Central Bancorp (CEBK) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period endedDecember 31, 2011

OR

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

For the transition period from              to             

Commission file number:0-25251

CENTRAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

(617) 628-4000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

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	¨	Accelerated filer	¨
Non-accelerated filer	¨  (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).    Yes  ¨    No  x

Common Stock, $1.00 par value	1,690,951
Class	Outstanding at February 14, 2012

CENTRAL BANCORP, INC.

FORM 10-Q

Table of Contents

		Page No.
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)		1
	Consolidated Statements of Financial Condition at December 31, 2011 and March 31, 2011		1
	Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2011 and 2010		2
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended December  31, 2011 and 2010		3
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2011 and 2010		4
	Notes to Unaudited Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations Operations		33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		47
Item 4.	Controls and Procedures		47
Part II.	Other Information
Item 1.	Legal Proceedings		48
Item 1A.	Risk Factors		48
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3.	Defaults Upon Senior Securities		48
Item 4.	Mine Safety Disclosures		48
Item 5.	Other Information		48
Item 6.	Exhibits		48
Signatures			49

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

(Unaudited)

(In Thousands, Except Share and Per Share Data)	December 31, 2011			March 31, 2011
ASSETS
Cash and due from banks	$	4,566		$	3,728
Short-term investments		32,494			37,190
Cash and cash equivalents		37,060			40,918
Investment securities available for sale, at fair value (Note 2)		35,269			25,185
Stock in Federal Home Loan Bank of Boston, at cost (Note 2)		8,518			8,518
The Co-operative Central Bank Reserve Fund, at cost		1,576			1,576
Total investments		45,363			35,279
Loans held for sale		221			—
Loans (Note 3)		420,955			394,217
Less allowance for loan losses		(4,083	)		(3,892	)
Loans, net		416,872			390,325
Accrued interest receivable		1,378			1,496
Banking premises and equipment, net		2,706			2,705
Deferred tax asset, net		3,875			3,600
Other real estate owned		320			132
Goodwill		2,232			2,232
Bank-owned life insurance (Note 11)		7,183			6,972
Other assets		4,140			3,966
Total assets	$	521,350		$	487,625
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits (Note 4)	$	332,709		$	309,077
Federal Home Loan Bank advances		117,260			117,351
Subordinated debentures (Note 5)		11,341			11,341
Advanced payments by borrowers for taxes and insurance		2,276			1,387
Accrued expenses and other liabilities		12,965			1,348
Total liabilities		476,551			440,504
Commitments and Contingencies (Note 7)
Stockholders’ equity:
Preferred stock – Series A Cumulative Perpetual, $1.00 par value; 5,000,000 shares authorized; No shares issued and outstanding at December 31, 2011 and 10,000 shares issued and outstanding, with a liquidation preference and redemption value of $10,063,889 at March 31, 2011		—			9,709
Preferred stock – Series B Senior Non-Cumulative Perpetual, $1.00 par value; 10,000 shares authorized; 10,000 shares issued and outstanding, with a liquidation preference and redemption value of $10,000,000 at December 31, 2011 and no shares issued and outstanding at March 31, 2011		9,961			—
Common stock $1.00 par value; 15,000,000 shares authorized; and 1,681,071 shares issued and outstanding at December 31, 2011 and March 31, 2011		1,681			1,681
Additional paid-in capital		2,121			4,589
Retained income		35,115			35,288
Accumulated other comprehensive income (Note 6)		442			892
Unearned compensation – Employee Stock Ownership Plan		(4,521	)		(5,038	)
Total stockholders’ equity		44,799			47,121
Total liabilities and stockholders’ equity	$	521,350		$	487,625

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
(In Thousands, Except Share and Per Share Data)	December 31,					December 31,
	2011			2010		2011		2010
Interest and dividend income:
Mortgage loans	$	5,343		$	5,746	$	16,143	$	18,423
Other loans		21			49		89		183
Investments		386			365		933		984
Short-term investments		15			27		39		47
Total interest and dividend income		5,765			6,187		17,204		19,637
Interest expense:
Deposits		429			573		1,238		1,962
Advances from Federal Home Loan Bank of Boston		1,102			1,226		3,295		3,837
Other borrowings		142			140		418		420
Total interest expense		1,673			1,939		4,951		6,219
Net interest and dividend income		4,092			4,248		12,253		13,418
Provision for loan losses		300			300		1,100		900
Net interest and dividend income after provision for loan losses (Note 3)		3,792			3,948		11,153		12,518
Noninterest income:
Deposit service charges		255			266		731		777
Net (loss) gain from sales and write-downs of investment securities		(48	)		13		507		(170	)
Net gains on sales of loans		105			111		140		241
Bank-owned life insurance		74			75		219		219
Other		80			87		273		305
Total noninterest income		466			552		1,870		1,372
Noninterest expenses:
Salaries and employee benefits		2,258			2,292		7,313		6,784
Occupancy and equipment		508			523		1,557		1,548
Data processing fees		189			212		579		629
Professional fees		228			233		627		730
FDIC deposit insurance premiums		106			139		307		426
Advertising and marketing		20			24		103		121
Other expenses		458			402		1,438		1,268
Total noninterest expenses		3,767			3,825		11,924		11,506
Income before income taxes		491			675		1,099		2,384
Provision for income taxes		131			330		299		900
Net income	$	360		$	345	$	800	$	1,484
Net income available to common shareholders (Note 9)	$	231		$	191	$	64	$	1,021
Earnings per common share – basic (Note 9)	$	0.15		$	0.13	$	0.04	$	0.68
Earnings per common share – diluted (Note 9)	$	0.15		$	0.12	$	0.04	$	0.64
Weighted average common shares outstanding – basic		1,541,300			1,505,873		1,535,924		1,500,497
Weighted average common and equivalent shares outstanding– diluted		1,570,076			1,633,165		1,648,554		1,608,120

See accompanying notes to unaudited consolidated financial statements.

2

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(In Thousands, Except Share and Per Share Data)

	Number of Shares of Series A Preferred Stock		Series  A Preferred Stock		Number of Shares of Series B Preferred Stock		Series B Preferred Stock		Number of Shares of Common Stock		Common Stock		Additional Paid-In Capital			Retained Income			Accumulated Other Comprehensive Income		Unearned Compensation- ESOP			Total Stockholders’ Equity
Nine Months Ended December 31, 2010
Balance at March 31, 2010		10,000	$	9,589		—	$	—		1,667,151	$	1,667	$	4,291		$	34,482		$	810	$	(5,726	)	$	45,113
Net income		—		—		—		—		—		—		—			1,484			—		—			1,484
Other comprehensive income, net of taxes of $83:
Unrealized gain on securities, net of reclassification adjustment (Note 6)		—		—		—		—		—		—		—			—			140		—			140
Comprehensive income																									1,624
Dividends paid to common stockholders ($0.15 per share)		—		—		—		—		—		—		—			(224	)		—		—			(224	)
Preferred stock accretion of discount and issuance costs		—		88		—		—		—		—		—			(88	)		—		—			—
Dividends paid on preferred stock		—		—		—		—		—		—		—			(375	)		—		—			(375	)
Stock-based compensation (Note 10)		—		—		—		—		—		—		302			—			—		—			302
Amortization of unearned compensation – ESOP		—		—		—		—		—		—		(325	)		—			—		516			191
Balance at December 31, 2010		10,000	$	9,677		—	$	—		1,667,151	$	1,667	$	4,268		$	35,279		$	950	$	(5,210	)	$	46,631

This table break for XBRL edit Consolidated Statements of Changes in Stockholders' Equity

	Number of Shares of Series A Preferred Stock			Series A Preferred Stock			Number of Shares of Series B Preferred Stock		Series B Preferred Stock		Number of Shares of Common Stock		Common Stock		Additional Paid-In Capital			Retained Income			Accumulated Other Comprehensive Income			Unearned Compensation- ESOP			Total Stockholders’ Equity
Nine Months Ended December 31, 2011
Balance at March 31, 2011		10,000		$	9,709			—	$	—		1,681,071	$	1,681	$	4,589		$	35,288		$	892		$	(5,038	)	$	47,121
Net income		—			—			—		—		—		—		—			800			—			—			800
Other comprehensive loss, net of tax benefit of $275:
Unrealized loss on securities, net of reclassification adjustment (Note 6)		—			—			—		—		—		—		—			—			(450	)		—			(450	)
Comprehensive income																												350
Dividends paid to common stockholders ($0.15 per share)		—			—			—		—		—		—		—			(237	)		—			—			(237	)
Redemption of Series A Preferred Stock net		(10,000	)		(9,701	)		—		—		—		—		—			(299	)		—			—			(10,000	)
Issuance of Series B Preferred Stock, net of issuance costs of $45		—			—			10,000		9,955		—		—		—			—			—			—			9,955
Preferred stock accretion of discount and issuance costs		—			56			—		6		—		—		—			(62	)		—			—			—
Redemption of Series A warrants		—			—			—		—		—		—		(2,526	)		—			—			—			(2,526	)
Dividends paid on preferred stock		—			(64	)		—		—		—		—		—			(375	)		—			—			(439	)
Stock-based compensation (Note 10)		—			—			—		—		—		—		278			—			—			—			278
Amortization of unearned compensation – ESOP		—			—			—		—		—		—		(220	)		—			—			517			297
Balance at December 31, 2011		—		$	—			10,000	$	9,961		1,681,071	$	1,681	$	2,121		$	35,115		$	442		$	(4,521	)	$	44,799

See accompanying notes to consolidated financial statements

3

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	December 31,
(In thousands)	2011			2010
Cash flows from operating activities:
Net income	$	800		$	1,484
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		398			470
Amortization of premiums		97			179
Deferred tax benefit		—			1,288
Provision for loan losses		1,100			900
Stock-based compensation and amortization of unearned compensation - ESOP		575			493
Net (gains) losses from sales of investment securities		(507	)		170
Bank-owned life insurance income		(211	)		(218	)
Gain on sale of OREO		—			(2	)
Gains on sales of loans held for sale		(140	)		(241	)
Originations of loans held for sale		(10,934	)		(20,621	)
Proceeds from sale of loans originated for sale		10,853			20,844
Decrease in accrued interest receivable		118			480
(Increase) decrease in other assets		(174	)		82
Increase (decrease) in accrued expenses and other liabilities		11,617			(483	)
Net cash provided by operating activities		13,592			4,781
Cash flows from investing activities:
Loan (originations) principal collections, net		(27,835	)		56,008
Principal payments on mortgage-backed securities		3,613			7,129
Proceeds from sales of investment securities		6,788			2,092
Purchases of investment securities		(20,800	)		(3,223	)
Proceeds from sales of OREO		—			62
Purchase of banking premises and equipment		(399	)		(562	)
Net cash (used in) provided by investing activities		(38,633	)		61,506
Cash flows from financing activities:
Issuance of Series B preferred stock		10,000			—
Preferred stock issuance costs		(45	)		—
Redemption of Series a preferred stock		(10,000	)		—
Redemption of Series A preferred stock warrants		(2,526	)		—
Net increase (decrease) in deposits		23,632			14,019
Increase in advance payments by borrowers for taxes and insurance		889			44
Repayment of advances from FHLB of Boston		(91	)		(17,087	)
Cash dividends paid		(676	)		(598	)
Net cash provided by (used in) financing activities		21,183			(31,704	)
Net (decrease) increase in cash and cash equivalents		(3,858	)		34,583
Cash and cash equivalents at beginning of period		40,918			16,536
Cash and cash equivalents at end of period	$	37,060		$	51,119
Cash paid (received) during the period for:
Interest	$	4,951		$	6,312
Income taxes		(669	)		—
Supplemental disclosure of non-cash investing and financing activities:
Accretion of Series A and B preferred stock discount and issuance costs		62			88
Deemed dividend on Series A preferred stock		299			—
Loans transferred to other real estate owned		188			132

See accompanying notes to unaudited consolidated financial statements.

4

CENTRAL BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

December 31, 2011

(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, 2011, included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on June 17, 2011. The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations, changes in stockholders’ equity or cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, the accompanying unaudited consolidated financial statements reflect all normal recurring adjustments that are necessary for a fair presentation. The results for the nine months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2012 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”) Accounting Standards Codification (“ASC”) 860Transfers and Servicing, 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, 2011 and are also included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-Q. 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, 2011, are summarized as follows:

	December, 2011
	Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses
			(In Thousands)
Government agency and government sponsored enterprise mortgage-backed securities	$	27,383	$	718	$	(13	)	$	28,088
Single issuer trust preferred securities issued by financial institutions		1,001		39		—			1,040
Total debt securities		28,384		757		(13	)		29,128
Perpetual preferred stock issued by financial institutions		3,065		93		(384	)		2,774
Common stock		3,361		212		(206	)		3,367
Total	$	34,810	$	1,062	$	(603	)	$	35,269

5

The amortized cost and fair value of investment securities available for sale at March 31, 2011 are as follows:

	March 31, 2011
	Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses
			(In Thousands)
Government agency and government sponsored enterprise mortgage-backed securities	$	18,129	$	764	$	(70	)	$	18,823
Single issuer trust preferred securities issued by financial institutions		1,002		47		—			1,049
Total debt securities		19,131		811		(70	)		19,872
Perpetual preferred stock issued by financial institutions		3,071		194		(80	)		3,185
Common stock		1,799		354		(25	)		2,128
Total	$	24,001	$	1,359	$	(175	)	$	25,185

During the nine-month period ended December 31, 2011, one common stock was deemed to be other-than-temporarily impaired and was written down by $47 thousand to its fair value as of December 31, 2011.

