BFBC Benjamin Franklin Bancorp (MM)

 

 

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 THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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. Employer
Incorporation or Organization)		Identification No.)
58 Main Street, Franklin, MA		02038
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (617) 528-7000

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o       No   þ

     Shares issued of the registrant’s common stock (no par value) at November 10, 2008: 7,842,015

 

 

		Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Balance Sheets at September 30, 2008 and December 31, 2007			3
Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007			4
Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2008 and 2007			5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007			6
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			31
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults on Senior Securities			32
Item 4. Submission of Matters to a Vote of Security Holders			32
Item 5. Other Information			32
Item 6. Exhibits			32
SIGNATURES			35
EX-31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EX-31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EX-32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

      PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

		September 30,				December 31,
		2008				2007
		(Unaudited)				(Audited)
ASSETS
Cash and due from banks		$	13,450			$	12,226
Cash supplied to ATM customers			24,784				42,002
Short-term investments			12,818				10,363
Total cash and cash equivalents			51,052				64,591
Securities available for sale, at fair value			181,376				156,761
Restricted equity securities, at cost			12,986				11,591
Total securities			194,362				168,352
Loans:
Residential real estate			229,981				188,654
Commercial real estate			179,521				168,649
Construction			48,919				55,763
Commercial			178,704				159,233
Consumer			41,783				40,436
Total loans, gross			678,908				612,735
Allowance for loan losses			(6,853	)			(5,789	)
Loans, net			672,055				606,946
Premises and equipment, net			5,049				5,410
Accrued interest receivable			3,803				3,648
Bank-owned life insurance			11,016				10,700
Goodwill			33,763				33,763
Other intangible assets			2,057				2,474
Other assets			7,580				7,394
		$	980,737			$	903,278
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Regular savings accounts		$	81,338			$	79,167
Money market accounts			141,566				110,544
NOW accounts			70,618				52,000
Demand deposit accounts			112,786				113,023
Time deposit accounts			254,437				262,634
Total deposits			660,745				617,368
Short-term borrowings			8,000				2,500
Long-term debt			189,109				162,784
Deferred gain on sale of premises			3,355				3,531
Other liabilities			13,014				9,651
Total liabilities			874,223				795,834
Common stock, no par value; 75,000,000 shares authorized; 7,842,015 shares issued and 7,710,632 shares outstanding at September 30, 2008; 8,030,415 shares issued and 7,856,172 shares outstanding at December 31, 2007			—				—
Additional paid-in capital			75,065				77,370
Retained earnings			40,256				38,515
Unearned compensation			(6,515	)			(7,094	)
Accumulated other comprehensive loss			(2,292	)			(1,347	)
Total stockholders’ equity			106,514				107,444
		$	980,737			$	903,278

See accompanying notes to condensed consolidated financial statements

BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Unaudited)								(Unaudited)
Interest and dividend income:
Loans, including fees		$	10,299			$	9,856			$	30,152			$	29,273
Debt securities			1,884				1,904				5,808				5,543
Dividends			121				180				405				512
Short-term investments			59				141				397				644
Total interest and dividend income			12,363				12,081				36,762				35,972
Interest expense:
Interest on deposits			3,193				4,367				10,462				12,832
Interest on short-term borrowings			4				75				43				222
Interest on long-term debt			2,241				1,873				6,531				5,274
Total interest expense			5,438				6,315				17,036				18,328
Net interest income			6,925				5,766				19,726				17,644
Provision for loan losses			447				57				1,128				469
Net interest income, after provision for loan losses			6,478				5,709				18,598				17,175
Other income:
ATM servicing fees			272				663				937				1,982
Deposit servicing fees			467				385				1,305				1,093
Other loan-related fees			98				297				521				770
Gain on sale of loans, net			30				217				216				514
Gain on sale of premises, net			63				63				189				377
Gain on trading assets			—				138				—				138
Gain on sale of CSSI customer list			—				—				92				100
Income from bank-owned life insurance			101				105				295				300
Miscellaneous			255				211				713				571
Total other income			1,286				2,079				4,268				5,845
Operating expenses:
Salaries and employee benefits			3,327				3,631				9,963				11,073
Occupancy and equipment			871				844				2,657				2,587
Data processing			559				601				1,728				1,803
Professional fees			184				179				541				651
Marketing and advertising			205				159				386				488
Amortization of intangible assets			151				197				483				619
Other general and administrative			704				639				1,933				2,240
Total operating expenses			6,001				6,250				17,691				19,461
Income before income taxes			1,763				1,538				5,175				3,559
Provision for income taxes			541				467				1,670				1,067
Net income		$	1,222			$	1,071			$	3,505			$	2,492
Weighted-average shares outstanding:
Basic			7,286,451				7,622,441				7,300,010				7,700,171
Diluted			7,355,906				7,666,939				7,369,376				7,736,356
Earnings per share:
Basic		$	0.17			$	0.14			$	0.48			$	0.32
Diluted		$	0.17			$	0.14			$	0.48			$	0.31

