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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**** ****FORM 10-Q****(Mark One)**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934******FOR THE QUARTER ENDED June 30, 2006******OR**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934****Commission file number 000-51194** **Benjamin Franklin Bancorp, Inc.**(Exact Name of Registrant as Specified in its Charter)   **Massachusetts** **04-3336598**(State or Other Jurisdiction of (I.R.S. EmployerIncorporation or Organization) Identification No.)   **58 Main Street, Franklin, MA** **02038**(Address of Principal Executive Offices) (Zip Code)Registrant’s telephone number,including area code: **(508) 528-7000**      Indicate by check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes þ No o     Indicate by check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer and large acceleratedfiler” in Rule 12b-2 of the Exchange Act. (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 þ     Shares outstanding of the registrant’s common stock (no par value) at August 14, 2006:8,488,898  
 

 
       **Page** **PART I – FINANCIAL INFORMATION**         Item 1. Consolidated Financial Statements         Consolidated Balance Sheets at June 30, 2006 and December 31, 2005  3      Consolidated Statements of Income for the three and six months endedJune 30, 2006 and 2005  4      Consolidated Statements of Changes in Stockholders’ Equity for the six months endedJune 30, 2006 and 2005  5      Consolidated Statements of Cash Flows for the six months endedJune 30, 2006 and 2005  6      Notes to Condensed Consolidated Financial Statements  8      Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  9      Item 3. Quantitative and Qualitative Disclosures about Market Risk  28      Item 4. Controls and Procedures  30      **PART II – OTHER INFORMATION**         Item 1. Legal Proceedings  31      Item 1A Risk Factors That May Affect Future Results  31      Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  31      Item 3. Defaults on Senior Securities  31      Item 4. Submission of Matters to a Vote of Security Holders  31      Item 5. Other Information  31      Item 6. Exhibits  31      **SIGNATURES**  33  EX-31.1 Section 302 Certification of C.E.O. EX-31.2 Section 302 Certification of C.F.O. EX-32.1 Section 906 Certification of C.E.O EX-32.2 Section 906 Certification of C.F.O.
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     **PART I. FINANCIAL INFORMATION****Item 1. Financial Statements****BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED BALANCE SHEETS**(Dollars in thousands)           June 30,  December 31,   2006  2005   (Unaudited)  (Audited) **ASSETS**                 Cash and due from banks $15,571  $16,499 Cash supplied to ATM customers  40,121   37,200 Short-term investments  16,278   12,051        Total cash and cash equivalents  71,970   65,750          Securities available for sale, at fair value  124,331   122,379 Securities held to maturity, at amortized cost  60   109 Restricted equity securities, at cost  10,480   10,012        Total securities  134,871   132,500          Loans        Residential real estate  290,452   286,204 Commercial real estate  223,944   209,009 Construction  55,263   60,399 Commercial business  20,426   19,162 Consumer  38,514   34,814 Net deferred loan costs  1,157   1,214        Total loans, gross  629,756   610,802 Allowance for loan losses  (5,797)  (5,670)       Loans, net  623,959   605,132          Premises and equipment, net  11,147   11,167 Accrued interest receivable  3,178   3,045 Bank-owned life insurance  10,101   7,451 Goodwill  33,763   33,763 Identifiable intangible asset  3,555   4,133 Other assets  4,291   4,116          $896,835  $867,057                 **LIABILITIES AND STOCKHOLDERS’ EQUITY**                 Deposits:        Regular savings $93,547  $97,960 Money market accounts  96,523   94,347 NOW accounts  34,830   32,147 Demand deposit accounts  125,887   124,396 Time deposit accounts  278,711   262,823        Total deposits  629,498   611,673          Short-term borrowings  15,000   — Long-term debt  134,954   140,339 Other liabilities  8,118   6,933        Total liabilities  787,570   758,945                 Common stock, no par value; 75,000,000 sharesauthorized; 8,488,898 shares issuedand outstanding  —   — Additional paid-in capital  82,866   82,849 Retained earnings  34,962   32,942 Unearned compensation  (5,261)  (5,353)Accumulated other comprehensive loss  (3,302)  (2,326)       Total stockholders’ equity  109,265   108,112          $896,835  $867,057        See accompanying notes to condensed consolidated financial statements
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**BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED STATEMENTS OF INCOME****(Dollars in thousands, except share and per share data)**                   Three Months Ended  Six Months Ended   June 30,  June 30,   2006  2005  2006  2005   (Unaudited)  (Unaudited) Interest and dividend income:                Loans, including fees $9,236  $8,048  $18,078  $12,940 Debt securities  1,377   893   2,639   1,554 Dividends  23   94   143   162 Short-term investments  186   151   402   244              Total interest and dividend income  10,822   9,186   21,262   14,900                  Interest expense:                Interest on deposits  3,535   2,193   6,637   3,424 Interest on borrowings  1,373   935   2,799   1,789              Total interest expense  4,908   3,128   9,436   5,213              Net interest income  5,914   6,058   11,826   9,687                  Provision for loan losses  122   328   128   496                               Net interest income, after provision for loanlosses  5,792   5,730   11,698   9,191                               Other income:                ATM servicing fees  722   509   1,334   509 Deposit service fees  341   298   670   504 Loan servicing fees  155   132   276   204 Investment sales commissions  30   89   97   146 Gain on sale of loans, net  73   4   138   20 Security impairment writedown  (35)  —   (35)  — Loss on sale/write-down of bank-ownedland, net  —   (1,020)  —   (1,020)Income from bank-owned life insurance  85   59   150   118 Miscellaneous  176   174   315   256              Total other income  1,547   245   2,945   737                               Operating expenses:                Salaries and employee benefits  2,725   2,466   5,446   4,480 Occupancy and equipment  642   658   1,308   1,099 Data processing  452   535   900   872 Professional fees  355   238   733   367 Marketing and advertising  148   117   311   273 Contribution to Benjamin Franklin BankCharitable Foundation  —   4,000   —   4,000 Amortization of core deposit intangible  277   554   578   599 Other general and administrative  756   574   1,398   916              Total operating expenses  5,355   9,142   10,674   12,606                               Income (loss) before income taxes  1,984   (3,167)  3,969   (2,678)                 Provision (benefit) for income taxes  724   (625)  1,441   (466)                              Net income (loss) $1,260  $(2,542) $2,528  $(2,212)                              Weighted-average shares outstanding:                Basic  8,030,629   N/A   8,028,636   N/A Diluted  8,030,629   N/A   8,028,636   N/A                  Earnings per share:                Basic $0.16   N/A  $0.32   N/A Diluted $0.16   N/A  $0.32   N/A See accompanying notes to condensed consolidated financial statements
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**BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY****(Dollars in thousands, except per share data)****(Unaudited)**                                                   Accumulated              Additional          Other  Total   Common Stock  Paid-in  Retained  Unearned  Comprehensive  Stockholders’   Shares  Amount  Capital  Earnings  Compensation  Loss  Equity Balance at December 31, 2004  —  $—  $—  $32,997  $—  $(1,669) $31,328                                                          Comprehensive income (loss):                            Net loss  —   —   —   (2,212)  —   —   (2,212)Net unrealized gain on securitiesavailable forsale, net of tax effects  —   —   —   —   —   266   266                             Total comprehensive loss                          (1,946)                            Issuance of common stock for initialpublic offering, net of expenses of$2.1 million  5,577,419   —   53,721   —   —   —   53,721 Issuance of common stock to BenjaminFranklin Bank Charitable Foundation  400,000   —   4,000   —   —   —   4,000 Issuance of common stock for acquisitionof Chart Bank, A Cooperative Bank  2,511,479   —   25,115   —   —   —   25,115 Stock purchased for ESOP                  (3,044)      (3,044)Release of ESOP stock  —   —   1   —   54   —   55                                                    Balance at June 30, 2005  8,488,898  $—  $82,837  $30,785  $(2,990) $(1,403) $109,229                                                    Balance at December 31, 2005  8,488,898  $—  $82,849  $32,942  $(5,353) $(2,326) $108,112                                                          Comprehensive income (loss):                            Net income  —   —   —   2,528   —   —   2,528 Net unrealized loss on securitiesavailable forsale, net of tax effects  —   —   —   —   —   (976)  (976)                            Total comprehensive income                          1,552                             Dividends declared ($.06 per share)  —   —   —   (508)  —   —   (508)Release of ESOP stock  —   —   17   —   92   —   109                                                    Balance at June 30, 2006  8,488,898  $—  $82,866  $34,962  $(5,261) $(3,302) $109,265                       See accompanying notes to condensed consolidated financial statements
