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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2005 OR  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-25251 CENTRAL BANCORP, INC. 
  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)
 Registrants telephone number, including area code: (617) 628-4000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share 
  Stock Purchase Rights 
  Indicate by check mark whether the registrant (l) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ As of September 30, 2004, the aggregate market value of voting stock held by nonaffiliates of
the registrant was approximately $22.7 million based on the closing sale price of the registrants
Common Stock as listed on the Nasdaq National MarketSM as of September 30, 2004 ($31.240
per share). Solely for purposes of this calculation, directors, executive officers and greater
than 5% stockholders are treated as affiliates. At June 10, 2005, the registrant had 1,590,181 shares of its Common Stock, $1.00 par value,
outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders (the Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.




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CENTRAL BANCORP, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS  
 PagePART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    21Item 3.
    
    Legal Proceedings
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22PART IIItem 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    22Item 6.
    
    Selected Financial Data
    
    
    23Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8.
    
    Financial Statements and Supplementary Data
    
    
    36Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    68Item 9A.
    
    Controls and Procedures
    
    
    68Item 9B.
    
    Other Information
    
    
    68PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    69Item 11.
    
    Executive Compensation
    
    
    69Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    69Item 13.
    
    Certain Relationships and Related Transactions
    
    
    70Item 14.
    
    Principal Accountant Fees and Services
    
    
    70PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    70EX-10.13 SEVERANCE AGREEMENTEX-21 SUBSIDIARIES OF REGISTRANTEX-23.1 CONSENT OF VITALE, CATURANO & COMPANY, PCEX-23.2 CONSENT OF KPMG LLPEX-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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PART I Note on Forward-Looking Statements When used in this Annual Report onForm 10-K, 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 advises readers that
various factors, including changes in regional and national economic conditions, changes in local
demographics, unfavorable judicial decisions, substantial changes in levels of market interest
rates, technological innovations, 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 the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements. 
 Item 1. Business General The Company.Central Bancorp, Inc. (the Company), a Massachusetts corporation, was
organized by Central Co-operative Bank (Central or the Bank)  on September 30, 1998, to acquire all of the
capital stock of the Bank as part of its reorganization into the holding company form of ownership,
which was completed on January 8, 1999. Upon completion of the holding company reorganization, the
Companys common stock, par value $1.00 per share (the Common Stock), became registered under the
Securities Exchange Act of 1934, as amended (the Exchange Act). The Company is a registered bank
holding company subject to regulation and examination by the Board of Governors of the Federal
Reserve System (the Federal Reserve Board). The Company has no significant assets other than a
loan to the Employee Stock Ownership Plan (ESOP) and subordinated debentures as well as common
stock of the Bank and various other liquid assets in which it invests in the ordinary course of
business. For that reason, substantially all of the discussion in this Annual Report on Form 10-K
relates to the operations of the Bank and its subsidiaries. The Bank.
Central Co-operative Bank was organized as a
Massachusetts chartered co-operative bank in 1915 and converted from mutual to stock form in 1986.
The primary business of the Bank is to generate funds in the form of deposits and use the funds to
make mortgage loans for the construction, purchase and refinancing of residential properties, and
to make loans on commercial real estate in its market area. In addition, the Bank makes a limited
amount of consumer loans including secured and unsecured personal loans, and commercial and
industrial loans. The Bank sells some of its residential mortgage loan production in the secondary
mortgage market. The Bank also maintains an investment portfolio of various types of debt
securities, including corporate bonds and mortgage-backed securities, and a limited amount of
equity securities. In fiscal 2002, the Bank began to offer investment services (including
annuities) to its customers through a third party broker-dealer and its insurance affiliate. The Bank is headquartered in Somerville, Massachusetts and its operations are conducted
through eight full-service office facilities located in Somerville, Arlington, Burlington, Chestnut
Hill, Malden, Melrose and Woburn, Massachusetts, a limited service high school branch in Woburn,
Massachusetts, and a stand alone 24-hour automated teller machine (ATM) in Somerville as well as
over the Internet. Each full-service branch office also has a 24-hour ATM. The Bank is a member
of the Federal Home Loan Bank (FHLB) of Boston and its deposits are insured to applicable limits
by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). All Massachusetts chartered co-operative banks are required to be members of the Share
Insurance Fund. The Share Insurance Fund maintains a deposit insurance fund which insures all
deposits in member banks which are not covered by federal insurance, which in the case of the Bank
are its deposits in excess of $100,000 per insured 1




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account. In past years, a premium of 1/24 of 1% of insured deposits has been assessed
annually on member banks such as the Bank for this deposit insurance. However, no premium has been
assessed in recent years. The Companys and Banks main office is located at 399 Highland Avenue, Somerville,
Massachusetts 02144 and their telephone number is (617) 628-4000. The Bank also maintains a
website at www.centralbk.com. The operations of the Bank 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 Commissioner), the Federal Reserve Board and the FDIC. Market Area All of the Banks offices are located in the northwestern suburbs of Boston, which are its
principal market area for deposits. The majority of the properties securing the Banks loans are
located in Middlesex County. The Banks market area consists of established suburban areas and
includes portions of the Route 128 high-technology corridor. Competition The Banks competition for savings deposits has historically come from other co-operative
banks, savings banks, credit unions, savings and loan associations and commercial banks located in
Massachusetts generally, and in the Boston metropolitan area, specifically. With the advent of
interstate banking the Bank also faces competition from out-of-state banking organizations. In the
past, during times of high interest rates, the Bank has also experienced additional significant
competition for investors funds from short-term money market funds and other corporate and
government securities. The Bank has faced continuing competition from other financial
intermediaries for deposits. The Bank competes for deposits principally by offering depositors a wide variety of savings
programs, convenient branch locations, 24-hour automated teller machines, Internet banking,
preauthorized payment and withdrawal systems, tax-deferred retirement programs and other
miscellaneous services such as money orders, travelers checks and safe deposit boxes. The Bank
does not rely upon any individual, group or entity for a material portion of its deposits. The Banks competition for real estate loans comes principally from mortgage banking
companies, co-operative banks and savings banks, credit unions, savings and loan associations,
commercial banks, insurance companies and other institutional lenders. The Bank competes for loan
originations primarily through the interest rates and loan fees it charges and the efficiency and
quality of services it provides borrowers, real estate brokers and builders. The competition for
loans encountered by the Bank, as well as the types of institutions with which the Bank competes,
varies from time to time depending upon certain factors, including the general availability of
lendable funds and credit, general and local economic conditions, current interest rate levels,
volatility in the mortgage markets and other factors which are not readily predictable. Changes in bank regulation, such as changes in the products and services banks can offer and
involvement in non-banking activities by bank holding companies, as well as bank mergers and
acquisitions, can affect the Banks ability to compete successfully. Legislation and regulations
have also expanded the activities in which depository institutions may engage. The ability of the
Bank to compete successfully will depend upon how successfully it can respond to the evolving
competitive, regulatory, technological and demographic developments affecting its operations. Future Expansion Plans In May 2004, the Board of Directors adopted a five-year strategic plan to enhance long-term
shareholder value through franchise growth. The strategic plan calls for expansion and core deposit
growth through marketing and de novo branching within the Banks market area of Middlesex County in
order to enable the Bank to take 2




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greater advantage of the opportunities afforded by the favorable demographics of this market. The
strategic plan also calls for the Bank to continue to focus primarily on its traditional businesses
of residential and commercial real estate lending and to grow its mortgage banking capabilities.
The Board and management believe that an increased asset size and greater access to deposits
resulting from the proposed expansion will enable the Bank to better leverage operating
efficiencies and technology without compromising its focus on personal service and relationships. While the Board and management anticipate that its proposed expansion plans will enhance
long-term shareholder value, new branches generally require a significant initial capital
investment as well as increased marketing and operational expenses before they become profitable.
As a result, management anticipates that, in the short-term, net income may be negatively affected
as the Bank incurs significant capital expenditures and non-interest expenses in opening, operating
and marketing new branches before these branches can produce sufficient net interest income to
offset the increased expenses. Lending Activities The Banks lending focus is concentrated in real estate secured transactions, including
residential mortgage and home equity loans, commercial mortgage loans and construction loans. For
the year ended March 31, 2005, the Bank originated loans totaling $167.2 million. Of the total
loans originated during fiscal 2005, $65.2 million, or 39.0%, were residential mortgage loans and
$102.0 million, or 61.0%, were commercial mortgage loans. During the years ended March 31, 2005
and 2004, the Bank sold $20.5 million and $32.7 million, respectively, of current year residential
mortgage loan originations. The sale of loans in the secondary market allows the Bank to continue
to make loans during periods when savings flows decline or funds are not otherwise available for
lending purposes and to manage interest rate risk. The Banks loan portfolio increased by $29.8 million, or 8.3%, to $386.4 million at March 31,
2005 from $356.6 million at March 31, 2004. The increase occurred as a result of the continuing
high level of loan refinancing activity, particularly residential mortgage loans, and managements
decision to sell many fixed-rate residential mortgages originated in fiscal 2005. While the loan
portfolio increased overall, the most significant growth was in the commercial real estate
portfolio which grew by $48.2 million, or 33.0%, in fiscal 2005. This growth is consistent with
managements strategic intent to grow its commercial mortgage portfolio due to the generally more
favorable yields and repricing frequency of these assets, as compared to other interest-earning
assets. Loan Portfolio Composition.The following table summarizes the composition of the Banks loan
portfolio by type of loan and the percentage each type represents of the total loan portfolio at
the dates indicated. At March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Mortgage loans:Residential
    
    $
    159,838
    
    
    
    41.4
    %
    
    $
    171,682
    
    
    
    48.2
    %
    
    $
    236,649
    
    
    
    60.7
    %
    
    $
    246,045
    
    
    
    66.2
    %
    
    $
    248,459
    
    
    
    71.9
    %Commercial
    
    
    194,326
    
    
    
    50.3
    
    
    
    146,107
    
    
    
    41.0
    
    
    
    107,140
    
    
    
    27.5
    
    
    
    87,013
    
    
    
    23.4
    
    
    
    69,949
    
    
    
    20.2Construction
    
    
    17,187
    
    
    
    4.4
    
    
    
    25,112
    
    
    
    7.0
    
    
    
    30,294
    
    
    
    7.8
    
    
    
    20,998
    
    
    
    5.6
    
    
    
    9,152
    
    
    
    2.6Home equity
    
    
    9,194
    
    
    
    2.4
    
    
    
    9,397
    
    
    
    2.6
    
    
    
    9,128
    
    
    
    2.3
    
    
    
    9,154
    
    
    
    2.5
    
    
    
    10,977
    
    
    
    3.2Total mortgage loans
    
    
    380,545
    
    
    
    98.5
    
    
    
    352,298
    
    
    
    98.8
    
    
    
    383,211
    
    
    
    98.3
    
    
    
    363,210
    
    
    
    97.7
    
    
    
    338,537
    
    
    
    97.9Other loans:Commercial and industrial
    
    
    4,786
    
    
    
    1.2
    
    
    
    3,198
    
    
    
    0.9
    
    
    
    5,319
    
    
    
    1.4
    
    
    
    6,901
    
    
    
    1.9
    
    
    
    4,979
    
    
    
    1.4Consumer
    
    
    1,051
    
    
    
    0.3
    
    
    
    1,129
    
    
    
    0.3
    
    
    
    1,287
    
    
    
    0.3
    
    
    
    1,596
    
    
    
    0.4
    
    
    
    2,277
    
    
    
    0.7Total other loans
    
    
    5,837
    
    
    
    1.5
    
    
    
    4,327
    
    
    
    1.2
    
    
    
    6,606
    
    
    
    1.7
    
    
    
    8,497
    
    
    
    2.3
    
    
    
    7,256
    
    
    
    2.1Total loans
    
    
    386,382
    
    
    
    100.0
    %
    
    
    356,625
    
    
    
    100.0
    %
    
    
    389,817
    
    
    
    100.0
    %
    
    
    371,707
    
    
    
    100.0
    %
    
    
    345,793
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    3,681
    
    
    
    
    
    
    
    3,537
    
    
    
    
    
    
    
    3,284
    
    
    
    
    
    
    
    3,292
    
    
    
    
    
    
    
    3,106Loans, net
    
    $
    382,701
    
    
    
    
    
    
    $
    353,088
    
    
    
    
    
    
    $
    386,533
    
    
    
    
    
    
    $
    368,415
    
    
    
    
    
    
    $
    342,687
 3




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Loan Portfolio Sensitivity.The following table sets forth certain maturity information
as of March 31, 2005 regarding the dollar amount of commercial and industrial loans as well as
construction loans in the Banks portfolio, including scheduled repayments of principal, based on
contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less. Due AfterDue Within
    
    
    One Through
    
    
    Due AfterOne Year
    
    
    Five Years
    
    
    Five Years
    
    
    Total(In thousands)Commercial and industrial loans
    
    $
    3,694
    
    
    $
    1,015
    
    
    $
    77
    
    
    $
    4,786Construction loans
    
    
    11,176
    
    
    
    5,786
    
    
    
    225
    
    
    
    17,187Total
    
    $
    14,870
    
    
    $
    6,801
    
    
    $
    302
    
    
    $
    21,973
 Of construction loans and commercial and industrial loans maturing more than one year
after March 31, 2005, $3.4 million have fixed rates and $3.7 million have floating or variable
rates. Residential Lending.The Banks residential mortgage loans at March 31, 2005 totaled $159.8
million, or 41.4%, of the total loan portfolio. Fixed-rate residential mortgages totaled $110.7
million, or 69.3%, of the residential loan portfolio and adjustable-rate loans totaled $49.1
million, or 30.7%, of the residential loan portfolio. With the implementation of its mortgage banking initiative in fiscal 2003, whereby the Bank is
seeking to increase its origination of residential mortgage loans and to generate additional
noninterest income via loan sale gains, management regularly assesses the desirability of holding
newly originated long-term, fixed-rate residential mortgage loans in its portfolio. A number of
factors are evaluated to determine whether or not to hold such loans including, current and
projected liquidity, current and projected interest rate risk profile, projected growth in other
interest-earning assets, e.g.,commercial real estate loans, and projected interest rates. With
the rate on the 30-year fixed-rate residential mortgage loan reaching a 45-year low in 2003, the
Company continued to experience high residential loan refinancing activity during fiscal 2005 and
fiscal 2004. Customers who refinanced their mortgages generally refinanced their existing home
loans with either a 15 or 30 year fixed-rate mortgage loan. The Banks adjustable-rate residential mortgage loans have a maximum term of 30 years, and
allow for periodic interest rate adjustments. The Bank prices the initial rate competitively, but
generally avoids initial deep discounts from contracted indices and margins. The Bank has adopted
the U.S. Treasury Securities Index, adjusted to a constant maturity of one to three years, as its
primary index. The margin at which adjustable-rate loans are generally set is 2.875 percentage
points over the stated index. Interest rate adjustments on adjustable mortgage loans are capped at
two percentage points per adjustment and six percentage points over the life of the loan. Residential loans may be granted as construction loans or permanent loans on residential
properties. Construction loans on owner-occupied residential properties may convert to residential
loans at fixed or adjustable rates upon completion of construction. Loans secured by one- to
four-family residential properties are typically written in amounts up to 80% of the appraised
value of the residential property. The Bank generally requires private mortgage insurance for
loans in excess of 80% of appraised value. The maximum loan-to-value ratio on owner occupied
residential properties is 95%. The maximum loan-to-value ratio on non-owner occupied residential
properties is 80%. Commercial Real Estate and Construction Lending.The Bank originates permanent and
construction loans on commercial real estate. Commercial real estate loans are typically secured
by income-producing properties such as apartment buildings, office buildings, industrial buildings
and various retail properties and are written with either fixed or adjustable interest rates.
Commercial real estate loans with fixed interest rates have terms generally ranging from one to
five years while the interest rate on adjustable rate loans is generally set to the five year FHLB
classic advance rate plus a margin of 2.00 to 3.00 percentage points. As of March 31, 2005,
commercial real estate loans totaled $194.3 million and constituted 50.3% of the total loan
portfolio. Commercial real estate loans may be made for up to 80% of the appraised value of the property
up to $6.0 million, the Banks house lending limit for an individual borrower. Commercial real
estate loans currently offered 4




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by the Bank have terms of one to 20 years. Title insurance, fire, casualty insurance and
flood insurance are required in amounts sufficient to protect the Banks interest, where
applicable. In some cases, commercial real estate loans are granted in participation with other
lenders. The Banks construction loans totaled $17.2 million, or 4.4%, of the Banks loan portfolio at
March 31, 2005. Construction loans are short-term in nature and have maturities ranging from six
months to two years. The Bank grants loans to construct residential and commercial real estate, as
well as land development for individual residential lots. Currently, construction loans are made
for up to 80% of the projected value of the completed property, based on independent appraisals.
Funds are disbursed based on a schedule of completed work presented to the Bank and confirmed by
physical inspection of the property by a construction consultant and only after receipt of title
updates. The Bank also originates loans for the construction of single-family homes for resale by
professional builders. The Bank also lends to individuals for construction of one- to four-family
homes which they intend to occupy. Borrowers are required to have a firm contract with a qualified
builder or developer or to have demonstrated prior home building experience. Construction loans
are normally made for a term of not more than eighteen months and based on a completed value of not
more than 80%, as determined by an independent certified and licensed appraiser. The growth in the commercial mortgage loan portfolio in fiscal 2005, which totaled $48.2
million, or 33.0%, is attributable to the expanded team of experienced commercial lenders and
credit administration personnel established in 2002. This planned growth was aided by
opportunities created by the declining rate environment prevailing during the past three years. Home Equity Lines of Credit.The Bank offers home equity lines of credit that are secured by
the borrowers equity in his or her primary residence and may take the form of a first or second
mortgage. Equity loans are made in amounts up to 80% of the appraised value less any first
mortgage. Payment of interest is required monthly and the rate is adjusted monthly based on
changes in the prime rate, as quoted in the Wall Street Journal. Loans are not contingent upon
proceeds being used for home improvement. The Banks home equity loans outstanding totaled $9.2
million, or 2.4%, of the Banks loan portfolio at March 31, 2005. Commercial and Industrial, Consumer and Other Loans.The Banks commercial and industrial,
consumer and other loans totaled $5.8 million, or 1.5%, of the total loan portfolio on March 31,
2005. The Banks commercial and industrial portfolio consists primarily of time, demand and
line-of-credit loans to a variety of local small businesses generally done on a secured basis. The
Bank engages in consumer lending primarily as an accommodation to existing customers. Risks of Commercial Real Estate, Construction and Commercial and Industrial Lending.
Commercial real estate, construction and commercial and industrial lending entail significant
additional risks compared to residential mortgage lending. The repayment of loans secured by
income-producing properties is typically dependent on the successful operation of the properties
and thus may be subject to a greater extent to adverse conditions in the local real estate market
or in the economy generally. Construction loans involve additional risks, because of the
uncertainties inherent in estimating construction costs, delays arising from labor problems,
material shortages, and other unpredictable contingencies, which make it relatively difficult to
evaluate accurately the total loan funds required to complete a project, and related loan-to-value
ratios. Commercial and industrial loans are generally not secured by real estate and may involve
greater risks than other types of lending. Because payments on such loans are often dependent on
the successful operation of the business involved, repayment of such loans may be subject to a
greater extent to adverse conditions in the economy. For more information see  Non-Performing
Assets below. Origination Fees and Other Fees.The Bank currently collects origination fees on some of the
real estate loan products offered. Fees to cover the cost of appraisals, credit reports and other
direct costs are also collected. Loan origination fees collected vary in proportion to the level
of lending activity, as well as competitive and economic conditions. 5




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The Bank imposes late charges on all loans with the exception of equity lines of credit and
loans secured by deposits. The Bank also collects prepayment premiums and partial release fees on
commercial real estate and construction loans where such items are negotiated as part of the loan
agreement. Loan Solicitation and Processing.Loan originations come from a number of sources.
Residential real estate loans are attributable to walk-in customers, existing customers, real
estate brokers and builders as well as the purchase of residential loans from other financial
institutions. During fiscal 2005, the Bank purchased $2.5 million of residential whole loans and
$1.1 million in commercial real estate loans. The Bank also utilizes both in-house and traveling
originators in the origination of residential real estate loans. Commercial real estate loans are
originated by the Banks team of commercial loan officers. Consumer loans result from walk-in
customers and depositors. Each loan originated by the Bank is underwritten by lending personnel of the Bank or, in the
case of certain residential mortgage loans to be sold, qualified independent contract underwriters.
Individual lending officers, a committee of loan officers and the Banks Security Committee have
the authority to approve loans up to various limits. Applications are received in each of the
offices of the Bank. Independent certified and licensed appraisers are used to appraise the
property intended to secure real estate loans. The Banks underwriting criteria are designed to
minimize the risks of each loan. There are detailed guidelines concerning the types of loans that
may be made, the nature of the collateral, the information that must be obtained concerning the
loan applicant and follow-up inspections of collateral after the loan is made. Non-Performing Assets.The Bank notifies a borrower of a delinquency when any payment becomes
15 days past due. Repeated contacts are made if the loan remains delinquent for 30 days or more.
The Bank will consider working out a payment schedule with a borrower to clear a delinquency, if
necessary. If, however, a borrower is unwilling or unable to resolve such a default after 60 days,
the Bank will generally proceed to foreclose and liquidate the property to satisfy the debt. Loans on which the accrual of interest has been discontinued are designated as non-accrual
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. When a loan is placed on non-accrual 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 collectable as to both
principal and interest. The Bank has instituted additional procedures to closely monitor loans and bring potential
problems to managements attention early in the collection process. The Bank prepares a monthly
watch list of potential problem loans including currently performing loans. The Senior Loan
Officer reviews delinquencies with the Security Committee of the Board of Directors at least
monthly. Due to the high priority given to monitoring asset quality, Senior Management is involved
in the early detection and resolution of problem loans. 6




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The following table sets forth information with respect to the Banks non-performing assets at
the dates indicated. At March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Loans accounted for on a non-accrual basis,
non-performing loans
    
    $
    190
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate acquired by foreclosure
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets
    
    $
    190
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Impaired loans, accruing
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Non-performing loans to total loans
    
    
    0.05
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Non-performing assets to total assets
    
    
    0.04
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 At March 31, 2005, there were no loans not listed on the table above where known
information about possible credit problems of borrowers causes management to have serious doubts as
to the ability of such borrowers to comply with present loan repayment terms. Allowance for Loan Losses.The allowance for loan losses is maintained at a level which
management considers adequate to provide for probable losses based on an evaluation of known and
inherent risks in the portfolio. Such evaluation for each of the periods reported includes
identification of adverse situations which may affect the ability of certain borrowers to repay, a
review of overall portfolio size, quality, composition and an assessment of existing and
anticipated economic conditions. Regular reviews of the loan portfolio are performed to identify
loans for which specific allowance allocations are considered prudent. Specific allocations are
made based on the risk classification assigned to individual loans. Additionally, general risk
allocations are determined by a formula whereby the loan portfolio is stratified by loan type and
by risk rating category. Loss factors are then applied to each strata based on various
considerations including historical loss experience, delinquency trends, current economic
conditions, collateral type, loan-to-value ratios, industry standards and regulatory guidelines.
While management uses available information in establishing the allowance for loan losses, future
adjustments to the allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluations. Additions to the allowance are charged to earnings and
realized losses, net of recoveries, are charged to the allowance. Various regulatory agencies, as an integral part of their examination process, periodically
review the Banks allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on judgment different from those of management. 7




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##### Table of Contents



The following table presents activity in the allowance for loan losses during the years
indicated. At or For the Years Ended March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Balance at beginning of year
    
    $
    3,537
    
    
    $
    3,284
    
    
    $
    3,292
    
    
    $
    3,106
    
    
    $
    2,993Provision
    
    
    100
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    Charge-offs:Residential mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other loans
    
    
    (3
    )
    
    
    (29
    )
    
    
    (21
    )
    
    
    (4
    )
    
    
    (4
    )Total charge-offs
    
    
    (3
    )
    
    
    (29
    )
    
    
    (21
    )
    
    
    (4
    )
    
    
    (4
    )Recoveries:Residential mortgage
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    80
    
    
    
    60Commercial mortgage
    
    
    39
    
    
    
    33
    
    
    
    
    
    
    
    103
    
    
    
