremental shares from the assumed exercise of dilutive stock options		—			4			—			7
Weighted average number of common shares outstanding used in calculating diluted earnings (loss) per share		1,404			1,358			1,394			1,354
Earnings (loss) per share
Basic	$	2.76		$	0.48		$	(3.73	)	$	1.00
Diluted	$	2.76		$	0.48		$	(3.73	)	$	0.99

     At December 31, 2008 and 2007, respectively, 92,618 and 81,596 stock option and restricted stock shares were anti-dilutive and were excluded from the above calculation for both the three and nine-month periods. Additionally, 234,742 warrants related to the December 2008 issuance of preferred stock were anti-dilutive and excluded from above calculations for the three and nine month periods ending December 31, 2008.

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(10) 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.

     The Company uses the Black-Scholes option pricing model as its method for the determining fair value of stock option grants. The Company has previously adopted two qualified stock option plans for the benefit of officers and other employees under which an aggregate of 281,500 shares have been reserved for issuance. One of these plans expired in 1997 and the other plan expires in 2009. All awards under the plan that expires in 2009 were granted by the end of 2005. However, awards may become available again if any participants forfeit awards under the plan prior to its expiration in 2009. As of December 31, 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 December 31, 2008, 91,000 shares remained unissued under the Incentive Plan.

     SFAS 123R 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 123R stock compensation expense for the year ended March 31, 2008, which it believes is a reasonable forfeiture estimate for the current 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 for both the three months ended December 31, 2008 and 2007, respectively, and $242,000 for both the nine months ended December 31, 2008 and 2007, respectively.

     Stock option activity was as follows for the nine months ended December 31, 2008:

	Number of		Weighted
	Shares		Exercise Price
Outstanding at March 31, 2008		68,218	$	25.364
Exercised		—		—
Cancelled		—		—
Granted		—		—
Outstanding at December 31, 2008		68,218	$	25.364
Exercisable at December 31, 2008		62,218	$	24.800

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     The range of exercise prices, weighted average remaining contractual lives of outstanding stock options and aggregate intrinsic value at December 31, 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)		1.9		16.625		—
		20.250		13,745	(2)		0.8		20.250		—
		28.990		32,396	(2)		6.1		28.990		—
		31.200		10,000	(3)		7.7		31.200		—
Average/Total		25.364		68,218			4.6		25.364	$	—

(1)	Represents the total intrinsic value, based on the Company’s closing stock price of $4.84 on December 31, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. As of December 31, 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, 40% vested at December 31, 2008.

     A summary of restricted stock activity under all Company plans for the nine months ended December 31, 2008 is as follows:

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
Non-vested at March 31, 2008		39,200	$	31.20
Granted		—		—
Vested		9,800		31.20
Forfeited		—		—
Non-vested at December 31, 2008		29,400	$	31.20

(11) Bank-Owned Life Insurance

     During the quarter ended December 31, 2007, the Bank purchased life insurance policies on one executive which totaled $6.0 million. The Bank follows FASB 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 $6.3 million at December 31, 2008.

(12) 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 eliminates the use of a

11

blockage factor for fair value measurements of financial instruments trading in an active market. SFAS 157 was effective for the Company on April 1, 2008.

     In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2. FSP FAS 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except those recognized or disclosed at fair value on an annual or more frequently recurring basis. The effective date for SFAS 157 was for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Bank will apply the fair value measurement and disclosure provisions of SFAS No. 157 to nonfinancial assets such as goodwill and real property held for sale, and nonfinancial liabilities effective April 1, 2009. Such application is not expected to be material to our results of operations or financial position.

     In October 2008, the FASB issued FSP No. FAS 157-3,Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active(FSP 157-3), which applies to financial assets that are required or permitted to be measured at fair value in accordance with SFAS 157 and was effective upon issuance. FSP 157-3 clarifies the application of SFAS 157 and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The adoption of FAS 157-3 did not have a significant impact on the Company’s financial position or results of operations, nor did it have a significant impact on the valuation techniques used by the Company in measuring the fair value of its financial assets.

(13) Fair Value Disclosures

     Effective April 1, 2008, the Company adopted SFAS 157 which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In addition, 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.

     The only assets of the Company recorded at fair value on a recurring basis at December 31, 2008 were securities available for sale and one impaired loan relationship. The following table presents the level of valuation assumptions used to determine the fair values of such securities and loans:

	Carrying Value (in thousands)
	Level 1		Level 2		Level 3		Total
Securities available for sale	$	2,436	$	33,225	$	605	$	36,266
Impaired Loans		—		—	$	3,223	$	3,223

     The securities comprising the balance at December 31, 2008 in the Level 3 column included a collateralized mortgage obligation totaling $599 thousand and asset-backed securities totaling $6 thousand, both of which lacked quoted prices in active markets.