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**BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED STATEMENTS OF CASH FLOWS****(Dollars in thousands)****(Unaudited)**           Six Months Ended June 30,   2006  2005 Cash flows from operating activities:        Net income (loss) $2,528  $(2,212)Adjustments to reconcile net income (loss) to net cashprovided by operating activities:        Amortization (accretion) of securities, net  (398)  69 Accretion of loans, net  (45)  (44)Provision for loan losses  128   496 Accretion of deposits and borrowings, net  (26)  (129)Amortization of mortgage servicing rights  124   140 Depreciation and amortization  499   441 Amortization of core deposit intangible  578   599 Amortization of unearned compensation  109   55 Income from bank-owned life insurance  (150)  (118)Gains on sales of loans, net  (138)  (20)Loans originated for sale  (12,849)  (7,314)Proceeds from sales of loans  12,987   7,334 Increase in accrued interest receivable  (132)  (653)Security impairment writedown  35   — Loss on sale / writedown of bank-owned land,net  —   1,020 Contribution to Benjamin Franklin BankCharitable Foundation  —   4,000 Other, net  977   (1,014)       Net cash provided by operating activities  4,227   2,650                 Cash flows from investing activities:        Activity in available-for-sale securities:        Maturities, calls, and principal repayments  41,780   15,461 Purchases  (44,403)  (16,373)Principal repayments on held-to-maturity securities  49   56 Net change in restricted equity securities  (503)  (102)Purchases of mortgage loans  (16,118)  — Loan originations, net  (2,791)  (41,259)Proceeds from sales of bank-owned land  —   868 Purchases of bank-owned life insurance  (2,500)  — Additions to premises and equipment  (479)  (101)       Net cash used for investing activities  (24,965)  (41,450)       (Continued)See accompanying notes to condensed consolidated financial statements
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**BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)****(Dollars in thousands)****(Unaudited)**           Six Months Ended June 30,   2006  2005 Cash flows from financing activities:        Net increase in deposits  17,869   17,458 Net proceeds from (repayments of) short-term borrowings  15,000   (4,250)Net proceeds from (repayments of) long-term debt  (5,403)  11,500 Net proceeds from common stock offering  —   53,721 Dividends paid on common stock  (508)  — Acquisition of common stock by ESOP  —   (3,044)       Net cash provided by financing activities  26,958   75,385                 Net change in cash and cash equivalents  6,220   36,585 Cash and cash equivalents acquired in the purchase of ChartBank  —   9,879 Cash and cash equivalents at beginning of period  65,750   14,204                 Cash and cash equivalents at end of period $71,970  $60,668                 Supplemental cash flow information:        Interest paid on deposits $6,676  $3,333 Interest paid on short-term borrowings  39   22 Interest paid on long-term debt  2,773   1,565 Income taxes paid  1,920   601 Premises and equipment transferred to other assets  —   634 See accompanying notes to condensed consolidated financial statements
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**BENJAMIN FRANKLIN BANCORP, INC AND SUBSIDIARY****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)*****1.*** ***Basis of presentation and consolidation***   The accompanying unaudited consolidated interim financial statements include the accounts ofBenjamin Franklin Bancorp, Inc. (the “Company’’) and its wholly-owned subsidiary, BenjaminFranklin Bank (the “Bank’’). These financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”) forinterim financial statements and the instructions for Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotes required by GAAPfor complete financial statements. In the opinion of management, all adjustments (consistingof only normal recurring adjustments) necessary for a fair presentation have been included.   These consolidated interim financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto included in the Company’s AnnualReport on Form 10-K as of and for the year ended December 31, 2005.   ***Recent Accounting Pronouncements***   On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which changes,among other things, the manner in which share-based compensation, such as stock options,will be accounted for by both public and non-public companies. SFAS No. 123R becameeffective as of January 1, 2006 for the Company. For public companies, the cost of employeeservices received in exchange for equity instruments including options and restricted stockawards generally is now measured at fair value at the grant date. The grant date fair valueis required to be estimated using option-pricing models adjusted for the uniquecharacteristics of those options and instruments, unless observable market prices for thesame or similar options are available. The cost must be recognized over the requisiteservice period, often the vesting period.   The provisions of SFAS No. 123R did not have an impact on the Company’s results ofoperations for the six months ended June 30, 2006. However, the Company’s stockholdersapproved the adoption of a stock-based incentive plan at the annual meeting on May 11, 2006.The Compensation Committee of the Board of Directors made awards of restricted stock andoptions under that plan on July 28, 2006. See Note 3 below. The granting of restricted stockawards and stock options under the stock-based incentive plan will increase the Company’scompensation costs in the periods in which such awards and options vest.   In August 2005, the FASB issued an exposure draft that would amend FASB Statement No. 140,*Accounting for Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*, with respect to the accounting for servicing of financial assets. This proposedStatement would require that all separately recognized servicing rights be initiallymeasured at fair value, if practicable. For each class of separately recognized servicingassets and liabilities, this proposed Statement would permit an entity to choose either ofthe following subsequent measurement methods: (1) amortize servicing assets or liabilitiesin proportion to and over the period of estimated net servicing income or net servicingloss, or (2) report servicing assets or liabilities at fair value at each reporting date andreport changes in fair value in earnings in the period in which the changes occur. Thisproposed Statement also would require additional disclosures for all separately recognizedservicing rights. This proposed Statement would be effective for new transactions occurringand for subsequent measurement in the earlier of the first fiscal year that begins afterSeptember 15, 2006, or fiscal years beginning during the fiscal quarter in which the
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  final Statement is issued. This Statement is not expected to have a material impact on theCompany’s consolidated financial statements.***2.*** ***Commitments***   Outstanding loan commitments totaled $131.3 million at June 30, 2006, compared to $118.2million as of December 31, 2005. Loan commitments consist of commitments to originate newloans as well as the outstanding undrawn portions of lines of credit.   The Bank recently received approval from the Massachusetts Commissioner of Banks and theFDIC to open a new branch in Watertown, Massachusetts. It is anticipated that this branchwill become operational in the second quarter of 2007. The annual direct costs of operatingthis branch are estimated at $700,000, including annual lease payments for the new branchfacility of approximately $127,000 per annum.   On May 2, 2006, the Company entered into a purchase and sales agreement to sell the propertyit owns at 500 West Central St., Franklin, MA. The sales price is $825,000 and the closingis expected within the next nine months. The Company’s carrying value for this property is$634,000. ***3.*** ***Earnings per share***   The basic earnings per share calculation excludes dilution and is computed by dividingincome available to common shareholders by the weighted-average common shares outstandingduring the period. The diluted earnings per share calculation takes into account thepotential dilution that could occur if securities or other contracts to issue common stockwere exercised and converted into common stock. There were no potentially dilutive commonstock equivalents outstanding during the quarter ended June 30, 2006. However, theCompensation Committee of the Board of Directors made awards under the Company’s stockincentive plan on July 28, 2006. The grants of 218,340 shares of restricted stock and448,750 stock options made under this plan will increase the Company’s compensation costs inthe periods in which such awards and options vest. Such awards will be accounted for in theCompany’s financial statements in accordance with SFAS No. 123R. Unallocated common sharesheld by the ESOP are shown as a reduction in stockholders’ equity and are not included inthe weighted-average number of common shares outstanding for either basic or dilutedearnings per share calculations. Earnings per share are not presented for the three or sixmonths ended June 30, 2005, because the Company did not complete its public offering and hadno shares outstanding until April 4, 2005.**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations**The following analysis discusses the changes in financial position and results of operations of theCompany, and should be read in conjunction with the Company’s unaudited consolidated interimfinancial statements and the notes thereto, appearing in Part I, Item 1 of this document.**Forward-Looking Statements**Certain statements herein constitute “forward-looking statements” and actual results may differfrom those contemplated by these statements. Forward-looking statements can be identified by thefact that they do not relate strictly to historical or current facts. They often include words like“believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as“will,” “would,” “should,” “could” or “may.” Certain factors that could cause actual results todiffer materially from expected results include changes in the interest rate environment, changesin general economic conditions, legislative and regulatory changes that adversely affect thebusinesses in which the Company is engaged and changes in the securities market.
