##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
   FORM 10-Q (Mark One)  þ
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2004 OR  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from  to Commission file number: 0-25251 CENTRAL BANCORP, INC. Massachusetts
    
    04-3447594(State or Other Jurisdiction of Incorporation or
    
    (I.R.S. Employer Identification No.)Organization)399 Highland AvenueSomerville, Massachusetts
    
    02144(Address of Principal Executive Offices)
    
    (Zip Code)
 (617) 628-4000   N/A   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 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. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). o þ
 Common Stock, $1.00 par value
    
    1,588,598Class
    
    Outstanding at February 10, 2005




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CENTRAL BANCORP, INC. Table of Contents Page No.Part I. Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Statements of Financial Condition at December 31, 2004 and March 31, 2004
    
    
    1Consolidated Statements of Income for the three and nine months ended December 31, 2004 and 2003
    
    
    2Consolidated Statements of Changes in Stockholders Equity for the nine months ended December 31, 2004
    
    
    3Consolidated Statements of Cash Flows for the nine months ended December 31, 2004 and 2003
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Liquidity and Capital Resources
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17Part II. Other InformationItem 1. Legal Proceedings
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18SignaturesEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO




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##### Table of Contents



Part I. Financial Information 
 Item 1. Financial Statements CENTRAL BANCORP, INC. AND SUBSIDIARY 
   December 31,
    
    
    March 31,(Dollars in Thousands)
    
    2004
    
    
    2004ASSETSCash and due from banks
    
    $
    6,087
    
    
    $
    7,113Short-term investments
    
    
    40
    
    
    
    27,224Cash and cash equivalents
    
    
    6,127
    
    
    
    34,337Certificate of deposit
    
    
    602
    
    
    
    1,211Investment securities available for sale (amortized cost of $111,421
at December 31, 2004 and $80,201 at March 31, 2004)
    
    
    113,356
    
    
    
    83,771Stock in Federal Home Loan Bank of Boston, at cost
    
    
    8,300
    
    
    
    8,300The Co-operative Central Bank Reserve Fund
    
    
    1,576
    
    
    
    1,576Total investments
    
    
    123,232
    
    
    
    93,647Loans held for sale
    
    
    2,277
    
    
    
    799Loans (Note 2)
    
    
    372,282
    
    
    
    356,625Less allowance for loan losses
    
    
    3,621
    
    
    
    3,537Net loans
    
    
    368,661
    
    
    
    353,088Accrued interest receivable
    
    
    2,222
    
    
    
    2,203Banking premises and equipment, net
    
    
    2,508
    
    
    
    2,113Deferred tax asset, net
    
    
    447
    
    
    
    243Goodwill, net
    
    
    2,232
    
    
    
    2,232Other assets
    
    
    1,083
    
    
    
    1,024Total assets
    
    $
    509,391
    
    
    $
    490,897LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits (Note 3)
    
    $
    314,322
    
    
    $
    295,920Short-term borrowings
    
    
    146
    
    
    
    845Federal Home Loan Bank advances (Note 4)
    
    
    144,800
    
    
    
    141,100Subordinated debenture
    
    
    5,258
    
    
    
    ESOP Loan
    
    
    3,019
    
    
    
    3,311Advance payments by borrowers for taxes and insurance
    
    
    1,231
    
    
    
    1,182Accrued expenses and other liabilities
    
    
    1,867
    
    
    
    5,085Total liabilities
    
    
    470,643
    
    
    
    447,443Commitments and Contingencies (Note 6)Stockholders equity (Note 7):Preferred stock $1.00 par value; authorized 5,000,000 shares;
none issued or outstanding
    
    
    
    
    
    
    Common stock $1.00 par value; authorized 15,000,000 shares;
2,031,026 shares issued at December 31, 2004 and 2,030,251
shares issued at March 31, 2004
    
    
    2,031
    
    
    
    2,030Additional paid-in capital
    
    
    12,906
    
    
    
    12,920Retained income
    
    
    38,030
    
    
    
    36,855Treasury stock (442,428 shares at December 31, 2004 and 365,294
issued at March 31, 2004), at cost
    
    
    (9,892
    )
    
    
    (7,311
    )Accumulated other comprehensive income (Note 5)
    
    
    1,243
    
    
    
    2,293Unearned
compensation - ESOP
    
    
    (5,570
    )
    
    
    (3,333
    )Total stockholders equity
    
    
    38,748
    
    
    
    43,454Total liabilities and stockholders equity
    
    $
    509,391
    
    
    $
    490,897
 See accompanying notes to unaudited consolidated financial statements. 1




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY 
  
 Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Interest and dividend income:Mortgage loans
    
    $
    5,455
    
    
    $
    5,414
    
    
    $
    16,295
    
    
    $
    17,228Other loans
    
    
    104
    
    
    
    90
    
    
    
    275
    
    
    
    338Short-term investments
    
    
    46
    
    
    
    75
    
    
    
    165
    
    
    
    168Investments
    
    
    1,367
    
    
    
    997
    
    
    
    3,778
    
    
    
    2,681Total interest and dividend income
    
    
    6,972
    
    
    
    6,576
    
    
    
    20,513
    
    
    
    20,415Interest expense:Deposits
    
    
    1,184
    
    
    
    1,075
    
    
    
    3,550
    
    
    
    3,332Advances from Federal Home Loan Bank of Boston
    
    
    1,709
    
    
    
    1,768
    
    
    
    5,140
    
    
    
    5,299Other borrowings
    
    
    105
    
    
    
    40
    
    
    
    196
    
    
    
    41Total interest expense
    
    
    2,998
    
    
    
    2,883
    
    
    
    8,886
    
    
    
    8,672Net interest and dividend income
    
    
    3,974
    
    
    
    3,693
    
    
    
    11,627
    
    
    
    11,743Provision for loan losses
    
    
    
    
    
    
    50
    
    
    
    50
    
    
    
    150Net interest and dividend income after
provision for loan losses
    
    
    3,974
    
    
    
    3,643
    
    
    
    11,577
    
    
    
    11,593Non-interest income:Deposit service charges
    
    
    147
    
    
    
    147
    
    
    
    438
    
    
    
    465Net gains (losses) from sales of investment securities
    
    
    84
    
    
    
    
    
    
    
    432
    
    
    
    (135
    )Gain on sales of loans
    
    
    85
    
    
    
    54
    
    
    
    204
    
    
    
    263Other income
    
    
    61
    
    
    
    106
    
    
    
    250
    
    
    
    291Total non-interest income
    
    
    377
    
    
    
    307
    
    
    
    1,324
    
    
    
    884Non-interest expenses:Salaries and employee benefits
    
    
    1,918
    
    
    
    1,816
    
    
    