Temporarily impaired securities as of December 31, 2011 are presented in the following table and are aggregated by investment category and length of time that individual securities have been in a continuous loss position:

	Less Than or Equal to 12 Months					Greater Than 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
Government agency and government sponsored enterprise mortgage-backed securities	$	120	$	(3	)	$	269	$	(10	)
Perpetual preferred stock issued by financial institutions		895		(124	)		757		(260	)
Common stock		1,456		(192	)		123		(14	)
Total temporarily impaired securities	$	2,471	$	(319	)	$	1,149	$	(284	)

The Company has one preferred stock investment currently in an unrealized loss position for longer than twelve months for which the fair value has decreased during the nine months ended December 31, 2011. The preferred stock had an unrealized loss to book value ratio of 25.6% at December 31, 2011 compared to an unrealized loss to book value ratio of 5.7% at March 31, 2011. Due to the long-term nature of preferred stocks, management considers these securities to be similar to debt securities for analysis purposes. Based on available information, management has determined that the unrealized loss on the Company’s investment in this preferred stock is not other-than-temporary as of December 31, 2011.

The Company had one debt security in an unrealized loss position as of December 31, 2011, which has been in a continuous unrealized loss position for a period greater than twelve months. This debt security has a total fair value of $269 thousand and an unrealized loss of $10 thousand as of December 31, 2011. This debt security is a government agency mortgage–backed security. Management currently does not have the intent to sell this security and it is more likely than not that it will not have to sell this security before recovery of its cost basis. Based on management’s analysis of this security, it has been determined that there is no other-than-temporarily impaired as of December 31, 2011.

6

The Company had seventeen equity securities with a fair value of $1.6 million and unrealized losses of $206 thousand which were temporarily impaired at December 31, 2011. The total unrealized losses relating to these securities represent approximately 11.5% of book value. This is an increase when compared to the ratio of unrealized losses to book value of 6.3% at March 31, 2011. Of these seventeen securities, one has been in a continuous unrealized loss position for greater than twelve months aggregating $14 thousand at December 31, 2011. Data indicates that, due to current economic conditions, the time for many stocks to recover may be substantially lengthened. Management’s investment approach is to be a long-term investor. As of December 31, 2011, the Company has determined that the unrealized losses associated with these securities are not other-than-temporary based on the projected recovery of the unrealized losses, and management’s intent and ability to hold the securities until recovery of cost.

The maturity distribution (based on contractual maturities) and annual yields of debt securities at December 31, 2011 are as follows:

	Amortized		Fair		Annual
	Cost		Value		Yield
	(Dollars in thousands)
Government agency and government sponsored enterprise mortgage-backed securities
Due within one year	$	605	$	613		3.88	%
Due after one year but within five years				—		—
Due after five years but within ten years		1,816		1,839		2.77
Due after ten years		24,962		25,636		3.54
Total		27,383		28,088
Single issuer trust preferred securities issued by financial institutions:
Due after ten years		1,001		1,040		7.78	%
Total	$	28,384	$	29,128

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

Mortgage-backed securities with an amortized cost of $1.0 million and a fair value of $1.1 million at December 31, 2011 were pledged to provide collateral for certain customers. At December 31, 2011 securities carried at $2.2 million were pledged under a blanket lien to partially secure the Bank’s advances from the Federal Home Loan Bank Board of Boston (“FHLBB”). Additionally, at December 31, 2011 investment securities carried at $2.7 million were pledged to maintain borrowing capacity at the Federal Reserve Bank of Boston.

As a member of the FHLBB, the Bank is required to invest in stock of the FHLBB in an amount which, until April 2004, was equal to 1% of its outstanding home loans or 1/20th of its outstanding advances from the FHLBB, whichever was higher.

The Company views its investment in the FHLBB stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value. The determination of whether a decline affects the ultimate recovery is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBB as compared to the capital stock amount and length of time a decline has persisted; (2) the impact of legislative and regulatory changes on the FHLBB; and (3) the liquidity position of the FHLBB.

The FHLBB reported earnings for 2010 of approximately $107 million after two consecutive years of losses. During July and October 2011, the FHLBB declared dividends based upon average stock outstanding for the

7

second and third quarters of 2011, respectively. The FHLBB’s board of directors anticipates that it will continue to declare modest cash dividends through 2011, but cautioned that adverse events such as a negative trend in credit losses on the FHLBB’s private label mortgage-backed securities or mortgage portfolio, a meaningful decline in income, or regulatory disapproval could lead to reconsideration of this plan.

On August 8, 2011, Standard & Poor’s Ratings Services cut the credit ratings for many government-related entities to AA+ from AAA reflecting their dependence on the recently downgraded U.S. Government. Included in those downgrades were ten of twelve Federal Home Loan Banks, including the FHLBB. The other two Federal Home Loan Banks previously had been downgraded to AA+.

The Company does not believe that its investment in the FHLBB is impaired as of December 31, 2011. However, this estimate could change in the near term in the event that: (1) additional significant impairment losses are incurred on the mortgage-backed securities causing a significant decline in the FHLBB’s regulatory capital status; (2) the economic losses resulting from credit deterioration on the mortgage-backed securities increases significantly; or (3) capital preservation strategies being utilized by the FHLBB become ineffective.

(3) Loans and the Allowance for Loan Losses

Loans.Loans that management has the intent and ability to hold for the foreseeable future are reported at the principal amount outstanding, adjusted by unamortized discounts, premiums, and net deferred loan origination costs and fees.

Loans classified as held for sale are stated at the lower of aggregate cost or fair value. Fair value is estimated based on outstanding investor commitments. Net unrealized losses, if any, are provided for in a valuation allowance by charges to operations. The Company enters into forward commitments (generally on a best efforts delivery basis) to sell loans held for sale in order to reduce market risk associated with the origination of such loans. Loans held for sale are sold on a servicing released basis. As of December 31, 2011 loans held for sale totaled $221 thousand compared to $0 at March 31, 2011.

Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income.

The Company carefully evaluates all loan sales agreements to determine whether they meet the definition of a derivative as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company generally uses “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income. The fair value of forward loan sale commitments at December 31, 2011 was not material.

Loan origination fees, net of certain direct loan origination costs, are deferred and are amortized into interest income over the contractual loan term using the level-yield method.

Interest income on loans is recognized on an accrual basis only if deemed collectible. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans and amortization of net deferred loan fees or costs are discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or when a loan becomes contractually past due 90 days with respect to interest or principal. The accrual on some loans, however, may continue even though they are more than 90 days past due if management deems it appropriate, provided that the loans are well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

8

Loans are classified as impaired when it is probable that the Bank will not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value such as loans held for sale, are accounted for at the present value of the expected future cash flows discounted at the loan’s effective interest rate or as a practical expedient in the case of collateral dependent loans, the lower of the fair value of the collateral less selling and other costs, or the recorded amount of the loan. In evaluating collateral values for impaired loans, management obtains new appraisals or opinions of value when deemed necessary and may discount those appraisals depending on the likelihood of foreclosure. Other factors considered by management when discounting appraisals are the age of the appraisal, availability of comparable properties, geographic considerations, and property type. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impairment classification. For all loans, charge-offs occur when management believes that the collectability of a portion or all of the loan’s principal balance is remote. Management considers nonaccrual loans, except for certain nonaccrual residential and consumer loans, to be impaired. However, all troubled debt restructurings (“TDRs”) are considered to be impaired. In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-02,Receivables (Topic 310): A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring.The Company adopted this guidance on June 30, 2011 and applied it retrospectively to April 1, 2011, the beginning of the annual period of adoption. In evaluating when a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. The majority of TDRs involve a modification in loan terms such as a temporary reduction in the interest rate or a temporary period of interest only, and escrow (if required). TDRs are accounted for as set forth in ASC 310. A TDR is typically on non-accrual until the borrower successfully performs under the new terms for at least six consecutive months. However, a TDR may be kept on accrual immediately following the restructuring in those instances where a borrower’s payments are current prior to the modification and management determines that principal and interest under the new terms are fully collectible.

Existing performing loan customers who request a loan (non-TDR) modification and who meet the Bank’s underwriting standards may, usually for a fee, modify their original loan terms to terms currently offered. The modified terms of these loans are similar to the terms offered to new customers with similar credit, income, and collateral. Each modification is examined on a loan-by-loan basis and if the modification of terms represents more than a minor change to the loan, then the unamortized balance of the pre-modification deferred fees or costs associated with the mortgage loan are recognized in interest income at the time of the modification. If the modification of terms does not represent more than a minor change to the loan, then the unamortized balance of the pre-modification deferred fees or costs continue to be deferred and amortized over the remaining life of the loan.

Allowance for Loan Losses.The allowance for loan losses is maintained at a level determined to be adequate by management to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off, and reduced by charge-offs on loans or reductions in the provision credited to operating expense.

The Bank 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.

Regarding impaired loans, the Bank individually evaluates each such loan and documents what management believes to be an appropriate reserve level in accordance with Accounting Standards Codification (“ASC”) 310Receivables (“ASC 310”). If management does not believe that any separate reserve for such loan is deemed necessary at the evaluation date in accordance with ASC 310, that loan would continue to be evaluated separately and will not be returned to be included in the general ASC 450Contingencies (“ASC 450”) formula

9

based reserve calculation. In evaluating impaired loans, all related management discounts of appraised values, selling and resolution costs are taken into consideration in determining the level of reserves required when appropriate.

The methodology employed in calculating the allowance for loan losses is portfolio segmentation. For the commercial real estate (“CRE”) portfolio, this is further refined through stratification within each segment based on loan-to-value (LTV) ratios. The CRE portfolio is further segmented by type of properties securing those loans. This approach allows the Bank to take into consideration the fact that the various sectors of the real estate market change value at differing rates and thereby present different risk levels. CRE loans are segmented into the following categories:

• Apartments

• Offices

• Retail

• Mixed Use

• Industrial/Other

CRE loans are segmented monthly using the above collateral-types and three LTV ratio categories: <40%, 40%-60%, and >60%. While these ranges are subjective, management feels that each category represents a significantly different degree of risk from the other. CRE loans carrying higher LTV ratios are assigned incrementally higher ASC 450 reserve rates. Annually, for the CRE portfolio, management adjusts the appraised values which are used to calculate LTV ratios in our allowance for loan losses calculation. The data is provided by an independent appraiser and it indicates annual changes in value for each property type in the Bank’s market area for the last ten years. Management then adjusts the appraised or most recent appraised values based on the year the appraisal was made. These adjustments are believed to be appropriate based on the Bank’s own experience with collateral values in its market area in recent years. Based on the Company’s allowance for loan loss methodology with respect to CRE, unfavorable trends in the value of real estate will increase the required level of the Company’s ASC 450 allowance for loan losses.

In developing ASC 450 reserve levels, recent regulatory guidance suggests using the Bank’s charge-off history as a starting point. For each loan type, we utilize a two-year average for our historical loss ratio. We believe that two years is appropriate at this time as it captures the economic downturn. The two-year average may be adjusted over time to cover longer periods as the economy improves. The charge-off ratios are then adjusted based on trends in delinquent and impaired loans, trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff, national and local economic trends, industry conditions, and changes in credit concentrations. There is a concentration in CRE loans, but the concentration is decreasing. Management’s efforts to reduce the levels of commercial real estate and construction loans are reflected in changes in the Bank’s commercial real estate concentration ratio, which is calculated as total non-owner occupied commercial real estate and construction loans divided by the Bank’s risk-based capital. At December 31, 2011, the commercial real estate concentration ratio was 296%, compared to a ratio of 330% at March 31, 2011.

Residential loans, home equity loans and consumer loans, other than TDRs and loans in the process of foreclosure or repossession, are collectively evaluated for impairment. Factors considered in determining the appropriate ASC 450 reserve levels are trends in delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff, national and local economic trends, industry conditions, and changes in credit concentrations. TDRs and loans that are in the process of foreclosure or repossession are evaluated under ASC 310.

Commercial and industrial and construction loans that are not impaired are evaluated under ASC 450 and factors considered in determining the appropriate reserve levels include trends in delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff, national and local economic trends, industry conditions, and changes in credit concentrations. Those loans that are individually reviewed for impairment are evaluated according to ASC 310.

During the three months ended December 31, 2011, management increased the ASC 450 loss factors related to changes in value of collateral for residential loans and trends in charge-offs and recoveries for residential

10

condominiums and commercial real estate loans. As a result of those changes and adjustments made by management for trends in recent historical losses, the impact to the allowance for loan losses were increases in ASC 450 reserves of $295 thousand for those loan types. During the nine months ended December 31, 2011, management increased the ASC 450 loss factors related to economic conditions for all loan types, changes in collateral values for residential loans, and trends in delinquencies and charge-offs and recoveries for commercial real estate loans. As a result of those changes and adjustments made by management for trends in recent historical losses, the impact to the allowance for loan losses were increases in ASC 450 reserves of 444 thousand for those loan types.