See accompanying notes to condensed consolidated financial statements

BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)

(Unaudited)

		Common Stock								Additional Paid-in				Retained				Unearned				Accumulated Other Comprehensive				Total Stockholders’
		Shares				Amount				Capital				Earnings				Compensation				Loss				Equity
Balance at December 31, 2006			8,249,802			$	—			$	82,909			$	36,634			$	(7,938	)		$	(2,200	)		$	109,405
Comprehensive income:
Net income			—				—				—				2,492				—				—				2,492
Net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects			—				—				—				—				—				(160	)			(160	)
FASB Statement No. 158 tax effect adjustment			—				—				—				—				—				101				101
Total comprehensive income																											2,433
Common stock repurchased			(326,200	)			—				(4,628	)			—				—				—				(4,628	)
Restricted stock expense			47,615				—				—				—				487				—				487
Stock option expense			—				—				547				—				—				—				547
Release of ESOP stock			—				—				35				—				139				—				174
Dividends declared ($.16 per share)			—				—				—				(1,353	)			—				—				(1,353	)
Balance at September 30, 2007			7,971,217			$	—			$	78,863			$	37,773			$	(7,312	)		$	(2,259	)		$	107,065
Balance at December 31, 2007			7,856,172			$	—			$	77,370			$	38,515			$	(7,094	)		$	(1,347	)		$	107,444
Comprehensive income:
Net income			—				—				—				3,505				—				—				3,505
Net unrealized loss on securities available for sale, net of tax effects			—				—				—				—				—				(945	)			(945	)
Total comprehensive income																											2,560
Common stock repurchased			(190,000	)			—				(2,608	)			—				—				—				(2,608	)
Issuance of common stock in connection with stock incentive plan			—				—				26				—				(26	)			—				—
Restricted stock expense			44,460				—				—				—				461				—				461
Forfeiture of restricted stock			—				—				(6	)			—				6				—				—
Stock option expense			—				—				265				—				—				—				265
Release of ESOP stock			—				—				18				—				138				—				156
Dividends declared ($.22 per share)			—				—				—				(1,764	)			—				—				(1,764	)
Balance at September 30, 2008			7,710,632			$	—			$	75,065			$	40,256			$	(6,515	)		$	(2,292	)		$	106,514

See accompanying notes to condensed consolidated financial statements

BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

		Nine Months Ended September 30,
		2008				2007
Cash flows from operating activities:
Net income		$	3,505			$	2,492
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Amortization (accretion) of securities, net			274				(472	)
Amortization of loans, net			246				91
Amortization of deferred gain on sale of premises			(189	)			(190	)
Gain on sale of premises, net			—				(187	)
Provision for loan losses			1,128				469
Accretion of deposit and borrowing discounts, net			(12	)			(7	)
Amortization of mortgage servicing rights			199				225
Depreciation expense			611				688
Amortization of intangible assets			483				619
Stock-based compensation and ESOP			882				1,208
Income from bank-owned life insurance			(295	)			(300	)
Gains on trading assets			—				(138	)
Purchases of trading assets			—				(15,000	)
Gain on sales of loans, net			(216	)			(514	)
Loans originated for sale			(1,535	)			(41,305	)
Proceeds from sales of loans			1,751				41,818
Increase in accrued interest receivable			(155	)			(187	)
Other, net			3,204				(281	)
Net cash provided by (used for) operating activities			9,881				(10,971	)
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, calls, and principal repayments			78,034				48,182
Purchases			(104,104	)			(74,580	)
Net change in restricted equity securities			(1,394	)			(448	)
Loan originations, net			(66,483	)			(15,516	)
Proceeds from sales of loans held for sale			—				62,122
Proceeds from sales of premises and equipment			—				821
Purchases of identifiable intangible assets			(66	)			(208	)
Additions to premises and equipment			(250	)			(1,057	)
Net cash (used for) provided by investing activities			(94,263	)			19,316