    48Other loans
    
    
    8
    
    
    
    30
    
    
    
    13
    
    
    
    7
    
    
    
    9Total recoveries
    
    
    47
    
    
    
    82
    
    
    
    13
    
    
    
    190
    
    
    
    117Net (charge-offs) recoveries
    
    
    44
    
    
    
    53
    
    
    
    (8
    )
    
    
    186
    
    
    
    113Balance at end of year
    
    $
    3,681
    
    
    $
    3,537
    
    
    $
    3,284
    
    
    $
    3,292
    
    
    $
    3,106Average loans outstanding during the year
    
    $
    365,130
    
    
    $
    367,094
    
    
    $
    378,502
    
    
    $
    335,271
    
    
    $
    341,732Ratio of net charge-offs to average loans
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aTotal loans outstanding at end of year
    
    $
    386,382
    
    
    $
    356,625
    
    
    $
    389,817
    
    
    $
    371,707
    
    
    $
    345,793Ratio of allowance for loan
losses to loans at end of year
    
    
    0.95
    %
    
    
    0.99
    %
    
    
    0.84
    %
    
    
    0.89
    %
    
    
    0.90
    %
 
 n/a means either not applicable or not meaningful 8




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##### Table of Contents



The allowance for loan losses is available for offsetting credit losses in connection with any
loan, but is internally allocated among loan categories as part of the process for evaluating the
adequacy of the allowance for loan losses. The following table presents the allocation of the
Banks allowance for loan losses, by type of loan, at the dates indicated. At March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofLoans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in thousands)Mortgage loans:Residential mortgage
    
    $
    422
    
    
    
    41.4
    %
    
    $
    446
    
    
    
    48.2
    %
    
    $
    583
    
    
    
    60.8
    %
    
    $
    636
    
    
    
    66.2
    %
    
    $
    1,637
    
    
    
    71.9
    %Commercial mortgage
    
    
    2,740
    
    
    
    50.3
    
    
    
    2,434
    
    
    
    41.0
    
    
    
    2,009
    
    
    
    27.4
    
    
    
    1,956
    
    
    
    23.4
    
    
    
    1,058
    
    
    
    20.2Construction
    
    
    334
    
    
    
    4.4
    
    
    
    494
    
    
    
    7.0
    
    
    
    457
    
    
    
    7.8
    
    
    
    462
    
    
    
    5.6
    
    
    
    169
    
    
    
    2.6Home equity
    
    
    100
    
    
    
    2.4
    
    
    
    101
    
    
    
    2.6
    
    
    
    94
    
    
    
    2.3
    
    
    
    98
    
    
    
    2.5
    
    
    
    163
    
    
    
    3.2Total mortgage loans
    
    
    3,596
    
    
    
    98.5
    
    
    
    3,475
    
    
    
    98.8
    
    
    
    3,143
    
    
    
    98.3
    
    
    
    3,152
    
    
    
    97.7
    
    
    
    3,027
    
    
    
    97.9Other loans
    
    
    85
    
    
    
    1.5
    
    
    
    62
    
    
    
    1.2
    
    
    
    141
    
    
    
    1.7
    
    
    
    140
    
    
    
    2.3
    
    
    
    79
    
    
    
    2.1Total
    
    $
    3,681
    
    
    
    100.0
    %
    
    $
    3,537
    
    
    
    100.0
    %
    
    $
    3,284
    
    
    
    100.0
    %
    
    $
    3,292
    
    
    
    100.0
    %
    
    $
    3,106
    
    
    
    100.0
    %
 9




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##### Table of Contents



Investment Activities The primary objectives of the investment portfolio are to achieve a competitive rate of return over
a reasonable period of time and to provide liquidity. As a Massachusetts chartered bank, the Bank
is authorized to invest in various obligations of federal and state governmental agencies,
corporate bonds and other obligations and, within certain limits, marketable equity securities.
The Banks investment policy requires that corporate debt securities be rated as investment grade
at the time of purchase. A security that is downgraded below investment grade will require
additional analysis relative to perceived credit quality, market price, and overall impact on
capital/earnings before a decision is made as to hold or sell. For all sub-investment grade
corporate holdings, additional analysis of credit worthiness is required. The Banks investment in
marketable equity securities is generally limited to large, well-known corporations whose shares
are actively traded. The size of the Banks holdings in an individual companys stock is also
limited by policy. A portion of the Banks investment portfolio consists of mortgage-backed
securities which represent interests in pools of residential mortgages. Such securities include
securities issued and guaranteed by the Federal National Mortgage Association (FNMA), Federal
Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage Association (GNMA)
as well as collateralized mortgage obligations (CMOs) issued primarily by FNMA and FHLMC. Investments are classified as held to maturity, available for sale, or trading.
Investments classified as trading securities are reported at fair value with unrealized gains and
losses included in earnings. Investments classified as available for sale are reported at fair
value, with unrealized gains and losses, net of taxes, reported as a separate component of
stockholders equity. Securities held to maturity are carried at amortized cost. At March 31,
2005, all of the Banks marketable investments were classified as available for sale. The following table sets forth a summary of the Banks investment securities, as well as the
percentage such investments comprise of the Banks total assets, at the dates indicated. At March 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)U. S. Government and agency obligations
    
    $
    21,725
    
    
    $
    10,086
    
    
    $
    8,247Corporate bonds
    
    
    35,217
    
    
    
    38,638
    
    
    
    38,727Mortgage-backed securities
    
    
    47,879
    
    
    
    31,575
    
    
    
    12,056Marketable equity securities
    
    
    3,795
    
    
    
    3,472
    
    
    
    2,081Total investment securities
    
    $
    108,616
    
    
    $
    83,771
    
    
    $
    61,111Percentage of total assets
    
    
    20.8
    %
    
    
    17.1
    %
    
    
    12.8
    %
 At March 31, 2005, the Bank owned securities issued by several companies having a fair
value that exceeded 10% of the Companys stockholders equity. Such securities consisted primarily
of debt obligations. The following table summarizes the Banks aggregate holdings of each issuer
as of March 31, 2005. Issuer
    
    Amortized Cost
    
    
    Market Value(In thousands)AT&T
    
    $
    5,100
    
    
    $
    5,231Ford Motor Credit
    
    
    4,566
    
    
    
    4,304Boeing Capital Corp.
    
    
    5,017
    
    
    
    5,134Hewlett Packard
    
    
    5,026
    
    
    
    5,187GMAC
    
    
    4,593
    
    
    
    4,590
 10




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##### Table of Contents



The following table sets forth the scheduled maturities, amortized cost, fair values and
average yields for the Banks debt securities at March 31, 2005. More Than
    
    
    More ThanOne Year or Less
    
    
    One to Five Years
    
    
    Five to Ten Years
    
    
    More than Ten Years
    
    
    Total Investment PortfolioAmortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. government and agency
obligations
    
    $
    
    
    
    
    
    %
    
    $
    21,958
    
    
    
    3.94
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    21,958
    
    
    $
    21,725
    
    
    
    3.94
    %Corporate bonds
    
    
    6,019
    
    
    
    6.64
    
    
    
    28,669
    
    
    
    5.96
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,688
    
    
    
    35,217
    
    
    
    6.08Mortgage-backed securities
    
    
    1
    
    
    
    7.50
    
    
    
    312
    
    
    
    6.47
    
    
    
    20,468
    
    
    
    4.11
    
    
    
    27,536
    
    
    
    4.50
    
    
    
    48,317
    
    
    
    47,879
    
    
    
    4.35Total
    
    $
    6,020
    
    
    
    
    
    
    $
    50,939
    
    
    
    
    
    
    $
    20,468
    
    
    
    
    
    
    $
    27,536
    
    
    
    
    
    
    $
    104,963
    
    
    $
    104,821
 Deposits and Borrowed Funds General.Savings accounts and other types of deposits have traditionally been an important
source of the Banks funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, loan sales, borrowings and from other
operations. The availability of funds is influenced by the general level of interest rates and
other market conditions. Scheduled loan repayments are a relatively stable source of funds while
deposit inflows and outflows vary widely and are influenced by prevailing interest rates and market
conditions. Borrowings may be used on a short-term basis to compensate for reductions in deposits
or deposit inflows at less than projected levels and may be used on a longer term basis to support
expanded lending activities. Deposits.Consumer deposits are attracted principally from within the Banks market area
through the offering of a broad selection of deposit instruments including demand deposit accounts,
NOW accounts, money market deposit accounts, regular savings accounts, term deposit accounts and
retirement savings plans. The Bank has historically not actively solicited or advertised for
deposits outside of its market area or solicited brokered deposits. During fiscal 2003, the Bank
did enter into a retail CD brokerage agreement with a major brokerage firm and considers this
arrangement to be a secondary source of liquidity. The Bank attracts deposits through its branch
office network, automated teller machines, the Internet and by paying rates competitive with other
Massachusetts financial institutions. Deposit Accounts.The following table shows the distribution of the average balance of the
Banks deposit accounts at the dates indicated and the weighted average rate paid for each category
of account for the years indicated. Years Ended March 31,2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    % of
    
    
    Rate
    
    
    Average
    
    
    %of
    
    
    Rate
    
    
    Average
    
    
    % of
    
    
    RateBalance
    
    
    Deposits
    
    
    Paid
    
    
    Balance
    
    
    Deposits
    
    
    Paid
    
    
    Balance
    
    
    Deposits
    
    
    Paid(Dollars in thousands)Demand deposit accounts
    
    $
    32,601
    
    
    
    10.4
    %
    
    
    
    %
    
    $
    29,998
    
    
    
    10.5
    %
    
    
    
    %
    
    $
    29,586
    
    
    
    10.7
    %
    
    
    
    %NOW accounts
    
    
    35,660
    
    
    
    11.4
    
    
    
    .68
    
    
    
    36,980
    
    
    
    13.0
    
    
    
    .53
    
    
    
    37,271
    
    
    
    13.4
    
    
    
    .64Passbook and other savings
accounts
    
    
    73,916
    
    
    
    23.6
    
    
    
    .54
    
    
    
    72,925
    
    
    
    25.5
    
    
    
    .63
    
    
    
    70,489
    
    
    
    25.4
    
    
    
    1.10Money market deposit accounts
    
    
    58,155
    
    
    
    18.5
    
    
    
    1.56
    
    
    
    44,125
    
    
    
    15.4
    
    
    
    1.55
    
    
    
    33,695
    
    
    
    12.1
    
    
    
    1.83Term deposit certificates
    
    
    113,495
    
    
    
    36.1
    
    
    
    2.77
    
    
    
    101,688
    
    
    
    35.6
    
    
    
    3.06
    
    
    
    106,572
    
    
    
    38.4
    
    
    
    3.72Total deposits
    
    $
    313,827
    
    
    
    100.0
    %
    
    
    1.51
    %
    
    $
    285,716
    
    
    
    100.0
    %
    
    
    1.56
    %
    
    $
    277,613
    
    
    
    100.0
    %
    
    
    2.02
    %
 11




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##### Table of Contents



Time Deposits in Excess of $100,000.The following table indicates the amount of the
Banks time deposits of $100,000 or more by time remaining until maturity as of March 31, 2005 (in
thousands). Maturity Period:Three months or less
    
    $
    7,902Three through six months
    
    
    10,012Six through twelve months
    
    
    12,488Over twelve months
    
    
    16,868Total
    
    $
    47,270
 Borrowings.From time to time, the Bank borrows funds from the FHLB of Boston. All advances
from the FHLB of Boston are secured by a blanket lien on residential first mortgage loans, certain
investment securities and commercial real estate loans and all the Banks stock in the FHLB of
Boston. At March 31, 2005, the Bank had advances outstanding from the FHLB of Boston of $138.1
million. Proceeds from these advances were primarily used to fund the Banks loan growth.
Additional sources of borrowed funds include The Co-operative Central Bank Reserve Fund and the
Federal Reserve Bank. The following table sets forth certain information regarding borrowings from the FHLB of
Boston, including short-term borrowings under a line of credit, at the dates and for the periods
indicated. At or for theYears Ended March 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Amounts outstanding at end of period
    
    $
    138,135
    
    
    $
    141,100
    
    
    $
    144,400Weighted average rate at end of period
    
    
    4.82
    %
    
    
    4.82
    %
    
    
    4.81
    %Maximum amount of borrowings outstanding
at any month end
    
    $
    153,800
    
    
    $
    144,400
    
    
    $
    165,500Approximate average amounts outstanding
    
    $
    141,091
    
    
    $
    143,455
    
    
    $
    155,590Approximate weighted average rate during the year
    
    
    4.85
    %
    
    
    4.89
    %
    
    
    4.67
    %
 Subsidiaries In September, 2004, the Company established Central Bancorp Capital Trust I (the Trust), a
Delaware statutory 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
the three month LIBOR. At March 31, 2005, the interest rate was 5.45%. 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. In April 1998 and July 2003, the Bank established Central Securities Corporation and Central
Securities Corporation II, respectively, Massachusetts corporations, as wholly owned subsidiaries
of the Bank for the purpose of engaging exclusively in buying, selling and holding, on their own
behalf, securities that may be held directly by the Bank. These subsidiaries hold government
agency obligations, corporate bonds and mortgage-backed securities and qualify under Section 38B of
Chapter 63 of the Massachusetts General Laws as Massachusetts securities corporations. In July 1999, the Bank established Central Preferred Capital Corporation (CPCC), a
Massachusetts corporation which elected to be taxed as a real estate investment trust (REIT) for
federal and Massachusetts tax 12




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##### Table of Contents



purposes. CPCC held mortgage loans which were previously originated by the Bank. In December
2003, the Bank liquidated its REIT subsidiary in a tax-free transaction. REGULATION AND SUPERVISION Regulation and Supervision of the Company General.The Company is a bank holding company subject to regulation by the Federal Reserve
Board under the Bank Holding Company Act of 1956, as amended (the BHCA). As a result, the
activities of the Company are subject to certain limitations, which are described below. In
addition, as a bank holding company, the Company is required to file annual and quarterly reports
with the Federal Reserve Board and to furnish such additional information as the Federal Reserve
Board may require pursuant to the BHCA. The Company is also subject to regular examination by and
the enforcement authority of the Federal Reserve Board. Activities.With certain exceptions, the BHCA prohibits a bank holding company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of a company that is
not a bank or a bank holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for its subsidiaries.
The principal exceptions to these prohibitions involve certain non-bank activities which, by
statute or by Federal Reserve Board regulation or order, have been identified as activities closely
related to the business of banking. The activities of the Company are subject to these legal and
regulatory limitations under the BHCA and the related Federal Reserve Board regulations.
Notwithstanding the Federal Reserve Boards prior approval of specific nonbanking activities, the
Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any
activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause
to believe that the continuation of such activity or such ownership or control constitutes a
serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding
company. Effective with the enactment of the Gramm-Leach-Bliley Act (the G-L-B Act) on November 12,
1999, bank holding companies whose financial institution subsidiaries are well capitalized and well
managed and have satisfactory Community Reinvestment Act (CRA) records can elect to become
financial holding companies which are permitted to engage in a broader range of financial
activities than are permitted to bank holding companies. Financial holding companies are
authorized to engage in, directly or indirectly, financial activities. A financial activity is an
activity that is: (i) financial in nature; (ii) incidental to an activity that is financial in
nature; or (iii) complementary to a financial activity and that does not pose a safety and
soundness risk. The G-L-B Act includes a list of activities that are deemed to be financial in
nature. Other activities also may be decided by the Federal Reserve Board to be financial in
nature or incidental thereto if they meet specified criteria. A financial holding company that
intends to engage in a new activity or to acquire a company to engage in such an activity is
required to give prior notice to the Federal Reserve Board. If the activity is not either
specified in the G-L-B Act as being a financial activity or one that the Federal Reserve Board has
determined by rule or regulation to be financial in nature, the prior approval of the Federal
Reserve Board is required. Acquisitions.Under the BHCA, a bank holding company must obtain the prior approval of the
Federal Reserve Board before (1) acquiring direct or indirect ownership or control of any voting
shares of any bank or bank holding company if, after such acquisition, the bank holding company
would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Satisfactory financial condition, particularly
with regard to capital adequacy, and satisfactory CRA ratings generally are prerequisites to
obtaining federal regulatory approval to make acquisitions. Under the BHCA, any company must obtain approval of the Federal Reserve Board prior to
acquiring control of the Company or the Bank. For purposes of the BHCA, control is defined as
ownership of more than 25% of any class of voting securities of the Company or the Bank, the
ability to control the election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company or the Bank. In addition, the Change in Bank
Control Act and the related regulations of the Federal Reserve Board require any person or persons
acting in concert (except for companies required to make application under the BHCA), to file a
written notice with the Federal Reserve Board before such person or persons may acquire control of
the Company or 13




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the Bank. The Change in Bank Control Act defines control as the power, directly or
indirectly, to vote 25% or more of any voting securities or to direct the management or policies of
a bank holding company or an insured bank. There is a presumption of control where the acquiring person will own, control or hold with
power to vote 10% or more of any class of voting security of a bank holding company or insured bank
if, like the Company, the company involved has registered securities under Section 12 of the
Securities Exchange Act of 1934. Under Massachusetts banking law, prior approval of the Massachusetts Division of Banks is also
required before any person may acquire control of a Massachusetts bank or bank holding company.
Massachusetts law generally prohibits a bank holding company from acquiring control of an
additional bank if the bank to be acquired has been in existence for less than three years or, if
after such acquisition, the bank holding company would control more than 30% of the FDIC-insured
deposits in the Commonwealth of Massachusetts. Capital Requirements.The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets. See Regulation and
Supervision of the BankCapital Requirements. Dividends.The Federal Reserve Board has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has
issued a policy statement on the payment of cash dividends by bank holding companies, which
expresses the Federal Reserve Boards view that a bank holding company should pay cash dividends
only to the extent that the companys net income for the past year is sufficient to cover both the
cash dividends and a rate of earnings retention that is consistent with the companys capital
needs, asset quality and overall financial condition. The Federal Reserve Board also indicated
that it would be inappropriate for a bank holding company experiencing serious financial problems
to borrow funds to pay dividends. Under the prompt corrective action regulations adopted by the
Federal Reserve Board pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), the Federal Reserve Board may prohibit a bank holding company from paying any dividends
if the holding companys bank subsidiary is classified as undercapitalized. See Regulation and
Supervision of the Bank  Prompt Corrective Regulatory Action. Stock Repurchases.As a bank holding company, the Company is required to give the Federal
Reserve Board prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12 months, is equal
to 10% or more of the Companys consolidated net worth. The Federal Reserve Board may disapprove
such a purchase or redemption if it determines that the proposal would violate any law, regulation,
Federal Reserve Board order, directive or any condition imposed by, or written agreement with, the
Federal Reserve Board. This requirement does not apply to bank holding companies that are
well-capitalized, received one of the two highest examination ratings at their last examination
and are not the subject of any unresolved supervisory issues. Sarbanes-Oxley Act of 2002.On July 30, 2002, the Sarbanes-Oxley Act of 2002 (SOX) was
signed into law which mandated a variety of reforms intended to address corporate and accounting
fraud. SOX contained provisions which amend the Securities Exchange Act of 1934, as amended (the
Act), and provisions which directed the SEC to promulgate rules. The resultant law and
regulations under the Act as of the time of this annual report is set forth in the following
paragraphs. SOX provides for the establishment of a new Public Company Accounting Oversight Board
(PCAOB), which enforces auditing, quality control and independence standards for firms that audit
Securities and Exchange Commission (SEC)-reporting companies and is funded by fees from all
SEC-reporting companies. SOX imposes higher standards for auditor independence and restricts the
provision of consulting services by auditing firms to companies they audit. Any non-audit services
being provided to an audit client will require preapproval by the Companys audit committee
members. In addition, certain audit partners must be rotated periodically. SOX requires chief
executive officers and chief financial officers, or their equivalent, to certify to the accuracy of
periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement. In addition, under SOX, counsel is required to
report evidence of a material violation of the securities laws or a breach of fiduciary duty by a
company to its chief executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other similar committee of
the board of directors or the board itself. 14




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##### Table of Contents



Longer prison terms will be applied to corporate executives who violate federal securities
laws, the period during which certain types of suits can be brought against a company or its
officers has been extended, and bonuses issued to top executives prior to restatement of a
companys financial statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading during retirement plan
blackout periods, and loans to company executives are restricted. In addition, a provision
directs that civil penalties levied by the SEC as a result of any judicial or administrative action
under the Act be deposited in a fund for the benefit of harmed investors. Directors and executive
officers must also report most changes in their ownership of a companys securities within two
business days of the change, and all ownership reports now must be electronically filed. Other
components of the Act require that public companies must disclose whether they have code of ethics
for their senior financial officers and if not, why not, and that management must periodically
assess and report on the adequacy of the companys internal controls. SOX also increases the oversight and authority of audit committees of publicly traded
companies. Audit committee members must be independent and are barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, all SEC-reporting companies must
disclose whether at least one member of the committee is an audit committee financial expert (as
such term is defined by the SEC rules) and if not, an explanation must be provided. Audit
committees of publicly traded companies will have authority to retain their own counsel and other
advisors funded by the company. Audit committees must establish procedures for the receipt,
retention and treatment of complaints regarding accounting and auditing matters and procedures for
the confidential and anonymous submission of employee concerns regarding questionable accounting or
auditing matters. It is the responsibility of the audit committee to hire, oversee and work on
disagreements with the Companys independent auditor. Beginning six months after the SEC determines that the PCAOB is able to carry out its
functions, it will be unlawful for any person that is not a registered public accounting firm
(RPAF) to audit an SEC-reporting company. Under the Act, a RPAF is prohibited from performing
statutorily mandated audit services for a company if such companys chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving in equivalent
positions has been employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. SOX also prohibits any officer or director of
a company or any other person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent public or certified accountant engaged in
the audit of the Companys financial statements for the purpose of rendering the financial
statements materially misleading. The SEC has prescribed rules requiring inclusion of an internal
control report and assessment by management in the annual report to shareholders, with which the
Company will be required to comply beginning with its fiscal year ending March 31, 2006. SOX
requires the RPAF that issues the audit report to attest to and report on managements assessment
of the Companys internal controls. In addition, SOX requires that each financial report required
to be prepared in accordance with (or reconciled to) generally accepted accounting principles and
filed with the SEC and reflect all material correcting adjustments that are identified by a RPAF in
accordance with generally accepted accounting principles and the rules and regulations of the SEC. Although the Company has incurred and anticipates it will continue to incur, additional
expense in complying with the provisions of the Act and the related rules, management does not
expect that such compliance will have a material impact on the Companys financial condition or
results of operations. On March 2, 2005, the SEC announced an extension of compliance dates for non-accelerated
filers regarding internal controls over financials reporting requirements (Section 404 of the
Sarbanes-Oxley Act of 2002). The Company is currently considered a non-accelerated filer with the SEC and, accordingly,
must begin to comply with Section 404 requirements for its fiscal year ending on March 31, 2007. Regulation and Supervision of the Bank General.The Bank is subject to extensive regulation by the Massachusetts Commissioner of
Banks (Commissioner) and the FDIC. The lending activities and other investments of the Bank must
comply with various regulatory requirements. The Commissioner and FDIC periodically examine the
Bank for compliance with these requirements. The Bank must file reports with the Commissioner and
the FDIC describing its activities and 15