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 loan composition or volume, changes in economic market area conditions or other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect the Company’s operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. Management currently believes that there are adequate reserves and collateral securing nonperforming loans to cover losses that may result from these loans at December 31, 2011.

In the ordinary course of business, the Bank enters into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded lending commitments is included in other liabilities in the balance sheet. The reserve was $0 at December 31, 2011 and March 31, 2011.

Loans, excluding loans held for sale, as of December 31, 2011 and March 31, 2011 are summarized below (in thousands):

	December 31, 2011			March 31, 2011
Real estate loans:
Residential real estate and condominium	$	237,085		$	183,157
Commercial real estate		172,819			199,074
Land		424			456
Home equity lines of credit		8,599			8,426
Total real estate loans		418,927			391,113
Commercial and Industrial loans		1,164			2,212
Consumer loans		864			892
Total loans		420,955			394,217
Less: allowance for loan losses		(4,083	)		(3,892	)
Total loans, net	$	416,872		$	390,325

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The following is a summary of the activity in the allowance for loan losses by loan portfolio segment for the three and nine months ended December 31, 2011 and 2010 (in thousands):

	For the Three Months Ending December 31, 2011
	Residential Real Estate and Condominium			Commercial Real Estate And Land			Commercial And Industrial Loans			Consumer Loans			Unallocated			Total
Beginning balance	$	1,393		$	2,635		$	12		$	6		$	127		$	4,173
Charge offs		(204	)		(186	)		—			(1	)		—			(391	)
Recoveries		—			—			—			1			—			1
Provision (benefit)		203			68			(1	)		—			30			300
Ending balance	$	1,392		$	2,517		$	11		$	6		$	157		$	4,083
	For the Three Months Ending December 31, 2010
	Residential Real Estate and Condominium			Commercial Real Estate And Land			Commercial And Industrial Loans			Consumer Loans			Unallocated			Total
Beginning balance	$	929		$	2,566		$	36		$	20		$	82		$	3,633
Charge offs		(12	)		(171			—			(2	)		—			(185	)
Recoveries		—			—			—			—			—
Provision (benefit)		13			355			(13	)		—			(55	)		300
Ending balance	$	930		$	2,750		$	23		$	18		$	27		$	3,748
	For the Nine Months Ending December 31, 2011
	Residential Real Estate and Condominium			Commercial Real Estate And Land			Commercial And Industrial Loans			Consumer Loans			Unallocated			Total
Beginning balance	$	816		$	2,771		$	16		$	17		$	272		$	3,892
Charge offs		(326	)		(604	)		(3	)		(10	)		—			(943	)
Recoveries		30			—			—			4			—			34
Provision (benefit)		872			350			(2	)		(5	)		(115	)		1,100
Ending balance	$	1,392		$	2,517		$	11		$	6		$	157		$	4,083
	For the Nine Months Ending December 31, 2010
	Residential Real Estate and Condominium			Commercial Real Estate And Land			Commercial And Industrial Loans			Consumer Loans			Unallocated			Total
Beginning balance	$	853		$	2,037		$	44		$	22		$	82		$	3,038
Charge offs		(12	)		(171	)		—			(10	)		—			(193	)
Recoveries		—			—			—			3			—			3
Provision (benefit)		89			884			(21	)		3			(55	)		900
Ending balance	$	930		$	2,750		$	23		$	18		$	27		$	3,748

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The increased provision for loan losses during the nine months ended December 31, 2011 compared to the nine months ended December 31, 2010 was primarily due to net increased allocated reserves for three commercial loans with balances of $3.7 million at December 31, 2011 and two residential loans with balances of $463 thousand at December 31, 2011.

Financing Receivables on Nonaccrual Status as of:
	December 31,		March 31,
	2011		2011
	(In Thousands)
Commercial real estate:
Mixed Use	$	1,875	$	1,616
Industrial (other)		1,360		1,500
Retail		923		769
Apartments		2,145		2,757
Offices		718		—
Residential:
Residential Real Estate		2,535		2,587
Condominium		264		352
Home equity lines of credit		20		—
	$	9,840	$	9,581

Total nonaccrual loans include nonaccrual impaired loans as well as certain nonaccrual residential loans that are not considered impaired.

The following is an age analysis of past due loans as of December 31, 2011 and March 31, 2011, by loan portfolio classes (in thousands):

	Age Analysis of Past Due Financing Receivables
	as of December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total
Commercial real estate:
Mixed use	$	—	$	—	$	347	$	347	$	32,303	$	32,650
Apartments		—		1,389		587		1,976		62,039		64,015
Industrial (other)		625		—		734		1,359		35,418		36,777
Retail		—		—		923		923		23,700		24,623
Offices		—		—		718		718		14,036		14,754
Land and Construction		—		—		—		—		424		424
Residential:
Residential real estate		1,843		521		323		2,687		204,443		207,130
Condominium		—		—				—		29,955		29,955
Home Equity Lines of Credit		59		—		20		79		8,520		8,599
Commercial and Industrial Loans		—		—		—		—		1,164		1,164
Consumer Loans		—		—		—		—		864		864
	$	2,527	$	1,910	$	3,652	$	8,089	$	412,866	$	420,955

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	Age Analysis of Past Due Financing Receivables
	as of March 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total
Commercial real estate:
Mixed use	$	398	$	—	$	1,616	$	2,014	$	36,605	$	38,619
Apartments		—		258		2,757		3,015		75,655		78,670
Industrial (other)		—		—		1,500		1,500		36,005		37,505
Retail		—		—		—		—		29,045		29,045
Offices		—		—		—		—		15,235		15,235
Land		—		—		—		—		456		456
Residential:
Residential real estate		782		247		1,299		2,328		154,266		156,594
Condominium		—		—		352		352		26,211		26,563
Home equity lines of credit		—		—		—		—		8,426		8,426
Commercial and industrial loans		—		—		—		—		2,212		2,212
Consumer loans		4		—		—		4		888		892
	$	1,184	$	505	$	7,524	$	9,213	$	385,004	$	394,217

There was one loan with a balance of $347 thousand which was past due 90 days or more and still accruing interest as of December 31, 2011 and March 31, 2011.

Credit Quality Indicators.Management regularly reviews the problem loans in the Bank's portfolio to determine whether any assets require classification in accordance with Bank policy and applicable regulations. The following table sets forth the balance of loans classified as pass, special mention, or substandard at December 31, 2011 and March 31, 2011 by loan class. Pass are those loans not classified as special mention or lower risk rating. Special mention loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrowers have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such loans in the nonperforming loan categories. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all the weaknesses inherent as those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values, highly questionable and improbable. Loans classified as loss are considered uncollectible and of such little value that their continuance as loans without the establishment of specific loss allowance is not warranted. Loans classified as substandard, doubtful or loss are individually evaluated for impairment. At December 31, 2011 and March 31, 2011 there were no loans classified as doubtful or loss.

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The following table displays the loan portfolio by credit quality indicators as of December 31, 2011 and March 31, 2011 (in thousands):

	Credit Quality Indicators as of December 31, 2011
	Commercial and Industrial		Residential Real Estate and Condominium		Home Equity Lines of Credit		Commercial Real Estate		Land		Consumer Loans		Total
Pass	$	1,164	$	235,816	$	8,599	$	158,595	$	424	$	864	$	405,462
Special mention		—		—		—		8,747		—		—		8,747
Substandard		—		1,269		—		5,477		—		—		6,746
	$	1,164	$	237,085	$	8,599	$	172,819	$	424	$	864	$	420,955

	Credit Quality Indicators as of March 31, 2011
	Commercial and Industrial		Residential Real Estate And Condominium		Home Equity Lines of Credit		Commercial Real Estate		Land		Consumer Loans		Total
Pass	$	2,212	$	182,931	$	8,426	$	188,917	$	456	$	892	$	383,834
Special mention		—		—		—		7,128		—		—		7,128
Substandard		—		226		—		3,029		—		—		3,255
	$	2,212	$	183,157	$	8,426	$	199,074	$	456	$	892	$	394,217

The $1.0 million net increase in substandard residential loans during the nine months ended December 31, 2011 was due to the addition of eight loans totaling $1.3 million, partially offset by a decrease of $226 thousand as the substandard loan relationship at March 31, 2011 was transferred to OREO during the nine-month period. The $2.4 million net increase in substandard commercial real estate loans during the nine months ended December 31, 2011 was due to increases resulting from the downgrades of ten loans totaling $5.4 million, partially offset by decreases due to the settlement payoff of one loans which totaled $2.8 million and the full charge-off of another loan which totaled $258 thousand.

The following table displays the balances of non-impaired CRE loans with various Loan-to-Value (“LTV”) ratios by collateral type. The Bank considers this an additional credit quality indicator specifically as it relates to the CRE loan portfolio as of December 31, 2011 and March 31, 2011 (in thousands):

	Non-Impaired CRE Loans by Collateral Type and LTV Ratio  as of December 31, 2011
	Apartments		Offices		Mixed Use		Industrial (Other)		Retail		Total
< 40%	$	9,757	$	926	$	8,996	$	6,590	$	6,112	$	32,351
40% - 60%		24,434		8,154		8,893		8,602		11,925		62,008
> 60%		23,727		4,559		12,494		11,480		3,830		56,090
Participations		—		—		—		8,984		444		9,428
Total	$	57,918	$	13,639	$	30,353	$	35,656	$	22,311	$	159,877

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	Non-Impaired CRE Loans by Collateral Type and LTV Ratio  as of March 31, 2011
	Apartments		Offices		Mixed Use		Industrial (Other)		Retail		Total
< 40%	$	12,720	$	1,028	$	10,083	$	6,646	$	6,883	$	37,360
40% - 60%		22,994		8,299		7,899		9,055		16,220		64,467
> 60%		32,165		5,494		18,658		10,396		2,660		69,373
Participations		4,576		—		—		9,352		1,116		15,044
Total	$	72,455	$	14,821	$	36,640	$	35,449	$	26,879	$	186,244

The following is a summary of the allowance for loan losses and loans as of December 31, 2011 and March 31, 2011, by loan portfolio segment disaggregated by impairment method (in thousands):

	Allowance for Loan Losses as of December 31, 2011
	Residential Real Estate And Condominium		Commercial Real Estate And Land		Commercial And Industrial Loans		Consumer Loans		Unallocated		Total
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	342	$	905	$	—	$	—	$	—	$	1,247
Collectively evaluated for impairment		1,050		1,612		11		6		157		2,836
	$	1,392	$	2,517	$	11	$	6	$	157	$	4,083
Loans ending balance:
Individually evaluated for impairment	$	3,289	$	12,785	$	—	$	—	$	—	$	16,074
Collectively evaluated for impairment		242,395		160,458		1,164		864		—		404,881
	$	245,684	$	173,243	$	1,164	$	864	$	—	$	420,955

	Allowance for Loan Losses as of March 31, 2011
	Residential Real Estate And Condominium		Commercial Real Estate And Land		Commercial And Industrial Loans		Consumer Loans			Unallocated		Total
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	110	$	1,307	$	—	$	—		$	—	$	1,417
Collectively evaluated for impairment		763		1,513		17		16			166		2,475
	$	873	$	2,820	$	17	$	16		$	166	$	3,892
Loans ending balance:
Individually evaluated for impairment	$	3,588	$	12,486	$	—	$	—	��	$	—	$	16,074
Collectively evaluated for impairment		187,883		187,572		690		2,048			—		378,143
	$	191,421	$	200,058	$	690	$	2,048		$	—	$	394,217

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The following is a summary of impaired loans and their related allowances within the allowance for loan losses as of December 31, 2011 and March 31, 2011 (in thousands):

	Impaired Loans and Their Related Allowances as of December 31, 2011
	Recorded Investment *		Unpaid Principal Balance		Related Allowance		Partial Charge-offs		Average Recorded Investment		Interest Income Recognized During Quarter
With no related allowance recorded:
Residential Real Estate and Condominium	$	1,543	$	1,696	$	—	$	3	$	1,683	$	10
Commercial Real Estate and Land		4,534		4,333		—		16		5,305		84
With an allowance recorded:
Residential Real Estate and Condominium		1,638		1,636		342		162		1,726		3
Commercial Real Estate and Land		8,473		8,452		850		—		7,164		—
Total
Residential Real Estate and Condominium		3,181		3,332		342		165		3,409		13
Commercial Real Estate and Land	$	13,007	$	12,785	$	850	$	16	$	12,469	$	84

* Includes accrued interest, specific reserves and net unearned deferred fees and costs.

	Impaired Loans and Their Related Allowances as of March 31, 2011
	Recorded Investment *		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Residential Real Estate and Condominium	$	2,119	$	2,123	$	—
Commercial Real Estate and Land		8,894		8,920		—
		—		—		—
With an allowance recorded:
Residential Real Estate and Condominium		1,468		1,630		110
Commercial Real Estate and Land		3,629		4,580		1,307
Total
Residential Real Estate and Condominium		3,587		3,753		110
Commercial Real Estate and Land	$	12,523	$	13,500	$	1,307

* Includes accrued interest, specific reserves and net unearned deferred fees and costs.

Impaired loans are evaluated separately and measured utilizing guidance set forth by ASC 310 as described in Note 1 to the Company’s audited financial statements for the year ended March 31, 2011. All loans modified in TDRs are included in impaired loans.