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**Critical Accounting Policies**Critical accounting policies are those that involve significant judgments and assessments bymanagement, and which could potentially result in materially different results under differentassumptions and conditions. As discussed in the Company’s 2005 Annual Report on Form 10-K, theCompany considers its critical accounting policies to be those associated with income taxes,intangible assets and the determination of the allowance for loan losses. The Company’s criticalaccounting policies have not changed since December 31, 2005.**Comparison of Financial Condition at June 30, 2006 and December 31, 2005****Overview**In the first six months of 2006, the Company’s balance sheet increased by $29.8 million, or 3.4%,to $896.8 million. Asset growth was focused primarily in loans, which increased by $19.0 million or3.1% during the six month period. Smaller increases occurred in short-term investments, which roseby $4.2 million or 35.1%, and in securities, which rose by $2.4 million or 1.8%. Asset growth wasfunded by increases in deposit balances aggregating $17.8 million or 2.9%, and in borrowed funds,which increased by $9.6 million or 6.9%.**Investment Activities**Cash and cash equivalent balances increased by $6.2 million, or 9.5%, to $72.0 million at June 30,2006 when compared to December 31, 2005. The largest portion of the increase was in short-terminvestments, which rose by $4.2 million, or 35.1%, when compared to year end 2005. This increasewas the result of normal fluctuations in the Company’s overnight investments, which includeovernight fed funds sold ($13.8 million) and money market funds ($2.5 million) at June 30, 2006.Cash supplied to customers of Creative Strategic Solutions, Inc. (“CSSI”), the Bank’s ATM servicingsubsidiary, increased by $2.9 million or 7.9%, due primarily to growth in existing customerrelationships.At June 30, 2006, the Company’s investment portfolio amounted to $134.9 million, or 15.0% of totalassets. When compared to year end 2005, securities increased by $2.4 million, or 1.8%, at June 30,2006. The increase was generally consistent with overall growth in the balance sheet during thefirst half of 2006. The following table sets forth certain information regarding the amortized costand market values of the Company’s securities at the dates indicated:
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                   **June 30, 2006**  **December 31, 2005**   **Amortized**  **Fair**  **Amortized**  **Fair**   **Cost**  **Value**  **Cost**  **Value**   (In thousands) **Securities available for sale:**                Government-sponsored enterpriseobligations $93,979  $93,113  $86,141  $85,494 State agency and municipal obligations  2,208   2,177   2,211   2,191 Corporate bonds and other obligations  —   —   2,508   2,500 Mortgage-backed securities  31,802   29,041   34,107   32,194               Total securities available for sale $127,989  $124,331  $124,967  $122,379                               **Securities held to maturity:**                                 Mortgage-backed securities $60  $60  $109  $109                               **Restricted equity securities:**                Federal Home Loan Bank of Boston stock $7,999  $7,999  $7,496  $7,496 Access Capital StrategiesCommunity Investment Fund  1,965   1,965   2,000   2,000 SBLI & DIF stock  516   516   516   516              Total restricted equity securities $10,480  $10,480  $10,012  $10,012              **Lending Activities**The Company’s net loan portfolio aggregated $624.0 million on June 30, 2006, or 69.6% of totalassets on that date. As of December 31, 2005, the net loan portfolio totaled $605.1 million, or69.8% of total assets. The following table sets forth the composition of the loan portfolio at thedates indicated:
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                   **June 30, 2006**  **December 31, 2005**   **Amount**  **Percent**  **Amount**  **Percent**   (Dollars in thousands) Mortgage loans on real estate:                Residential $290,452   46.2% $286,204   47.0%Commercial  223,944   35.6%  209,009   34.3%Construction  55,263   8.8%  60,399   9.9%Home equity  35,719   5.7%  32,419   5.3%                605,378   96.3%  588,031   96.5%                              Other loans:                Commercial business  20,426   3.2%  19,162   3.1%Consumer  2,795   0.4%  2,395   0.4%                23,221   3.7%  21,557   3.5%                              Total loans  628,599   100.0%  609,588   100.0%                                Other items:                Net deferred loan costs  1,157       1,214     Allowance for loan losses  (5,797)      (5,670)                   Total loans, net $623,959      $605,132                    The net loan portfolio increased by $18.8 million, or 3.1%, during the first six months of2006. The increase in loans during this period was principally the result of growth inthe Bank’s commercial loan portfolio, as commercial real estate loans increased by $14.9 million or7.1% and commercial business loans increased by $1.3 million or 6.6%, offset by a decline inconstruction loans outstanding of $5.1 million or 8.5%. While theCompany continues to emphasize commercial lending generally, its construction lending forresidential development projects has declined over the past six months, as demand has slackened dueto an increase in inventory of unsold residential units in the Bank’s market area. Residentialmortgage and consumer and home equity loans also increased during the period, rising by $4.2million (1.5%) and $3.7 million (10.6%), respectively. The Company purchased $16.1 million ofadjustable-rate residential mortgage pools during the six-month period from other institutions, inorder to offset a drop-off in market demand for these types of loans. Fixed rate residentialmortgages originated by the Company are sold into the secondary market, generating non-interestincome. $12.8 million in fixed-rate loans were originated and sold in the first six months of2006.**Non-performing Assets**The table below sets forth the amounts and categories of the Company’s non-performing assets at thedates indicated. At each date presented, the Company had no troubled debt restructurings (loans forwhich a portion of interest or principal has been forgiven and loans modified at interest ratesmaterially less than current market rates):
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           **June 30, 2006**  **December 31, 2005**   (Dollars in thousands) **Non-accrual loans:**        Residential mortgage $60  $184 Commercial mortgage  —   — Construction  —   — Commercial business  40   256 Consumer  32   25        **Total non-accrual loans** $132  $465                 **Loans greater than 90 days delinquentand still accruing:**        Residential mortgage $—  $— Commercial mortgage  —   — Construction  —   — Commercial business  —   — Consumer  2   2        **Total loans 90 days and still accruing** $2  $2                 **Total non-performing loans** $134  $467                 **Ratios:**        Non-performing loans to total loans  0.02%  0.08%Non-performing assets to total assets  0.01%  0.05%**Allowance for Loan Losses**In originating loans, the Company recognizes that losses will be experienced on loans and that therisk of loss will vary with many factors, including the type of loan being made, thecreditworthiness of the borrower over the termof the loan, general economic conditions and, in the case of a secured loan, the quality of thesecurity for the loan over the term of the loan. The Company maintains an allowance for loanlosses to absorb losses inherent in the loan portfolio, and as such, this allowance representsmanagement’s best estimate of the probable known and inherent credit losses in the loan portfolioas of the date of the financial statements.The allowance for loan losses is evaluated on a regular basis by management and is based uponmanagement’s periodic review of the collectibility of the loans in light of historical experience,portfolio volume and mix, geographic and large borrower concentrations, estimated credit lossesbased on internal and external portfolio reviews, adverse situations that may affect the borrower’sability to repay, estimated value of any underlying collateral and prevailing economic conditions.This evaluation is inherently subjective, as it requires estimates that are susceptible tosignificant revision as more information becomes available.The allowance consists of specific, general and unallocated components. The specific componentrelates to loans that are classified as doubtful, substandard or special mention. The generalcomponent covers non-classified loans and is based on historical loss experience adjusted forqualitative factors. An unallocated component is maintained to cover uncertainties that couldaffect management’s estimate of probable losses. The unallocated component of the allowancereflects the margin of imprecision inherent in the underlying assumptions used in the methodologiesfor estimating specific and general losses in the portfolio.