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##### Table of Contents



financial condition. The Bank is also subject to certain reserve requirements promulgated by
the Federal Reserve Board. This supervision and regulation is intended primarily for the
protection of depositors. Massachusetts State Law.As a Massachusetts-chartered co-operative bank, the Bank is subject
to the applicable provisions of Massachusetts law and the regulations of the Commissioner. The
Bank derives its lending and investment powers from these laws, and is subject to periodic
examination and reporting requirements by and of the Commissioner. Certain powers granted under
Massachusetts law may be constrained by federal regulation. In addition, the Bank is required to
make periodic reports to the Co-operative Central Bank. In 1990, legislation was enacted
permitting banks nationwide to enter the Banks market area and compete for deposits and loan
originations. The approval of the Commissioner is required prior to any merger or consolidation,
or the establishment or relocation of any branch office. Massachusetts cooperative banks are
subject to the enforcement authority of the Commissioner who may suspend or remove directors or
officers, issue cease and desist orders and appoint conservators or receivers in appropriate
circumstances. Cooperative banks are required to pay fees and assessments to the Commissioner to
fund that offices operations. The cost of state examination fees and assessments for the fiscal
year ended March 31, 2005 was $40,000. Capital Requirements.Under FDIC regulations, state-chartered banks that are not members of
the Federal Reserve System are required to maintain a minimum leverage capital requirement
consisting of a ratio of Tier 1 capital to total assets of 3% if the FDIC determines that the
institution is not anticipating or experiencing significant growth and has well-diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System (the CAMELS rating system) established by the Federal
Financial Institutions Examination Council. For all but the most highly-rated institutions meeting
the conditions set forth above, the minimum leverage capital ratio is 3% plus an additional
cushion amount of at least 100 to 200 basis points with a minimum leverage capital requirement of
not less than 4%. Tier 1 capital is the sum of common stockholders equity, noncumulative
perpetual preferred stock (including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than certain mortgage and non-mortgage servicing
assets, purchased credit card relationships and qualifying supervisory goodwill) minus identified
losses, disallowed deferred tax assets and investments in financial subsidiaries and certain
non-financial equity investments. In addition to the leverage ratio (the ratio of Tier 1 capital to total assets),
state-chartered nonmember banks must maintain a minimum ratio of qualifying total capital to
risk-weighted assets of at least 8%, of which at least half must be Tier 1 capital. Qualifying
total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2
capital items include allowances for loan losses in an amount of up to 1.25% of risk-weighted
assets, cumulative preferred stock and preferred stock with a maturity of over 20 years, certain
other capital instruments and up to 45% of pre-tax net unrealized holding gains on equity
securities. The includable amount of Tier 2 capital cannot exceed the institutions Tier 1
capital. Qualifying total capital is further reduced by the amount of the banks investments in
banking and finance subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross-holdings of capital securities issued by other banks, most intangible assets and
certain other deductions. Under the FDIC risk-weighting system, all of a banks balance sheet
assets and the credit equivalent amounts of certain off-balance sheet items are assigned to one of
four broad risk weight categories from 0% to 100%, based on the risks inherent in the type of
assets or item. The aggregate dollar amount of each category is multiplied by the risk weight
assigned to that category. The sum of these weighted values equals the banks risk-weighted
assets. At March 31, 2005, the Banks ratio of Tier 1 capital to average assets was 7.38%, its ratio
of Tier 1 capital to risk-weighted assets was 10.19% and its ratio of total risk-based capital to
risk-weighted assets was 11.19%. Dividend Limitations.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. Earnings of the Bank appropriated to bad debt reserves and deducted for Federal income tax
purposes are not available for payment of cash dividends or other distributions to stockholders
without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed
from the reserves for such distributions. The Bank intends to make full use of this favorable tax
treatment and does not contemplate use of any earnings in a manner which would limit the Banks bad
debt deduction or create federal tax liabilities. 16




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##### Table of Contents



Under FDIC regulations, the Bank is prohibited from making any capital distributions if, after
making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than
8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0%. Investment Activities.Under federal law, all state-chartered FDIC-insured banks have
generally been limited to activities as principal and equity investments of the type and in the
amount authorized for national banks, notwithstanding state law. The Federal Deposit Insurance
Corporation Improvement Act and the FDIC permit exceptions to these limitations. For example,
state chartered banks, such as the Bank, may, with FDIC approval, continue to exercise
grandfathered state authority to invest in common or preferred stocks listed on a national
securities exchange or the NASDAQ National Market and in the shares of an investment company
registered under federal law. In addition, the FDIC is authorized to permit such institutions to
engage in state authorized activities or investments that do not meet this standard (other than
non-subsidiary equity investments) for institutions that meet all applicable capital requirements
if it is determined that such activities or investments do not pose a significant risk to the Bank
Insurance Fund. All non-subsidiary equity investments, unless otherwise authorized or approved by
the FDIC, must have been divested by December 19, 1996, under a FDIC-approved divestiture plan,
unless such investments were grandfathered by the FDIC. The Bank has received grandfathering
authority from the FDIC to invest in listed stocks and/or registered shares. The maximum
permissible investment is 100% of Tier 1 capital, as specified by the FDICs regulations, or the
maximum amount permitted by Massachusetts Banking Law, whichever is less. Such grandfathering
authority may be terminated upon the FDICs determination that such investments pose a safety and
soundness risk to the Bank or if the Bank converts its charter or undergoes a change in control.
As of March 31, 2005, the Bank had marketable equity securities, including money market preferred
stocks, with a market value of $3.8 million, which were held under such grandfathering authority. Deposit Insurance.The Bank is required to pay assessments to the FDIC for insurance of its
deposits by the BIF based on a percentage of its insured deposits. Under the Federal Deposit
Insurance Act, the FDIC is required to set semi-annual assessments for BIF-insured institutions at
a rate determined by the FDIC to be necessary to maintain the designated reserve ratio of the BIF
at 1.25% of estimated insured deposits or at a higher percentage of insured deposits that the FDIC
determines to be justified for that year by circumstances raising a significant risk of substantial
future losses to the BIF. In the event the BIF should fail to meet the statutory reserve ratio,
the FDIC would be required to set semi-annual assessments for BIF members that are sufficient to
increase the reserve ratio to 1.25% within one year or in accordance with such other schedule that
the FDIC adopts by regulation to restore the reserve ratio. The assessment rate for an insured depository institution is determined by the assessment risk
classification assigned to the institution by the FDIC based on the institutions capital level and
supervisory evaluations. Based on data reported to regulators, institutions are assigned to one of
three capital groups  well capitalized, adequately capitalized or undercapitalized  using the
same percentage criteria as in the prompt corrective action regulations. See  Prompt Corrective
Regulatory Action. Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institutions primary supervisory authority and such
other information as the FDIC determines to be relevant to the institutions financial condition
and the risk posed to the deposit insurance fund. The FDIC has adopted an assessment schedule for BIF deposit insurance pursuant to which the
assessment rate for well capitalized institutions with the highest supervisory ratings was reduced
to zero and institutions in the worst risk assessment classification will be assessed at the rate
of 0.27% of insured deposits. At March 31, 2005, the Bank was considered well capitalized. In
addition, FDIC-insured institutions are required to pay assessments to the FDIC to help fund
interest payments on certain bonds issued by the Financing Corporation (FICO), an agency of the
federal government established to finance takeovers of insolvent thrifts. All Massachusetts chartered co-operative banks are required to be members of the Share
Insurance Fund. The Share Insurance Fund maintains a deposit insurance fund which insures all
deposits in member banks which are not covered by federal insurance, which in the case of the Bank
are its deposits in excess of $100,000 per insured account. In past years, a premium of 1/24 of 1%
of insured deposits has been assessed annually on member banks such as the Bank for this deposit
insurance. However, no premium has been assessed in recent years. 17




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Prompt Corrective Regulatory Action.Federal banking regulators are required to take prompt
corrective action if an insured depository institution fails to satisfy certain minimum capital
requirements, including a leverage limit, a risk-based capital requirement and any other measure
deemed appropriate by the federal banking regulators for measuring the capital adequacy of an
insured depository institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees if the institution
would thereafter fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital measure (an
undercapitalized institution) may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45
days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval
for acquisitions, branching and new lines of businesses. The capital restoration plan must include
a guarantee by the institutions holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive quarters, under which the
holding company would be liable up to the lesser of 5% of the institutions total assets or the
amount necessary to bring the institution into capital compliance as of the date it failed to
comply with its capital restoration plan. A significantly undercapitalized institution, as well
as any undercapitalized institution that does not submit an acceptable capital restoration plan,
may be subject to regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and restrictions on capital
distributions by any bank holding company controlling the institution. Any company controlling the
institution may also be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly undercapitalized institution
may not receive bonuses or increases in compensation without prior approval and the institution is
prohibited from making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing sanctions on an
undercapitalized institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective provisions. Under the implementing regulations, the federal banking regulators generally measure an
institutions capital adequacy on the basis of its total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted
total assets). The following table shows the capital ratios required for the various prompt
corrective action categories. Adequately
    
    
    
    SignificantlyWell Capitalized
    
    Capitalized
    
    Undercapitalized
    
    UndercapitalizedTotal risk-based
capital ratio
    
    
    10.0
    %
    
    or more
    
    
    8.0
    %
    
    or more
    
    Less than
8.0%
    
    Less than 6.0%Tier 1 risk-based
capital ratio
    
    
    6.0
    %
    
    or more
    
    
    4.0
    %
    
    or more
    
    Less than
4.0%
    
    Less than 3.0%Leverage ratio
    
    
    5.0
    %
    
    or more
    
    
    4.0
    %
    
    or more *
    
    Less than 4.0% *
    
    Less than 3.0%
 
 *
    
    3.0% if the institution has a composite 1 CAMELS rating. If an institutions capital falls below the critically undercapitalized level, it is
subject to conservatorship or receivership within specified time frames. A critically
undercapitalized institution is defined as an institution that has a ratio of tangible equity to
total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all intangible assets other than certain
purchased mortgage servicing rights. The FDIC may reclassify a well capitalized depository
institution as adequately capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized institution as critically
undercapitalized) if the FDIC determines, after notice and an opportunity for a hearing, that the
savings institution is in an unsafe or unsound condition or that the institution has received and
not corrected a less-than-satisfactory rating for any CAMELS rating category. USA Patriot Act.The USA Patriot Act is intended to strengthen U.S. law enforcements and the
intelligence communities abilities to work cohesively to combat terrorism on a variety of fronts.
The potential impact of the USA Patriot Act on financial institutions of all kinds is significant
and wide ranging. The USA Patriot Act contains sweeping anti-money laundering and financial
transparency laws and imposes various regulations including standards for verifying client
identification at account opening, and rules to promote cooperation among 18




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financial institutions, regulators and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering. Loans to Executive Officers, Directors and Principal Stockholders.Loans to directors,
executive officers and principal stockholders of a state non-member bank like the Bank must be made
on substantially the same terms as those prevailing for comparable transactions with persons who
are not executive officers, directors, principal stockholders or employees of the Bank unless the
loan is made pursuant to a compensation or benefit plan that is widely available to employees and
does not favor insiders. Loans to any executive officer, director and principal stockholder,
together with all other outstanding loans to such person and affiliated interests, generally may
not exceed 15% of the banks unimpaired capital and surplus, and aggregate loans to such persons
may not exceed the institutions unimpaired capital and unimpaired surplus. Loans to directors,
executive officers and principal stockholders, and their respective affiliates, in excess of the
greater of $25,000 or 5% of capital and surplus (and any loans exceeding $500,000) must be approved
in advance by a majority of the board of directors of the bank with any interested director not
participating in the voting. State non-member banks are prohibited from paying the overdrafts of
any of their executive officers or directors unless payment is made pursuant to a written,
pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or
transfer of funds from another account at the bank. Loans to executive officers may not be made
on terms more favorable than those afforded other borrowers and are restricted as to type, amount
and terms of credit. In addition, Section 106 of the BHCA prohibits extensions of credit to
executive officers, directors and greater than 10% stockholders of a depository institution by any
other institution which has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the normal risk of
repayment or present other unfavorable features. Transactions with Affiliates.A state non-member bank or its subsidiaries may not engage in
covered transactions with any one affiliate in an amount greater than 10% of such banks capital
stock and surplus, and for all such transactions with all affiliates a state non-member bank is
limited to an amount equal to 20% of capital stock and surplus. All such transactions must also be
on terms substantially the same, or at least as favorable, to the bank or subsidiary as those
provided to a non-affiliate. The term covered transaction includes the making of loans, purchase
of assets, issuance of a guarantee and similar other types of transactions. An affiliate of a
state non-member bank is any company or entity which controls or is under common control with the
state non-member bank and, for purposes of the aggregate limit on transactions with affiliates, any
subsidiary that would be deemed a financial subsidiary of a national bank. In a holding company
context, the parent holding company of a state non-member bank (such as the Company) and any
companies which are controlled by such parent holding company are affiliates of the state
non-member bank. The BHCA and Regulation W further prohibit a depository institution from
extending credit to or offering any other services, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some additional service
from the institution or certain of its affiliates or not obtain services of a competitor of the
institution, subject to certain limited exceptions. Enforcement.The FDIC has extensive enforcement authority over insured non-member banks,
including the Bank. This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease and desist orders and to remove directors and officers. In
general, these enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices. The FDIC has authority under federal law to appoint a conservator or receiver for an insured
bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a
receiver or conservator for an insured state non-member bank if that bank was critically
undercapitalized on average during the calendar quarter beginning 270 days after the date on which
the institution became critically undercapitalized. See Prompt Corrective Regulatory Action.
The FDIC may also appoint itself as conservator or receiver for an insured state non-member
institution under specific circumstances on the basis of the institutions financial condition or
upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of
assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an
unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of
losses that will deplete substantially all of the institutions capital with no reasonable prospect
of replenishment without federal assistance. 19




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Federal Reserve System.The Federal Reserve Board regulations require depository institutions
to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and
regular checking accounts). The Federal Reserve Board regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: for that portion of transaction
accounts aggregating $47.6 million less an exemption of $7 million (which may be adjusted by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $47.6 million,
the reserve requirements is 10% (which may be adjusted by the Federal Reserve Board between 8% and
14%) of the portion in excess of $47.6 million. The Bank is in compliance with these requirements. Community Reinvestment Act.Under the Community Reinvestment Act, as implemented by FDIC
regulations, a state non-member bank has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire community, including low
and moderate-income neighborhoods. The Community Reinvestment Act neither establishes specific
lending requirements or programs for financial institutions nor limits an institutions discretion
to develop the types of products and services that it believes are best suited to its particular
community. The Community Reinvestment Act requires the FDIC, in connection with its examination of
an institution, to assess the institutions record of meeting the credit needs of its community and
to consider such record when it evaluates applications made by such institution. The Community
Reinvestment Act requires public disclosure of an institutions Community Reinvestment Act rating.
The Banks latest Community Reinvestment Act rating received from the FDIC was satisfactory. The Bank is also subject to similar obligations under Massachusetts Law, which has an
additional CRA rating category. The Massachusetts Community Reinvestment Act requires the
Massachusetts Banking Commissioner to consider a banks Massachusetts Community Reinvestment Act
rating when reviewing a banks application to engage in certain transactions, including mergers,
asset purchases and the establishment of branch offices or automated teller machines, and provides
that such assessment may serve as a basis for the denial of such application. The Banks latest
Massachusetts Community Reinvestment Act rating received from the Massachusetts Division of Banks
was satisfactory. Federal Home Loan Bank System.The Bank is a member of the Federal Home Loan Bank system,
which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member of the Federal
Home Loan Bank of Boston, is required to acquire and hold shares of capital stock in the Federal
Home Loan Bank of Boston. The Bank was in compliance with this requirement with an investment in
Federal Home Loan Bank of Boston stock at March 31, 2005 of $8.3 million. The Federal Home Loan Banks are required to provide funds for certain purposes including
contributing funds for affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan
Banks imposing a higher rate of interest on advances to their members. For the years ended 2005,
2004 and 2003, cash dividends from the Federal Home Loan Bank of Boston to the Bank amounted to
approximately $231,000, $209,000 and $296,000, respectively. Further, there can be no assurance
that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause
a decrease in the value of the Federal Home Loan Bank stock held by the Bank. Employees At March 31, 2005, the Company and the Bank employed 117 full-time and 34 part-time employees.
The Companys and Banks employees are not represented by any collective bargaining agreement.
Management of the Company and Bank considers its relations with its employees to be good. 20




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##### Table of Contents



Item 2. Properties The Bank owns all its offices, except the Burlington, Malden and Woburn High School branch
offices, the stand along ATM and the loan and operations centers located in Somerville. Net book
value includes the cost of land, buildings and improvements as well as leasehold improvements, net
of depreciation and amortization. At March 31, 2005, all of the Banks offices were in reasonable
condition and met the business needs of the Bank. The following table sets forth the location of
the Banks offices, as well as certain information relating to these offices as of March 31, 2005: Net BookYear
    
    Value atOffice Location
    
    Opened
    
    March 31, 2005(in thousands)Main Office
399 Highland Avenue
Somerville, MA (owned)
    
    
    1974
    
    
    $
    329Branch Offices:
175 Broadway
Arlington, MA (owned)

    
    
    1982
    
    
    
    17185 Wilmington Road
Burlington, MA (leased)
    
    
    1978
    (a)
    
    
    531192 Boylston Street
Chestnut Hill (Brookline), MA (owned)
    
    
    1954
    
    
    
    150137 Pleasant Street
Malden, MA (leased)
    
    
    1975
    (b)
    
    
    68846 Main Street
Melrose, MA (owned)
    
    
    1994
    
    
    
    233275 Main Street
Woburn, MA (owned)
    
    
    1980
    
    
    
    514198 Lexington Street
Woburn, MA (owned)
    
    
    1974
    
    
    
    271Woburn High School
Woburn, MA (leased)
    
    
    2002
    (c)
    
    
    21Stand Alone ATM:
94 Highland Avenue
Somerville, MA (leased)
    
    
    2004
    (d)
    
    
    125Operations Center
17 Inner Belt Road
Somerville, MA (leased)
    
    
    1994
    (e)
    
    
    8Commercial Loan Center
401 Highland Avenue
Somerville, MA (leased)
    
    
    2002
    (f)
    
    
    25Residential Loan Center
403 Highland Avenue
Somerville, MA (leased)
    
    
    2002
    (g)
    
    
    33
 21




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##### Table of Contents



(a)
    
    The lease for the Burlington branch expires 10/31/2007 with no renewal options.(b)
    
    The lease for the Malden branch expires 8/31/2005 with an option to extend the lease for one
ten-year term. The Bank exercised its option under the lease which expires 8/31/15.(c)
    
    The lease for the Woburn High School branch is for one year, renewable annually on an automatic
basis.(d)
    
    The lease for the stand along ATM expires 11/30/07 with an option to extend for three
three-year terms.(e)
    
    The lease for the Operations Center expires 3/31/2006 with no renewal options.(f)
    
    The lease for the Commercial Loan Center expires 11/1/2006 with an option to extend for one
three-year term.(g)
    
    The lease for the Residential Loan Center expires in 8/31/2005 with an option to extend for one
three-year term. The Bank does not intend to exercise its lease extension. In March, 2005, the Bank signed a lease for a combined retail branch and operations center to
be located at 270 Mystic Avenue, Medford. The rate of the lease is for $168,000 per year, with
options to extend the lease by two five-year terms. Due to certain regulatory approvals that still
need to be received; the Bank does not anticipate occupancy until the latter part of fiscal year
2006. At March 31, 2005, the net book value of the Banks premises and equipment was $2.8
million. 
 Item 3. Legal Proceedings The Company from time to time is involved as a plaintiff or defendant in various legal actions
incidental to its business, none of which are believed to be material, either individually or
collectively, to the results of operations and financial condition of the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the
fiscal year covered by this report. 
 PART II 
 Item 5. Market for the Registrants Common Equity and Related Stockholder Matters and Issuer
Purchases of Securities The Companys common stock is quoted on the Nasdaq National MarketSM under the
symbol CEBK. At March 31, 2005, there were 1,588,598 shares of the common stock outstanding and
approximately 232 holders of record. The foregoing number of holders does not reflect the number
of persons or entities who held the stock in nominee or street name through various brokerage
firms. In October 1996, the Company established a quarterly cash dividend policy and made its
first dividend distribution on November 15, 1996; it has paid cash dividends on a quarterly basis
since initiating the dividend program. The following tables list the high and low prices for the Common Stock during each quarter of
fiscal 2005 and fiscal 2004 as reported by the Nasdaq National MarketSM, and the amounts
and payable dates of the cash dividends paid during each quarter of fiscal 2005 and fiscal 2004.
The stock quotations constitute interdealer prices without retail markups, markdowns or
commissions, and may not necessarily represent actual transactions. Common Stock Prices
    
    
    
    
    
    
    Cash Dividends (payable dates)Fiscal 2005
    
    High
    
    
    Low
    
    
    Fiscal 2005
    
    
    Amount6/30/04
    
    $
    37.87
    
    
    $
    33.50
    
    
    
    5/14/04
    
    
    $
    0.129/30/04
    
    
    34.50
    
    
    
    26.00
    
    
    
    8/13/04
    
    
    
    0.1212/31/04
    
    
    32.25
    
    
    
    27.00
    
    
    
    11/19/04
    
    
    
    0.123/31/05
    
    
    30.00
    
    
    
    26.88
    
    
    
    2/15/05
    
    
    
    0.12
 Fiscal 2004
    
    High
    
    
    Low
    
    
    Fiscal 2004
    
    
    Amount6/30/03
    
    $
    35.00
    
    
    $
    31.05
    
    
    
    5/16/03
    
    
    $
    0.129/30/03
    
    
    35.74
    
    
    
    34.37
    
    
    
    8/15/03
    
    
    
    0.1212/31/03
    
    
    38.00
    
    
    
    34.41
    
    
    
    11/14/03
    
    
    
    0.123/31/04
    
    
    38.00
    
    
    
    33.00
    
    
    
    2/13/04
    
    
    
    0.12
 The Company did not repurchase any of its securities during the quarter ended March 31, 2005. 22




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##### Table of Contents



Item 6. Selected Financial Data At or for the Year Ended March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars and shares in thousands, except per share data)Balance SheetTotal assets
    
    $
    521,071
    
    
    $
    490,897
    
    
    $
    477,208
    
    
    $
    468,219
    
    
    $
    449,337Total loans
    
    
    386,382
    
    
    
    356,625
    
    
    
    389,817
    
    
    
    371,707
    
    
    
    345,793Investments available for sale
    
    
    108,616
    
    
    
    83,771
    
    
    
    61,111
    
    
    
    73,884
    
    
    
    49,388Deposits
    
    
    333,215
    
    
    
    295,920
    
    
    
    287,959
    
    
    
    261,907
    
    
    
    287,167Total borrowings
    
    
    146,455
    
    
    
    145,256
    
    
    
    144,576
    
    
    
    164,000
    
    
    
    121,000Total stockholders equity
    
    
    38,239
    
    
    
    43,454
    
    
    
    39,443
    
    
    
    38,954
    
    
    
    38,212Shares outstanding
    
    
    1,589
    
    
    
    1,665
    
    
    
    1,662
    
    
    
    1,633
    
    
    
    1,684Statements of OperationsNet interest and dividend income
    
    $
    15,731
    
    
    $
    15,570
    
    
    $
    17,257
    
    
    $
    14,413
    
    
    $
    13,914Provision for loan losses
    
    
    100
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    Net gain (loss) from sale and write-down of
investment securities
    
    
    453
    
    
    
    (135
    )
    
    
    (308
    )
    
    
    (150
    )
    

    
    680Gain on sale of loans
    
    
    252
    
    
    
    295
    
    
    
    796
    
    
    
    
    
    
    
    Other non-interest income
    
    
    950
    
    
    
    966
    
    
    
    917
    
    
    
    838
    
    
    
    608Total non-interest expenses
    
    
    13,518
    
    
    
    12,401
    
    
    
    13,877
    
    
    
    10,464
    
    
    
    10,330Net income
    
    
    2,463
    
    
    
    2,936
    
    
    
    2,187
    
    
    
    2,860
    
    
    
    3,109Earnings per common share  diluted
    
    
    1.65
    
    
    
    1.88
    
    
    
    1.37
    
    
    
    1.72
    
    
    
    1.81Selected RatiosInterest rate spread
    
    
    2.85
    %
    
    
    2.96
    %
    
    
    3.29
    %
    
    
    2.85
    %
    
    
    2.80
    %Net yield on interest-earning assets
    
    
    3.20
    
    
    
    3.36
    
    
    
    3.71
    
    
    
    3.36
    
    
    
    3.38Non-interest expenses to average assets
    
    
    2.68
    
    
    
    2.60
    
    
    
    2.91
    
    
    
    2.38
    
    
    
    2.44Equity-to-assets
    
    
    7.34
    
    
    
    8.85
    
    
    
    8.27
    
    
    
    8.32
    
    
    
    8.50Return on average assets
    
    
    0.49
    
    
    
    0.62
    
    
    
    0.46
    
    
    
    0.65
    
    
    
    0.74Return on average stockholders equity
    
    
    6.12
    
    
    
    6.98
    
    
    
    5.52
    
    
    
