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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 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, 2006****OR**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****Forthe transition period from                     to                     ****Commission file number 0-25251****CENTRAL BANCORP, INC.**(Exact name of registrant as specified in its charter)   **Massachusetts** **04-3447594**(State or other jurisdiction of (I.R.S. Employerincorporation or organization) 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**(Title of Class)**Stock Purchase Rights**(Title of Class)Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule405 of the Securities Act. YES o NO þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or15(d) of the Act. YES o NO þIndicate by check mark whether the registrant (l) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes þ No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-Kor any amendment of this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):Large Accelerated Filer o          Accelerated Filer o          Non-accelerated Filer þIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). YES o NO þAs of September 30, 2005, the aggregate market value of voting stock held by nonaffiliates of theregistrant was approximately $22.2 million based on the closing sale price of the registrant’sCommon Stock as listed on the Nasdaq National MarketSM as of September 30, 2005 ($27.55per share). Solely for purposes of this calculation, directors, executive officers and greater than5% stockholders are treated as affiliates.At June 22, 2006, the registrant had 1,590,951 shares of its Common Stock, $1.00 par value,outstanding.**DOCUMENTS INCORPORATED BY REFERENCE**     Portions of the Proxy Statement for the 2006 Annual Meeting of Stockholders (the “ProxyStatement”) are incorporated by reference in Part III of this Form 10-K.  
 

 
**CENTRAL BANCORP, INC.****ANNUAL REPORT ON FORM 10-K****TABLE OF CONTENTS**           Page  **PART I**           Item 1. Business  1 Item 1A. Risk Factors  20 Item 1B. Unresolved Staff Comments  24 Item 2. Properties  24 Item 3. Legal Proceedings  26 Item 4. Submission of Matters to a Vote of Security Holders  26          **PART II**           Item 5. Market for the Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities  26 Item 6. Selected Financial Data  27 Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations  29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk  39 Item 8. Financial Statements and Supplementary Data  40 Item 9. Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure  72 Item 9A. Controls and Procedures  72 Item 9B. Other Information  72          **PART III**           Item 10. Directors and Executive Officers of the Registrant  73 Item 11. Executive Compensation  73 Item 12. Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters  73 Item 13. Certain Relationships and Related Transactions  74 Item 14. Principal Accountant Fees and Services  74          **PART IV**           Item 15. Exhibits and Financial Statement Schedules  74        SIGNATURES    76  EX-21 SUBSIDIARIES OF THE COMPANY EX-23.1 CONSENT OF VITALE, CATURANO & CO, LTD. EX-31.1 SECTION 302 CERTIFICATION OF CEO EX-31.2 SECTION 302 CERTIFICATION OF CFO EX-32 SECTION 906 CERTIFICATION OF CEO & CFO
 

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**PART I*****Note on Forward-Looking Statements***     ***When used in this Annual Report on******Form 10-K******, the words or phrases “will likely result,” “areexpected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions areintended to identify “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any suchforward-looking statements, which speak only as of the date made, and advises readers that variousfactors, including changes in regional and national economic conditions, changes in localdemographics, unfavorable judicial decisions, substantial changes in levels of market interestrates, technological innovations, credit and other risks of lending and investment activities andcompetitive and regulatory factors, could affect the Company’s financial performance and couldcause the Company’s actual results for future periods to differ materially from those anticipatedor projected.***     ***The Company does not undertake and specifically disclaims any obligation to update anyforward-looking statements to reflect the occurrence of anticipated or unanticipated events orcircumstances after the date of such statements.*****Item 1. Business****General**     ***The Company.***Central Bancorp, Inc. (the “Company”), a Massachusetts corporation, was organizedby Central Co-operative Bank (“Central” or the “Bank”) on September 30, 1998, to acquire all of thecapital 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, theCompany’s common stock, par value $1.00 per share (the “Common Stock”), became registered under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is a registered bankholding company subject to regulation and examination by the Board of Governors of the FederalReserve System (the “Federal Reserve Board”). The Company has no significant assets other than aloan to the Employee Stock Ownership Plan (“ESOP”) and subordinated debentures as well as commonstock of the Bank and various other liquid assets in which it invests in the ordinary course ofbusiness. For that reason, substantially all of the discussion in this Annual Report on Form 10-Krelates to the operations of the Bank and its subsidiaries.     ***The Bank.***Central Co-operative Bank was organized as a Massachusetts chartered co-operativebank in 1915 and converted from mutual to stock form in 1986. The primary business of the Bank isto generate funds in the form of deposits and use the funds to make mortgage loans for theconstruction, purchase and refinancing of residential properties, and to make loans on commercialreal estate in its market area. In addition, the Bank makes a limited amount of consumer loansincluding secured and unsecured personal loans, and commercial and industrial loans. The Bank sellssome of its residential mortgage loan production in the secondary mortgage market. The Bank alsomaintains an investment portfolio of various types of debt securities, including corporate bondsand mortgage-backed securities, and a limited amount of equity securities. The Bank also offersinvestment services (including annuities) to its customers through a third party broker-dealer andits insurance affiliate.     The Bank is headquartered in Somerville, Massachusetts and its operations are conductedthrough nine full-service office facilities located in Somerville, Arlington, Burlington, ChestnutHill, Malden, Medford, Melrose and Woburn, Massachusetts, a limited service high school branch inWoburn, Massachusetts, and a stand alone 24-hour automated teller machine (“ATM”) in Somerville aswell as over the Internet. Each full-service branch office also has a 24-hour ATM. The Bank is amember of the Federal Home Loan Bank (“FHLB”) of Boston and its deposits are insured to applicablelimits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”).     All Massachusetts chartered co-operative banks are required to be members of the ShareInsurance Fund. The Share Insurance Fund maintains a deposit insurance fund which insures alldeposits in member banks which are not covered by federal insurance. In past years, a premium of1/24 of 1% of insured deposits has been assessed annually on member banks such as the Bank for thisdeposit insurance. However, no premium has been assessed in recent years.
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     The Main offices of the Company and Bank are located at 399 Highland Avenue, Somerville,Massachusetts 02144 and their telephone number is (617) 628-4000. The Bank also maintains awebsite at *www.centralbk.com*.     The operations of the Bank are generally influenced by overall economic conditions, therelated monetary and fiscal policies of the federal government and the regulatory policies offinancial 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 itsprincipal market area for deposits. The majority of the properties securing the Bank’s loans arelocated in Middlesex County. The Bank’s market area consists of established suburban areas andincludes portions of the Route 128 high-technology corridor.**Competition**     The Bank’s competition for savings deposits has historically come from other co-operativebanks, savings banks, credit unions, savings and loan associations and commercial banks located inMassachusetts generally, and in the Boston metropolitan area, specifically. With the advent ofinterstate banking the Bank also faces competition from out-of-state banking organizations. In thepast, during times of high interest rates, the Bank has also experienced additional significantcompetition for investors’ funds from short-term money market funds and other corporate andgovernment securities. The Bank has faced continuing competition for deposits from other financialintermediaries, including those operating over the Internet.     The Bank competes for deposits principally by offering depositors a wide variety of savingsprograms, convenient branch locations, 24-hour automated teller machines, Internet banking,preauthorized payment and withdrawal systems, tax-deferred retirement programs and othermiscellaneous services such as money orders, travelers’ checks and safe deposit boxes. The Bankdoes 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 bankingcompanies, co-operative banks and savings banks, credit unions, savings and loan associations,commercial banks, insurance companies and other institutional lenders. The Bank competes for loanoriginations primarily through the interest rates and loan fees it charges and the efficiency andquality of services it provides borrowers, real estate brokers and builders. The competition forloans 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 oflendable 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 andinvolvement in non-banking activities by bank holding companies, as well as bank mergers andacquisitions, can affect the Bank’s ability to compete successfully. Legislation and regulationshave also expanded the activities in which depository institutions may engage. The ability of theBank to compete successfully will depend upon how successfully it can respond to the evolvingcompetitive, regulatory, technological and demographic developments affecting its operations.**Future Expansion Plans**     In May 2004, the Board of Directors adopted a strategic plan to enhance long-term shareholdervalue through franchise growth. The plan has been updated each year to reflect changes in the localeconomy and the banking environment in general. The strategic plan calls for expansion and coredeposit growth through marketing and de novo branching within the Bank’s market area of MiddlesexCounty in order to enable the Bank to take greater advantage of the opportunities afforded by thefavorable demographics of this market. The strategic plan also calls for the Bank to continue tofocus primarily on its traditional businesses of residential and commercial real estate lending andto grow its mortgage banking capabilities. The Board and management believe that an increased
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asset size and greater access to deposits resulting from the proposed expansion will enable theBank to better leverage operating efficiencies and technology without compromising its focus onpersonal service and relationships.     While the Board and management anticipate that its proposed expansion plans will enhancelong-term shareholder value, new branches generally require a significant initial capitalinvestment 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 affectedas the Bank incurs significant capital expenditures and non-interest expenses in opening,operating and marketing new branches before these branches can produce sufficient net interestincome to offset the increased expenses. In accordance with this plan, on June 1, 2006, the Bankopened a new branch office in Medford, Massachusetts.**Lending Activities**     The Bank’s lending focus is concentrated in real estate secured transactions, includingresidential mortgage and home equity loans, commercial mortgage loans and construction loans. Forthe year ended March 31, 2006, the Bank originated loans totaling $116.4 million. Of the totalloans originated during fiscal 2006, $35.6 million, or 31%, were residential mortgage loans and$80.7 million, or 69%, were commercial mortgage loans. During the years ended March 31, 2006 and2005, the Bank sold $19.5 million and $20.5 million respectively, of current year residentialmortgage loan originations. The sale of loans in the secondary market allows the Bank to continueto make loans during periods when savings flows decline or funds are not otherwise available forlending purposes and to manage interest rate risk.     The Bank’s loan portfolio increased by $28.9 million, or 7.5%, to $415.3 million at March 31,2006 from $386.4 million at March 31, 2005. The increase occurred primarily as a result of thecontinuing high level of loan refinancing activity, particularly residential mortgage loans, andmanagement’s decision to sell many fixed-rate residentialmortgages originated in fiscal 2006 and continued’ focuson commercial real estate lending.     While the loan portfolio increased overall, the most significant growth was in the commercialreal estate portfolio which grew by $22.3 million, or 11.3%, in fiscal 2006. This growth isconsistent with management’s strategic intent to grow its commercial mortgage portfolio due to thegenerally more favorable yields and repricing frequency of these assets, as compared to otherinterest-earning assets.     ***Loan Portfolio Composition.***The following table summarizes the composition of the Bank’sloan portfolio by type of loan and the percentage each type represents of the total loan portfolioat the dates indicated.                                           **At March 31,**   **2006**  **2005**  **2004**  **2003**  **2002**   **Amount**  **%**  **Amount**  **%**  **Amount**  **%**  **Amount**  **%**  **Amount**  **%**   **(Dollars in thousands)** Mortgage loans:                                        Residential $160,381   38.6% $159,838   41.4% $171,682   48.2% $236,649   60.7% $246,045   66.2%Commercial  213,935   51.5   194,326   50.3   146,107   41.0   107,140   27.5   87,013   23.4 Construction  27,680   6.7   17,187   4.4   25,112   7.0   30,294   7.8   20,998   5.6 Home equity  7,505   1.8   9,194   2.4   9,397   2.6   9,128   2.3   9,154   2.5                                Total mortgage loans  409,501   98.6   380,545   98.5   352,298   98.8   383,211   98.3   363,210   97.7                                                                         Other loans:                                        Commercial and industrial  4,457   1.07   4,786   1.2   3,198   0.9   5,319   1.4   6,901   1.9 Consumer  1,360   0.33   1,051   0.3   1,129   0.3   1,287   0.3   1,596   0.4                                Total other loans  5,817   1.40   5,837   1.5   4,327   1.2   6,606   1.7   8,497   2.3                                Total loans  415,318   100.0 %  386,382   100.0%  356,625   100.0%  389,817   100.0%  371,707   100.0%                                                                        Less:                                        Allowance for loan losses  3,788       3,681       3,537       3,284       3,292                                         Loans, net $411,530      $382,701      $353,088      $386,533      $368,415                                         
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     ***Loan Portfolio Sensitivity.***The following table sets forth certain maturity informationas of March 31, 2006 regarding the dollar amount of commercial and industrial loans as well asconstruction loans in the Bank’s portfolio, including scheduled repayments of principal, based oncontractual terms to maturity. Demand loans, loans having no schedule of repayments and no statedmaturity and overdrafts are reported as due in one year or less.                       **Due After**         **Due Within**  **One Through**  **Due After**      **One Year**  **Five Years**  **Five Years**  **Total**   **(In thousands)** Commercial and industrial loans $3,222  $1,158  $77  $4,457 Construction loans  15,864   10,556   1,260   27,680              Total $19,086  $11,714  $1,337  $32,137                   Of construction loans and commercial and industrial loans maturing more than one yearafter March 31, 2006, $5.4 million have fixed rates and $26.7 million have floating or variablerates.     ***Residential Lending.***The Bank’s residential mortgage loans at March 31, 2006 totaled $160.4million, or 38.6%, of the total loan portfolio. Fixed-rate residential mortgages totaled $100.1million, or 62.5%, of the residential loan portfolio and adjustable-rate loans totaled$60.2 million, or 37.5%, of the residential loan portfolio.     With the implementation of its mortgage banking initiative in fiscal 2003, whereby the Bank isseeking to increase its origination of residential mortgage loans and to generate additionalnoninterest income via loan sale gains, management regularly assesses the desirability of holdingnewly originated long-term, fixed-rate residential mortgage loans in its portfolio. A number offactors are evaluated to determine whether or not to hold such loans including, current andprojected liquidity, current and projected interest rate risk profile, projected growth in otherinterest-earning assets, *e.g.,*commercial real estate loans, and projected interest rates. With therate on the 30-year fixed-rate residential mortgage loan reaching a 45-year low in 2003, theCompany continued to experience high residential loan refinancing activity during fiscal 2005 andfiscal 2004. Customers who refinanced their mortgages generally refinanced their existing homeloans with either a 15 or 30 year fixed-rate mortgage loan. This activity slowed during fiscal 2006as long term rates increased, presenting homeowners fewer refinance opportunities.     The Bank’s adjustable-rate residential mortgage loans have a maximum term of 30 years, andallow for periodic interest rate adjustments. The Bank prices the initial rate competitively, butgenerally avoids initial deep discounts from contracted indices and margins. The Bank has adoptedthe U.S. Treasury Securities Index, adjusted to a constant maturity of one to three years, as itsprimary index. The margin at which adjustable-rate loans are generally set is 2.875 percentagepoints over the stated index. Interest rate adjustments on adjustable mortgage loans are capped attwo 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 residentialproperties. Construction loans on owner-occupied residential properties may convert to residentialloans at fixed or adjustable rates upon completion of construction. Loans secured by one- tofour-family residential properties are typically written in amounts up to 80% of the appraisedvalue of the residential property. The Bank generally requires private mortgage insurance for loansin excess of 80% of appraised value. The maximum loan-to-value ratio on owner occupied residentialproperties is 95%. The maximum loan-to-value ratio on non-owner occupied residential properties is80%.     ***Commercial Real Estate and Construction Lending*****.**The Bank originates permanent commercialmortgages and construction loans on commercial and residential real estate projects. Commercialreal 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 eitherfixed or adjustable interest rates. Commercial real estate loans with fixed interest rates haveterms generally ranging from one to five years while the interest rate on adjustable rate loans isgenerally set to the five year FHLB classic advance rate plus a margin of 1.75 to 2.50 percentagepoints. As of March 31, 2006, commercial real estate loans totaled $213.9 million and constituted51.5% of the total loan portfolio.
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     Commercial real estate loans are generally made for up to 75% of the appraised value of theproperty. Commercial real estate loans currently offered by the Bank have terms of one to 20 years.Title insurance, fire, casualty insurance and flood insurance are required in amounts sufficient toprotect the Bank’s interest, where applicable. In some cases, commercial real estate loans aregranted in participation with other lenders.     The Bank’s construction loans totaled $27.7 million, or 6.7%, of the Bank’s loan portfolio atMarch 31, 2006. Construction loans are short-term in nature and have maturities ranging from sixmonths to two years. The Bank grants loans to construct residential and commercial real estate, aswell as land development for individual residential lots. The Bank also originates loans for theconstruction of single-family homes for resale by professional builders. Currently, constructionloans are made for up to 75% of the projected value of the completed property, based on independentappraisals. Funds are disbursed basedon a schedule of completed work presented to the Bank and confirmed by physical inspection ofthe property by a construction consultant and only after receipt of title updates.     The Bank’s commercial mortgage portfolio totaled $213.9 million, or 51.5%, of the Bank’s loanportfolio at March 31, 2006. The growth in the commercial mortgage loan portfolio in fiscal 2006,which totaled $19.6 million, or 10.1%, is attributable to the continued focus by the Bank in thecommercial mortgage market. This strategy was initiated in 2002 with the Bank’s hiring ofadditional experienced commercial lenders and credit administration personnel. This planned growthwas aided by opportunities created by the declining rate environment prevailing during the pastthree years.     ***Home Equity Lines of Credit*****.**The Bank offers home equity lines of credit that are secured bythe borrower’s equity in his or her primary residence and may take the form of a first or secondmortgage. Equity loans are made in amounts up to 80% of the appraised value less any firstmortgage. Payment of interest is required monthly and the rate is adjusted monthly based onchanges in the prime rate, as quoted in the *Wall Street Journal*. Loans are not contingent uponproceeds being used for home improvement. The Bank’s home equity loans outstanding totaled $7.5million, or 1.8%, of the Bank’s loan portfolio at March 31, 2006.     ***Commercial and Industrial, Consumer and Other Loans*****.**The Bank’s commercial and industrial,consumer and other loans totaled $5.8 million, or 1.4%, of the total loan portfolio on March 31,2006. The Bank’s commercial and industrial portfolio consists primarily of time, demand andline-of-credit loans to a variety of local small businesses generally done on a secured basis. TheBank 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 significantadditional risks compared to residential mortgage lending. The repayment of loans secured byincome-producing properties is typically dependent on the successful operation of the propertiesand thus may be subject to a greater extent to adverse conditions in the local real estate marketor in the economy generally. Construction loans involve a higher degree of risk of loss thanlong-term financing on improved occupied real estate because of the uncertainties inherent inestimating construction costs, delays arising from labor problems, material shortages, and otherunpredictable contingencies. Commercial and industrial loans are generally not secured by realestate and may involve greater risks than other types of lending. Because payments on such loansare often dependent on the successful operation of the business involved, repayment of such loansmay 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 thereal estate loan products offered. Fees to cover the cost of appraisals, credit reports and otherdirect costs are also collected. Loan origination fees collected vary in proportion to the level oflending activity, as well as competitive and economic conditions.     The Bank imposes late charges on all loan products it offers with the exception of equitylines of credit and loans secured by deposits. The Bank also collects prepayment premiums andpartial release fees on commercial real estate and construction loans where such items arenegotiated as part of the loan agreement.     ***Loan Solicitation and Processing*****.**Loan originations come from a number of sources. Residentialreal estate loans are attributable to walk-in customers, existing customers, real estate brokersand builders as well as the
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purchase of residential loans from other financial institutions. During fiscal 2006, the Bankpurchased no residential whole loans and $1.2 million in commercial real estate loans. The Bankalso utilizes both in-house and traveling originators in the origination of residential real estateloans. 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 thecase 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 havethe authority to approve loans up to various limits. Applications are received in each of theoffices of the Bank. Independent certified and licensed appraisers are used to appraise theproperty intended to secure real estate loans. The Bank’s underwriting criteria are designed tominimize the risks of each loan. There are detailed guidelines concerning the types of loans thatmay be made, the nature of the collateral, the information that must be obtained concerning theloan 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 becomes15 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, ifnecessary. 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-accrualloans. Accrual of interest on loans and amortization of net deferred loan fees or costs arediscontinued either when reasonable doubt exists as to the full and timely collection of interestor principal, or when a loan becomes contractually past due 90 days with respect to interest orprincipal. When a loan is placed on non-accrual status, all interest previously accrued but notcollected is reversed against current period interest income. Interest accruals are resumed on suchloans only when they are brought fully current with respect to interest and principal and when, inthe judgment of management, the loans are estimated to be fully collectable as to both principaland interest.     The Bank has instituted additional procedures to closely monitor loans and bring potentialproblems to management’s attention early in the collection process. The Bank prepares a monthlywatch list of potential problem loans including currently performing loans. The Senior LoanOfficer reviews delinquencies with the Security Committee of the Board of Directors at leastmonthly. Due to the high priority given to monitoring asset quality, Senior Management is involvedin the early detection and resolution of problem loans. Additionally, the Bank has a workoutcommittee composed of the Senior Loan Officer and other lending personnel that meets regularly todiscuss the ongoing resolution of any loans identified for special review.
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     The following table sets forth information with respect to the Bank’s non-performing assets atthe dates indicated.                       **At March 31,**   **2006**  **2005**  **2004**  **2003**  **2002**   **(Dollars in thousands)** Loans accounted for on a non-accrual basis,non-performing loans $1,220  $190  $—  $—  $— Restructured loans  —   —   —   —   — Real estate acquired by foreclosure  —   —   —   —   —                                      Total non-performing assets $1,220  $190  $—  $—  $—                                      Impaired loans, accruing $—  $—  $—  $—  $—                      Non-performing loans to total loans  .29%  0.05%  0.00%  0.00%  0.00%                     Non-performing assets to total assets  .22%  0.04%  0.00%  0.00%  0.00%     At March 31, 2006, there were no loans that are not listed on the table above where knowninformation about possible credit problems of borrowers causes management to have serious doubts asto 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 whichmanagement considers adequate to provide for probable losses based on an evaluation of known andinherent risks in the portfolio. Such evaluation for each of the periods reported includesidentification of adverse situations which may affect the ability of certain borrowers to repay, areview of overall portfolio size, quality, composition and an assessment of existing andanticipated economic conditions. Regular reviews of the loan portfolio are performed to identifyloans for which specific allowance allocations are considered prudent. Specific allocations aremade based on the risk classification assigned to individual loans. Additionally, general riskallocations are determined by a formula whereby the loan portfolio is stratified by loan type andby risk rating category. Loss factors are then applied to each strata based on variousconsiderations including historical loss experience, delinquency trends, current economicconditions, collateral type, loan-to-value ratios, industry standards and regulatory guidelines.While management uses available information in establishing the allowance for loan losses, futureadjustments to the allowance may be necessary if economic conditions differ substantially from theassumptions used in making the evaluations. Additions to the allowance are charged to earnings andrealized losses, net of recoveries, are charged to the allowance.     Various regulatory agencies, as an integral part of their examination process, periodicallyreview the Bank’s allowance for loan losses. Such agencies may require the Bank to recognizeadditions to the allowance based on judgment different from those of management.