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     The Company measures the fair value of impaired loans on a periodic basis in periods subsequent to its initial recognition. At December 31, 2008, impaired loans measured at fair value using Level 3 inputs amounted to $3.2 million, which represents one customer relationship. There were no impaired loans measured at fair value using Level 2 inputs at December 31, 2008. Level 3 inputs utilized to determine the fair value of the impaired loan relationship consists of appraisals and expected cash flows.

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

	Investment
	Securities
	Available for Sale
Balance at March 31, 2008	$	717
Total realized and unrealized gains (losses) included in income		—
Total unrealized losses included in other comprehensive income		(27	)
Net accretion of discount and repayment of principal		(85	)
Net transfers in/out of Level 3		—
Balance at December 31, 2008	$	605

     Of the Level 3 investment securities that were still held by the Company at December 31, 2008, the unrealized loss for the nine months ended December 31, 2008 was $27 thousand, 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.

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

	Impaired
	Loans
Balance at March 31, 2008	$	4,226
Total realized and unrealized losses included in income		(1,100	)
Additional principal disbursement		97
Balance at December 31, 2008	$	3,223

     The Company did not have any sales, purchases, or transfers of Level 3 loans during the nine months ended December 31, 2008.

     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.

(14) Troubled Asset Relief Program Capital Purchase Program

     On December 5, 2008, the Company sold $10.0 million in preferred shares to the U.S. Department of Treasury (“Treasury”) as a participant in the federal government’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program. This represented approximately 2.6% of the Company’s risk-weighted assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary program for healthy U.S. financial institutions designed to encourage these institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. In connection with the investment, the Company entered into a Letter Agreement and the related Securities Purchase Agreement with the Treasury pursuant to which the Company issued (i) 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per

13

share (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 234,742 shares of the Company’s common stock for an aggregate purchase price of $10.0 million in cash. As a result of the Treasury’s investment, the Company and the Bank now meet all regulatory requirements to be considered well capitalized.

     The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A Preferred Stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. Prior to February 15, 2012, the Company may redeem shares of Series A Preferred Stock only if it has received aggregate gross proceeds of not less than $2.5 million from one or more qualified equity offerings, and the aggregate redemption price may not exceed the net proceeds received by the Company from such offerings. The redemption of the Series A Preferred Stock requires prior regulatory approval. The restrictions on redemption are set forth in the Articles of Amendments to the Company’s Articles of Organization (the “Articles of Amendment”) filed with the Secretary of the Commonwealth of Massachusetts on December 3, 2008.

     The Warrant is exercisable at $6.39 per share at any time on or before December 5, 2018. The number of shares of the Company’s common stock issuable upon exercise of the Warrant and the exercise price per share will be adjusted if specific events occur. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual restrictions on transfer, except that Treasury may not transfer a portion of the Warrant with respect to, or exercise the Warrant for, more than one-half of the shares of common stock underlying the Warrant prior to the earlier of (i) the date on which the Company has received aggregate gross proceeds of not less than $10.0 million from one or more qualified equity offerings or December 31, 2009.

     The Warrant was valued at $594,000 and was recognized as equity under EITF 00-19“Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, and is reported within additional paid-in capital in the accompanying Consolidated Balance Sheets. The proceeds from the sale of the Series A Preferred Stock was allocated between the Series A Preferred Stock and Warrant on a relative fair value basis, resulting in the Series A Preferred Stock having a value of $9.4 million and the Warrant having a value of $594 thousand. Therefore, the fair value of the Warrant has been recognized as a discount to the Series A Preferred Stock and Warrant and such discount is being accreted over five years using the effective yield method. The Warrant was valued using the Black-Scholes options pricing model. The assumptions used to compute the fair value of the Warrant for the nine months ended December 31, 2008 were:

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

     See“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Events”for more information regarding the impact of the Company’s participation in the TARP Capital Purchase Program on the Company’s and the Bank’s capital ratios.

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

14

of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank’s market area, changes in real estate market values in the Bank’s market area, and changes in relevant accounting principles and guidelines. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on Form 10-K 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 at www.sec.gov, as well as under “Part II—Item 1A. Risk Factors” of this Form 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

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

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

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

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

     The following is a discussion and analysis of the Company’s results of operations for the three and nine months ended December 31, 2008 and 2007 and its financial condition at December 31, 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 and the fair value of investments to be its critical accounting policies. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions.

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     Allowance for Loan Losses. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, delinquency trends, nonperforming loan trends, charge-off experience and other asset quality factors. Regular reviews of the loan portfolio are performed to identify loans for which specific allowance allocations are considered prudent. Specific allocations are made based upon evaluations that we believe to be appropriate in accordance with SFAS No. 114, and such allocations are determined by reviewing current collateral values, financial information, cash flows, payment histories and trends and other relevant facts surrounding the particular credits. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience, loan to value ratios and qualitative adjustments. For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience and other pertinent data to the current outstanding balance in each loan category. Loans not individually reviewed for impairment in accordance with SFAS 114 are analyzed in accordance with SFAS No. 5. 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.