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A loan is considered impaired when, based on current information and events, it is probable thatthe Company will be unable to collect the scheduled payments of principal or interest when dueaccording to the contractual terms of the loan agreement. Factors considered by management indetermining impairment include payment status, collateral value, and the probability of collectingscheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basisfor commercial loans by either the present value of expected future cash flows discounted at theloan’s effective interest rate or the fair value of the collateral if the loan is collateraldependent. Large groups of smaller balance homogeneous loans are collectively evaluated forimpairment. Accordingly, the Company does not separately identify individual consumer andresidential loans for impairment disclosures. At June 30, 2006, the Company had no impaired loans.At December 31, 2005, impaired loans totaled $264,000 and in the aggregate carried a valuationallowance within the allowance for loan losses of $140,000.While the Company believes that it has established adequate specific and general allowances forlosses on loans, adjustments to the allowance may be necessary if future conditions differsubstantially from the information used in making the evaluations. In addition, as an integralpart of their examination process, the Company’s regulators periodically review the allowance forloan losses. These regulatory agencies may require the Company to recognize additions to theallowance based on their judgments of information available to them at the time of theirexamination, thereby negatively affecting the Company’s financial condition and earnings.The following table sets forth activity in the Company’s allowance for loan losses for the periodsindicated:
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                   **Three Months Ended**  **Six Months Ended**   **June 30,**  **June 30,**   **2006**  **2005**  **2006**  **2005**   (Dollars in thousands) **Balance at beginning of period** $5,666  $3,351  $5,670  $3,172               **Allowance added from acquisitionof Chart Bank**  —   1,812   —   1,812                               **Charge-offs:**                Mortgage loans on real estate:  —   —   —   —              Other loans:                Commercial business  —   (11)  —   (11)Consumer  (17)  (3)  (46)  (3)             Total other loans  (17)  (14)  (46)  (14)             Total charge-offs  (17)  (14)  (46)  (14)                              **Recoveries:**                Mortgage loans on real estate:  —   —   —   —              Other loans:                Commercial business  16   53   24   60 Consumer  10   1   21   5              Total other loans  26   54   45   65              Total recoveries  26   54   45   65              Net (charge-offs) recoveries  9   40   (1)  51 Provision for loan losses  122   328   128   496              **Balance at end of period** $5,797  $5,531  $5,797  $5,531                               **Ratios:**                Net recoveries to averageloans outstanding (annualized)  0.01%  0.03%  0.00%  0.02%Allowance for loan losses tonon-performing loans at end of period  4354.94%  1593.89%  4354.94%  1593.89%Allowance for loan losses tototal loans at end of period  0.92%  0.90%  0.92%  0.90%**Deposits**The following table sets forth the Company’s deposit accounts for the periods indicated:
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                   **June 30,**  **% of**  **December 31,**  **% of**   **2006**  **Total**  **2005**  **Total**       (Dollars in thousands)     **Deposit type:**                Demand deposit accounts $125,887   20.0% $124,396   20.3%NOW accounts  34,830   5.5%  32,147   5.3%Regular savings accounts  93,547   14.9%  97,960   16.0%Money market accounts  96,523   15.3%  94,347   15.4%             Total non-certificate accounts  350,787   55.7%  348,850   57.0%             Termcertificates less than $100,000  164,244   26.1%  157,933   25.8%Term certificates of $100,000or more  114,467   18.2%  104,890   17.1%             Total certificate accounts  278,711   44.3%  262,823   43.0%             Total deposits $629,498   100.0% $611,673   100.0%             Total deposits increased by $17.8 million, or 2.9%, when compared to December 31, 2005. Growth intime deposit accounts, which increased by $15.9 million or 6.0% in the six-months ended June 30,2006, caused most of the increase in total deposits. Also increasing during this six-month periodwere NOW accounts (up $2.7 million), money market accounts (up $2.2 million), and demand deposits(up $1.5 million), offset by a $4.4 million, or 4.5% decrease in savings accounts. With increasesin short-term market interest rates, customers have increasingly shown a preference for short-termtime deposits and other higher-yielding core accounts, rather than savings deposits.**Borrowed Funds**Borrowed funds increased by $9.6 million, or 6.9%, during the first half of 2006. This increasefunded, in part, the growth in loans, securities and cash and cash equivalents during the sixmonths ended June 30, 2006.**Stockholder’s Equity**Total stockholders’ equity was $109.3 million as of June 30, 2006, an increase of $1.1 million whencompared to the balance at December 31, 2005. The increase was primarily attributable to earningsof $2.5 million, net of dividends paid of $508,000 and a decrease of $976,000 in the fair value ofsecurities available for sale.The Company announced on July 27, 2006 that its Board of Directors had authorized the purchase ofup to 239,096 shares of the Company’s common stock in connection with anticipated awards ofrestricted stock under the Company’s 2006 Stock Incentive Plan, approved by stockholders at theirAnnual Meeting on May 11, 2006. The purchases will be accomplished through open market transactionsor negotiated block transactions, at the discretion of management. As of August 11, 2006,119,200 shares had been purchased at an average price of $14.05 by the Company as part this effort. Theexact timing of future purchases will depend on market conditions and other factors, such asCompany-imposed blackout periods.**Comparison of Operating Results for the Three and Six Months Ended June 30, 2006 and 2005**The Company earned net income of $1.3 million for the quarter ended June 30, 2006, an increase of$3.8 million when compared to a net loss of $2.5 million incurred in the second quarter of 2005.The Company incurred the 2005 quarterly loss primarily as a result of two non-recurring charges: a$4.0 million contribution made to the Benjamin Franklin Bank Charitable Foundation, and a $1.0million net loss from the sale/write-down of bank-owned land. Excluding these non-recurringcharges, and their related income tax benefit of $1.4 million, net
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income increased $142,000, or12.7%, over the comparable 2005 quarterly period. Excluding the non-recurring transactions, theearnings improvement largely reflected strong growth in non-interest income and a reduction in theloan loss provision, partially offset by higher operating expenses.The Company earned net income of $2.5 million for the six months ended June 30, 2006, an increaseof $4.7 million when compared to a net loss of $2.2 million incurred in the first six months of2005. Excluding the $5.0 million in non-recurring charges, and their related income tax benefit,net income increased $1.1 million, or 74.6%, over the comparable 2005 six-month period. There weresignificant increases in net interest income and non-interest income when compared to the 2005six-month period, due to the acquisition of the operations of Chart Bank on April 4, 2005 and tointernally generated balance sheet growth. Operating expenses also increased significantly whencompared to the six-month period ended June 30, 2005, due to the addition of Chart Bank’soperations, as well as to higher costs related to generating internal growth and meeting thedemands of operating as a public company.**Analysis of Net Interest Income**Net interest income represents the difference between income on interest-earning assets and expenseon interest-bearing liabilities. Net interest income depends upon the relative amounts ofinterest-earning assets and interest-bearing liabilities and the interest rates earned or paid onthem.
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The following tables set forth average balance sheets, average yields and costs, and certain otherinformation for the periods indicated. Most average balances are daily average balances.Non-accrual loans were included in the computation of average balances, but have been reflected inthe table as loans carrying a zero yield. The yields set forth below include the effect ofdeferred fees, discounts and premiums that are amortized or accreted to interest income or expense:                           **Three Months Ended June 30,**   **2006**  **2005**   **Average**          **Average**         **Outstanding**          **Outstanding**         **Balance**  **Interest**  **Yield/Rate**(1)  **Balance**  **Interest**  **Yield/Rate**(1)           (Dollars in thousands)         **Interest-earning assets:**                        Loans $620,986  $9,236   5.91% $589,869  $8,048   5.47%Securities  139,739   1,400   3.94%  128,698   987   3.08%Short-terminvestments  15,504   186   4.75%  26,429   151   2.29%                   Totalinterest-earningassets  776,229   10,822   5.54%  744,996   9,186   4.95%Non-interest-earningassets  113,054           106,428                                Total assets $889,283          $851,424                                **Interest-bearingliabilities:**                        Savings deposits $94,810   121   0.51% $109,318   142   0.52%Money marketaccounts  116,061   716   2.47%  117,969   458   1.56%NOW accounts  28,250   10   0.15%  36,240   32   0.35%Certificates ofdeposit  277,996   2,688   3.88%  244,490   1,561   2.56%                   Total deposits  517,117   3,535   2.74%  508,017   2,193   1.73%Borrowings  126,214   1,373   4.30%  99,857   935   3.76%                   Totalinterest-bearingliabilities  643,331   4,908   3.05%  607,874   3,128   2.06%Non-interestbearing liabilities  136,999           138,073                                Total liabilities  780,330           745,947         Equity  108,953           105,477                                Total liabilitiesand equity $889,283          $851,424                                 Net interest income     $5,914          $6,058                             Net interest ratespread(2)          2.49%          2.89% Netinterest-earningassets(3) $132,898          $137,122                                 Net interest margin(4)          3.06%          3.26% Average interest-earning assets tointerest-bearingliabilities          120.66%          122.56% (1) Yields and rates for the three months ended June 30, 2006 and 2005 are annualized. (2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of averageinterest-bearing liabilities (3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets.
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                           **Six Months Ended June 30,**   **2006**  **2005**   **Average**          **Average**         **Outstanding**          **Outstanding**         **Balance**  **Interest**  **Yield/Rate**(1)  **Balance**  **Interest**  **Yield/Rate**(1)         (Dollars in thousands)           **Interest-earning assets:**                        Loans $613,788  $18,078   5.88% $489,108  $12,940   5.34%Securities  138,280   2,782   4.03%  110,167   1,716   3.14%Short-term investments $17,589   402   4.55%  21,272   244   2.31%                   Total interest-earning assets  769,657   21,262   5.51%  620,547   14,900   4.84%Non-interest-earning assets  114,487           71,073                                Total assets $884,144          $691,620                                 **Interest-bearing liabilities:**                        Savings deposits $95,712   239   0.50% $102,177   258   0.51%Money marketaccounts  107,372   1,226   2.30%  87,618   668   1.54%NOW accounts  27,706   20   0.15%  29,161   40   0.28%Certificates of deposit  276,957   5,152   3.75%  193,450   2,458   2.56%                   Total deposits  507,747   6,637   2.64%  412,406   3,424   1.67%Borrowings  131,314   2,799   4.24%  90,485   1,789   3.99%                   Total interest-bearingliabilities  639,061   9,436   2.97%  502,891   5,213   2.09%Non-interest bearing liabilities  136,372           120,171                                Total liabilities  775,433           623,062         Equity  108,711           68,558                                Total liabilities and equity $884,144          $691,620                                 Net interest income     $11,826          $9,687                             Net interest rate spread(2)          2.54%          2.75% Net interest-earning assets(3) $130,596          $117,656                                 Net interest margin (4)          3.10%          3.15% Averageinterest-earning assets to interest-bearing liabilities          120.44%          123.40% (1) Yields and rates for the six months ended June 30, 2006 and 2005 are annualized. (2) Net interest rate spread represents the difference between the yield on average interest-earning assets andthe cost of averageinterest-bearing liabilities (3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets.