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     The following table presents activity in the allowance for loan losses during the years indicated.                       **At or For the Years Ended March 31,**   **2006**  **2005**  **2004**  **2003**  **2002**   **(Dollars in thousands)** Balance at beginning of year $3,681  $3,537  $3,284  $3,292  $3,106                                      Provision  100   100   200   —   —                      Charge-offs:                    Residential mortgage  —   —   —   —   — Commercial mortgage  —   —   —   —   — Other loans  (39)  (3)  (29)  (21)  (4)                Total charge-offs  (39)  (3)  (29)  (21)  (4)                                     Recoveries:                    Residential mortgage  —   —   19   —   80 Commercial mortgage  37   39   33   —   103 Other loans  9   8   30   13   7                 Total recoveries  46   47   82   13   190                                      Net (charge-offs) recoveries  7   44   53   (8)  186                 Balance at end of year $3,788  $3,681  $3,537  $3,284  $3,292                                      Average loans outstanding during theyear $406,474  $365,130  $367,094  $378,502  $$335,271 Ratio of net charge-offs to averageloans  n/a   n/a   n/a   n/a   n/a Total loans outstanding at end of year $415,318  $386,382  $356,625  $389,817  $$371,707 Ratio of allowance for loan                    losses to loans at end of year  0.91%  0.95%  0.99%  0.84%  0.89% n/a means either not applicable or not meaningful
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          The allowance for loan losses is available for offsetting credit losses in connection with anyloan, but is internally allocated among loan categories as part of the process for evaluating theadequacy of the allowance for loan losses. The following table presents the allocation of theBank’s allowance for loan losses, by type of loan, at the dates indicated.                                           **At March 31,**   **2006**  **2005**  **2004**  **2003**  **2002**       **% of**      **% of**      **% of**      **% of**      **% of**       **Loans to**      **Loans to**      **Loans to**      **Loans to**      **Loans to**   **Amount**  **Total Loans**  **Amount**  **Total Loans**  **Amount**  **Total Loans**  **Amount**  **Total Loans**  **Amount**  **Total Loans**   **(Dollars in thousands)** Mortgage loans:                                        Residential mortgage $443   38.0% $422   41.4% $446   48.2% $583   60.8% $636   66.2%Commercial mortgage  2,653   51.9   2,740   50.3   2,434   41.0   2,009   27.4   1,956   23.4 Construction  523   6.6   334   4.4   494   7.0   457   7.8   462   5.6 Home equity  88   2.1   100   2.4   101   2.6   94   2.3   98   2.5                                Total mortgage loans  3,707   98.6   3,596   98.5   3,475   98.8   3,143   98.3   3,152   97.7 Other loans  81   1.4   85   1.5   62   1.2   141   1.7   140   2.3                                Total $3,788   100.0% $3,681   100.0% $3,537   100.0% $3,284   100.0% $3,292   100.0%                               
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**Investment Activities**     The primary objectives of the investment portfolio are to achieve a competitive rate of returnover a reasonable period of time and to provide liquidity. As a Massachusetts chartered bank, theBank 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 requireadditional analysis relative to perceived credit quality, market price, and overall impact oncapital/earnings before a decision is made as to hold or sell. For all sub-investment gradecorporate holdings, additional analysis of credit worthiness is required. The Bank’s investment inmarketable equity securities is generally limited to large, well-known corporations whose sharesare actively traded. The size of the Bank’s holdings in an individual company’s stock is alsolimited by policy. A portion of the Bank’s investment portfolio consists of mortgage-backedsecurities which represent interests in pools of residential mortgages. Such securities includesecurities issued and guaranteed by the Federal National Mortgage Association (“FNMA”), FederalHome 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 andlosses included in earnings. Investments classified as available for sale are reported at fairvalue, with unrealized gains and losses, net of taxes, reported as a separate component ofstockholders’ equity. Securities held to maturity are carried at amortized cost. At March 31, 2006,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 thepercentage such investments comprise of the Bank’s total assets, at the dates indicated.               **At March 31,**   **2006**  **2005**  **2004**   **(Dollars in thousands)** U. S. Government and agency obligations $25,407  $21,725  $10,086 Corporate bonds  28,297   35,217   38,638 Mortgage-backed securities  38,948   47,879   31,575 Marketable equity securities  4,543   3,795   3,472           Total investment securities $97,195  $108,616  $83,771                        Percentage of total assets  17.8%  20.8%  17.1%               At March 31, 2006, the Bank owned securities issued by several companies having a fairvalue that exceeded 10% of the Company’s stockholders’ equity. Such securities consisted primarilyof debt obligations. The following table summarizes the Bank’s aggregate holdings of each issuer asof March 31, 2006.          **Issuer** **Amortized Cost** **Market Value**   **(In thousands)** AT&T  $5,038   $5,060  Ford Motor Credit  4,548   4,112  Boeing Capital Corp.  5,008   5,015  Hewlett Packard  4,990   5,016  
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     The following table sets forth the scheduled maturities, amortized cost, fair values andaverage yields for the Bank’s debt securities at March 31, 2006.                                                       **More Than**  **More Than**         **One Year or Less**  **One to Five Years**  **Five to Ten Years**  **More than Ten Years**  **Total Investment Portfolio**   **Amortized**  **Average**  **Amortized**  **Average**  **Amortized**  **Average**  **Amortized**  **Average**  **Amortized**  **Fair**  **Average**   **Cost**  **Yield**  **Cost**  **Yield**  **Cost**  **Yield**  **Cost**  **Yield**  **Cost**  **Value**  **Yield**   **(Dollars in thousands)** U.S. government and agencyobligations $2,000   3.02% $23,973   4.12% $—   —% $—   —% $25,973  $25,407   4.30 %Corporate bonds  18,930   5.97   9,628   5.89   —   —   —   —   28,558   28,297   5.94 Mortgage-backed securities  20   6.09   126   5.55   16,602   4.23   23,366   4.74   40,114   38,947   4.55                                        Total $20,950      $33,727      $16,602      $23,366      $94,645  $92,651                                            **Deposits and Borrowed Funds**     ***General*****.**Savings accounts and other types of deposits have traditionally been an importantsource of the Bank’s funds for use in lending and for other general business purposes. In additionto deposits, the Bank derives funds from loan repayments, loan sales, borrowings and from otheroperations. The availability of funds is influenced by the general level of interest rates andother market conditions. Scheduled loan repayments are a relatively stable source of funds whiledeposit inflows and outflows vary widely and are influenced by prevailing interest rates and marketconditions. Borrowings may be used on a short-term basis to compensate for reductions in depositsor deposit inflows at less than projected levels and may be used on a longer term basis to supportexpanded lending activities. During fiscal 2003, the Bank entered into a retail CD brokerageagreement with a major brokerage firm and considers this arrangement to be a secondary source ofliquidity.     ***Deposits*****.**Consumer deposits are attracted principally from within the Bank’s market areathrough 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 andretirement savings plans. The Bank has historically not actively solicited or advertised fordeposits outside of its market area or solicited brokered deposits. The Bank attracts depositsthrough its branch office network, automated teller machines, the Internet and by paying ratescompetitive with other financial institutions in our market area.     ***Deposit Accounts.***The following table shows the distribution of the average balance of theBank’s deposit accounts at the dates indicated and the weighted average rate paid for each categoryof account for the years indicated.                                       **Years Ended March 31,**   **2006**  **2005**  **2004**       **Average**          **Average**         **Average**      **Average**  **% of**  **Rate**  **Average**  **% of**  **Rate**  **Average**  **% of**  **Rate**   **Balance**  **Deposits**  **Paid**  **Balance**  **Deposits**  **Paid**  **Balance**  **Deposits**  **Paid**   **(Dollars in thousands)** Demand deposit accounts $37,985   10.7%  —% $32,601   10.4%  —% $29,998   10.5%  —%NOW accounts  33,604   9.5   .54   35,660   11.4   0.68   36,980   13.0   0.53 Passbook and other savingsaccounts  69,336   19.6   .66   73,916   23.6   0.54   72,925   25.5   0.63 Money market deposit accounts  43,490   12.3       58,155   18.5   1.56   44,125   15.4   1.55 Term deposit certificates  169,303   47.9   3.34   113,495   36.1   2.77   101,688   35.6   3.06                                Total deposits $353,718   100.0%  1.96% $313,827   100.0%  1.51% $285,716   100.0%  1.56%                               
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     ***Time Deposits in Excess of $100,000.***The following table indicates the amount of theBank’s time deposits of $100,000 or more by time remaining until maturity as of March 31, 2006 (inthousands).     Maturity Period:    Three months or less $17,456 Three through six months  42,672 Six through twelve months  15,457 Over twelve months  8,443     Total $84,028          ***Borrowings*****.**From time to time, the Bank borrows funds from the FHLB of Boston. All advancesfrom the FHLB of Boston are secured by a blanket lien on residential first mortgage loans, certaininvestment securities and commercial real estate loans and all the Bank’s stock in the FHLB ofBoston. At March 31, 2006, the Bank had advances outstanding from the FHLB of Boston of $103.5million and unused borrowing capacity, based on available collateral, of approximately $78.1million. 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 theFederal Reserve Bank.     The following table sets forth certain information regarding borrowings from the FHLB ofBoston, including short-term borrowings under a line of credit, at the dates and for the periodsindicated.                **At or for the**  **Years Ended March 31,**  **2006** **2005** **2004**  **(Dollars in thousands)**Amounts outstanding at end of period $103,500  $138,135   $141,100 Weighted average rate at end of period  5.15%  4.82%   4.82%Maximum amount of borrowings outstandingat any month end $147,800  $153,800   $144,400 Approximate average amounts outstanding $134,299  $141,091   $143,455 Approximate weighted average rate during the year  4.93%  4.85%   4.89%**Subsidiaries**     In September 2004, the Company established Central Bancorp Capital Trust I (the “Trust”), aDelaware statutory trust. The Trust issued and sold $5.1 million of trust preferred securities in aprivate placement and issued $158,000 of trust common securities to the Company. The Trust used theproceeds of these issuances to purchase $5,258,000 of the Company’s floating rate juniorsubordinated debentures due September 16, 2034 (the Debentures). The interest rate on theDebentures and the trust preferred securities is variable and adjustable quarterly at 2.44% overthe three month LIBOR. At March 31, 2006, the interest rate was 7.35%. The Debentures are the soleassets of the Trust and are subordinate to all of the Company’s existing and future obligations forborrowed money. The trust preferred securities generally rank equal to the trust common securitiesin priority of payment, but will rank prior to the trust common securities if and so long as theCompany fails to make principal or interest payments on the Debentures. Concurrently with theissuance of the Debentures and the trust preferred securities, the Company issued a guaranteerelated to the trust securities for the benefit of the holders.     In April 1998 and July 2003, the Bank established Central Securities Corporation and CentralSecurities Corporation II, respectively, Massachusetts corporations, as wholly owned subsidiariesof the Bank for the purpose of engaging exclusively in buying, selling and holding, on their ownbehalf, securities that may be held directly by the Bank. These subsidiaries hold government agencyobligations, corporate bonds and mortgage-backed securities and qualify under Section 38B ofChapter 63 of the Massachusetts General Laws as Massachusetts securities corporations.
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     In July 1999, the Bank established Central Preferred Capital Corporation (“CPCC”), aMassachusetts corporation which elected to be taxed as a real estate investment trust (“REIT”) forfederal and Massachusetts tax purposes. CPCC held mortgage loans which were previously originatedby 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 ReserveBoard under the Bank Holding Company Act of 1956, as amended (the “BHCA”). As a result, theactivities of the Company are subject to certain limitations, which are described below. Inaddition, as a bank holding company, the Company is required to file annual and quarterly reportswith the Federal Reserve Board and to furnish such additional information as the Federal ReserveBoard may require pursuant to the BHCA. The Company is also subject to regular examination by andthe enforcement authority of the Federal Reserve Board.     ***Activities.***With certain exceptions, the BHCA prohibits a bank holding company from acquiringdirect or indirect ownership or control of more than 5% of the voting shares of a company that isnot a bank or a bank holding company, or from engaging directly or indirectly in activities otherthan 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, bystatute or by Federal Reserve Board regulation or order, have been identified as activities closelyrelated to the business of banking. The activities of the Company are subject to these legal andregulatory limitations under the BHCA and the related Federal Reserve Board regulations.Notwithstanding the Federal Reserve Board’s prior approval of specific nonbanking activities, theFederal Reserve Board has the power to order a holding company or its subsidiaries to terminate anyactivity, or to terminate its ownership or control of any subsidiary, when it has reasonable causeto believe that the continuation of such activity or such ownership or control constitutes aserious risk to the financial safety, soundness or stability of any bank subsidiary of that holdingcompany.     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 wellmanaged 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 financialactivities than are permitted to bank holding companies, including banking and insurance companies.Financial holding companies are authorized to engage in, directly or indirectly, financialactivities. A financial activity is an activity that is: (i) financial in nature; (ii) incidentalto an activity that is financial in nature; or (iii) complementary to a financial activity and thatdoes not pose a safety and soundness risk. The G-L-B Act includes a list of activities that aredeemed to be financial in nature. Other activities also may be decided by the Federal Reserve Boardto be financial in nature or incidental thereto if they meet specified criteria. A financialholding company that intends to engage in a new activity or to acquire a company to engage in suchan activity is required to give prior notice to the Federal Reserve Board. If the activity is noteither specified in the G-L-B Act as being a financial activity or one that the Federal ReserveBoard has determined by rule or regulation to be financial in nature, the prior approval of theFederal Reserve Board is required.     ***Acquisitions.***Under the BHCA, a bank holding company must obtain the prior approval of theFederal Reserve Board before (1) acquiring direct or indirect ownership or control of any votingshares of any bank or bank holding company if, after such acquisition, the bank holding companywould directly or indirectly own or control more than 5% of such shares; (2) acquiring all orsubstantially all of the assets of another bank or bank holding company; or (3) merging orconsolidating with another bank holding company. Satisfactory financial condition, particularlywith regard to capital adequacy, and satisfactory CRA ratings generally are prerequisites toobtaining federal regulatory approval to make acquisitions.     Under the BHCA, any company must obtain approval of the Federal Reserve Board prior toacquiring control of the Company or the Bank. For purposes of the BHCA, “control” is defined asownership of more than 25% of any class of voting securities of the Company or the Bank, theability to control the election of a majority of the directors, or the exercise of a controllinginfluence over management or policies of the Company or the Bank. In
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addition, the Change in Bank Control Act and the related regulations of the Federal Reserve Boardrequire any person or persons acting in concert (except for companies required to make applicationunder the BHCA), to file a written notice with the Federal Reserve Board before such person orpersons may acquire control of the Company or 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 orpolicies of a bank holding company or an insured bank.     There is a presumption of “control” where the acquiring person will own, control or hold withpower to vote 10% or more of any class of voting security of a bank holding company or insured bankif, like the Company, the company involved has registered securities under Section 12 of theSecurities Exchange Act of 1934.     Under Massachusetts banking law, prior approval of the Massachusetts Division of Banks is alsorequired 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 anadditional bank if the bank to be acquired has been in existence for less than three years or, ifafter such acquisition, the bank holding company would control more than 30% of the FDIC-insureddeposits in the Commonwealth of Massachusetts.     ***Capital Requirements.***The Federal Reserve Board has adopted guidelines regarding the capitaladequacy of bank holding companies, which require bank holding companies to maintain specifiedminimum ratios of capital to total assets and capital to risk-weighted assets. See “Regulation andSupervision of the Bank—Capital Requirements.”     ***Dividends*****.**The Federal Reserve Board has the power to prohibit dividends by bank holdingcompanies if their actions constitute unsafe or unsound practices. The Federal Reserve Board hasissued a policy statement on the payment of cash dividends by bank holding companies, whichexpresses the Federal Reserve Board’s view that a bank holding company should pay cash dividendsonly to the extent that the company’s net income for the past year is sufficient to cover both thecash dividends and a rate of earnings retention that is consistent with the company’s capitalneeds, asset quality and overall financial condition. The Federal Reserve Board also indicated thatit would be inappropriate for a bank holding company experiencing serious financial problems toborrow funds to pay dividends. Under the prompt corrective action regulations adopted by theFederal 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 dividendsif the holding company’s bank subsidiary is classified as “undercapitalized” or worse.” See“Regulation and Supervision of the Bank — Prompt Corrective Regulatory Action.”     ***Stock Repurchase****s*Bank holding companies are required to give the Federal Reserve Board priorwritten notice of any purchase or redemption of its outstanding equity securities if the grossconsideration for the purchase or redemption, when combined with the net consideration paid for allsuch purchases or redemptions during the preceding 12 months, is equal to 10% or more of theCompany’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase orredemption if it determines that the proposal would violate any law, regulation, Federal ReserveBoard order, directive or any condition imposed by, or written agreement with, the Federal ReserveBoard. 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 thesubject of any unresolved supervisory issues.     ***The Sarbanes-Oxley Act of 2002***implemented legislative reforms intended to address corporateand accounting fraud. The Sarbanes-Oxley Act restricts the scope of services that may be providedby accounting firms to their public company audit clients and any non-audit services being providedto a public company audit client will require pre-approval by the company’s audit committee. Inaddition, the Sarbanes-Oxley Act requires chief executive officers and chief financial officers, ortheir equivalents, to certify to the accuracy of periodic reports filed with the Securities andExchange Commission, subject to civil and criminal penalties if they knowingly or willingly violatethis certification requirement.     Under the Sarbanes-Oxley Act, bonuses issued to top executives before restatement of acompany’s financial statements are now subject to disgorgement if such restatement was due tocorporate misconduct. Executives are also prohibited from insider trading during retirement plan“blackout” periods and loans to company executives (other than loans by financial institutions permitted byfederal rules and regulations) are restricted. The
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legislation accelerates the time frame for disclosures by public companies of changes in ownershipin a company’s securities by directors and executive officers.     The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirementsrelating to audit committees of public companies and how they interact with the company’s“registered public accounting firm.” Among other requirements, companies must disclose whether atleast one member of the audit committee is a “financial expert” (as such term is defined by theSecurities and Exchange Commission) and if not, why not. Although the Company anticipates that itwill incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and theresulting regulations, management does not expect that such compliance will have a material impacton the Company’s results of operations or financial condition.     On September 29, 2005, the SEC announced an extension of compliance dates for non-acceleratedfilers regarding internal controls over financials reporting requirements (Section 404 of theSarbanes-Oxley Act of 2002). The Company is currently considered a non-accelerated filer with theSEC and, accordingly, must begin to comply with Section 404 requirements for its fiscal year endingon March 31, 2008.**Regulation and Supervision of the Bank**     ***General*****.**The Bank is subject to extensive regulation by the Massachusetts Commissioner ofBanks (“Commissioner”) and the FDIC. The lending activities and other investments of the Bank mustcomply with various regulatory requirements. The Commissioner and FDIC periodically examine theBank for compliance with these requirements. The Bank must file reports with the Commissioner andthe FDIC describing its activities and financial condition. The Bank is also subject to certainreserve requirements promulgated by the Federal Reserve Board. This supervision and regulation isintended primarily for the protection of depositors.     ***Massachusetts State Law*****.**As a Massachusetts-chartered co-operative bank, the Bank is subjectto the applicable provisions of Massachusetts law and the regulations of the Commissioner. The Bankderives its lending and investment powers from these laws, and is subject to periodic examinationand reporting requirements by and of the Commissioner. Certain powers granted under Massachusettslaw may be constrained by federal regulation. In addition, the Bank is required to make periodicreports to the Co-operative Central Bank. In 1990, legislation was enacted permitting banksnationwide to enter the Bank’s market area and compete for deposits and loan originations. Theapproval of the Commissioner is required prior to any merger or consolidation, or the establishmentor relocation of any branch office. Massachusetts cooperative banks are subject to the enforcementauthority of the Commissioner who may suspend or remove directors or officers, issue cease anddesist orders and appoint conservators or receivers in appropriate circumstances. Cooperative banksare required to pay fees and assessments to the Commissioner to fund that office’s operations. Thecost of state examination fees and assessments for the fiscal year ended March 31, 2006 was$42,062.     ***Capital Requirements*****.**Under FDIC regulations, state-chartered banks that are not members ofthe Federal Reserve System are required to maintain a minimum leverage capital requirementconsisting of a ratio of Tier 1 capital to total assets of 3% if the FDIC determines that theinstitution is not anticipating or experiencing significant growth and has well-diversified risk,including no undue interest rate risk exposure, excellent asset quality, high liquidity, goodearnings and, in general, a strong banking organization, rated composite 1 under the UniformFinancial Institutions Rating System (the CAMELS rating system) established by the FederalFinancial Institutions Examination Council. For all but the most highly-rated institutions meetingthe conditions set forth above, the minimum leverage capital ratio is not less than 4%. Tier 1capital is the sum of common stockholders’ equity, noncumulative perpetual preferred stock(including any related surplus) and minority interests in consolidated subsidiaries, minus allintangible assets (other than certain mortgage and non-mortgage servicing assets, purchased creditcard relationships and qualifying supervisory goodwill) minus identified losses, disalloweddeferred tax assets and investments in financial subsidiaries and certain non-financial equityinvestments.     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 torisk-weighted assets of at least 8%, of which at least half must be Tier 1 capital. Qualifyingtotal capital consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2 capitalitems 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 othercapital instruments
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and up to 45% of pre-tax net unrealized holding gains on equity securities. The includable amountof Tier 2 capital cannot exceed the institution’s Tier 1 capital. Qualifying total capital isfurther reduced by the amount of the bank’s investments in banking and finance subsidiaries thatare not consolidated for regulatory capital purposes, reciprocal cross-holdings of capitalsecurities issued by other banks, most intangible assets and certain other deductions. Under theFDIC risk-weighting system, all of a bank’s balance sheet assets and the credit equivalent amountsof 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 ofeach category is multiplied by the risk weight assigned to that category. The sum of these weightedvalues equals the bank’s risk-weighted assets.     At March 31, 2006, the Bank’s ratio of Tier 1 capital to average assets was 7.31%, its ratioof Tier 1 capital to risk-weighted assets was 11.10% and its ratio of total risk-based capital torisk-weighted assets was 12.15%.     ***Dividend Limitations*****.**The Bank may not pay dividends on its capital stock if its regulatorycapital would thereby be reduced below the amount then required for the liquidation accountestablished for the benefit of certain depositors of the Bank at the time of its conversion tostock form.     Earnings of the Bank appropriated to bad debt reserves and deducted for Federal income taxpurposes are not available for payment of cash dividends or other distributions to stockholderswithout payment of taxes at the then current tax rate by the Bank on the amount of earnings removedfrom the reserves for such distributions. The Bank intends to make full use of this favorable taxtreatment and does not contemplate use of any earnings in a manner which would limit the Bank’s baddebt deduction or create federal tax liabilities.     Under FDIC regulations, the Bank is prohibited from making any capital distributions if, aftermaking the distribution, the Bank would be “undercapitalized” within the meaning of the PromptCorrective Action regulations. See “Regulation and Supervision of the Bank—Prompt CorrectiveRegulatory Action.”     ***Investment Activities.***Under federal law, all state-chartered FDIC-insured banks havegenerally been limited to activities as principal and equity investments of the type and in theamount authorized for national banks, notwithstanding state law. The Federal Deposit InsuranceCorporation Improvement Act and the FDIC permit exceptions to these limitations. For example, statechartered banks, such as the Bank, may, with FDIC approval, continue to exercise grandfatheredstate authority to invest in common or preferred stocks listed on a national securities exchange orthe 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 authorizedactivities or investments that do not meet this standard (other than non-subsidiary equityinvestments) for institutions that meet all applicable capital requirements if it is determinedthat such activities or investments do not pose a significant risk to the Bank Insurance Fund. Allnon-subsidiary equity investments, unless otherwise authorized or approved by the FDIC, must havebeen divested by December 19, 1996, under a FDIC-approved divestiture plan, unless such investmentswere grandfathered by the FDIC. The Bank has received grandfathering authority from the FDIC toinvest in listed stocks and/or registered shares. The maximum permissible investment is 100% ofTier 1 capital, as specified by the FDIC’s regulations, or the maximum amount permitted byMassachusetts Banking Law, whichever is less. Such grandfathering authority may be terminated uponthe FDIC’s determination that such investments pose a safety and soundness risk to the Bank or ifthe Bank converts its charter or undergoes a change in control. As of March 31, 2006, the Bank had marketable equitysecurities, including money market preferred stocks, with a market value of $ 4.5 million, whichwere held under such grandfathering authority.     ***Deposit Insurance.***The Bank is a member of the Deposit Insurance Fund of the Federal DepositInsurance Corporation. The Federal Deposit Insurance Corporation maintains a risk-based assessmentsystem by which institutions are assigned to one of three categories based on their capitalizationand one of three subcategories based on examination ratings and other supervisory information. Aninstitution’s assessment rate depends upon the categories to which it is assigned. Assessment ratesare determined semi-annually by the Federal Deposit Insurance Corporation and currently range fromzero basis points for the healthiest institutions to 27 basis points of assessable deposits for theriskiest.     In addition to the assessment for deposit insurance, institutions are required to makepayments on bonds issued in the late 1980s by the “Financing Corporation to recapitalize apredecessor insurance fund.