    7.62
    
    
    
    8.11Dividend payout ratio
    
    
    28.91
    
    
    
    23.23
    
    
    
    33.24
    
    
    
    23.39
    
    
    
    22.42Book value per share
    
    $
    24.07
    
    
    $
    26.10
    
    
    $
    23.73
    
    
    $
    23.85
    
    
    $
    22.69Tangible book value per share
    
    
    24.11
    
    
    
    24.72
    
    
    
    22.38
    
    
    
    22.49
    
    
    
    21.19
 23




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##### Table of Contents



Quarterly Results of Operations(In Thousands, Except Per Share Data) The following tables summarize the operating results on a quarterly basis for the years ended
March 31, 2005 and 2004. 2005First
    
    
    Second
    
    
    Third
    
    
    FourthInterest and dividend income
    
    $
    6,614
    
    
    $
    6,926
    
    
    $
    6,972
    
    
    $
    7,104Interest expense
    
    
    2,907
    
    
    
    2,980
    
    
    
    2,998
    
    
    
    3,000Net interest and dividend income
    
    
    3,707
    
    
    
    3,946
    
    
    
    3,974
    
    
    
    4,104Provision for loan losses
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50Non-interest income
    
    
    448
    
    
    
    499
    
    
    
    377
    
    
    
    331Non-interest expenses
    
    
    3,394
    
    
    
    3,611
    
    
    
    3,249
    
    
    
    3,264Income before income taxes
    
    
    711
    
    
    
    834
    
    
    
    1,102
    
    
    
    1,121Income tax
    
    
    257
    
    
    
    328
    
    
    
    416
    
    
    
    304Net income
    
    $
    454
    
    
    $
    506
    
    
    $
    686
    
    
    $
    817Earnings per common share  basic
    
    $

    0.29
    
    
    $
    0.33
    
    
    $
    0.49
    
    
    $
    0.58Earnings per common share  diluted
    
    $
    0.29
    
    
    $
    0.33
    
    
    $
    0.48
    
    
    $
    0.57
 2004First
    
    
    Second
    
    
    Third
    
    
    FourthInterest and dividend income
    
    $
    7,023
    
    
    $
    6,816
    
    
    $
    6,576
    
    
    $
    6,692Interest expense
    
    
    2,914
    
    
    
    2,875
    
    
    
    2,883
    
    
    
    2,865Net interest and dividend income
    
    
    4,109
    
    
    
    3,941
    
    
    
    3,693
    
    
    
    3,827Provision for loan losses
    
    
    50
    
    
    
    50
    
    
    
    50
    
    
    
    50Non-interest income
    
    
    414
    
    
    
    163
    
    
    
    307
    
    
    
    242Non-interest expenses
    
    
    3,003
    
    
    
    2,756
    
    
    
    3,017
    
    
    
    3,625Income before income taxes
    
    
    1,470
    
    
    
    1,298
    
    
    
    933
    
    
    
    394Income tax
    
    
    182
    
    
    
    468
    
    
    
    358
    
    
    
    151Net income
    
    $
    1,288
    
    
    $
    830
    
    
    $
    575
    
    
    $
    243Earnings per common share  basic
    
    $
    0.83
    
    
    $
    0.54
    
    
    $
    0.37
    
    
    $
    0.16Earnings per common share  diluted
    
    $
    0.83
    
    
    $
    0.53
    
    
    $
    0.37
    
    
    $
    0.15
 24




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations General The operations of the Company and its subsidiary, the Bank, 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
Commissioner, the Federal Reserve Board and 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
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 last
three fiscal years and its financial condition at the end of fiscal years 2005 and 2004.
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. Application of Critical Accounting Policies Managements discussion and analysis of the Companys financial condition and results of
operations are based on the consolidated financial statements which are prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of such
financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates its estimates, including those related
to the allowance for loan losses, income taxes, impairment of securities, and derivative loan
commitments. Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis in making judgments about the carrying values of assets that are not readily apparent
from other sources. Actual results could differ from the amount derived from managements
estimates and assumptions under different assumptions or conditions. Management believes the allowance for loan losses policy is a critical accounting policy that
requires the most significant estimates and assumptions used in the preparation of the consolidated
financial statements. The allowance for loan losses is based on managements evaluation of the
level of the allowance required in relation to the estimated loss exposure in the loan portfolio.
Management believes the allowance for loan losses is a significant estimate and therefore regularly
evaluates it for adequacy by taking into consideration factors such as prior loan loss experience,
the character and size of the loan portfolio, business and economic conditions and managements
estimation of inherent losses. The use of different estimates or assumptions could produce
different provisions for loan losses. Refer to the discussion of Allowance for Loan Losses in
Item 1. Business and Notes 1 and 4 to Consolidated Financial Statements for a detailed description
of managements estimation process and methodology related to the allowance for loan losses. Management periodically reviews the Banks deferred tax asset and current income tax position
using historical, current, and future pretax earnings. Adjustments to the deferred tax asset are
recognized as deferred income tax expense or benefit based on managements judgments relating to
the realizability of such asset. There can be no assurance, however that the Company will
generate any earnings or any specific level of continuing earnings. Refer to Income Taxes Note 8
to the Consolidated Financial Statements for details concerning the Companys tax position. Management believes that the measurement of impairment of securities requires an evaluation
process that considers both the historical and current financial performance and environment of the
security, credit worthiness of the issuer, and potential recovery measures of each impaired
investment. Management periodically reviews all securities to identify those that show signs of
impairment. Once identified these securities are monitored and 25




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##### Table of Contents



evaluated based upon the above considerations and if the decline in fair value below the cost basis
of an investment is judged to be other-than-temporary, the cost basis is written down to the
current fair value and the amount of the write-down is included in the results of operations. The Company has derivatives consisting of forward commitments to sell loans in order to reduce
market risk associated with commitments to fund loans held for sale. An increase in market
interest rates between the time the Bank commits to terms on a loan and the time the loan is sold
will generally have the effect of reducing the gain (or increasing the loss) recorded for the sale.
Forward loan sale contracts and commitments to fund loans intended for sale are recorded at fair
value. Management uses both a discounted cash flow analysis ( which is dependent upon estimated
future cash flows and the level of interest rates) and estimates based on outstanding investor
commitments to calculate market value. Results of Operations Overview.The Companys results of operations during the past three fiscal years have been
influenced by several significant factors. From a recurring operating perspective, the generally
declining trend in both short and long-term interest rates from January 2001 until March 2004 has
had a significant impact on both the balance sheet and income statement. Most notably, residential
mortgage loans, which have historically been the Companys largest asset, have declined $88.7
million, or 35.7%, from $248.5 million at March 31, 2001 to $159.8 million at March 31, 2005. With
home mortgage rates declining and ultimately hitting a 45 year low in 2003, consumers have
refinanced their mortgages, oftentimes on multiple occasions, to take advantage of the opportunity
to lock in these low rates for up to 30 years. Since the second half of fiscal 2003, the Company
has sold the majority of its current originations of fixed-rate residential mortgage loans in order
to better manage its exposure to changing rates and, as a result, has experienced a shift in its
asset mix from residential to commercial mortgage loans. Management has favored commercial real
estate lending in recent years due to the shorter repricing characteristics of these loans
(generally every 5 years), acceptable yields and the favorable economic market conditions in the
Companys lending area. With the declining rate trend referred to above, the Company experienced reductions in both
its yield on interest-earning assets and its cost of interest-bearing liabilities since fiscal
2001, as summarized in the following table: Yield
    
    
    Cost
    
    
    SpreadFiscal 2001
    
    
    7.50
    %
    
    
    4.70
    %
    
    
    2.80
    %Fiscal 2002
    
    
    6.83
    
    
    
    3.98
    
    
    
    2.85Fiscal 2003
    
    
    6.48
    
    
    
    3.19
    
    
    
    3.29Fiscal 2004
    
    
    5.84
    
    
    
    2.88
    
    
    
    2.96Fiscal 2005
    
    
    5.62
    
    
    
    2.77
    
    
    
    2.85
 As this table indicates, the declining rate trend had a favorable impact on the Companys net
interest spread through fiscal 2003. This trend was also aided by the relatively high ratio of
loans to interest-earning assets maintained during this entire period, especially through fiscal
2003. In fiscal 2004 and fiscal 2005, the favorable trend reversed as more assets were repriced
downward (mostly due to loan prepayments and modifications) than were liabilities. The unfavorable trend in the net interest margin in fiscal 2005 and fiscal 2004 is primarily
reflective of the limitations the Company had in reducing its overall cost of funds. In spite of
the increases in shorter term interest rates, the Company attempts to hold the interest rates it
pays on its deposits to the minimum amount it can pay in a competitive market. During fiscal 2005,
the Bank held off increasing the interest rates it paid on the core deposit account, but rather,
introduced a promotional certificate for 13 months that was successful in drawing in new funds to
the Bank. During fiscal 2004, the Companys utilization of long-term FHLB advances had limited
repricing opportunity as only $5.3 million in advances matured in fiscal 2004. Long-term FHLB
advances can not be prepaid without a substantial penalty, which management elected not to pay.
Second, the ability to reduce deposit rates in the current year was limited after the two prior
years of rate reductions as well as competitive market factors. 26




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##### Table of Contents



The Company financial results in fiscal 2005 were negatively impacted by costs incurred with
the stock buyback, net of taxes, of approximately $179,000. The Companys overall financial
results in fiscal 2003 and 2004 were also affected by two significant non-operating items, namely,
state legislation affecting the taxation of its former REIT subsidiary and shareholder and other
litigation. Each of these items adversely affected overall financial results in fiscal 2003 and
favorably affected financial results in fiscal 2004. In 2005 overall financial results were
adversely affected by costs associated with the stock buyback discussed elsewhere. The impact of
these items is demonstrated in the following table (in thousands): 2005
    
    
    
    2004
    
    
    
    2003Net income per GAAP
    
    
    $
    2,463
    
    
    
    $
    2,936
    
    
    
    $
    2,187REIT legislation, net of taxes
    
    
    
    
    
    
    
    
    (374
    )
    
    
    
    835Impact of shareholder litigation and
legal fees, net of insurance and taxes
    
    
    
    
    
    
    
    
    (329
    )
    
    
    
    1,080Costs associated with stock buyback, net
of taxes
    
    
    
    179
    
    
    
    
    
    
    
    
    
    Non-GAAP pro forma earnings
    
    
    $
    2,642
    
    
    
    $
    2,233
    
    
    
    $
    4,102
 The Companys earnings in fiscal 2003 were adversely affected by state legislation (the
REIT legislation) passed in March 2003 that retroactively eliminated the dividends received
deduction on dividends received from the Banks former REIT subsidiary. The REIT legislation
resulted in an increase in the Companys provision for income taxes of $835,000 in fiscal 2003. In
June 2003, a group of banks negotiated a settlement with the Massachusetts Department of Revenue
(DOR) and, as a result, the Bank recognized in fiscal 2004 a reduction in the Companys provision
for income taxes of $374,000. The legal fees associated with the litigation with certain shareholders, who initially filed
suit against the Company in October 2002 following the annual meeting of shareholders and an
accrual for a commercial claim, totaled approximately $1.1 million, net of taxes, in fiscal 2003.
The Company had coverage under its directors and officers liability insurance policy for
reimbursement of certain legal fees. During fiscal 2004, insurance recoveries in excess of related
legal fees totaled $329,000, net of taxes. 27




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##### Table of Contents



Interest Rate Spread.The Companys and the Banks operating results are significantly
affected by its net interest spread, which is the difference between the yield on loans and
investments and the interest cost of deposits and borrowings. The interest spread is affected by
economic conditions and market factors that influence interest rates, loan demand and deposit
flows. The following table presents average balances, interest income and expense and yields
earned or rates paid on all interest-earning assets and interest-bearing liabilities for the years
indicated. Years Ended March 31,2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in thousands)Assets:Interest-earning assets:Mortgage loans
    
    $
    358,783
    
    
    $
    21,902
    
    
    
    6.10
    %
    
    $
    361,305
    
    
    $
    22,797
    
    
    
    6.31
    %
    
    $
    370,505
    
    
    $
    25,033
    
    
    
    6.76
    %Other loans
    
    
    6,347
    
    
    
    366
    
    
    
    5.77
    
    
    
    5,789
    
    
    
    363
    
    
    
    6.29
    
    
    
    7,997
    
    
    
    505
    
    
    
    6.31Total loans
    
    
    365,130
    
    
    
    22,268
    
    
    
    6.10
    
    
    
    367,094
    
    
    
    23,160
    
    
    
    6.31
    
    
    
    378,502
    
    
    
    25,538
    
    
    
    6.75Short-term investments
    
    
    15,368
    
    
    
    175
    
    
    
    1.14
    
    
    
    20,342
    
    
    
    204
    
    
    
    1.00
    
    
    
    7,620
    
    
    
    125
    
    
    
    1.64Investment securities
    
    
    111,085
    
    
    
    5,173
    
    
    
    4.66
    
    
    
    76,638
    
    
    
    3,743
    
    
    
    4.88
    
    
    
    78,928
    
    
    
    4,466
    
    
    
    5.66Total investments
    
    
    126,453
    
    
    
    5,348
    
    
    
    4.22
    
    
    
    96,980
    
    
    
    3,947
    
    
    
    4.07
    
    
    
    86,548
    
    
    
    4,591
    
    
    
    5.30Total interest-earning assets
    
    
    491,583
    
    
    
    27,616
    
    
    
    5.62
    
    
    
    464,074
    
    
    
    27,107
    
    
    
    5.84
    
    
    
    465,050
    
    
    

    30,129
    
    
    
    6.48Allowance for loan losses
    
    
    (3,607
    )
    
    
    
    
    
    
    
    
    
    
    (3,400
    )
    
    
    
    
    
    
    
    
    
    
    (3,287
    )Non-interest-earning assets
    
    
    16,797
    
    
    
    
    
    
    
    
    
    
    
    16,317
    
    
    
    
    
    
    
    
    
    
    
    14,406Total assets
    
    $
    504,773
    
    
    
    
    
    
    
    
    
    
    $
    476,991
    
    
    
    
    
    
    
    
    
    
    $
    476,169Liabilities and Stockholders
Equity:Interest-bearing liabilities:Deposits
    
    $
    281,226
    
    
    $
    4,733
    
    
    
    1.68
    
    
    $
    255,717
    
    
    $
    4,436
    
    
    
    1.73
    
    
    $
    248,027
    
    
    $
    5,601
    
    
    
    2.26Other borrowings
    
    
    6,901
    
    
    
    304
    
    
    
    4.41
    
    
    
    1,977
    
    
    
    82
    
    
    
    4.15
    
    
    
    505
    
    
    
    9
    
    
    
    1.78Advances from FHLB of Boston
    
    
    140,482
    
    
    
    6,848
    
    
    
    4.87
    
    
    
    143,380
    
    
    
    7,019
    
    
    
    4.90
    
    
    
    155,085
    
    
    
    7,262
    
    
    
    4.68Total interest-bearing
liabilities
    
    
    428,609
    
    
    
    11,885
    
    
    
    2.77
    
    
    
    401,074
    
    
    
    11,537
    
    
    
    2.88
    
    
    
    403,617
    
    
    
    12,872
    
    
    
    3.19Non-interest-bearing deposits
    
    
    32,601
    
    
    
    
    
    
    
    
    
    
    
    29,998
    
    
    
    
    
    
    
    
    
    
    
    29,586Other liabilities
    
    
    3,308
    
    
    
    
    
    
    
    
    
    
    
    3,862
    
    
    
    
    
    
    
    
    
    
    
    3,371Total liabilities
    
    
    464,518
    
    
    
    
    
    
    
    
    
    
    
    434,934
    
    
    
    
    
    
    
    
    
    
    
    436,574Stockholders equity
    
    
    40,255
    
    
    
    
    
    
    
    
    
    
    
    42,057
    
    
    
    
    
    
    
    
    
    
    
    39,595Total liabilities and stockholders
equity
    
    $
    504,773
    
    
    
    
    
    
    
    
    
    
    $
    476,991
    
    
    
    
    
    
    
    
    
    
    $
    476,169Net interest and dividend income
    
    
    
    
    
    $
    15,731
    
    
    
    
    
    
    
    
    
    
    $
    15,570
    
    
    
    
    
    
    
    
    
    
    $
    17,257Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.85
    %
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    
    
    
    
    
    
    
    
    3.29
    %Net yield on interest-earning assets
    
    
    
    
    
    
    
    
    
    
    3.20
    %
    
    
    
    
    
    
    
    
    
    
    3.36
    %
    
    
    
    
    
    
    
    
    
    
    3.71
    %
 28




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##### Table of Contents



Rate/Volume Analysis.The effect on net interest income of changes in interest rates and
changes in the amounts of interest-earning assets and interest-bearing liabilities is shown in the
following table. Information is provided on changes for the fiscal years indicated attributable to
changes in interest rates and changes in volume. Changes due to combined changes in interest rates
and volume are allocated between changes in rate and changes in volume proportionally to the change
due to volume and the change due to rate. 2005 vs. 2004
    
    
    2004 vs. 2003Changes due to
    
    
    Changes due toincrease (decrease) in:
    
    
    increase (decrease) in:Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest income:Mortgage loans
    
    $
    (155
    )
    
    $
    (740
    )
    
    $
    (895
    )
    
    $
    (608
    )
    
    $
    (1,628
    )
    
    $
    (2,236
    )Other loans
    
    
    33
    
    
    
    (30

    )
    
    
    3
    
    
    
    (139
    )
    
    
    (3
    )
    
    
    (142
    )Total income from loans
    
    
    (122
    )
    
    
    (770
    )
    
    
    (892
    )
    
    
    (747
    )
    
    
    (1,631
    )
    
    
    (2,378
    )Short-term investments
    
    
    (54
    )
    
    
    25
    
    
    
    (29
    )
    
    
    143
    
    
    
    (64
    )
    
    
    79Investment securities
    
    
    1,606
    
    
    
    (176
    )
    
    
    1,430
    
    
    
    (126
    )
    
    
    (597
    )
    
    
    (723
    )Total income from investments
    
    
    1,552
    
    
    
    (151
    )
    
    
    1,401
    
    
    
    17
    
    
    
    (661
    )
    
    
    (644
    )Total interest and dividend income
    
    
    1,430
    
    
    
    (921
    )
    
    
    509
    
    
    
    (730
    )
    
    
    (2,292
    )
    
    
    (3,022
    )Interest expense:Deposits
    
    
    429
    
    
    
    (132
    )
    
    
    297
    
    
    
    171
    
    
    
    (1,336
    )
    
    
    (1,165
    )Other borrowings
    
    
    217
    
    
    
    5
    
    
    
    222
    
    
    
    51
    
    
    
    22
    
    
    
    73Advances from FHLB of Boston
    
    
    (131
    )
    
    
    (40
    )
    
    
    (171
    )
    
    
    (562
    )
    
    
    319
    
    
    
    (243
    )Total interest expense
    
    
    515
    
    
    
    (167
    )
    
    
    348
    
    
    
    (340
    )
    
    
    (995
    )
    
    
    (1,335
    )Net interest and dividend income
    
    $
    915
    
    
    $
    (754
    )
    
    $
    161
    
    
    $
    (390
    )
    
    $
    (1,297
    )
    
    $
    (1,687
    )
 Interest
and Dividend Income.The Company experienced an increase of $161,000 in net
interest and dividend income for the year ended March 31, 2005 compared to fiscal 2004. The balance
of average interest-earning assets was virtually unchanged between years, however, the Company
shifted its asset mix towards shorter-term investments in response to the decline in residential
mortgage rates to forty-five year lows. With the decline in interest rates, management decided that
most fixed-rate residential mortgage loans would be sold in the secondary market rather than put
into the loan portfolio. During fiscal 2005, $20.5 million of such loans were sold. This strategy,
combined with continued loan prepayments as customers refinance their mortgages at favorable rates,
lead to a reduction in the average balance of mortgage loans of $2.5 million in fiscal 2005. This reduction
occurred despite an increase in the commercial real estate portfolio of $48.2 million during fiscal
2005. Interest income on loans decreased by $892 thousand to $22.3 million due to the aforementioned
decline in the average balance of loans and a 21 basis point decline in the average rate earned.
Interest income on investments increased by $1.4 million in fiscal 2005 due to a 15 basis point
yield increase, combined with the aforementioned increase in average holdings. The increase in
yield on investments reflects the $34.4 million increase in the average balance of investment
securities which had a yield of 4.66% in fiscal 2005. Interest Expense. Interest expense increased $348 thousand from $11.5 million in fiscal 2004 to $11.9 million in
fiscal 2005. This increase is attributable to a $27.5 million increase in the average balance of
interest-bearing liabilities. The increase was primarily attributed to money market deposit
accounts and certificates of deposit, which increased $14 million and $11.8 million respectively.
The increase in interest expense due to higher balances was partially offset by a decline in cost
for interest bearing liabilities from 2.88% for 2004 to 2.77% for 2005, a decline of 11 basis
points. The average cost of FHLB advances decreased by 3 basis points in fiscal 2005. This
decline was attributable to the average outstanding balances of FHLB advances, which decreased by
$2.9 million. An increase in the average balance of other borrowings of $4.9 million was primarily
due to the issuance of subordinated debentures by the Company in September of fiscal year 2005
which contributed $135 thousand to interest expense. 29




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##### Table of Contents



Provision for Loan Losses.During the year ended March 31, 2005, the Company provided $100,000
for loan losses compared to a $200,000 provision for the year ended March 31, 2004 and no provision
for the year ended March 31, 2003. While the Companys loan 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 allowance for loan losses in fiscal 2005. At March 31, 2005, the
Company had 2 non-performing loans totaling $190,000 and no non-performing loans as of March 31,
2004. Non-Interest Income.Total non-interest income increased $529,000, or 47.0%, in fiscal 2005
to $1.7 million from $1.1 million in fiscal 2004. The increase was primarily due to net gains on
the sales and write-downs of investments available for sale of $453,000 in fiscal 2005 as compared
to a net loss of $135,000 in fiscal 2004. Service fee income on deposits increased $49,000 during
fiscal 2005 and totaled $649,000. Net gains on the sales of loans totaled $252,000 in fiscal 2005,
for a decrease of $43,000 from $295,000 in fiscal 2004. The decrease in 2005 was primarily due to
the reduction of the total volume of loans sold to investors and totaled $33.0 million in fiscal
2004 and $20.5 million in fiscal 2005. Other components of non-interest income decreased during
2005 by $37,000 for brokerage income and $28,000 for other non-interest income. Total non-interest income declined $279,000 during fiscal 2004 from $1.4 million in fiscal
2003 to $1.1 million in fiscal 2004. The decline was attributable to an overall reduction in gains
on asset sales, net of impairment write-downs, of $328,000. Loan sale gains declined by $501,000 as
a greater portion of loans were sold in fiscal 2003 on a mandatory delivery basis which results
in a higher gain rate than the best efforts delivery basis used in 2004. In addition, loan sale
gains in fiscal 2004 were adversely affected by the late delivery of certain loans to the investor,
which caused the selling price of such loans to be reduced by $240,000. During fiscal 2004, the
Company recognized additional impairment write-downs of $130,000 in marketable equity securities
which had experienced a decline in fair value judged to be other than temporary compared to
$803,000 in such write-downs in the prior year. Non-Interest Expenses. 2005 v. 2004. Non-interest expenses increased $1.1 million during fiscal 2005, or 9.0%, to $13.5 million as
compared to $12.4 million for the year ended March 31, 2004. This increase is primarily due to
increases in salaries and employee benefits ($506,000), office occupancy and equipment expenses
($204,000), professional fees ($666,000) and other non-interest expenses ($17,000), partially
offset by a decrease in marketing expenses ($201,000) and data processing service fees ($75,000). Salaries and employee benefits increased $506,000, or 7.4%, to $7.7 million in fiscal 2005 as
compared to the prior year. This increase was primarily due to average salary increases of 4.0%,
increases in staffing to support a larger asset base, as well as increases in health insurance
($82,000), ESOP expenses ($123,000) and unemployment insurance ($24,000). Office occupancy and equipment expenses increased $204,000, or 17.6%, to $1.4 million in
fiscal 2005 as compared to the prior year. This increase was primarily increased insurance and
maintenance and repairs expense along with increased depreciation of bank buildings and equipment
and amortization of leasehold improvements. Data processing servicing fees decreased by $75,000, or 6.9%, to $1.0 million in fiscal 2005
as compared to the prior year. The decrease was primarily due to a renegotiation and extension of
the contract with the Banks primary data processing provider. Professional fees increased $666,000, or approximately 200%, to $1.0 million in fiscal 2005 as
compared to the prior year. The increase in 2005 was primarily due to the costs incurred by the
Company that were associated with the stock buyback by the Company and the ESOP plan during the
current fiscal year, while the prior year amounts include the insurance recovery of expenses
incurred with the shareholder litigation discussed herein. Marketing expenses decreased $201,000, or 25.9%, to $574,000 in fiscal 2005 as compared to the
prior year. While the Bank was able to undertake a significant deposit promotion during fiscal
2005, there were fewer 30