At December 31, 2011 total TDRs amounted to $9.7 million and were comprised of nine residential real estate loan relationships which totaled $2.3 million and five commercial real estate loan relationships which totaled $7.4 million. Additionally, at December 31, 2011, total accruing TDRs amounted to $4.2 million and total nonaccruing TDRs amounted to $5.5 million.

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Following are tables and discussions regarding TDR activity during the quarter and nine month periods ended December 31, 2011 and 2010 (in thousands):

	Troubled Debt Restructurings
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
TDRs during the quarter ended December 31, 2011:
Commercial Real Estate:
Apartments		1	$	1,558	$	1,558
Residential:
Residential Real Estate		2	$	163	$	163
			Defaulted Balance at December 31, 2011
TDRs during the 12 months ended December 31, 2011 which defaulted during the quarter ended December 31, 2011:
Commercial Real Estate:
Industrial (other)			$	—
Residential:
Residential real estate		1	$	199
Condominium			$	—
	Troubled Debt Restructurings
	Number		Pre-Modification		Post-Modification
	of		Outstanding Recorded		Outstanding Recorded
	Contracts		Investment		Investment
TDRs during the nine months ended December 31, 2011:
Commercial Real Estate:
Apartments		2	$	1,973	$	1,973
Residential:
Residential real estate		3	$	362	$	362
			Defaulted Balance at December 31, 2011
TDRs during the 12 months ended December 31, 2011 which defaulted during the nine months ended December 31, 2011:
Commercial Real Estate
Industrial (other)			$	—
Residential :
Residential real estate		2	$	950
Condominium			$	—

There were three troubled debt restructurings during the quarter ended December 31, 2011. During the nine months ended December 31, 2011, five customer relationships were modified in troubled debt restructurings comprised of two commercial real estate loan relationships which totaled $2.0 million as of December 31, 2011 and three residential customer relationships which totaled $362 thousand as of December 31, 2011. One commercial real estate TDR which totaled $1.6 million resulted from delinquencies due to tenant vacancies in the current economic environment. The modification consisted of six months of interest only to give the borrower time to effect an orderly liquidation of the properties. However, due to uncertainty regarding the success of the borrower’s efforts, management is considering this relationship to be collateral dependent with an allocated reserve of $355 thousand. The other commercial real estate TDR resulted from delinquencies due to the borrower’s financial difficulties. This modification also consisted of six months of interest only to give the borrower sufficient time to obtain financing elsewhere. During the quarter ended December 31, 2011 the borrower was able to obtain outside financing which resulted in payment in full of this customer’s loan balance. As there was no reduction in the interest rate, no loss resulted and therefore there was no allocated reserve for this commercial customer. One residential modification

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resulted from the re-default of a prior modification. Both modifications for this residential customer consisted of temporary reductions in the interest rate as management has attempted to allow this customer to work through financial difficulties. The customer was not able to meet the modified terms and this relationship is now considered to be collateral dependent with an allocated reserve of $85 thousand which represents the estimated loss under the foreclosure and sale of collateral scenario. The second residential TDR resulted in an estimated loss of $27 thousand after the Bank agreed to a short sale after the borrower experienced financial difficulties. The estimated loss is allocated within the allowance for loan losses until the transaction is consummated. The third residential TDR resulted from an agreement between the Bank and a residential borrower in bankruptcy. An allocated reserve of $15 thousand represents the estimated loss that will be realized once final approval of the agreement is accepted by the bankruptcy court. Regarding TDR re-defaults, all TDRs are considered impaired and are subject to individual loss analysis both at the time of the TDR and subsequent to the restructuring periodically as determined by management, which includes events of re-default. Management may change allocated reserves within the allowance for loan losses as necessary based upon those subsequent reviews.

	Troubled Debt Restructurings
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
TDRs during the quarter ended December 31, 2010:
Commercial Real Estate:
Mixed Use		1	$	1,397	$	1,397
Residential:
Residential Real Estate		1	$	359	$	359
			Defaulted Balance at December 31, 2010
TDRs during the 12 months ended December 31, 2010 which defaulted during the three months ended December 31, 2010:
Commercial Real Estate :
Industrial (other)		1	$	283
Residential
Residential real estate		2	$	585
	Troubled Debt Restructurings
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
TDRs during the nine months ended December 31, 2010:
Commercial Real Estate:
Apartments		1	$	4,130	$	4,130
Industrial (Other)		1	$	293	$	293
Mixed Use		2	$	2,918	$	3,073
Residential:
Residential real estate		3	$	1,323	$	1,323
Condominium		1	$	270	$	270
			Defaulted Balance at December 31, 2010
TDRs during the 12 months ended December 31, 2010 which defaulted during the nine months ended December 31, 2010:
Commercial Real Estate
Industrial (other)		1	$	283
Residential :
Residential real estate		4	$	1,536

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There were two troubled debt restructurings during the quarter ended December 31, 2010. During the nine months ended December 31, 2010, eight customer relationships were modified in troubled debt restructurings comprised of four commercial real estate loan relationships which totaled $7.3 million as of December 31, 2011 and four residential real estate loan relationships which totaled $1.6 million as of December 31, 2011. Three of the commercial real estate TDRs which totaled $5.8 million resulted from what management determined to be temporary cash flow difficulties. The modified terms consisted of six months of interest only and no forgiveness of principal. As there were no changes in the interest rate, no losses resulted and therefore there are no allocated reserves for these two customers which were determined to have temporary cash flow difficulties. The fourth commercial real estate TDR consisted of relationship which totaled $1.5 million. While there was no forgiveness of principal, the interest rate was reduced and payments were changed to interest-only. Additional funds were disbursed to pay past due taxes resulting in a post-TDR balance of $1.7 million. Management was unsure regarding the total collectability of the principal and interest under the modified terms, therefore the interest-only payments have been applied to principal resulting in an estimated reduction in interest income of $64 thousand during the nine months ended December 31, 2011. Additionally, management is considering this relationship to be collateral dependent with an allocated reserve of $315 thousand within the allowance for loan losses at December 31, 2011. Regarding the four residential TDRs, one totaled $839 thousand with TDR terms of interest only for six months and no forgiveness of principal, resulting in no estimated loss and no allocated reserve. The second residential TDR had an interest rate reduction for one year resulting in an estimated interest rate differential loss of $3 thousand which is allocated as a reserve within the allowance for loan losses. The third residential TDR consisted of interest only for three months. This customer continued to have financial problems and this relationship is considered to be collateral dependent with an allocated reserve of $70 thousand. The fourth residential TDR represents a loan that was restructured by the servicer. The servicer has not been cooperative regarding the details of the transaction, therefore, management is considering this loan to be collateral dependent with an allocated loss of $80 thousand. Regarding TDR re-defaults, all TDRs are considered impaired and are subject to individual loss analysis both at the time of the TDR and subsequent to the restructuring periodically as determined by management, which includes events of re-default. Management may change allocated reserves within the allowance for loan losses as necessary based upon those subsequent reviews.

(4) Deposits

Deposits at December 31, 2011 and March 31, 2011 are summarized as follows (in thousands):

	December 31, 2011		March 31, 2011
Demand deposit accounts	$	44,341	$	40,745
NOW accounts		27,857		28,989
Passbook and other savings accounts		58,434		55,326
Money market deposit accounts		68,210		76,201
Total non-certificate accounts		198,842		201,261
Term deposit certificates:
Certificates of $100,000 and above		69,520		40,843
Certificates of less than $100,000		64,347		66,973
Total term deposit certificates		133,867		107,816
Total deposits	$	332,709	$	309,077

(5) Subordinated Debentures

On September 16, 2004, the Company completed a trust preferred securities financing in the amount of $5.1 million. In the transaction, the Company formed a Delaware statutory trust, known as Central Bancorp Capital Trust I (“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, 2011 the interest rate was 2.99%. The Trust I

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Debentures are the sole assets of Trust I and are subordinate to all of the Company’s existing and future obligations for borrowed money. With respect to Trust I, the trust preferred securities and debentures each have 30-year lives and may be callable by the Company or Trust I, at their respective option, after five years, and sooner in the case of certain specific events, including in 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 debentures may be deferred at any time or from time to time for a period not exceeding 20 consecutive quarterly periods (five years), provided there is no event of default.

On January 31, 2007, the Company completed a trust preferred securities financing in the amount of $5.9 million. In 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 in 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/or the Trust II Debentures. Concurrently with the issuance of the Trust I and the Trust II Debentures and the trust preferred securities, the Company issued guarantees related to each trust’s securities for the benefit of the respective holders of Trust I and Trust II.

(6) Other Comprehensive Income

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

The Company’s other comprehensive income (loss) and related tax effect for the three and nine months ended December 31, 2011 and 2010 are as follows (in thousands):

	For the Three Months Ended									For the Three Months Ended
	December 31, 2011									December 31, 2010
	Before						After			Before				After
	Tax			Tax			Tax			Tax		Tax		Tax
	Amount			Effect			Amount			Amount		Effect		Amount
Unrealized gains on securities:
Unrealized net holding gains during period	$	380		$	151		$	229		$	187	$	68	$	119
Less: reclassification adjustment for net (losses) gains included in net income		(47	)		(19	)		(28	)		13		5		8
Other comprehensive income	$	427		$	170		$	257		$	174	$	63	$	111

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	For the Nine Months Ended									For the Nine Months Ended
	December 31, 2011									December 31, 2010
	Before						After			Before						After
	Tax			Tax			Tax			Tax			Tax			Tax
	Amount			Effect			Amount			Amount			Effect			Amount
Unrealized (losses) gains on securities:
Unrealized net holding losses during period	$	(218	)	$	(71	)	$	(147	)	$	60		$	20		$	40
Less: reclassification adjustment for net gains (losses) included in net income		507			204			303			(170	)		(70	)		(100	)
Other comprehensive (loss) income	($	725	)	($	275	)	($	450	)	$	230		$	90		$	140

(7) Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk. The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unused lines of credit, unadvanced portions of commercial loans, and commitments to originate loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets. The amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to its financial instruments is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Financial instruments with off-balance sheet risks as of December 31, 2011 and March 31, 2011 included the following (In thousands):

	At December 31, 2011		At March 31, 2011
Unused lines of credit	$	15,617	$	15,940
Unadvanced portions of commercial loans		414		459
Commitments to originate residential mortgage loans		15,246		11,232
Commitments to sell residential mortgage loans		—		595
Total off-balance sheet commitments	$	31,277	$	28,226

Commitments to originate loans, unused lines of credit and unadvanced portions of commercial loans are agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower.

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Legal Proceedings.The Company from time to time is involved in various legal actions incident to its business. At December 31, 2011, none of these actions is believed to be material, either individually or collectively, to the results of operations and financial condition of the Company.

(8) Subsequent Events

On January 19, 2012, the Company’s Board of Directors approved the payment of a quarterly cash dividend of $0.05 per common share. The dividend is payable on or about February 17, 2012 to common stockholders of record as of February 3, 2012.

(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, 2011 and 2010, there were approximately 138,000 and 159,000 unallocated ESOP shares, respectively.

The following depicts a reconciliation of earnings per share:

	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
	(Amounts in thousands except share and per share amounts)						(Amounts in thousands except share and per share amounts)
Net income as reported	$	360		$	345		$	800		$	1,484
Less preferred dividends and accretion		(129	)		(154	)		(736	)		(463	)
Net income available to common stockholders	$	231		$	191		$	64		$	1,021
Weighted average number of common shares outstanding		1,681,071			1,667,151			1,681,071			1,667,151
Weighted average number of unallocated ESOP shares		(139,771	)		(161,278	)		(145,147	)		(166,654	)
Weighted average number of common shares outstanding used in calculation of basic earnings per share		1,541,300			1,505,873			1,535,924			1,500,497
Incremental shares from the assumed exercise of dilutive securities		28,776			127,292			112,630			107,623
Weighted average number of common shares outstanding used in calculating diluted earnings per share		1,570,076			1,633,165			1,648,554			1,608,120
Earnings per common share
Basic	$	0.15		$	0.13		$	0.04		$	0.68
Diluted	$	0.15		$	0.12		$	0.04		$	0.64

At December 31, 2011, 33,589 stock options were anti-dilutive and, therefore, excluded from the above calculations for the three and nine-month periods ended December 31, 2011. At December 31, 2010, 34,458 stock options were anti-dilutive and, therefore, excluded from the above calculation for both the three and nine-month periods ended December 31, 2010.

(10) Stock-Based Compensation

The Company accounts for stock-based compensation pursuant to ASC 718Compensation–Stock Compensation (“ASC 718”). The Company uses the Black-Scholes option pricing model as its method for

23

determining the fair value of stock option grants. The Company has previously adopted two qualified stock option plans for the benefit of officers and other employees under which an aggregate of 281,500 shares have been reserved for issuance. One of these plans expired in 1997 and the other plan expired in 2009. All awards under the plan that expired in 2009 were granted by the end of 2005. 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. However, a maximum of 100,000 restricted shares may be granted under the plan. 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, 2011, 49,880 shares remained unissued and available for award under the Incentive Plan, of which 9,880 were available to be issued in the form of stock grants.