    5,780
    
    
    
    5,314Occupancy and equipment
    
    
    323
    
    
    
    286
    
    
    
    948
    
    
    
    826Data processing service fees
    
    
    239
    
    
    
    264
    
    
    
    794
    
    
    
    810Professional fees
    
    
    217
    
    
    
    95
    
    
    
    825
    
    
    
    108Advertising and marketing
    
    
    109
    
    
    
    157
    
    
    
    513
    
    
    
    404Other expenses
    
    
    443
    
    
    
    399
    
    
    
    1,394
    
    
    
    1,314Total non-interest expenses
    
    
    3,249
    
    
    
    3,017
    
    
    
    10,254
    
    
    
    8,776Income before income taxes
    
    
    1,102
    
    
    
    933
    
    
    
    2,647
    
    
    
    3,701Provision for income taxes (Note 6)
    
    
    416
    
    
    
    358
    
    
    
    1,001
    
    
    
    1,008Net income
    
    $
    686
    
    
    $
    575
    
    
    $
    1,646
    
    
    $
    2,693Earnings per common share  basic (Note 8)
    
    $
    0.49
    
    
    $
    0.37
    
    
    $
    1.10
    
    
    $
    1.74Earnings per common share  diluted (Note 8)
    
    $
    0.48
    
    
    $
    0.37
    
    
    $
    1.09
    
    
    $
    1.72Weighted average common shares outstanding  basic
    
    
    1,413
    
    
    
    1,553
    
    
    
    1,503
    
    
    
    1,549Weighted average common and equivalent shares
outstanding  diluted
    
    
    1,424
    
    
    
    1,567
    
    
    
    1,515
    
    
    
    1,563
 See accompanying notes to unaudited consolidated financial statements. 2




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CENTRAL BANCORP, INC. AND SUBSIDIARY 
   AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Unearned
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Treasury
    
    
    Comprehensive
    
    
    Compensation
    
    
    Stockholders(In Thousands)
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Stock
    
    
    Income
    
    
    ESOP
    
    
    EquityNine Months Ended December 31, 2004Balance at March 31, 2004
    
    $
    2,030
    
    
    $
    12,920
    
    
    $
    36,855
    
    
    $
    (7,311
    )
    
    $
    2,293
    
    
    $
    (3,333
    )
    
    $
    43,454Net income
    
    
    
    
    
    
    
    
    
    
    1,646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,646Other comprehensive income net of tax:Unrealized loss on securities, net
of reclassification adjustment (Note 5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,050
    )
    
    
    
    
    
    
    (1,050
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    596Purchase of shares by ESOP (77,134 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,565
    )
    
    
    (2,565
    )Proceeds from exercise
of stock options (775 shares)
    
    
    1
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Tax benefit of stock option
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Director deferred compensation
transactions
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    5Dividends paid ($0.36 per share)
    
    
    
    
    
    
    
    
    
    
    (542
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (542
    )Amortization of unearned compensation -
ESOP
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328
    
    
    
    345Purchase of treasury stock (77,134 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,565
    )
    
    
    
    
    
    
    
    
    
    
    (2,565
    )Other Equity Transactions
    
    
    
    
    
    
    (94
    )
    
    
    71
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    1Balance at December 31, 2004
    
    $
    2,031
    
    
    $
    12,906
    
    
    $
    38,030
    
    
    $
    (9,892
    )
    
    $
    1,243
    
    
    $
    (5,570
    )
    
    $
    38,748
 See accompanying notes to unaudited consolidated financial statements. 3




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY 
   Nine Months EndedDecember 31,(In thousands)
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    1,646
    
    
    $
    2,693Adjustments to reconcile net income to net cash provided
by (used in) operating activitiesDepreciation and amortization
    
    
    293
    
    
    
    234Amortization of premiums
    
    
    137
    
    
    
    115Provision for loan losses
    
    
    50
    
    
    
    150Stock-based compensation
    
    
    345
    
    
    
    233Net (gains) losses from sales and write-downs of
investment securities
    
    
    (432
    )
    
    
    135Gain on sales of loans held for sale
    
    
    (204
    )
    
    
    (263
    )Originations of loans held for sale
    
    
    (17,493
    )
    
    
    (30,081
    )Proceeds from sale of loans originated for sale
    
    
    16,219
    
    
    
    30,685(Increase) decrease in accrued interest receivable
    
    
    (19
    )
    
    
    103Decrease (increase) in other assets, net
    
    
    322
    
    
    
    4Increase (decrease) in advance payments by borrowers for taxes and insurance
    
    
    49
    
    
    
    211Increase (decrease) in accrued expenses and other liabilities, net
    
    
    (3,218
    )
    
    
    (2,386
    )Net cash provided by (used in) operating activities
    
    
    (2,305
    )
    
    
    1,833Cash flows from investing activities:(Increase) decrease in loans
    
    
    (15,623
    )
    
    
    31,133Principal payments on mortgage-backed securities
    
    
    5,797
    
    
    
    4,187(Increase) decrease in certificate of deposit
    
    
    609
    
    
    
    (1,200
    )Purchases of investment securities
    
    
    (47,404
    )
    
    
    (33,885
    )Maturities and calls of investment securities
    
    
    4,495
    
    
    
    4,000Proceeds from sales of investment securities
    
    
    6,188
    
    
    
    482Purchase of banking premises and equipment
    
    
    (688
    )
    
    
    (397
    )Net cash provided by (used in) investing activities
    
    
    (46,626
    )
    
    
    4,320Cash flows from financing activities:Increase (decrease) in deposits
    
    
    18,402
    
    
    
    (864
    )Proceeds from advances from FHLB of Boston
    
    
    13,000
    
    
    
    Repayment of advances from FHLB of Boston
    
    
    (9,300
    )
    
    
    (3,300
    )Increase (decrease) in short-term borrowings
    
    
    (699
    )
    
    
    378Issuance of subordinated debenture
    
    
    5,258
    
    
    
    Proceeds from ESOP loan
    
    
    
    
    
    
    3,506Repayment of ESOP loan
    
    
    (292
    )
    
    
    (98
    )Purchase of shares by ESOP
    
    
    (2,565
    )
    
    
    Proceeds from exercise of stock options
    
    
    19
    

    
    
    47Dividends paid
    
    
    (542
    )
    
    
    (496
    )Net directors deferred compensation
    
    
    5
    
    
    
    (3
    )Purchase of treasury stock
    
    
    (2,565
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    20,721
    
    
    
    (830
    )Net increase (decrease) in cash and cash equivalents
    
    
    (28,210
    )
    
    
    5,323Cash and cash equivalents at beginning of year
    
    
    34,337
    
    
    