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

     Fair Value of Investments. Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at cost, adjusted for amortization of premiums and accretion of discounts, both computed by a method that approximates the effective yield method. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity and comprehensive income.

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

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

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

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

16

     Accounting for Goodwill and Impairment.In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) which is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 as of April 1, 2002. SFAS 142 addresses the method of identifying and measuring goodwill and other intangible assets having indefinite lives acquired in a business combination, eliminates further amortization of goodwill and requires periodic impairment evaluations of goodwill using a fair value methodology prescribed in the statement. As a result of adopting SFAS 142, the Company no longer amortizes the goodwill balance of $2.2 million. Impairment testing is required at least annually or more frequently as a result of an event or change in circumstances (e.g., recurring operating losses by the acquired entity) that would indicate an impairment adjustment may be necessary. The Company adopted December 31 as its assessment date. Annual Impairment testing was performed during each year and in each analysis, it was determined that an impairment charge was not required. The most recent testing was performed as of December 31, 2008 and management determined that no impairment existed as of December 31, 2008.

Market Events

     The Company’s financial results for both the three and nine months ended December 31, 2008 were significantly impacted by the September 2008 conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) that resulted in a previously announced $9.4 million impairment of the value of the Company’s investment in the preferred stock of these companies during the quarter ended September 30, 2008. No tax benefit was recorded during that period as the losses were initially considered capital losses and there were insufficient capital gains to offset such losses. However, during the quarter ended December 31, 2008, the Company recognized a tax benefit of approximately $3.5 million on the Fannie Mae and Freddie Mac impairment charges due to the October 3, 2008 enactment of the Emergency Economic Stabilization Act of 2008, which permitted the Company to treat losses incurred on the Fannie Mae and Freddie Mac preferred stock as ordinary losses for federal income tax purposes.

     On December 5, 2008, the Company sold $10.0 million in preferred shares to the U.S. Department of Treasury (“Treasury”) as a participant in the federal government’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program. This represented approximately 2.6% of the Company’s risk-weighted assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary program for healthy U.S. financial institutions designed to encourage these institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the weakened U.S. economy. In connection with the investment, the Company entered into a Letter Agreement and the related Securities Purchase Agreement with the Treasury pursuant to which the Company issued (i) 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 234,742 shares of the Company’s common stock for an aggregate purchase price of $10.0 million in cash. For more information on the Series A Preferred Stock and Warrant issued to the Treasury in connection with the TARP Capital Purchase Program, see Note 14 to the Company’s unaudited consolidated financial statements included in this Form 10-Q.

17

     With the U.S. Department of Treasury’s $10.0 million investment in the Company, the Company and the Bank now meet all regulatory requirements to be considered well-capitalized under the federal prompt corrective action regulations. As of December 31, 2008, the Company’s and the Bank’s capital ratios were as follows:

	At December 31, 2008
				Regulatory
				Threshold
				For Well
	Actual			Capitalized
Central Bancorp (1):
Tier 1 Leverage		8.44	%		5.0	%
Tier 1 Risk-Based Ratio		12.10	%		6.0	%
Total Risk-Based Ratio		13.32	%		10.0	%
Central Co-operative Bank (1):
Tier 1 Leverage		6.81	%		5.0	%
Tier 1 Risk-Based Ratio		9.75	%		6.0	%
Total Risk-Based Ratio		10.98	%		10.0	%

(1) Reflects $8.0 million in TARP funds received as a capital contribution from the Company to the Bank. The balance of the TARP proceeds, $2.0 million, was contributed as a capital contribution by the Company to the Bank after December 31, 2008. The ratios above reflect that, as of December 31, 2008, such $2.0 million was held by the Company.

Comparison of Financial Condition at December 31, 2008 and March 31, 2008

     Total assets were $552.0 million at December 31, 2008 compared to $571.2 million at March 31, 2008, representing a decrease of $19.2 million, or 3.4%. Total loans (excluding loans held for sale) were $455.9 million at December 31, 2008, compared to $474.9 million at March 31, 2008, representing a decrease of $19.0 million, or 4.0%. This decrease was primarily due to decreases in construction loans of $12.3 million, commercial and industrial loans of $7.1 million, and commercial real estate loans of $563 thousand, partially offset by an increase in residential loans of $818 thousand. Construction loans declined as management de-emphasized this type of lending in the current economic environment. Commercial and industrial loans decreased primarily due to payoffs during the period.

     The allowance for loan losses totaled $4.6 million at December 31, 2008 compared to $3.6 million at March 31, 2008, representing an increase of $1.0 million, or 27.3%. This increase was primarily related to one customer relationship. Based upon 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 December 31, 2008 and March 31, 2008.