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     The Federal Deposit Insurance Reform Act of 2005 (the “Act”), signed by the President onFebruary 8, 2006, revised the laws governing the federal deposit insurance system. The Act providesfor the consolidation of the Bank and Savings Association Insurance Funds into a combined “DepositInsurance Fund.”     Under the Act, insurance premiums are to be determined by the Federal Deposit InsuranceCorporation (“FDIC”) based on a number of factors, primarily the risk of loss that insuredinstitutions pose to the Deposit Insurance Fund. The legislation eliminates the current minimum1.25% reserve ratio for the insurance funds, the mandatory assessments when the ratio fall below1.25% and the prohibition on assessing the highest quality banks when the ratio is above 1.25%.The Act provides the FDIC with flexibility to adjust the new insurance fund’s reserve ratio between1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end ofa calendar year.     The Act increased deposit insurance coverage limits from $100,000 to $250,000 for certaintypes of Individual Retirement Accounts, 401(k) plans and other retirement savings accounts. Whileit preserved the $100,000 coverage limit for individual accounts and municipal deposits, the FDICwas furnished with the discretion to adjust all coverage levels to keep pace with inflationbeginning in 2010. Also, institutions that become undercapitalized will be prohibited fromaccepting certain employee benefit plan deposits.     Pursuant to the Act, the consolidation of the Bank and Savings Association Insurance Fundsinto the Deposit Insurance Fund occurred on March 31, 2006. The Act also states that the FDIC mustpromulgate final regulations implementing the remainder of its provisions not later than 270 daysafter its enactment.     At this time, management cannot predict the effect, if any, that the Act will have oninsurance premiums paid by the Bank.     All Massachusetts chartered co-operative banks are required to be members of the ShareInsurance Fund. The Share Insurance Fund maintains a deposit insurance fund which insures alldeposits in member banks which are not covered by federal insurance. In past years, a premium of1/24 of 1% of insured deposits has been assessed annually on member banks such as the Bank for thisdeposit insurance. However, no premium has been assessed in recent years.     ***Prompt Corrective Regulatory Action*****.**Federal banking regulators are required to take promptcorrective action if an insured depository institution fails to satisfy certain minimum capitalrequirements, including a leverage limit, a risk-based capital requirement and any other measuredeemed appropriate by the federal banking regulators for measuring the capital adequacy of aninsured depository institution. All institutions, regardless of their capital levels, arerestricted from making any capital distribution or paying any management fees if the institutionwould thereafter fail to satisfy the minimum levels for any of itscapital requirements. An institution that fails to meet the minimum level for any relevantcapital measure (an “undercapitalized institution”) may be: (i) subject to increased monitoring bythe appropriate federal banking regulator; (ii) required to submit an acceptable capitalrestoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtainprior regulatory approval for acquisitions, branching and new lines of businesses. The capitalrestoration plan must include a guarantee by the institution’s holding company that the institutionwill comply with the plan until it has been adequately capitalized on average for four consecutivequarters, under which the holding company would be liable up to the lesser of 5% of theinstitution’s total assets or the amount necessary to bring the institution into capital complianceas of the date it failed to comply with its capital restoration plan. A “significantlyundercapitalized” institution, as well as any undercapitalized institution that does not submit anacceptable capital restoration plan, may be subject to regulatory demands for recapitalization,broader application of restrictions on transactions with affiliates, limitations on interest ratespaid on deposits, asset growth and other activities, possible replacement of directors andofficers, and restrictions on capital distributions by any bank holding company controlling theinstitution. Any company controlling the institution may also be required to divest theinstitution or the institution could be required to divest subsidiaries. The senior executiveofficers of a significantly undercapitalized institution may not receive bonuses or increases incompensation without prior approval and the institution is prohibited from making payments ofprincipal or interest on its subordinated debt. In their discretion, the federal banking regulatorsmay also impose the foregoing sanctions on an undercapitalized institution if the regulatorsdetermine that such actions are necessary to carry out the purposes of the prompt correctiveprovisions.
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     Under the implementing regulations, the federal banking regulators generally measure aninstitution’s capital adequacy on the basis of its total risk-based capital ratio (the ratio of itstotal capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its corecapital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjustedtotal assets). The following table shows the capital ratios required for the various promptcorrective action categories.             **Adequately**   **Significantly**  **Well Capitalized** **Capitalized** **Undercapitalized** **Undercapitalized**Total risk-basedcapital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%Tier 1 risk-basedcapital 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 issubject to conservatorship or receivership within specified time frames. A “criticallyundercapitalized” institution is defined as an institution that has a ratio of “tangible equity” tototal assets of less than 2.0%. Tangible equity is defined as core capital plus cumulativeperpetual preferred stock (and related surplus) less all intangible assets other than certainpurchased mortgage servicing rights. The FDIC may reclassify a well capitalized depositoryinstitution as adequately capitalized and may require an adequately capitalized or undercapitalizedinstitution to comply with the supervisory actions applicable to institutions in the next lowercapital category (but may not reclassify a significantly undercapitalized institution as criticallyundercapitalized) if the FDIC determines, after notice and an opportunity for a hearing, that thesavings institution is in an unsafe or unsound condition or that the institution has received andnot corrected a less-than-satisfactory rating for any CAMELS rating category.     ***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 madeon substantially the same terms as those prevailing for comparable transactions with persons whoare not executive officers, directors, principal stockholders or employees of the Bank unless the loan ismade pursuant to a compensation or benefit plan that is widely available to employees and does notfavor insiders. Loans to any executive officer, director and principal stockholder, together withall 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 exceedthe institution’s unimpaired capital and unimpaired surplus. Loans to directors, executiveofficers 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 advanceby a majority of the board of directors of the bank with any “interested” director notparticipating in the voting. State non-member banks are prohibited from paying the overdrafts ofany 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 ortransfer of funds from another account at the bank. Loans to executive officers may not be made onterms more favorable than those afforded other borrowers and are restricted as to type, amount andterms of credit. In addition federal law prohibits extensions of credit to executive officers,directors and greater than 10% stockholders of a depository institution by any other institutionwhich has a correspondent banking relationship with the institution, unless such extension ofcredit is on substantially the same terms as those prevailing at the time for comparabletransactions with other persons and does not involve more than the normal risk of repayment orpresent 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 capitalstock and surplus, and for all such transactions with all affiliates a state non-member bank islimited to an amount equal to 20% of capital stock and surplus. All such transactions must also beon terms substantially the same, or at least as favorable, to the bank or subsidiary as thoseprovided to a non-affiliate. The term “covered transaction” includes the making of loans, purchaseof assets, issuance of a guarantee and similar other types of transactions. An affiliate of a statenon-member bank is any company or entity which controls or is under common control with the statenon-member bank and, for purposes of the aggregate limit on transactions with affiliates, anysubsidiary that would be deemed a financial subsidiary of a national bank. In a holding companycontext, the parent holding company of a state non-
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member bank (such as the Company) and any companies which are controlled by such parentholding company are affiliates of the state non-member bank. Federal law further prohibit adepository institution from extending credit to or offering any other services, or fixing orvarying the consideration for such extension of credit or service, on the condition that thecustomer obtain some additional service from the institution or certain of its affiliates or notobtain 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 assesscivil money penalties, to issue cease and desist orders and to remove directors and officers. Ingeneral, these enforcement actions may be initiated in response to violations of laws andregulations and unsafe or unsound practices.     The FDIC has authority under federal law to appoint a conservator or receiver for an insuredbank under limited circumstances. The FDIC is required, with certain exceptions, to appoint areceiver or conservator for an insured state non-member bank if that bank was “criticallyundercapitalized” on average during the calendar quarter beginning 270 days after the date on whichthe institution became “critically undercapitalized.” See “Prompt Corrective Regulatory Action.”The FDIC may also appoint itself as conservator or receiver for an insured state non-memberinstitution under specific circumstances on the basis of the institution’s financial condition orupon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation ofassets or earnings through violations of law or unsafe or unsound practices; (3) existence of anunsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring oflosses that will deplete substantially all of the institution’s capital with no reasonable prospectof replenishment without federal assistance.     ***Federal Reserve System.***The Federal Reserve Board regulations require depository institutionsto maintain noninterest-earning reserves against their transaction accounts (primarily NOW andregular checking accounts). The Federal Reserve Board regulations generally provide that reservesbe maintained against aggregate transaction accounts as follows: for that portion of transactionaccounts aggregating $48.3 million less an exemption of $7.8 million (which may be adjusted by theFederal Reserve Board) the reserve requirement is 3%; and for accounts greater than $48.3 million,the reserve requirements is 10% (which may be adjusted by the Federal Reserve Board between 8% and14%) of the portion in excess of $48.3 million. The Bank is in compliance with these requirements.     ***Community Reinvestment Act.***Under the Community Reinvestment Act, as implemented by FDICregulations, a state non-member bank has a continuing and affirmative obligation consistent withits safe and sound operation to help meet the credit needs of its entire community, including lowand moderate-income neighborhoods. The Community Reinvestment Act neither establishes specificlending requirements or programs for financial institutions nor limits an institution’s discretionto develop the types of products and services that it believes are best suited to its particularcommunity. The Community Reinvestment Act requires the FDIC, in connection with its examination ofan institution, to assess the institution’s record of meeting the credit needs of its community andto consider such record when it evaluates applications made by such institution. The CommunityReinvestment 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., The MassachusettsCommunity Reinvestment Act requires the Massachusetts Banking Commissioner to consider a bank’sMassachusetts Community Reinvestment Act rating when reviewing a bank’s application to engage incertain transactions, including mergers, asset purchases and the establishment of branch offices orautomated teller machines, and provides that such assessment may serve as a basis for the denial ofsuch application. The Bank’s latest Massachusetts Community Reinvestment Act rating received fromthe 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 acentral credit facility primarily for member institutions. The Bank, as a member of the FederalHome Loan Bank of Boston, is required to acquire and hold shares of capital stock in the FederalHome Loan Bank of Boston. The Bank was in compliance with this requirement with an investment inFederal Home Loan Bank of Boston stock at March 31, 2006 of $8.3 million.
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     The Federal Home Loan Banks are required to provide funds for certain purposes includingcontributing funds for affordable housing programs. These requirements could reduce the amount ofdividends that the Federal Home Loan Banks pay to their members and result in the Federal Home LoanBanks imposing a higher rate of interest on advances to their members. For the years ended 2006,2005 and 2004, cash dividends from the Federal Home Loan Bank of Boston to the Bank amounted toapproximately $360,000, $231,000 and $209,000 respectively. Further, there can be no assurance thatthe impact of recent or future legislation on the Federal Home Loan Banks will not also cause adecrease in the value of the Federal Home Loan Bank stock held by the Bank.**Employees**     At March 31, 2006, the Company and the Bank employed 113 full-time and 40 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.**Item 1A. Risk Factors**     *An investment in shares of our common stock involves various risks. Before deciding to investin our common stock, you should carefully consider the risks described below in conjunction withthe other information in this annual report on**Form 10-K**and information incorporated by referenceinto this annual report on**Form 10-K**, including our consolidated financial statements and relatednotes. Our business, financial condition and results of operations could be harmed by any of thefollowing risks or by other risks that have not been identified or that we may believe areimmaterial or unlikely. The value or market price of our common stock could decline due to any ofthese risks, and you may lose all or part of your investment. The risks discussed below alsoinclude forward-looking statements and our actual results may differ substantially from thosediscussed in these forward-looking statements.****Our nonresidential real estate and construction lending may expose us to a greater risk of loss andhurt our earnings and profitability.***     Our business strategy centers, in part, on offering nonresidential real estate andconstruction loans in order to expand our net interest margin. These types of loans generally havehigher risk-adjusted returns and shorter maturities than traditional one-to-four family residentialmortgage loans. At March 31, 2006, nonresidential real estate and construction loans totaled $241.6million, which represented 58.2 % of net total loans. If we continue to increase the level of ournonresidential real estate and construction loans, we will increase our credit risk profilerelative to other financial institutions that have higher concentrations of one-to-four familyresidential mortgage loans.     Loans secured by commercial or nonresidential real estate properties are generally for largeramounts and involve a greater degree of risk than one-to-four family residential mortgage loans.Payments on loans secured by nonresidential real estate buildings generally are dependent on theincome produced by the underlying properties which, in turn, depends on the successful operationand management of the properties. Accordingly, repayment of these loans is subject to adverseconditions in the real estate market or the local economy. While we seek to minimize these risksin a variety of ways, including limiting the size of our nonresidential real estate loans,generally restricting such loans to our primary market area and attempting to employ conservativeunderwriting criteria, there can be no assurance that these measures will protect againstcredit-related losses.     Construction financing typically involves a higher degree of credit risk than long-termfinancing on improved, owner-occupied real estate. Risk of loss on a construction loan is largelydependent upon the accuracy of the initial estimate of the property’s value at completion ofconstruction and the bid price and estimated cost (including interest) of construction. If theestimate of construction costs proves to be inaccurate, we may be required to advance funds beyondthe amount originally committed to permit completion of the project. If the estimate of the valueproves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with aproject whose value is insufficient to assure full repayment. When lending to builders, the costof construction breakdown is provided by the builder, as well as supported by the appraisal.Although our underwriting criteria is
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designed to evaluate and minimize the risks of each construction loan, there can be no guaranteethat these practices will safeguard against material delinquencies and losses to our operations.***Our business is subject to the success of the local economy in which we operate.***     Because the majority of our borrowers and depositors are individuals and businesses locatedand doing business in the northwestern suburbs of Boston, our success depends to a significantextent upon economic conditions in that market area. Adverse economic conditions in our market areacould reduce our growth rate, affect the ability of our customers to repay their loans andgenerally affect our financial condition and results of operations. Conditions such as inflation,recession, unemployment, high interest rates, short money supply, scarce natural resources,international disorders, terrorism and other factors beyond our control may adversely affect ourprofitability. We are less able than a larger institution to spread the risks of unfavorable localeconomic conditions across a large number of diversified economies. Any sustained period ofincreased payment delinquencies, foreclosures or losses caused by adverse market or economicconditions in the Commonwealth of Massachusetts could adversely affect the value of our assets,revenues, results of operations and financial condition. Moreover, we cannot give any assurance wewill benefit from any market growth or favorable economic conditions in our primary market areas.***If the value of real estate in northwestern suburbs of Boston were to decline materially, asignificant portion of our loan portfolio could become under-collateralized, which could have amaterial adverse effect on us.***     With most of our loans concentrated in the northwestern suburbs of Boston, a decline in localeconomic conditions could adversely affect the value of the real estate collateral securing ourloans. A decline in property values would diminish our ability to recover on defaulted loans byselling the real estate collateral, making it more likely that we would suffer losses on defaultedloans. Additionally, a decrease in asset quality could require additions to our allowance for loanlosses through increased provisions for loan losses, which would hurt our profits. Also, a declinein local economic conditions may have a greater effect on our earnings and capital than on theearnings and capital of larger financial institutions whose real estate loan portfolios are moregeographically diverse. Real estate values are affected by various factors in addition to localeconomic conditions, including, among other things, changes in general or regional economicconditions, governmental rules or policies and natural disasters.***Our continued pace of growth may require us to raise additional capital in the future, but thatcapital may not be available when it is needed.***     We are required by regulatory authorities to maintain adequate levels of capital to supportour operations. We anticipate our capital resources will satisfy our capital requirements for theforeseeable future. We may at some point, however, need to raise additional capital to support ourcontinued growth. If we raise capital through the issuance of additional shares of our common stockor other securities, it would dilute the ownership interests of current investors and may dilutethe per share book value of our common stock. New investors may also have rights, preferences andprivileges senior to our current shareholders, which may adversely impact our current shareholders.     Our ability to raise additional capital, if needed, will depend on conditions in the capitalmarkets at that time, which are outside our control, and on our financial performance. Accordingly,we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable tous. If we cannot raise additional capital when needed, our ability to further expand our operationsthrough internal growth and acquisitions could be materially impaired.***Competition from financial institutions and other financial service providers may adversely affectour growth and profitability.***     The banking business is highly competitive and we experience competition in each of ourmarkets from many other financial institutions. We compete with commercial banks, credit unions,savings and loan associations, mortgage banking firms, consumer finance companies, securitiesbrokerage firms, insurance companies, money market funds, and other mutual funds, as well as othersuper-regional, national and international financial institutions that operate offices in ourprimary market areas and elsewhere. We compete with these institutions both
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in attracting deposits and in making loans. This competition has made it more difficult for us tomake new loans and has occasionally forced us to offer higher deposit rates. Price competition forloans and deposits might result in us earning less on our loans and paying more on our deposits,which reduces net interest income. While we believe we can and do successfully compete with theseother financial institutions in our primary markets, we may face a competitive disadvantage as aresult of our smaller size, smaller resources and smaller lending limits, lack of geographicdiversification and inability to spread our marketing costs across a broader market. Although wecompete by concentrating our marketing efforts in our primary markets with local advertisements,personal contacts, and greater flexibility and responsiveness in working with local customers, wecan give no assurance this strategy will be successful.***Fluctuations in interest rates could reduce our profitability and affect the value of our assets.***     Like other financial institutions, we are subject to interest rate risk. Our primary source ofincome is net interest income, which is the difference between interest earned on loans andinvestments and the interest paid on deposits and borrowings. We expect that we will periodicallyexperience imbalances in the interest rate sensitivities of our assets and liabilities and therelationships of various interest rates to each other. Over any defined period of time, ourinterest-earning assets may be more sensitive to changes in market interest rates than ourinterest-bearing liabilities, or vice versa. In addition, the individual market interest ratesunderlying our loan and deposit products (*e.g.*, prime) may not change to the same degree over agiven time period. In any event, if market interest rates should move contrary to our position, ourearnings may be negatively affected. In addition, loan volume and quality and deposit volume andmix can be affected by market interest rates. Changes in levels of market interest rates couldmaterially adversely affect our net interest spread, asset quality, origination volume and overallprofitability.     Interest rates have recently been at historically low levels. However, since June 30, 2004,the U.S. Federal Reserve has increased its target for the federal funds rate 16 times, from 1.00%to 5.00%. While these short-term market interest rates (which we use as a guide to price ourdeposits) have increased, longer-term market interest rates (which we use as a guide to price ourlonger-term loans) have not. This “flattening” of the market yield curve has had a negative impacton our interest rate spread and net interest margin to date. If short-term interest rates continueto rise, and if rates on our deposits and borrowings continue to reprice upwards faster than therates on our long-term loans and investments, we would experience further compression of ourinterest rate spread and net interest margin, which would have a negative effect on ourprofitability.     We principally manage interest rate risk by managing our volume and mix of our earning assetsand funding liabilities. In a changing interest rate environment, we may not be able to manage thisrisk effectively. If we are unable to manage interest rate risk effectively, our business,financial condition and results of operations could be materially harmed.     Changes in the level of interest rates also may negatively affect our ability to originatereal estate loans, the value of our assets and our ability to realize gains from the sale of ourassets, all of which ultimately affect our earnings.***Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.***     Like all financial institutions, we maintain an allowance for loan losses to provide for loansin our portfolio that may not be repaid in their entirety. We believe that our allowance for loanlosses is maintained at a level adequate to absorb probable losses inherent in our loan portfolioas of the corresponding balance sheet date. However, our allowance for loan losses may not besufficient to cover actual loan losses, and future provisions for loan losses could materiallyadversely affect our operating results.     In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitativefactors, including our historical charge-off experience, growth of our loan portfolio, changes inthe composition of our loan portfolio and the volume of delinquent and criticized loans. Inaddition, we use information about specific borrower situations, including their financial positionand estimated collateral values, to estimate the risk and amount of loss for those borrowers.Finally, we also consider many qualitative factors, including general and economic businessconditions, duration of the current business cycle, current general market collateral valuations,trends apparent in any of the factors we take into account and other matters, which are by naturemore subjective and fluid. Our