    11,222Cash and cash equivalents at end of period
    
    $
    6,127
    
    
    $
    16,545Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    8,874
    
    
    $
    8,642Income taxes
    
    $
    655
    
    
    $
    1,911
 See accompanying notes to unaudited consolidated financial statements. 4




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY 
 Notes to Unaudited Consolidated Financial Statements
 December 31, 2004
 (1) Basis of Presentation The unaudited consolidated financial statements of Central Bancorp, Inc. and its wholly-owned
subsidiary Central Co-operative Bank (collectively referred to as the Company) presented herein
should be read in conjunction with the consolidated financial statements of the Company as of and
for the year ended March 31, 2004, included in the Companys Annual Report on Form 10-K filed with
the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation. Interim results are not necessarily indicative of
results to be expected for the entire year. The Company owns 100% of the common stock of Central Bancorp Capital Trust I (the Trust)
which has issued trust preferred securities to the public. In accordance with Financial Accounting
Standards Board (FASB) Interpretation (FIN) No. 46 Consolidation of Variable Interest Entities
 an Interpretation of Accounting Research Bulletin No. 51, as revised by FIN No. 46R (FIN 46R)
issued in December 2002, the Trust is not included in the Companys consolidated financial
statements. (See Note 4) The Companys significant accounting policies are described in Note 1 of the Notes to
Consolidated Financial Statements included in its Form 10-K for the year ended March 31, 2004. For
interim reporting purposes, the Company follows the same significant accounting policies. Certain reclassifications have been made to the prior year financial statements to conform to
the current year presentation. Such reclassifications have no effect on previously reported net
income. (2) Loans Loans, excluding loans held for sale, as of December 31, 2004 and March 31, 2004 are
summarized below (in thousands): December 31,
    
    
    March 31,2004
    
    
    2004Real estate loans:Residential real estate
    
    $
    165,543
    
    
    $
    171,682Commercial real estate
    
    
    176,074
    
    
    
    146,107Construction
    
    
    13,971
    
    
    
    25,112Home equity lines of credit
    
    
    9,087
    
    
    
    9,397Total real estate loans
    
    
    364,675
    
    
    
    352,298Commercial loans
    
    
    6,522
    
    
    
    3,198Consumer loans
    
    
    1,085
    
    
    
    1,129Total loans
    
    
    372,282
    
    
    
    356,625Less: allowance for loan losses
    
    
    (3,621
    )
    
    
    (3,537
    )Total loans, net
    
    $
    368,661
    
    
    $
    353,088
 There were no non-accrual loans as of March 31, 2004 and one loan totaling $121,000 as of
December 31, 2004. 5




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A summary of changes in the allowance for loan losses for the quarter ended and nine months
ended December 31, 2004 and 2003 follows (in thousands): Three months ended
    
    
    Nine months endedDecember 31
    
    
    December 312004
    
    
    2003
    
    
    2004
    
    
    2003Balance at beginning of period
    
    $
    3,606
    
    
    $
    3,389
    
    
    $
    3,537
    
    
    $
    3,284Provision charged to expense
    
    
    
    
    
    
    50
    
    
    
    50
    
    
    
    150Less: charge-offs
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    27Add: recoveries
    
    
    15
    
    
    
    35
    
    
    
    35
    
    
    
    66Balance at end of period
    
    $
    3,621
    
    
    $
    3,473
    
    
    $
    3,621
    
    
    $
    3,473
 (3) Deposits Deposits at December 31, 2004 and March 31, 2004 are summarized as follows (in thousands): December 31,
    
    
    March 31,2004
    
    
    2004Demand deposit accounts
    
    $
    35,441
    
    
    $
    27,881NOW accounts
    
    
    33,643
    
    
    
    37,106Passbook and other savings accounts
    
    
    73,223
    
    
    
    73,737Money market deposit accounts
    
    
    53,745
    
    
    
    56,084Total non certificate accounts
    
    
    196,052
    
    
    
    194,808Term deposit certificatesCertificates of $100,000 and above
    
    
    40,102
    
    
    
    27,607Certificates less than $100,000
    
    
    78,168
    
    
    
    73,505Total term deposit certificates
    
    
    118,270
    
    
    
    101,112Total deposits
    
    $
    314,322
    
    
    $
    295,920
 (4) Subordinated Debenture On September 16, 2004, Central Bancorp, Inc. (the Company) completed a trust preferred
securities financing in the amount of $5.1 million. In the transaction, the Company formed a
Delaware statutory trust, known as Central Bancorp Capital Trust I (the Trust). The Trust issued
and sold $5.1 million of trust preferred securities in a private placement and issued $158,000 of
trust common securities to the Company. The Trust used the proceeds of these issuances to purchase
$5,258,000 of the Companys floating rate junior subordinated debentures due September 16, 2034
(the Debentures). The interest rate on the Debentures and the trust preferred securities is
variable and adjustable quarterly at 2.44% over three-month LIBOR. At December 31, 2004 the
interest rate was 4.93%. The Debentures are the sole assets of the Trust and are subordinate to
all of the Companys existing and future obligations for borrowed money. The trust preferred
securities generally rank equal to the trust common securities in priority of payment, but will
rank prior to the trust common securities if and so long as the Company fails to make principal or
interest payments on the Debentures. Concurrently with the issuance of the Debentures and the trust
preferred securities, the Company issued a guarantee related to the trust securities for the
benefit of the holders. On September 17, 2004, the Company completed the repurchase of 77,134 shares of its
outstanding common stock, reducing the Companys outstanding common stock to 1,588,598 shares. In
addition, the Central Co-operative Bank Employee Stock Ownership Trust (the ESOP) completed the
purchase of another 77,134 shares of the Companys common stock. The Company and the ESOP purchased
the shares pursuant to the terms of the Stock 6




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##### Table of Contents



Purchase Agreement, dated September 13, 2004, by and among the Company and the ESOP and PL
Capital, LLC, Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., Goodbody/PL Capital,
L.P., Goodbody/PL Capital, LLC, Richard Lashley, John W. Palmer and Richard J. Fates. (5) Other Comprehensive Income (Loss) The Company has established standards for reporting and displaying comprehensive income, which
is defined as all changes to equity except investments by, and distributions to, shareholders. Net
income is a component of comprehensive income, with all other components referred to, in the
aggregate, as other comprehensive income. The Companys other comprehensive income (loss) and related tax effect for the nine months
ended December 31, 2004 and 2003 are as follows (in thousands): For the Nine Months EndedDecember 31, 2004Before-Tax
    
    
    Tax
    
    
    After-TaxAmount
    
    
    Effect
    
    
    AmountUnrealized losses on securities:Unrealized net holding losses during period
    
