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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly period ended September 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 33-22224-B



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Beverly National Corporation

(Name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Massachusetts                                                  |  | 04-2832201                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|240 Cabot Street Beverly, Massachusetts  |  | 01915     
|(Address of principal executive offices) |  | (Zip Code)

Registrants telephone number, including area code (978) 922-2100



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Indicate by check mark whether registrant
(l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 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  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated
Filer ̈Accelerated Filer ̈Non-Accelerated Filer  x

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of November 2, 2006. 2,723,435.



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##### Table of Contents

BEVERLY NATIONAL CORPORATION

INDEX



|                              |  |                                                                                                                         |  |   
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --
|PART I.
FINANCIAL INFORMATION |  |                                                                                                                        
|                              | 
|Item 1.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Financial Statements                                                                                                    |  |   
|                              |  |                                                                                                                        
|                              |  | Condensed Consolidated Balance Sheets at September 30, 2006 (Unaudited) and December 31, 2005                           |  | 3 
|                              |  |                                                                                                                        
|                              |  | Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2006 and 2005 (Unaudited) |  | 4 
|                              |  |                                                                                                                        
|                              |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (Unaudited)       |  | 5 
|                              |  |                                                                                                                        
|                              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                        |  | 6 
|                              | 
|Item 2.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 8 
|                              | 
|Item 3.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Quantitative and Qualitative Disclosures about Market Risk                                                              |  | 17
|                              | 
|Item 4.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Controls and Procedures                                                                                                 |  | 18
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                        
|                              | 
|Item 1.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Legal Proceedings                                                                                                       |  | 19
|                              | 
|Item 1A.                      |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Risk Factors                                                                                                            |  | 19
|                              | 
|Item 2.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                             |  | 19
|                              | 
|Item 3.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Defaults Upon Senior Securities                                                                                         |  | 19
|                              | 
|Item 4.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Submission of Matters to a Vote of Security Holders                                                                     |  | 19
|                              | 
|Item 5.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Other Information                                                                                                       |  | 19
|                              | 
|Item 6.                       |  |                                                                                                                        
|                              |  |                                                                                                                        
|                              |  | Exhibits                                                                                                                |  | 19
|                              |  |                                                                                                                        
|                              |  | Signatures                                                                                                              |  | 20



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##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                                |  | September 30, 2006 |         |   | December 31, 2005 |  
|                                                                                                                                                                                                                                |  | (Unaudited)        |         |   |                   |  
|ASSETS                                                                                                                                                                                                                          |  |                    |         |   |                   |   |         |  
|Cash and due from banks                                                                                                                                                                                                         |  | $                  | 8,831   |   |                   | $ | 13,134  |  
|Interest bearing demand deposits with other banks                                                                                                                                                                               |  |                    | 707     |   |                   |   | 306     |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                       |  |                    | 9,538   |   |                   |   | 13,440  |  
|Investments in available-for-sale securities (at fair value)                                                                                                                                                                    |  |                    | 52,019  |   |                   |   | 47,729  |  
|Investments in held-to-maturity securities                                                                                                                                                                                      |  |                    | 61,847  |   |                   |   | 65,514  |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                                                           |  |                    | 2,716   |   |                   |   | 1,872   |  