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##### Table of Contents



discretionary promotions compared to the prior year. During fiscal 2004, the Bank initiated a
major marketing initiative, including its first-ever use of radio advertisements, to promote the
Bank, in general, and its new free checking account. In order for the Bank to remain competitive
in the market for deposit and loan customers, it anticipates that marketing expenditures will
likely continue. Other
non-interest expenses increased by $17,000, or 0.9%, to $1.9 million in fiscal 2005 as
compared to the prior year. The modest increase in fiscal 2005 is primarily due to increases in
insurance costs, primarily directors and officers liability insurance, recruiting expenses and
increased contributions, partially offset by lower office supplies and reduced travel and seminar
costs. 2004 v. 2003. Non-interest expenses decreased $1.5 million during fiscal 2004 as compared to the year ended
March 31, 2003. Exclusive of the impact of the costs of litigation and related insurance recoveries
for a commercial claim and shareholder litigation, both of which were settled in fiscal 2004,
non-interest expenses would have increased $694,000, or 5.7%. This increase is primarily due to
increases in salaries and employee benefits ($325,000), marketing expenses ($381,000) and other
non-interest expenses ($215,000), partially offset by a decrease in professional fees ($206,000). Salaries and employee benefits increased $325,000, or 4.7%, in fiscal 2004 as compared to the
prior year. This increase was primarily due to average salary increases of 4.0%, increases in
staffing in the residential lending area, as well as increases in health insurance and pension
expense. These increase were substantially offset by a $461,000 reduction in incentive
compensation. Professional fees decreased $2.1 million in fiscal 2004 as compared to the prior year.
Exclusive of the legal fees associated with shareholder litigation incurred in both fiscal 2003 and
2004, and an insurance recovery of $3.1 million recognized in fiscal 2004, professional fees would
have decreased $206,000 in fiscal 2004. This decrease is largely due to the additional legal and
other professional fees incurred in fiscal 2003 in connection with the contested election of
directors at the Companys September 2002 annual stockholders meeting. Marketing expenses increased $381,000, or 96.7%, in fiscal 2004 as compared to the prior year.
This significant increase resulted from additional promotion of residential and commercial loan
products throughout the year as well as deposit promotions during the second half of the year. The
Bank initiated a major marketing initiative, including its first-ever use of radio advertisements,
in March 2004 to promote the Bank, in general, and its new free checking account. The Bank
anticipates that competition for deposit customers will continue to increase as a result of the
recent Bank of America acquisition of Fleet Bank. Other financial institutions, including credit
unions, have also been more active in their promotions in recent months, which will likely result
in the continuation of marketing spending at higher rates than in the past though not at the level
which occurred in fiscal 2004. Other non-interest expenses decreased $85,000 in fiscal 2004 as compared to the prior year.
Exclusive of settlement costs associated with a commercial claim, such expenses would have
increased $215,000, or 13.5%, in fiscal 2004. This increase is primarily due to increases in
insurance costs, primarily directors and officers liability insurance, a record retention project,
contributions and lending related costs. Income Taxes.The effective rates of income tax expense for the years ended March 31, 2005,
2004 and 2003 were 34.6%, 28.3% and 54.3%, respectively. Exclusive of the impact of an additional
state tax provision necessitated by 2003 tax legislation and the related settlement of such taxes
in fiscal 2004, the Companys effective tax rate would have been 36.9% and 38.2% in fiscal 2004
and 2003, respectively. The Governor of Massachusetts signed legislation on March 5, 2003, expressly disallowing
deductions for dividends received from a REIT, resulting in such dividends being subject to state
taxation. In addition, the legislation applied retroactively to tax years ending on or after
December 31, 1999. In fiscal 2003, the Company provided additional income taxes of $835,000 as a
result of this legislation. Given the significant financial impact of this issue on numerous Massachusetts financial
institutions and the considerable uncertainty of the constitutionality of the retroactive
provisions of the legislation, a settlement was 31




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##### Table of Contents



reached in June 2003 among the DOR and the majority of affected financial institutions. This
settlement provided that 50% of all dividends received by the Bank from its REIT subsidiary from
1999 through December 2002 were subject to state income taxes. In addition, interest on the
related taxes was also assessed. In settlement of this matter, the Bank paid $431,000 in June 2003
and also recognized a reduction in its tax provision of $374,000, which increased net income by the
same amount in fiscal 2004. Financial Condition Total assets at March 31, 2005 amounted to $521.1 million, an increase of $30.2 million, or
6.1%, from $490.9 million at March 31, 2004. Total assets at March 31, 2004 amounted to $490.9
million, an increase of $13.7 million, or 2.9%, from $477.2 million at March 31, 2003. The growth
in assets in 2005 was primarily caused by growth in the commercial real estate portfolio. The
modest growth in assets in fiscal 2004 was primarily caused by the deposit increase of $7.9
million. During fiscal 2003, the increase in the deposits of $26.1 million was used to repay FHLB
advances, which contributed to the modest asset growth in fiscal 2003. Net loans increased $29.6 million, or 8.4%, to $382.7 million at March 31, 2005 primarily due
to the growth in the commercial real estate portfolio. The increase in fiscal 2005 is after
realizing an increase of $39.0 million in commercial mortgage loans during fiscal 2004. These
increases reflect managements preference for these loans, which carry an adjustable interest rate
that generally adjust every 5 years based on the 5-year FHLB classic advance rate. As of March 31,
2005, commercial mortgages represent just over 50% of the loan portfolio. Net loans decreased
$33.4 million to $353.1 million at March 31, 2004 from $386.5 million at March 31, 2003 while
short-term investments and investment securities increased $22.0 million and $22.6 million,
respectively, during this same period. This shift in asset mix reflects the impact of the reduction
in longer-term interest rates to a forty-five year low in 2003 and the resulting decision by
management to allow the residential loan portfolio, which consists primarily of 15 to 30 year
fixed-rate loans, to decline by $65.0 million during fiscal 2004. Total deposits increased $37.3 million, or 12.6%, to $333.2 million at March 31, 2005
primarily due to a heavily marketed promotional certificate of
deposit with a term of 13 months.
Total certificates of deposit represent approximately 40.7% of total deposits at March 31, 2005.
The Bank realized increases of $6.1 million in demand deposits, $2.1 million in NOW accounts and
$579,000 in regular savings accounts during fiscal 2005. Total deposits at March 31, 2004 were
$295.9 million, a $7.9 million increase from $288.0 million in the prior year. This increase
includes core deposit growth of $10.9 million, or 5.9%, partially offset by a decrease in
certificates of deposit of $3.0 million. Advances from the FHLB of Boston decreased to $138.1 million at March 31, 2005 from $141.1
million at March 31, 2004. The Bank decreased its borrowings from the FHLB of Boston in both
fiscal 2005 and 2004 consistent with its intent of reducing the utilization of FHLB advances.
Offsetting the reduction in the advances from the FHLB were increases in another form of borrowing,
or subordinated debentures. The Company issued subordinated debentures during fiscal year 2005 and
used the proceeds to pay for other funding needs. Stockholders equity decreased to $38.2 million at March 31, 2005 from $43.5 million at March
31, 2004 due primarily to a decrease of $2.4 million in comprehensive income during fiscal 2005 and
the purchase of 77,134 shares of common stock from shareholders of
the Company. 32




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##### Table of Contents



Liquidity The Companys primary sources of liquidity are dividends from its bank subsidiary. In
addition, the Company has access to the capital markets to raise additional equity. The Banks principal sources of liquidity are customer deposits, repayments of loans and
mortgage-backed securities, FHLB of Boston advances and maturities of various other investments.
These various sources of liquidity, as well as the Banks ability to sell residential mortgage
loans in the secondary market, are used to fund deposit withdrawals, loan originations and
investment purchases. Deposits have been a relatively stable source of funds for the Bank despite significant
competition. During fiscal 2005 however, the Bank ran an aggressive marketing campaign for term
certificates with a term of 13 months causing the deposit balances to increase by $37.3 million to
$333.2 million at March 31, 2005 from $295.9 million at March 31, 2004. Core deposits represented
approximately two-thirds of the Banks total deposits in fiscal 2004 but declined to less than 60%
as a result of the aforementioned promotion. Money market deposits had been the fastest growing
component of core deposits but, as a result of the increase in the rates paid on all deposits by
both the Bank and its competitors as shorter term interest rates increased, there was a shift out
of the money market accounts into higher rate certificates. While the balances in the money market
accounts had consistently increased in previous years, it is uncertain whether the impact of
sustained higher interest rates will continue to draw balances from the core accounts into the
certificates of deposit in future years. The Bank is a member of the FHLB of Boston and has the ability to borrow from the FHLB of
Boston for any sound business purpose for which the Bank has legal authority, subject to such
regulations and limitations as may be prescribed. At March 31, 2005 and 2004, the Bank had
outstanding FHLB of Boston advances of $138.1 million and $141.1 million, respectively. The FHLB
of Boston advances are secured primarily by a blanket lien on residential first mortgage loans,
U.S. Government and agency securities and all stock in the FHLB of Boston. At March 31, 2005, the
Bank had approximately $32.7 million in unused borrowing capacity at the FHLB of Boston. The Bank also may obtain funds from the Federal Reserve Bank of Boston, the Co-operative
Central Bank Reserve Fund and through a retail CD brokerage agreement with a major brokerage firm.
The Bank views these borrowing facilities as secondary sources of liquidity and has had no need to
use them. Commitments, Contingencies and Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk including
commitments to extend credit under existing lines of credit and commitments to originate and sell
loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. Commitments to originate new loans or to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Loan commitments
generally expire within 30 to 45 days. Most home equity line commitments are for a term of 15
years, and commercial lines of credit are generally renewable on an annual basis. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates
each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on managements credit
evaluation of the borrower. Commitments to sell loans held for sale are agreements to sell loans on a best efforts
delivery basis to a third party at an agreed upon price. The Company on September 16, 2004 completed a trust preferred securities financing forming a
Delaware statutory trust, known as Central Bancorp Capital Trust I (the Trust). Central Bancorp
Capital Trust I is the Companys only special purpose entity. The Company within the financing
transaction and concurrent with the issuance of the junior subordinated debentures and the trust
preferred securities, issued a guarantee related to the 33




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##### Table of Contents



trust securities for the benefit of the holders. Refer to Subordinated Debenture in Notes to
Consolidated Financial Statements for more detail. Management believes that the Company
and Bank have adequate sources of liquidity to fund these
commitments. Contractual Obligations and Commitments by Maturity The following table sets forth information regarding the Companys contractual obligations and
commitments as of March 31, 2005. Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    

1 year
    
    

1-3 years
    
    

4-5 years
    
    

5 years(In thousands)Deposits
    
    $
    333,215
    
    
    $
    285,792
    
    
    $
    39,951
    
    
    $
    7,472
    
    
    $
    Advances from FHLB
    
    
    138,135
    
    
    
    25,635
    
    
    
    27,500
    
    
    
    27,000
    
    
    
    58,000Short-term borrowings
    
    
    141
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debenture
    
    
    5,258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,258ESOP loan
    
    
    2,921
    
    
    
    388
    
    
    
    776
    
    
    
    776
    
    
    
    981Operating lease obligations
    
    
    2,268
    
    
    
    237
    
    
    
    471
    
    
    
    374
    
    
    
    1,186Total contractual cash obligations
    
    $
    481,938
    
    
    $
    312,193
    
    
    $
    68,698
    
    
    $
    35,622
    
    
    $
    65,425
 Amount of Commitment Expiring by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    

1 year
    
    

1-3 years
    
    
    4-5 years
    
    

5 years(In thousands)Loan originations
    
    $
    26,834
    
    
    $
    26,834
    
    
    $
    
    
    
    $
    
    
    
    $
    Lines of credit
    
    
    33,660
    
    
    
    12,023
    
    
    
    10,233
    
    
    
    268
    
    
    
    11,136Sell mortgage loans
    
    
    5,196
    
    
    
    5,196
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    65,690
    
    
    $
    44,053
    
    
    $
    10,233
    
    
    $
    268
    
    
    $
    11,136
 Impact of Inflation and Changing Prices The consolidated financial statements and related data presented in this Form 10-K have been
prepared in conformity with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power of money over time
due to inflation. Unlike many industrial companies, substantially all
of the assets and liabilities
of the Bank are monetary in nature. As a result, interest rates have a more significant impact on
the Banks performance than the general level of inflation. Over short periods of time, interest
rates may not necessarily move in the same direction or in the same magnitude as inflation. Capital Resources The Company and the Bank are required to maintain minimum capital ratios pursuant to federal
banking regulations. The first standard establishes a risk-adjusted ratio relating capital to
different categories of balance sheet assets and off-balance sheet obligations. Two categories of
capital are defined: Tier 1 or core capital (stockholders equity) and Tier 2 or supplementary
capital. Total capital is the sum of both Tier 1 and Tier 2 capital. According to the standards,
Tier 1 capital must represent at least 50% of qualifying total capital. At March 31, 2005, the
minimum total risk-based capital ratio required was 8.00%. The Companys and the Banks risk-based
total capital ratios at March 31, 2005 were 12.12% and 11.19%, respectively. To complement the risk-based standards, the FDIC adopted a leverage ratio (adjusted
stockholders equity divided by total average assets) of 3% for the most highly rated banks and 4%
to 5% for all others. The leverage 34




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##### Table of Contents



ratio is to be used in tandem with the risk-based capital ratios as the minimum standards for
banks. The Companys and the Banks leverage ratios were 8.04% and 7.38%, respectively, at March
31, 2005. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Bank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
Bank 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 Bank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 the Banks net interest income and preserve capital, while adjusting the
Banks 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 Bank 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 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 forecasted cash flows and managements assumptions is
compared to net interest income projections based on immediate shifts of 300 basis points upward
and immediate downward shifts of 150 basis points and 75 basis points for fiscal year 2005 and
2004, respectively. Internal guidelines on interest rate risk state that for every 100 basis
points immediate shift in interest rates, estimated net interest income over the next twelve months
should decline by no more than 5%. The following table indicates the projected change in net interest income, and sets forth such
change as a percentage of estimated net interest income, for the twelve month period following the
date indicated assuming an immediate and parallel shift for all market rates with other rates
adjusting to varying degrees in each scenario based on both historical and expected spread
relationships: At March 31,2005
    
    
    2004Amount
    
    
    % Change
    
    
    Amount
    
    
    % Change(Dollars in thousands)300 basis point increase in rates
    
    $
    (2,361
    )
    
    
    (13.8
    )%
    
    $
    (1,236
    )
    
    
    (8.1
    )%150 basis point decrease in rates
    
    
    (455
    )
    
    
    (2.7
    )
    
    
    
    
    
    
    75 basis point decrease in rates
    
    
    
    
    
    
    
    
    
    
    (315
    )
    
    
    (2.1
    )
 35




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data PageConsolidated Balance Sheets
    
    
    37Consolidated Statements of Income
    
    
    38Consolidated Statement of Changes in Stockholders Equity
    
    
    39Consolidated Statements of Cash Flows
    
    
    41Notes to Consolidated Financial Statements
    
    
    42Reports of Independent Registered Public Accounting Firms
    
    
    66
 36




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY 
 Consolidated Balance Sheets
 (Dollars in thousands)
 March 31,2005
    
    
    2004ASSETSCash and due from banks
    
    
    6,158
    
    
    $
    7,113Short-term investments
    
    
    225
    
    
    
    27,224Cash and cash equivalents
    
    
    6,383
    
    
    
    34,337Certificate of deposit (note 11)
    
    
    606
    
    
    
    1,211Investment securities available for sale (amortized cost of $108,690
in 2005 and $80,201 in 2004) (note 2)
    
    
    108,616
    
    
    
    83,771Stock in Federal Home Loan Bank of Boston (notes 2 and 7)
    
    
    8,300
    
    
    
    8,300The Co-operative Central Bank Reserve Fund (note 2)
    
    
    1,576
    
    
    
    1,576Total investments
    
    
    118,492
    
    
    
    93,647Loans held for sale (note 1)
    
    
    2,221
    
    
    
    799Loans (note 3)
    
    
    386,382
    
    
    
    356,625Less allowance for loan losses (note 4)
    
    
    3,681
    
    
    
    3,537Net loans
    
    
    382,701
    
    
    
    353,088Accrued interest receivable
    
    
    2,444
    
    
    
    2,203Banking premises and equipment, net (note 5)
    
    
    2,807
    
    
    
    2,113Deferred tax asset, net (note 8)
    
    
    1,639
    
    
    
    243Goodwill, net (note 1)
    
    
    2,232
    
    
    
    2,232Other assets
    
    
    1,546
    
    
    
    1,024Total assets
    
    $
    521,071
    
    
    $
    490,897LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits (note 6)
    
    
    333,215
    
    
    $
    295,920Short-term borrowings
    
    
    141
    
    
    
    845Federal Home Loan Bank advances (notes 2 and 7)
    
    
    138,135
    
    
    
    141,100Subordinated debenture (note 1)
    
    
    5,258
    
    
    
    ESOP loan (note 11)
    
    
    2,921
    
    
    
    3,311Advance payments by borrowers for taxes and insurance
    
    
    1,168
    
    
    
    1,182Accrued expenses and other liabilities
    
    
    1,994
    
    
    
    5,085Total liabilities
    
    
    482,832
    
    
    
    447,443Commitments and contingencies (notes 8, 9 and 12)Stockholders equity (note 10):Preferred stock $1.00 par value; authorized 5,000,000 shares; none issued
    
    
    
    
    
    
    Common stock $1.00 par value; authorized 15,000,000 shares;
2,031,026 shares issued at March 31, 2005 and 2,030,251 shares issued
at March 31, 2004
    
    
    2,031
    
    
    
    2,030Additional paid-in capital
    
    
    12,883
    
    
    
    12,920Retained income
    
    
    38,728
    
    
    
    36,855Treasury stock (442,428 shares at March 31, 2005 and 365,294 shares at
March 31, 2004), at cost
    
    
    (9,907
    )
    
    
    (7,311
    )Accumulated other comprehensive income (loss)
    
    
    (56
    )
    
    
    2,293Unearned compensation  ESOP (note 11)
    
    
    (5,440
    )
    
    
    (3,333
    )Total stockholders equity
    
    
    38,239
    
    
    
    43,454Total liabilities and stockholders equity
    
    $
    521,071
    
    
    $
    490,897
 See accompanying notes to consolidated financial statements. 37




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY 
 Consolidated Statements of Income
 (In Thousands, Except Per Share Data)
 Years Ended March 31,2005
    
    
    2004
    
    
    2003Interest and dividend income:Mortgage loans
    
    $
    21,902
    
    
    $
    22,797
    
    
    $
    25,033Other loans
    
    
    366
    
    
    
    363
    
    
    
    505Short-term investments
    
    
    175
    
    
    
    204
    
    
    
    125Investments
    
    
    5,173
    
    
    
    3,743
    
    
    
    4,466Total interest and dividend income
    
    
    27,616
    
    
    
    27,107
    
    
    
    30,129Interest expense:Deposits
    
    
    4,733
    
    
    
    4,436
    
    
    
    5,601Advances from Federal Home Loan Bank of Boston
    
    
    6,848
    
    
    
    7,019
    
    
    
    7,262Other borrowings
    
    
    304
    
    
    
    82
    
    
    
    9Total interest expense
    
    
    11,885
    
    
    
    11,537
    
    
    
    12,872Net interest and dividend income
    
    
    15,731
    
    
    
    15,570
    
    
    
    17,257Provision for loan losses (note 4)
    
    
    100
    
    
    
    200
    
    
    
    Net interest and dividend income after
provision for loan losses
    
    
    15,631
    
    
    
    15,370
    
    
    
    17,257Non-interest income:Deposit service charges
    
    
    649
    
    
    
    600
    
    
    
    571Net gains (losses) from sales and write-downs
of investment securities (note 2)
    
    
    453
    
    
    
    (135
    )
    
    
    (308
    )Gain on sales of loans, net
    
    
    252
    
    
    
    295
    
    
    
    796Brokerage income
    
    
    101
    
    
    
    138
    
    
    
    94Other income
    
    
    200
    
    
    
    228
    
    
    
    252Total non-interest income
    
    
    1,655
    
    
    
    1,126
    
    
    
    1,405Non-interest expenses:Salaries and employee benefits (note 11)
    
    
    7,693
    
    
    
    7,187
    
    
    
    6,862Occupancy and equipment (note 5)
    
    
    1,363
    
    
    
    1,159
    
    
    
    1,137Data processing service fees
    
    
    1,018
    
    
    
    1,093
    
    
    
    1,136Professional fees (note 12)
    
    
    1,000
    
    
    
    334
    
    
    
    2,410Advertising and marketing
    
    
    574
    
    
    
    775
    
    
    
    394Other expenses (note 1)
    
    
    1,870
    
    
    
    1,853
    
    
    
    1,938Total non-interest expenses
    
    
    13,518
    
    
    
    12,401
    
    
    
    13,877Income before income taxes
    
    
    3,768
    
    
    
    4,095
    
    
    
    4,785Provision for income taxes (note 8)
    
    
    1,305
    
    
    
    1,159
    
    
    
    2,598Net income
    
    $
    2,463
    
    
    $
    2,936
    
    
    $
    2,187Earnings per common share (note 1):Basic
    
    $
    1.66
    
    
    $
    1.89
    
    
    $
    1.38Diluted
    
    $
    1.65
    
    
    $
    1.88
    
    
    $
    1.37Weighted average common shares outstanding  basic
    
    
    1,482
    
    
    
    1,551
    
    
    
    1,584Weighted average common and equivalent shares
outstanding  diluted
    
    
    1,493
    
    
    
    1,565
    
    
    
    1,599
 See accompanying notes to consolidated financial statements. 38




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY 
 Consolidated Statements of Changes in Stockholders Equity
 (In Thousands, Except Per Share Data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Unearned
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Treasury
    
    
    Comprehensive
    
    
    Compensation
    
    
    StockholdersStock
    
    
    Capital
    
    
    Income
    
    
    Stock
    
    
    Income (Loss)
    
    
    ESOP
    
    
    EquityBalance at March 31, 2002
    
    $
    2,000
    
    
    $
    11,934
    
    
    $
    33,141
    
    
    $
    (7,189
    )
    
    $
    (626
    )
    
    $
    (306
    )
    
    $
    38,954Net income
    
    
    
    
    
    
    
    
    
    
    2,187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,187Other comprehensive income net of tax:Unrealized gain on securities, net
of reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,628
    
    
    
    
    
    
    
    1,628Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,815Purchase of shares by ESOP (Note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,595
    )
    
    
    (3,595
    )Proceeds from exercise of stock options (28,139 shares)
    
    
    28
    
    
    
    488
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516Tax benefit of stock options
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Director deferred compensation transactions
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )Dividends paid ($0.44 per share)
    
    
    
    
    
    
    
    
    
    
    (727
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (727
    )Amortization of unearned compensation
- ESOP
    
    
    
    
    
    
    218
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    429Balance at March 31, 2003
    
    $
    2,028
    
    
    $
    12,751
    
    
    $
    34,601
    
    
    $
    (7,249
    )
    
    $
    1,002
    
    
    $
    (3,690
    )
    
    $
    39,443Net income
    
    
    
    
    
    
    
    
    
    
    2,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,936Other comprehensive income net of tax:Unrealized gain on securities, net
of reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,291
    
    
    
    
    
    
    
    1,291Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,227Proceeds from exercise of stock options (2,524 shares)
    
    
    2
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47Tax benefit of stock options
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Director deferred compensation transactions
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Dividends paid ($0.48 per share)
    