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estimates of the risk of loss and amount of loss on any loan are complicated by the significantuncertainties surrounding our borrowers’ abilities to successfully execute their business modelsthrough changing economic environments, competitive challenges and other factors. Because of thedegree of uncertainty and susceptibility of these factors to change, our actual losses may varyfrom our current estimates.     At March 31, 2006, our allowance for loan losses as a percentage of total loans was 0.91%.Regulators periodically review our allowance for loan losses and may require us to increase ourallowance for loan losses by recognizing additional provisions for loan losses charged to expense,or to decrease our allowance for loan losses by recognizing loan charge-offs, net of recoveries.Any such additional provisions for loan losses or charge-offs, as required by these regulatoryagencies, could have a material adverse effect on our financial condition and results ofoperations.***We are dependent upon the services of our management team.***     Our future success and profitability is substantially dependent upon the management andbanking abilities of our senior executives. We believe that our future results will also depend inpart upon our attracting and retaining highly skilled and qualified management. We are especiallydependent on a limited number of key management personnel and the loss of our chief executiveofficer or other senior executive officers could have a material adverse impact on our operationsbecause other officers may not have the experience and expertise to readily replace theseindividuals. Competition for such personnel is intense, and we cannot assure you that we will besuccessful in attracting or retaining such personnel. Changes in key personnel and theirresponsibilities may be disruptive to our business and could have a material adverse effect on ourbusiness, financial condition and results of operations.***Our failure to continue to recruit and retain qualified loan originators could adversely affect ourability to compete successfully and affect our profitability.***     Our continued success and future growth depend heavily on our ability to attract and retainhighly skilled and motivated loan originators and other banking professionals. We compete againstmany institutions with greater financial resources, both within our industry and in otherindustries, to attract these qualified individuals. Our failure to recruit and retain adequatetalent could reduce our ability to compete successfully and adversely affect our business andprofitability.***We operate in a highly regulated environment and we may be adversely affected by changes in lawsand regulations.***     Central Co-operative Bank is subject to regulation, supervision and examination by theMassachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation, as insurer ofits deposits. Such regulation and supervision govern the activities in which a co-operative bankand its holding company may engage and are intended primarily for the protection of the depositinsurance funds and for the depositors of Central Co-operative Bank and are not intended to protectthe interests of investors in our common stock. Regulatory authorities have extensive discretion intheir supervisory and enforcement activities, including the imposition of restrictions on ouroperations, the classification of our assets and determination of the level of our allowance forloan losses. Any change in such regulation and oversight, whether in the form of regulatorypolicy, regulations, legislation or supervisory action, may have a material impact on ouroperations. In addition, the Sarbanes-Oxley Act of 2002, and the related rules and regulationspromulgated by the Securities and Exchange Commission and Nasdaq that are applicable to us, haveincreased the scope, complexity and cost of corporate governance, reporting and disclosurepractices, including the costs of completing our audit and maintaining our internal controls.***We are subject to security and operational risks relating to our use of technology that coulddamage our reputation and our business.***     Security breaches in our internet banking activities could expose us to possible liability anddamage our reputation. Any compromise of our security also could deter customers from using ourinternet banking services that involve the transmission of confidential information. We rely onstandard internet security systems to provide the security and authentication necessary to effectsecure transmission of data. These precautions may not protect our systems from compromises orbreaches of our security measures that could result in damage to our reputation and
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our business. Additionally, we outsource our data processing to a third party. If our third partyprovider encounters difficulties or if we have difficulty in communicating with such third party,it will significantly affect our ability to adequately process and account for customertransactions, which would significantly affect our business operations.***We may have fewer resources than many of our competitors to invest in technological improvements.***     The financial services industry is undergoing rapid technological changes, with frequentintroductions of new technology-driven products and services. The effective use of technologyincreases efficiency and enables financial institutions to better serve customers and to reducecosts. Our future success will depend, in part, upon our ability to address the needs of ourcustomers by using technology to provide products and services that will satisfy customer demandsfor convenience, as well as to create additional efficiencies in our operations. Many of ourcompetitors have substantially greater resources to invest in technological improvements. We maynot be able to effectively implement new technology-driven products and services or be successfulin marketing these products and services to our customers.***Our ability to service our debt, pay dividends and otherwise pay our obligations as they come dueis substantially dependent on capital distributions from Central Co-operative Bank, and thesedistributions are subject to regulatory limits and other restrictions.***     A substantial source of our income from which we service our debt, pay our obligations andfrom which we can pay dividends is the receipt of dividends from Central Co-operative Bank. Theavailability of dividends from Central Co-operative Bank is limited by various statutes andregulations. It is also possible, depending upon the financial condition of Central Co-operativeBank, and other factors, that the applicable regulatory authorities could assert that payment ofdividends or other payments is an unsafe or unsound practice. In the event that Central CooperativeBank is unable to pay dividends to us, we may not be able to service our debt, pay our obligationsor pay dividends on our common stock. The inability to receive dividends from Central Co-operativeBank would adversely affect our business, financial condition, results of operations and prospects.**Item 1B. Unresolved Staff Comments**     Not applicable.**Item 2. Properties**     The Bank owns all its offices, except the Burlington, Malden and Woburn High School branchoffices, the stand along ATM and the loan and operations centers located in Somerville. Net bookvalue includes the cost of land, buildings and improvements as well as leasehold improvements, netof depreciation and amortization. At March 31, 2006, all of the Bank’s offices were in reasonablecondition and met the business needs of the Bank. The following table sets forth the location ofthe Bank’s offices, as well as certain information relating to these offices as of March 31, 2006:               **Net Book**  **Year** **Value at****Office Location** **Opened** **March 31, 2006**      **(in thousands)*****Main Office***399 Highland AvenueSomerville, MA (owned)  1974  $300  ***Branch Offices:***175 BroadwayArlington, MA (owned)  1982   183  85 Wilmington RoadBurlington, MA (leased)  1978  (a)  126 
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               **Net Book**  **Year** **Value at****Office Location** **Opened** **March 31, 2006**      **(in thousands)**1192 Boylston StreetChestnut Hill (Brookline), MA (owned)  1954   138  137 Pleasant StreetMalden, MA (leased)  1975  (b)  59  846 Main StreetMelrose, MA (owned)  1994   245  275 Main StreetWoburn, MA (owned)  1980   506  198 Lexington StreetWoburn, MA (owned)  1974   255  Woburn High SchoolWoburn, MA (leased)  2002  (c)  15  ***Stand Alone ATM:***94 Highland AvenueSomerville, MA (leased)  2004  (d)  99  ***Operations Center***17 Inner Belt RoadSomerville, MA (leased)  1994  (e)  2  ***Commercial Loan Center***401 Highland AvenueSomerville, MA (leased)  2002  (f)  31  ***Residential Loan Center***403 Highland AvenueSomerville, MA (leased)  2002  (g)  25  ***Operations Center/Branch Office***270 Mystic AvenueMedford, MA (leased)  2006  (h)  510  (a) The lease for the Burlington branch expires 10/31/2007 with norenewal options. (b) The lease for the Malden branch expires 8/31/2015. (c) The lease for the Woburn High School branch is for one year, renewable annually onan automatic basis. (d) The lease for the stand along ATM expires 11/30/07 with an option to extend forthree three-year terms. (e) The lease for the Operations Center expired 3/31/2006 with no renewal options. The Bankis a tenant at will and expects to vacate the location by 6/30/06. (f) The lease for the Commercial Loan Center was scheduled to expire on 11/1/2006 with anoption to extend for one three-year term. On May 1, 2006 this lease was terminated andrewritten, adding more space and additional parking for the Bank’s lending operations. Thenew lease is for ten years with two five year options to extend. The initial base rent is$113,745 per year. (g) The lease for the Residential Loan Center expired in 8/31/2005. TheBank expects to vacate this location during the summer of 2006. (h) In March, 2005, the Bank signed a lease for a combined retail branch and operationscenter to be located at 270 Mystic Avenue, Medford. The lease was subsequently renegotiatedand the Bank took occupancy in May 2006. The rent under the lease is for $150,000 per yearand the initial term is 10 years. There are options to extend the lease by two five-yearterms.          At March 31, 2006, the net book value of the Bank’s premises and equipment was $3.9 million.
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**Item 3. Legal Proceedings**     The Company from time to time is involved as a plaintiff or defendant in various legal actionsincidental to its business, none of which are believed to be material, either individually orcollectively, 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 thefiscal year covered by this report.**PART II****Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters and IssuerPurchases of Securities**     The Company’s common stock is quoted on the Nasdaq National MarketSM under thesymbol “CEBK.” At March 31, 2006, there were 1,590,181 shares of the common stock outstanding andapproximately 230 holders of record. The foregoing number of holders does not reflect the number ofpersons 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 firstdividend distribution on November 15, 1996; it has paid cash dividends on a quarterly basis sinceinitiating the dividend program.     The following tables list the high and low prices for the Common Stock during each quarter offiscal 2006 and fiscal 2005 as reported by the Nasdaq National MarketSM, and the amountsand payable dates of the cash dividends paid during each quarter of fiscal 2006 and fiscal 2005.The stock quotations constitute interdealer prices without retail markups, markdowns orcommissions, and may not necessarily represent actual transactions.**Common Stock Prices**         **Fiscal 2006** **High** **Low** 6/30/05 $29.97  $25.20 9/30/05  28.67   25.25 12/31/05  30.87   27.00 3/31/06  29.97   28.25          **Fiscal 2005** **High** **Low** 6/30/04 $37.87  $33.50 9/30/04  34.50   26.00 12/31/04  32.25   27.00 3/31/05  30.00   26.88 **CashDividends *(payable dates)***     **Fiscal 2006** **Amount** 5/19/05 $0.12 8/19/05  0.18 11/17/05  0.18 2/17/06  0.18      **Fiscal 2005** **Amount** 5/14/04 $0.12 8/13/04  0.12 11/19/04  0.12 2/15/05  0.12 The Company did not repurchase any of its securities during the quarter ended March 31, 2006.
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**Item 6. Selected Financial Data**The Company has derived the following selected consolidated financial and other data in part fromits Consolidated Financial Statements and Notes appearing elsewhere in this Form 10-K.                       **At or for the Year Ended March 31,**  **2006** **2005** **2004** **2003** **2002**  **(Dollars and shares in thousands, except per share data)****Balance Sheet**                                         Total assets $547,275  $521,071  $490,897  $477,208  $468,219 Total loans  415,318   386,382   356,625   389,817   371,707 Investments available for sale  97,195   108,616   83,771   61,111   73,884 Deposits  393,413   333,215   295,920   287,959   261,907 Total borrowings  111,290   146,455   145,256   144,576   164,000 Total stockholders’ equity  39,189   38,239   43,454   39,443   38,954                      Shares outstanding  1,591   1,589   1,665   1,662   1,633                      **Statements of Operations**                                         Net interest and dividend income $16,317  $15,731  $15,570  $17,257  $14,413 Provision for loan losses  100   100   200   —   — Net gain (loss) from sale and write-down ofinvestment securities  419   453   (135)  (308)  (150)Gain on sale of loans  208   252   295   796   — Other non-interest income  1,370   950   966   917   838 Total non-interest expenses  14,183   13,518   12,401   13,877   10,464 Net income  2,643   2,463   2,936   2,187   2,860 Earnings per common share-diluted  1.84   1.65   1.88   1.37   1.72                      **Selected Ratios**                                         Interest rate spread  2.72%  2.85%  2.96%  3.29%  2.85%Net yield on interest-earning assets  3.11   3.20   3.36   3.71   3.36 Non-interest expenses to average assets  2.64   2.68   2.60   2.91   2.38 Equity-to-assets  7.16   7.34   8.85   8.27   8.32 Return on average assets  0.49   0.49   0.62   0.46   0.65 Return on average stockholders’ equity  6.78   6.12   6.98   5.52   7.62 Dividend payout ratio  35.68   28.91   23.23   33.24   23.39 Book value per share $24.64  $24.07  $26.10  $23.73  $23.85 Tangible book value per share  23.24   22.67   24.72   22.38   22.49 
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**Quarterly Results of Operations**(In Thousands, Except Per Share Data)     The following tables summarize the operating results on a quarterly basis for the years endedMarch 31, 2006 and 2005.                   **2006**   **First**  **Second**  **Third**  **Fourth** Interest and dividend income $7,368  $7,571  $7,702  $7,700 Interest expense  3,210   3,357   3,623   3,834              Net interest and dividend income  4,158   4,214   4,079   3,866              Provision for loan losses  50   50   —   —              Non-interest income  494   606   447   450 Non-interest expenses  3,514   3,805   3,302   3,562              Income before income taxes  1,088   965   1,224   754 Income tax  383   341   428   236              Net income $705  $624  $796  $518              Earnings per common share — basic $.50  $.44  $.56  $.36              Earnings per common share — diluted $.49  $.43  $.55  $.36                                 **2005**   **First**  **Second**  **Third**  **Fourth** Interest and dividend income $6,614  $6,926  $6,972  $7,104 Interest expense  2,907   2,980   2,998   3,000              Net interest and dividend income  3,707   3,946   3,974   4,104 Provision for loan losses  50   —   —   50 Non-interest income  448   499   377   331 Non-interest expenses  3,394   3,611   3,249   3,264              Income before income taxes  711   834   1,102   1,121 Income tax  257   328   416   304              Net income $454  $506  $686  $817              Earnings per common share — basic $0.29  $0.33  $0.49  $0.58              Earnings per common share — diluted $0.29  $0.33  $0.48  $0.57              
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**Item 7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations****General**     The operations of the Company and its subsidiary, the Bank, are generally influenced byoverall economic conditions, the related monetary and fiscal policies of the federal government andthe regulatory policies of financial institution regulatory authorities, including theCommissioner, the Federal Reserve Board and the FDIC.     The Bank monitors its exposure to earnings fluctuations resulting from market interest ratechanges. Historically, the Bank’s earnings have been vulnerable to changing interest rates due todifferences in the terms to maturity or repricing of its assets and liabilities. For example, in arising interest rate environment, the Bank’s net interest income and net income could be negativelyaffected as interest-sensitive liabilities (deposits and borrowings) could adjust more quickly torising 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 lastthree fiscal years and its financial condition at the end of fiscal years 2006, and 2005.Management’s discussion and analysis of financial condition and results of operations should beread 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 ofoperations are based on the consolidated financial statements which are prepared in accordance withaccounting principles generally accepted in the United States of America. The preparation of suchfinancial statements requires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses and related disclosure of contingent assetsand liabilities. On an ongoing basis, management evaluates its estimates, including those relatedto the allowance for loan losses, income taxes, impairment of securities, and derivative loancommitments. Management bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, the results of which formthe basis in making judgments about the carrying values of assets that are not readily apparentfrom other sources. Actual results could differ from the amount derived from management’sestimates and assumptions under different assumptions or conditions.     Management believes the allowance for loan losses policy is a critical accounting policy thatrequires the most significant estimates and assumptions used in the preparation of the consolidatedfinancial statements. The allowance for loan losses is based on management’s evaluation of thelevel 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 regularlyevaluates 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’sestimation of inherent losses. The use of different estimates or assumptions could producedifferent 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 detaileddescription of management’s estimation process and methodology related to the allowance for loanlosses.     Management periodically reviews the Bank’s deferred tax asset and current income tax positionusing historical, current, and future pretax earnings. Adjustments to the deferred tax asset arerecognized as deferred income tax expense or benefit based on management’s judgments relating tothe realizability of such asset. There can be no assurance, however that the Company will generateany earnings or any specific level of continuing earnings. Refer to “Income Taxes” Note 8 to theConsolidated Financial Statements for details concerning the Company’s tax position.     Management believes that the measurement of impairment of securities requires an evaluationprocess that considers both thehistorical and current financial performance and environment of the security, credit worthiness ofthe issuer, and potential recovery measures of each impaired investment. Management periodicallyreviews all
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securities to identify those that show signs of impairment. Once identified these securities aremonitored and evaluated based upon the above considerations and if the decline in fair value belowthe cost basis of an investment is judged to be other-than-temporary, the cost basis is writtendown to the current fair value and the amount of the write-down is included in the results ofoperations.     The Company has derivatives consisting of forward commitments to sell loans in order to reducemarket risk associated with commitments to fund loans held for sale. An increase in market interestrates between the time the Bank commits to terms on a loan and the time the loan is sold willgenerally 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 fairvalue. Management uses both a discounted cash flow analysis ( which is dependent upon estimatedfuture cash flows and the level of interest rates) and estimates based on outstanding investorcommitments to calculate market value.**Results of Operations**     ***Overview.***The Company’s results of operations during the past three fiscal years have beeninfluenced by several significant factors. From a recurring operating perspective, the generallydeclining trend in both short and long-term interest rates that began in January 2001 has had asignificant impact on both the balance sheet and income statement. Most notably, residentialmortgage loans, which have historically been the Company’s largest asset, have declined $93million, or 37.4%, from $248.5 million at March 31, 2001 to $160.3 million at March 31, 2006. Withhome mortgage rates declining and ultimately hitting a 45 year low in 2003, consumers refinancedtheir mortgages, oftentimes on multiple occasions, to take advantage of the opportunity to lock inlow rates for up to 30 years. Since the second half of fiscal 2003, the Company has sold themajority of its current originations of fixed-rate residential mortgage loans in order to bettermanage its exposure to changing rates and, as a result, has experienced a shift in its asset mixfrom residential to commercial mortgage loans. Management has favored commercial real estatelending in recent years due to the shorter repricing characteristics of these loans (generallyevery 5 years), acceptable yields and the favorable economic market conditions in the Company’slending area.     With the declining rate trend that occurred until fiscal year 2006 as referred to above, theCompany experienced reductions in both its yield on interest-earning assets and its cost ofinterest-bearing liabilities each year since fiscal 2001, except for fiscal 2006. However, infiscal 2006, the cost increase exceeded the yield increase, resulting in a lower spread, assummarized in the following table:               **Yield** **Cost** **Spread**Fiscal 2001  7.50%  4.70%  2.80%Fiscal 2002  6.83   3.98   2.85 Fiscal 2003  6.48   3.19   3.29 Fiscal 2004  5.84   2.88   2.96 Fiscal 2005  5.62   2.77   2.85 Fiscal 2006  5.78   3.06   2.72      As this table indicates, the declining rate trend had a favorable impact on the Company’s netinterest spread through fiscal 2003. This trend was also aided by the relatively high ratio ofloans to interest-earning assets maintained during this entire period, especially through fiscal2003. In fiscal 2004 and fiscal 2005, the favorable trend reversed as more assets were repriceddownward (mostly due to loan prepayments and modifications) than were liabilities.     During fiscal year 2006 rising interest rates increased both the Company’s yield and cost andnegatively affected the spread by 13 basis points as liabilities repriced quicker than theCompany’s assets. The unfavorable trend in the net interest margin in fiscal 2005 and fiscal 2004is 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 interestrates it pays on its deposits to the minimum amount it can pay in a competitive market. Duringfiscal 2005, the Bank maintained the interest rates it paid on the core deposit account, andintroduced a promotional certificate for 13 months that was successful in drawing in new funds tothe Bank. The Bank continued to offer various certificate promotions throughout fiscal 2006.During fiscal 2004, the Company’s utilization of
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long-term FHLB advances had limited repricing opportunity as only $5.3 million in advances maturedin fiscal 2004. Long-term FHLB advances can not be prepaid without a substantial penalty, whichmanagement elected not to pay. The ability to reduce deposit rates in the current year was limited,primarily as a result of competitive market factors in a rising short-term interest rateenvironment. Because of competitive pressures, we were not able to raise the yield on our lendingproducts that generally are priced based on longer term rates which have remained quite stable.This has resulted in a flat to inverted yield curve that negatively impacted earnings as the yearprogressed.     The Company financial results in fiscal 2005 were negatively impacted by costs incurred withthe stock buyback, net of taxes, of approximately $179,000. The Company’s overall financial resultsin fiscal 2004 were also affected by two significant non-operating items, namely, state legislationaffecting the taxation of its former REIT subsidiary and shareholder and other litigation. Each ofthese items adversely affected overall financial results in fiscal 2003 and favorably affectedfinancial results in fiscal 2004. The impact of these items is demonstrated in the following table(in thousands):               **2006**  **2005**  **2004** Net income per GAAP $2,643  $2,463  $2,936 REIT legislation, net of taxes  —   —   (374)Impact of shareholder litigation and legal  —         fees, net of insurance and taxes  —   —   (329)Costs associated with stock buyback, net oftaxes  —   179   —                        Non-GAAP pro forma earnings $2,643  $2,642  $2,233                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 receiveddeduction on dividends received from the Bank’s former REIT subsidiary. The REIT legislationresulted in an increase in the Company’s provision for income taxes of $835,000 in fiscal 2003. InJune 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 provisionfor income taxes of $374,000.     The legal fees associated with the litigation with certain shareholders, who initially filedsuit against the Company in October 2002 following the annual meeting of shareholders and anaccrual 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 forreimbursement of certain legal fees. During fiscal 2004, insurance recoveries in excess of relatedlegal fees totaled $329,000, net of taxes.