|Federal Reserve Bank stock, at cost                                                                                                                                                                                             |  |                    | 188     |   |                   |   | 188     |  
|Loans, net of the allowance for loan losses of $2,911 and $2,514, respectively                                                                                                                                                  |  |                    | 300,206 |   |                   |   | 267,256 |  
|Premises and equipment                                                                                                                                                                                                          |  |                    | 5,385   |   |                   |   | 4,577   |  
|Accrued interest receivable                                                                                                                                                                                                     |  |                    | 2,089   |   |                   |   | 1,639   |  
|Other assets                                                                                                                                                                                                                    |  |                    | 10,255  |   |                   |   | 10,297  |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|Total assets                                                                                                                                                                                                                    |  | $                  | 444,243 |   |                   | $ | 412,512 |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                            |  |                    |         |   |                   |   |         |  
|Deposits:                                                                                                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Noninterest-bearing                                                                                                                                                                                                             |  | $                  | 70,569  |   |                   | $ | 78,218  |  
|Interest-bearing                                                                                                                                                                                                                |  |                    | 267,377 |   |                   |   | 267,594 |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|Total deposits                                                                                                                                                                                                                  |  |                    | 337,946 |   |                   |   | 345,812 |  
|Federal Home Loan Bank advances                                                                                                                                                                                                 |  |                    | 42,740  |   |                   |   | 22,900  |  
|Securities sold under agreements to repurchase                                                                                                                                                                                  |  |                    | 13,282  |   |                   |   | 11,390  |  
|Other liabilities                                                                                                                                                                                                               |  |                    | 3,570   |   |                   |   | 3,689   |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                                                               |  |                    | 397,538 |   |                   |   | 383,791 |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Preferred stock, $1.00 par value per share;                                                                                                                                                                                     |  |                    |         |   |                   |   |         |  
|300,000 shares authorized; issued and outstanding none                                                                                                                                                                          |  |                    |        |   |                   |   |        |  
|Common stock, $2.50 par value per share;                                                                                                                                                                                        |  |                    |         |   |                   |   |         |  
|5,000,000 shares authorized; issued 2,833,840 shares as of September 30, 2006 and 1,993,200 shares as of December 31, 2005;
outstanding, 2,723,435 shares as of September 30, 2006 and 1,882,795 shares as of December 31, 2005 |  |                    | 7,085   |   |                   |   | 4,983   |  
|Paid-in capital                                                                                                                                                                                                                 |  |                    | 21,638  |   |                   |   | 6,848   |  
|Retained earnings                                                                                                                                                                                                               |  |                    | 19,910  |   |                   |   | 18,992  |  
|Treasury stock, at cost (110,405 shares as of September 30, 2006 and December 31, 2005)                                                                                                                                         |  |                    | (1,495  | ) |                   |   | (1,495  | )
|Accumulated other comprehensive loss                                                                                                                                                                                            |  |                    | (433    | ) |                   |   | (607    | )
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                                                      |  |                    | 46,705  |   |                   |   | 28,721  |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                      |  | $                  | 444,243 |   |                   | $ | 412,512 |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  
|Book value per share                                                                                                                                                                                                            |  | $                  | 17.15   |   |                   | $ | 15.25   |  
|                                                                                                                                                                                                                                |  |                    |         |   |                   |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)