    
    
    
    
    
    
    
    
    
    (682
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (682
    )Amortization of unearned compensation
- ESOP
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    357
    
    
    
    403Balance at March 31, 2004
    
    $
    2,030
    
    
    $
    12,920
    
    
    $
    36,855
    
    
    $
    (7,311
    )
    
    $
    2,293
    
    
    $
    (3,333
    )
    
    $
    43,454Net income
    
    
    
    
    
    
    
    
    
    
    2,463
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,463Other comprehensive income net of tax:Unrealized loss on securities, net
of reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,349
    )
    
    
    
    
    
    
    (2,349
    )Comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114Purchase of 77,134 shares by ESOP (Note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,565
    )
    
    
    (2,565
    )Proceeds from exercise of stock options (775 shares)
    
    
    1
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Tax benefit of stock options
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Director deferred compensation transactions
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    
    
    
    
    9Dividends paid ($0.48 per share)
    
    
    
    
    
    
    
    
    
    
    (712
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (712
    )Amortization of unearned compensation
- ESOP
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    458
    
    
    
    463Purchase of treasury stock (77,134 shares) (Note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,565
    )
    
    
    
    
    
    
    
    
    
    
    (2,565
    )Other equity transactions
    
    
    
    
    
    
    (125
    )
    
    
    122
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    21Balance at March 31, 2005
    
    $
    2,031
    
    
    $
    12,883
    
    
    $
    38,728
    
    
    $
    (9,907
    )
    
    $
    (56
    )
    
    $
    (5,440
    )
    
    $
    38,239
 See accompanying notes to consolidated financial statements. 39




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders Equity (continued) (In Thousands) The Companys other comprehensive income (loss) and related tax effect for the years ended March 31 are as follows: 2005Before-Tax
    
    
    Tax (Benefit)
    
    
    After-TaxAmount
    
    
    Expense
    
    
    AmountUnrealized losses on securities:Unrealized net holding losses during period
    
    $
    (3,191
    )
    
    $
    (1,133
    )
    
    $
    (2,058
    )Add reclassification adjustment for net gains included in net income
    
    
    (453
    )
    
    
    (162
    )
    
    
    (   291
    )Other comprehensive loss
    
    $
    (3,644
    )
    
    $
    (1,295
    )
    
    $
    (2,349
    )
 2004Before-Tax
    
    
    Tax (Benefit)
    
    
    After-TaxAmount
    
    
    Expense
    
    
    AmountUnrealized gains on securities:Unrealized net holding gains during period
    
    $
    1,824
    
    
    $
    622
    
    
    $
    1,202Add reclassification adjustment for net losses included in net income
    
    
    135
    
    
    
    46
    
    
    
    89Other comprehensive income
    
    $
    1,959
    
    
    $
    668
    
    
    $
    1,291
 2003Before-Tax
    
    
    Tax (Benefit)
    
    
    After-TaxAmount
    
    
    Expense
    
    
    AmountUnrealized losses on securities:Unrealized net holding gains during period
    
    $
    2,306
    
    
    $
    901
    
    
    $
    1,405Add reclassification adjustment for net losses
included in net income
    
    
    308
    
    
    
    85
    
    
    
    223Other comprehensive loss
    
    $
    2,614
    
    
    $
    986
    
    
    $
    1,628
 See accompanying notes to consolidated financial statements. 40




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CENTRAL BANCORP, INC. AND SUBSIDIARY 
 Consolidated Statements of Cash Flows
 (Dollars in Thousands)
 Years Ended March 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    2,463
    
    
    $
    2,936
    
    
    $
    2,187Adjustments to reconcile net income to net cash provided
by operating activitiesDepreciation and amortization
    
    
    427
    
    
    
    319
    
    
    
    314Amortization of premiums and discounts
    
    
    174
    
    
    
    165
    
    
    
    269Provision for loan losses
    
    
    100
    
    
    
    200
    
    
    
    Stock-based compensation
    
    
    463
    
    
    
    332
    
    
    
    429Benefit deferred tax assets
    
    
    (101
    )
    
    
    (194
    )
    
    
    (462
    )Net (gains) losses from sales and write-downs of
investment securities
    
    
    (453
    )
    
    
    135
    
    
    
    308Gain on sale of loans held for sale
    
    
    (252
    )
    
    
    (295
    )
    
    
    (796
    )Originations of loans held for sale
    
    
    (21,683
    )
    
    
    (32,823
    )
    
    
    (36,364
    )Proceeds from the sale of loans originated for sale
    
    
    20,513
    
    
    
    32,966
    
    
    
    36,513(Increase) decrease in accrued interest receivable
    
    
    (241
    )
    
    
    177
    
    
    
    150(Increase) decrease in other assets, net
    
    
    (522
    )
    
    
    (348
    )
    
    
    (26
    )Increase (decrease) in advance payments by borrowers for
taxes and insurance
    
    
    (14
    )
    
    
    183
    
    
    
    (112
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    (3,091
    )
    
    
    (2,175
    )
    
    
    2,043Net cash
provided by (used in) operating activities
    
    
    (2,217
    )
    
    
    1,578
    
    
    
    4,453Cash flows from investing activities:Net (increase) decrease in loans
    
    
    (29,713
    )
    
    
    33,245
    
    
    
    (18,110
    )Principal payments on mortgage-backed securities
    
    
    7,956
    
    
    
    5,453
    
    
    
    7,426Purchases of investment securities
    
    
    (48,036
    )
    
    
    (40,431
    )
    
    
    (6,210
    )Proceeds from sales of investment securities
    
    
    6,875
    
    
    
    482
    
    
    
    7,638Maturities and redemptions of investment securities
    
    
    4,995
    
    
    
    13,500
    
    
    
    6,000Due to broker
    
    
    
    
    
    
    3,029
    
    
    
    (Purchase) redemption of certificate of deposit
    
    
    605
    
    
    
    (1,200
    )
    
    
    Purchase of banking premises and equipment, net
    
    
    (1,121
    )
    
    
    (563
    )
    
    
    (346
    )Net cash provided by (used in) investing activities
    
    
    (58,439
    )
    
    
    13,515
    
    
    
    (3,602
    )Cash flows from financing activities:Net increase in deposits
    
    
    37,295
    
    
    
    7,961
    
    
    
    26,052Proceeds from FHLB of Boston advances
    
    
    67,000
    
    
    
    2,000
    
    
    
    39,000Repayments of FHLB of Boston advances
    
    
    (74,300
    )
    
    
    (5,300
    )
    
    
    (55,600
    )Proceeds from ESOP loan
    
    
    
    
    
    
    3,506
    
    
    
    Repayments of ESOP loan
    
    
    (390
    )
    
    
    (195
    )
    
    
    Net increase (decrease) in short-term borrowings
    
    
    3,631
    
    
    
    669
    
    
    
    (2,824
    )Proceeds from issuance of subordinated debenture
    
    
    5,258
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    20
    
    
    
    47
    
    
    
    516Purchase of treasury stock
    
    
    (2,565
    )
    
    
    
    
    
    
    Payments of dividends, net
    
    
    (712
    )
    
    
    (682
    )
    
    
    (727
    )Purchase of common stock by ESOP
    
    
    (2,565
    )
    
    
    
    
    
    
    (3,595
    )Other equity transactions
    
    
    30
    
    
    
    16
    
    
    
    (15
    )Net cash provided by financing activities
    
    
    32,702
    
    
    
    8,022
    
    
    
    2,807Net increase (decrease) in cash and cash equivalents
    
    
    (27,954
    )
    
    
    23,115
    
    
    
    3,658Cash and cash equivalents at beginning of year
    
    
    34,337
    
    
    
    11,222
    
    
    
    7,564Cash and cash equivalents at end of year
    
    $
    6,383
    
    
    $
    34,337
    
    
    $
    11,222Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    11,937
    
    
    $
    11,591
    
    
    $
    12,938Income taxes
    
    $
    1,065
    
    
    $
    2,005
    
    
    $
    2,820
 See accompanying notes to consolidated financial statements. 41




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CENTRAL BANCORP, INC. AND SUBSIDIARY 
 Notes to Consolidated Financial Statements March 31, 2005 Note 1. Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of Central Bancorp,
Inc. (the Company), a Massachusetts corporation, and its wholly-owned subsidiary, Central
Co-operative Bank (the Bank), as well as wholly-owned subsidiaries of the Bank. The Company was organized at the direction of the Bank in September 1998 to acquire all of the
capital stock of the Bank upon the consummation of the reorganization of the Bank into the holding
company form of ownership. This reorganization was completed in January 1999. The Bank was
organized as a Massachusetts chartered co-operative bank in 1915 and converted from mutual to stock
form in 1986. The primary business of the Bank is to generate funds in the form of deposits and use
the funds to make mortgage loans for the construction, purchase and refinancing of residential
properties, and to make loans on commercial real estate in its market area. The Bank is subject to
competition from other financial institutions. The Company is subject to the regulations of, and
periodic examinations by, the Federal Reserve Bank (FRB). The Bank is also subject to the
regulations of, and periodic examination by, the Federal Deposit Insurance Corporation (FDIC) and
the Massachusetts Division of Banks. The Banks deposits are insured by the Bank Insurance Fund of
the FDIC for deposits up to $100,000 and the Share Insurance Fund (SIF) for deposits in excess of
$100,000. The Company conducts its business through one operating segment, the Bank. Most of the Banks
activities are with customers located in eastern Massachusetts. As set forth in Note 3 herein, the
Bank concentrates in real estate lending. Management believes that the Bank does not have any
significant concentrations in any one customer or industry. 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 1  Subordinated Debenture and Recent Accounting Pronouncement in this Note
1) The accompanying consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. All significant
intercompany balances and transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the balance sheet and
income and expenses for the year. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change relate to the determination of the allowance
for loan losses, income taxes, impairment of securities and derivatives. Certain prior year amounts have been reclassified to conform to the current years
presentation. The following is a summary of the more significant accounting policies adopted by the
Bank. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from
banks, money market mutual fund investments, federal funds sold and other short-term investments
having an original maturity of 90 days or less. The Bank is required to maintain cash and reserve balances with the Federal Reserve Bank. Such
reserves are calculated based upon deposit levels and amounted to approximately $950,000 at March
31, 2005. 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 42




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 unrealized gains and losses included in earnings. Debt and equity securities not classified as
either held-to-maturity or trading are classified as available-for-sale and reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a separate component of
stockholders equity and comprehensive income. Gains and losses on sales of securities are recognized when realized with the cost basis of
investments sold determined on a specific-identification basis. Premiums and discounts on
investment and mortgage-backed securities are amortized or accreted to interest income over the
actual or expected lives of the securities using the level-yield method. If a decline in fair value below the amortized cost basis of an investment is judged to be
other-than-temporary, the cost basis of the investment is written down to fair value as a new cost
basis and the amount of the write-down is included in the results of operations. The Companys investments in the Federal Home Loan Bank of Boston and the Co-operative Central
Bank Reserve Fund are accounted for at cost. Loans Loans 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 market value. The Company has derivatives consisting of
forward commitments (generally on a best efforts delivery basis) to sell loans in order to reduce
market risk associated with commitments to fund loans held for sale. Forward loan sale contracts
and commitments to fund loans intended for sale are recorded at fair value. When the loan is funded, the Bank designates the forward loan sale contract as a hedge against the loan held for sale. Market value is
estimated based on outstanding investor commitments. Net unrealized
gains and losses are provided for by charges to operations. At March 31, 2005 and 2004, such activity
was not material. Loans are sold on a servicing released basis. 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. At
March 31, 2005 and 2004, net deferred loan fees of $389,000 and $520,000, respectively, were offset
against the related loan balances for financial presentation purposes. Interest income on loans is recognized on an accrual basis using the simple interest method.
Loans on which the accrual of interest has been discontinued are designated as non-accrual 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
provided that the loans are well secured and in the process of collection. When a loan is placed
on non-accrual 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. The
Bank records interest income on non-accrual and impaired loans on the cash basis of accounting. 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, 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 or the recorded amount of the loan. 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 impaired
classification. Impaired loans are charged off when management believes that the collectibility of
the loans principal is remote. Management considers non-accrual loans, except for smaller balance,
homogeneous residential mortgage loans, to be impaired. 43




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 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 March 31, 2005 the interest
rate was 5.54%. 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. 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. Arriving at an appropriate level of allowance for loan losses necessarily involves a high
degree of judgment. The allowance for loan losses is evaluated on a quarterly basis. Primary
considerations in this evaluation are prior loan loss experience, the character and size of the
loan portfolio, business and economic conditions, loan growth, delinquency trends, nonperforming
loan trends and other asset quality factors. The Bank evaluates specific loan status reports on
certain commercial and commercial real estate loans rated substandard or worse. Estimated
reserves for each of these credits is determined by reviewing current collateral value, financial
information, cash flow, payment history and trends and other relevant facts surrounding the
particular credit. The remaining commercial and commercial real estate loans are provided for as
part of pools of similar loans based on a combination of historical loss experience and qualitative
adjustments including collateral type and loan-to-value ratios. Smaller balance, homogeneous
loans, including residential real estate loans and consumer loans, are evaluated as a group by
applying estimated charge off and recovery percentages, based on historical experience and certain
qualitative factors, to the current outstanding balance in each category. Based on these analyses,
the resulting allowance is deemed adequate to absorb all probable credit losses in the portfolio. 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 a changes in economic conditions and other factors.
In addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Banks allowance for loan losses. Such agencies may require the Bank to
recognize adjustments to the allowance based on their judgments about information available to them
at the time of their examination. Changes in estimates are provided currently in earnings. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the accounting basis and the tax basis of the Banks assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be
realized or settled. The Banks deferred tax asset is reviewed periodically and adjustments to such
asset are recognized as deferred income tax expense or benefit based on managements judgments
relating to the realizability of such asset. 44




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Banking Premises and Equipment Land is stated at cost. Buildings, leasehold improvements and equipment are stated at cost,
less allowances for depreciation and amortization. Depreciation and amortization are computed on
the straight-line method over the estimated useful lives of the assets or terms of the leases, if
shorter. Goodwill In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) which is
effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 as of
April 1, 2002. SFAS 142 addresses the method of identifying and measuring goodwill and other
intangible assets having indefinite lives acquired in a business combination, eliminates further
amortization of goodwill, and requires periodic impairment evaluations of goodwill using a fair
value methodology prescribed in the statement. As a result of adopting SFAS 142, the Company no
longer amortizes the goodwill balance of $2.2 million. Impairment testing is required at least
annually or more frequently as a result of an event or change in circumstances (e.g.,recurring
operating losses by the acquired entity) that would indicate an impairment adjustment may be
necessary. Impairment testing was performed during 2005, 2004 and 2003 and in each analysis, it
was determined that an impairment charge was not required. Pension Benefits The Bank provides pension benefits for its employees in a multi-employer pension plan through
membership in the Co-operative Banks Employees Retirement Association. Pension costs are funded as
they are accrued and are accounted for on a defined contribution plan basis. Stock-Based Compensation The Company follows the intrinsic value method set forth in APB Opinion No. 25 Accounting for
Stock Issued to Employees (APB No. 25) under which there is generally no charge to earnings for
stock option grants. Companies that elect to use this method are required to disclose the pro forma
effect of using the fair value method of accounting for stock-based compensation that is encouraged
by SFAS No. 123, Accounting for Stock-Based Compensation. The estimated fair value of options granted in 2005 was $7.47. No options were granted during fiscal years 2003 and 2004 and options to purchase 33,299
shares were granted during fiscal year 2005. These options were fully vested when issued.
Forfeitures during these years were insignificant. The impact on net income as a result of the
Companys use of the intrinsic value method rather than the fair value method of accounting for
stock-based compensation is presented in the following table: Year ended March 31,2005
    
    
    2004
    
    
    2003(amounts in thousands, except per share amounts)Net income available to common stockholders
    
    $
    2,463
    
    
    $
    2,936
    
    
    $
    2,187Total stock-based compensation under the fair
value-based method for all awards
    
    
    249
    
    
    
    
    
    
    
    Pro forma net income available to common stockholders
    
    $
    2,214
    
    
    $
    2,936
    
    
    $
    2,187Net income per shareAs reported-basic
    
    
    1.66
    
    
    
    1.89
    
    
    
    1.38As reported-diluted
    
    
    1.65
    
    
    
    1.88
    
    
    
    1.37Pro forma-basic
    
    
    1.49
    
    
    
    1.89
    
    
    
    1.38Pro forma-diluted
    
    
    1.48
    
    
    
    1.88
    
    
    
    1.37
 The per-share weighted-average fair value of stock options
granted in 2005 was $7.47 on the date of grant using the
Black-Scholes option pricing model with the following
weighted-average assumptions. There were no options granted in
2004 and 2003. Expected
    
    Risk-Free
    
    
    
    ExpectedYear
    
    Dividend Yield
    
    Interest Rate
    
    Expected Option Life
    
    Volatility Factor2005
    
    
    
    1.66
    %
    
    
    4.14
    %
    
    
    5 years
    
    
    
    26.20
    %
 45




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Earnings Per Share Basic earnings per share (EPS) is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other contracts to issue
common stock, such as stock options, were exercised or converted into common stock. Unallocated
ESOP shares are not treated as being outstanding in the computation of either basic or diluted EPS.
At March 31, 2005, 2004 and 2003 there were approximately 170,000, 107,000 and 118,000 unallocated
ESOP shares, respectively. The following depicts a reconciliation of earnings per share: 2005
    
    
    2004
    
    
    2003(Amounts in thousands, except per share amounts)Net income available to common shareholders
    
    $
    2,463
    
    
    $
    2,936
    
    
    $
    2,187Weighted average number of common shares outstanding
    
    
    1,624
    
    
    
    1,664
    
    
    
    1,634Weighted average number of unallocated ESOP shares
    
    
    (142
    )
    
    
    (113
    )
    
    
    (50
    )Weighted average number of common shares
outstanding used in calculation of basic earnings
per share
    
    
    1,482
    
    
    
    1,551
    
    
    
    1,584Incremental shares from the assumed exercise of
dilutive stock options
    
    
    11
    
    
    
    14
    
    
    
    15Weighted average number of common shares
outstanding used in calculating diluted earnings
per share
    
    
    1,493
    
    
    
    1,565
    
    
    
    1,599Earnings per shareBasic
    
    $
    1.66
    
    
    $
    1.89
    
    
    $
    1.38Diluted
    
    $
    1.65
    
    
    $
    1.88
    
    
    $
    1.37
 46




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 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. The Company is currently reporting share based payment
transactions with employees in accordance with APB 25 and provides the required disclosures. Under
SFAS No. 123(R), companies will be required to adopt the fair value method of measurement over a
wide range of share-based compensation arrangements including stock options, restricted share
plans, performance-based awards, stock appreciation rights and employee stock purchase plans.
Application of SFAS No. 123(R) is required for the Company as of April 1, 2006 at which time the
Company will adopt the modified prospective application transition method of SFAS 123R. SFAS 123R
requires the application of this standard to all new awards after the effective date, all
modifications, repurchases or cancellations of existing awards after the effective date and all
unvested awards at the effective date. Based on current options outstanding, the Company
anticipates the adoption of this standard to result in no compensation cost in the year of
adoption, as all outstanding options are fully vested. In January 2003, the FASB issued FIN No. 46. FIN 46 established accounting guidance for
consolidation of variable interest entities (VIE) that function to support the activities of the
primary beneficiary. The primary beneficiary of a VIE is the entity that absorbs a majority of the
VIEs expected losses, receives a majority of the VIEs expected residual returns, or both, as a
result of ownership, controlling interest, contractual relationship or other business relationship
with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through ownership of a majority
of voting interest in the entity. In December 2003, the FASB issued a revised Fin No. 46 (FIN 46R), which in part, addressed
limited purpose trusts formed to issue trust preferred securities. FIN 46R requires the company to
account for its investment in the trust as an equity method investment, rather than to consolidate
the trust. As a result , the subordinated debentures of the parent company are included in the
consolidated balance sheets and the interest expense of the subordinated debentures are included in
the net interest margin of the consolidated statement of operations. In
March 2005, the Board of Governors of the Federal Reserve issued a
final ruling instructing bank holding companies regarding the
regulatory capital rules for trust preferred securities. Under the final
rules: 
    Trust preferred securities may be included in Tier 1
    capital up to 25% of the bank holding companys core
    capital elements during a transition period ending
    March 31, 2009.
    After March 31, 2009, the 25% limit will be calculated net of
goodwill (net of any associated deferred tax liability).
    For internationally active bank holding companies, the limit
    will be 15%.
    The grandfather date for issuances of trust preferred securities
    with nonconforming terms has been extended to April 15,
    2005 from May 31, 2004.
    Trust preferred securities no longer are required to have a call
    option, but call options are still permitted. Because call
    options are an important economic term for issuers, we
    anticipate that they will continue to be included in most
    issuance. 47




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 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. 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 proposed FSP EITF 03-1-a. Note 2. Investments(Dollars in Thousands) The amortized cost and fair value of investments securities available for sale are summarized
as follows: March 31, 2005Amortized
    
    
    Gross Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government and agency obligations
    
    $
    21,958
    
    
    $
    5
    
    
    $
    (238
    )
    
    $
    21,725Corporate bonds
    
    
    34,688
    
    
    
    790
    
    
    
    (261
    )
    
    
    35,217Mortgage-backed securities
    
    
    48,317
    
    
    
    157
    
    
    
    (595
    )
    
    
    47,879Total debt securities
    
    
    104,963
    
    
    
    952
    
    
    
    (1,094
    )
    
    
    104,821Marketable equity securities
    
    
    3,727
    
    
    
    269
    
    
    
    (201
    )
    
    
    3,795Total
    
    $
    108,690
    
    
    $
    1,221
    
    
    $
    (1,295
    )
    
    $
    108,616
 March 31, 2004Amortized
    
    
    Gross Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government and agency obligations
    
    $
    9,998
    
    
    $
    88
    
    
    $
    
    
    
    $
    10,086Corporate bonds
    
    
    35,788
    
    
    
    2,850
    
    
    
    
    
    
    
    38,638Mortgage-backed securities
    
    
    31,277
    
    
    
    405
    
    
    
    (107
    )
    
    
    31,575Total debt securities
    
    
    77,063
    
    
    
    3,343
    
    
    
    (107
    )
    
    
    80,299Marketable equity securities
    
    
    3,138
    
    
    
    453
    
    
    
    (119
    )
    
    
    3,472Total
    
    $
    80,201
    
    
    
    3,796
    
    
    $
    (226
    )
    
    $
    83,771
 48




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Gross unrealized losses and fair value at March 31, 2005, aggregated by investment category
and length of time that individual securities have been in a continuous unrealized loss position
follows: Less Than
    
    
    Greater Than12 Months
    
    
    12 MonthsFair
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Government and agency obligations
    
    $
    19,758
    
    
    $
    (238
    )
    
    $
    
    
    
    $
    Corporate bonds
    
    
    4,304
    
    
    
    (261
    )
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    25,415
    
    
    
    (420
    )
    
    
    6,048
    
    
    
    (175
    )Marketable equity securities
    
    
    1,211
    
    
    
    (136
    )
    
    
    589
    
    
    
    (  65
    )Total temporarily impaired securities
    
    $
    50,688
    
    
    $
    (1,055
    )
    
    $
    6,637
    
    
    $
    (240
    )
 As of March 31, 2005, securities held in the investment portfolio with unrealized losses have
been evaluated by management. During the years ended March 31, 2005, 2004 and 2003, the Bank
recognized write-downs in certain equity securities totaling $42,000, $130,000 and $803,000
respectively, as a result of declines in the fair value of such securities judged to be
other-than-temporary. Management in realizing the
other-than-temporary impairment evaluates the length of time and the extent of the unrealized loss
position from original cost, the credit worthiness of the issuer, and three to five year trend line
projections. The primary reason these securities are in an unrealized loss position is due to
changes in market conditions and interest rates. Most of the securities are debt securities whose
values fluctuate daily based on the current interest rate environment. The maturity distribution (based on contractual maturities) and annual yields of debt
securities at March 31, 2005 are as follows: Amortized
    
    
    Fair
    
    
    AnnualCost
    
    
    Value
    
    
    YieldDue within one year
    
    $
    6,020
    
    
    $
    6,046
    
    
    
    6.64
    %Due after one year but within five years
    
    
    50,939
    
    
    