(Continued)

See accompanying notes to condensed consolidated financial statements

BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

(Dollars in thousands)

(Unaudited)

		Nine Months Ended September 30,
		2008				2007
Cash flows from financing activities:
Net increase (decrease) in deposits			43,395				(5,399	)
Net change in short-term borrowings			5,500				(8,850	)
Proceeds from long-term debt			53,500				27,000
Repayment of long-term debt			(27,180	)			(17,151	)
Common stock repurchased			(2,608	)			(4,628	)
Dividends paid on common stock			(1,764	)			(1,353	)
Net cash provided by (used for) financing activities			70,843				(10,381	)
Net change in cash and cash equivalents			(13,539	)			(2,036	)
Cash and cash equivalents at beginning of period			64,591				72,595
Cash and cash equivalents at end of period		$	51,052			$	70,559
Supplemental cash flow information:
Interest paid on deposits		$	10,492			$	12,977
Interest paid on borrowings			6,522				5,429
Income taxes paid			2,476				970
Loans held for sale transferred to loans, net			—				1,063
Loans held for sale transferred to other assets			—				545
Loans transferred to other assets			—				225
Securities transferred from held-to-maturity to available for sale			—				26

See accompanying notes to condensed consolidated financial statements

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 of Benjamin Franklin Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Benjamin Franklin Bank (the “Bank”). These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included.
		The Company operates as one reportable segment for financial reporting purposes. All significant intercompany items are eliminated in consolidation. Certain amounts previously reported have been reclassified to conform to the current year’s presentation.
		These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2007.
		Recent Accounting Pronouncements
		In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141 (revised), “Business Combinations.” This Statement replaces FASB Statement No. 141, and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for certain business combinations. Under Statement No. 141 (revised) an acquirer is required to recognize at fair value the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date. This replaces the cost allocation process under Statement No. 141, which resulted in the non-recognition of some assets and liabilities at the acquisition date and in measuring some assets and liabilities at amounts other than their fair values at the acquisition date. This Statement requires that acquisition costs and expected restructuring costs be recognized separately from the acquisition, and that the acquirer in a business combination achieved in stages recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. This Statement also requires an acquirer to recognize assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, while Statement 141 allowed for the deferred recognition of pre-acquisition contingencies until certain recognition criteria were met, and an acquirer is only required to recognize assets or liabilities arising from all other contingencies if it is more likely than not that they meet the definition of an asset or a liability. Under this Statement, an acquirer is required to recognize contingent consideration at the acquisition date, whereas contingent consideration obligations usually were not recognized at the acquisition date under Statement 141. Further, this Statement eliminates the concept of negative goodwill and requires gain recognition in instances in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest in the acquiree. This Statement makes significant amendments to other Statements and other authoritative guidance, and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date.
		In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” This Statement establishes accounting and

		reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after December 15, 2008, and is not expected to have a material impact on the consolidated financial statements.
		On October 10, 2008, the FASB issued Staff Position No. SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157, Fair Value Measurements, in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The Staff Position states that an entity should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be acceptable. The Staff Position also indicates that quotes from brokers or pricing services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active market for the asset. The Staff Position is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. Its adoption did not have a material impact on the Company’s financial results or fair value determinations.
2.		Commitments
		Outstanding loan commitments totaled $122.1 million at September 30, 2008, compared to $116.4 million as of December 31, 2007. Loan commitments consist of commitments to originate new loans as well as undrawn portions of lines of credit. Commitments to originate new loans totaled $15.1 million at September 30, 2008, while commitments under unused lines and letters of credit were $107.0 million.
3.		Earnings per share
		Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were issued during the period. For the three and nine month periods ending September 30, 2008, potentially dilutive common stock equivalents totaled 69,455 and 69,366 shares, respectively, representing the effect of dilutive common stock equivalents. For the three and nine month periods ending September 30, 2007, potentially dilutive common stock equivalents totaled 44,498 and 36,185 shares, respectively. Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.
4.		Fair Values of Assets and Liabilities
		Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, which provides a framework for measuring fair value under generally accepted accounting principles.
		The Company also adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial

		assets and liabilities on a contract-by-contract basis. The Company did not elect fair value treatment for any financial assets or liabilities upon adoption.
		In accordance with SFAS 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
		Level 1 — Quoted prices in active markets for identical assets or liabilities.
		Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
		Assets measured at fair value on a recurring basis are summarized below. There are no liabilities measured at fair value on a recurring basis at September 30, 2008:

		September 30, 2008
														Assets at
		Level 1				Level 2				Level 3				Fair Value
		(Dollars in thousands)
Assets
Securities available for sale		$	—			$	181,376			$	—			$	181,376
Total assets		$	—			$	181,376			$	—			$	181,376

Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service that subscribes to multiple third-party pricing vendors. The pricing service conducts a series of quality assurance activities on a monthly basis to select the most appropriate pricing vendor for each sector of the bond market. The fair value measurements consider observable market data that may include, among other data, benchmark yields and spread relationships, cash flows, collateral attributes, market consensus prepayment speeds, and credit risk information as well as terms and conditions relevant to the individual bond (such as issuer, coupon, maturity and credit rating). Also, the Company may be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of September 30, 2008:

														Quarter ended
		September 30, 2008												September 30, 2008
														Total
		Level 1				Level 2				Level 3				Gains/(Losses)
		(Dollars in thousands)
Assets
Impaired loans		$	—			$	—			$	7,104	(A)		$	(341	)
Total assets		$	—			$	—			$	7,104			$	(341	)

The amount of loans represents the carrying value (loan balance net of related allocated reserves) for impaired loans, for which adjustments are based on the appraised value of the collateral. Appraised values are typically based on a blend of (a) an income approach using unobservable cash flows to measure fair value, and (b) a market approach using observable market comparables. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from the time of valuation. For these reasons, impaired loans are categorized as Level 3 assets.

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 the Company, and should be read in conjunction with the Company’s unaudited consolidated interim financial 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 differ from those contemplated by these statements. Forward-looking statements can be identified by the fact 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 to differ materially from expected results include changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the businesses in which the Company is engaged and changes in the securities market.

Recent Developments

There have been disruptions of historic proportions in the financial system in the United States and globally during the past year. Dramatic declines in the national housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. In response to the crisis affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the following is a summary of recently enacted laws and regulations.

Emergency Economic Stabilization Act of 2008

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which provides the U. S. Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. Under the EESA, the basic limit on federal deposit insurance coverage was temporarily increased from $100,000 to $250,000 per depositor, until December 31, 2009.

On October 14, 2008, the Department of the Treasury announced it would purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program, or CPP, from the $700 billion authorized by the EESA, the Treasury will make $250 billion of capital available to U.S. financial institutions in the form of perpetual preferred stock. The preferred stock would qualify as Tier 1 capital. In conjunction with the purchase of preferred stock, the Treasury will receive warrants to purchase common stock with a ten-year term and an aggregate market price equal to 15% of the preferred stock investment.

The CPP program is voluntary and requires an institution to comply with a number of restrictions and provisions. Participants will be required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the CPP. These standards generally apply to the Chief Executive Officer, Chief Financial Officer, and the next three highest compensated officers. Plan participation also results in certain restrictions on the institution’s dividend and stock repurchase activities. These restrictions remain in place until the Treasury no longer holds any equity or debt securities of the institution.

The CPP provides for a minimum investment of 1% of risk-weighted assets, with a maximum investment equal to the smaller of 3% of total risk-weighted assets or $25 billion The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9%, thereafter. The preferred stock can be called after three years, or beforehand if it is replaced with common or other perpetual preferred stock. Participation in the program is subject to approval by the Treasury department. Applications must be submitted by November 14, 2008.

The Bank currently exceeds minimum regulatory capital standards by substantial margins. However, the Company is currently assessing the benefit of participation in the CPP and has not yet made a final decision as to whether it will apply.

FDIC Temporary Liquidity Guarantee Program

On October 14, 2008, the systemic risk exception to the FDIC Improvement Act of 1991 was invoked enabling the FDIC to temporarily provide a 100% guarantee of the senior unsecured debt of all FDIC-insured institutions and their holding companies, as well as deposits in noninterest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program (TLGP).