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The following table presents the dollar amount of changes in interest income andinterest expense for the major categories of the Company’s interest-earning assets andinterest-bearing liabilities. Information is provided for each category of interest-earning assetsand interest-bearing liabilities with respect to (i) changes attributable to changes in volume(i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changesattributable to rate (i.e., changes in average rate multiplied by prior-period average balances).For purposes of this table, changes attributable to both rate and volume, which cannot besegregated, have been allocated proportionately to the change due to volume and the change due torate.
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               **Three Months Ended June 30,**   **2006 vs. 2005**   **Increase (Decrease)**  **Total**   **Due to**  **Increase**   **Volume**  **Rate**  **(Decrease)**   (In thousands) Interest-earning assets:            Loans $439  $749  $1,188 Securities  90   323   413 Short-term investments  (81)  116   35           Total interest-earning assets  448   1,188   1,636            Interest-bearing liabilities:            Savings deposits  (19)  (2)  (21)Money marketaccounts  (8)  266   258 NOW accounts  (6)  (16)  (22)Certificates of deposit  237   890   1,127           Total deposits  204   1,138   1,342 Borrowings  272   166   438           Total interest-bearing liabilities  476   1,304   1,780           Change in net interest income $(28) $(116) $(144)                         **Six Months Ended June 30,**   **2006 vs. 2005**   **Increase (Decrease)**  **Total**   **Due to**  **Increase**   **Volume**  **Rate**  **(Decrease)**   (In thousands) Interest-earning assets:            Loans $3,557  $1,581  $5,138 Securities  497   569   1,066 Short-term investments  (48)  206   158           Total interest-earning assets  4,006   2,356   6,362            Interest-bearing liabilities:            Savings deposits  (16)  (3)  (19)Money market accounts  174   384   558 NOW accounts  (2)  (18)  (20)Certificates of deposit  1,298   1,396   2,694           Total deposits  1,454   1,759   3,213 Borrowings  861   149   1,010           Total interest-bearing liabilities  2,315   1,908   4,223           Change in net interest income $1,691  $448  $2,139           
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Net interest income for the quarter ended June 30, 2006 was $5.9 million, a decrease of $144,000when compared to net interest income of $6.1 million for the three months ended June 30, 2005. The$144,000 decrease was primarily the result of a significant 20 basis point decrease in the netinterest margin, which exceeded the positive benefit of overall balance sheet growth.Interest income for the quarter ended June 30, 2006 was $10.8 million, compared to $9.2 million forthe quarter ended June 30, 2005, an increase of $1.6 million or 17.8%. The increase arose largelyfrom a 59 basis point increase in the yield earned on average interest-earning assets, augmented bya $31.2 million increase in those assets. The largest increase in average interest-earning assetswas in loans, which increased by $31.1 million. Increases (decreases) in average balances ofsecurities and short-term investments were $11.0 million and ($10.9) million, respectively, nearlyoffsetting each other. Increases in yields earned on securities and short-term investments of 86and 246 basis points, respectively, were due mainly to the increase in market interest ratesyear-over-year. Interest income for the 2006 second quarter did not include income on FHLBB stock held bythe Company, as the FHLBB deferred the declaration of its quarterly stock dividend, due to aone-time change in its dividend schedule. An estimate of the amount of dividend income deferred is$97,000, the amount recognized as income in the first quarter of 2006. An increase in the loanyield of 44 basis points was due primarily to the increase in market interest rates, supplementedby greater dollar growth in higher-yielding commercial loans than in residential mortgages andconsumer loans.Interest expense for the quarter ended June 30, 2006 was $4.9 million, an increase of $1.8 millionover the comparable quarter of the prior year. The $1.8 million increase stems primarily from a 99basis point increase in the cost of average interest-bearing liabilities, supplemented by a $35.5million increase in the average balance of those liabilities. The increase in averageinterest-bearing liabilities between the comparable 2006 and 2005 quarters consists largely ofincreases in borrowed funds ($26.4 million) and deposits ($9.1 million). Within the depositportfolio, time accounts increased on average by $33.5 million, while other interest-bearingdeposits decreased on average by $24.4 million. The 99 basis point increase in the cost ofinterest-bearing liabilities was due largely to the increase in market interest rates over thetwelve months. The Company was able to hold its rate on certain non-maturity deposit product linesyear-over-year. However, customer demand for time accounts as an alternative to savings products,the Company’s desire to use deposits to fund loan growth, the short duration of the Company’s timedeposit portfolio, and intense pricing competition all fueled a substantial 132 basis pointincrease in the cost of time accounts, year-over-year.Net interest income for the first half of 2006 was $11.8 million, an increase of $2.1 million, or22.1%, over the $9.7 million earned in the first six months of 2005. The improvement was largelythe result of overall balance sheet growth. Year-over-year, over a six-month period, averageinterest-earning assets increased by $149.1 million, or 24.0%, and average interest-bearingliabilities increased by $136.2 million, or 27.1%.The increase in interest-earning assets can largely be attributed to the Chart Bank acquisition onApril 4, 2005. On that date, $184.0 million of loans and $36.1 million of securities were added tothe Company’s balance sheet. Deposits of $217.4 million and borrowings of $25.4 million wereassumed as well, including $37.0 million of non-interest bearing demand deposits. Internallygenerated balance sheet growth for the twelve months ended June 30, 2006 includes $15.8 million inloans, $5.6 million in securities, and $12.9 million in cash supplied to ATM customers (which isnot interest-earning). This asset growth was funded primarily through increased borrowings, up$32.0 million year-over-year.The net interest margin dropped five basis points (from 3.15% to 3.10%) when comparing the firstsix months of 2006 to the comparable period in 2005. The decline was the net result of a favorable67 basis point increase in yield on average interest-earning assets, an unfavorable 88 basis pointincrease in cost of average interest-bearing liabilities, and a favorable $12.9 million increase inthe excess of average interest-earning assets over average
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interest-bearing liabilities. The basispoint increases for both assets and liabilities are largely the result of market interest ratemovements, including a flattening yield curve that has put pressure on the Company’s net interestmargin. Also contributing is the fact that the assets and liabilities acquired in the purchase ofChart Bank roughly midway through the first half of 2005 generally carried higher yields/rates thanthat of the Company.**Provision for Loan Losses**The Company recorded provisions for loan losses of $122,000 and $328,000 for the three monthsended June 30, 2006 and 2005, respectively. For the first six months of 2006 and 2005, provisionsfor loan losses amounted to $128,000 and $496,000, respectively. The provisions were reflective ofgrowth in the loan portfolio and a small amount of net recoveries recorded in each period. Thesmaller provisions in the 2006 periods also reflect slower loan growth as compared to 2005. TheCompany’s credit quality continues to be very strong. At June 30, 2006, the allowance for loanlosses totaled $5.8 million, or .92% of total loans, as compared to $5.7 million, or .93% of totalloans, at December 31, 2005.**Non-interest Income**Non-interest income of $1.5 million for the three-month period ended June 30, 2006 represented anincrease of $1.3 million, or 531.4%, over the $245,000 earned in the second quarter of 2005. Forthe same six-month comparable period, non-interest income increased by $2.2 million, or 299.6%, to$2.9 million. The primary cause of the increases were higher ATM, deposit and loan servicing feesin 2006, and a $1.0 million net loss/write-down recognized in June of 2005 on bank-owned land.Excluding the $1.0 million net loss/write-down on bank-owned land, non-interest income increased by$282,000, or 22.3%, when comparing the second quarter of 2006 to the comparable quarter in 2005.Approximately 76% of the increase, or $213,000, represents increased fees for ATM servicingperformed by CSSI. CSSI provides cash to ATMs owned by independent service organizations (ISOs)nationwide. Fees are collected from the ISOs for managing the ATMs and for the use of the cash inthe machines. ATM servicing fees are generally based upon the amount of cash utilized, and amarket based floating interest-rate pricing structure. Deposit service fees also increased,quarter-over-quarter, by $43,000. This growth was largely the result of growth in the Company’soverdraft checking account product. The Company also benefited from a $69,000 increase in gains onloan sales, quarter-over-quarter, while investment sales commissions (non-deposit investmentproducts) declined by $59,000, due to staff turnover in 2006.Non-interest income increased by $2.2 million in the first six months of 2006 compared to the yearearlier period. Excluding the $1.0 million net loss/write-down on bank-owned land, non-interestincome increased by $1.2 million, or 67.6%, in the first six months of 2006 when compared to thesix months ended June 30, 2005. Approximately 69% of the increase, or $825,000, representsincreased fees for ATM servicing performed by CSSI, which fees are reflected for the full six monthperiod in 2006 but only for the second half of the 2005 period. Fees earned on deposit accountsand other miscellaneous income increased by a combined $225,000, or 29.6%, when compared to thefirst quarter of 2005. This growth was mainly the result of a growth in the overdraft checkingaccount product and the addition of the Chart Bank deposit accounts and branch locations in April2005. Loan servicing fees and gains on sales of loans increased by $72,000 and $118,000,respectively, when comparing the first halves of 2006 and 2005. These increases were largely theresult of collection of prepayment penalties and other fees, and growth in sales of fixed rateloans originated and sold, or serviced for others.**Non-interest Expense**Non-interest expenses of $5.4 million for the three-month period ended June 30, 2006 represented adecrease of $3.8 million from the $9.1 million incurred in the second quarter of 2005. For thesame six-month comparable period, non-interest expense decreased by $1.9 million, or 15.3%, to$10.7 million. The 2005 results include a