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     ***Interest Rate Spread.***The Company’s and the Bank’s operating results are significantlyaffected by its net interest spread, which is the difference between the yield on loans andinvestments and the interest cost of deposits and borrowings. The interest spread is affected byeconomic conditions and market factors that influence interest rates, loan demand and depositflows. Net interest spread and margin declined from 2.85% and 3.20% to 2.92% and 3.66%,respectively, from March 31, 2005 to March 31, 2006, primarily due to increases in the rates paidon interest bearing liabilities. The increase in the cost of interest bearing liabilities wasgreater than the increase in the yield on interest earning assets, primarily due to the increase inshort term interest rates and the resulting flat yield curve, as well as the Bank’s ongoingcampaign to increase certificates of deposit by offering aggressively priced promotional rates onthese accounts. The following table presents average balances, interest income and expense andyields earned or rates paid on all interest-earning assets and interest-bearing liabilities for theyears indicated.                                       **Years Ended March 31,**   **2006**  **2005**  **2004**           **Average**          **Average**          **Average**   **Average**      **Yield/**  **Average**      **Yield/**  **Average**      **Yield/**   **Balance**  **Interest**  **Cost**  **Balance**  **Interest**  **Cost**  **Balance**  **Interest**  **Cost**                   **(Dollars in thousands)**             **Assets:**                                    Interest-earning assets:                                    Mortgage loans $400,576  $24,425   6.10% $358,783  $21,902   6.10% $361,305  $22,797   6.31%Other loans  5,898   428   7.26   6,347   366   5.77   5,789   363   6.29                                Total loans  406,474   24,853   6.11   365,130   22,268   6.10   367,094   23,160   6.31                                Short-term investments  6,570   232   3.53   15,368   175   1.14   20,342   204   1.00 Investment securities  112,206   5,256   4.68   111,085   5,173   4.66   76,638   3,743   4.88                                Total investments  118,776   5,488   4.62   126,453   5,348   4.22   96,980   3,947   4.07                                Total interest-earning assets  525,250   30,341   5.78   491,583   27,616   5.62   464,074   27,107   5.84                                   Allowance for loan losses  (3,754)          (3,607)          (3,400)        Non-interest-earning assets  16,747           16,797           16,317                                           Total assets $538,243          $504,773          $476,991                                                                                **Liabilities and Stockholders’ Equity:**                                    Interest-bearing liabilities:                                    Deposits $315,733  $6,893   2.18  $281,226  $4,733   1.68  $255,717  $4,436   1.73 Other borrowings  8,615   537   6.23   6,901   304   4.41   1,977   82   4.15 Advances from FHLB of Boston  133,718   6,594   4.93   140,482   6,848   4.87   143,380   7,019   4.90                                Total interest-bearingliabilities  458,066   14,024   3.06   428,609   11,885   2.77   401,074   11,537   2.88                                   Non-interest-bearing deposits              32,601           29,998         Other liabilities  41,209           3,308           3,862                                           Total liabilities              464,518           434,934         Stockholders’ equity  38,968           40,255           42,057                                           Total liabilities and stockholders’equity $538,243          $504,773          $476,991                                           Net interest and dividend income     $16,317          $15,731          $15,570                                       Interest rate spread          2.72%          2.85%          2.96%                                  Net yield on interest-earning assets          3.11%          3.20%          3.36%                                  
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     ***Rate/Volume Analysis.***The effect on net interest income of changes in interest rates andchanges in the amounts of interest-earning assets and interest-bearing liabilities is shown in thefollowing table. Information is provided on changes for the fiscal years indicated attributable tochanges in interest rates and changes in volume. Changes due to combined changes in interest ratesand volume are allocated between changes in rate and changes in volume proportionally to the changedue to volume and the change due to rate.                           **2006 vs. 2005**  **2005 vs. 2004**   **Changes due to**  **Changes due to**   **increase (decrease) in:**  **increase (decrease) in:**   **Volume**  **Rate**  **Total**  **Volume**  **Rate**  **Total**           **(In thousands)**         Interest income:                        Mortgage loans $2,523  $—  $2,523  $(155) $(740) $(895)Other loans  (28)  90   62   33   (30)  3                    Total income from loans  2,495   90   2,585   (122)  (770)  (892)                   Short-term investments              (54)  25   (29)Investment securities  (145)  202   57   1,606   (176)  1,430                    Total income from investments  58   25   83   1,552   (151)  1,401                    Total interest and dividend income  (87)  227   140   1,430   (921)  509                                             Interest expense:                        Deposits  631   1,529   2,160   429   (132)  297 Other borrowings  (336)  82   (254)  217   5   222 Advances from FHLB of Boston  88   145   233   (131)  (40)  (171)                   Total interest expense  383   1,756   2,139   515   (167)  348                                             Net interest and dividend income $2,025  $(1,439) $586  $915  $(754) $161                    ***Interest and Dividend Income.***The Company experienced an incease of $586,000 in net interestand dividend income for the year ended March 31, 2006 compared to fiscal 2005. The balance ofaverage interest-earning assets increased by $33.7 million to $525.3 million with the Companycontinued shift of its asset mix towards commercial real estate lending as residential lendingslowed due to raising interest rates. Management has decided that most fixed-rate residentialmortgage loans would be sold in the secondary market rather than put into the loan portfolio.During fiscal 2006, $19.3 million of such loans were sold. This strategy, combined with continuedloan prepayments as customers refinance their mortgages at favorable rates, lead to a reduction inthe average balance of residential mortgage loans of $4.6 million in fiscal 2006. The reduction inresidential mortgage loans was offset by an increase in the average balance of commercial realestate loans of $39.4 million during fiscal 2006. The average balance of mortgage loans increasedfrom $358.8 million during fiscal 2005 to $400.6 million for fiscal 2006 a change of $41.8 millionor 11.6%.     Interest income on loans increased from fiscal 2005 to fiscal 2006 by $2.6 million to$24.9 million due to an increase in the average balance of loans of $41.3 million to $406.3million. Interest income on investments increased by $140,000 in fiscal 2006 primarily due toincreasing rates on investments, which was partially offset by a $7.7 million decline in averagebalance of investments during fiscal 2006 as compared to fiscal 2005. In fiscal 2006 excess shortterm funds have been used to pay down FHLB advances. The yield on investments during fiscal 2006and fiscal 2005 is 4.62% and 4.22% respectively.     ***Interest Expense.***Interest expense increased $2.1 from $11.9 million in fiscal 2005 to $14.0million in fiscal 2006. This increase is attributable to a $29.5 million increase in the averagebalance of interest-bearing liabilities, primarily due to the increase in certificates of deposit,which increased in average balance by $88.8 million from $122.4 million during fiscal 2005 to$211.3 million in fiscal 2006. The increase in certificates of deposits was primarily the resultof the Bank’s promotional campaign to increase these deposits by offering agressively pricedpromotional rates on certificates of deposit coupled with increases in deposit interset rates inits market area. The increase in interest expense due to higher balances for certificates ofdeposit was partially offset by a decline in average balance for FHLB advances. The average balancefor FHLB advances declined $6.8 million from $140.5 million during fiscal 2005 to $133.7 million infiscal 2006. The average cost of FHLB advances increased by 6 basis points in fiscal 2006. Theincrease in the average balance of other borrowings of $1,714,000 was
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primarily due to the issuance of subordinated debentures by the Company in fiscal year 2005 whichcontributed $316,000 and $135,000 to interest expense during fiscal year 2006 and 2005respectively.     ***Provision for Loan Losses.***During the fiscal year ended March 31, 2006 and 2005, the Companyprovided $100,000 for loan losses compared with a $200,000 provision for the year ended March 31,2004. While the Company’s loan quality, as measured principally by delinquency rates, charge-offsand loan classifications continues to be strong, the provision for loan losses during the fiscalyears ended March 31, 2006, 2005 and 2004 reflects the shifting of the mix of the loan portfolio toa greater portion of commercial estate loans as a percentage of total loans. This loan type isgenerally considered to have greater inherent risk of loss than one to four family residentialmortgagte loans. At March 31, 2006, the Company had two non-performing loans totaling $1.2 millionand two non-performing loans totaling $190,000 as of March 31, 2005.     ***Non-Interest Income.***     ***2006 v. 2005***     Total non-interest income increased $342,000, or 20.7%, in fiscal 2006 to $2 million from $1.7million in fiscal 2005. The increase is primarily the result of an increase in fees for depositaccounts of $320,000 from an overdraft protection program initiated in fiscal year 2006 and anincrease in other income of $100,000 primarily due to loan prepayment fees and increased fees fromthird party investment services. These increases were partially offset by decreases in gains onsales of loans and gains on sales of investment securities.     ***2005 v. 2004***     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 andwrite-downs of investments available for sale of $453,000 in fiscal 2005 as compared to a net lossof $135,000 in fiscal 2004. Service fee income on deposits increased $49,000 during fiscal 2005 andtotaled $649,000. Net gains on the sales of loans totaled $252,000 in fiscal 2005, for a decreaseof $43,000 from $295,000 in fiscal 2004. The decrease in 2005 was primarily due to the reductionof the total volume of loans sold to investors and totaled $33.0 million in fiscal 2004 and $20.5million in fiscal 2005. Other components of non-interest income decreased during 2005 by $37,000for brokerage income and $28,000 for other non-interest income.     ***Non-Interest Expenses.***     ***2006 v. 2005***     Non-interest expenses increased $665,000 during fiscal 2006, or 4.9%, to $14.2 million ascompared to $13.5 million for the year ended March 31, 2006. The increase is principally due to anincrease in salaries and benefits of $783,000 and occupancy costs of $279,000, partially offset bydecreases in professional fees of $258,000, other expense costs of $121,000 and data processingcosts of $68,000.     Salaries and employee benefits increased $783,000, or 10.2%, to $7.7 million in fiscal 2006 ascompared to the prior year. This increase was primarily due to an accrued severance expense of$283,000 due to branch staffing restructuring, overall salary increases in the ordinary course ofbusiness, increases in staffing to support a larger asset base and increased health care costs.     Office occupancy and equipment expenses increased $279,000, or 20.5%, to $1.6 million infiscal 2006 as compared to the prior year. This increase was primarily due to increased insuranceand maintenance and repairs expense, along with increased depreciation of bank buildings andequipment and amortization of leasehold improvements.     Data processing servicing fees decreased by $68,000, or 6.7%, to $950,000 in fiscal 2006 ascompared to the prior year. The decrease was primarily due to a renegotiation and extension of thecontract with the Bank’s primary data processing provider.
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     Professional fees decreased $258,000, or 25.8%, to $742,000 in fiscal 2006 as compared to theprior year. The decrease in 2006 was primarily due to a decrease in legal fees of $139,000 and adecrease of $103,000 in professional fees paid to outside consulting related to services utilizedin 2005 that were absent in 2006.     Marketing expenses increased $50,000. or 8.7% to $624,000 in fiscal 2006 as compared to theprior year as the Bank continued to aggressively market products to remain competitive in themarket for deposit and loan customers.     Other non-interest expenses decreased by $121,000, or 6.5%, to $1.7 million in fiscal 2006 dueprimarily to an insurance settlement recovery of $36,309 and an overall decrease in generaloverhead costs, specifically office supplies and other services provided to the Bank.     ***2005 v. 2004.***     Non-interest expenses increased $1.1 million during fiscal 2005, or 9.0%, to $13.5 million ascompared to $12.4 million for the year ended March 31, 2004. This increase is primarily due toincreases 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), partiallyoffset 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 ascompared 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 infiscal 2005 as compared to the prior year. This increase was primarily increased insurance andmaintenance and repairs expense along with increased depreciation of bank buildings and equipmentand amortization of leasehold improvements.     Data processing servicing fees decreased by $75,000, or 6.9%, to $1.0 million in fiscal 2005as compared to the prior year. The decrease was primarily due to a renegotiation and extension ofthe contract with the Bank’s primary data processing provider.     Professional fees increased $666,000 or approximately 200%, to $1.0 million in fiscal 2005 ascompared to the prior year. The increase in 2005 was primarily due to the costs incurred by theCompany that were associated with the stock buyback by the Company and the ESOP plan during thecurrent fiscal year, while the prior year amounts include the insurance recovery of expensesincurred with the shareholder litigation discussed herein.     Marketing expenses decreased $201,000, or 25.9%, to $574,000 in fiscal 2005 as compared to theprior year. While the Bank was able to undertake a significant deposit promotion during fiscal2005, there were fewer discretionary promotions compared to the prior year. During fiscal 2004,the Bank initiated a major marketing initiative, including it’s first-ever use of radioadvertisements, to promote the Bank, in general, and its new free checking account. In order forthe Bank to remain competitive in the market for deposit and loan customers, it anticipates thatmarketing expenditures will likely continue.     Other non-interest expenses increased by $17,000, or 0.9%, to $1.9 million in fiscal 2005 ascompared to the prior year. The modest increase in fiscal 2005 is primarily due to increases ininsurance costs, primarily directors and officers liability insurance, recruiting expenses andincreased contributions, partially offset by lower office supplies and reduced travel and seminarcosts.**Financial Condition**     Total assets at March 31, 2006 amounted to $547.3 million, an increase of $26.2 million, or 5%from $521.1 million at March 31, 2005. The growth in assets in 2006 was primarily caused by growthin the commercial real estate portfolio which grew primarily as a result of continued focus onoriginating these loans. 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
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March 31, 2004. The growth in assets in 2005 was primarily caused by growth in the commercial realestate portfolio. The modest growth in assets in fiscal 2004 was primarily caused by an increasein deposits of $7.9 million.     Net loans increased $28.8 million, or 7.5%, to $411.5 million at March 31, 2006 from March 31,2005 primarily due to growth in the commercial real estate portfolio. Net loans increased $29.6million, or 8.4%, to $382.7 million at March 31, 2005, as compared to March 31, 2004, primarily dueto the growth in the commercial real estate portfolio. The increase in fiscal 2005 is afterrealizing an increase of $39.0 million in commercial mortgage loans during fiscal 2004. Theseincreases reflect management’s decision to increase commercial real estate loans (which carry aninterest rate that generally adjusts every five years based on the FHLB classic advance rate) as apercentage of the total loan portfolio. As of March 31, 2006, commercial mortgages represent justover 50% of the loan portfolio.     Total deposits increased $60.2 million, or 18.1%, to $393.4 million at March 31, 2006, ascompared to March 31, 2005, primarily due to an increase in certificates of deposits. Totalcertificates of deposit represent approximately 56.2% of total deposits at March 31, 2006. The Bankrealized increases of $6.9 million in demand deposits, and decreases of $9.3 million in NOWaccounts and $8.8 million in regular savings accounts during fiscal 2006. Total deposits increased$37.3 million, or 12.6%, to $333.2 million at March 31, 2005, as compared to March 31, 2004,primarily due to the promotional campaign to originate certificates of deposit that was initiatedin fiscal 2005 and continued in fiscal 2006.     Advances from the FHLB of Boston decreased to $103.5 million at March 31, 2006 from $138.1million at March 31, 2005. The Bank decreased its borrowings from the FHLB of Boston in bothfiscal 2006 and 2005 consistent with its intent of reducing the utilization of FHLB advances. Thereduction of the FHLB advances was achieved through the use of funds from the increasedcertificates of deposit balances. The Bank aggressively priced and marketed certificates ofdeposits between seven months and thirteen months which increased by approximately $51.6 million ofnew funds, some of which were used to reduce FHLB advances and to originate loans.     Stockholders’ equity increased to $39.2 million at March 31, 2006 from $38.2 million at March31, 2005 due primarily to an increase in net earnings, partially offset by dividends paid of$950,000.**Liquidity**     The Company’s primary sources of liquidity are dividends from its bank subsidiary. Inaddition, 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 andmortgage-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 mortgageloans in the secondary market, are used to fund deposit withdrawals, loan originations andinvestment purchases.     Deposits have been a relatively stable source of funds for the Bank despite significantcompetition. The Bank has increased deposits since March 31, 2004 by $97.5 million to $393.4million at March 31, 2006. During fiscal years 2006 and 2005, the Bank increased deposits by $60.2million and $37.3 million or 18.1% and 12.6%, respectively, primarily as a result of the Bank’sefforts to aggressively price and market certificates of deposit with terms between 7 months and 13months. Core deposits, consisting or non-interest bearing demand deposits, saving accounts, NOWaccounts and money market accounts, represented approximately two-thirds of the Bank’s totaldeposits in fiscal 2004 but declined to less than 60% at March 31, 2005 and to under 45% at March31, 2006, as funds moved from money market and other core accounts to certificate accounts, to agreat extent as a result of the aforementioned promotions. Money market deposits had been thefastest growing component of core deposits but, as a result of the increase in the rates paid onall deposits by both the Bank and its competitors as shorter term interest rates increased, therewas a shift out of the money market accounts, as well regular savings and NOW accounts into higherrate certificates. While the percentage of core deposits to total deposits has declined, balancesin non interest earning demand deposits have increased from $34.0 million at March 31, 2005 to$40.9 million at March 31, 2006. It is uncertain whether the impact of sustained higher interestrates will continue to draw balances from the core accounts into the certificates of deposit infuture years.
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     The Bank is a member of the FHLB of Boston and has the ability to borrow from the FHLB ofBoston for any sound business purpose for which the Bank has legal authority, subject to suchregulations and limitations as may be prescribed. At March 31, 2006 and 2005, the Bank hadoutstanding FHLB of Boston advances of $103.5 million and $138.1 million, respectively. The FHLB ofBoston 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, 2006, the Bankhad approximately $78.1 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-operativeCentral 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 touse them.**Commitments, Contingencies and Off-Balance Sheet Risk**     The Company is a party to financial instruments with off-balance sheet risk includingcommitments to extend credit under existing lines of credit and commitments to originate and sellloans. These instruments involve, to varying degrees, elements of credit and interest rate risk inexcess 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 aslong as there is no violation of any condition established in the contract. Loan commitmentsgenerally expire within 30 to 45 days. Most home equity line commitments are for a term of 15years, and commercial lines of credit are generally renewable on an annual basis. Commitmentsgenerally have fixed expiration dates or other termination clauses and may require payment of afee. Since many of the commitments are expected to expire without being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements. The Company evaluateseach customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Company upon extension of credit, is based on management’s creditevaluation of the borrower.     Commitments to sell loans held for sale are agreements to sell loans on a best effortsdelivery basis to a third party at an agreed upon price.     On September 16, 2004 the Company completed a trust preferred securities financing forming aDelaware statutory trust, known as Central Bancorp Capital Trust I (the “Trust”). Central BancorpCapital Trust I is the Company’s only special purpose entity. The Company, within the financingtransaction and concurrent with the issuance of the junior subordinated debentures and the trustpreferred securities, issued a guarantee related to the trust securities for the benefit of theholders. Refer to “Subordinated Debenture” in Notes to Consolidated Financial Statements for moredetail.     Management believes that the Company and Bank have adequate sources of liquidity to fund thesecommitments.
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**Contractual Obligations and Commitments by Maturity**     The following table sets forth information regarding the Company’s contractual obligations andcommitments as of March 31, 2006.                       **Payments Due by Period**       **Less than**          **More than**   **Total**  **1 year**  **1-3 years**  **4-5 years**  **5 years**   **(In thousands)** Deposits $393,413  $366,220  $22,839  $4,354  $— Advances from FHLB  103,500   13,500   37,000   44,000   9,000 Short-term borrowings  —   —   —   —   — Subordinated debenture  5,258   —   —   —   5,258 ESOP loan  2,532   388   776   776   592 Operating lease obligations  1,694   248   367   338   741                 Total contractual cash obligations $506,397  $380,356  $60,982  $49,468  $15,591                                        **Amount of Commitment Expiring by Period**       **Less than**          **More than**   **Total**  **1 year**  **1-3 years**  **4-5 years**  **5 years**   **(In thousands)** Loan commitments $5,460  $5,460  $—  $—  $— Lines of credit  27,412   6,754   5,150   —   15,508 Sell mortgage loans  2,518   2,518   —   —   —                 Total commitments $35,390  $14,732  $5,150  $—  $15,508                 **Impact of Inflation and Changing Prices**     The consolidated financial statements and related data presented in this Form 10-K have beenprepared in conformity with accounting principles generally accepted in the United States ofAmerica, which require the measurement of financial position and operating results in terms ofhistorical dollars, without considering changes in the relative purchasing power of money over timedue to inflation. Unlike many industrial companies, substantially all of the assts and liabilitiesof the Bank are monetary in nature. As a result, interest rates have a more significant impact onthe Bank’s performance than the general level of inflation. Over short periods of time, interestrates 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 federalbanking regulations. The first standard establishes a risk-adjusted ratio relating capital todifferent categories of balance sheet assets and off-balance sheet obligations. Two categories ofcapital are defined: Tier 1 or core capital (stockholders’ equity) and Tier 2 or supplementarycapital. 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, 2006, theminimum total risk-based capital ratio required was 8.00%. The Company’s and the Bank’s risk-basedtotal capital ratios at March 31, 2006 were 12.03% and 11.10%, respectively.     To complement the risk-based standards, the FDIC adopted a leverage ratio (adjustedstockholders’ equity divided by total average assets) of 3% for the most highly rated banks and 4%for all others. The leverage ratio is to be used in tandem with the risk-based capital ratios asthe minimum standards for banks. The Company’s and the Bank’s leverage ratios were 7.31% and 7.98%,respectively, at March 31, 2006.