|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|---------------------------------------------------------------- |  | ------------------ | --------- | ------------------ | ----------------- | --------- | ------------------ |  | ------------------ | --------- |  | - | ---------
|                                                                 |  | Three Months Ended |           |                    | Nine Months Ended
|                                                                 |  | September 30, 2006 |           | September 30, 2005 |                   |           | September 30, 2006 |  | September 30, 2005
|Interest and dividend income:                                    |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Interest and fees on loans                                       |  | $                  | 4,882     |                    | $                 | 3,764     |                    |  | $                  | 13,900    |  | $ | 10,911   
|Interest on debt securities:                                     |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Taxable                                                          |  |                    | 1,149     |                    |                   | 1,035     |                    |  |                    | 3,175     |  |   | 3,050    
|Tax-exempt                                                       |  |                    | 23        |                    |                   | 25        |                    |  |                    | 72        |  |   | 64       
|Dividends on marketable equity securities                        |  |                    | 61        |                    |                   | 6         |                    |  |                    | 185       |  |   | 10       
|Other interest                                                   |  |                    | 32        |                    |                   | 69        |                    |  |                    | 46        |  |   | 143      
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Total interest and dividend income                               |  |                    | 6,147     |                    |                   | 4,899     |                    |  |                    | 17,378    |  |   | 14,178   
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Interest expense:                                                |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Interest on deposits                                             |  |                    | 1,570     |                    |                   | 1,098     |                    |  |                    | 4,122     |  |   | 2,923    
|Interest on other borrowed funds                                 |  |                    | 694       |                    |                   | 66        |                    |  |                    | 1,889     |  |   | 196      
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Total interest expense                                           |  |                    | 2,264     |                    |                   | 1,164     |                    |  |                    | 6,011     |  |   | 3,119    
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Net interest and dividend income                                 |  |                    | 3,883     |                    |                   | 3,735     |                    |  |                    | 11,367    |  |   | 11,059   
|Provision for loan losses                                        |  |                    | 150       |                    |                   | 180       |                    |  |                    | 440       |  |   | 440      
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Net interest and dividend income after provision for loan losses |  |                    | 3,733     |                    |                   | 3,555     |                    |  |                    | 10,927    |  |   | 10,619   
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Noninterest income:                                              |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Income from fiduciary activities                                 |  |                    | 424       |                    |                   | 415       |                    |  |                    | 1,344     |  |   | 1,310    
|Fees from sale of non-deposit products                           |  |                    | 45        |                    |                   | 59        |                    |  |                    | 168       |  |   | 190      
|Service charges on deposit accounts                              |  |                    | 137       |                    |                   | 153       |                    |  |                    | 416       |  |   | 433      
|Other deposit fees                                               |  |                    | 216       |                    |                   | 161       |                    |  |                    | 521       |  |   | 432      
|Gain (loss) on sales of loans, net                               |  |                    |          |                    |                   | (1        | )                  |  |                    |          |  |   | 13       
|Income on cash surrender value of life insurance                 |  |                    | 58        |                    |                   | 53        |                    |  |                    | 162       |  |   | 157      
|Other income                                                     |  |                    | 176       |                    |                   | 206       |                    |  |                    | 598       |  |   | 654      
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Total noninterest income                                         |  |                    | 1,056     |                    |                   | 1,046     |                    |  |                    | 3,209     |  |   | 3,189    
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Noninterest expense:                                             |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Salaries and employee benefits                                   |  |                    | 2,160     |                    |                   | 2,652     |                    |  |                    | 6,526     |  |   | 7,087    
|Director fees                                                    |  |                    | 65        |                    |                   | 78        |                    |  |                    | 232       |  |   | 221      
|Occupancy expense                                                |  |                    | 329       |                    |                   | 319       |                    |  |                    | 1,001     |  |   | 1,050    
|Equipment expense                                                |  |                    | 203       |                    |                   | 184       |                    |  |                    | 598       |  |   | 494      
|Data processing fees                                             |  |                    | 208       |                    |                   | 206       |                    |  |                    | 602       |  |   | 635      
|Marketing and public relations                                   |  |                    | 137       |                    |                   | 66        |                    |  |                    | 332       |  |   | 252      
|Professional fees                                                |  |                    | 208       |                    |                   | 271       |                    |  |                    | 492       |  |   | 707      
|Other expense                                                    |  |                    | 380       |                    |                   | 251       |                    |  |                    | 1,133     |  |   | 1,047    
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Total noninterest expense                                        |  |                    | 3,690     |                    |                   | 4,027     |                    |  |                    | 10,916    |  |   | 11,493   
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Income before income taxes                                       |  |                    | 1,099     |                    |                   | 574       |                    |  |                    | 3,220     |  |   | 2,315    
|Income taxes                                                     |  |                    | 339       |                    |                   | 131       |                    |  |                    | 1,003     |  |   | 661      
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Net income                                                       |  | $                  | 760       |                    | $                 | 443       |                    |  | $                  | 2,217     |  | $ | 1,654    
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Comprehensive income                                             |  | $                  | 1,177     |                    | $                 | 346       |                    |  | $                  | 2,391     |  | $ | 1,393    
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Earnings per share:                                              |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Weighted average shares outstanding                              |  |                    | 2,558,642 |                    |                   | 1,876,941 |                    |  |                    | 2,116,626 |  |   | 1,870,768
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Weighted average diluted shares outstanding                      |  |                    | 2,592,186 |                    |                   | 1,933,094 |                    |  |                    | 2,154,128 |  |   | 1,932,371
|                                                                 |  |                    |           |                    |                   |           |                    |  |                    |           |  |   |          
|Earnings per common share                                        |  | $                  | 0.30      |                    | $                 | 0.24      |                    |  | $                  | 1.05      |  | $ | 0.88     
|Earnings per common share, assuming dilution                     |  | $                  | 0.29      |                    | $                 | 0.23      |                    |  | $                  | 1.03      |  | $ | 0.86     
|Dividends per share                                              |  | $                  | 0.20      |                    | $                 | 0.20      |                    |  | $                  | 0.60      |  | $ | 0.60     