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$4.0 million contribution in the second quarter to theBenjamin Franklin Bank Charitable Foundation. The Company has not since, and does not intend tomake future contributions to the Foundation.Non-interest expenses, excluding the $4.0 million non-recurring contribution, increased by $213,000(or 4.1%) in the second quarter of 2006, compared to the three months ended June 30, 2005. Thelargest increase, of $259,000 or 10.5%, was in salaries and employee benefits expense. The Companyhas added staff judiciously for business development, such as commercial loan origination, loansupport, and marketing, and for the accounting and audit functions, needed to satisfy growingregulatory demands associated with being a public company. Professional fees increased by$117,000, or 49.2%, over the comparable 2005 quarter, due to increased legal and audit fees. TheCompany required increased legal assistance in 2006 to implement its new stock compensation plansand prepare for its first annual meeting of shareholders, and has engaged outside firms to assistin its first-time Sarbanes-Oxley Act Section 404 compliance program. Amortization of the coredeposit intangible asset created in the Chart Bank acquisition decreased $277,000 from thecomparable period in 2005, and will continue to decline in future periods. An $83,000 decrease indata processing costs between the two quarters was due largely to additional costs incurred in 2005adding Chart Bank operations.Non-interest expenses decreased by $1.9 million in the first six months of 2006 compared to theyear earlier period. Excluding the $4.0 million non-recurring contribution, non-interest expensesincreased by $2.1 million (or 24.0%) to $10.7 million in the first six months of 2006, compared tothe six months ended June 30, 2005. The Company’s non-interest expense base rose significantlybeginning in the second quarter of 2005, due to the acquisition of Chart Bank. The largestincrease comparing the two six-month periods was in salaries and employee benefits expense, whichrose by $966,000 or 21.6%, attributable primarily to the assimilation of Chart Bank’s employees.Adds to staffing in the lending, marketing, accounting and audit functions, as well as pricingincreases and other changes to certain benefit plans, also contributed to the increase.Professional fees increased by $366,000, or 99.7%, over the comparable 2005 period, due toincreased legal and audit fees. The Company has made changes to certain of its benefits plans,requiring legal assistance, and has incurred substantial increases in audit and legal feesassociated with its new public company status. Occupancy and equipment expenses increased by$309,000 or 28.1%, mainly due to the addition of costs associated with Chart Bank’s three branchesand its former corporate headquarters. An increase of $482,000, or 52.6%, in other general andadministrative expenses largely reflected the addition of Chart Bank’s operations. This includedadding several of Chart Bank’s former directors to the Company’s Board, and higher printing,postage, insurance, and other operating costs associated with running a larger company.The Company is scheduled to open a new branch in Wellesley, Massachusetts in September, 2006. Theannual direct costs of operating this branch are estimated at $610,000. The Company also recentlyreceived regulatory approval to open a new branch in Watertown, Massachusetts. It is anticipatedthat this branch will become operational in the second quarter of 2007. The direct costs ofoperating this branch are estimated at $700,000 annually. The Company intends to continue itssearch for promising de novo branch locations, with the goal of identifying two to three additionalsites over the next two years.The Compensation Committee of the Board of Directors made awards under the Company’s stockincentive plan on July 28, 2006. The grants of restricted stock and stock options made under thisplan will increase the Company’s compensation costs in the periods in which such awards and optionsvest. Such awards will be accounted for in the Company’s financial statements in accordance withSFAS No. 123R. Details of the July 28, 2006 awards are as follows:
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                       Vesting  Fair Market  Option   Number Awarded:  Period  Value of Stock at  Exercise   Shares or Options  (years)  Date of Grant  Price      Restricted Stock  29,600   3  $13.95   n/a Restricted Stock  188,740   5   13.95   n/a                    218,340                                              Stock Options (1):                Incentive stock options  100,250   5   13.95   13.95 Non-statutory stock options  55,000   3   13.95   13.95 Non-statutory stock options  293,500   5   13.95   13.95                    448,750                              (1) The expiration date of the stock options is July 28, 2013.**Income Taxes**The income tax expense of $724,000 recorded for the second quarter of 2006 resulted in an effectivetax rate of 36.5%. In the second quarter of 2005, an income tax benefit of $625,000 equated to aneffective tax rate of 19.7%. The income tax expense of $ 1.4 million for the six months ended June30, 2006 resulted in an effective tax rate of 36.3%, while an income tax benefit of $466,000 forthe first half of 2005 resulted in an effective tax rate of 17.4%. The primary reason for the lowereffective rates in the 2005 periods is the capital loss treatment of the $1.0 million netloss/write-down recognized on the bank-owned land, resulting in a $1.0 million increase in thedeferred tax asset valuation allowance on the balance sheet.**Liquidity and Capital Resources**The Company’s primary sources of funds are from deposits, borrowings, amortization of loans, loanprepayments and the maturity of loans, mortgage-backed securities and other investments, and otherfunds provided by operations. While scheduled payments from amortization of loans andmortgage-backed securities and maturing loans and investment securities are relatively predictablesources of funds, deposit flows and loan prepayments can be greatly influenced by general interestrates, economic conditions and competition. The Company maintains excess funds in cash andshort-term interest-bearing assets that provide additional liquidity. At June 30, 2006, cash anddue from banks, short-term investments and debt securities maturing within one year totaled $80.1million (excluding cash supplied by CSSI to ATM customers) or 8.9% of total assets.The Company borrows from the FederalHome Loan Bank of Boston (“FHLBB”) as an additional funding source. Asof June 30, 2006, the Company had $141.0 million of FHLBBBorrowings outstanding and had the ability to borrow an additional $61.8 million.The Company uses its liquidity to fund existing and future loan commitments, to fund maturingcertificates of deposit and borrowings, to fund other deposit withdrawals, to invest in otherinterest-earning assets and to meet operating expenses. The Company anticipates that it willcontinue to have sufficient funds and alternative funding sources to meet its current commitments.The following tables present information indicating various contractual obligations and commitmentsof the Company as of the dates indicated and the respective maturity dates:
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***Contractual Obligations:***                       **June 30, 2006**           **More than**  **More than**              **One Year**  **Three Years**          **One Year**  **through Three**  **through five**  **Over Five**   **Total**  **or Less**  **Years**  **Years**  **Years**   (In thousands) Federal Home Loan Bank advances(1) $140,954  $34,000  $57,954  $49,000  $— Subordinated debt  9,000   —   —   —   9,000 Operating leases (2)  1,868   270   558   405   635 Other contractual obligations(3)  5,743   2,362   3,381                         Total contractual obligations $157,565  $36,632  $61,893  $49,405  $9,635                  (1) Secured under a blanket security agreement on qualifying assets, principally 1-4Family Residential mortgage loans. At June 30, 2006, an advance of $6.0 million, bearing a rate of4.91%, was callable at the sole option of the FHLB. This advance was called in July, 2006. Anotheradvance in the amount of $10.0 million maturing in June, 2010, will become immediately payable if3-month LIBOR rises above 6.0% (measured on a quarterly basis, beginning in June 2006). (2) Represents non-cancelable operating leases for branch offices. (3) Represents contracts for technology services and employment agreements.***Loan Commitments***                       **June 30, 2006**           **More than**  **More than**              **One Year**  **Three Years**          **One Year**  **through**  **through**  **Over Five**   **Total**  **or Less**  **Three Years**  **Five Years**  **Years**   (In thousands) Commitments to grant loans (1) $29,349  $29,349  $—  $—  $— Unadvanced funds on commercial lines of credit  23,397   20,355   3,042   —   — Unadvanced funds on home equity lines of credit(3)  39,349   —   —   —   39,349 Unadvanced funds on construction loans (4)  35,414   24,474   10,468   —   472 Unadvanced funds on personal lines of credit (2)  2,374   —   —   —   2,374 Commercial letters of credit  1,419   1,419                                                  Total loan commitments $131,302  $75,597  $13,510  $—  $42,195                     General: Commitments to extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Commitments generally have fixedexpiration dates or other termination clauses.(1) Commitments for loans are extended to customers for up to 180 days afterwhich they expire. (2)  Unused portion of checking overdraft lines of credit are available to customersin “good standing” indefinitely. (3)  Unused portions of home equity loans are available to the borrower for up to 10years. (4) Unused portions of construction loans are available to the borrower for up to 2years for development loans and up to 1 year for other construction loans.