    51,215
    
    
    
    5.09Due after five years but within ten years
    
    
    20,468
    
    
    
    20,106
    
    
    
    4.11Due after ten years
    
    
    27,536
    
    
    
    27,454
    
    
    
    4.50$
    104,963
    
    
    $
    104,821
 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. Proceeds from sales of investment securities and related gains and losses for the years ended
March 31, 2005, 2004, and 2003 (all classified as available for sale) were as follows: 2005
    
    
    2004
    
    
    2003Proceeds from sales
    
    $
    6,875
    
    
    $
    482
    
    
    $
    7,638Gross gains
    
    
    536
    
    
    
    
    
    
    
    495Gross losses
    
    
    41
    
    
    
    5
    
    
    
    Other than temporary impairments
    
    
    42
    
    
    
    130
    
    
    
    803Net realized gains (losses)
    
    $
    453
    
    
    $
    (135
    )
    
    $
    (308
    )
 49




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 At March 31, 2005, the Bank owned securities issued by several companies having a fair value
that exceeded 10% of the Companys stockholders equity. Such securities consisted primarily of
debt obligations. A mortgage-backed security with an amortized cost of $1,172,000 and fair value of $1,138,000
at March 31, 2004, was pledged to provide collateral for certain customers. In addition,
investment securities carried at $66.7 million were pledged under a blanket lien to partially
secure the Banks advances from the Federal Home Loan Bank of Boston (FHLB of Boston). As a member of the FHLB of Boston, the Bank was required to invest in stock of the FHLB of
Boston 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 FHLB of Boston, whichever was higher. In April 2004,
the FHLB of Boston amended its capital structure at which time the Companys FHLB of Boston stock
was converted to Class B stock. Such stock is redeemable at par value five years after filing for
a redemption or upon termination of membership. The FHLB of Boston may, but is not obligated to,
repurchase Class B stock prior to expiration of the five-year redemption notice. Under the new
capital structure, the Banks stock investment requirement is an amount equal to the sum of 0.35%
of certain specified assets (such assets totaled $265.0 million at the time of the change in
capital structure) plus 4.5% of the Banks advances and certain other specified items. In
connection with the adoption of the new capital structure, the Bank was not required to increase
its investment in FHLB stock. The Co-operative Central Bank Reserve Fund (the Fund) was established for liquidity purposes
and consists of deposits required of all insured co-operative banks in Massachusetts. The Fund is
used by The Co-operative Central Bank to advance funds to member banks or to make other
investments. Note 3. Loans(In Thousands) Loans as of March 31, 2005 and 2004 are summarized below: 2005
    
    
    2004Real estate loans:Residential real estate
    
    $
    159,838
    
    
    $
    171,682Commercial real estate
    
    
    194,326
    
    
    
    146,107Construction
    
    
    17,187
    
    
    
    25,112Home equity lines of credit
    
    
    9,194
    
    
    
    9,397Total real estate loans
    
    
    380,545
    
    
    
    352,298Commercial loans
    
    
    4,786
    
    
    
    3,198Consumer loans
    
    
    1,051
    
    
    
    1,129Total loans
    
    
    386,382
    
    
    
    356,625Less: allowance for loan losses
    
    
    (3,681
    )
    
    
    (3,537
    )Total loans, net
    
    $
    382,701
    
    
    $
    353,088
 The Bank had no non-accrual loans at March 31, 2004 and two loans on non-accrual status
totaling $190,000 as of March 31, 2005. During the years ended March 31, 2005 and 2004, there were
no impaired loans. Mortgage loans serviced by the Bank for others amounted to $391,000 and $747,000 at March 31,
2005 and 2004, respectively. The Banks lending activities are conducted principally in communities in the suburban Boston
area. The Bank grants mortgage loans on residential property, commercial real estate, construction
of residential homes, second mortgages, home equity and other loans. Substantially all loans
granted by the Bank are secured by real estate collateral. The ability and willingness of
residential mortgage borrowers to honor their repayment commitments are generally impacted by the
level of overall economic activity within the borrowers geographic areas and real estate values.
The ability and willingness of commercial real estate and construction loan borrowers to honor
their repayment commitments are generally impacted by the health of the real estate market in the
borrowers geographic area and the general economy. 50




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 The following summarizes the activity with respect to loans made to directors and officers and
their related interests for the years ended March 31: 2005
    
    
    2004Balance at beginning of year
    
    $
    901
    
    
    $
    919New loans
    
    
    302
    
    
    
    378Repayment of principal
    
    
    (184
    )
    
    
    (396
    )Balance at end of year
    
    $
    1,019
    
    
    $
    901
 Loans included above were made in the Banks ordinary course of business, on substantially the
same terms, including interest rates and collateral requirements, as those prevailing at the time
for comparable transactions with unrelated persons. All loans included above are performing in
accordance with the terms of the respective loan agreement. Note 4. Allowance for Loan Losses(In Thousands) A summary of changes in the allowance for loan losses follows: Years Ended March 31,2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    3,537
    
    
    $
    3,284
    
    
    $
    3,292Provision charged to expense
    
    
    100
    
    
    
    200
    
    
    
    Amounts charged-off
    
    
    (3
    )
    
    
    (29
    )
    
    
    (21
    )Recoveries on accounts previously charged-off
    
    
    47
    
    
    
    82
    
    
    
    13Balance at end of year
    
    $
    3,681
    
    
    $
    3,537
    
    
    $
    3,284
 Note 5. Banking Premises and Equipment(In Thousands) A summary of cost, accumulated depreciation and amortization of banking premises and equipment
at March 31 follows: Estimated2005
    
    
    2004
    
    
    Useful LivesLand
    
    $
    589
    
    
    $
    589Buildings and improvements
    
    
    2,969
    
    
    
    2,571
    
    
    50 yearsFurniture and fixtures
    
    
    6,715
    
    
    
    6,244
    
    
    3-5 yearsLeasehold improvements
    
    
    911
    
    
    
    660
    
    
    5-6 years11,184
    
    
    
    10,064Less accumulated depreciation and amortization
    
    
    (8,377
    )
    
    
    (7,951
    )Total
    
    $
    2,807
    
    
    $
    2,113
 Depreciation and amortization for the years ended March 31, 2005, 2004 and 2003 amounted to
$427,000, $319,000 and $314,000, respectively, and is included in occupancy and equipment expense
in the accompanying consolidated statements of income. 51




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 A summary of minimum rentals of banking premises for future periods under non-cancelable
operating leases follows: Years Ending March 31,2006
    
    $
    2372007
    
    $
    2552008
    
    $
    2162009
    
    $
    1872010
    
    $
    187Thereafter
    
    $
    1,186
 Certain leases contain renewal options the potential impact of which is not included above.
Rental expense for the years ended March 31, 2005, 2004 and 2003 was $152,000, $147,000 and
$145,000, respectively, and is included in occupancy and equipment expense in the accompanying
consolidated statements of income. Note 6. Deposits(Dollars in Thousands) Deposits at March 31 are summarized as follows: 2005
    
    
    2004Demand deposit accounts
    
    $
    33,982
    
    
    $
    27,881NOW accounts
    
    
    39,205
    
    
    
    37,106Passbook and other savings accounts
    
    
    74,316
    
    
    
    73,737Money market deposit accounts
    
    
    50,051
    
    
    
    56,084Total non certificate accounts
    
    
    197,554
    
    
    
    194,808Term deposit certificatesCertificates of $100,000 and above
    
    
    47,270
    
    
    
    27,607Certificates less than $100,000
    
    
    88,391
    
    
    
    73,505Total term deposit certificates
    
    
    135,661
    
    
    
    101,112$
    333,215
    
    
    $
    295,920
 Contractual maturities of term deposit certificates with weighted average interest rates at
March 31, 2005 are as follows: WeightedAverageAmount
    
    
    RateWithin 1 year
    
    $
    88,238
    
    
    
    2.44
    %Over 1 to 3 years
    
    
    39,951
    
    
    
    3.46Over 3 years
    
    
    7,472
    
    
    
    3.57$
    135,661
    
    
    
    2.80
 52




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Note 7. Federal Home Loan Bank Advances(Dollars in Thousands) A summary of the maturity distribution of FHLB of Boston advances (based on final maturity
dates) with weighted average interest rates at March 31 follows: 2005
    
    
    2004Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    RateWithin 1 year
    
    $
    25,635
    
    
    
    4.17
    %
    
    $
    13,300
    
    
    
    3.38
    %1-2 years
    
    
    9,500
    
    
    
    3.67
    
    
    
    15,300
    
    
    
    4.962-3 years
    
    
    18,000
    
    
    
    5.58
    
    
    
    9,500
    
    
    
    3.673-4 years
    
    
    15,000
    
    
    
    5.13
    
    
    
    18,000
    
    
    
    5.584-5 years
    
    
    20,000
    
    
    
    5.94
    
    
    
    15,000
    
    
    
    5.13Over 5 to 10 years
    
    
    50,000
    
    
    
    4.75
    
    
    
    70,000
    
    
    
    4.96Over 10 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    138,135
    
    
    
    4.82
    
    
    $
    141,100
    
    
    
    4.82
 At March 31, 2005, advances totaling $107 million are callable prior to their scheduled
maturity of which $100 million are callable during fiscal 2006. The Bank is subject to a
substantial penalty in the event it elects to prepay any of its FHLB of Boston advances. The FHLB of Boston is authorized to make advances to its members subject to such regulations
and limitations as the Federal Home Loan Bank Board may prescribe. The advances are secured by FHLB
of Boston stock and a blanket lien on certain qualified collateral, defined principally as 90% of
the fair value of U.S. Government and federal agency obligations and 75% of the carrying value of
first mortgage loans on owner-occupied residential property. In addition, certain multi-family
property loans are pledged to secure FHLB advances. The Banks unused borrowing capacity with the
FHLB of Boston was approximately $32.7 million at March 31, 2005. Note 8. Income Taxes(Dollars in Thousands) The components of the provision for income taxes for the years indicated are as follows: Years Ended March 31,2005
    
    
    2004
    
    
    2003CurrentFederal
    
    $
    1,332
    
    
    $
    1,113
    
    
    $
    1,708State
    
    
    74
    
    
    
    (148
    )
    
    
    1,352Total current provision
    
    
    1,406
    
    
    
    965
    
    
    
    3,060Deferred (prepaid)
    
    
    (101
    )
    
    
    194
    
    
    
    (462
    )$
    1,305
    
    
    $
    1,159
    
    
    $
    2,598
 53




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 The provision for income taxes for the periods presented is different from the amounts
computed by applying the statutory Federal income tax rate to income before income taxes. The
differences between expected tax rates and effective tax rates are as follows: Years Ended March 31,2005
    
    
    2004
    
    
    2003Statutory Federal tax rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %Items affecting Federal income tax rate:Dividends received deduction
    
    
    (0.7
    )
    
    
    (0.4
    )
    
    
    (0.3
    )Stock buyback costs
    
    
    1.5
    
    
    
    
    
    
    
    State income taxes
    
    
    0.2
    
    
    
    3.3
    
    
    
    2.7Retroactive REIT legislation and settlement
    
    
    
    
    
    
    (9.1
    )
    
    
    16.1ESOP expense
    
    
    (0.5
    )
    
    
    
    
    
    
    1.5Other
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.3Effective tax rate
    
    
    34.6
    %
    
    
    28.3
    %
    
    
    54.3
    %
 During 2002, the Massachusetts Department of Revenue (DOR) issued notices of intent to
assess additional state excise taxes to numerous financial institutions in Massachusetts that had
formed a real estate investment trust (REIT) subsidiary. The DOR contended that dividends received
by the banks from such subsidiaries were fully taxable in Massachusetts. Subsequently, in March
2003, the Governor of Massachusetts signed legislation, expressly disallowing deductions for
dividends received from a REIT, resulting in such dividends being subject to state taxation. In
addition, this law applied retroactively to tax years ending on or after December 31, 1999. In
fiscal 2003, the Company provided additional state taxes, including interest, net of the related
federal tax benefit, of $835,000. 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 reduction of $374,000 in its
accrued tax liabilities, which increased net income by the same amount in fiscal 2004. 54




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 The components of gross deferred tax assets and gross deferred tax liabilities that have been
recognized as of March 31 are as follows: 2005
    
    
    2004Deferred tax assets:Allowance for loan losses
    
    $
    872
    
    
    $
    651Deferred loan origination fees
    
    
    21
    
    
    
    32Depreciation
    
    
    282
    
    
    
    277Post-employee retirement benefit
accrual
    
    
    247
    
    
    
    238Write-down of investments
    
    
    395
    
    
    
    500Unrealized loss on securities, net
    
    
    18
    
    
    
    Other
    
    
    101
    
    
    
    88Gross deferred tax asset
    
    
    1,936
    
    
    
    1,786Deferred tax liabilities:Unrealized gain on securities, net
    
    
    
    
    
    
    1,277Accrued dividend receivable
    
    
    34
    
    
    
    18Deferred loan origination costs
    
    
    263
    
    
    
    248Deferred income
    
    
    
    
    
    
    Gross deferred tax liability
    
    
    297
    
    
    
    1,543Net deferred tax asset
    
    $
    1,639
    
    
    $
    243
 Based on the Companys historical and current pre-tax earnings, management believes it is more
likely than not that the Company will realize the net deferred tax asset existing at March 31,
2005. Further, management believes the existing net deductible temporary differences will reverse
during periods in which the Company generates net taxable income. At March 31, 2005, recoverable
income taxes, plus estimated taxes for fiscal 2006, exceed the amount of the net deferred tax
asset. There can be no assurance, however, that the Company will generate any earnings or any
specific level of continuing earnings. The unrecaptured base year tax bad debt reserves will not be subject to recapture as long as
the Company continues to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continues to be subject to provision of present law that requires recapture in
the case of certain excess distributions to shareholders. The tax effect of pre-1988 bad debt
reserves subject to recapture in the case of certain excess distributions is approximately $1.3
million. Note 9. Financial Instruments with Off-Balance Sheet Risk(In Thousands) The Bank is 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 and construction 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. 55




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Financial instruments with off-balance sheet risks as of March 31, included the following: 2005
    
    
    2004Unused home equity and personal lines of credit
    
    $
    17,655
    
    
    $
    14,340Unadvanced portions of construction loans
    
    
    14,088
    
    
    
    6,391Unadvanced portions of commercial loans
    
    
    1,917
    
    
    
    5,917Commitments to originate commercial mortgage loans
    
    
    18,277
    
    
    
    16,387Commitments to originate residential mortgage loans
    
    
    8,557
    
    
    
    4,992Commitments to sell residential mortgage loans
    
    
    5,196
    
    
    
    5,603Total off-balance sheet commitments
    
    $
    65,690
    
    
    $
    53,630
 Commitments to originate loans, unused lines of credit and unadvanced portions of commercial
and construction 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. Note 10. Stockholders Equity(Dollars in Thousands, except per share amount) The Company and the Bank may not declare or pay cash dividends on their stock if the effect
thereof would cause capital to be reduced below regulatory requirements, or if such declaration and
payment would otherwise violate regulatory requirements. In October 1991, the Company adopted a Shareholder Rights Agreement (Rights Plan) entitling
each shareholder, other than an Acquiring Person or an Adverse Person as defined below, to purchase
the Companys stock at a discount price in the event any person or group of persons exceeded
predetermined ownership limitations of the Companys outstanding common stock (an Acquiring
Person) and, in certain circumstances, engaged in specific activities deemed adverse to the
interests of the Companys shareholders (an Adverse Person). The Rights Plan was due to expire in
October 2001, but was renewed by the Board of Directors during fiscal 2002 and is now scheduled to
expire in October 2011. Beginning in April 1999, the Board of Directors authorized a series of four separate 5% stock
repurchase programs under which the Company has acquired 442,428 shares of its stock at an average
cost of $21.95 per share. The latest repurchase program was completed on September 17, 2004 when
the Company and the ESOP each purchased 77,134 shares of the Companys common stock pursuant to the
terms of the Stock 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. The Bank is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. The minimum core (leverage) capital ratio required for banks with
the highest overall rating from bank regulatory agencies is 3.00% and is 4.00% to 5.00% for all
others. The Bank must also have a minimum total risk-based capital ratio of 8.00% (of which 4.00%
must be Tier I capital, consisting of common stockholders equity). As of March 31, 2005, the Bank
met all capital adequacy requirements to which it is subject. 56




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 The most recent notification from the FDIC categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum risk-weighted capital, Tier 1 capital and tangible capital ratios as set
forth in the table. There are no conditions or events, since that notification that management
believes would cause a change in the Banks categorization. No deduction was taken from capital for
interest-rate risk. Included in the Companys Tier 1 capital for March 31, 2005 are qualifying trust preferred
securities of $5.1 million. In March 2005, the Federal
Reserve Board published its final rule which permits the continued
inclusion of trust preferred securities as an element of Tier 1
capital for bank holding companies. Details of the new rule are
outlined in Footnote 1 herein. The Companys and the Banks Tier 1
leverage, Tier 1 risk-based and total risk-based capital ratios together with related regulatory
minimum requirements are summarized below: To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action provisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of March 31, 2005:Company (consolidated)Total capital
    
    $
    44,855
    
    
    
    12.12
    %
    
    $
    29,619
    
    
    
    38.00
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital
    
    
    41,162
    
    
    
    11.12
    
    
    
    14,810
    
    
    
    34.00
    
    
    
    N/A
    
    
    
    N/ATier 1 leverage capital
    
    
    41,162
    
    
    
    8.04
    
    
    
    20,477
    
    
    
    34.00
    
    
    
    N/A
    
    
    
    N/ABankTotal capital
    
    
    41,451
    
    
    
    11.19
    
    
    
    29,631
    
    
    
    38.00
    %
    
    $
    37,038
    
    
    
    310.00
    %Tier 1 capital
    
    
    37,758
    
    
    
    10.19
    
    
    
    14,815
    
    
    
    34.00
    
    
    
    22,223
    
    
    
    3  6.00Tier 1 leverage capital
    
    
    37,758
    
    
    
    7.38
    
    
    
    20,455
    
    
    
    34.00
    
    
    
    25,569
    
    
    
    3  5.00As of March 31, 2004:Company (consolidated)Total capital
    
    $
    42,613
    
    
    
    12.14
    %
    
    $
    28,070
    
    
    
    38.00
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital
    
    
    38,929
    
    
    
    11.09
    
    
    
    14,035
    
    
    
    34.00
    
    
    
    N/A
    
    
    
    N/ATier 1 leverage capital
    
    
    38,929
    
    
    
    8.13
    
    
    
    19,153
    
    
    
    34.00
    
    
    
    N/A
    
    
    
    N/ABankTotal capital
    
    
    41,376
    
    
    
    11.80
    
    
    
    28,060
    
    
    
    38.00
    
    
    $
    35,074
    
    
    
    310.00
    %Tier 1 capital
    
    
    37,692
    
    
    
    10.75
    
    
    
    14,030
    
    
    
    34.00
    
    
    
    21,044
    
    
    
    3  6.00Tier 1 leverage capital
    
    
    37,692
    
    
    
    7.92
    
    
    
    19,027
    
    
    
    34.00
    
    
    
    23,783
    
    
    
    3  5.00
 57




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Note 11. Employee Benefits(Dollars in Thousands, Except Per Share Data) Pension and Savings Plans As a participating employer in the Cooperative Banks Employees Retirement Association
(CBERA), a multi-employer plan, the Bank has a noncontributory defined benefit plan (Pension
Plan) and a defined contribution plan (Savings Plan) covering substantially all eligible
employees. Benefits under the Pension Plan are determined at the rate of 1% and 1.5%, respectively, of
certain elements of final average pay times years of credited service and are generally provided at
age 65 based on years of service and the average of the participants three highest consecutive
years of compensation from the Bank. Employee contributions are made to a Savings Plan which
qualifies under section 401(k) of the Internal Revenue Code of 1986, as amended. The Bank matches
50% of an eligible deferral contribution on the first 5% of the deferral amount subject to the
maximum allowable under federal regulations. Pension benefits and employer contributions to the
Savings Plan become vested over six years. Expenses for the Pension Plan and the Savings Plan were $441,000, $449,000 and $319,000, for
the years ended March 31, 2005, 2004 and 2003, respectively. Forfeitures are used to reduce
expenses of the plans. Other Post-Retirement Benefits The Bank maintains a post-retirement medical insurance plan and life insurance plan for
certain individuals. The following tables summarize the funded status and the actuarial benefit
obligations of these plans for fiscal 2005 and 2004. 2005
    
    
    2004Life
    
    
    Medical
    
    
    Life
    
    
    MedicalActuarial present value of benefits obligation:Retirees
    
    $
    (254
    )
    
    $
    (373
    )
    
    $
    (244
    )
    
    $
    (377
    )Fully eligible participants
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (67
    )Total
    
    
    (254
    )
    
    
    (373
    )
    
    $
    (260
    )
    
    $
    (444
    )Change in projected benefit obligation:Accumulated benefit obligations at prior year-end
    
    $
    (260
    )
    
    $
    (444
    )
    
    $
    (243
    )
    
    $
    (414
    )Service cost less expense component
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest cost
    
    
    (14
    )
    
    
    (22
    )
    
    
    (16
    )
    
    
    (27
    )Actuarial gain (loss)
    
    
    15
    
    
    
    61
    
    
    
    (1
    )
    
    
    (27
    )Assumptions
    
    
    (5
    )
    
    
    (5
    )
    
    
    (10
    )
    
    
    (15
    )Benefits paid
    
    
    10
    
    
    
    37
    
    
    
    10
    
    
    
    39Accumulated benefit obligations at year-end
    
    
    (254
    )
    
    
    (373
    )
    
    $
    (260
    )
    
    $
    (444
    )Change in plan assets:Fair value of plan assets at prior year-end
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employer contribution
    
    
    10
    
    
    
    37
    
    
    
    10
    
    
    
    39Benefits paid and expenses
    
    
    (10
    )
    
    
    (37
    )
    
    
    (10
    )
    
    
    (39
    )Fair value of plan assets at current year-end
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    Funded
    
    
    (254
    )
    
    
    (373
    )
    
    $
    (260
    )
    
    $
    (444
    )Unrecognized net obligation
    
    
    69
    
    
    
    199
    
    
    
    77
    
    
    
    223Unrecognized prior year service
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrecognized net loss (gain)
    
    
    (65
    )
    
    
    (169
    )
    
    
    (57
    )
    
    
    (127
    )$
    (250
    )
    
    
    (343
    )
    
    $
    (240
    )
    
    $
    (348
    )
 58




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 2005
    
    
    2004Life
    
    
    Medical
    
    
    Life
    
    
    MedicalReconciliation of (accrual) prepaid:(Accrued) pension cost at beginning
of year
    
    
    (240
    )
    
    
    (348
    )
    
    $
    (229
    )
    
    $
    (346
    )Minus net periodic cost
    
    
    (20
    )
    
    
    (32
    )
    
    
    (21
    )
    
    
    (41
    )Plus employer contributions, net
    
    
    10
    
    
    
    37
    
    
    
    10
    
    
    
    39(Accrued) cost at end of year
    
    
    (250
    )
    
    
    (343
    )
    
    $
    (240
    )
    
    $
    (348
    )Benefit obligation weighted average assumption as
of fiscal year-end:Discount rate
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    6.00
    %
    
    
    6.00
    %Expected return on plan assets
    
    
    5.75
    
    
    
    5.75
    
    
    
    6.00
    
    
    
    6.00Rate of compensation increase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 1 Percentage Point Increase2005
    

    
    2004Life
    
    Medical
    
    Life
    
    MedicalImpact of 1% change in health care trend rates:Effect on total service and interest cost components
    

    $
    N/A
    
    
    $
    1
    
    
    $
    N/A
    
    
    $
    (2
    )Effect on the post retirement benefit obligations
    
    
    N/A
    
    
    
    23
    
    
    
    N/A
    
    
    
    29Components of net periodic benefit cost:Service cost
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    15
    
    
    
    22
    
    
    
    16
    
    
    
    27Expected return on plan assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    8
    
    
    
    24
    
    
    
    8
    
    
    
    25Recognized actuarial (gain) loss
    
    
    (3
    )
    
    
    (14
    )
    
    
    (3
    )
    