Forfeitures of awards granted under the Incentive Plan are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately expected to vest. Estimated forfeiture rates represent only the unvested portion of a surrendered option and are typically estimated based on historical experience. Based on an analysis of the Company’s historical data, the Company applied a forfeiture rate of 0% to stock options outstanding in determining stock compensation expense for the nine months ended December 31, 2011 and 2010.

The Company granted no stock options in fiscal 2011. During the fourth quarter of fiscal 2011, 13,920 restricted shares were issued under the Incentive Plan. Of these shares, 5,871 shares vested immediately and 8,049 shares vest over a five-year life. No stock options or grants were issued during the quarter and nine months ended December 31, 2011. Stock-based compensation totaled $278,000 and $302,000 for the nine months ended December 31, 2011 and 2010, respectively.

Stock option activity was as follows for the nine months ended December 31, 2011:

	Number of Shares			Weighted Exercise Price
Outstanding at March 31, 2011		34,458		$	29.63
Exercised		—			—
Forfeited		—			—
Expired		(869	)	$	28.99
Outstanding at December 31, 2011		33,589		$	29.65
Exercisable at December 31, 2011		33,589		$	29.65

As of December 31, 2011, the Company expects all non-vested stock options to vest over their remaining vesting periods.

As of December 31, 2011, the expected future compensation costs related to options and restricted stock vesting is as follows: $24 thousand during the final three months of the fiscal year ending March 31, 2012; $30 thousand per year during the fiscal years ending March 31, 2013 through March 31, 2015; and $29 thousand during the fiscal year ending March 31, 2016.

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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, 2011 were as follows:

	Exercise Price		Number of Shares Outstanding			Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (1)
	$	28.99		23,589	(2)		3.2		—
		31.20		10,000	(3)		4.7		—
Average/Total	$	29.65		33,589			3.7	$	—

(1) Represents the total intrinsic value, based on the Company’s closing stock price of $17.05 on December 31, 2011, which would have been received by the option holders had all option holders exercised their options as of that date. As of December 31, 2011, the intrinsic value of outstanding stock options and exercisable stock options was $0.

(2) Fully vested and exercisable at the time of grant.

(3) Subject to vesting over five years, 100% vested at December 31, 2011.

A summary of restricted stock activity under all Company plans for the nine months ended December 31, 2011 is as follows:

	Number of Restricted Shares			Weighted Average Grant Date Value Fair
Non-vested at March 31, 2011	$	38,949		$	15.33
Granted		—			—
Vested		(8,400	)	$	31.20
Forfeited		—			—
Non-vested at December 31, 2011	$	30,549		$	10.97

(11) Bank-Owned Life Insurance

The Bank follows ASC 325Investments – Other (“ASC 325”) in accounting for bank-owned life insurance. Increases in the cash value are recognized in other noninterest income and are not subject to income taxes. The Bank reviewed the financial strength of the insurance carriers prior to the purchase of the policies, and continues to conduct such reviews on an annual basis. Bank-owned life insurance totaled $7.2 million at December 31, 2011.

(12) Recent Accounting Pronouncements

In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-02,Receivables (Topic 310): A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring.For public entities this update provides guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of this guidance on June 30, 2011 did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-03,Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.The main provisions in this amendment remove from the assessment of effective control (1) the criterion requiring the transferor to have the

25

ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Eliminating the transferor’s ability criterion and related implementation guidance from an entity’s assessment of effective control should improve the accounting for repos and other similar transactions. The guidance in this update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.The amendments in this update are a result of the work by the FASB and the International Accounting Standards Board to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for these amendments to result in a change in the application of the requirements of Topic 820. The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income.The objective of this update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments in this update require that all non-owner changes in stockholders’ equity be presented either in as single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08,Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.The objective of this update is to simplify how entities test goodwill for impairment. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are to be applied prospectively. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-10,Property, Plant, and Equipment (Topic 360): De-recognition of in Substance Real Estate – a Scope Clarification.Under the amendments in this update, when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. The amendments are to be applied prospectively to deconsolidation events occurring after the effective date. The amendments are effective for fiscal years and interim periods within those years, beginning on or after June 15, 2012. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-11,Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.Under the amendments in this update, entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a

26

master netting arrangement. This scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by the amendment retrospectively for all comparative periods presented. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12,Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.The objective of this update is to allow the FASB to reconsider whether it is necessary to require entities to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in as single continuous financial statement or in two separate but consecutive financial statements. The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.

(13) Fair Value Disclosures

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

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

The Company uses fair value measurements to record certain assets at fair value on a recurring basis. Additionally, the Company may be required to record fair values 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.

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The only assets of the Company recorded at fair value on a recurring basis at December 31, 2011 and March 31, 2011 were securities available for sale. The assets of the Company recorded at fair value on a nonrecurring basis at December 31, 2011 and March 31, 2011 were collateral dependent loans and other real estate owned (“OREO”). The following table presents the level of valuation assumptions used to determine the values of such securities and loans:

At December 31, 2011	Carrying Value (In Thousands)
	Level 1		Level 2		Level 3		Total
Assets recorded at fair value on a recurring basis:
Securities available for sale
Government agency and government sponsored agency mortgage-backed securities	$	—	$	28,088	$	—	$	28,088
Single issuer trust preferred securities issued by financial institutions		1,040		—		—		1,040
Perpetual preferred stock issued by financial institutions		814		1,960		—		2,774
Common stock		3,367		—		—		3,367
Assets measured at estimated fair value on a nonrecurring basis:
Impaired loans:
CRE		—		—		3,541		3,541
Residential		—		—		965		965
OREO		—		—		320		320

At March 31, 2011	Carrying Value (In Thousands)
	Level 1		Level 2		Level 3		Total
Assets recorded at fair value on a recurring basis:
Securities available for sale
Government agency and government sponsored agency mortgage-backed securities	$	—	$	18,823	$	—	$	18,823
Single issuer trust preferred securities issued by financial institutions		1,049		—		—		1,049
Perpetual preferred stock issued by financial institutions		2,063		1,122		—		3,185
Common stock		2,128		—		—		2,128
Assets measured at estimated fair value on a nonrecurring basis:
Impaired loans:
CRE		—		—		4,566		4,566
Residential		—		—		433		433
OREO		—		—		132		132

There were no Level 3 securities at December 31, 2011 or March 31, 2011. The Company did not have any sales, purchases or transfers of Level 3 available for sale securities during the quarter ended December 31, 2011.

At December 31, 2011, the fair value of one government sponsored enterprise preferred stock amounting to $36 thousand was measured using Level 1 inputs in comparison to March 31, 2011, at which time the security had a fair value of $46 thousand and was measured using Level 2 inputs. The transfer from Level 2 to Level 1 was primarily the result of increased trading volume of the security at and around December 31, 2011. The fair value as of December 31, 2011 was determined using actual trades of the exact security, whereas the fair value as of March 31, 2011 was determined by matrix pricing models based upon comparable securities. At December 31, 2011, the fair value of one financial institution preferred stock amounting to $1.1 million was measured using Level 2 inputs in comparison to March 31, 2011, at which time the security had a fair value of $1.1 million and was measured using Level 1 inputs. The transfer from Level 1 to Level 2 was primarily the result of decreased trading volume of

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the security at and around December 31, 2011. The fair value as of December 31, 2011 was determined by matrix pricing models based upon comparable securities, whereas the fair value as of December 31, 2011 was determined using actual trades of the exact security. There were no other transfers of Level 1 or Level 2 securities during the nine months ended December 31, 2011.

Management utilizes a fair value measurement to determine the allocated allowance for collateral dependent impaired loans on a periodic basis in periods subsequent to its initial recognition. At December 31, 2011, impaired loans measured at estimated fair value using Level 3 inputs amounted to $4.5 million, which represents ten customer relationships, compared to ten customer relationships which totaled $5.0 million at March 31, 2011. There were no impaired loans measured at estimated fair value using Level 2 inputs at December 31, 2011 or March 31, 2011. Level 3 inputs utilized to determine the estimated fair value of the impaired loan relationships at December 31, 2011 and March 31, 2011 consist of appraisals, which may be discounted by management using non-observable inputs, as well as estimated costs to sell.

OREO is measured at fair value less selling costs. Fair value is based upon independent market prices, fair appraised values of the collateral, or management’s estimation of the value of the collateral. During the nine months ended December 31, 2011, OREO increased by $188 thousand as the Bank foreclosed upon one parcel of residential property with an estimated value less selling costs of $55 thousand, and recorded a residential in-substance foreclosure of $133 thousand. As of December 31, 2011, the Company had three residential parcels of OREO which totaled $320 thousand.

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

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

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

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

Investment Securities Available for Sale -Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Examples of such instruments include publicly traded common and preferred stocks. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) and market interest rates and credit assumptions or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency and government sponsored agency mortgage-backed securities, as well as certain preferred and trust preferred stocks. Level 3 securities are securities for which significant unobservable inputs are utilized. There were no changes in valuation techniques used to measure similar assets during the period. Available for sale securities are recorded at fair value on a recurring basis.

Loans and Loans Held for Sale -The fair values of loans are estimated using discounted cash flow analysis, using interest rates, estimated using local market data, of which loans with similar terms would be made to borrowers of similar credit quality. The incremental credit risk for nonperforming loans has been considered in the determination of the fair value of loans. The fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. Regular reviews of the loan portfolio are performed to identify impaired loans for which specific allowance allocations are considered prudent. Valuations of impaired loans are made based on evaluations that the Bank believes to be appropriate in accordance with ASC 310, and such valuations are determined by reviewing current collateral values, financial information, cash flows, payment histories and trends and other relevant facts surrounding the particular credits.

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

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Stock in FHLBB -The carrying amount reported in the balance sheet for FHLBB stock approximates its fair value based on the redemption features of the stock.

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

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

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

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

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

Off-Balance Sheet Instruments -Fair values of the Company’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair value of off-balance-sheet instruments was not significant at December 31, 2011 and March 31, 2011.

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

	December 31, 2011				March 31, 2011
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets
Cash and due from banks	$	4,566	$	4,566	$	3,728	$	3,728
Short-term investments		32,494		32,494		37,190		37,190
Investment securities available for sale		35,269		35,269		25,185		25,185
Loans held for sale		221		221		—		—
Net loans		416,872		429,124		390,325		394,475
Stock in FHLB of Boston		8,518		8,518		8,518		8,518
The Co-operative Central Bank Reserve Fund		1,576		1,576		1,576		1,576
Accrued interest receivable		1,378		1,378		1,496		1,496
Liabilities
Deposits	$	332,709	$	332,206	$	309,077	$	300,875
Advances from FHLB of Boston		117,260		127,996		117,351		125,314
Subordinated debentures		11,341		8,899		11,341		8,651
Advance payments by borrowers for taxes and insurance		2,276		2,276		1,387		1,387
Accrued interest payable		398		398		397		397

(14) Troubled Asset Relief Program Capital Purchase Program

On August 25, 2011, the Company entered into and consummated a letter agreement (the “Repurchase Letter”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company redeemed, out of the proceeds of its issuance of 10,000 shares of its Series B Senior Non-Cumulative Perpetual Preferred Stock, all 10,000 outstanding shares of its Series A Fixed Rate Cumulative Perpetual Preferred Stock, liquidation amount $1,000 per share (the “Series A Preferred Stock”), for a redemption price of $10,013,889, including accrued but unpaid dividends to the date of redemption. On December 5, 2008, the Company sold $10.0 million in the Series A Preferred Stock to the 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. In connection with the investment, the Company had entered into a Letter Agreement and the related Securities Purchase Agreement with the Treasury pursuant to which the Company issued the 10,000 shares of Series A Preferred Stock and 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.

The Company subsequently repurchased the Warrant from the Treasury on October 19, 2011 for an aggregate purchase price of $2.525 million. For additional information, see Note 15.

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(15) U.S. Treasury Department Small Business Lending Fund

On August 25, 2011, the Company entered into and consummated a Securities Purchase Agreement (the “Purchase Agreement”) with the Secretary of the U.S. Department of the Treasury (the “Secretary”), pursuant to which the Company issued 10,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $10,000,000. The Purchase Agreement was entered into, and the Series B Preferred Stock was issued, pursuant to the Small Business Lending Fund (“SBLF”) program, a fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. The Company used the $10 million in SBLF funds to redeem shares of the Series A Preferred Stock issued under the TARP Capital Purchase Program.

The Series B Preferred Stock is entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Stock is outstanding, based upon changes in the level of “Qualified Small Business Lending” or “QSBL” (as defined in the Purchase Agreement) by the Company’s wholly owned subsidiary Central Co-operative Bank. Based upon the increase in the Bank’s level of QSBL over the baseline level calculated under the terms of the Purchase Agreement, the dividend rate for the initial dividend period has been set at five percent (5%). For the second through ninth calendar quarters, the dividend rate may be adjusted to between one percent (1%) and five percent (5%) per annum, to reflect the amount of change in the Bank’s level of QSBL. If the level of the Bank’s qualified small business loans declines so that the percentage increase in QSBL as compared to the baseline level is less than 10%, then the dividend rate payable on the Series B Preferred Stock would increase. For the tenth calendar quarter through four and one half years after issuance, the dividend rate will be fixed at between one percent (1%) and seven percent (7%) based upon the increase in QSBL as compared to the baseline. After four and one half years from issuance, the dividend rate will increase to 9% (including a quarterly lending incentive fee of 0.5%). In addition, beginning on January 1, 2014, and on all Series B Preferred Stock dividend payment dates thereafter ending on April 1, 2016, the Company will be required to pay to the Secretary, on each share of Series B Preferred Stock, but only out of assets legally available therefore, a fee equal to 0.5% of the liquidation amount per share of Series B Preferred Stock.