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***Minimum Regulatory Capital Requirements:***As of June 30, 2006, the most recent notification from the Federal Deposit InsuranceCorporation categorized the Bank as well capitalized under the regulatory framework for promptcorrective action. To be categorized as well capitalized, the Bank must maintain minimum totalrisk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. Thereare no conditions or events since the notification that management believes have changed the Bank’scategory. Prompt corrective action provisions are not applicable to bank holding companies. TheCompany’s and the Bank’s actual capital amounts and ratios as of June 30, 2006 and December 31,2005 are also presented in this table:                                           Minimum                  To Be Well          Minimum Capitalized Under          Capital Prompt Corrective  Actual Requirements Action Provisions  Amount Ratio Amount Ratio Amount Ratio**June 30, 2006:**                                                 Total capital to risk weighted assets:                        Consolidated $90,047   15.1% $47,864   8.0%  N/A   N/A Bank  64,416   10.8   47,799   8.0  $59,748   10.0%                         Tier 1 capital to risk weighted assets:                        Consolidated  84,250   14.1   23,932   4.0   N/A   N/A Bank  58,619   9.8   23,899   4.0   35,849   6.0                          Tier 1 capital to average assets:                        Consolidated  84,250   9.9   34,079   4.0   N/A   N/A Bank  58,619   6.9   34,046   4.0   42,557   5.0                          **December 31, 2005:**                                                 Total capital to risk weighted assets:                        Consolidated $87,212   15.3% $45,614   8.0%  N/A   N/A Bank  61,393   10.8   45,528   8.0  $56,910   10.0%                         Tier 1 capital to risk weighted assets:                        Consolidated  81,543   14.3   22,807   4.0   N/A   N/A Bank  55,724   9.8   22,764   4.0   34,146   6.0                          Tier 1 capital to average assets:                        Consolidated  81,543   9.9   33,115   4.0   N/A   N/A Bank  55,724   6.7   33,085   4.0   41,356   5.0 
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**Item 3. Quantitative and Qualitative Disclosures about Market Risk**.The Company’s Asset/Liability Committee’s primary method for measuring and evaluating interest raterisk is income simulation analysis. This analysis considers the maturity and repricingcharacteristics of assets and liabilities, as well as the relative sensitivities of these balancesheet components over a range of interest rate scenarios. Interest rate scenarios tested generallyinclude instantaneous rate shocks, rate ramps over a one year period, and static (or flat) rates.The simulation analysis is used to measure the exposure of net interest income to changes ininterest rates over a specified time horizon, usually a two-year period.The table below sets forth, as of May 31, 2006 the estimated changes in the Company’s net interestincome that would result from the designated instantaneous changes in the U.S. Treasury yield curve(note: differences between May 31, 2006 and June 30, 2006 balance sheets are not material forpurposes of this analysis, or the gap analysis, below). Computations of prospective effects ofhypothetical interest rate changes are based on numerous assumptions including relative levels ofmarket interest rates, loan prepayments and deposit decay, and should not be relied upon asindicative of actual results.       **Percentage Change in Estimated**  **Net Interest Income over 12**  **months**200 basis point increase in rates  (3.59)%100 basis point increase in rates  (1.72)%Flat interest rates  — 100 basis point decrease in rates  1.25%As indicated in the table above, the result of an immediate 100 basis point increase in interestrates is estimated to decrease net interest income by 1.72% over a 12-month horizon, when comparedto the flat rate scenario. For an immediate 200 basis point parallel increase in the level ofinterest rates, net interest income is estimated to decline by 3.59% over a 12-month horizon, whencompared against the flat rate scenario. Inherent in these estimates is the assumption thatsavings account deposit rates would increase by 25 basis points and that money market depositaccount rates would increase by 37 basis points for each 100 basis point increase in marketinterest rates. These scenarios also assume no change in checking account interest rates. Theseassumptions are based on the Bank’s past experience with the changes in rates paid on thesenon-maturity deposits coincident with changes in market interest rates. The estimated change in netinterest income from the flat rate scenario for a 100 basis point decline in the level of interestrates is an increase of 1.25%, which assumes no decrease in interest-bearing checking rates or insavings rates and an average decrease in money market rates of 37 basis points.There are inherent shortcomings in income simulation, given the number and variety of assumptionsthat must be made in performing the analysis. The assumptions relied upon in making thesecalculations of interest rate sensitivity include the level of market interest rates, the shape ofthe yield curve, the degree to which certain assets and liabilities with similar maturities orperiods to repricing react to changes in market interest rates, the degree to which non-maturitydeposits react to changes in market rates, the expected prepayment rates on loans andmortgage-backed securities, the degree to which early withdrawals occur on certificates of depositand the volume of other deposit flows. As such, although the analysis shown above provides anindication of the Company’s sensitivity to interest rate changes at a point in time, theseestimates are not intended to and do not provide a precise forecast of the effect of changes inmarket interest rates on the Company’s net interest income and will differ from actual results.In its management of interest rate risk, the Company also relies on the analysis of its interestrate “gap,” which is the measure of the mismatch between the amount of interest-earning assets andinterest-bearing liabilities that mature or reprice within specified timeframes. Anasset-sensitive position (positive gap) exists when there are more rate-sensitive assets thanrate-sensitive liabilities maturing or repricing within a particular time horizon, and
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generallysignifies a favorable effect on net interest income during periods of rising interest rates and anegative effect during periods of falling interest rates. Conversely, a liability-sensitiveposition (negative gap) would generally indicate a negative effect on net interest income duringperiods of rising rates and a positive effect during periods of falling rates.The table below shows the Company’s interest sensitivity gap position as of May 31, 2006,indicating the amount of interest-earning assets and interest-bearing liabilities that areanticipated to mature or reprice in each of the future time periods shown. Generally, these assetsand liabilities are shown in the table based on the earlier of the time remaining to repricing orcontractual maturity. However, residential mortgage loans and mortgage-backed securities have beenpresented in a manner that also incorporates the estimated effects of prepayment assumptions.Interest-bearing checking, savings, money market checking and money market savings deposit accountsare assumed to have annual rates of withdrawal (decay rates) of 9.2%, 38.3%, 59.5% and 100.0%,respectively.**Repricing Gap as of May 31, 2006**                               **Up to**  **More than**  **More than**  **More than**  **More than**  **More than**      **one**  **one year to**  **two years to**  **three years to**  **four years to**  **five**      **year**  **two years**  **three years**  **four years**  **five years**  **years**  **Total**   **(Dollars in thousands)** **Interest-earning assets:**                            Loans (1) $233,988  $113,827  $102,287  $81,950  $34,363  $55,414  $621,829 Securities (2)  53,924   39,183   9,162   5,025   4,773   25,866   137,932 Short-term investments  10,700   —   —   —   —   —   10,700                       Total interest-earning assets  298,612   153,009   111,449   86,975   39,136   81,280   770,461                                                    **Interest-bearing liabilities:**                            Savings accounts  36,156   22,308   13,764   8,492   5,240   8,441   94,402 Money market accounts  70,279   28,463   11,528   4,669   1,891   1,287   118,116 NOW accounts  2,761   2,507   2,276   2,067   1,877   18,522   30,010 Certificates of deposit  237,837   24,913   6,294   5,632   1,362   1   276,040 Long-term debt  29,951   28,000   33,000   —   34,000   —   124,951                       Total interest-bearing liabilities $376,984  $106,191  $66,862  $20,860  $44,369  $28,252  $643,518                                                    Interest rate sensitivity gap  (78,372)  46,818   44,587   66,114   (5,233)  53,028   126,943                       **Interest rate sensitivity gapas a % of total assets**  **-8.88****%**  **5.30****%**  **5.05****%**  **7.49****%**  **-0.59****%**  **6.01****%**    Cumulative interest ratesensitivity gap  (78,372)  (31,554)  13,033   79,148   73,915   126,943                            **Cumulative interest ratesensitivity gap as a %of total assets**  **-8.88****%**  **-3.57****%**  **1.48****%**  **8.96****%**  **8.37****%**  **14.38****%**     (1) Excludes the allowance for loan losses, deferred fees and costs, and non-performing loans. (2) Securities are shown at amortized cost.     Certain factors may serve to limit the usefulness of the measurement of the interest rate gap.For example, interest rates on certain assets and liabilities are discretionary and may change inadvance of, or may lag behind, changes in market rates. The gap analysis does not give effect tochanges Benjamin Franklin may undertake to mitigate interest rate risk. Certain assets, such asadjustable-rate loans, have features that may restrict the magnitude of changes in interest ratesboth on a short-term basis and over the life of the assets. Further, in the event of changes ininterest rates, prepayment and early withdrawal levels would likely deviate significantly from