    
    (11
    )Net periodic benefit cost
    
    $
    20
    
    
    $
    32
    
    
    $
    21
    
    
    $
    41Periodic benefit cost weighted average assumptions:Discount rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.50
    %
    
    
    6.50
    %Expected return on plan assets
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.50
    %
    
    
    6.50
    %Rate of compensation increase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 For measurement purposes, an 11.0% annual rate of increase in the per capita cost of covered
health care benefits was assumed for the fiscal year ended March 31, 2005. The rate was assumed to
decrease gradually to 5.5% for the fiscal year ending March 31, 2007 and remain at that level
thereafter. These post-retirement benefits are not funded but are paid out of current operating expenses.
The expected benefit payout for the life insurance portion is anticipated to be $25,000 for each
fiscal year of 2006 through 2010 and approximately $114,000 on a combined basis for the fiscal
years 2011 through 2015. The expected medical benefit payout is anticipated to be $40,000,
$40,000, $39,000, $37,000 and $36,000 for the fiscal years 2006 through 2010 and approximately
$157,000 on a combined basis for the fiscal years 2011 through 2015. These expected benefits to be
paid are based on the same assumptions used to measure the Companys benefit obligation at March
31, 2005. 59




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Employee Stock Ownership Plan The Bank maintains an Employee Stock Ownership Plan (ESOP) that is authorized to purchase
shares of outstanding common stock of the Company from time to time in the open market or in
negotiated transactions. The ESOP is a tax-qualified defined contribution plan established for the
exclusive benefit of the Banks employees. All full-time employees who have completed one year of
service with the Bank are eligible to participate in the ESOP. During fiscal 2002, the Companys Board of Directors authorized a loan to the ESOP to acquire
up to an additional 5% of outstanding shares of Company stock. During fiscal 2003, loans to
purchase up to an additional $3,200,000 in shares for the ESOP were authorized by the Company. At
March 31, 2004, $1,942,000 remained available under this authorization. During fiscal 2003 and
2002, 114,864 and 7,222 shares, respectively, were purchased at a purchase price of $3,595,000 and
$199,000, respectively. Through October 2003, the ESOP repaid its loans to the Company with funds from the Banks
contributions to the ESOP along with dividends on unallocated ESOP shares. These loans had terms
of up to 20 years. In October 2003, the ESOP refinanced these loans from the Company with a third
party lender. In connection with this refinancing, the Company received proceeds of $3,506,000, of
which $2,250,000 was contributed to the Banks capital. The loan bears interest at the prevailing
prime rate plus 1/2% and matures in March 2012. Principal payments of $97,000 are to be made each
quarter. The loan is collateralized by the ESOPs unallocated Company stock, a certificate of
deposit of $600,000 and a pledge of the Companys stock in the Bank. In addition, the Company
guarantees repayment of the loan. The Company entered into a settlement agreement with certain shareholders in September 2004.
Pursuant to the terms of the Stock 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, the Company and ESOP completed the purchase of 77,134 shares of the Companys
common stock. The ESOP financed this purchase with a loan from the Company in the amount of
$2,565,000. The term of the loan is 20 years and calls for quarterly payments of principal and
interest of $51,000. Compensation expense is recognized as the shares are allocated to participants based upon the
fair value of the shares at the time they are allocated. As a result, changes in the market value
of the Companys stock have an effect on the Companys results of operations but have no effect on
stockholders equity. ESOP expense for fiscal 2005, 2004 and 2003 amounted to $455,000, $332,000
and $429,000, respectively. Stock Option Plan The Company has adopted two qualified Stock Option Plans for the benefit of officers and other
employees under which an aggregate of 281,500 shares had been reserved for issuance. One of these
plans terminated in 1997 and the other plan terminated in 2005. Stock option activity is as follows for the years indicated: Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceBalance March 31, 2002
    
    
    59,613
    
    
    $
    18.448Exercised
    
    
    (28,139
    )
    
    
    18.308Balance March 31, 2003
    
    
    31,474
    
    
    
    18.572Exercised
    
    
    (2,524
    )
    
    
    18.469Balance March 31, 2004
    
    
    28,950
    
    
    
    18.581Exercised
    
    
    (775
    )
    
    
    19.796Granted
    
    
    33,299
    
    
    
    28.990Balance March 31, 2005
    
    
    61,474
    
    
    
    24.204
 60




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##### Table of Contents



CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 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 March 31, 2005, no shares remained unissued under the Stock Option
Plans. All stock options are fully vested and exercisable at the time of grant. The range of exercise
prices and weighted average remaining contractual lives of outstanding stock options at March 31,
2005 are as follows: Exercise
    
    Number
    
    RemainingPrice
    
    Outstanding
    
    Life$

16.625
    
    13,228
    
    5.7 years20.250
    
    14,947
    
    4.7 years28.990
    
    33,299
    
    10.0 years
 Note 12. Legal Proceedings(In Thousands) The Bank from time to time is involved as plaintiff or defendant in various legal actions
incident to its business. Except as described herein, none of these actions are believed to be
material, either individually or collectively, to the results of operations and financial condition
of the Company or any subsidiary. The Company and certain present and former directors had been named in related federal and
state court lawsuits brought by PL Capital, LLC and affiliates (PL Capital) and also by Lawrence
B. Seidman and affiliates (Seidman), respectively, current and former stockholders, in which PL
Capital and Seidman had challenged the directors determination that PL Capital and Seidman
secretly acted in concert in violation of the Companys Rights Plan. On August 4, 2003, the
Company and the directors, former directors and affiliated entities that were parties to the
litigation entered into an Agreement (the Agreement) with PL Capital, LLC and its affiliated
persons and entities, pursuant to which all the parties settled all of the pending litigation
between them and filed with the appropriate courts the filings necessary for the litigation to be
dismissed. As part of the Agreement, a payment of $400,000, which was reimbursed by insurance, was
made to PL Capital. The Company had been working with its insurance carrier to recover its legal defense costs,
including the settlement payment noted in the preceding paragraph, incurred in connection with the
PL Capital and Seidman litigation. In connection therewith, the Company received insurance
recoveries of $3.1 million during the year ended March 31, 2004. These recoveries have been
classified with professional fees in the accompanying consolidated statements of income. Note 13. Fair Values of Financial Instruments(In Thousands) Fair value estimates are based on existing on- and off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Significant assets and liabilities that
are not considered financial assets or liabilities include the intangible value inherent in deposit
relationships (i.e.,core deposits) and banking premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can have a significant
effect on fair values and have not been considered in any of the estimates. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of the Bank. The following methods and assumptions were used by the Bank in estimating fair values of its
financial instruments: 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. 61




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Short-term Investments and Certificate of Deposit The carrying values reported in the balance sheet for short-term investments and the
certificate of deposit approximate fair value because of the short maturity of these investments. Investment Securities The fair values presented for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on quoted market prices
of comparable instruments. Loans and Loans Held for Sale The fair values of loans are estimated using discounted cash flow analysis, using interest
rates currently being offered for loans with similar terms 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 value of loans held for sale is determined based on the market
interest rates as of March 31. Accrued Interest Receivable The carrying value reported in the balance sheet for accrued interest receivable approximates
its fair value because of the short maturity of these accounts. Stock in FHLB of Boston The carrying amount reported in the balance sheet for FHLB stock approximates its fair value.
If redeemed, the Bank will receive an amount equal to the par value 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 FHLB of Boston Fair values of non-callable advances from the FHLB of Boston are estimated based on the
discounted cash flow of scheduled future payments using the respective year-end published rates for
advances with similar terms and remaining maturities. Fair values of callable advances from the
FHLB of Boston are estimated using the prepayment fee payable to the FHLB of Boston assuming all
such advances were prepaid on the reporting date. ESOP Loan and Subordinated Debenture The carrying values reported in the balance sheet for the ESOP Loan and the Subordinated
Debenture approximate their fair value because of the short interest rate adjustment period for
these accounts. 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. 62




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Off-Balance Sheet Instruments The Banks commitments for unused lines of credit and unadvanced portions of loans are at
floating rates, which approximate current market rates, and, therefore, no fair value adjustment
has been made. Commitments
to Extend Credit and Standby Letters of Credit The
fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the differences between current levels of
interest rates and the committed rates. The fair value of financial
standby letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties. Assumptions Fair
value estimates are made at a specific point in time, based on
relevant market information and information about specific financial
instruments. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Banks
entire holdings of a particular financial instrument. Because no
active observable market exists for a significant portion of the
Banks financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments,
and other factors. Those estimates are subjective in nature and
involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates. The estimated carrying amounts and fair values of the Banks financial instruments are as
follows: March 31, 2005
    
    
    March 31, 2004Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssetsCash and due from banks
    
    $
    6,158
    
    
    $
    6,158
    
    
    $
    7,113
    
    
    $
    7,113Short-term investments
    
    
    225
    
    
    
    225
    
    
    
    27,224
    
    
    
    27,224Certificate of deposit
    
    
    606
    
    
    
    606
    
    
    
    1,211
    
    
    
    1,211Investment available for sale
    
    
    108,616
    
    
    
    108,616
    
    
    
    83,771
    
    
    
    83,771Loans held for sale
    
    
    2,221
    
    
    
    2,213
    
    
    
    799
    
    
    
    810Net loans
    
    
    382,701
    
    
    
    385,491
    
    
    
    353,088
    
    
    
    358,753Stock in Federal Home Loan Bank of Boston, at cost
    
    
    8,300
    
    
    
    8,300
    
    
    
    8,300
    
    
    
    8,300The Co-operative Central Bank Reserve Fund
    
    
    1,576
    
    
    
    1,576
    
    
    
    1,576
    
    
    
    1,576Accrued interest receivable
    
    
    2,444
    
    
    
    2,444
    
    
    
    2,203
    
    
    
    2,203LiabilitiesDeposits
    
    $
    333,215
    
    
    $
    315,484
    
    
    $
    295,920
    
    
    $
    297,345Short-term borrowings
    
    
    141
    
    
    
    141
    
    
    
    845
    
    
    
    845Advances from FHLB of Boston
    
    
    138,135
    
    
    
    141,507
    
    
    
    141,100
    
    
    
    152,422ESOP loan
    
    
    2,921
    
    
    
    2,921
    
    
    
    3,311
    
    
    
    3,311Subordinated debenture
    
    
    5,258
    
    
    
    5,258
    
    
    
    
    
    
    
    Advance payments by borrowers for taxes and insurance
    
    
    1,168
    
    
    
    1,168
    
    
    
    1,182
    
    
    
    1,182Accrued interest payable
    
    
    595
    
    
    
    595
    
    
    
    647
    
    
    
    647
 63




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Note 14. Parent Company Only Condensed Financial Statements(In Thousands) The following are the condensed financial statements for Central Bancorp, Inc. (the Parent
Company) only: March 31,Balance Sheets
    
    2005
    
    
    2004AssetsCash deposit in subsidiary bank
    
    $
    220
    
    
    $
    107Certificate of deposit (Note 11)
    
    
    606
    
    
    
    1,211Investment in subsidiary
    
    
    39,935
    
    
    
    42,217ESOP loan (Note 11)
    
    
    2,531
    
    
    
    Investment in unconsolidated subsidiary
    
    
    162
    
    
    
    Other assets
    
    
    86
    
    
    
    Total assets
    
    $
    43,540
    
    
    $
    43,535Liabilities and Stockholders EquitySubordinated debentures (Note 1)
    
    $
    5,258
    
    
    $
    Accrued taxes and other liabilities
    
    
    43
    
    
    
    81Total stockholders equity
    
    
    38,239
    
    
    
    43,454Total liabilities and stockholders equity
    
    $
    43,540
    
    
    $
    43,535
 Years Ended March 31,Statements of Income
    
    2005
    
    
    2004
    
    
    2003Dividends from subsidiary
    
    $
    800
    
    
    $
    1,000
    
    
    $
    2,437Interest income
    
    
    87
    
    
    
    98
    
    
    
    92Interest expense on subordinated debentures
    
    
    (135
    )
    
    
    
    
    
    
    Non-interest income (expenses) (Note 12)
    
    
    (529
    )
    
    
    87
    
    
    
    (2,006
    )Income before income taxes
    
    
    223
    
    
    
    1,185
    
    
    
    523Income tax benefit (provision)
    
    
    98
    
    
    
    (63
    )
    
    
    650Income before equity in undistributed net income of subsidiary
    
    
    321
    
    
    
    1,122
    
    
    
    1,173Equity in undistributed net income of subsidiary
    
    
    2,142
    
    
    
    1,814
    
    
    
    1,014Net income
    
    $
    2,463
    
    
    $
    2,936
    
    
    $
    2,187
 64




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CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2005 Years Ended March 31,Statements of Cash Flows
    
    2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    2,463
    
    
    $
    2,936
    
    
    $
    2,187Adjustments to reconcile net income to net cash provided by operating
activities:Equity in undistributed net income of subsidiary
    
    
    (2,142
    )
    
    
    (1,814
    )
    
    
    (1,014
    )Decrease (increase) in other assets
    
    
    (96
    )
    
    
    394
    
    
    
    (394
    )Increase (decrease) in accrued taxes and other liabilities
    
    
    (38
    )
    
    
    (949
    )
    
    
    1,030Net cash provided by operating activities
    
    
    187
    
    
    
    567
    
    
    
    1,809Cash flows from investing activities:ESOP loans, net of repayment
    
    
    (2,531
    )
    
    
    3,660
    
    
    
    (3,461
    )(Purchase) redemption of certificate of deposit
    
    
    605
    
    
    
    (1,200
    )
    
    
    Investment in subsidiary
    
    
    
    
    
    
    (2,366
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (1,926
    )
    
    
    94
    
    
    
    (3,461
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    20
    
    
    
    47
    
    
    
    516Proceeds from issuance of subordinated debenture
    
    
    5,100
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    (2,565
    )
    
    
    
    
    
    
    Cash dividends paid, net
    
    
    (712
    )
    
    
    (682
    )
    
    
    (727
    )Other, net
    
    
    9
    
    
    
    (12
    )
    
    
    (14
    )Net cash provided by (used in) financing activities
    
    
    1,852
    
    
    
    (647
    )
    
    
    (225
    )Net increase (decrease) in cash in subsidiary bank
    
    
    113
    
    
    
    14
    
    
    
    (1,877
    )Cash in subsidiary bank at beginning of year
    
    
    107
    
    
    
    93
    
    
    
    1,970Cash in subsidiary bank at end of year
    
    $
    220
    
    
    $
    107
    
    
    $
    93
 65




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[LETTERHEAD OF VITALE, CATURANO & COMPANY, Ltd.] 
 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of
Central Bancorp, Inc.: We have audited the
consolidated balance sheets of Central Bancorp, Inc. and subsidiary (the
Company) as of March 31, 2005 and 2004 and the related consolidated statements of income, changes
in stockholders equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Central Bancorp, Inc. and subsidiary as of March 31,
2005 and 2004 and the results of their operations and their cash flows for the two years then
ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Vitale, Caturano & Company, Ltd VITALE, CATURANO & COMPANY, Ltd Boston, Massachusetts
May 3, 2005 66




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[Letterhead of KPMG LLP] Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Central Bancorp, Inc. We have audited the accompanying consolidated balance sheet of Central Bancorp, Inc. and
subsidiary (the Company) as of March 31, 2003 and the related consolidated statements of
income, changes in stockholders equity and cash flows for the year ended March 31, 2003.
These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Central Bancorp, Inc. and subsidiary as of March 31,
2003, and the results of their operations and their cash flows for the year ended March 31, 2003,
in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the Consolidated Financial Statements, effective April 1, 2002, the
Company adopted Statements of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. KPMG LLP Boston, Massachusetts
April 25, 2003, except as to the fourth paragraph
Of Note 8, which is as of June 23, 2003 67




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##### Table of Contents



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure KPMG LLP served as the Companys independent auditors for the 2003 fiscal year. On November
17, 2003, KPMG LLPs appointment as principal accountants was terminated and the Company engaged
Vitale, Caturano & Company, Ltd. (Vitale) as its principal accountants. The engagement of Vitale
was approved by the Audit Committee of the Companys Board of Directors. A representative of
Vitale is expected to be present at the Annual Meeting to respond to stockholders questions and
will have the opportunity to make a statement if he or she so desires. KPMG LLP served as the Companys independent auditors to audit the Companys consolidated
financial statements as of and for the fiscal year ended March 31, 2003. KPMG LLPs report on the
Companys consolidated financial statements as of and for the fiscal years ended March 31, 2003 did
not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. During the fiscal year ended March 31, 2003, and the subsequent interim period from April 1,
2003 through November 17, 2003, there were no disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused KPMG LLP to
make reference to the subject matter of the disagreements in their report on the financial
statements for such years. 
 Item 9A. 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. It should be noted that the design of the Companys disclosure controls and procedures
is based in part upon certain reasonable assumptions about the likelihood of future events, and
there can be no reasonable assurance that any design of disclosure controls and procedures will
succeed in achieving its stated goals under all potential future conditions, regardless of how
remote. The Companys principal executive and financial officers have concluded that the Companys
disclosure controls and procedures are, in fact, effective at a reasonable assurance level. 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. 
 Item 9B. Other Information Not applicable. 68




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant The information contained under the sections captioned Proposal I  Election of Directors
and Section 16(a) Beneficial Ownership Reporting Compliance in the Companys definitive proxy
statement for the Companys 2004 Annual Meeting of Stockholders (the Proxy Statement) is
incorporated herein by reference. The Company has adopted a Code of Ethics that applies to the Companys officers, directors and
employees. 
 Item 11. Executive Compensation The information required by this item is incorporated herein by reference to the section
titled Executive Compensation and Other Benefits in the Proxy Statement. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters  (a)
    
    Security Ownership of Certain Beneficial OwnersThe information required by this item is incorporated herein by reference to the
section captioned Principal Holders of Voting Securities in the Proxy Statement.(b)
    
    Security Ownership of ManagementThe information required by this item is incorporated herein by reference to the
section captioned Proposal I  Election of Directors  Security Ownership of
Management in the Proxy Statement.(c)
    
    Changes in ControlManagement of the Company knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.(d)
    
    Equity Compensation PlansThe Company has adopted the 1999 Stock Option and Incentive Plan pursuant to which
equity may be awarded to participants. This plan has been approved by stockholders. 69




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##### Table of Contents



The following table sets forth certain information with respect to the Companys equity
compensation plan as of March 31, 2005. (a)
    
    
    (b)
    
    
    (c)Number of securities remainingavailable for future issuanceNumber of securities to be issued
    
    
    Weighted-average exercise
    
    
    under equity compensationupon exercise of outstanding
    
    
    price of outstanding
    
    
    plan (excluding securitiesPlan Category
    
    options, warrants and rights
    
    
    options, warrants and rights
    
    
    reflected in column (a))Equity compensation plans
approved by security holders
    
    
    33,299
    
    
    $
    28.990
    
    
    
    -0-Equity compensation plans not
approved by security holdersTotal (1)
    
    
    33,299
    
    
    $
    28.990
    
    
    
    -0-
 
 (1)
    
    The 1999 Stock Option and Incentive Plan provides for a proportionate adjustment to the
number of shares reserved thereunder in the event of a stock split, stock dividend,
reclassification or similar event. 
 Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to the section
titled Certain Transactions in the Proxy Statement. 
 Item 14. Principal Accountant Fees and Services The information required by this item is incorporated herein by reference to the section
captioned Independent Auditors in the Proxy Statement. 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules  (a)
    
    The following documents are filed as part of this Annual Report on Form 10-K.  (1)
    
    Financial StatementsFor the Financial Statements filed as part of this Annual Report on Form 10-K,
reference is made to Item 8  Financial Statements and Supplementary Data.(2)
    
    Financial Statement SchedulesAll financial statement schedules have been omitted as not applicable or not
required or because they are included in the financial statements appearing at Item
8.(3)
    
    ExhibitsThe exhibits required by Item 601 of Regulation S-K are either filed as part of this
Annual Report on Form 10-K or incorporated by reference herein. 70




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##### Table of Contents



(b)
    
    ExhibitsThe following exhibits are filed as exhibits to this report. Exhibit No.
    
    Description3.1*
    
    Articles of Organization of Central Bancorp, Inc.3.2**
    
    Amended Bylaws of Central Bancorp, Inc.4.1**
    
    Shareholder Rights Agreement, dated as of October 11, 2001, by and between
Central Bancorp, Inc. and Registrar and Transfer Company, as Rights Agent, as amended
and restated as of January 29, 2003, and as amended on February 11, 2003, May 22,
2003, July 24, 2003 and August 4, 200310.1*
    
    Employment Agreement between the Bank and John D. Doherty, dated October
24, 1986 10.2*
    
    First Amendment to Employment Agreement between the Bank and John D.
Doherty, dated March 31, 1992 10.3*
    
    Second Amendment to Employment Agreement between the Bank and John D.
Doherty, dated June 8, 1995 10.4*
    
    Third Amendment to the Employment Agreement between the Bank and John D.
Doherty, dated January 8, 1999 10.5*
    
    Severance Agreement between the Bank and William P. Morrissey, dated
December 14, 1994 10.6*
    
    Severance Agreement between the Bank and David W. Kearn, dated December
14, 1994 10.7*
    
    Severance Agreement between the Bank and Paul S. Feeley, dated May 14,
1998 10.8*
    
    Amendments to Severance Agreements between the Bank and Messrs. Feeley,
Kearn and Morrissey, dated January 8, 1999 10.09***
    
    1999 Stock Option and Incentive Plan 10.10****
    
    Deferred Compensation Plan for Non-Employee Directors 10.11**
    
    Senior Management Incentive Plan, as amended 10.12
    
    Intentionally omitted10.13
    
    Severance Agreement between the Bank and Bryan E. Greenbaum, dated March
17, 2005.10.14*****
    
    Stock Purchase Agreement dated September 13, 2004, between the Company and the
Central Co-operative Bank Employee Stock Ownership Trust, on the one hand, 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 on the other hand on behalf of themselves and their respective
affiliates14******
    
    Code of Ethics21
    
    Subsidiaries of Registrant23.1
    
    Consent of Vitale, Caturano &
Company, Ltd.23.2
    
    Consent of KPMG LLP31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32
    
    Section 1350 Certifications
 
 
    
    Management contract or compensatory plan.*
    
    Incorporated by reference to the Form 10-K for the fiscal year ended March 31, 1999 (File No.
0-25251), filed with the SEC on June 28, 1999.**
    
    Incorporated by reference to the Form 10-K for the fiscal year ended March 31, 2004 (File No.
0-25251), filed with the SEC on June 28, 2004.***
    
    Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-87005)
filed on September 13, 1999.****
    
    Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-49264)
filed on November 3, 2000.*****
    
    Incorporated by reference to the Current Report on Form 8-K (File No. 0-25251) filed with
the SEC on September 14, 2004.******
    
    Incorporated by reference to the Current Report on Form 8-K (File No. 0-25251) filed with
the SEC on April 13, 2004. 71




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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.Date: June 28, 2005
    
    By:
    
    /s/ John D. DohertyJohn D. DohertyChairman, President and Chief Executive Officer(Duly Authorized Representative)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. By:
    
    /s/ John D. Doherty
    
    
    
    Date: June 28, 2005John D. DohertyChairman, President and Chief Executive OfficerBy:
    
    /s/ Paul S. Feeley
    
    
    
    Date: June 28, 2005Paul S. FeeleySenior Vice President, Treasurerand Chief Financial Officer(Principal Financial and Accounting Officer)By:
    
    /s/ Gregory W. Boulos
    
    
    
    Date: June 28, 2005Gregory W. BoulosDirectorBy:
    
    /s/ Paul E. Bulman
    
    
    
    Date: June 28, 2005Paul E. BulmanDirectorBy:
    
    /s/ Joseph R. Doherty
    
    
    
    Date: June 28, 2005Joseph R. DohertyDirectorBy:
    
    /s/ James F. Linnehan
    
    
    
    Date: June 28, 2005James F. LinnehanDirectorBy:
    
    /s/ Albert J. Mercuri, Jr.
    
    
    
    Date: June 28, 2005Albert J. Mercuri, Jr.DirectorBy:
    
    /s/ John J. Morrissey
    
    
    
    Date: June 28, 2005John J. MorrisseyDirectorBy:
    
    /s/ Edward F. Sweeney, Jr.
    
    
    
    Date: June 28, 2005Edward F. Sweeney, Jr.Director
 72