The Series B Preferred Stock is non-voting, except in limited circumstances. In the event that the Company misses five dividend payments, whether or not consecutive, the holder of the Series B Preferred Stock will have the right, but not the obligation, to appoint a representative as an observer on the Company’s Board of Directors. In the event that the Company misses six dividend payments, whether or not consecutive, and if the then outstanding aggregate liquidation amount of the Series B Preferred Stock is at least $25,000,000, then the holder of the Series B Preferred Stock will have the right to designate two directors to the Board of Directors of the Company.

The Series B Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal banking regulator.

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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 information contained in this section should be read in conjunction with the unaudited consolidated financial statements and footnotes appearing in Part I, Item 1 of this Form 10-Q.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to: recent and future bail-out actions by the government; the impact of the Company’s participation in the U.S. Department of Treasury’s Small Business Lending Fund; a further slowdown in the national and Massachusetts economies; a further deterioration in asset values locally and nationwide; the volatility of rate-sensitive deposits; changes in the regulatory environment; increasing competitive pressure in the banking industry; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; continued access to liquidity sources; changes in our borrowers’ performance on loans; changes in critical accounting policies and judgments; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; changes in the equity and debt securities markets; governmental action as a result of our inability to comply with regulatory orders and agreements; the effect of additional provision for loan losses; the effect of an impairment charge on our deferred tax asset; fluctuations of our stock price; the success and timing of our business strategies; the impact of reputation risk created by these developments on such matters as business generation and retention, funding and liquidity; the impact of regulatory restrictions on our ability to receive dividends from our subsidiaries; and political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions. Additionally, other risks and uncertainties may be described in reports the Company files with the SEC, including the Company’s Annual Report on Form 10-K for the year ended March 31, 2011, as filed with the Securities and Exchange Commission on June 17, 2011, which is available through the SEC’s website atwww.sec.gov. 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 bank 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 commercial real estate in its market area.

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

The Bank monitors its exposure to earnings fluctuations resulting from market interest rate changes. Historically, the Bank’s earnings have been vulnerable to changing interest rates due to differences in the terms to maturity or repricing of its assets and liabilities. For example, in a declining interest rate environment, the Bank’s

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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, 2011 as compared to the three and nine months December 31, 2010 and its financial condition at December 31, 2011 compared to March 31, 2011. 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, loans, fair value of other real estate owned, fair value of investments, income taxes, accounting for goodwill and impairment, and stock-based compensation to be its critical accounting policies. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions.

Allowance for Loan Losses.The allowance for loan losses is maintained at a level determined to be adequate by management to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off, and reduced by charge-offs on loans or reductions in the provision credited to operating expense.

The Bank 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.

Regarding impaired loans, the Bank individually evaluates each such loan and documents what management believes to be an appropriate reserve level in accordance with Accounting Standards Codification (“ASC”) 310Receivables (“ASC 310”). If management does not believe that any separate reserve for such loan is deemed necessary at the evaluation date in accordance with ASC 310, that loan would continue to be evaluated separately and will not be returned to be included in the general ASC 450Contingencies (“ASC 450”) formula based reserve calculation. In evaluating impaired loans, all related management discounts of appraised values, selling and resolution costs are taken into consideration in determining the level of reserves required when appropriate.

The methodology employed in calculating the allowance for loan losses is portfolio segmentation. For the commercial real estate (“CRE”) portfolio, this is further refined through stratification within each segment based on loan-to-value (LTV) ratios. The CRE portfolio is further segmented by type of properties securing those loans. This approach allows the Bank to take into consideration the fact that the various sectors of the real estate market change value at differing rates and thereby present different risk levels. CRE loans are segmented into the following categories:

• Apartments

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• Offices

• Retail

• Mixed Use

• Industrial/Other

CRE loans are segmented monthly using the above collateral-types and three LTV ratio categories: <40%, 40%-60%, and >60%. While these ranges are subjective, management feels that each category represents a significantly different degree of risk from the other. CRE loans carrying higher LTV ratios are assigned incrementally higher ASC 450 reserve rates. Annually, for the CRE portfolio, management adjusts the appraised values which are used to calculate LTV ratios in our allowance for loan losses calculation. The data is provided by an independent appraiser and it indicates annual changes in value for each property type in the Bank’s market area for the last ten years. Management then adjusts the appraised or most recent appraised values based on the year the appraisal was made. These adjustments are believed to be appropriate based on the Bank’s own experience with collateral values in its market area in recent years. Based on the Company’s allowance for loan loss methodology with respect to CRE, unfavorable trends in the value of real estate will increase the required level of the Company’s ASC 450 allowance for loan losses.

In developing ASC 450 reserve levels, recent regulatory guidance suggests using the Bank’s charge-off history as a starting point. The Bank’s charge-off history in recent years has been minimal. The charge-off ratios are then adjusted based on trends in delinquent and impaired loans, trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff, national and local economic trends, industry conditions, and changes in credit concentrations. There is a concentration in CRE loans, but the concentration is decreasing. Management’s efforts to reduce the levels of commercial real estate and construction loans are reflected in changes in the Bank’s commercial real estate concentration ratio, which is calculated as total non-owner occupied commercial real estate and construction loans divided by the Bank’s risk-based capital. At December 31, 2011, the commercial real estate concentration ratio was 296%, compared to a ratio of 330% at March 31, 2011 and 466% at March 31, 2010.

Residential loans, home equity loans and consumer loans, other than TDRs and loans in the process of foreclosure or repossession, are collectively evaluated for impairment. Factors considered in determining the appropriate ASC 450 reserve levels are trends in delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff, national and local economic trends, industry conditions, and changes in credit concentrations. TDRs and loans that are in the process of foreclosure or repossession are evaluated under ASC 310.

Commercial and industrial and construction loans that are not impaired are evaluated under ASC 450 and factors considered in determining the appropriate reserve levels include trends in delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff, national and local economic trends, industry conditions, and changes in credit concentrations. Those loans that are individually reviewed for impairment are evaluated according to ASC 310.

During the nine months ended December 31, 2011, management increased the ASC 450 loss factors related to economic conditions for all loan types, changes in collateral values for residential loans, and trends in delinquencies and charge-offs and recoveries for commercial real estate loans. As a result of those changes and adjustments made by management for trends in recent historical losses, the impact to the allowance for loan losses were increases in ASC 450 reserves of 444 thousand for those loan types.

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 loan composition or volume, changes in economic market area conditions or other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect the Company’s operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. Management currently believes that there are adequate reserves and collateral securing nonperforming loans to cover losses that may result from these loans at December 31, 2011.

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In the ordinary course of business, the Bank enters into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded lending commitments is included in other liabilities in the balance sheet. At December 31, 2011 and March 31, 2011, the reserve for unfunded commitments was not significant.

Loans.Loans that management has the intent and ability to hold for the foreseeable future are reported at the principal amount outstanding, adjusted by unamortized discounts, premiums, and net deferred loan origination costs and fees.

Loans classified as held for sale are stated at the lower of aggregate cost or fair value. Fair value is estimated based on outstanding investor commitments. Net unrealized losses, if any, are provided for in a valuation allowance by charges to operations. The Company enters into forward commitments (generally on a best efforts delivery basis) to sell loans held for sale in order to reduce market risk associated with the origination of such loans. Loans held for sale are sold on a servicing released basis. As of December 31, 2011, loans held for sale totaled $221 thousand compared to $0 at March 31, 2011.

Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income.

The Company carefully evaluates all loan sales agreements to determine whether they meet the definition of a derivative as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company generally uses “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income. At December 31, 2011, the fair value of forward loan sale commitments was not material.

Loan origination fees, net of certain direct loan origination costs, are deferred and are amortized into interest income over the contractual loan term using the level-yield method.

Interest income on loans is recognized on an accrual basis only if deemed collectible. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans and amortization of net deferred loan fees or costs are discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or when a loan becomes contractually past due 90 days with respect to interest or principal. The accrual on some loans, however, may continue even though they are more than 90 days past due if management deems it appropriate, provided that the loans are well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

Loans are classified as impaired when it is probable that the Bank will not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value such as loans held for sale, are accounted for at the present value of the expected future cash flows discounted at the loan’s effective interest rate or as a practical expedient in the case of collateral dependent loans, the lower of the fair value of the collateral less selling and other costs, or the recorded amount of the loan. In evaluating collateral values for impaired loans, management obtains new appraisals or opinions of value when deemed necessary and may discount those appraisals depending on the likelihood of foreclosure. Other factors considered by management when discounting appraisals are the age of the

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appraisal, availability of comparable properties, geographic considerations, and property type. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impairment classification. For all loans, charge-offs occur when management believes that the collectability of a portion or all of the loan’s principal balance is remote. Management considers nonaccrual loans, except for certain nonaccrual residential and consumer loans, to be impaired. However, all troubled debt restructurings (“TDRs”) are considered to be impaired. A TDR occurs when the Bank grants a concession to a borrower with financial difficulties that it would not otherwise consider. The majority of TDRs involve a modification in loan terms such as a temporary reduction in the interest rate or a temporary period of interest only, and escrow (if required). TDRs are accounted for as set forth in ASC 310. A TDR is typically on nonaccrual until the borrower successfully performs under the new terms for at least six consecutive months. However, a TDR may be kept on accrual immediately following the restructuring in those instances where a borrower’s payments are current prior to the modification and management determines that principal and interest under the new terms are fully collectible.

Existing performing loan customers who request a loan (non-TDR) modification and who meet the Bank’s underwriting standards may, usually for a fee, modify their original loan terms to terms currently offered. The modified terms of these loans are similar to the terms offered to new customers with similar credit, income, and collateral. Each modification is examined on a loan-by-loan basis and if the modification of terms represents more than a minor change to the loan, then the unamortized balance of the pre-modification deferred fees or costs associated with the mortgage loan are recognized in interest income at the time of the modification. If the modification of terms does not represent more than a minor change to the loan, then the unamortized balance of the pre-modification deferred fees or costs continue to be deferred and amortized over the remaining life of the loan.

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 an asset.

Accounting for Goodwill and Impairment. ASC 350, “Intangibles – Goodwill and Other Intangibles” (“ASC 350”), 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 ASC 350. In accordance with ASC 350, the Company does not amortize the goodwill balance of $2.2 million and the Company consists of a single reporting unit. 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, 2011 utilizing average earnings and average book and tangible book multiples of sales transactions of banks considered to be comparable to the Company, and management determined that no impairment existed at that date. During the December 31, 2011 impairment testing, management also considered utilizing market capitalization, but ultimately concluded that it was not an appropriate measure of the Company’s value due to the overall depressed valuations in the financial sector and the significance of the Company’s insider ownership and the lack of volume in trading in the Company’s shares of common stock. Management also does not believe that this measure generally reflects the premium that a buyer would typically pay for a controlling interest. No facts or circumstances have arisen after the Company’s impairment testing date to warrant an interim analysis.

Fair Value of Other Real Estate Owned. OREO is recorded at the lower of cost, or fair 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.

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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 determined by management to be temporary excluded from earnings and reported as a separate component of stockholders’ equity and comprehensive income. At December 31, 2011, all of the Bank’s investment securities were classified as available for sale.

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. For debt securities, when the Bank does not intend to sell the security, and it is more-likely-than-not that the Bank will not have to sell the security before recovery of its cost basis, it will recognize the credit component of a other-than-temporary impairment loss in earnings, and the remaining portion in other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as estimated based on the cash flows projections discounted at the applicable original yield of the security.

Stock-Based Compensation.The Company accounts for stock based compensation pursuant to ASC 718Compensation-Stock Compensation(“ASC 718”). The Company uses the Black-Scholes option pricing model as its method for 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 expired in 2009. 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, however, a maximum of 100,000 restricted shares may be granted under the plan. The exercise price of an option may not be less than the fair market value of the Company’s common stock on the date of grant of the option and may not be exercisable more than ten years after the date of grant. However, awards may become available again if participants forfeit awards under the plan prior to its expiration. As of December 31, 2011, 49,880 shares remained available for issue under the Incentive Plan, of which 9,880 were available to be issued in the form of stock grants.

Forfeitures of awards granted under the Incentive Plan are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately expected to vest. Forfeitures represent only the unvested portion of a surrendered option and are typically estimated based on historical experience. Based on an analysis of the Company’s historical data, the Company applied a forfeiture rate of 0% to stock options outstanding in determining stock compensation expense for the quarter and nine months ended December 31, 2011.