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

     Cash and cash equivalents totaled $30.0 million at December 31, 2008 compared to $17.7 million at March 31, 2008, representing an increase of $12.3 million, or 69.2%, comprised of a $12.8 million increase in short-term investments partially offset by a $515 thousand decrease in cash and due from banks. The increase in this category is primarily due to $10.0 million of TARP funds received from the U.S. Department of Treasury. Investment

18

securities totaled $46.4 million at December 31, 2008 compared to $63.1 million at March 31, 2008, representing a decrease of $16.7 million, or 26.5%. The decrease in this category includes the $9.4 million impairment write-down on the Company’s investment in Fannie Mae and Freddie Mac preferred stock, and maturities of corporate and agency debt securities. Stock in the Federal Home Loan Bank of Boston remained unchanged and totaled $8.5 million at both December 31, 2008 and March 31, 2008.

     Banking premises and equipment, net, totaled $3.5 million at December 31, 2008 compared to $4.0 million at March 31, 2008, primarily reflecting amortization of leasehold improvements and depreciation for the period.

     Deferred tax asset totaled $7.4 million at December 31, 2008 compared to $2.6 million at March 31, 2008. The increase in this category is primarily the result of the tax benefit associated with the impairment write-downs on the Company’s Fannie Mae and Freddie Mac preferred stock investments.

     As the result of a foreclosure during the quarter ended December 31, 2008, one residential loan was transferred to the Other Real Estate Owned category on the Bank’s balance sheet. The amount transferred was $102 thousand, which increased the balance of the Other Real Estate Owned account to $191 thousand at December 31, 2008. In total, this category is comprised of two residential properties recorded at market value less estimated selling costs as of December 31, 2008.

     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 $6.3 million at December 31, 2008 as compared to $6.1 as of March 31, 2008.

     Total deposits amounted to $349.5 million at December 31, 2008 compared to $361.1 million at March 31, 2008, representing a decrease of $11.6 million or 3.2%, reflecting the combined effect of a $4.3 million, or 2.4%, decrease in certificates of deposit, and a $7.3 million, or 4.0% decrease in core deposits (consisting of all noncertificate accounts). Deposits decreased due to continued strong competition in our market area.

     Federal Home Loan Bank advances amounted to $144.6 million at December 31, 2008 compared to $156.7 million at March 31, 2008, representing a decrease of $12.1 million, or 7.7%, as maturing Federal Home Loan Bank advances were paid with available cash on hand.

Comparison of Operating Results for the Quarters Ended December 31, 2008 and 2007

     As mentioned in“Market Events”above, earnings for the quarter ended December 31, 2008 were significantly impacted by the $3.5 million tax benefit on the Fannie Mae and Freddie Mac impairment charges due to the October 3, 2008 enactment of the Emergency Economic Stabilization Act of 2008, which permitted the Company to treat losses incurred on the Fannie Mae and Freddie Mac preferred stock as ordinary losses for federal income tax purposes. Net income for the quarter ended December 31, 2008 was $3.9 million or $2.76 per diluted share, as compared to net income of $656 thousand, or $0.48 per diluted share, for the comparable prior year quarter. In addition to the aforementioned tax benefit on the Fannie Mae and Freddie Mac preferred stock losses, other items contributing to the operating results for the quarter ended December 31, 2008 as compared to the quarter ended December 31, 2007 were a $458 thousand increase in net interest and dividend income, offset by a $354 thousand decrease in noninterest income, and a $451 thousand increase in noninterest expenses.

     Interest and Dividend Income.Interest and dividend income decreased by $644 thousand, or 8.0%, to $7.4 million for the quarter ended December 31, 2008 as compared to $8.1 million during the same period of 2007. The yield on interest-earning assets declined by 31 basis points primarily due to a 145 basis point reduction in interest income on investments and a 481 basis point reduction in interest income on short-term investments. Items primarily affecting the reduced yield on investments during the quarter ended December 31, 2008 as compared to the quarter ended December 31, 2007 were: (1) $125 thousand less in dividend income as The Co-operative Central Bank, which insures in-full deposits in excess of FDIC limits, paid a special dividend of $125 thousand during the quarter ended December 31, 2007 compared to $0 during the same period of 2008; (2) a reduction of $70 thousand in FHLB stock dividends as the FHLB of Boston reduced its dividend rate from 6.5% to 2.5%, and (3) the elimination of dividend income on approximately $707 thousand in Fannie Mae and Freddie Mac preferred stock.

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Although the average balance of short-term investments increased from $4.6 million during the quarter ended December 31, 2007 to $16.3 million during the quarter ended December 31, 2008, interest income on these investments declined by $39 thousand. This decline was primarily due to recessionary economic conditions which resulted in the Federal Reserve’s lowering of the fed funds target rate from a range of 4.75% to 4.25% during the quarter ended December 31, 2007, to a target rate which ranged from a high of 2.0% to a low of 25 to 0 basis points during the quarter ended December 31, 2008. Interest earned on short-term investments is closely tied to the target fed funds rate.