The TLGP is a voluntary and time-limited program that will be funded through special fees charged to participating financial institutions. For the first 30 days of the program, the guarantees provided by the program have been offered at no cost to the Company. Unless the Company opts out of either or both of the TLGP programs before December 5, 2008, the Company will thereafter be assessed fees for its participation in either or both of the programs.

The TLGP program consists of two components: a temporary guarantee of newly issued senior unsecured debt (the Debt Guarantee Program or “DGP”) and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured institutions (the Transaction Account Guarantee Program or “TAGP”). The Company is eligible to participate in either or both components of the TLGP.

The DGP is designed primarily to provide liquidity to the bank-to-bank lending market and to help banks roll over unsecured debt. The program specifies that the FDIC will temporarily guarantee (through June 30, 2012) all new senior unsecured debt up to prescribed limits issued by participating financial institutions from October 14, 2008 through June 30, 2009. Coverage under the DGP is available for 30 days without charge and thereafter at a cost of 75 basis points per year multiplied by the amount of debt covered by the program. The Company has not previously issued senior unsecured debt, and has not made a decision relative to its continued participation in the DGP.

Under the TAGP, the FDIC will provide an unlimited guarantee for noninterest-bearing transaction accounts in excess of the existing deposit insurance limit of $250,000 per account. This coverage is effective on October 14, 2008, and will continue through December 31, 2009. Coverage under the TAGP is available for 30 days without charge and thereafter at a cost of 10 basis points per year for the affected noninterest bearing transaction deposits.

The Company is currently assessing the benefit of participation in the TLGP after the December 5, 2008 opt-out date. Although management has not made a final decision relative to the Bank’s participation in the TAGP, management does not believe any assessments under the TAGP would be material to the Bank’s future operating results.

It is not clear at present whether these programs, along with other recently announced liquidity and funding initiatives of the Federal Reserve and other agencies, will result in significant improvement in national financial and economic conditions, including those affecting the banking industry. If the significant levels of volatility and disruption in the credit markets were to continue, and if U.S. economy were to remain in a recessionary condition for an extended period, this would likely have an adverse effect on all financial institutions, including the Company.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in the Company’s 2007 Annual Report on Form 10-K, the Company considers its critical accounting policies to be those associated with the allowance for loan losses, the valuation of goodwill and other intangible assets and the valuation of deferred tax assets. The Company’s critical accounting policies have not changed since December 31, 2007.

Comparison of Financial Condition at September 30, 2008 and December 31, 2007

Overview

Total assets increased by $77.5 million, or 8.6%, to $980.7 million at September 30, 2008 from $903.3 million at December 31, 2007. The increase in assets was primarily attributable to increases in net loans (up $65.1 million or 10.7%) and securities (up $26.0 million or 15.4%), offset in part by a decrease in cash and cash equivalents (down $13.5 million or 21.0%). The increase in total assets was funded principally by growth in deposits, which increased by $43.4 million or 7.0%, and in borrowed funds, which increased by $31.8 million or 19.3%.

Investment Activities

Cash and cash equivalent balances, comprised of $13.5 million in cash and correspondent bank balances, $12.8 million in short-term investments, and $24.8 million in cash supplied to ATMs owned by ATM customers decreased by $13.5 million to $51.1 million at September 30, 2008, compared to $64.6 million at December 31, 2007. This decrease was primarily a result of a $17.2 million decrease in cash supplied to ATM customers over the nine-month period, and is primarily attributable to the loss of three large customers.

At September 30, 2008, the Company’s securities portfolio amounted to $194.4 million, or 19.8% of total assets. When compared to year-end 2007, securities increased by $26.0 million, or 15.4%. The increase primarily consisted of increases in government-sponsored enterprise (“GSE”) insured mortgage-backed securities, which grew by $19.9 million or 28.7% in the first nine months of 2008. All of the Company’s holdings of mortgage-backed securities are issued by a GSE (FHLMC and FNMA), or by GNMA, which bears full and explicit credit backing by the federal government. The following table sets forth certain information regarding the amortized cost and fair values of the Company’s securities at the dates indicated:

		September 30,								December 31,
		2008								2007
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
						(Dollars in thousands)
Securities available for sale:
Government-sponsored enterprise obligations		$	92,141			$	92,072			$	85,972			$	86,178
Municipal obligations			—				—				1,206				1,202
			92,141				92,072				87,178				87,380
Mortgage-backed securities			91,671				89,304				70,839				69,381
Total debt securities			183,812				181,376				158,017				156,761
Total available for sale securities		$	183,812			$	181,376			$	158,017			$	156,761
Restricted equity securities:
Federal Home Loan Bank of Boston stock		$	10,505			$	10,505			$	9,110			$	9,110
Access Capital Strategies Community Investment Fund			1,965				1,965				1,965				1,965
SBLI & DIF stock			516				516				516				516
Total restricted equity securities		$	12,986			$	12,986			$	11,591			$	11,591

The following supplemental table provides information regarding the issuers of the Company’s available for sale securities as of September 30, 2008:

		September 30,
		2008
		Amortized				Fair
		Cost				Value
		(Dollars in thousands)
Securities available for sale:
Federal Home Loan Banks		$	45,890			$	45,848
Federal Farm Credit Banks			10,915				10,922
Federal National Mortgage Association			15,559				15,541
Federal Home Loan Mortgage Corporation			19,777				19,761
Government-sponsored enterprise obligations			92,141				92,072
Government National Mortgage Association		$	38			$	38
Federal National Mortgage Association			47,018				46,320
Federal Home Loan Mortgage Corporation			44,615				42,946
Mortgage-backed securities			91,671				89,304
Total debt securities			183,812				181,376
Total available for sale securities		$	183,812			$	181,376

Lending Activities

The Company’s net loan portfolio aggregated $672.1 million on September 30, 2008, or 68.5% of total assets on that date. As of December 31, 2007, the net loan portfolio totaled $606.9 million, or 67.2% of total assets. The main components of the growth of $65.1 million in the first nine months of 2008 were a $41.3 million (21.9%) increase in residential mortgage loans, a $19.5 million (12.2%) increase in commercial business loans and a $10.9 million (6.4%) increase in commercial real estate loans. Offsetting these increases was a reduction of $6.8 million (12.3%) in construction loans. The growth in residential mortgage loans reflects the Company’s strategic decision in late 2007 to retain most new residential originations (fixed-rate and adjustable-rate) in its portfolio, due to the widening of market interest rate spreads available on most residential mortgage products. Previously, for much of 2006 and 2007, the Company had sold most fixed-rate residential loan production in the secondary market. While demand for commercial loans have been strong for much of this year, management believes that commercial loan demand may lessen in future quarters as a result of the current economic downturn occurring in New England and nationally. The following table sets forth the composition of the loan portfolio at the dates indicated:

		September 30, 2008								December 31, 2007
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
Mortgage loans on real estate:
Residential		$	229,253				33.82	%		$	187,991				30.73	%
Commercial			179,298				26.45	%			168,463				27.54	%
Construction			48,919				7.22	%			55,763				9.11	%
Home equity			38,982				5.75	%			37,768				6.17	%
			496,452				73.24	%			449,985				73.55	%
Other loans:
Commercial			178,704				26.37	%			159,233				26.03	%
Consumer			2,674				0.39	%			2,592				0.42	%
			181,378				26.76	%			161,825				26.45	%
Total loans			677,830				100.00	%			611,810				100.00	%
Other items:
Net deferred loan costs			1,078								925
Allowance for loan losses			(6,853	)							(5,789	)
Total loans, net		$	672,055							$	606,946

Non-performing Assets

The table below sets forth the amounts and categories of the Company’s non-performing assets at the dates indicated:

		September 30, 2008				December 31, 2007
		(Dollars in thousands)
Non-accrual loans:
Residential mortgage		$	1,208			$	712
Commercial mortgage			4,972				658
Construction			1,945				—
Commercial			567				—
Consumer and other			116				228
Total non-accrual loans		$	8,808			$	1,598
Loans greater than 90 days delinquent and still accruing:		$	—			$	—
		$	—			$	—
Total non-performing loans and assets		$	8,808			$	1,598
Total restructured loans		$	1,182			$	—
Ratios:
Non-performing loans to total loans			1.30	%			0.26	%
Non-performing assets to total assets			0.90	%			0.18	%

Loans are placed on non-accrual status either when reasonable doubt exists as to the full and timely collection of interest and principal, or when a loan becomes 90 days past due, unless an evaluation by the management Credit Committee clearly indicates that the loan is well-secured and in the process of collection.