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**Item 7A.Quantitative and Qualitative Disclosures About Market Risk**     The Bank’s earnings are largely dependent on its net interest income, which is the differencebetween the yield on interest-earning assets and the cost of interest-bearing liabilities. The Bankseeks to reduce its exposure to changes in interest rate, or market risk, through active monitoringand management of its interest-rate risk exposure. The policies and procedures for managing bothon- and off-balance sheet activities are established by the Bank’s asset/liability managementcommittee (“ALCO”). The Board of Directors reviews and approves the ALCO policy annually andmonitors related activities on an ongoing basis.     Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’smarket risk arises primarily from interest rate risk inherent in its lending, borrowing and deposittaking activities.     The main objective in managing interest rate risk is to minimize the adverse impact of changesin interest rates on the Bank’s net interest income and preserve capital, while adjusting theBank’s asset/liability structure to control interest-rate risk. However, a sudden and substantialincrease or decrease in interest rates may adversely impact earnings to the extent that theinterest 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 interestrates over a specific time horizon. Simulation analysis involves projecting future interest incomeand expense under various rate scenarios. The simulation is based on forecasted cash flows andassumptions of management about the future changes in interest rates and levels of activity (loanoriginations, loan prepayments, deposit flows, etc). The assumptions are inherently uncertain and,therefore, actual results will differ from simulated results due to timing, magnitude and frequencyof interest rate changes as well as changes in market conditions and strategies. The net interestincome projection resulting from use of forecasted cash flows and management’s assumptions iscompared to net interest income projections based on immediate shifts of 300 basis points upwardand immediate downward shifts of 150 basis points and 75 basis points for fiscal year 2006 and2005, respectively. Internal guidelines on interest rate risk state that for every 100 basis pointsimmediate shift in interest rates, estimated net interest income over the next twelve months shoulddecline by no more than 5%.     The following table indicates the projected change in net interest income, and sets forth suchchange as a percentage of estimated net interest income, for the twelve month period following thedate indicated assuming an immediate and parallel shift for all market rates with other ratesadjusting to varying degrees in each scenario based on both historical and expected spreadrelationships:                   **At March 31,**   **2006**  **2005**   **Amount**  **% Change**  **Amount**  **% Change**       **(Dollars in thousands)**     200 basis point increase in rates $(1,530)  (10.0)% $—   —%300 basis point increase in rates          (2,361)  (13.8)200 basis point decrease in rates  611   4.0   —   — 150 basis point decrease in rates  —   —   (455)  (2.7)
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**Item 8.Financial Statements and Supplementary Data**       **Page** Consolidated Balance Sheets at March 31, 2006 and 2005 41 Consolidated Statements of Income for the years ended March 31, 2006, 2005 and 2004 42 Consolidated Statement of Changes in Stockholders’ Equity for the years endedMarch 31, 2006, 2005 and 2004 43 Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005 and 2004 45 Notes to Consolidated Financial Statements 46 Report of Independent Registered Public Accounting Firm 71 
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Consolidated Balance Sheets****(Dollars in thousands)**           **March 31,**   **2006**  **2005** ASSETS        Cash and due from banks $6,590  $6,158 Short-term investments  8,673   225        Cash and cash equivalents  15,263   6,383        Certificates of deposit (note 11)  627   606 Investment securities available for sale (amortized cost of $99,159in 2006 and $108,732 in 2005) (note 2)  97,195   108,616 Stock in Federal Home Loan Bank of Boston (notes 2 and 7)  8,300   8,300 The Co-operative Central Bank Reserve Fund (note 2)  1,576   1,576        Total investments  107,071   118,492        Loans held for sale (note 1)  45   2,221          Loans (note 3)  415,318   386,382 Less allowance for loan losses (note 4)  3,788   3,681        Net loans  411,530   382,701                 Accrued interest receivable  2,678   2,444 Banking premises and equipment, net (note 5)  3,870   2,807 Deferred tax asset, net (note 8)  2,347   1,639 Goodwill, net (note 1)  2,232   2,232 Other assets  1,612   1,546        Total assets $547,275  $521,071        LIABILITIES AND STOCKHOLDERS’ EQUITY        Liabilities:        Deposits (note 6) $393,413  $333,215 Short-term borrowings  —   141 Federal Home Loan Bank advances (notes 2 and 7)  103,500   138,135 Subordinated debenture (note 1)  5,258   5,258 ESOP loan (note 11)  2,532   2,921 Advance payments by borrowers for taxes and insurance  1,277   1,168 Accrued expenses and other liabilities  2,106   1,994        Total liabilities  508,086   482,832        Commitments 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; 1,590,181sharesissued at March 31, 2006 and 1,588,598 shares issued at March 31, 2005  2,033   2,031 Additional paid-in capital  2,938   2,976 Retained income  40,421   38,728 Accumulated other comprehensive income  (1,281)  (56)Unearnedcompensation — ESOP (note 11)  (4,922)  (5,440)       Total stockholders’ equity  39,189   38,239        Total liabilities and stockholders’ equity $547,275  $521,071        See accompanying notes to consolidated financial statements.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Consolidated Statements of Income****(In Thousands, Except Per Share Data)**               **Years Ended March 31,**   **2006**  **2005**  **2004** Interest and dividend income:            Mortgage loans $24,425  $21,902  $22,797 Other loans  428   366   363 Short-term investments  232   175   204 Investments  5,256   5,173   3,743           Total interest and dividend income  30,341   27,616   27,107           Interest expense:            Deposits  6,893   4,733   4,436 Advances from Federal Home Loan Bank of Boston  6,615   6,848   7,019 Other borrowings  516   304   82           Total interest expense  14,024   11,885   11,537                        Net interest and dividend income  16,317   15,731   15,570 Provision for loan losses (note 4)  100   100   200           Net interest and dividend income afterprovision for loan losses  16,217   15,631   15,370           Non-interest income:            Deposit service charges  969   649   600 Net gains (losses) from sales and write-downsof investment securities (note 2)  419   453   (135)Gain on sales of loans  208   252   295 Brokerage income  125   101   138 Other income  276   200   228           Total non-interest income  1,997   1,655   1,126           Non-interest expenses:            Salaries and employee benefits (note 11)  8,476   7,693   7,187 Occupancy and equipment (note 5)  1,642   1,363   1,159 Data processing service fees  950   1,018   1,093 Professional fees (note 12)  742   1,000   334 Advertising and marketing  624   574   775 Other expenses (note 1)  1,749   1,870   1,853           Total non-interest expenses  14,183   13,518   12,401                        Income before income taxes  4,031   3,768   4,095 Provision for income taxes (note 8)  1,388   1,305   1,159           Net income $2,643  $2,463  $2,936            Earnings per common share (note 1):            Basic $1.85  $1.66  $1.89           Diluted $1.84  $1.65  $1.88                        Weighted average common shares outstanding — basic  1,429   1,482   1,551              Weighted average common and equivalent sharesoutstanding — diluted  1,438   1,493   1,565 See accompanying notes to consolidated financial statements.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Consolidated Statements of Changes in Stockholders’ Equity****(In Thousands, Except Per Share Data)**                                               **Accumulated**             **Additional**          **Other**  **Unearned**  **Total**   **Common**  **Paid-In**  **Retained**  **Treasury**  **Comprehensive**  **Compensation**  **Stockholders’**   **Stock**  **Capital**  **Income**  **Stock**  **Income (Loss)**  **ESOP**  **Equity**  Balance at March 31, 2003 $2,028  $12,751  $34,601  $(7,249) $1,002  $(3,690) $39,443 Net income  —   —   2,936   —   —   —   2,936 Other comprehensive income net of tax:                            Unrealized gain on securities, netof reclassification adjustment  —   —   —   —   1,291   —   1,291                             Comprehensive income                          4,227                             Proceeds from exerciseof stock options (2,524 shares)  2   45   —   —   —   —   47 Tax benefit of stock options  —   18   —   —   —   —   18 Director deferred compensation transactions  —   60   —   (62)  —   —   (2)Dividends paid ($0.48 per share)  —   —   (682)  —   —   —   (682)Amortization of unearned compensation— ESOP  —   46   —   —   —   357   403                       Balance at March 31, 2004  2,030   12,920   36,855   (7,311)  2,293   (3,333)  43,454                              Net income  —   —   2,463   —   —   —   2,463 Other comprehensive income net of tax:                            Unrealized loss on securities, netof reclassification adjustment  —   —   —   —   (2,349)  —   (2,349)                            Comprehensive income                          114                             Purchase of 77,134 shares by ESOP (Note 11)  —   —   —   —   —   (2,565)  (2,565)Proceeds from exerciseof stock options (775 shares)  1   15   —   —   —   —   16 Tax benefit of stock option  —   4   —   —   —   —   4 Director deferred compensation transactions  —   64   —   (55)  —   —   9 Dividends paid ($0.48 per share)  —   —   (712)  —   —   —   (712)Amortization of unearned compensation— ESOP  —   5   —   —   —   458   463 Purchase of treasury stock (77,134 shares)(Note 12)  —   —   —   (2,565)  —   —   (2,565)Other equity transactions (note 10)  —   (10,032)  122   9,931   —   —   21                       Balance at March 31, 2005  2,031   2,976   38,728   —   (56)  (5,440)  38,239                              Net Income  —   —   2,643   —   —   —   2,643 Other comprehensive income net of tax:                            Unrealized loss on securities, netof reclassification adjustment  —   —   —   —   (1,225)  —   (1,225)                            Comprehensive income                          1,418                             Proceeds from exerciseof stock options (1,583 shares)  2   23   —   —   —   —   25 Tax benefit of stock option exercises  —   5   —   —   —   —   5 Dividends paid ($.66 per share)  —   —   (950)  —   —   —   (950)Amortization of unearned compensation— ESOP  —   (66)  —   —   —   518   452                       Balance at March 31, 2006 $2,033  $2,938  $40,421  $—  $(1,281) $(4,922) $39,189                       See accompanying notes to consolidated financial statements.
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**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 31are as follows:               **2006**   **Before-Tax**  **Tax (Benefit)**  **After-Tax**   **Amount**  **Expense**  **Amount**  Unrealized losses on securities:            Unrealized net holding gains during period $(1,471) $(522) $(949)Add reclassification adjustment for net gains included in net income  (419)  (144)  (275)   Other comprehensive income $(1,890) $(666) $(1,224)      **2005**   **Before-Tax**  **Tax (Benefit)**  **After-Tax**   **Amount**  **Expense**  **Amount**  Unrealized 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 income $(3,644) $(1,295) $(2,349)      **2004**   **Before-Tax**  **Tax (Benefit)**  **After-Tax**   **Amount**  **Expense**  **Amount**  Unrealized gains on securities:            Unrealized net holding gains during period $1,824  $622  $1,202 Add reclassification adjustment for net losses included in net income  135   46   89    Other comprehensive loss $1,959  $668  $1,291    See accompanying notes to consolidated financial statements.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Consolidated Statements of Cash Flows****(Dollars in Thousands)**               **Years Ended March 31,**   **2006**  **2005**  **2004** Cash flows from operating activities:            Net income $2,643  $2,463  $2,936 Adjustments to reconcile net income to net cash providedby (used in) operating activities            Depreciation and amortization  572   427   319 Amortization of premiums and discounts  141   174   165 Provision for loan losses  100   100   200 Stock-based compensation  452   463   332 (Increase) decrease in deferred tax assets, net  (43)  (101)  (194)Net (gains) losses from sales and write-downs ofinvestment securities  (419)  (453)  135 Gain on sale of loans held for sale  (208)  (252)  (295)Originations of loans held for sale  (17,120)  (21,935)  (32,823)Proceeds from the sale of loans originated for sale  19,504   20,765   32,966 (Increase) decrease in accrued interest receivable  (234)  (241)  177 (Increase) in other assets, net  (66)  (522)  (348)Increase (decrease) in advance payments by borrowers fortaxes and insurance  109   (14)  183 Increase (decrease) in accrued expenses and other liabilities  112   (3,091)  (2,175)          Net cash provided by operating activities  5,543   (2,217)  1,578           Cash flows from investing activities:            Net (increase) decrease in loans  (28,929)  (29,713)  33,245 Principal payments on mortgage- backed securities  11,125   7,956   5,453 Purchases of investment securities  (11,716)  (48,036)  (40,431)Proceeds from sales of investment securities  4,400   6,875   482 Maturities and redemptions of investment securities  6,000   4,995   13,500 Due to broker  —   —   3,029 (Purchase) redemption of certificate of deposit  (21)  605   (1,200)Purchase of banking premises and equipment  (1,635)  (1,121)  (563)          Net cash provided by (used in) investing activities  (20,776)  (58,439)  13,515           Cash flows from financing activities:            Net increase (decrease) in deposits  60,198   37,295   7,961 Proceeds from FHLB of Boston advances  124,184   67,000   2,000 Repayments of FHLB of Boston advances  (158,819)  (74,300)  (5,300)Proceeds from ESOP loan  —   —   3,506 Repayments of ESOP loan  (389)  (390)  (195)Net increase (decrease) in short-term borrowings  (141)  3,631   669 Issuance of subordinated debenture  —   5,258   — Proceeds from exercise of stock options  25   20   47 Tax benefit from exercise of stock option  5   —   — Purchase of treasury stock  —   (2,565)  — Payments of dividends, net  (950)  (712)  (682)Purchase of common stock by ESOP  —   (2,565)  — Other equity transactions  —   30   16           Net cash provided by financing activities  24,113   32,702   8,022           Net increase (decrease) in cash and cash equivalents  8,880   (27,954)  23,115 Cash and cash equivalents at beginning of year  6,383   34,337   11,222           Cash and cash equivalents at end of year $15,263  $6,383  $34,337           Supplemental disclosure of cash flow information:            Cash paid during the period for:            Interest $14,113  $11,937  $11,591 Income taxes $1,458  $1,065  $2,005 See accompanying notes to consolidated financial statements.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****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, CentralCo-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 thecapital stock of the Bank upon the consummation of the reorganization of the Bank into the holdingcompany form of ownership. This reorganization was completed in January 1999. The Bank wasorganized as a Massachusetts chartered co-operative bank in 1915 and converted from mutual to stockform in 1986. The primary business of the Bank is to generate funds in the form of deposits and usethe funds to make mortgage loans for the construction, purchase and refinancing of residentialproperties, and to make loans on commercial real estate in its market area. The Bank is subject tocompetition from other financial institutions. The Company is subject to the regulations of, andperiodic examinations by, the Federal Reserve Bank (“FRB”). The Bank is also subject to theregulations of, and periodic examination by, the Federal Deposit Insurance Corporation (“FDIC”) andthe Massachusetts Division of Banks. The Bank’s deposits are insured by the Deposit Insurance Fundof the FDIC for deposits up to $100,000 for most accounts and up to $250,000 for retirementaccounts and the Share Insurance Fund (“SIF”) for deposits in excess of the FDIC limits.     The Company conducts its business through one operating segment, the Bank. Most of the Bank’sactivities are with customers located in eastern Massachusetts. As set forth in Note 3 herein, theBank concentrates in real estate lending. Management believes that the Bank does not have anysignificant 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 AccountingStandards 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 financialstatements. (See Note 1 – *Subordinated Debentures*)     The accompanying consolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America. All significantintercompany balances and transactions have been eliminated in consolidation. In preparing theconsolidated financial statements, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of the balance sheet andincome and expenses for the year. Actual results could differ from those estimates. Materialestimates that are particularly susceptible to change relate to the determination of the allowancefor loan losses.     Certain prior year amounts have been reclassified to conform to the current year’spresentation. The following is a summary of the more significant accounting policies adopted by theBank.     *Cash and Cash Equivalents*     For purposes of reporting cash flows, cash and cash equivalents include cash and due frombanks, money market mutual fund investments, federal funds sold and other short-term investmentshaving an original maturity at date of purchase of 90 days or less.     The Bank is required to maintain cash and reserve balances with the Federal Reserve Bank. Suchreserves are calculated based upon deposit levels and amounted to approximately $935,000 at March31, 2006.     *Investments*     Debt securities that management has the positive intent and ability to hold to maturity areclassified as held-to-maturity and reported at cost, adjusted for amortization of premiums andaccretion 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 inthe near term are classified as trading and reported at fair value, with
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**unrealized gains and losses included in earnings. Debt and equity securities not classified aseither 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 ofstockholders’ equity and comprehensive income.     Gains and losses on sales of securities are recognized when realized with the cost basis ofinvestments sold determined on a specific-identification basis. Premiums and discounts oninvestment and mortgage-backed securities are amortized or accreted to interest income over theactual 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 beother-than-temporary, the cost basis of the investment is written down to fair value as a new costbasis 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 CentralBank 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 arestated at the lower of aggregate cost or market value. The Company enters into forward commitments(generally on a best efforts delivery basis) to sell loans in order to reduce market riskassociated with the origination of loans held for sale. Market value is estimated based onoutstanding investor commitments. Net unrealized losses, if any, are provided for in a valuationallowance by charges to operations. Loans are sold on a servicing released basis.     Loan origination fees, net of certain direct loan origination costs, are deferred and areamortized into interest income over the contractual loan term using the level-yield method. AtMarch 31, 2006 and 2005, net deferred loan fees of $272,000 and $389,000, respectively, were offsetagainst 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 discontinuedeither 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. Theaccrual on some loans, however, may continue even though they are more than 90 days past due ifmanagement deems it appropriate, provided that the loans are well secured and in the process ofcollection. When a loan is placed on non-accrual status, all interest previously accrued but notcollected is reversed against current period interest income. Interest accruals are resumed on suchloans only when they are brought fully current with respect to interest and principal and when, inthe judgment of management, the loans are estimated to be fully collectible as to both principaland interest. The Bank records interest income on non-accrual and impaired loans on the cash basisof accounting.     Loans are classified as impaired when it is probable that the Bank will not be able to collectall 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, areaccounted for at the present value of the expected future cash flows discounted at the loan’seffective interest rate or as a practical expedient in the case of collateral dependent loans, thelower of the fair value of the collateral or the recorded amount of the loan. Management considersthe payment status, net worth and earnings potential of the borrower, and the value and cash flowof the collateral as factors to determine if a loan will be paid in accordance with its contractualterms. Management does not set any minimum delay of payments as a factor in reviewing for impairedclassification. Impaired loans are charged off when management believes that the collectibility ofthe loan’s principal is remote. Management considers non-accrual loans, except for smaller balance,homogeneous residential mortgage loans, to be impaired.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     *Subordinated Debentures*     On September 16, 2004, Central Bancorp, Inc. (the “Company”) completed a trust preferredsecurities financing in the amount of $5.1 million. In the transaction, the Company formed aDelaware statutory trust, known as Central Bancorp Capital Trust I (the “Trust”). The Trust issuedand sold $5.1 million of trust preferred securities in a private placement and issued $158,000 oftrust 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 isvariable and adjustable quarterly at 2.44% over three-month LIBOR. At March 31, 2006 the interestrate was 7.35%. The Debentures are the sole assets of the Trust and are subordinate to all of theCompany’s existing and future obligations for borrowed money. The trust preferred securitiesgenerally rank equal to the trust common securities in priority of payment, but will rank prior tothe trust common securities if and so long as the Company fails to make principal or interestpayments on the Debentures. Concurrently with the issuance of the Debentures and the trustpreferred securities, the Company issued a guarantee related to the trust securities for thebenefit of the holders.     *Allowance for Loan Losses*     The allowance for loan losses is maintained at a level determined to be adequate by managementto absorb probable losses based on an evaluation of known and inherent risks in the portfolio. Thisallowance is increased by provisions charged to operating expense and by recoveries on loanspreviously charged off, and reduced by charge-offs on loans.     Arriving at an appropriate level of allowance for loan losses necessarily involves a highdegree of judgment. The allowance for loan losses is evaluated on a quarterly basis. Primaryconsiderations in this evaluation are prior loan loss experience, the character and size of theloan portfolio, business and economic conditions, loan growth, delinquency trends, nonperformingloan trends and other asset quality factors. The Bank evaluates specific loan status reports oncertain commercial and commercial real estate loans rated “substandard” or worse. Estimatedreserves for each of these credits is determined by reviewing current collateral value, financialinformation, cash flow, payment history and trends and other relevant facts surrounding theparticular credit. The remaining commercial and commercial real estate loans are provided for aspart of pools of similar loans based on a combination of historical loss experience and qualitativeadjustments including collateral type and loan-to-value ratios. Smaller balance, homogeneousloans, including residential real estate loans and consumer loans, are evaluated as a group byapplying estimated charge off and recovery percentages, based on historical experience and certainqualitative 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 theallowance for loan losses, future additions to the allowance may be necessary based on estimatesthat are susceptible to change as a result of changes in economic conditions and other factors. Inaddition, 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 torecognize adjustments to the allowance based on their judgments about information available to themat 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 consequencesattributable to differences between the accounting basis and the tax basis of the Bank’s assets andliabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences are expected to berealized or settled. The Bank’s deferred tax asset is reviewed periodically and adjustments to suchasset are recognized as deferred income tax expense or benefit based on management’s judgmentsrelating to the realizability of such asset.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     *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 onthe straight-line method over the estimated useful lives of the assets or terms of the leases, ifshorter.     *Goodwill*     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) which iseffective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 as of April1, 2002. SFAS 142 addresses the method of identifying and measuring goodwill and other intangibleassets having indefinite lives acquired in a business combination, eliminates further amortizationof goodwill, and requires periodic impairment evaluations of goodwill using a fair valuemethodology prescribed in the statement. As a result of adopting SFAS 142, the Company no longeramortizes the goodwill balance of $2.2 million. Impairment testing is required at least annually ormore frequently as a result of an event or change in circumstances (*e.g.,*recurring operatinglosses by the acquired entity) that would indicate an impairment adjustment may be necessary.Annual Impairment testing was performed during 2006 and 2005 and in each analysis, it wasdetermined that an impairment charge was not required.     *Pension Benefits*     The Bank provides pension benefits for its employees in a multi-employer pension plan throughmembership in the Co-operative Banks Employees Retirement Association. Pension costs are funded asthey are accrued and are accounted for on a defined contribution plan basis.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     *Stock-Based Compensation*     The Company follows the intrinsic value method set forth in APB Opinion No. 25 “Accounting forStock Issued to Employees” (“APB No. 25”) under which there is generally no charge to earnings forstock option grants. Companies that elect to use this method are required to disclose the pro formaeffect of using the fair value method of accounting for stock-based compensation that is encouragedby SFAS No. 123, “Accounting for Stock-Based Compensation.”     No options were granted during fiscal years 2004, and 2006. The estimated fair value ofoptions granted in 2005 was $7.47. Options to purchase 33,299 shares were granted during fiscalyear 2005. These options were fully vested when issued. Forfeitures during these years wereinsignificant. The impact on net income as a result of the Company’s use of the intrinsic valuemethod rather than the fair value method of accounting for stock-based compensation is presented inthe following table:               Year ended March 31,   2006  2005  2004   (amounts in thousands, except per share amounts) Net income available to common stockholders $2,643  $2,463  $2,936 Total stock-based compensation under the fair–value-basedmethod for all awards  —   249   —           Pro forma net income available to common stockholders $2,643  $2,214  $2,936                        Net income per share            As reported-basic  1.85   1.66   1.89 As reported-diluted  1.84   1.65   1.88              Pro forma-basic  1.85   1.49   1.89 Pro forma-diluted  1.84   1.48   1.88      The per-share weighted-average fair value of stock options granted in 2005 was $7.47 on thedate of grant using the Black-Scholes option pricing model with the following weighted-averageassumptions. There were no options granted in 2006 and 2004.                   **Expected** **Risk-Free**     **Expected****Year** **Dividend Yield** **Interest Rate** **Expected Option Life** **Volatility Factor**2005  1.66%  4.14% 5 Years  26.20%