     Interest Expense. Interest expense decreased by $1.1 million, or 24.0%, to $3.5 million for the quarter ended December 31, 2008 as compared to $4.6 million during the same period of 2007 due to decreases in the average rates paid on deposits, FHLB borrowings, and other borrowings. The cost of deposits decreased by 119 basis points from 3.32% during quarter ended December 31, 2007 to 2.13% during the quarter ended December 31, 2008, as some high-cost certificates of deposit were replaced by more cost-effective FHLB borrowings and lower-costing deposits. The average balance of certificates of deposit totaled $170.3 million during the quarter ended December 31, 2008, compared to $181.3 million for the same period in 2007, a decline of $11.0 million. The average balance of FHLB borrowings increased by $5.9 million, from $138.7 million during the quarter ended December 31, 2007 to $144.6 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 $678 thousand to $140.1 million for the quarter ended December 31, 2008, as compared to an average balance of $139.4 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 December 31, 2008 was 6.04%, compared to an average rate of 7.42% during the quarter ended December 31, 2007.

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     The following table presents average balances and average rates earned/paid by the Company for the quarter ended December 31, 2008 compared to the quarter ended December 31, 2007:

	Three Months Ended December 31,
	2008								2007
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Mortgage loans	$	453,209		$	6,836		6.03	%	$	449,420		$	6,798		6.05	%
Other loans		6,713			105		6.26			14,024			252		7.19
Investment securities		43,476			454		4.18			67,508			950		5.63
Short-term investments		16,290			23		0.56			4,622			62		5.37
Total interest-earning assets		519,688			7,418		5.71			535,574			8,062		6.02
Allowance for loan losses		(4,673	)							(3,375	)
Noninterest-earning assets		25,781								18,771
Total assets	$	540,796							$	550,970
Interest-bearing liabilities:
Deposits	$	310,361			1,656		2.13		$	320,709			2,664		3.32
Advances from FHLB of Boston		144,620			1,670		4.62			138,666			1,726		4.98
Other borrowings		12,343			177		5.74			11,801			215		7.29
Total interest-bearing liabilities.		467,324			3,503		3.00			471,176			4,605		3.91
Noninterest-bearing liabilities		40,152								40,953
Total liabilities		507,476								512,129
Stockholders’ equity		33,320								38,841
Total liabilities and stockholders’ equity	$	540,796							$	550,970
Net interest and dividend income				$	3,915							$	3,457
Net interest spread							2.71	%							2.11	%
Net interest margin							3.01	%							2.58	%

     Provision for Loan Losses.The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management estimates is adequate to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of underlying collateral, financial condition of the borrower, prevailing economic conditions, the nature and volume of the loan portfolio and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for loan losses monthly when appropriate to maintain the adequacy of the allowance. The Company uses a process of portfolio segmentation to calculate the appropriate reserve level at the end of each quarter. Periodically, the Company evaluates the allocations used in these calculations. During the quarters ended December 31, 2008, and 2007, management performed a thorough analysis of the loan portfolio as well as the required reserve allocations for loans considered impaired under SFAS No 114 and the allocation percentages used when calculating potential losses under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS No. 5). Based on this analysis, no provision for loan losses was recorded during the quarters ended December 31, 2008 and 2007.

     Senior management continues to give high priority to monitoring and managing the Company’s asset quality. At December 31, 2008, nonperforming loans totaled $9.2 million as compared to $9.6 million on March 31, 2008. The nine loans constituting this category at December 31, 2008 are all secured by real estate collateral located

21

almost exclusively in the Greater Boston area. Eight of these loans have an active plan for resolution in place from either the sale of the real estate directly by the borrower, through foreclosure, or a deed in lieu of foreclosure. The other nonperforming loan has entered 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 required to resolve some nonperforming assets, management continues to work with borrowers to resolve these situations as soon as possible.

      During both quarters ended December 31, 2008 and December 31, 2007, the Company recorded no provision for loan losses. Management believes there are adequate reserves and collateral securing the above-described nonperforming loans to cover losses that may result from such loans. Based on all relevant and then available information, management believes that the allowance for loan losses as of December 31, 2008 was adequate at that date. As a result of a foreclosure during the quarter ended December 31, 2008, one residential loan was transferred to the Other Real Estate Owned category on the Bank’s balance sheet. The amount transferred was $102 thousand, which increased the balance of the Other Real Estate Owned account to $191 thousand at December 31, 2008.

     Noninterest Income.Noninterest income decreased by $354 thousand to $432 thousand during the quarter ended December 31, 2008 as compared to noninterest income of $786 thousand during the same period of 2007. This decrease was mainly the result of net gains on the sale of investment securities, which totaled $359 thousand during the quarter ended December 31, 2007 and $0 during the quarter ended December 31, 2008. Gains on the sale of loans decreased by $11 thousand. Income on bank-owned life insurance policies purchased during the quarter ended December 31, 2007 totaled $78 thousand during the quarter ended December 31, 2008, compared to $23 thousand during the same period of 2007.