    $
    1,203
    
    
    $
    424
    
    
    $
    779Add: reclassification adjustment for net
gains included in net income
    
    
    432
    
    
    
    161
    
    
    
    271Other comprehensive loss
    
    $
    1,635
    
    
    $
    585
    
    
    $
    1,050
 For the Nine Months EndedDecember 31, 2004Before-Tax
    
    
    Tax
    
    
    After-TaxAmount
    
    
    Effect
    
    
    AmountUnrealized gains on securities:Unrealized holding gains during period
    
    $
    1,506
    
    
    $
    507
    
    
    $
    999Less: reclassification adjustment for net
losses included in net income
    
    
    135
    
    
    
    46
    
    
    
    89Other comprehensive income
    
    $
    1,641
    
    
    $
    553
    
    
    $
    1,088
 (6) Contingencies Legal Proceedings The Company from time to time is involved as plaintiff or defendant in various legal actions
incident to its business. None of these actions are believed to be material, either individually
or collectively, to the results of operations and financial condition of the Company. Tax Settlement During 2003, the Massachusetts Department of Revenue (DOR) issued notices of intent to
assess additional state excise taxes to numerous financial institutions in Massachusetts that had
received dividends from a real estate investment trust (REIT) subsidiary. The DOR contended that
dividends received by the banks from such subsidiaries were fully taxable in Massachusetts. 7




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##### Table of Contents



In June 2003, a settlement of this matter was reached between the DOR and the majority of
affected financial institutions. The settlement provided that 50% of all dividends received from
REIT subsidiaries from 1999 through 2002 were subject to state taxation. Interest on such
additional taxes was also assessed. Payment of such taxes and interest totaling $431,000 was made
in June 2003. As a result of this settlement, the Company recognized a recovery of $374,000 in
income taxes, which increased net income by the same amount in the quarter ended June 30, 2003. (7) Subsequent Event On January 20, 2005, the Board of Directors voted the payment of a quarterly cash dividend of
$0.12 per share. The dividend is payable on February 18, 2005 to stockholders of record as of
February 4, 2005 . (8) Earnings per Share (EPS) Unallocated ESOP shares are not treated as being outstanding in the computation of either
basic or diluted EPS. At December 31, 2004 and March 31, 2004, there were approximately 174,000
and 107,000 unallocated ESOP shares, respectively. (9) Recent Accounting Pronouncements In December 2004, the
FASB issued
SFAS No. 123(R), Share-Based Payment. SFAS
No. 123(R)
replaces FASB No. 123 Accounting for Stock-Based Compensation and supersedes APB opinion No. 25
Accounting for Stock Issued to Employees and requires entities to recognize a compensation cost
on the financial statements relating to share-based transactions. Previously, companies had the
option of adopting a fair value measurement of the equity or liability instruments issued or
disclosing the impact in the footnotes. Under SFASNo. 123(R), companies will be required to adopt
the fair value method of measurement over a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, stock appreciation
rights and employee stock purchase plans. Application of SFAS
No. 123(R); is required for periods
ending after June 15, 2005. The Company does not believe that
the application of SFAS No. 123(R)
will have a material impact on the Companys financial position or results of operations. In December 2003, the FASB issued Interpretation No. 46R Consolidation of Variable Interest
Entities   An Interpretation of ARB No. 51 (FIN 46R), to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its financial statements the
assets, liabilities and activities of another entity. Until now, a company generally has included
another entity in its combined financial statements only if it controlled the entity through voting
interests. FIN 46R changes that guidance by requiring a variable interest entity, as defined, to
be combined by a company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or is entitled to receive a majority of the entitys residual
returns or both. FIN 46R also requires disclosure about variable interest entities that the
company is not required to consolidate but in which it has a significant variable interest.
Application of FIN 46R is required in financial statements for periods ending after March 15, 2004.
The adoption did not have a material impact on the Companys results of operations or financial
position. In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 105. SAB No. 105 summarizes the views of the SEC regarding the application of
Generally Accepted Accounting Principles (GAAP) to loan commitments for mortgage loans that will
be held for sale accounted for as derivatives. The guidance requires the measurement at fair value
of such loan commitments include only the differences between the guaranteed interest rate in the
loan commitment and a market interest rate; future cash flows related to servicing the loan or the
customer relationship should not be recorded as a part of the loan commitment derivative. SAB No.
105 is effective for said loan commitments accounted for as derivatives entered into beginning
April 1, 2004. The Bank adopted this SAB on April 1, 2004. The adoption of SAB No. 105 did not
have an impact on the Company as the Company was valuing loan commitments to be accounted for as
derivatives consistent with this guidance. 8




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##### Table of Contents



In June 2004, the FASBs Emerging Issues Task Force (EITF) issued EITF Issue 03-01,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 contains new guidance on other-than-temporary impairments of investment securities. The
guidance dictates when impairment is deemed to exist, provides guidance on determining if
impairment is other than temporary, and directs how to calculate impairment loss. Issue 03-1 also
details expanded annual disclosure rules. In September 2004, the FASB issued FASB staff position
FSP EITF 03-1-1 which delayed the effective date of the new guidance on recognizing
other-than-temporary impairments indefinitely. The Company will evaluate the impact of EITF 03-1
on the Companys financial position and results of operations upon the issuance of FSB EITF 03-1-a. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words or
phrases will likely result, are expected to, will continue, is anticipated, estimate,
project, or similar expressions are intended to identify forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not
to place undue reliance on any such forward-looking statements, which speak only as of the date
made, and to advise readers that various factors, including changes in regional and national
economic conditions, unfavorable judicial decisions, substantial changes in levels of market
interest rates, credit and other risks of lending and investment activities and competitive and
regulatory factors, could affect the Companys financial performance and could cause the Companys
actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake and specifically disclaims any obligation to update any
forward-looking statements to reflect occurrence of anticipated or unanticipated events or
circumstances after the date of such statements. Critical Accounting Policies Accounting policies involving significant judgments and assumptions by management, which have,
or could have, a material impact on the carrying value of certain assets and impact income, are
considered critical accounting policies. The Company considers the allowance for loan losses to be
its critical accounting policy. There have been no significant changes in the methods or
assumptions used in the accounting policies that require material estimates and assumptions. Arriving at an appropriate level of allowance for loan losses necessarily involves a high
degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance
each quarter, which considers, among other factors, the character and size of the loan portfolio,
business and economic conditions, loan growth, delinquency trends, nonperforming loans trends,
charge-off experience and other asset quality factors. The Company evaluates specific loan status
reports on certain commercial and commercial real estate loans rated substandard or worse in
excess of a specified dollar amount. Estimated reserves for each of these credits is determined by
reviewing current collateral value, financial information, cash flow, payment history and trends
and other relevant facts surrounding the particular credit. Provisions for losses on the remaining
commercial and commercial real estate loans are based on pools of similar loans using a combination
of historical loss experience and qualitative adjustments. For the residential real estate and
consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and
recovery experience to the current outstanding balance in each loan category. Although management
uses available information to establish the appropriate level of the allowance for loan losses,
future additions to the allowance may be necessary based on estimates that are susceptible to
change as a result of changes in economic conditions and other factors. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the
Companys allowance for loan losses. Such agencies may require the Company to recognize
adjustments to the allowance based on their judgments about information available to them at the
time of their examination. 9