The accompanying notes are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(In thousands)

(Unaudited)



|                                                                                            |  |                    |         |   |                    |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|                                                                                            |  | September 30, 2006 |         |   | September 30, 2005 |  
|Cash flows from operating activities:                                                       |  |                    |         |   |                    |   |         |  
|Net income                                                                                  |  | $                  | 2,217   |   |                    | $ | 1,654   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                    |         |   |                    |   |         |  
|Amortization of securities, net                                                             |  |                    | 192     |   |                    |   | 152     |  
|Provision for loan losses                                                                   |  |                    | 440     |   |                    |   | 440     |  
|Change in deferred loan costs, net                                                          |  |                    | (29     | ) |                    |   | 41      |  
|Net decrease in mortgages held-for-sale                                                     |  |                    |        |   |                    |   | 447     |  
|Depreciation and amortization                                                               |  |                    | 495     |   |                    |   | 477     |  
|Stock award                                                                                 |  |                    | 12      |   |                    |   | 13      |  
|Increase in interest receivable                                                             |  |                    | (450    | ) |                    |   | (273    | )
|(Increase) decrease in prepaid expenses                                                     |  |                    | (17     | ) |                    |   | 171     |  
|Decrease in mortgage servicing rights                                                       |  |                    | 30      |   |                    |   | 52      |  
|Increase in cash surrender value of life insurance                                          |  |                    | (162    | ) |                    |   | (186    | )
|Decrease in RABBI Trust trading securities                                                  |  |                    | 69      |   |                    |   | 82      |  
|Decrease in taxes receivable                                                                |  |                    | 20      |   |                    |   | 87      |  
|Increase in other assets                                                                    |  |                    | (4      | ) |                    |   | (325    | )
|Increase in interest payable                                                                |  |                    | 243     |   |                    |   | 172     |  
|(Decrease) increase in accrued expenses                                                     |  |                    | (211    | ) |                    |   | 518     |  
|Decrease in other liabilities                                                               |  |                    | (191    | ) |                    |   | (5      | )
|                                                                                            |  |                    |         |   |                    |   |         |  
|Net cash provided by operating activities                                                   |  |                    | 2,654   |   |                    |   | 3,517   |  
|                                                                                            |  |                    |         |   |                    |   |         |  
|Cash flows from investing activities:                                                       |  |                    |         |   |                    |   |         |  
|Purchases of available-for-sale securities                                                  |  |                    | (11,821 | ) |                    |   | (7,757  | )
|Proceeds from maturities of available-for-sale securities                                   |  |                    | 7,641   |   |                    |   | 6,394   |  
|Purchases of held-to-maturity securities                                                    |  |                    |        |   |                    |   | (1,000  | )
|Proceeds from maturities of held-to-maturity securities                                     |  |                    | 3,645   |   |                    |   | 4,701   |  
|Purchase of Federal Home Loan Bank stock                                                    |  |                    | (844    | ) |                    |   |        |  
|Purchase of Federal Reserve Bank stock                                                      |  |                    |        |   |                    |   | (45     | )
|Loan originations and principal collections, net                                            |  |                    | (33,327 | ) |                    |   | (16,034 | )
|Recoveries of loans previously charged off                                                  |  |                    | 6       |   |                    |   | 17      |  
|Capital expenditures                                                                        |  |                    | (1,303  | ) |                    |   | (329    | )
|                                                                                            |  |                    |         |   |                    |   |         |  
|Net cash used in investing activities                                                       |  |                    | (36,003 | ) |                    |   | (14,053 | )
|                                                                                            |  |                    |         |   |                    |   |         |  
|Cash flows from financing activities:                                                       |  |                    |         |   |                    |   |         |  
|Net decrease in demand deposits, NOW, money market and savings accounts                     |  |                    | (19,756 | ) |                    |   | (1,085  | )
|Net increase in time deposits                                                               |  |                    | 11,890  |   |                    |   | 15,405  |  
|Net increase in Federal Home Loan Bank advances                                             |  |                    | 19,840  |   |                    |   | 4,000   |  
|Increase (decrease) in securities sold under agreements to repurchase                       |  |                    | 1,892   |   |                    |   | (1,742  | )
|Proceeds from exercise of stock options                                                     |  |                    | 16,880  |   |                    |   | 175     |  
|Proceeds from issuance of treasury stock                                                    |  |                    |        |   |                    |   | 2       |  
|Dividends paid                                                                              |  |                    | (1,299  | ) |                    |   | (1,122  | )
|                                                                                            |  |                    |         |   |                    |   |         |  
|Net cash provided by financing activities                                                   |  |                    | 29,447  |   |                    |   | 15,633  |  
|                                                                                            |  |                    |         |   |                    |   |         |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                    | (3,902  | ) |                    |   | 5,097   |  
|Cash and cash equivalents at beginning of year                                              |  |                    | 13,440  |   |                    |   | 10,646  |  
|                                                                                            |  |                    |         |   |                    |   |         |  
|Cash and cash equivalents at September 30                                                   |  | $                  | 9,538   |   |                    | $ | 15,743  |  
|                                                                                            |  |                    |         |   |                    |   |         |  
|Supplemental disclosures:                                                                   |  |                    |         |   |                    |   |         |  
|Interest paid                                                                               |  | $                  | 5,768   |   |                    | $ | 2,947   |  
|Income taxes paid                                                                           |  |                    | 983     |   |                    |   | 931     |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF
PRESENTATION

The interim condensed consolidated financial statements contained herein are unaudited but, in the opinion of management,
include all adjustments that are necessary to make the financial statements not misleading. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results that may be
expected for the year ended December 31, 2006.