     Noninterest Expenses. Noninterest expenses increased by $451 thousand or 13.5%, to $3.8 million for the quarter ended December 31, 2008 as compared to $3.3 million during the quarter ended December 31, 2007. For the 2008 quarter, increases in salaries and benefits of $12 thousand, marketing expenses of $157 thousand, occupancy and equipment expenses of $46 thousand, professional fees of $25 thousand and other expenses of $234 thousand, were partially offset by a decrease in data processing fees of $23 thousand. Included in other expenses for the quarters ended December 31, 2008 and 2007 were foreclosure and collection expenses of $243 thousand and $0, respectively. The $234 thousand of foreclosure and collection expenses during the quarter ended December 31, 2008 are primarily related to one borrower. Overall, management continues to closely monitor operating expenses throughout the Company.

     Salaries and employee benefits increased by $12 thousand, or 0.6%, to $2.0 million during the quarter ended December 31, 2008 as compared to the quarter ended December 31, 2007 primarily due to open positions being filled and salary increases granted for the first time since April 2006, bank-owned life insurance related expenses, and a reduction in deferred loan origination costs. Partially offsetting the aforementioned increases were reductions in ESOP compensation expenses, pension expenses, and commissions.

     Advertising and marketing expenses increased by $157 thousand to $158 thousand during the quarter ended December 31, 2008 as compared to $1 thousand 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 $46 thousand, or 8.6%, to $579 thousand during the quarter ended December 31, 2008 as compared to $533 thousand during the same period of 2007 primarily due to increases in rents, real estate taxes, utilities, computer maintenance costs, and repairs and maintenance, partially offset by decreases in the amortization of leasehold improvements and depreciation of furniture, fixtures and equipment, as well as decreases in equipment rental expenses and security expenses.

     Data processing charges decreased by $25 thousand, or 10.5% to $196 thousand during the quarter ended December 31, 2008 as compared to $219 thousand during the same period of 2007, due to a reduction in certain processing costs.

     Income Taxes. Although the Company had pre-tax income of $556 thousand for the quarter ended December 31, 2008, a benefit for income taxes of $3.4 million was recorded mainly due to a $3.5 million tax benefit resulting from the October 3, 2008 enactment of the Emergency Economic Stabilization Act of 2008, which permits the Company to treat losses incurred on its Fannie Mae and Freddie Mac preferred stock as ordinary losses for federal income tax purposes (see the Market Events section of this document).

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     The Commonwealth 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 therefore 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. As a result of this new legislation, the Company recorded a $59 thousand reduction of its deferred tax asset and a $59 thousand increase in its provision for income taxes during the quarter ended September 30, 2008.

Comparison of Operating Results for the Nine Months Ended December 31, 2008 and 2007

     As mentioned in“Market Events”above, earnings for the nine months ended December 31, 2008 were significantly impacted by the net after-tax loss of $5.9 million related to the September 2008 write-down of the investment in Fannie Mae and Freddie Mac preferred stock.

     Net loss for the nine months ended December 31, 2008 was $5.1 million, or $(3.73) per diluted share, as compared to net income of $1.3 million, or $0.99 per diluted share, for the nine months ended December 31, 2007. In addition to the aforementioned after-tax loss related to the impairment of Fannie Mae and Freddie Mac preferred stock, other items contributing to the operating results for the nine months ended December 31, 2008 as compared to the nine months ended December 31, 2007 were a $2.0 million increase in net interest and dividend income, a $1.4 million increase in the provision for loan losses, a $685 thousand decrease in noninterest income, an increase in noninterest expenses of $766 thousand, and a decrease of $263 thousand in the provision for income taxes.

     Interest and Dividend Income.Interest and dividend income decreased by $951 thousand, or 4.0%, to $23.1 million for the nine months ended December 31, 2008 compared to $24.0 million for the same period of 2007 primarily due to decreases in the average balances of investment securities, and a decrease in the average yield on short-term investments, partially offset by increased average loan balances. 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. The average balance on investment securities declined as maturities and principal repayments were used to fund loan growth and an increase in short-term investments. Additionally, the average balance of investment securities during the nine months ended December 31, 2008 was negatively impacted by the $9.4 million impairment write-down of Fannie Mae and Freddie Mac preferred stock which occurred during the quarter ended September 30, 2008. The yield on short-term investments was 1.51% during the nine months ended December 31, 2008 as compared to 5.30% during the same period of 2007. Although the average balance of short-term investments increased from $8.1 million during the nine months ended December 31, 2007 to $11.7 million during the nine months ended December 31, 2008, interest income on these investments declined by $189 thousand. This decline was primarily due to recessionary economic conditions which resulted in the Federal Reserve’s lowering of the fed funds target rate from a range of 5.25% to 4.75% during the nine months ended December 31, 2007, to a target rate which ranged from a high of 2.25% to a low of 25 to 0 basis points during the nine months ended December 31, 2008. Interest earned on short-term investments is closely tied to the target fed funds rate.