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##### Table of Contents



Comparison of Financial Condition at December 31, 2004 and March 31, 2004 Total assets increased by $18.5 million from $490.9 million at March 31, 2004 to $509.4
million at December 31, 2004. During the 9 months ended December 31, 2004, loans (excluding loans
held for sale) increased by $15.7 million due primarily to a $30.0 million increase in commercial
real estate loans and a $3.3 million increase in commercial loans, partially offset by a $6.1
million decrease in residential mortgage loans and a $11.1 million decrease in construction loans.
Management regularly assesses the desirability of holding newly originated long-term fixed-rate
residential mortgage loans in portfolio or selling such loans in the secondary market. A number of
factors are evaluated to determine whether or not to hold such loans in portfolio including,
current and projected liquidity, current and projected interest rates, projected growth in other
interest-earning assets and the current and projected interest rate risk profile. Based on its
consideration of these factors, management determined that most fixed-rate residential mortgage
loans originated during the current quarter should be sold in the secondary market. The decision
to sell or hold loans is made at the tome the loan commitment is issued and the Bank simultaneously
enters into a best efforts forward commitment to sell the loan to manage the interest rate risk
associated with the decision to sell the loan. Loans are sold servicing released. Additionally,
the Company redeployed most of its short-term investments into higher yielding investment
securities to take advantage of higher yields available on such instruments. The Company experienced growth of $1.2 million in core deposits and $17.2 million in term
deposits resulting in an increase in total deposits of $18.4 million. The growth in core deposits
was principally related to the increase of $7.6 million in demand deposit accounts, offset by
declines in NOW accounts, savings accounts and money market deposit accounts. The increase in
demand deposits reflects the successful marketing efforts in promoting a free checking product
during the latter part of 2004. The increase in term deposits was the result of promotional rates
offered on shorter term deposits (8-months or 15-months) in anticipation of increasing interest
rates. These term deposits were aggressively marketed to larger balance money market deposit
account holders which resulted in the largest increase in the over $100,000 account category. The decrease in stockholders equity of $4.7 million to $38.7 million at December
31, 2004 was primarily attributable to the previously announced purchase of 77,134 shares of common
stock by the Company and an equal number of shares purchased by the Central Cooperative Bank
Employee Stock Ownership Trust (the ESOP) for a total of $5.1 million. The Company and the ESOP
purchased the shares pursuant to the terms of the Stock Purchase Agreement, dated September 13,
2004, by and among the Registrant and the ESOP and PL Capital, LLC, Financial Edge Fund, L.P.,
Financial Edge-Strategic Fund, L.P., Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Richard
Lashley, John W. Palmer and Richard J. Fates. At the same time, the Company received the proceeds
from the issuance of $5.1 million of trust preferred securities which are included in capital for
regulatory purposes and shown separately in the liability section of the balance sheet. Comparison of Operating Results for the Quarters Ended December 31, 2004 and 2003 Net income increased by $111,000 to $686,000, or $0.48 per diluted share, for the quarter
ended December 31, 2004, compared to $575,000, or $0.37 per diluted share, for the corresponding
quarter in the prior year. Included in net income in the prior years quarter, was an insurance
recovery of $53,000, net of the related legal fees and taxes, attributable to the dispute with
certain shareholders, which was settled during 2003. Exclusive of the insurance recovery in 2003,
pro forma earnings would have increased $164,000 during the current quarter compared to the
corresponding quarter in the prior year. This increase was primarily attributable to an increase
in net interest income and gains on sales of investments, partly offset by increases in salaries
and benefits, data processing and advertising and marketing expenses. The Companys net interest margin increased 7 basis points from 3.15% in the prior years
quarter to 3.22% in the current quarter. Part of the favorable increase is attributable to the
increase in overall market interest rates being realized on the earning assets as they trend slowly
upward and the Company continuing to hold its deposit rates at a static level in spite of the
increasing interest rates. By continuing to keep its overall core deposit rates from rising in
conjunction with market interest rate increases, the Company will benefit in maintaining its net
interest spread. By offering the aforementioned 8-month and 15-month promotional term deposits,
the Company hopes to maintain the overall deposit balances. The Company has also slightly
decreased its reliance on FHLB 10




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##### Table of Contents



advances to fund its growth during the three months ended December 31, 2004 compared to the
corresponding period in 2003. The increase in the net interest margin is also partially attributable to the shift in the mix
of interest-earning assets from short-term investments, that carry a lower interest yield to loans
and investment securities which typically have higher yields. Interest Income.Interest income for the quarter ended December 31, 2004 increased approximately
$400,000 to $7.0 million as compared to $6.6 million in the prior year quarter. This increase was
a result of the yield on interest-earning assets increasing from 5.60% in the quarter ended
December 31, 2003 to 5.65% in the current quarter. In addition, average interest earning assets
increased by $23.9 million during the corresponding period. Interest Expense.Interest expense for the quarter ended December 31, 2004 increased by $115,000
to $3.0 million as compared to the quarter ended December 31, 2003. A decline of 9 basis points in
the cost of funds from 2.88% in the quarter ended December 31, 2003 to 2.79% in the quarter ended
December 31, 2004 was more than offset by an increase in average interest-bearing liabilities of
$29.4 million in the corresponding period. The following table presents average balances and average rates earned/paid by the Company for
the quarter ended December 31, 2004 compared to the quarter ended December 31, 2003: Three Months Ended December 31,2004
    
    
    2003Average
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-earning assets:Mortgage loans
    
    $
    357,470
    
    
    $
    5,455
    
    
    
    6.10
    %
    
    $
    349,042
    
    
    $
    5,414
    
    
    
    6.20
    %Other loans
    
    
    6,328
    
    
    
    104
    
    
    
    6.57
    
    
    
    4,796
    
    
    
    90
    
    
    
    7.51Investment securities
    
    
    118,443
    
    
    
    1,367
    
    
    
    4.62
    
    
    
    85,809
    
    
    
    997
    
    
    
    4.65Short-term investments
    
    
    11,354
    
    
    
    46
    
    
    
    1.62
    
    
    