The $7.2 million increase in non-performing loans since year-end 2007 is primarily due to the addition of one $6.4 million loan relationship to non-performing status during the second quarter of 2008. Within this loan relationship, two loans totaling $5.9 million (one for $4.0 million in the commercial mortgage category and one for $1.9 million reported within the construction loan category ; construction on the building is complete with the exception of tenant fit-up in some areas) are secured by a mixed-use building located in Boston, MA. The remainder of this relationship consists of two commercial business loans aggregating $492,000, both of which were underwritten under the Massachusetts Capital Access Program (“MCAP”). These loans are secured primarily by equipment and the Bank’s specific reserves accumulated as a result of its participation in the MCAP program. Based on a review of all relevant factors, including the collateral securing these loans, specific loan loss reserves of $277,000 have been allocated for this loan relationship.

Restructured loans represent performing loans for which concessions (such as extension of repayment terms or reductions of interest rates to below market rates) are granted due to a borrower’s financial condition. The balance of $1.2 million in restructured loans at September 30, 2008 represents one residential real estate mortgage loan that was modified to lengthen the borrower’s repayment period. This loan was performing in accordance with its modified terms at September 30, 2008.

Allowance for Loan Losses

In originating loans, the Company recognizes that losses will be experienced on loans and that the risk of loss will vary with many factors, including the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan

over the term of the loan. The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio, and as such, this allowance represents management’s best estimate of the probable known and inherent credit losses in the loan portfolio as of the date of the financial statements.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’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 losses based on internal and external portfolio reviews, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors considered include general business and economic conditions, the level of real estate values in our market area, the tenure and experience of the Company’s lending staff, the seasoning of the loan portfolio, and delinquency trends in the loan portfolio. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The following tables set forth Benjamin Franklin Bank’s allowance by loan category and the percent of the loans to total loans in each of the categories listed at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories:

		At September 30,												At December 31,
		2008												2007
										Percent												Percent
										of Loans												of Loans
						Loan				in Each								Loan				in Each
		Allowance				Balances				Category to				Allowance				Balances				Category to
		for Loan				by				to Total				for Loan				by				to Total
		Losses				Category				Loans				Losses				Category				Loans
										(Dollars in thousands)
Mortgage loans on real estate:
Residential		$	1,027			$	229,253				33.82	%		$	499			$	187,991				30.73	%
Commercial			2,342				179,298				26.45	%			1,959				168,463				27.54	%
Construction			791				48,919				7.22	%			850				55,763				9.11	%
Home equity			146				38,982				5.75	%			142				37,768				6.17	%
			4,306				496,452				73.24	%			3,450				449,985				73.55	%
Other loans:
Commercial			2,178				178,704				26.37	%			1,874				159,233				26.03	%
Consumer			69				2,674				0.39	%			80				2,592				0.42	%
Unallocated (1)			300				0				0.00	%			385				0				0.00	%
			2,547				181,378				26.76	%			2,339				161,825				26.45	%
Total		$	6,853			$	677,830				100.00	%		$	5,789			$	611,810				100.00	%

The Massachusetts economy has slowed, as labor market conditions and residential real estate values have deteriorated. Unemployment in Massachusetts over the past twelve months has increased from 4.4% to 5.3% (Federal Reserve New England Economic Indicators, October 2008). In addition, the median home price in September declined 15.6% from a year earlier, and now represents a six-year low. Sales of single-family homes in Massachusetts also decreased in the third quarter to the lowest sales pace for the three-month period since 1991 (The Warren Group). Management monitors these trends closely, as well as many portfolio characteristics, including the level of delinquencies, charge-offs, and other measures of risk within the loan portfolio. Several of the key elements of that analysis are:

	•		Loan delinquency : At September 30, 2008, portfolio delinquency (percentage of total loans greater than 30 days past due) stood at 1.66%, compared to 1.55% at June 30, 2008 and an average of 1.07% for all of 2007. The increase compared to December 31, 2007 was primarily caused by the addition of one $6.4 million commercial relationship, discussed earlier in “Non-performing Assets”. For all other loans, delinquency at September 30, 2008 was 0.71% of total loans.
	•		Level of charge-offs : Net charge-offs have been nominal in both 2008 and 2007. For the three and nine months ended September 30, 2008, net charge-offs were $25,000 and $64,000, respectively. For the comparable 2007 periods, net charge-offs were $154,000 and $193,000, respectively. For the 2008 and 2007 year-to-date periods, net charge-offs represented a negligible 0.1% and 0.3% of average loans outstanding, respectively.
	•		Real estate collateral values : Management monitors loan-to-value ratios for its residential mortgage loan portfolio, as well as for its construction portfolio, which is a mix of commercial and residential construction credits. At September 30, 2008, the weighted average loan-to-value ratio of the Bank’s construction loan portfolio was approximately 67%, and the weighted average loan-to value ratio of the Bank’s residential mortgage loan portfolio was approximately 55%. Loan-to-value ratios are computed using the appraised value of collateral on the date of loan origination.
	•		Underwriting criteria: The Bank has not originated and does not hold any sub-prime mortgages in its loan portfolio.