Comparison of Financial Condition at December 31, 2011 and March 31, 2011

Total assets were $521.3 million at December 31, 2011 compared to $487.6 million at March 31, 2011, representing an increase of $33.7 million, or 6.9%. The increase in total assets reflected strategic actions taken by management to reduce risk, which included increasing the residential loan portfolio by $54.9 million and continuing to de-emphasize commercial real estate lending in accordance with the Company’s business plan. Total loans (excluding loans held for sale) were $420.9 million at December 31, 2011, compared to $394.2 million at March 31, 2011, representing an increase of $26.7 million, or 6.8%. This increase was primarily due to increases in residential

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and home equity loans of $53.9 million and $173 thousand, respectively, offset by decreases in commercial real estate loans of $27.0 million. Residential and home equity loans increased from $191.6 million at March 31, 2011 to $245.7 million at December 31, 2011. Commercial and industrial loans decreased from $2.1 million at March 31, 2011 to $1.2 million at December 31, 2011 primarily due to the scheduled repayments of principal. Management’s efforts to reduce the levels of commercial real estate and land and construction loans are reflected in changes in the Bank’s commercial real estate concentration ratio, which is calculated as total non-owner occupied commercial real estate and land and construction loans divided by the Bank’s risk-based capital. At December 31, 2011 the commercial real estate concentration ratio was 296%, compared to a ratio of 330% at March 31, 2011.

The allowance for loan losses totaled $4.1 million at December 31, 2011 compared to $3.9 million at March 31, 2011, representing a net increase of $191 thousand, or 4.9%. This net increase was primarily due to a provision of $1.1 million for the nine months ended December 31, 2011 resulting from management’s review of the adequacy of the allowance for loan losses. Based upon management’s regular analysis of the adequacy of the allowance for loan losses, management considered the allowance for loan losses to be adequate at both December 31, 2011 and March 31, 2011. See “Comparison of Operating Results for the Quarters Ended December 31, 2011 and 2010–Provision for Loan Losses.”

Management regularly assesses the desirability of holding newly originated residential mortgage loans in the Bank’s portfolio or selling such loans in the secondary market. A number of factors are evaluated to determine whether or not to hold such loans in the Bank’s portfolio including current and projected liquidity, current and projected interest rates, projected growth in other interest-earning assets and the current and projected interest rate risk profile. Based on its consideration of these factors, management determined that most long-term residential mortgage loans originated during the nine months ended December 31, 2011 should be retained in the Bank’s portfolio 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 $37.1 million at December 31, 2011 compared to $40.9 million at March 31, 2011, representing a decrease of $3.9 million, or 9.4%. During the nine months ended December 31, 2011, proceeds from cash and cash equivalents, commercial real estate payoffs and increases in certificates of deposit were generally utilized to fund the growth in the residential loan portfolio.

Investment securities totaled $45.4 million at December 31, 2011 compared to $35.3 million at March 31, 2011, representing an increase of $10.1 million, or 28.6%. The increase in investment securities is primarily due to the purchase of $18.6 million in mortgage-backed securities and $2.4 million in common stock, offset by the sale of $6.2 million in mortgage-backed securities, the repayment of $3.6 million of principal on mortgage-backed securities and a net decrease of $725 thousand in the fair value of available for sale securities. Stock in the Federal Home Loan Bank of Boston totaled $8.5 million at both December 31, 2011 and March 31, 2011.

Banking premises and equipment, net, totaled $2.7 million at December 31, 2011 and March 31, 2011, respectively.

Other real estate owned totaled $320 thousand at December 31, 2011 compared to $132 thousand at March 31, 2011 as two new residential properties were added.

Deferred tax asset totaled $3.9 million at December 31, 2011 compared to $3.6 million at March 31, 2011.

The cash surrender value of a bank-owned life insurance policy on one executive is carried as an asset titled“Bank-Owned Life Insurance” and totaled approximately $7.2 million at December 31, 2011 compared to $7.0 million at March 31, 2011.

Total deposits amounted to $332.7 million at December 31, 2011 compared to $309.1 million at March 31, 2011, representing an increase of $23.6 million, or 7.6%. The increase was a result of the combined effect of a $26.0 million increase in certificates of deposit and a net decrease in core deposits of $2.4 million (consisting of all non-certificate accounts). Certificate of deposit growth for the nine months ended December 31, 2011 included

39

$24.2 million obtained through a non-broker listing service. During the nine months ended December 31, 2011, management utilized increases in deposits to fund residential loan portfolio growth in an effort to reduce risk in accordance with the Company’s business plan.

FHLBB advances amounted to $117.3 million at both December 31, 2011 and March 31, 2011.

Included in other liabilities at December 31, 2011 is $10.4 million which represents purchases of available for sale mortgage-backed securities which had December 2011 trade dates and January 2012 settlement dates.

The net decrease in stockholders’ equity from $47.1 million at March 31, 2011 to $44.8 million at December 31, 2011 was primarily due to a $2.5 million negotiated repurchase on October 19, 2011 of the warrant associated with the Company’s participation in the U.S. Department of Treasury’s TARP Capital Purchase Program. Other items contributing to the net decrease in stockholders’ equity during the period were a $450 thousand decrease in other comprehensive income due to an overall decrease in the market value of available for sale securities and $676 thousand of dividends paid to common and preferred stockholders, partially offset by net income of $800 thousand and stock-based compensation of $575 thousand.

Comparison of Operating Results for the Quarters Ended December 31, 2011 and 2010

Net income available to common shareholders for the quarter ended December 31, 2011 was $231 thousand, or $0.15 per diluted common share, as compared to net income available to common shareholders of $191 thousand, or $0.12 per diluted common share, for the comparable prior year quarter. The increase was primarily due to a decrease in net interest and dividend income of $156 thousand, an $86 decrease in non-interest income and a $58 thousand decrease in non-interest expenses. Additionally, for each of the quarters ended December 31, 2011 and 2010 net income available to common shareholders was reduced by $125 thousand for allocated dividends paid to preferred shareholders and accretion of the discount related to the Company’s December 2008 sale of $10.0 million of Series A Preferred Stock and a warrant to purchase 234,732 shares of the Company’s common stock pursuant to the TARP Capital Purchase Program. Using the $10.0 million in proceeds it received from 10,000 shares issued in Series B Preferred stock to the Treasury Department through the Company’s participation in the SBLF program, on August 25, 2011, the Company redeemed all 10,000 outstanding shares of its Series A Preferred Stock for a redemption price of $10,013,889, which amount includes accrued but unpaid dividends. The Company subsequently repurchased the warrant from the Treasury on October 19, 2011 for an aggregate purchase price of $2.525 million.

Interest and Dividend Income.Interest and dividend income decreased by $422 thousand, or 6.8%, to $5.8 million for the quarter ended December 31, 2011 as compared to $6.2 million for the same period of 2010. During the quarter ended December 31, 2011, the yield on interest-earning assets decreased by 25 basis points primarily due to a 52 basis point reduction in the yield on mortgage loans, partially offset by a 20 basis point decrease in the cost of interest bearing liabilities. The average balance of commercial real estate loans decreased by $40.1 million, from $217.4 million for the quarter ended December 31, 2010 to $177.3 million for the quarter ended December 31, 2011.

Interest Expense. Interest expense decreased by $266 thousand, or 13.8%, to $1.7 million for the quarter ended December 31, 2011 as compared to $1.9 million for the same period of 2010 primarily due to decreases in the average rates paid on deposits and FHLBB borrowings. The cost of deposits decreased by 19 basis points from 0.79% for the quarter ended December 31, 2010 to 0.60% for the quarter ended December 31, 2011, as some higher-cost certificates of deposit were either not renewed or were replaced by lower-costing deposits. The average balance of certificates of deposit totaled $133.4 million for the quarter ended December 31, 2011, compared to $126.7 million for the same period in 2010, an increase of $6.7 million. The average balance of lower-cost non-maturity deposits decreased by $8.8 million to $153.9 million for the quarter ended December 31, 2011, as compared to an average balance of $162.7 million for the same period of 2010. The average balance of FHLBB borrowings decreased by $10.9 million, from $128.1 million for the quarter ended December 31, 2010 to $117.3 million for the quarter ended December 31, 2011. The average cost of these borrowings declined as management utilized short-term investments to fund a maturing, relatively higher-rate advance during the quarter ended December 31, 2010.

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The following table presents average balances and average rates earned/paid by the Company for the three months ended December 31, 2011 compared to the three months ended December 31, 2010:

	Three Months Ended December 31,
	2011								2010
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Interest-earning assets:
Mortgage loans	$	427,631		$	5,343		5.00	%	$	416,517		$	5,746		5.52	%
Other loans		1,658			21		5.07			3,955			49		4.96
Investment securities		27,296			379		5.55			28,333			365		5.15
Federal Home Loan Bank Stock		8,518			6		0.28			8,518			—		—
Short-term investments		23,992			15		0.25			41,606			27		0.26
Total interest-earning assets		489,095			5,764		4.71			498,929			6,187		4.96
Allowance for loan losses		(4,102	)							(3,733	)
Noninterest-earning assets		25,942								27,624
Total Assets	$	510,935							$	522,820
Interest-bearing liabilities
Deposits	$	287,327			429		0.60		$	289,535			573		0.79
Advances from FHLB of Boston		117,274			1,102		3.76			128,134			1,226		3.83
Other borrowings		11,341			141		4.97			11,341			140		4.94
Total interest-bearing liabilities		415,942			1,672		1.61			429,010			1,939		1.81
Noninterest-bearing liabilities		49,761								47,332
Total liabilities		465,703								476,342
Stockholders’ equity		45,232								46,478
Total liabilities and stockholders’ equity	$	510,935							$	522,820
Net interest and dividend income				$	4,092							$	4,248
Net interest spread							3.10	%							3.15	%
Net interest margin							3.35	%							3.41	%

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 level at the end of each quarter. Periodically, the Company evaluates the allocations used in these calculations. During the quarters ended December 31, 2011 and 2010, management analyzed required allowance allocations for loans considered impaired under ASC 310 and the allocation percentages used when calculating potential losses under ASC 450. During the quarter ended December 31, 2011, management increased the ASC 450 loss factors related to changes in value of collateral for residential loans and trends in charge-offs and recoveries for residential condominiums and commercial real estate loans. As a result of those changes and adjustments made by management for trends in recent historical losses, the impact to the allowance for loan losses were increases in ASC 450 reserves of $295 thousand for those loan types. Management made no changes to ASC 450 loss factors during the quarter ended December 31, 2010. Based on these analyses, a provision for loan losses of $300 thousand was recorded during the quarters ended December 31, 2011 and December 31, 2010 respectively.

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Management gives high priority to monitoring and managing the Company’s asset quality. At December 31, 2011, nonperforming loans totaled $9.8 million as compared to $9.6 million on March 31, 2011. All twenty three of the loans included in this category at December 31, 2011 are secured by real estate collateral that is predominantly located in the Bank’s market area.

Noninterest Income. Noninterest income totaled $466 thousand for the quarter ended December 31, 2011 compared to $552 thousand for the quarter ended December 31, 2010. The decrease of $86 thousand was primarily due to a net decrease in securities related income of $61 thousand, as an other than temporary impairment write-down was taken on one available for sale equity security of $47 thousand during the current period compared to a write-down of $9 thousand on one available for sale equity security the quarter ended December 31, 2010. Additionally, gains on the sale of securities totaled $0 during the quarter ended December 31, 2011 compared to $22 thousand during the same period of 2010. Other items contributing to the overall decrease in non-interest income were decreases in deposit service charges of $411 thousand and gains on the sales of loans of $6 thousand.

Noninterest Expenses. Noninterest expenses decreased by $58 thousand, or 1.5%, to $3.8 million for the quarter ended December 31, 2011 as compared to $3.8 million for the quarter ended December 31, 2010 that was primarily a result of a $34 thousand decrease in salaries and benefits due to lower costs of loan originations, a $23 thousand decrease in data processing costs and a $15 thousand decrease in occupancy and equipment expenses, partially offset by a $14 thousand increase in other expense and a $10 thousand increase in foreclosure and collection expenses.

Salaries and employee benefits decreased by $34 thousand, or 1.5%, to $2.3 million during the quarter ended December 31, 2011 as compared to $2.3 million during the quarter ended December 31, 2010 primarily due to decreases of $75 in the costs of loan originations, $45 thousand decrease in incentive based compensation, and $38 thousand decrease in stock based compensation, partially offset by increase of $89 thousand for staffing increases, $29 thousand in contract labor costs, and $25 thousand in employee related benefits.

FDIC deposit insurance premiums decreased by $33 thousand to $106 thousand during the quarter ended December 31, 2011 compared to $139 thousand during the same quarter of 2010 due to a change in the calculation methodology implemented by the FDIC in April 2011 and lower deposit insurance costs due to declining average balances of deposits.

Advertising and marketing expenses decreased by $4 thousand to $20 thousand during the quarter ended December 31, 2011 as compared to $24 thousand during the same period of 2010 as the Company strategically decided to decrease advertising and marketing efforts on a limited basis.

Office occupancy and equipment expenses decreased by $15 thousand, or 2.9% to $508 thousand for the quarter ended December 31, 2011 as compared to $523 thousand during the same period of 2010.

Data processing fees decreased by $23 thousand, or 10.8%, to $189 thousand during the quarter ended December 31, 2011 as compared to $212 thousand during the same period of 2010 due to decreases in certain processing costs.

Professional fees decreased by $5 thousand, or 2%, to $228 thousand during the quarter ended December 31, 2011 as compared to $233 thousand during the same period of 2010 primarily due to decreases in loan workout-related expenses and contract labor costs, partially offset by higher legal fees.