    30,012
    
    
    
    75
    
    
    
    1.00Total interest-earning assets
    
    
    493,595
    
    
    
    6,972
    
    
    
    5.65
    
    
    
    469,659
    
    
    
    6,576
    
    
    
    5.60Allowance for loan losses
    
    
    (3,613
    )
    
    
    
    
    
    
    
    
    
    
    (3,435
    )Noninterest-earning assets
    
    
    15,588
    
    
    
    
    
    
    
    
    
    
    
    12,944Total assets
    
    $
    505,570
    
    
    
    
    
    
    
    
    
    
    $
    479,168Interest-bearing liabilities:Deposits
    
    $
    283,304
    
    
    
    1,184
    
    
    
    1.67
    
    
    $
    254,189
    
    
    
    1,075
    
    
    
    1.69Advances from FHLB of Boston
    
    
    138,343
    
    
    
    1,709
    
    
    
    4.94
    
    
    
    143,611
    
    
    
    1,768
    
    
    
    4.92Other borrowings
    
    
    8,466
    
    
    
    105
    
    
    
    4.96
    
    
    
    2,945
    
    
    
    40
    
    
    
    5.43Total interest-bearing liabilities
    
    
    430,113
    
    
    
    2,998
    
    
    
    2.79
    
    
    
    400,745
    
    
    
    2,883
    
    
    
    2.88Noninterest-bearing liabilities
    
    
    36,971
    
    
    
    
    
    
    
    
    
    
    
    37,487Total liabilities
    
    
    467,084
    
    
    
    
    
    
    
    
    
    
    
    438,232Stockholders equity
    
    
    38,486
    
    
    
    
    
    
    
    
    
    
    
    40,936Total liabilities and
stockholders equity
    
    $
    505,570
    
    
    
    
    
    
    
    
    
    
    $
    479,168Net interest and dividend income
    
    
    
    
    
    $
    3,974
    
    
    
    
    
    
    
    
    
    
    $
    3,693Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.86
    %
    
    
    
    
    
    
    
    
    
    
    2.72
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.22
    %
    
    
    
    
    
    
    
    
    
    
    3.15
    %
 Provisions for Loan Losses.The Company provides for loan losses in order to maintain the
allowance for loan losses at a level that management estimates is adequate to absorb probable
losses based on an evaluation of known and inherent risks in the portfolio. In determining the
appropriate level of the allowance for loan losses, 11




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##### Table of Contents



management considers past and anticipated loss experience, evaluations of underlying collateral,
prevailing economic conditions, the nature and volume of the loan portfolio and the levels of
non-performing and other classified loans. The amount of the allowance is based on estimates and
ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on
a quarterly basis and provides for loan losses monthly in order to maintain the adequacy of the
allowance. During the quarter ended December 31, 2004, the Company did not record a provision for loan
losses and recognized a provision of $50,000 during the corresponding quarter in 2003. The
Companys asset quality, as measured principally by delinquency rates, charge-offs and loan
classifications, continues to be outstanding. Non-interest Income.Total non-interest income was $377,000 for the quarter ended December 31, 2004
compared to $307,000 in the same period of 2003. The primary reason for the $70,000 increase in
the current years quarter was the gain on sales of securities which amounted to $84,000. This
additional non-interest income was partially offset by a decline in other non-interest income of
$45,000 in the current quarter to $61,000. Non-interest Expenses.Non-interest expenses increased $232,000, or 7.7%, to $3.2 million during
the quarter ended December 31, 2004 as compared to the same quarter in 2003 due principally to
increases in professional fees ($122,000), salaries and employee benefits ($102,000), office
occupancy and equipment ($37,000) and other non-interest expenses ($44,000). The increase in salaries and employee benefits of $102,000, or 5.6%, to $1.9 million during
the quarter ended December 31, 2004, was due to overall salary increases, increases in staffing, as
well as increases in pension, ESOP and health care costs. The decline in data processing costs declined from $264,000 to $239,000 primarily as a result
of the renegotiation and extension of our primary data processing provider. Professional fees increased $122,000 to $217,000 during the current quarter ended December 31,
2004 due to the recognition of a partial reimbursement of legal defense costs from the Companys
insurance carrier in the prior years quarter. The legal defense costs were incurred in connection
with shareholder litigation, which was settled in August 2003. Office occupancy and equipment expenses increased $37,000 to $323,000 during the current
quarter ended December 31, 2004 due to higher utility costs and increased depreciation of
equipment. Other non-interest expenses increased $44,000 to $443,000 during the current quarter ended
December 31, 2004 due to increased corporate contributions and other general costs involved in
running a larger organization. Income Taxes.The effective tax rates for the quarters ended December 31, 2004 and 2003 were 37.7%
and 38.4%, respectively. Comparison of Operating Results for the Nine Months Ended December 31, 2004 and 2003 For the nine months ended December 31, 2004, net income decreased $1.1 million to $1.6
million, or $1.09 per diluted share, compared to $2.7 million, or $1.72 per diluted share, in the
year earlier period. The return on average earning assets totaled 0.53% for the nine months ended
December 31, 2004 as compared to 0.71% for the corresponding period in the prior year. Exclusive
of the favorable impact of $374,000, after-taxes, resulting from the settlement of the Companys
REIT-related tax liability with the Massachusetts Department of Revenue and the favorable impact of
$329,000 from a net insurance recovery associated with certain shareholder litigation, in the first
nine months of the previous year, and the $179,000 in costs during the current year associated
with the stock buyback, net income on a proforma basis declined $165,000 compared to the year
earlier period. A reconciliation of GAAP earnings to pro forma earnings follows: 12




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##### Table of Contents



Reconciliation of GAAP earnings to
    
    Nine Months Endedpro forma earnings
    
    December 31,2004
    
    
    2003Net Income per GAAP
    
    $
    1,646
    
    
    $
    2,693Impact of REIT legislation, net of taxes
    
    
    
    
    
    
    (374
    )Impact of litigation and legal fees,
net of insurance and taxes
    
    
    
    
    
    
    (329
    )Costs associated with stock buyback, net of taxes
    
    
    179
    
    
    