At September 30, 2008, the allowance for loan losses was 1.01% of total loans, compared to 0.94% at both December 31, 2007 and September 30, 2007. To some extent, the increase in this ratio (the “coverage” ratio) reflects an increase in the general loss reserve for residential mortgage loans. Higher risks are now evident in the general marketplace relating to the declining value of collateral securing these loans and recent increases in unemployment rates. The coverage ratio also increased (in part) pursuant to additional reserves for impaired commercial and commercial real estate loans.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and home equity loans for impairment disclosures. At September 30, 2008 and December 31, 2007, the Company’s impaired loans totaled $9.8 million and $880,000 respectively. The increase in impaired loans as of September 30, 2008 is primarily the result of the additions of one $6.4 million commercial loan relationship (see “Non-performing Assets” on pages 14-15 for further discussion of this loan), and one $1.2 million restructured residential mortgage loan that is performing in accordance with its modified terms. The specific valuation allowances for impaired

loans carried within the allowance for loan losses at September 30, 2008 and December 31, 2007 were $597,000 and $37,000, respectively.

While the Company believes that it has established adequate specific and general allowances for losses on loans, adjustments to the allowance may be necessary if future conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Company’s regulators periodically review the allowance for loan losses.

The following table sets forth activity in the Company’s allowance for loan losses for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Dollars in thousands)
Balance at beginning of period		$	6,431			$	5,710			$	5,789			$	5,337
Charge-offs:
Residential mortgage loans			—				(143	)			—				(143	)
Commercial loans			—				—				—				(7	)
Consumer loans			(31	)			(24	)			(98	)			(85	)
Total charge-offs			(31	)			(167	)			(98	)			(235	)
Recoveries:
Commercial loans			1				6				13				11
Consumer loans			5				7				21				31
Total recoveries			6				13				34				42
Net charge-offs			(25	)			(154	)			(64	)			(193	)
Provision for loan losses			447				57				1,128				469
Balance at end of period		$	6,853			$	5,613			$	6,853			$	5,613
Ratios:
Net charge-offs to average loans outstanding			0.00	%			0.03	%			0.01	%			0.03	%
Allowance for loan losses to non-performing loans at end of period			77.80	%			172.87	%			77.80	%			172.87	%
Allowance for loan losses to total loans at end of period			1.01	%			0.94	%			1.01	%			0.94	%

The reserve for unfunded lending commitments, included in other liabilities, was reduced by a credit of $17,000 to the provision for unfunded lending commitments during the nine months ended September 30, 2008 and was reduced by a credit of $259,000 to the provision for unfunded lending commitments during the nine months ended September 30, 2007. These provisions are included in other general and administrative expenses. The total reserve was $167,000 at September 30, 2008 and $183,000 at December 31, 2007.

Deposits

The following table sets forth the Company’s deposit accounts at the dates indicated:

		September 30,				% of				December 31,				% of
		2008				Total				2007				Total
						(Dollars in thousands)
Deposit type:
Demand deposits		$	112,786				17.1	%		$	113,023				18.3	%
NOW accounts			70,618				10.7	%			52,000				8.4	%
Regular and other savings			81,338				12.3	%			79,167				12.8	%
Money market deposits			141,566				21.4	%			110,544				17.9	%
Total non-certificate accounts			406,308				61.5	%			354,734				57.4	%
Term certificates less than $100,000			154,880				23.4	%			159,272				25.8	%
Term certificates of $100,000 or more			99,557				15.1	%			103,362				16.8	%
Total certificate accounts			254,437				38.5	%			262,634				42.6	%
Total deposits		$	660,745				100.0	%		$	617,368				100.0	%