Other expenses increased by $56 thousand, or 13.9%, to $458 thousand during the quarter ended December 31, 2011 as compared to $402 thousand during the quarter ended December 31, 2010 primarily as a result of an increase in telephone expenses of $28 thousand, a $15 thousand increase in directors’ fees and a $11 thousand increase for customer check printing costs, partially offset by a $9 thousand decrease in office supplies and a $5 thousand decrease in bank policy losses.

Income Taxes. The effective income tax rate for the quarter ended December 31, 2011 was 26.68%, compared to an effective income tax rate of 48.8% for the same quarter in 2010. The difference in the effective tax rate for the two periods was due to differences in the amounts and the composition of actual pre-tax income as well as differences in management’s estimates of projected pre-tax income for each fiscal year.

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Comparison of Operating Results for the Nine Months Ended December 31, 2011 and 2010

Net income available to common shareholders for the nine months ended December 31, 2011 was $64 thousand, or $0.04 per diluted share, as compared to net income of $1.0 million, or $0.64 per diluted share, during the nine months ended December 31, 2010. Items primarily affecting the Company’s earnings for the nine months ended December 31, 2011 when compared to the nine months ended December 31, 2010 was a 50 basis point reduction in the yield on mortgage loans, partially offset by a 28 basis point decrease in the average cost of interest bearing liabilities; and an increase in noninterest expenses of $418 thousand. Noninterest expenses increased primarily due to increases in salaries and benefits of $529 thousand and other expenses of $68 thousand, partially offset by decreases in data processing costs of $50 thousand and marketing expenses of $18 thousand. Additionally, for each of the nine months ended December 31, 2011 and 2010 net income was reduced by $375 thousand for allocated dividends to preferred shareholders related to the Company’s December 2008 sale of $10.0 million of preferred stock and warrant to purchase common stock to the U.S. Treasury Department as a participant in the federal government’s TARP Capital Purchase Program. On August 25, 2011, using the $10 million in proceeds it received from issued 10,000 shares in Series B Preferred stock to the Treasury Department through the Company’s participation in the SBLF program, the Company redeemed all 10,000 outstanding shares of its Series A Preferred Stock for a redemption price of $10,013,889, which amount included accrued but unpaid dividends. This transaction also resulted in the Company recording a deemed dividend of $299 thousand which further reduced net income available to common shareholders during the nine months ended December 31, 2011. The Company subsequently repurchased the warrant from the Treasury on October 19, 2011 for an aggregate purchase price of $2.525 million.

Interest and Dividend Income. Interest and dividend income decreased by $2.4 million, or 12.4%, to $17.2 million for the nine months ended December 31, 2011 compared to $19.6 million for the same period of 2010 primarily due to decreases in the average yields and average loan balances. The average balance of loans decreased primarily due to decreases in the average balances of commercial real estate and construction loans as the Bank continued to shift its focus from those loan types to originating residential real estate loans.

Interest Expense. Interest expense decreased by $1.3 million, or 20.4%, to $4.9 million for the nine months ended December 31, 2011 compared to $6.2 million for the same period of 2010. The cost of deposits decreased by 21 basis points from 0.90% during the quarter ended December 31, 2010 to 0.59% during the quarter ended December 31, 2011, as some higher-cost certificates of deposit were replaced by lower-costing deposits. The average balance of certificates of deposit totaled $128.5 million during the nine months ended December 31, 2010, compared to $122.5 million for the same period in 2011, a decline of $6 million. The average balance of lower-costing non-maturity deposits decreased by $7.9 million to $155.6 million for the nine months ended December 31, 2011, as compared to an average balance of $163.5 million for the same period of 2010. The average balance of FHLBB borrowings decreased by $14.8 million, from $132.1 million during the nine months ended December 31, 2010 to $117.3 million for the same period of 2011. The decrease in the average cost of these funds was the result of a decrease in market interest rates. The average cost of other borrowings decreased as a portion of these borrowings are adjustable and the average rate paid for the nine months ended December 31, 2011 was 4.91%, compared to an average rate of 4.94% during the same period of 2010.

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The following table presents average balances and average rates earned/paid by the Company for the nine months ended December 31, 2011 compared to the nine months ended December 31, 2010:

	Nine Months Ended December 31,
	2011								2010
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
				(Dollars in thousands)
Interest-earning assets:
Mortgage loans	$	419,139		$	16,143		5.14	%	$	435,555		$	18,423		5.64	%
Other loans		2,173			90		5.52			4,392			183		5.56
Investment securities		28,750			913		4.23			30,654			984		4.28
Federal Home Loan Bank Stock		8,518			19		0.30			8,518			—		—
Short-term investments		22,043			39		0.24			24,685			47		0.25
Total interest-earning assets		480,623			17,204		4.77			503,804			19,637		5.20
Allowance for loan losses		(4,204	)							(3,427	)
Noninterest-earning assets		24.429								27,380
Total assets	$	500,848							$	527,757
Interest-bearing liabilities:
Deposits	$	278,137			1,238		.59		$	292,069			1,962		.90
Advances from FHLB of Boston		117,302			3,295		3.75			132,084			3,837		3.87
Other borrowings		11,341			418		4.91			11,341			420		4.94
Total interest-bearing liabilities		406,780			4,951		1.62			435,494			6,219		1.90
Noninterest-bearing liabilities		47,461								46,363
Total liabilities		454,441								481,857
Stockholders’ equity		46,407								45,900
Total liabilities and stockholders’ equity	$	500,848							$	527,757
Net interest and dividend income				$	12,253							$	13,418
Net interest spread							3.15	%							3.30	%
Net interest margin							3.40	%							3.55	%

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 allowance level at the end of each quarter. Periodically, the Company evaluates the allocations used in these calculations. During the nine-month periods ended December 31, 2011 and 2010, management performed a thorough analysis of the loan portfolio as well as the required allowance allocations for loans considered impaired under ASC 310 and the allocation percentages used when calculating potential losses under ASC 450. During the nine months ended December 31, 2011, management increased the ASC 450 loss factors related to economic conditions for all loan types, changes in collateral values for residential loans, and trends in delinquencies and charge-offs and recoveries for commercial real estate loans. As a result of those changes and adjustments made by management for trends in recent historical losses, the impact to the allowance for loan losses were increases in ASC 450 reserves of 444 thousand for those loan types. During the nine months ended December 31, 2010, management increased the ASC 450 loss factors related to trends in delinquent

44

and impaired loans for residential real estate, commercial real estate, and commercial and industrial loans, and increased loss factors related to national and local economic conditions for commercial real estate and commercial and industrial loans. As a result of the aforementioned ASC 450 factor changes, the impact to the allowance for loan losses were increases in ASC 450 reserves of $35 thousand for residential loans, $51 thousand for CRE loans, and $1 thousand for commercial and industrial loans. Based on these analyses, the Company recorded a provision of $1.1 million for the nine months ended December 31, 2011 compared to a provision for loan losses of $900 thousand during the corresponding 2010 period.

Management continues to give high priority to monitoring and managing the Company’s asset quality. At December 31, 2011, nonperforming loans totaled $9.8 million as compared to $9.6 million at March 31, 2011. Of the twenty three loans constituting this category at December 31, 2011, all are secured by real estate collateral that is predominantly located in the Bank’s market area.

Noninterest Income. Noninterest income increased by $498 thousand from $1.4 million during the nine months ended December 31, 2010 to $1.9 million during the nine months ended December 31, 2011. The increase was primarily due to net gains on the sales and write-downs on investments, which totaled $507 thousand during the nine months ended December 31, 2011 compared to losses of $170 thousand during the prior year period. Partially offsetting the aforementioned increase were decreases in gains on sales of loans of $101 thousand due to decreased loan sale activity, deposit fees of $46 thousand, brokerage income of $23 thousand, and other income of $9 thousand.

Noninterest Expenses. Noninterest expense increased by $418 thousand, or 3.6% to $11.9 million during the nine months ended December 31, 2011 as compared to $11.5 million during the same period of 2010. This increase is due to increases in salaries and other benefits of $529 thousand, a $168 thousand increase in other expenses, and a $9 thousand increase in occupancy and equipment costs, partially offset by a $119 thousand decrease in FDIC insurance premiums, a $103 thousand decrease in other professional fees, a $50 thousand decrease in data processing costs, and a $18 thousand decrease in marketing expenses.

Salaries and employee benefits increased by $529 thousand, or 7.8%, to $7.3 million during the nine months ended December 31, 2011 as compared to $6.8 million during the same period of 2010 primarily due to increases of $368 thousand commissions paid for non-deposit investment product and loan origination and $244 thousand for salaries due to staffing increases.

FDIC deposit insurance premiums decreased by $119 thousand to $307 thousand during the nine months ended December 31, 2011 compared to $426 thousand during the same period of 2010. This decrease was primarily due to a change in the calculation methodology implemented by the FDIC in April 2011 and lower deposit insurance costs due to declining average balances of deposits.

Advertising and marketing expenses decreased by $18 thousand to $103 thousand during the nine months ended December 31, 2011 as compared to $121 thousand during the same period of 2010 as management strategically decided to deemphasize advertising and marketing efforts.

Office occupancy and equipment expenses increased by $9 thousand, or 0.6%, to $1.6 million during the nine months ended December 31, 2011 as compared to $1.5 million during the same period of 2010 primarily due to decreases in the amortization of leasehold improvements, depreciation of furniture, fixtures and equipment and decreases for other bank building expenses, partially offset by increases in computer/network maintenance costs, maintenance and repairs and security expenses.

Data processing costs decreased by $50 thousand, or 7.9%, to $579 thousand during the nine months ended December 31, 2011 as compared to $629 thousand during the same period of 2010 due to decreases in certain processing costs.

Income Taxes. The effective income tax rate for the nine months ended December 31, 2011 was 27.21%, compared to an effective income tax rate of 37.8% for the same period of 2010. The difference in the effective tax rate for the two periods was due to differences in the amounts and the composition of actual pre-tax income as well as differences in management’s estimates of projected pre-tax income for each fiscal year.

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Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s principal sources of liquidity are customer deposits, short-term investments, loan repayments, and advances from the FHLBB and funds from operations. The Bank is a voluntary member of the FHLBB 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 FHLBB. At December 31, 2011, the Company had approximately $65.2 million in unused borrowing capacity at the FHLBB. The Company also has established borrowing capacity with the Federal Reserve Bank of Boston (“FRB”) at December 31, 2011. The unused borrowing capacity at the FRB totaled $6.1 million at December 31, 2011.

At December 31, 2011, the Company had commitments to originate loans, unused outstanding lines of credit, undisbursed proceeds of loans totaling $16.1 million, and commitments to sell loans of $15.2 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, 2011, the Company believes it has sufficient funds available to meet its current loan commitments.

On September 29, 2009, the FDIC adopted an Amended Restoration Plan to enable the Deposit Insurance Fund to return to its minimum reserve ratio of 1.15% over eight years. Under this plan, the FDIC did not impose a previously-planned second special assessment (on June 30, 2009, the Bank accrued the first special assessment which totaled $270 thousand that was paid on December 31, 2009). Additionally, to meet bank failure cash flow needs, the FDIC assessed a three-year insurance premium prepayment, which was paid by banks in December 2009 and covers the period of January 1, 2010 through December 31, 2012. The FDIC estimates that bank failures will total approximately $100 billion during this three-year period. The Bank’s prepaid premium totaled $2.3 million and was paid during the quarter ended December 31, 2009, and it is being amortized monthly over the three-year period. This prepaid deposit premium is carried on the balance sheet in the other assets category and totaled $1.4 million at December 31, 2011.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company’s primary source of cash are dividends received from the Bank, and principal and interest payment receipts related to loans which the Company has made to the ESOP. Regarding dividends received from the Bank, the Bank may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Bank at the time of its conversion to stock form. The approval of the Massachusetts Commissioner of Banks is necessary for the payment of any dividend which exceeds the total net profits for the year combined with retained net profits for the prior two years. At December 31, 2011, the Company had liquid assets of $75 thousand.

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The following table sets forth the capital positions of the Company and the Bank at December 31, 2011:

	Actual			Regulatory Threshold For Well Capitalized
Central Bancorp:
Tier 1 Leverage		9.89	%		5.0	%
Tier 1 Risk-Based Ratio		15.70	%		6.0	%
Total Risk-Based Ratio		16.92	%		10.0	%
Central Co-operative Bank:
Tier 1 Leverage		8.87	%		5.0	%
Tier 1 Risk-Based Ratio		14.06	%		6.0	%
Total Risk-Based Ratio		15.28	%		10.0	%

Off-Balance Sheet Arrangements

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

For the year ended March 31, 2011 and for the nine months ended December 31, 2011, the Company engaged in no off-balance sheet transactions reasonably likely to have a material effect on its 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, 2011. 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, 2011.

Item 4. Controls and Procedures

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

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Periodically, there have been various claims and lawsuits against the Company considered 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 Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2011, as filed with the SEC on June 17, 2011. At December 31, 2011, the Company’s risk factors had not changed materially from those set forth in the Company’s Form 10-K and Form 10-Q.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.

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, 2011.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable.

Item 6. Exhibits

31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certifications
101*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

* Furnished, not filed.

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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 14, 2012	By:	/s/ John D. Doherty
		John D. Doherty
		Chairman and Chief Executive Officer
		(Principal Executive Officer)
February 14, 2012	By:	/s/ Paul S. Feeley
		Paul S. Feeley
		Senior Vice President, Treasurer and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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