    Pro forma earnings
    
    $
    1,825
    
    
    $
    1,990
 Contributing to this change was an $116,000 decrease in net interest income between periods
attributable to the factors disclosed herein. Interest Income.Interest income for the nine months ended December 31, 2004 was $20.5 million, or
$98,000 higher than the amount earned in the corresponding period in the prior year. The increase
was due to an increase in average interest-earning assets of $22.0 million to $487.7 million during
the nine months ended December 31, 2004, offset by a 23 basis point decline in the yield on
interest-earning assets from 5.84% in the first nine months of the prior year to 5.61% in the first
nine months of the current year. Interest Expense.Interest expense for the nine months ended December 31, 2004 was $8.9 million
compared to $8.7 million for the nine months ended December 31, 2003, an increase of $214,000 or
2.5%. The increase was due to an increase in average interest-bearing liabilities of $24.7 million
to $424.6 million during the nine months ended December 31, 2004, offset by a decline of 10 basis
points in the cost of funds from 2.89% in the first nine months of the prior year to 2.79% in the
first nine months of the current year. Average interest-bearing liabilities increased primarily
from the promotion of an 8-month and a 15-month CD product. The decrease in the cost of funds during the first nine months of the current year was
entirely due to a reduction in the cost of deposits from 1.74% during the prior year period to
1.69% during the nine months ended December 31, 2004. The cost of FHLB advances, the Companys
other primary interest-bearing liability, increased slightly during the first nine months of the
current year to 4.92% from 4.90% in the comparable prior year period. As FHLB advances cannot be
prepaid without a substantial penalty, these longer term, fixed-rate borrowings have been a
significant factor in the compression of the Companys net interest margin during the recent period
of declining rates. 13




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##### Table of Contents



The following table presents average balances and average rates earned/paid by the Company for
the nine months ended December 31, 2004 compared to the nine months ended December 31, 2003: Nine Months Ended December 31,2004
    
    

2003Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-earning assets:Mortgage loans
    
    $
    354,935
    
    
    $
    16,295
    
    
    
    6.12
    %
    
    $
    363,416
    
    
    $
    17,228
    
    
    
    6.32
    %Other loans
    
    
    5,722
    
    
    
    275
    
    
    
    6.41
    
    
    
    6,100
    
    
    
    338
    
    
    
    7.39Investment securities
    
    
    108,100
    
    
    
    3,778
    
    
    
    4.66
    
    
    
    74,590
    
    
    
    2,681
    
    
    
    4.79Short-term investments
    
    
    18,988
    
    
    
    165
    
    
    
    1.16
    
    
    
    21,610
    
    
    
    168
    
    
    
    1.04Total interest-earning assets
    
    
    487,745
    
    
    
    20,513
    
    
    
    5.61
    
    
    
    465,716
    
    
    
    20,415
    
    
    
    5.84Allowance for loan losses
    
    
    (3,596
    )
    
    
    
    
    
    
    
    
    
    

    (3,369
    )Noninterest-earning assets
    
    
    17,511
    
    
    
    
    
    
    
    
    
    
    
    13,826Total assets
    
    $
    501,660
    
    
    
    
    
    
    
    
    
    
    $
    476,173Interest-bearing liabilities:Deposits
    
    $
    279,742
    
    
    
    3,550
    
    
    
    1.69
    
    
    $
    254,620
    
    
    
    3,332
    
    
    
    1.74Advances from FHLB of Boston
    
    
    139,163
    
    
    
    5,140
    
    
    
    4.92
    
    
    
    144,136
    
    
    
    5,299
    
    
    
    4.90Other borrowings
    
    
    5,709
    
    
    
    196
    
    
    
    4.58
    
    
    
    1,140
    
    
    
    41
    
    
    
    4.80Total interest-bearing liabilities
    
    
    424,614
    
    
    
    8,886
    
    
    
    2.79
    
    
    
    399,896
    
    
    
    8,672
    
    
    
    2.89Noninterest-bearing liabilities
    
    
    37,178
    
    
    
    
    
    
    
    
    
    
    
    37,537Total liabilities
    
    
    461,792
    
    
    
    
    
    
    
    
    
    
    
    437,433Stockholders equity
    
    
    39,868
    
    
    
    
    
    
    
    
    
    
    
    38,740Total liabilities and stockholders equity
    
    $
    501,660
    
    
    
    
    
    
    
    
    
    
    $
    476,173Net interest and dividend income
    
    
    
    
    
    $
    11,627
    
    
    
    
    
    
    
    
    
    
    $
    11,743Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.82
    %
    
    
    
    
    
    
    
    
    
    
    2.95
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.18
    %
    
    
    
    
    
    
    
    
    
    
    3.36
    %
 Provision for Loan Losses.During the first nine months of the current year, the Company provided
$50,000 for loan losses and $150,000 was recorded in the corresponding period of the prior year.
While the Companys asset quality, as measured principally by delinquency rates, charge-offs and
loan classifications, continues to be outstanding, the shifting of the mix of the loan portfolio to
a greater portion of commercial real estate loans indicated the need for an increase in the reserve
for loan losses in the periods indicated. Non-interest Income.Non-interest income increased $440,000 to $1.3 million during the nine months
ended December 31, 2004 from $884,000 in the prior year period. An increase in gains on sales of
investment securities of $567,000 was partially offset by a decline in gains on the sale of loans
of $59,000 caused by slower refinance activity this year compared to 2003. Net gains from sales and write-downs of investment securities were $432,000 for the nine
months ended December 31, 2004 compared to net losses on sales and write-downs of $135,000 in the
comparable prior year period. During the nine months ended December 31, 2003, the Company recorded
write-downs of $130,000 on certain equity securities which had experienced a decline in fair value
judged to be other than temporary. Non-interest Expenses.Non-interest expenses increased $1.5 million to $10.3 million during the
nine months ended December 31, 2004, as compared to the corresponding period in the prior year.
Contributing to the increase in the current years results were the impact of litigation and legal
fees, net of the related insurance recovery, attributable to the dispute with certain shareholders
which was settled in 2003. Increases in non-interest expenses for the first 14