     Interest Expense.Interest expense decreased by $3.0 million, or 21.0%, to $11.0 million for the nine months ended December 31, 2008 compared to $14.0 million for the same period of 2007. The cost of deposits decreased by 108 basis points from 3.35% during the nine months ended December 31, 2007 to 2.27% during the nine months ended December 31, 2008, as some high-cost certificates of deposit were replaced by more cost-effective FHLB borrowings and lower-costing deposits. The average balance of certificates of deposit totaled $172.8 million during the nine months ended December 31, 2008, compared to $191.3 million for the same period in 2007, a decline of $18.5 million. The average balance of lower-costing non-maturity deposits increased by $6.6 million to $144.0 million for the nine months ended December 31, 2008, as compared to an average balance of $137.4 million during the same period of 2007. The average balance of FHLB borrowings increased by $13.7 million, from $134.2 million during the nine months ended December 31, 2007 to $147.9 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.

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The average cost of other borrowings decreased as a portion of these borrowings are adjustable and the average rate paid during the nine months ended December 31, 2008 was 6.01%, compared to an average rate of 7.32% during the same period of 2007.

     The following table presents average balances and average rates earned/paid by the Company for the nine months ended December 31, 2008 compared to the nine months ended December 31, 2007:

	Nine Months Ended December 31,
	2008								2007
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Mortgage loans	$	457,478		$	20,573		6.00	%	$	448,334		$	20,360		6.06
Other loans		9,176			435		6.32			11,354			637		7.48
Investment securities		57,328			1,942		4.52			71,770			2,715		5.04
Short-term investments		11,678			132		1.51			8,078			321		5.30
Total interest-earning assets		535,660			23,082		5.75			539,536			24,033		5.94
Allowance for loan losses		(4,091	)							(3,690	)
Noninterest-earning assets		22,407								18,522
Total assets	$	553,976							$	554,368
Interest-bearing liabilities:
Deposits	$	316,759			5,400		2.27		$	328,640			8,263		3.35
Advances from FHLB of Boston		147,943			5,124		4.62			134,235			5,077		5.04
Other borrowings		11,907			520		5.82			11,946			643		7.18
Total interest-bearing liabilities.		476,609			11,044		3.09			474,821			13,983		3.93
Noninterest-bearing liabilities		41,259								41,080
Total liabilities		517,868								515,901
Stockholders’ equity		36,108								38,467
Total liabilities and stockholders’ equity	$	553,976							$	554,368
Net interest and dividend income				$	12,038							$	10,050
Net interest spread							2.66	%							2.01
Net interest margin							3.00	%							2.48

     Provision for Loan Losses.The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management estimates is adequate to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of underlying collateral, financial condition of the borrower, prevailing economic conditions, the nature and volume of the loan portfolio and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for loan losses monthly when appropriate to maintain the adequacy of the allowance. The Company uses a process of portfolio segmentation to calculate the appropriate reserve level at the end of each quarter. Periodically, the Company evaluates the allocations used in these calculations. During the nine-month period ended December 31, 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 recorded a provision of $1.1 million during the nine months ended December 31, 2008, as compared to a negative provision for loan losses of $300 thousand during the corresponding 2007 period.

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     At December 31, 2008, nonperforming loans totaled $9.2 million as compared to $9.6 million on March 31, 2008. Management has evaluated the financial condition of the borrowers as well as the collateral of the loans and, based upon all relevant and then available information, believes it has properly identified potential losses relating to such loans as of December 31, 2008. Based on all relevant and then available information, management believes that the allowance for loan losses as of December 31, 2008 was adequate as of that date. As mentioned above, a foreclosure during the quarter ended December 31, 2008, resulted in the transfer of one residential loan to the Other Real Estate Owned category on the Bank’s balance sheet. The amount transferred was $102 thousand, resulting in a balance of $191 thousand in the Other Real Estate Owned category at December 31, 2008. There was no Other Real Estate Owned at March 31, 2008.

     Noninterest Income.Noninterest income decreased by $10.1 million to a noninterest loss of $8.2 million during the nine months ended December 31, 2008 compared to noninterest income of $1.8 million during the same period of 2007 primarily due to impairment write-downs on Fannie Mae and Freddie Mac preferred stock of $9.4 million, and a net loss of $144 thousand related to gains, losses and write-downs on other investment securities during the nine months ended December 31, 2008 compared to gains on the sale of securities of $647 thousand during the nine months ended December 31, 2007. Based upon management’s analysis of the investment portfolio as of December 31, 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. Gains on the sale of loans decreased by $73 thousand as most residential loans originated during the nine months ended December 31, 2008 were retained in the Bank’s portfolio rather than being sold in the secondary market. Income on bank-owned life insurance policies purchased during the quarter ended December 31, 2007 totaled $236 thousand during the nine months ended December 31, 2008 as compared to $23 thousand during the same period of 2007.