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     *Earnings Per Share*     Basic earnings per share (“EPS”) is computed by dividing income available to commonstockholders by the weighted-average number of common shares outstanding for the period. DilutedEPS reflects the potential dilution that could occur if securities or other contracts to issuecommon stock, such as stock options, were exercised or converted into common stock. UnallocatedESOP shares are not treated as being outstanding in the computation of either basic or diluted EPS.At March 31, 2006, 2005 and 2004, there were approximately 154,000 170,000 and 107,000 unallocatedESOP shares, respectively.     The following depicts a reconciliation of basic and diluted earnings per share:               **2006**  **2005**  **2003**   (Amounts in thousands, except per share amounts) Net income available to common shareholders $2,643  $2,463  $2,936           Weighted average number of common shares outstanding  1,590   1,624   1,664 Weighted average number of unallocated ESOP shares  (161)  (142)  (113)          Weighted average number of common shares outstandingused in calculation of basic earnings per share  1,429   1,482   1,551 Incremental shares from the assumed exercise of dilutivestock options  9   11   14           Weighted average number of common shares outstandingused in calculating diluted earnings per share  1,438   1,493   1,565           Earnings per share            Basic $1.85  $1.66  $1.89 Diluted $1.84  $1.65  $1.88 
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**Recent Accounting Pronouncements*Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”(“SFAS 123R*”). In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.123 (revised 2004). SFAS No. 123R replaces SFAS No. 123 “Accounting for Stock-Based Compensation”and supersedes Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issuedto Employees”. SFAS No. 123R requires that the compensation cost relating to share-based paymentawards be recognized in the Company’s financial statements, eliminating pro forma disclosure as analternative. That cost will be measured based on the grant-date fair value of the equity orliability instruments issued. In addition, liability awards are remeasured to fair value eachreporting period. On April 14, 2005, the SEC deferred the compliance date of SFAS 123R until thebeginning of a company’s next fiscal year for calendar-year companies. For the Company,implementation is therefore required beginning April 1, 2006. Adoption of SFAS 123R is not expectedto have a material impact on the Company’s financial position or results of operations.*FASB Emerging Issues Task Force (“EITF”) Issue 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments*”. In November 2003 and March 2004, the FASB’sEITF issued a consensus on EITF Issue 03-1. The guidance in EITF 03-1 provided application guidanceto assess whether there has been any event or economic circumstances to indicate that a security isimpaired on an other-than-temporary basis.Consideration is to be given to the length of time a security has had a market value less than thecost basis, the intent and ability of the Company to hold the security for a period of timesufficient for a recovery in value, recent events specific to the issuer or industry and, for debtsecurities, external credit ratings and recent downgrades. Securities deemed to beother-than-temporarily impaired are to be written down to fair value with the write-down recordedas a realized loss. Additionally, the guidance provided for expanded annual disclosure.In September 2004, the FASB issued FASB Staff Position (“FSP”) EITF Issue No. 03-1-1 “*EffectiveDate of Paragraphs 10-20 of EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments*”, which delayed the effective date for the guidance addressingthe issues to be considered in determining whether a security is other-than-temporarily impaired.Companies still need to comply with the disclosure requirements under EITF 03-1 and all otherrelevant measurement and recognition requirements in other accounting literature.In November 2005, the FASB issued FSP FAS 115-1 and 124-1, “*The Meaning of Other-Than-Temporary**Impairment and Its Application to Certain Investments*”. This FSP, which nullifies certainrequirements of EITF 03-1, addresses the determination as to when an investment is consideredimpaired, whether that impairment is other than temporary and the measurement of an impairmentloss. Additionally, the FSP addresses accounting considerations subsequent to the recognition ofother-than-temporary impairment and requires certain disclosures about unrealized losses that havenot been recognized as other-than-temporary impairments. The guidance requires an impairment chargeto be recognized in the current period if it is determined that a security will be sold in asubsequent period where the fair value is not expected to be fully covered by the time of sale.This FSP is effective for other-than-temporary impairment analysis conducted in periods beginningafter December 15, 2005. The adoptions of EITF 03-1 and EITF 03-1-1 did not have a material impacton the Company’s financial position or results of operations and the Company does not believe thatthe adoption of FSP FAS 115-1 and 124-1 will have a material impact on the Company’s financialposition or results of operations.*Statement of Position 03-3 (“SOP 03-3”), “Accounting for Certain Loans or Debt Securities Acquiredin a**Transfer*”. In December 2003, the American Institute of Certified Public Accountants (“AICPA”)issued SOP 03-3. SOP 03-3 requires loans acquired through a transfer, such as a businesscombination, where there are differences in expected cash flows and contractual cash flows due inpart to credit quality, be recognized at their fair value. The yield that may be accreted islimited to the excess of the investor’s estimate of undiscounted expected principal, interest andother cash flows over the investor’s initial investment in the loan. The excess of contractual cashflows over expected cash flows is not to berecognized as an adjustment of yield, loss accruals or valuation allowance. Any
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**future excess of cash flows over the original expected cash flows is to be recognized as anadjustment of future yield.Future decrease in actual cash flows compared to the original expected cash flows are recognized asa valuation allowance and expensed immediately. Valuation allowances can not be created nor“carried over” in the initial accounting for loans acquired in a transfer of loans with evidence ofdeterioration of credit quality since origination. However, valuation allowances for non-impairedloans acquired in a business combination can be carried over. This SOP was effective for loansacquired in fiscal years beginning after December 15, 2004 for the company. The adoption of SOP03-3 did not have a material impact on the Company’s financial position or results of operations.*FSP SOP 94-6-1, “Terms of Loan Products That May Give Rise to a Concentration of Credit Risk*”. InDecember 2005, the FASB issued FSP SOP 94-6-1. This FSP was issued in response to inquiries fromconstituents and discussions with the SEC staff and regulators of financial institutions to addressthe circumstances in which the terms of loan products give rise to a concentration of credit riskas that term is used in SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” andwhat disclosures apply to entities who deal with loan products whose terms may give rise to aconcentration of credit risk. An entity shall provide the disclosures required by SFAS No. 107 foreither an individual loan product type or a group of loan products with similar features that aredetermined to represent a concentration of credit risk in accordance with the guidance of SOP94-6-1 for all periods presented in financial statements. This SOP is effective for interim andannual periods ending after December 19, 2005.*FASB Interpretation “Accounting for Uncertain Tax Positions*” The FASB met on May 10, 2006, andaddressed its Uncertain Tax Positions project. Among the various decisions reached at this meeting,the FASB decided to amend FASB Statement No. 5, Accounting for Contingencies, to excludecontingencies relating to income taxes, and require the following disclosures as part of the finalInterpretation: o A tabular reconciliation of the beginning and ending balances of unrecognized taxbenefits in a manner similar to that prescribed in other recent guidance that addressesestimates with significant uncertainty.  o For items in which it is reasonably possible that the estimate of the realized taxbenefit (an increase in the unrecognized tax benefit liability) for the tax uncertaintywill significantly change in the next 12 months:  o The nature of the uncertainty;  o The nature of the event that could occur in the next 12 months that would cause the change; and  o An estimate of the range of the reasonably possible change or a statement that anestimate of the change cannot be made.  o A description of open tax years by major tax jurisdictions.The FASB currently intends to issue a final interpretation resulting from this income tax projectin late June 2006.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****Note 2. Investments**(Dollars in Thousands)     The amortized cost and fair value of investments securities available for sale are summarizedas follows:                   **March 31, 2006**   **Amortized**  **Gross Unrealized**  **Fair**   **Cost**  **Gains**  **Losses**  **Value**   (Dollars in Thousands) U.S. Government and agencyobligations $25,973  $—  $(566) $25,407 Corporate bonds  28,558   175   (436)  28,297 Mortgage-backed securities  40,115   61   (1,228)  38,948              Total debt securities  94,646   236   (2,230)  92,652 Marketable equity securities  4,513   140   (110)  4,543              Total $99,159  $376  $(2,340) $97,195                                 **March 31, 2005**   **Amortized**  **Gross Unrealized**  **Fair**   **Cost**  **Gains**  **Losses**  **Value**   (Dollars in Thousands) U.S. Government and agencyobligations $21,958  $5  $(238) $21,725 Corporate bonds  34,688   790   (261)  35,217 Mortgage-backed securities  48,317   157   (595)  47,879              Total debt securities  104,963   952   (1,094)  104,821 Marketable equity securities  3,727   269   (201)  3,795              Total $108,690  $1,221  $(1,295) $108,616                   Gross unrealized losses and fair value at March 31, 2006, aggregated by investment categoryand length of time that individual securities have been in a continuous unrealized loss positionfollows:                   **Less Than**  **Greater Than**   **12 Months**  **12 Months**   **Fair**  **Unrealized**      **Unrealized**   **Value**  **Losses**  **Fair Value**  **Losses**   (Dollars in Thousands) U.S. Government and agency obligations $12,719  $(256) $12,688  $(311)Corporate bonds  —   —   4,112   (436)Mortgage-backed securities  17,141   (335)  20,214   (893)Marketable equity securities  1,548   (136)  274   (5)             Total temporarily impaired securities $31,408  $(727) $37,288  $(1,645)                  As of March 31, 2006, securities held in the investment portfolio with unrealized losses havebeen evaluated by management and management has concluded that an other-than-temporary impairmentdoes not exist at March 31, 2006. The primary reason these securities are in an unrealized lossposition is due to changes in market conditions and interest rates. Most of the securities aredebt securities whose values fluctuate daily based on the current interest rate environment.Management considers the credit worthiness of the issuer in evaluating impairment.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     The maturity distribution (based on contractual maturities) and annual yields of debtsecurities at March 31, 2006 are as follows:               **Amortized**  **Fair**  **Annual**   **Cost**  **Value**  **Yield**   (Dollars in Thousands) Due within one year $20,950  $20,982   5.43%Due after one year but within five years  33,727   32,867   4.80 Due after five years but within ten years  16,602   15,855   4.23 Due after ten years  23,367   22,946   4.74              $94,646  $92,650                     Mortgage-backed securities are shown at their contractual maturity dates but actual maturities maydiffer 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 March31, 2006, 2005 and 2004 (all classified as available for sale) were as follows:               **2006**  **2005**  **2004**   (Dollars in Thousands) Proceeds from sales $4,400  $6,875  $482 Gross gains  508   536   — Gross losses  89   41   5 Other than temporary impairments  —   42   130           Net realized gains (losses) $419  $453  $(135)               During the years ended March 31, 2005 and 2004, the Bank recognized write-downs in certainequity securities totaling $42,000 and $130,000, respectively, as a result of declines in the fairvalue of such securities judged to be other-than-temporary. During the year ended March 31, 2006the Bank did not recognize any write-downs for equity securities. These write-downs are included inthe preceding table.     A mortgage-backed security with an amortized cost of $886,000 and fair value of $860,000 atMarch 31, 2006, was pledged to provide collateral for certain customers. In addition, investmentsecurities carried at $61.4 million were pledged under a blanket lien to partially secure theBank’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 ofBoston in an amount which, until April 2004, was equal to 1% of its outstanding home loans or1/20th 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 stockwas converted to Class B stock. Such stock is redeemable at par value five years after filing for aredemption 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 newcapital 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 incapital structure) plus 4.5% of the Bank’s advances andcertain 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 purposesand consists of deposits required of all insured co-operative banks in Massachusetts. The Fund isused by The Cooperative Central Bank to advance funds to member banks or to make other investments.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****Note 3. Loans**(In Thousands)     Loans as of March 31, 2006 and 2005 are summarized below:           **2006**  **2005** Real estate loans:        Residential real estate $160,381  $159,838 Commercial real estate  213,935   194,326 Construction  27,680   17,187 Home equity lines of credit  7,505   9,194        Total real estate loans  409,051   380,545        Commercial loans  4,457   4,786 Consumer loans  1,360   1,051        Total loans  415,318   386,382 Less: allowance for loan losses  (3,788)  (3,681)       Total loans, net $411,530  $382,701             The Bank had two loans on non-accrual status totaling $190,000 as of March 31, 2005 and twoloans on non-accrual status totaling $1,220,000 as of March 31, 2006. During the years ended March31, 2006, 2005 and 2004, there were no impaired loans other than non-accrual loans.     Mortgage loans serviced by the Bank for others amounted to $241,826 and $391,000 at March 31,2006 and 2005, respectively.     The Bank’s lending activities are conducted principally in communities in the suburban Bostonarea. The Bank grants mortgage loans on residential property, commercial real estate, constructionof residential homes, second mortgages, home equity and other loans. Substantially all loansgranted by the Bank are secured by real estate collateral. The ability and willingness ofresidential mortgage borrowers to honor their repayment commitments are generally impacted by thelevel 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 honortheir repayment commitments are generally impacted by the health of the real estate market in theborrowers’ geographic area and the general economy.     The following summarizes the activity with respect to loans made to directors and officers andtheir related interests for the years ended March 31:           **2006**  **2005** Balance at beginning of year $1,019  $901 New loans  16   302 Repayment of principal  (333)  (184)       Balance at end of year $702  $1,019             Loans included above were made in the Bank’s ordinary course of business, on substantially thesame terms, including interest rates and collateral requirements, as those prevailing at the timefor comparable transactions with unrelated persons. All loans included above are performing inaccordance with the terms of the respective loan agreement.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****Note 4. Allowance for Loan Losses**(In Thousands)     A summary of changes in the allowance for loan losses follows:               **Years Ended March 31,**   **2006**  **2005**  **2004** Balance at beginning of year $3,681  $3,537  $3,284 Provision charged to expense  100   100   200 Amounts charged-off  (39)  (3)  (29)Recoveries on accounts previously charged-off  46   47   82           Balance at end of year $3,788  $3,681  $3,537           **Note 5. Banking Premises and Equipment**(In Thousands)     A summary of cost, accumulated depreciation and amortization of banking premises and equipmentat March 31 follows:                       **Estimated**   **2006**  **2005**  **Useful Lives** Land $589  $589     Buildings and improvements  3,059   2,969  50 yearsFurniture and fixtures  7,887   6,715  3-5 yearsLeasehold improvements  998   911  5-6 years              12,533   11,184     Less accumulated depreciation and amortization  (8,663)  (8,377)               Total $3,870  $2,807                     Depreciation and amortization for the years ended March 31, 2006, 2005 and 2004 amounted to$572,000, $427,000 and $319,000, respectively, and is included in occupancy and equipment expensein the accompanying consolidated statements of income.     A summary of minimum rentals of banking premises for future periods under non-cancelableoperating leases follows:             **Years Ending March 31,**         2007    $248    2008     198    2009     169    2010     169    2011     169   Thereafter    741      Certain leases contain renewal options the potential impact of which is not included above.Rental expense for the years ended March 31, 2006, 2005 and 2004 was $181,000, $152,000 and$147,000, respectively, and is included in occupancy and equipment expense in the accompanyingconsolidated statements of income.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****Note 6. Deposits**(Dollars in Thousands)     Deposits at March 31 are summarized as follows:           **2006**  **2005** Demand deposit accounts $40,871  $33,982 NOW accounts  29,902   39,205 Passbook and other savings accounts  65,546   74,316 Money market deposit accounts  36,051   50,051        Total non certificate accounts  172,370   197,554        Term deposit certificates        Certificates of $100 and above  84,028   47,270 Certificates less than $100  137,015   88,391        Total term deposit certificates  221,043   135,661          $393,413  $333,215             Contractual maturities of term deposit certificates with weighted average interest rates atMarch 31, 2006 are as follows:           **Amount**  **Rate** Within 1 year $193,850   3.60%Over 1 to 3 years  22,839   3.50 Over 3 years  4,354   3.78          $221,043   3.59        **Note 7. Federal Home Loan Bank Advances**(Dollars in Thousands)     A summary of the maturity distribution of FHLB of Boston advances (based on final maturitydates) with weighted average interest rates at March 31 follows:                   **2006**  **2005**   **Amount**  **Rate**  **Amount**  **Rate** Within 1 year $13,500   3.71% $25,635   4.17%1-2 years  22,000   5.36   9,500   3.67 2-3 years  15,000   5.13   18,000   5.58 3-4 years  20,000   5.97   15,000   5.13 4-5 years  24,000   5.61   20,000   5.94 Over 5 to 10 years  9,000   3.83   50,000   4.75 Over 10 years  —       —                      $103,500   5.15% $138,135   4.82%                    At March 31, 2006, advances totaling $86.0 million were callable prior to their scheduledmaturity of which $18.0 million were callable during fiscal 2007. The Bank is subject to asubstantial 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 regulationsand limitations as the Federal Home Loan Bank Board may prescribe. The advances are secured by FHLBof Boston stock and a blanket lien on certain qualified collateral, defined principally as 90%of the fair value of U.S.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**Government and federal agency obligations and 75% of the carrying value of first mortgage loans onowner-occupied residential property. In addition, certain multi-family property loans are pledgedto secure FHLB advances. The Bank’s unused borrowing capacity with the FHLB of Boston wasapproximately $78.1 million at March 31, 2006.**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,**   **2006**  **2005**  **2004** CurrentFederal $1,446  $1,332  $1,113 State  76   74   (148)          Total current provision  1,522   1,406   965 Deferred (prepaid)  (134)  (101)  194             $1,388  $1,305  $1,159                The provision for income taxes for the periods presented is different from the amountscomputed by applying the statutory Federal income tax rate to income before income taxes. Thedifferences between expected tax rates and effective tax rates are as follows:               **Years Ended March 31,**   **2006**  **2005**  **2004** Statutory Federal tax rate  34.0%  34.0%  34.0%Items affecting Federal income tax rate:            Dividends received deduction  (0.6)  (0.7)  (0.4)Stock buyback costs  —   1.5   — State income taxes  0.7   0.2   3.3 Retroactive REIT legislation and settlement  —   —   (9.1)ESOP expense  —   (0.5)  — Other  0.3   0.1   0.5           Effective tax rate  34.4%  34.6%  28.3%               During 2002, the Massachusetts Department of Revenue (“DOR”) issued notices of intent toassess additional state excise taxes to numerous financial institutions in Massachusetts that hadformed a real estate investment trust (REIT) subsidiary. The DOR contended that dividends receivedby the banks from such subsidiaries were fully taxable in Massachusetts. Subsequently, in March2003, the Governor of Massachusetts signed legislation, expressly disallowing deductions fordividends received from a REIT, resulting in such dividends being subject to state taxation. Inaddition, this law applied retroactively to tax years ending on or after December 31, 1999. Infiscal 2003, the Company provided additional state taxes, including interest, net of the relatedfederal tax benefit, of $835,000.     In June 2003, a settlement of this matter was reached between the DOR and the majority ofaffected financial institutions. The settlement provided that 50% of all dividends received fromREIT subsidiaries from 1999 through 2002 were subject to state taxation. Interest on suchadditional taxes was also assessed. Payment of such taxes and interest totaling $431,000 was madein June 2003. As a result of this settlement, the Company recognized a reduction of $374,000 in itsaccrued tax liabilities, which increased net income by the same amount in fiscal 2004.