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##### Table of Contents



nine months of the current year were spread among all categories and included increases in salaries
and employee benefits of $466,000, office occupancy and equipment of $122,000, professional fees of
$717,000, advertising and marketing costs of $109,000 and other non-interest expenses of $80,000. The increase in salaries and employee benefits of $466,000 to $5.8 million for the nine months
ended December 31, 2004, was due to overall salary increases, increases in staffing to support a
larger asset base, as well as increases in health insurance, ESOP costs and pension expense
combined with less costs being deferred as result of lower residential loan volumes. The increase in office occupancy and equipment costs of $122,000 to $948,000 for the nine
months ended December 31, 2004, was due to higher utility costs and increased depreciation costs
resulting from increased equipment. The increase in professional fees of $717,000 to $825,000 for the nine months ended December
31, 2004, was primarily due to the costs associated with the stock buyback by the Company and the
ESOP plan during the current year, while the prior year amounts reflect the insurance recovery of
expenses incurred with the shareholder litigation discussed herein. The increase in advertising and marketing costs of $109,000 to $513,000 for the nine months
ended December 31, 2004, was due to increased discretionary promotions undertaken during the year. The increase in other non-interest expenses of $80,000 to $1.4 million for the nine months
ended December 31, 2004, was due to increased FDIC deposit insurance and corporate insurance
coverage along with other miscellaneous costs associated with running a larger organization. Income Taxes.The effective tax rates for the nine months ended December 31, 2004 and 2003 were
37.8% and 27.2%, respectively. As previously noted, the Company recovered $374,000 in taxes during
the first half of 2003 as a result of the settlement of the REIT tax dispute with the Massachusetts
Department of Revenue. Exclusive of this item, the effective tax rate for the nine months ended
December 31, 2003 was 37.3%. The increase in the effective tax rates recognized in both years is
due to the change in state tax law eliminating the use of the dividends received deduction on
dividends received by a bank from its REIT subsidiary. 
 Liquidity and Capital Resources The Companys principal sources of liquidity are customer deposits, short-term investments,
loan repayments, advances from the FHLB of Boston and funds from operations. The Bank is a
voluntary member of the FHLB of Boston and, as such, is entitled to borrow up to the value of its
qualified collateral that has not been pledged to others. Qualified collateral generally consists
of residential first mortgage loans, U.S. Government and agencies securities, mortgage-backed
securities and funds on deposit at the FHLB of Boston. At December 31, 2004, the Company had
approximately $26.5 million in unused borrowing capacity at the FHLB of Boston. At December 31, 2004, the Company had commitments to originate loans, unused outstanding lines
of credit and undisbursed proceeds of loans totaling $48.8 million. Since many of the commitments
may expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company anticipates that it will have sufficient funds available to
meet its current loan commitments. The Companys and the Banks capital ratios at December 31, 2004 were as follows: Company
    
    
    BankTier 1 Capital (to average assets)
    
    
    8.03
    %
    
    
    7.37
    %Tier 1 Capital (to risk-weighted assets)
    
    
    11.48
    
    
    
    10.53Total Capital (to risk-weighted assets)
    
    
    12.53
    
    
    
    11.58
 15




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##### Table of Contents



These ratios placed the Company in excess of regulatory standards and the Bank in the well
capitalized category as set forth by the FDIC. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Companys earnings are largely dependent on its net interest income, which is the
difference between the yield on interest-earning assets and the cost of interest-bearing
liabilities. The Company seeks to reduce its exposure to changes in interest rate, or market risk,
through active monitoring and management of its interest-rate risk exposure. The policies and
procedures for managing both on- and off-balance sheet activities are established by the Banks
asset/liability management committee (ALCO). The Board of Directors reviews and approves the
ALCO policy annually and monitors related activities on an ongoing basis. Market risk is the risk of loss from adverse changes in market prices and rates. The
Companys market risk arises primarily from interest rate risk inherent in its lending, borrowing
and deposit taking activities. The main objective in managing interest rate risk is to minimize the adverse impact of changes
in interest rates on net interest income and preserve capital, while adjusting the asset/liability
structure to control interest-rate risk. However, a sudden and substantial increase or decrease in
interest rates may adversely impact earnings to the extent that the interest rates borne by assets
and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company quantifies its interest-rate risk exposure using a sophisticated simulation model.
Simulation analysis is used to measure the exposure of net interest income to changes in interest
rates over a specific time horizon. Simulation analysis involves projecting future interest income
and expense under various rate scenarios. The simulation is based on both actual and forecasted
cash flows and assumptions of management about the future changes in interest rates and levels of
activity (loan originations, loan prepayments, deposit flows, etc). The assumptions are inherently
uncertain and, therefore, actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes as well as changes in market conditions and
strategies. The net interest income projection resulting from use of actual and forecasted cash
flows and managements assumptions is compared to net interest income projections based on an
immediate shift of 300 basis points upward and 100 basis points downward. Internal guidelines on
interest rate risk state that for every 100 basis points immediate shift in interest rates,
estimated net interest income over the next twelve months should decline by no more than 5%. The following table indicates the estimated exposure, as a percentage of estimated net
interest income, for the twelve-month period following the date indicated assuming an immediate
shift in interest rates as set forth below (dollars in thousands): December 31,
    
    
    March 31,2004
    
    
    2004Amount
    
    
    %Change
    
    
    Amount
    
    

%
Change300 basis point increase in rates
    
    $
    (1,996
    )
    
    
    (12.1
    )%
    
    $
    (1,236
    )
    
    
    (8.1
    )%75 basis point decrease in rates
    
    
    
    
    
    
    
    
    
    
    (315
    )
    
    
    (2.1
    )%100 basis point decrease in rates
    
    
    72
    
    
    
    0.4
    %
    
    
    
    
    
    
    
 16




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##### Table of Contents



Item 4. Controls and Procedures As of the end of the period covered by this report, management of the Company carried out an
evaluation, under the supervision and with the participation of the Companys principal executive
officer and principal financial officer, of the effectiveness of the Companys disclosure
controls and procedures. Based on this evaluation, the Companys principal executive officer and
principal financial officer concluded that the Companys disclosure controls and procedures are
effective in ensuring that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms. In addition, there have been no changes in the Companys internal control over financial
reporting (to the extent that elements of internal control over financial reporting are subsumed
within disclosure controls and procedures) identified in connection with the evaluation described
in the above paragraph that occurred during the Companys last fiscal quarter, that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings Not Applicable 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table sets forth information regarding the Companys repurchases of its Common
Stock during the quarter ended December 31, 2004. Total Numberof SharesPurchased
    
    
    Maximumas Part of
    
    
    Number of SharesTotal
    
    
    
    
    
    
    Publicly
    
    
    that May Yet BeNumber of
    
    
    Average
    
    
    Announced
    
    
    Purchased UnderShares
    
    
    Price Paid
    
    
    Plans or
    
    
    the Plans orPeriod
    
    Purchased
    
    
    Per Share
    
    
    Programs
    
    
    ProgramsOctober 2004
    
    none
    
    none
    
    none
    
    noneBeginning date: October 1Ending date: October 31November 2004
    
    none
    
    none
    
    none
    
    noneBeginning date: November 1Ending date: November 30December 2004
    
    none
    
    none
    
    none
    
    noneBeginning date: December 1Ending date: December 31
 17




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##### Table of Contents



Item 3. Defaults Upon Senior Securities Not applicable 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable 
 Item 5. Other Information None 
 Item 6. Exhibits Exhibits31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32
    
    Section 1350 Certification
 18




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##### Table of Contents



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.RegistrantFebruary 14, 2005
    
    /s/ John D. DohertyJohn D. DohertyChairman, President and Chief Executive OfficerFebruary 14, 2005
    
    /s/ Paul S. FeeleyPaul S. FeeleySenior Vice President, Treasurerand Chief Financial Officer