     Noninterest Expenses.Noninterest expense increased by $766 thousand, or 7.5%, to $11.0 million during the nine months ended December 31, 2008 as compared to $10.2 million during the same period of 2007. This increase is due to increases in salaries and benefits of $272 thousand, marketing costs of $239 thousand, occupancy and equipment costs of $95 thousand, professional fees of $7 thousand and other expenses of $218 thousand, partially offset by a decrease in data processing costs of $65 thousand. Included in other expenses the nine months ended December 31, 2008 and 2007 were foreclosure and collection expenses of $261 thousand and $34, respectively. The $261 thousand of foreclosure and collection expenses during the nine months ended December 31, 2008 are primarily related to one borrower. Overall, management continues to closely monitor operating expenses throughout the Company.

     Salaries and employee benefits increased by $272 thousand, or 4.5%, to $6.3 million during the nine months ended December 31, 2008 as compared $6.0 million during the same period of 2007 primarily due to open positions being filled and salary increases being granted for the first time since April 2006, bank-owned life insurance related expenses, and reductions in deferred loan origination costs. Partially offsetting these increases were decreases in ESOP compensation and pension costs.

     Advertising and marketing expenses increased by $239 thousand to $247 thousand during the nine months ended December 31, 2008 as compared to $8 thousand during the same period of 2007 as management strategically decided to increase these expenses on a limited basis.

     Office occupancy and equipment expenses increased by $95 thousand, or 5.9%, to $1.7 million during the nine months ended December 31, 2008 as compared $1.6 million during the same period of 2007 primarily due to increases in rents, real estate taxes, utilities, computer maintenance costs, and bank building expenses, partially offset by decreases in the amortization of leasehold improvements and depreciation of furniture, fixtures and equipment, as well as decreases in property insurance costs and security expenses.

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     Data processing costs decreased by $65 thousand, or 9.8%, to $596 thousand during the nine months ended December 31, 2008 as compared to $661 thousand during the same period of 2007 due to a reduction in certain processing costs.

     Income Taxes. The tax benefit of $3.2 million for the nine months ended December 31, 2008 included a $3.5 million tax benefit associated with the impairment losses of $9.4 million on Fannie Mae and Freddie Mac preferred stock investments.

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, commercial real estate loans, U.S. Government and agencies securities, mortgage-backed securities and funds on deposit at the Federal Home Loan Bank of Boston. At December 31, 2008, the Company had approximately $45.1 million in unused borrowing capacity at the Federal Home Loan Bank of Boston.

     At December 31, 2008, the Company had commitments to originate loans, unused outstanding lines of credit and undisbursed proceeds of loans totaling $23.8 million. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At December 31, 2008, the Company believes it has sufficient funds available to meet its current loan commitments.

     As previously discussed, on December 5, 2008, the Company sold $10.0 million of its preferred stock and issued a warrant to purchase common stock to the U.S. Department of Treasury under the TARP Capital Purchase Program. The following table sets forth the capital positions of the Company and the Bank at December 31, 2008 after giving effect to the Treasury’s investment:

	At December 31, 2008
				Regulatory
				Threshold
				For Well
	Actual			Capitalized
Central Bancorp (1):
Tier 1 Leverage		8.44	%		5.0	%
Tier 1 Risk-Based Ratio		12.10	%		6.0	%
Total Risk-Based Ratio		13.32	%		10.0	%
Central Co-operative Bank (1):
Tier 1 Leverage		6.81	%		5.0	%
Tier 1 Risk-Based Ratio		9.75	%		6.0	%
Total Risk-Based Ratio		10.98	%		10.0	%

(1) Reflects $8.0 million in TARP funds received as a capital contribution from the Company to the Bank. The balance of the TARP proceeds, $2.0 million, was contributed as a capital contribution by the Company to the Bank after December 31, 2008. The ratios above reflect that, as of December 31, 2008, such $2.0 million was held by the Company.

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.

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     For the year ended March 31, 2008 and for the nine months ended December 31, 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 (T). Controls and Procedures

     The Company’s management has carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

     In addition to the other information set forth in this report, you should carefully consider the factors, which could materially affect our business, financial condition or future results. These risk factors are discussed in: (1) 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 (“SEC”) on June 20, 2008; and (2) Part II, “Item 1A. Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2008 and September 30, 2008, as filed with the SEC on August 14, 2008 and November 14, 2008, respectively. The risks described in these documents 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.

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

     The Company did not repurchase any of its securities during the quarter ended December 31, 2008.

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

     Not applicable.

Item 6. Exhibits

10.1	Amended and Restated Central Bancorp, Inc. Deferred Compensation Plan for Non-Employee Directors*(1)
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

*	Management contract or compensatory plan, contract or arrangement.
(1)	Amended during the quarter ended December 31, 2008 to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations and guidance issued with respect to Section 409A of the Code.

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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
February 17, 2009	By:	/s/ John D. Doherty
		John D. Doherty
		Chairman, President and Chief Executive Officer

February 17, 2009	By:	/s/ Paul S. Feeley
		Paul S. Feeley
		Senior Vice President, Treasurer and Chief Financial Officer