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     The components of gross deferred tax assets and gross deferred tax liabilities that have beenrecognized as of March 31 are as follows:           **2006**  **2005** Deferred tax assets:        Allowance for loan losses $975  $872 Deferred loan origination fees  10   21 Depreciation  353   282 Post-employee retirement benefitaccrual  253   247 Write-down of investments  24   395 Unrealized loss on securities, net  696   18 Capital loss carryforward  273   — Other  69   101        Gross deferred tax asset  2,653   1,936        Deferred tax liabilities:        Unrealized gain on securities, net      — Accrued dividend receivable  44   34 Deferred loan origination costs  262   263 Deferred income  —   —        Gross deferred tax liability  306   297        Net deferred tax asset $2,347  $1,639             Based on the Company’s historical and current pre-tax earnings, management believes it is morelikely than not that the Company will realize the net deferred tax asset existing at March 31,2006. Further, management believes the existing net deductible temporary differences will reverseduring periods in which the Company generates net taxable income. At March 31, 2006, recoverableincome taxes, plus estimated taxes for fiscal 2007, exceed the amount of the net deferred taxasset. There can be no assurance, however, that the Company will generate any earnings or anyspecific level of continuing earnings.     The unrecaptured base year tax bad debt reserves will not be subject to recapture as long asthe Company continues to carry on the business of banking. In addition, the balance of the pre-1988bad debt reserves continues to be subject to provision of present law that requires recapture inthe case of certain excess distributions to shareholders. The tax effect of pre-1988 bad debtreserves subject to recapture in the case of certain excess distributions is approximately $1.3million.**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 ofbusiness to meet the financing needs of its customers. These financial instruments include unusedlines of credit, unadvanced portions of commercial and construction loans, and commitments tooriginate loans. The instruments involve, to varying degrees, elements of credit and interest raterisk in excess of the amounts recognized in the balance sheets. The amounts of those instrumentsreflect 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 itsfinancial instruments is represented by the contractual amount of those instruments. The Bank usesthe same credit policies in making commitments and conditional obligations as it does foron-balance sheet instruments.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     Financial instruments with off-balance sheet risks as of March 31, included the following:           **2006**  **2005** Unused home equity and personal lines of credit $18,563  $17,655 Unadvanced portions of construction loans  8,011   14,088 Unadvanced portions of commercial loans  838   1,917 Commitments to originate commercial mortgage loans  3,684   18,277 Commitments to originate residential mortgage loans  1,776   8,557 Commitments to sell residential mortgage loans  2,518   5,196        Total off-balance sheet commitments $35,390  $65,690             Commitments to originate loans, unused lines of credit and unadvanced portions of commercialand construction loans are agreements to lend to a customer, provided there is no violation of anycondition established in the contract. Commitments generally have fixed expiration dates or othertermination clauses and may require payment of a fee. Since many of the commitments may expirewithout being drawn upon, the total commitment amounts do not necessarily represent future cashrequirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. Theamount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is basedon 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 effectthereof would cause capital to be reduced below regulatory requirements, or if such declaration andpayment would otherwise violate regulatory requirements.     In October 1991, the Company adopted a Shareholder Rights Agreement (“Rights Plan”) entitlingeach shareholder, other than an Acquiring Person or an Adverse Person as defined below, to purchasethe Company’s stock at a discounted price in the event any person or group of persons exceededpredetermined ownership limitations of the Company’s outstanding common stock (an “AcquiringPerson”) and, in certain circumstances, engaged in specific activities deemed adverse to theinterests of the Company’s shareholders (an “Adverse Person”). The Rights Plan was due to expire inOctober 2001, but was renewed by the Board of Directors during fiscal 2002 and is now scheduled toexpire in October 2011.     Beginning in April 1999, the Board of Directors authorized a series of four separate 5% stockrepurchase programs under which the Company has acquired 442,428 shares of its stock at an averagecost of $21.95 per share. The latest repurchase program was completed in September 2004 as part ofthe stock repurchased under the Stock Purchase Agreement between the Company and the ESOP and PLCapital and other related parties.     In fiscal 2005, the Commonwealth of Massachusetts adopted legislation that eliminated treasurystock, including treasury stock that was present at the effective date. As a result of this change,the presentation of treasury stock in the equity section of the balance sheet is no longerpermitted for Massachusetts corporations. Shares that have been or will be repurchased are restoredto the status of authorized but unissued shares.     The Bank is subject to various regulatory capital requirements administered by the federalbanking agencies. Failure to meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements. Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specific capital guidelinesthat involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheetitems as calculated under regulatory accountingpractices. The Bank’s capital amounts and classification are also subject to qualitativejudgments 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 regulatoryagencies is 3.00% and is 4.00% for all others. The Bank must also have a minimum total risk-basedcapital ratio of 8.00% (of which 4.00% must be Tier I capital, consisting of common stockholders’equity). As of March 31, 2006, the Bank met all capital adequacy requirements to which it issubject.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     The most recent notification from the FDIC categorized the Bank as “well capitalized” underthe regulatory framework for prompt corrective action. To be categorized as “well capitalized,” theBank must maintain minimum risk-weighted capital, Tier 1 capital and tangible capital ratios as setforth in the table. There are no conditions or events, since that notification that managementbelieves would cause a change in the Bank’s categorization. No deduction was taken from capital forinterest-rate risk. The Company’s and the Bank’s Tier 1 leverage, Tier 1 risk-based and totalrisk-based capital ratios together with related regulatory minimum requirements are summarizedbelow:                                           **To Be Well**          **For Capital** **Capitalized Under**          **Adequacy** **Prompt Corrective**  **Actual** **Purposes** **Action provisions**  **Amount** **Ratio** **Amount** **Ratio** **Amount** **Ratio**As of March 31, 2006:                        **Company (consolidated)**                        Total capital $47,139   13.09% $28,816   38.00%  N/A   N/A Tier 1 capital  43,337   12.03   14,408   34.00   N/A   N/A Tier 1 leverage capital  43,337   7.93   21,858   34.00   N/A   N/A **Bank**                        Total capital $43,684   12.15% $28,755   38.00% $35,944  310.00%Tier 1 capital  39,882   11.10   14,378   34.00   21,566  36.00 Tier 1 leverage capital  39,882   7.31   21,826   34.00   27,283  35.00                          As of March 31, 2005:                        **Company (consolidated)**                        Total capital $44,855   12.12% $29,619   38.00%  N/A   N/A Tier 1 capital  41,162   11.12   14,810   34.00   N/A   N/A Tier 1 leverage capital  41,162   8.04   20,477   34.00   N/A   N/A **Bank**                        Total 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  36.00 Tier 1 leverage capital  37,758   7.38   20,455   34.00   25,569  35.00 **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 in effect a noncontributory defined benefit plan(“Pension Plan”) and a defined contribution plan (“Savings Plan”) covering substantially alleligible employees.     Benefits under the Pension Plan are determined at the rate of 1% and 1.5%, respectively, ofcertain elements of final average pay times years of credited service and are generally provided atage 65 based on years of service and the average of the participants’ three highest consecutiveyears of compensation from the Bank. Employee contributions are made to a Savings Plan whichqualifies under section 401(k) of the Internal Revenue Code of 1986, as amended. The Bank matches50% of an eligible deferral contribution on the first 5% of the deferral amount subject to themaximum allowable under federal regulations. Pension benefits and employer contributions to theSavings Plan become vested over six years.     Expenses for the Pension Plan and the Savings Plan were $441,000, $441,000 and $448,000, forthe years ended March 31, 2006, 2005 and 2004, respectively. Forfeitures are used to reduceexpenses of the plans.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****Employee Stock Ownership Plan**     The Bank maintains an Employee Stock Ownership Plan (“ESOP”) that is authorized to purchaseshares of outstanding common stock of the Company from time to time in the open market or innegotiated transactions. The ESOP is a tax-qualified defined contribution plan established for theexclusive benefit of the Bank’s employees. All full-time employees who have completed one year ofservice with the Bank are eligible to participate in the ESOP.     Through October 2003, the ESOP repaid its loans to the Company with funds from the Bank’scontributions to the ESOP along with dividends on unallocated ESOP shares. These loans had terms ofup to 20 years. In October 2003, the ESOP refinanced these loans from the Company with a thirdparty lender. In connection with this refinancing, the Company received proceeds of $3,506,000, ofwhich $2,250,000 was contributed to the Bank’s capital. The loan bears interest at the prevailingprime rate plus 1/2% and matures in March 2012. Principal payments of $97,000 are to be made eachquarter. The loan is collateralized by the ESOP’s unallocated Company stock, a certificate ofdeposit of $627,000 and a pledge of the Company’s stock in the Bank. In addition, the Companyguarantees 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 theCompany 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 andRichard J. Fates, the Company and the ESOP completed the purchase of 77,134 shares of the Company’scommon stock.     Compensation expense is recognized as the shares are allocated to participants based upon thefair value of the shares at the time they are allocated. As a result, changes in the market valueof the Company’s stock have an effect on the Company’s results of operations but have no effect onstockholders’ equity. ESOP expense for fiscal 2006, 2005 and 2004 amounted to $439,000, $455,000and $332,000, respectively.**Stock Option Plan**     The Company has adopted two qualified Stock Option Plans for the benefit of officers and otheremployees under which an aggregate of 281,500 shares had been reserved for issuance. One of theseplans terminated in 1997 and the other plan terminated in 2005.     Stock option activity is as follows for the years indicated:           **Number of**  **Weighted Average**   **Shares**  **Exercise Price** Balance March 31, 2003  31,474  $18.572 Exercised  (2,524)  18.469         Balance March 31, 2004  28,950   18.581         Exercised  (775)  19.796 Granted  33,299   28.990         Balance March 31, 2005  61,474   24.204         Exercised  (1,583)  18.471         Balance March 31, 2006  59,891   24.356              The exercise price of an option may not be less than the fair market value of the Company’scommon stock on the date of grant of the option and may not be exercisable more than ten yearsafter the date of grant. As of March 31, 2006, no shares remained unissued under the Stock OptionPlans.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**     All stock options are fully vested and exercisable at the time of grant. The range of exerciseprices and weighted average remaining contractual lives of outstanding stock options at March 31,2006 are as follows:               **Exercise**  **Number**  **Remaining**   **Price**  **Outstanding**  **Life**   $16.625   12,451  4.9 years   20.250   14,141  3.8 years   28.990   33,299  9.0 years          Average/Total $24.356   59,891  6.7 years          
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****Other Post-Retirement Benefits**     The Bank maintains a post-retirement medical insurance plan and life insurance plan forcertain individuals. The following tables summarize the funded status and the actuarial benefitobligations of these plans for fiscal 2006 and 2005.                   **2006**  **2005**   **Life**  **Medical**  **Life**  **Medical** Actuarial present value of benefits obligation:                Retirees $(258) $(209) $(254) $(373)Fully eligible participants  —   —   —   —              Total $(258) $(209) $(254) $(373)                              Change in projected benefit obligation:                Accumulated benefit obligations at prior year-end $(254) $(373) $(260) $(444)Service cost less expense component  —   —   —   — Interest cost  (15)  (19)  (14)  (22)Actuarial gain (loss)  5   47   15   61 Amendment  —   107   —   — Assumptions  4   (4)  (5)  (5)Benefits paid  2   32   10   37              Accumulated benefit obligations at year-end $(258) $(210) $(254) $(373)                              Change in plan assets:                Fair value of plan assets at prior year-end $—  $—  $—  $— Actual return on plan assets  —   —   —   — Employer contribution  1   32   10   37 Benefits paid and expenses  (1)  (32)  (10)  (37)             Fair value of plan assets at current year-end $—  $—  $—  $—                               Funded $(258) $(210) $(254) $(373)Unrecognized net obligation  60   174   69   199 Unrecognized prior service cost  —   (107)  —   — Unrecognized prior year service  —   —   —   — Unrecognized net loss (gain)  (72)  (196)  (65)  (169)               $(270) $(339) $(250) $(343)                              Reconciliation of (accrual) prepaid:                (Accrued) prepaid pension cost at beginningof year $(250) $(343) $(240) $(348)Minus net periodic cost  (21)  (28)  (20)  (32)Plus employer contributions, net  1   32   10   37              (Accrued) prepaid cost at end of year $(270) $(339) $(250) $(343)                              Benefit obligation weighted average assumption asof fiscal year-end:                Discount rate  5.75%  5.75%  5.75%  5.75%Expected return on plan assets  5.75   5.75   5.75   5.75                  Rate of compensation increase  —   —   —   — 
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006**                   **1 Percentage Point Increase**   **2006**  **2005**   **Life**  **Medical**  **Life**  **Medical** Impact of 1% change in health care trend rates:                Effect on total service and interest cost components $N/A  $(1) $N/A  $1 Effect on the post retirement benefit obligations  N/A   20   N/A   23                  Components of net periodic benefit cost:                Service cost $—  $—  $—  $— Interest cost  15   19   15   22 Expected return on plan assets  —   —   —   — Amortization of prior service cost  8   25   8   24 Recognized actuarial (gain) loss  (2)  (16)  (3)  (14)             Net periodic benefit cost $21  $28  $20  $32                               Periodic benefit cost weighted average assumptions:                Discount rate  5.75%  5.75%  6.00%  6.00%Expected return on plan assets  5.75%  5.75%  6.00%  6.00%Rate of compensation increase          —   —      For measurement purposes, an 11% annual rate of increase in the per capita cost of coveredhealth care benefits was assumed for the fiscal year ended March 31, 2004. The rate was assumed todecrease gradually to 5.5% for the fiscal year ending March 31, 2007 and remain at that levelthereafter.**Note 12. Legal Proceedings**(In Thousands)     The Bank from time to time is involved as plaintiff or defendant in various legal actionsincident to its business. Except as described herein, none of these actions are believed to bematerial, either individually or collectively, to the results of operations and financial conditionof the Company or any subsidiary.     The Company and certain present and former directors had been named in related federal andstate court lawsuits brought by PL Capital, LLC and affiliates (“PL Capital”) and also by LawrenceB. Seidman and affiliates (“Seidman”), respectively, current and former stockholders, in which PLCapital and Seidman had challenged the directors’ determination that PL Capital and Seidmansecretly acted in concert in violation of the Company’s Rights Plan. On August 4, 2003, the Companyand the directors, former directors and affiliated entities that were parties to the litigationentered into an Agreement (the “Agreement”) with PL Capital, LLC and its affiliated persons andentities, pursuant to which all the parties settled all of the pending litigation between them andfiled with the appropriate courts the filings necessary for the litigation to be dismissed. As partof 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 thePL Capital and Seidman litigation. In connection therewith, the Company received insurancerecoveries of $3.1 million during the year ended March 31, 2004. These recoveries have beenclassified with professional fees in the accompanying consolidated statements of income.     On September 17, 2004, The Company and the ESOP each purchased 77,134 shares of the Company’scommon stock pursuant to the terms of the Stock Purchase Agreement, dated September 13, 2004, byand among the Company and the ESOP and PL Capital, LLC, Financial Edge Fund, L.P., FinancialEdge-Strategic Fund, L.P., Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Richard Lashley,John W. Palmer and Richard J. Fates.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****Note 13. Fair Values of Financial Instruments**(In Thousands)     Fair value estimates are based on existing on- and off-balance sheet financial instrumentswithout attempting to estimate the value of anticipated future business and the value of assets andliabilities that are not considered financial instruments. Significant assets and liabilities thatare not considered financial assets or liabilities include the intangible value inherent in depositrelationships (*i.e.,*core deposits) and banking premises and equipment. In addition, the taxramifications related to the realization of the unrealized gains and losses can have a significanteffect on fair values and have not been considered in any of the estimates. Accordingly, theaggregate fair value amounts presented do not represent the underlying value of the Bank.      Thefollowing methods and assumptions were used by the Bank in estimating fair values of its financialinstruments:     **Cash and Due from Banks**     The carrying values reported in the balance sheet for cash and due from banks approximatetheir fair value because of the short maturity of these instruments.     **Short-term Investments and Certificate of Deposit**     The carrying values reported in the balance sheet for short-term investments and thecertificate of deposit approximate fair value because of the short maturity of these investments.     **Investment and Mortgage-Backed Securities**     The fair values presented for investment and mortgage-backed securities are based on quotedmarket prices, where available. If quoted market prices are not available, fair values are based onquoted market prices of comparable instruments.     **Loans and Loans Held for Sale**     The fair values of loans are estimated using discounted cash flow analysis, using interestrates 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 thefair value of loans. The fair value of loans held for sale is determined based on the unrealizedgain or loss on such loans.     **Accrued Interest Receivable**     The carrying value reported in the balance sheet for accrued interest receivable approximatesits 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 ReserveFund approximates its fair value.     **Deposits**     The fair values of deposits (excluding term deposit certificates) are, by definition, equal tothe amount payable on demand at the reporting date. Fair values for term deposit certificates areestimated using a discounted cash flow technique that applies interest rates currently beingoffered on certificates to a schedule of aggregated monthly maturities on time deposits withsimilar remaining maturities.
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**CENTRAL BANCORP, INC. AND SUBSIDIARY****Notes to Consolidated Financial Statements****March 31, 2006****Advances from FHLB of Boston**     Fair values of non-callable advances from the FHLB of Boston are estimated based on thediscounted cash flow of scheduled future payments using the respective year-end published rates foradvances with similar terms and remaining maturities. Fair values of callable advances from theFHLB of Boston are estimated using the prepayment fee payable to the FHLB of Boston assuming allsuch advances were prepaid on the reporting date.**Short-term Borrowings, Advance Payments by Borrowers for Taxes and Insurance and AccruedInterest Payable**     The carrying values reported in the balance sheet for short-term borrowings, advance paymentsby borrowers for taxes and insurance and accrued interest payable approximate their fair valuebecause of the short maturity of these accounts.**Off-Balance Sheet Instruments**     The Bank’s commitments for unused lines of credit and unadvanced portions of loans are atfloating rates, which approximate current market rates, and, therefore, no fair value adjustmenthas been made.     The estimated carrying amounts and fair values of the Bank’s financial instrumentsare as follows:                   **March 31, 2006** **March 31, 2005**  **Carrying** **Estimated** **Carrying** **Estimated**  **Amount** **Fair Value** **Amount** **Fair Value****Assets**                Cash and due from banks $6,590  $6,590  $6,158  $6,158 Short-term investments  8,673   8,673   225   225 Certificate of deposit  627   627   606   606 Investment securities  97,195   97,187   108,616   108,616 Loans held for sale  45   45   2,221   2,213 Net loans  411,530   413,844   382,701   385,491 Stock in Federal Home LoanBank of Boston, at cost  8,300   8,300   8,300   8,300 The Co-operative CentralBank Reserve Fund  1,576   1,576   1,576   1,576 Accrued interest receivable  2,678   2,678   2,444   2,444                  **Liabilities**                Deposits $393,413  $375,481  $332,215  $315,484 Short-term borrowings  0   0   141   141 Advances from FHLB of Boston  103,500   104,522   138,135   141,507 ESOP loan  2,532   2,532   2,921   2,921 Subordinated debenture  5,258   5,258   5,258   5,258 Advance payments byborrowers for taxes andinsurance  1,277   1,277   1,168   1,168 Accrued interest payable  507   507   595   595 
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**Note 14. Parent Company Only Condensed Financial Statements**(In Thousands)     The following are the condensed financial statements for Central Bancorp, Inc. (the “ParentCompany”) only:           **March 31,** **Balance Sheets** **2006**  **2005**   **Assets**        Cash deposit in subsidiary bank $217  $220 Certificate of deposit (Note 11)  627   606 Investment in subsidiary  40,834   39,935 ESOP loan (Note 11)  2,452   2,531 Investment in unconsolidated subsidiary  158   162 Other assets  190   86        Total assets $44,478  $43,540        **Liabilities and Stockholders’ Equity**        Subordinated debentures (Note 1) $5,258  $5,258 Accrued taxes and other liabilities  31   43 Total stockholders’ equity  39,189   38,239        Total liabilities and stockholders’ equity $44,478  $43,540                       **Years Ended March 31,** **Statements of Income** **2006**  **2005**  **2004**   Dividends from subsidiary $1,300  $800  $1,000 Interest income  160   87   98 Interest expense on subordinated debentures  (330)  (135)  — Non-interest income (expenses) (Note 12)  (332)  (529)  87           Income before income taxes  798   223   1,185 Income tax benefit (provision)  171   98   (63)          Income before equity in undistributed netincome of subsidiary  969   321   1,122 Equity in undistributed net income of subsidiary  1,674   2,142   1,814           Net income $2,643  $2,463  $2,936           
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               **Years Ended March 31,** **Statements of Cash Flows** **2006**  **2005**  **2004**  Cash flows from operating activities:            Net income $2,643  $2,463  $2,936 Adjustments to reconcile net income to net cash providedby operatingactivities:            Equity in undistributed net income of subsidiary  (1,674)  (2,142)  (1,814)Decrease (increase) in other assets  (104)  (96)  394 Increase (decrease) in accrued taxes and other liabilities  (6)  (38)  (949)          Net cash provided by operating activities  859   187   567           Cash flows from investing activities:            ESOP loans, net of repayment  79   (2,531)  3,660 (Purchase) redemption of certificate of deposit  (21)  605   (1,200)Investment in subsidiary  —   —   (2,366)          Net cash provided by (used in) investing activities  58   (1,926)  94           Cash flows from financing activities:            Proceeds from exercise of stock options  30   20   47 Proceeds from issuance of subordinated debenture  —   5,100   — Purchase of treasury stock  —   (2,565)  — Cash dividends paid, net  (950)  (712)  (682)Other, net  —   9   (12)          Net cash provided by (used in) financing activities  (920)  1,852   (647)          Net increase (decrease) in cash in subsidiary bank  (3)  113   14 Cash in subsidiary bank at beginning of year  220   107   93           Cash in subsidiary bank at end of year $217  $220  $107           
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