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those assumed in the gap analysis. Lastly, should interest rates increase, the ability ofborrowers to service their debt may decrease.**Item 4. Controls and Procedures.**     (a) *Evaluation of Disclosure Controls and Procedures.*The Company’s President and ChiefExecutive Officer, its Chief Financial Officer, and other members of its senior management teamhave evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, the President and ChiefExecutive Officer and Chief Financial Officer have concluded that the Company’s disclosure controlsand procedures, as of the end of the periods covered by this report, were adequate and effective toprovide reasonable assurance that information required to be disclosed by the Company, includingits consolidated subsidiaries, in reports that the Company files or submits under the Exchange Act,is recorded, processed, summarized and reported, within the time periods specified in theCommission’s rules and forms.     The effectiveness of a system of disclosure controls and procedures is subject to variousinherent limitations, including cost limitations, judgments used in decision making, assumptionsabout the likelihood of future events, the soundness of internal controls, and fraud. Due to suchinherent limitations, there can be no assurance that any system of disclosure controls andprocedures will be successful in preventing all errors or fraud, or in making all materialinformation known in a timely manner to the appropriate levels of management.     (b) *Changes in Internal Controls Over Financial Reporting.*There were no changes in theCompany’s internal control over financial reporting during the first six months of 2006 that havematerially affected, or that are reasonably likely to materially affect, its internal controls overfinancial reporting.
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**PART II. OTHER INFORMATION****Item 1. Legal Proceedings.**     None.**Item 1A. Risk Factors That May Affect Future Results**Risk factors that may affect future results were discussed in the Company’s 2005 AnnualReport on Form 10-K. The Company’s analysis of its risk factors has not changed sinceDecember 31, 2005.**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.** (a) *Unregistered Sale of Equity Securities.*Not applicable.  (b) *Use of Proceeds*. Not applicable.  (c) *Repurchases of Our Equity Securities.*The Company had no share repurchasesduring the quarter.**Item 3. Defaults on Senior Securities.**     Not applicable.**Item 4. Submission of Matters to a Vote of Security Holders.**The Company held its annual meeting of stockholders on May 11, 2006 at which time the sixnominees for director, as set forth in the proxy materials for the meeting, were electedwith the following votes cast:         **Name** **For** **Withheld**William P. Bissonnette  7,303,470   40,119 Paul E. Capasso  7,303,457   40,132 Jonathan A. Haynes  7,298,081   45,508 Anne M. King  7,296,915   46,674 Neil E. Todreas  7,295,006   48,583 Charles Yergatian  7,271,046   72,543 In addition, the stockholders approved the Company’s 2006 Stock Incentive Plan and theratification of Wolf & Company, P.C. as our independent public accounting firm with thefollowing votes cast:           **2006 Stock Incentive Plan** **Ratification of Wolf & Co.****For**  5,200,647   7,256,824 **Against**  237,834   27,062 **Abstentions**  31,733   59,703 **Broker Non-Votes**  1,873,375   0 **Item 5. Other Information.**     Not applicable
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**Item 6. Exhibits.**The following exhibits, required by Item 601 of Regulation S-K, are filed as part of thisQuarterly Report on Form 10-Q. Exhibit numbers, where applicable, in the left columncorrespond to those of Item 601 of Regulation S-K.       Exhibit No. Description Footnotes2.1 Plan of Conversion of Benjamin Franklin Bancorp.  3        2.2 Agreement and Plan of Merger among Benjamin Franklin Bancorp,M.H.C., Benjamin Franklin Savings Bank and Chart Bank, aCooperative Bank, dated as of September 1, 2004.  2        3.1 Articles of Organization of Benjamin Franklin Bancorp, Inc.  2        3.2 Bylaws of Benjamin Franklin Bancorp, Inc.  7        4.1 Form of Common Stock Certificate of Benjamin Franklin Bancorp, Inc.  5        10.1.1 Form of Employment Agreement with Thomas R. Venables. *  6        10.1.2 Form of Employment Agreement with Claire S. Bean. *  6        10.2 Form of Change in Control Agreement with five other ExecutiveOfficers, providing one year’s severance to Brian E. Ledwith,Michael J. Piemonte and Kathleen P. Sawyer, and two years’severance to Mariane E. Broadhurst and Rose M. Buckley. This formcontains all material information concerning the agreement and theonly differences are the name and contact information of theexecutive officer who is party to the agreement and the number ofyears of severance provided. *  2        10.3 Form of Benjamin Franklin Bank Benefit Restoration Plan. *  2        10.4.1 Amended and Restated Supplemental Executive Retirement Agreementbetween Benjamin Franklin Bank and Thomas R. Venables dated as ofMarch 22, 2006.  8        10.4.2 Amended and Restated Supplemental Executive Retirement Agreementbetween Benjamin Franklin Bank and Claire S. Bean dated as ofMarch 22, 2006.  8        10.5 Benjamin Franklin Bancorp Director Fee Continuation Plan. *  4        10.6 Benjamin Franklin Bancorp Employee Salary Continuation Plan. *  2        10.7.1 Payments and Waiver Agreement among Richard E. Bolton, Jr.,Benjamin Franklin Bancorp, M.H.C., Benjamin Franklin Savings Bankand Chart Bank, a Cooperative Bank, dated as of September 1, 2004.*  2        10.7.2 Consulting and Noncompetition Agreement between Richard E. Bolton,Jr. and Benjamin Franklin Bancorp, M.H.C., dated as of September1, 2004. *  2        10.8 Benjamin Franklin Bancorp, Inc. 2006 Stock Incentive Plan  9        11 See Note 3 to the Financial Statements for a discussion ofearnings per share. —       31.1 Certification of Chief Executive Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002.  1        31.2 Certification of Chief Financial Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002.  1        32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.  1 
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       Exhibit No. Description Footnotes32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.  1  * Relates to compensation. 1 Filed herewith. 2 Incorporated by reference to the Registrant’s Registration Statement on FormS-1, File No. 333-121154, filed on December 10, 2004. 3 Incorporated by reference to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1, File No. 333-121154, filed on January 24, 2005. 4 Incorporated by reference to the Registrant’s Registration Statement on FormS-4, File No. 333-121608, filed on December 23, 2004. 5 Incorporated by reference to the Registrant’s Registration Statement on Form8-A, File No. 000-51194, filed on March 9, 2005. 6 Incorporated by reference to the Registrant’s Annual Report on Form 10-K,filed on March 29, 2005. 7 Incorporated by reference to the Registrant’s Current Report on Form 8-K,filed on March 3, 2006. 8 Incorporated by reference to the Registrant’s Annual Report on Form 10-K,filed on March 28, 2006 9 Incorporated by reference to Appendix B to the Registrant’s Proxy Statementfor the 2006 Annual Meeting of Stockholders, filed on March 28, 2006.
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**SIGNATURES**     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto duly authorized.       **Benjamin Franklin Bancorp, Inc.**     Date: August 14, 2006 By:      /s/ Thomas R. Venables         Thomas R. Venables    President and Chief Executive Officer     Date: August 14, 2006 By:      /s/ Claire S. Bean         Claire S. Bean    Treasurer and Chief Financial Officer
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**EXHIBIT INDEX**   **Exhibit**  **No.** **Item**31.1 Certification of Chief Executive Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002.   31.2 Certification of Chief Financial Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002.   32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.   32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.
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