The year-end condensed consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

2. EARNINGS PER SHARE

Earnings per share (EPS) calculations are based on the weighted-average
number of common shares outstanding during the period.

Basic EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

3. RECLASSIFICATION

Certain amounts for prior periods have been reclassified to be consistent with the current statement presentation.

4. IMPACT OF NEW ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised), Share-Based Payment (SFAS No. 123R). This Statement revises FASB Statement
No. 123, Accounting for Stock Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires that the cost
resulting from all share-based payment transactions be recognized in the consolidated financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply
a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. SFAS No. 123R was effective for the Company as of January 1,
2006. The Company does not believe the adoption of SFAS No. 123R will have a material impact on the Companys financial position, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets  an amendment of FASB Statement No. 140.
SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing
asset or servicing liability shall be initially measured at fair value; however, an entity may elect the amortization method or fair value method for subsequent balance sheet reporting periods. SFAS No. 156 is effective
as of an entitys first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial statements, including interim
financial statements, for any period of that fiscal year. The company does not expect the adoption of this statement to have a material impact on its financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and other Postretirement Plans 
an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158). SFAS 158 requires 1) the recognition of an asset or liability for the over-funded or under-funded status of a defined benefit plan, 2) the recognition of actuarial
gains and losses and prior service costs and credits in other comprehensive income, 3) measurement of plan assets and benefit obligations as of the employers balance sheet date, rather than at interim measurement dates as currently allowed,
and 4)



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disclosure of additional information concerning actuarial gains and losses and prior service costs and
credits recognized in other comprehensive income. This statement is effective for financial statements with fiscal years ending after December 15, 2006. The Company does not believe the adoption of this Statement will have a material impact on
the Companys financial position or result of operations.

5. STOCK BASED COMPENSATION

The Company maintains five stock-based employee compensation plans. Effective January 1, 2006, the Company adopted SFAS 123R. In the three and nine
months ended September 30, 2006, stock-based employee compensation costs recorded as expenses amounted to $8,185 and $24,555, respectively. Prior to January 1, 2006, the Company accounted for the plans under the recognition and measurement
principles of APB Opinion No. 25. No stock-based employee compensation cost had been recognized during periods prior to January 1, 2006 for the Companys fixed stock option plans. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation during the three and nine month periods ended September 30, 2005.



|                                                                                                                                            |  |                                               |      |                                            |   |      
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ---- | ------------------------------------------ | - | -----
|                                                                                                                                            |  | For the ThreeMonths EndedSeptember 30, 2005   |      | For the NineMonths EndedSeptember 30, 2005
|                                                                                                                                            |  | (Dollars in thousands, except per share data)
|Net income, as reported                                                                                                                     |  | $                                             | 443  |                                            | $ | 1,654
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                               | 12   |                                            |   | 36   
|                                                                                                                                            |  |                                               |      |                                            |   |      
|Pro forma net income                                                                                                                        |  | $                                             | 431  |                                            | $ | 1,618
|                                                                                                                                            |  |                                               |      |                                            |   |      
|Earnings per share:                                                                                                                         |  |                                               |      |                                            |   |      
|Basic - as reported                                                                                                                         |  | $                                             | 0.24 |                                            | $ | 0.87 
|Basic - pro forma                                                                                                                           |  | $                                             | 0.23 |                                            | $ | 0.85 
|Diluted - as reported                                                                                                                       |  | $                                             | 0.23 |                                            | $ | 0.86 
|Diluted - pro forma                                                                                                                         |  | $                                             | 0.22 |                                            | $ | 0.84 

6. PENSION BENEFITS

The following summarizes the net periodic cost for the three months and nine months ended September 30:



|                                                 |  |                                          |      |   |                                        |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------ |  | ---------------------------------------- | ---- | - | -------------------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                 |  | For the Three Months Ended September 30, |      |   | For the Nine Months EndedSeptember 30, |  
|                                                 |  | 2006                                     |      |   | 2005                                   |   |      | 2006 |  |   | 2005 |  
|                                                 |  | (in thousands)                           |      |   | (in thousands)                         |  
|Service cost                                     |  | $                                        |     |   |                                        | $ | 97   |      |  | $ |     |   |  | $ | 290  |  
|Interest cost on benefit obligation              |  |                                          | 118  |   |                                        |   | 137  |      |  |   | 355  |   |  |   | 411  |  
|Expected return on plan assets                   |  |                                          | (150 | ) |                                        |   | (152 | )    |  |   | (451 | ) |  |   | (456 | )
|Amortization of prior service cost               |  |                                          |     |   |                                        |   | 14   |      |  |   |     |   |  |   | 41   |  
|                                                 |  |                                          |      |   |                                        |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                        |  |                                          | (32  | ) |                                        |   | 96   |      |  |   | (96  | ) |  |   | 286  |  
|Adjustment for curtailment gain                  |  |                                          |     |   |                                        |   | (254 | )    |  |   |     |   |  |   | (254 | )
|Adjustment for recognition of prior service cost |  |                                          |     |   |                                        |   | 756  |      |  |   |     |   |  |   | 756  |  
|                                                 |  |                                          |      |   |                                        |   |      |      |  |   |      |   |  |   |      |  
|Total plan expense                               |  | $                                        | (32  | ) |                                        | $ | 598  |      |  | $ | (96  | ) |  | $ | 788  |  
|                                                 |  |                                          |      |   |                                        |   |      |      |  |   |      |   |  |   |      |  

Effective January 1, 2006, the pension plan was suspended so that employees no longer earn
additional defined benefits for future service.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Introduction

The following discussion includes Beverly National Corporation (Company) and its subsidiary, Beverly National Bank
(Bank) and the Banks wholly owned subsidiary, Beverly National Security Corporation (BNSC). BNSC was established to buy, sell and hold securities for the Banks investment portfolios. A former subsidiary of the
Bank, Hannah Insurance Agency (Hannah), which was established to sell annuities, life and long-term disability insurance, was dissolved during the first quarter of 2006.

Critical Accounting Estimates

In
preparing the Companys financial statements, management selects and applies numerous accounting policies. In applying these policies, management must make estimates and assumptions. The accounting policy that is most susceptible to critical
estimates and assumptions is the allowance for loan losses. The determination of an appropriate provision is based on a determination of the probable amount of credit losses in the loan portfolio. Many factors influence the amount of potential
charge-offs of loans deemed to be uncollectible. These factors include the specific characteristics of the loan portfolio and general economic conditions nationally and locally. While management carefully considers these factors in determining the
amount of the allowance for loan losses, future adjustments may be necessary due to changed conditions, which could have an adverse impact on reported earnings in the future. See Provisions and Allowance for Loan Losses.

Summary

At September 30, 2006
total assets reflected an increase of $31.7 million, or 7.7%, compared to total assets at December 31, 2005. Loans, net of the allowance for loan losses, increased $33.0 million, or 12.3%, from December 31, 2005. Managing the prudent
growth of the loan portfolio is the main focus of management with respect to the asset side of the balance sheet and is the primary reason for the change in net loans. Investing the Banks assets in this area offers the greatest earnings
potential, as it provides the better spread to the Banks incremental and increasing cost of funds. In addition, investment in available-for-sale securities increased $4.3 million, or 9.0%. Total deposits decreased $7.9 million, or 2.3%, when
compared to balances at December 31, 2005. The decline in deposits is a result of the current market for deposits, which has become very competitive as financial institutions have been more aggressive in pricing at current interest rate levels
to gather and retain deposits. While the Bank remained competitive in its pricing, it also remained disciplined in protecting its core customer base and low cost deposit structure. During the quarter ended September 30, 2006, the Company
completed its previously announced secondary stock offering. This offering raised an additional $16.4 million in capital, net of expenses, as 805,000 shares were issued at a price of $22.00 per share. These funds, along with an increase in advances
from the Federal Home Loan Bank of $19.8 million, or 86.6%, were used to fund asset growth.



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Investment Portfolio

Debt and equity securities have been classified in the consolidated balance sheets according to managements intent. The following table presents the amortized cost
of securities and their approximate fair values as of September 30, 2006 (unaudited) and December 31, 2005:



|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       
|---------------------------------------------------------------------------------------------- |  | ------------------- | ------ | -------------------- | - | --------------------- |  | --------- | ----- |  | - | ------
|                                                                                               |  | AmortizedCost Basis |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                                                                               |  | (in thousands)     
|Available-for-sale securities:                                                                 |  |                     |        |                      |   |                       |  |           |       |  |   |       
|September 30, 2006:                                                                            |  |                     |        |                      |   |                       |  |           |       |  |   |       
|Debt securities issued by U.S. government corporations and agencies                            |  | $                   | 16,999 |                      | $ | 16                    |  | $         | 287   |  | $ | 16,728
|Debt securities issued by states of the United States or political subdivisions of the states  |  |                     | 971    |                      |   |                      |  |           | 23    |  |   | 948   
|Corporate debt securities                                                                      |  |                     | 2,959  |                      |   |                      |  |           | 7     |  |   | 2,952 
|Trust preferred securities                                                                     |  |                     | 3,381  |                      |   |                      |  |           | 96    |  |   | 3,285 
|Marketable equity securities                                                                   |  |                     | 1,500  |                      |   | 212                   |  |           | 13    |  |   | 1,699 
|Mortgage-backed securities                                                                     |  |                     | 26,952 |                      |   | 88                    |  |           | 633   |  |   | 26,407
|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       
|                                                                                               |  | $                   | 52,762 |                      | $ | 316                   |  | $         | 1,059 |  | $ | 52,019
|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       
|December 31, 2005:                                                                             |  |                     |        |                      |   |                       |  |           |       |  |   |       
|Debt securities issued by U.S. government corporations and agencies                            |  | $                   | 13,494 |                      | $ |                      |  | $         | 355   |  | $ | 13,139
|Debt securities issued by states of the United States or political subdivisions of the states  |  |                     | 975    |                      |   |                      |  |           | 29    |  |   | 946   
|Corporate debt securities                                                                      |  |                     | 4,999  |                      |   |                      |  |           | 29    |  |   | 4,970 
|Trust preferred securities                                                                     |  |                     | 3,415  |                      |   | 20                    |  |           |      |  |   | 3,435 
|Marketable equity securities                                                                   |  |                     | 1,374  |                      |   | 188                   |  |           | 9     |  |   | 1,553 
|Mortgage-backed securities                                                                     |  |                     | 24,495 |                      |   |                      |  |           | 809   |  |   | 23,686
|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       
|                                                                                               |  | $                   | 48,752 |                      | $ | 208                   |  | $         | 1,231 |  | $ | 47,729
|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       
|Held-to-maturity securities:                                                                   |  |                     |        |                      |   |                       |  |           |       |  |   |       
|September 30, 2006:                                                                            |  |                     |        |                      |   |                       |  |           |       |  |   |       
|Debt securities issued by U.S. government corporations and agencies                            |  | $                   | 39,014 |                      | $ |                      |  | $         | 708   |  | $ | 38,306
|Debt securities issued by states of the United States and political subdivisions of the states |  |                     | 1,658  |                      |   | 2                     |  |           | 10    |  |   | 1,650 
|Debt securities issued by foreign governments                                                  |  |                     | 400    |                      |   |                      |  |           | 5     |  |   | 395   
|Mortgage-backed securities                                                                     |  |                     | 20,775 |                      |   |                      |  |           | 707   |  |   | 20,068
|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       
|                                                                                               |  | $                   | 61,847 |                      | $ | 2                     |  | $         | 1,430 |  | $ | 60,419
|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       
|December 31, 2005:                                                                             |  |                     |        |                      |   |                       |  |           |       |  |   |       
|Debt securities issued by U.S. government corporations and agencies                            |  | $                   | 39,013 |                      | $ |                      |  | $         | 841   |  | $ | 38,172
|Debt securities issued by states of the United States and political subdivisions of the states |  |                     | 1,927  |                      |   | 3                     |  |           | 9     |  |   | 1,921 
|Debt securities issued by foreign governments                                                  |  |                     | 400    |                      |   |                      |  |           | 1     |  |   | 399   
|Mortgage-backed securities                                                                     |  |                     | 24,174 |                      |   |                      |  |           | 771   |  |   | 23,403
|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       
|                                                                                               |  | $                   | 65,514 |                      | $ | 3                     |  | $         | 1,622 |  | $ | 63,895
|                                                                                               |  |                     |        |                      |   |                       |  |           |       |  |   |       



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Loan Portfolio

The following table summarizes the distribution of the Banks loan portfolio as of September 30, 2006 and December 31, 2005:



|                                                |  |                    |         |   |            |        |   |                   |   |         |            |  |        |  
|----------------------------------------------- |  | ------------------ | ------- | - | ---------- | ------ | - | ----------------- | - | ------- | ---------- |  | ------ | -
|                                                |  | September 30, 2006 |         |   | % of Total |        |   | December 31, 2005 |   |         | % of Total | 
|                                                |  | (in thousands)     |         |   |            |        |   | (in thousands)    |   |         |            | 
|                                                |  | (unaudited)        |         |   |            |        |   |                   |   |         |            | 
|Commercial, financial and agricultural          |  | $                  | 46,336  |   |            | 15.43  | % |                   | $ | 42,034  |            |  | 15.73  | %
|Real estate - construction and land development |  |                    | 25,383  |   |            | 8.46   | % |                   |   | 16,413  |            |  | 6.14   | %
|Real estate - residential                       |  |                    | 106,622 |   |            | 35.52  | % |                   |   | 98,007  |            |  | 36.67  | %
|Real estate - commercial                        |  |                    | 112,100 |   |            | 37.34  | % |                   |   | 98,761  |            |  | 36.95  | %
|Consumer                                        |  |                    | 3,283   |   |            | 1.09   | % |                   |   | 4,949   |            |  | 1.85   | %
|Other                                           |  |                    | 8,726   |   |            | 2.91   | % |                   |   | 8,968   |            |  | 3.36   | %
|                                                |  |                    |         |   |            |        |   |                   |   |         |            |  |        |  
|                                                |  |                    | 302,450 |   |            | 100.75 | % |                   |   | 269,132 |            |  | 100.70 | %
|Allowance for loan losses                       |  |                    | (2,911  | ) |            | -0.97  | % |                   |   | (2,514  | )          |  | -0.94  | %
|Deferred loan costs, net                        |  |                    | 667     |   |            | 0.22   | % |                   |   | 638     |            |  | 0.24   | %
|                                                |  |                    |         |   |            |        |   |                   |   |         |            |  |        |  
|Net Loans                                       |  | $                  | 300,206 |   |            | 100.00 | % |                   | $ | 267,256 |            |  | 100.00 | %
|                                                |  |                    |         |   |            |        |   |                   |   |         |            |  |        |  

Deposits

The following table summarizes deposits as of September 30, 2006 and the year ended December 31, 2005:



|                      |  |                    |         |            |       |   |                   |   |            |  |       |  
|--------------------- |  | ------------------ | ------- | ---------- | ----- | - | ----------------- | - | ---------- |  | ----- | -
|                      |  | September 30, 2006 |         | % of Total |       |   | December 31, 2005 |   | % of Total | 
|                      |  | (in thousands)     |         |            |       |   | (in thousands)    |   |            | 
|                      |  | (unaudited)        |         |            |       |   |                   |   |            | 
|Demand Deposits       |  | $                  | 70,569  |            | 20.88 | % |                   | $ | 78,218     |  | 22.62 | %
|NOW Accounts          |  |                    | 58,978  |            | 17.45 | % |                   |   | 59,507     |  | 17.21 | %
|Money Market Accounts |  |                    | 76,299  |            | 22.58 | % |                   |   | 78,487     |  | 22.70 | %
|Savings Deposits      |  |                    | 52,011  |            | 15.39 | % |                   |   | 61,401     |  | 17.76 | %
|Time Deposits         |  |                    | 80,089  |            | 23.70 | % |                   |   | 68,199     |  | 19.72 | %
|                      |  |                    |         |            |       |   |                   |   |            |  |       |  
|Total                 |  | $                  | 337,946 |            |       |   |                   | $ | 345,812    |  |       |  
|                      |  |                    |         |            |       |   |                   |   |            |  |       |  

Comparison of operating results for the three months ended September 30,
2006 and September 30, 2005

Net income for the quarter of $760,000, or basic earnings per share of $0.30 and fully diluted earnings of $0.29 per
share, increased compared to net income of $443,000, or basic earnings per share of $0.24 and fully diluted earnings of $0.23 per share for the same period last year. The results for last year included a non-recurring charge, net of tax, of $296,000
related to the curtailment of the Companys defined benefit pension plan effective December 31, 2005. After adjusting for the one time charge, net income would have been $739,000 or basic earnings per share of $0.39 and fully diluted
earnings of $0.38 per share for the 2005 period. The 2006 results represent an increase in net income of $21,000, or 2.8%, compared to the same period last year after adjusting for the non-recurring charge in 2005.

Total interest and dividend income, when compared to the same period last year, increased by $1.2 million, or 25.5%. Interest and fees on loans, which increased by $1.1
million, or 29.7%, from the same period last year, accounted for this increase. The current rising interest rate environment has led to the increase in the Companys yield on assets.

Total interest expense increased by $1.1 million, or 94.5%, compared to the same period last year. The increase was partially comprised of a $472,000, or 43.0%, increase
in deposit interest expense, which was fueled by an increase in the average interest rate paid on a declining amount of deposits, caused by the current rate environment. The increase in interest expense was also attributed to interest on Federal
Home Loan Bank advances. Interest paid on these borrowings increased $628,000, or 951.5%, from the same period last year. This was due to an increase in the amount of borrowings by the Bank to fund loan portfolio growth and deposit outflow.

The above changes in interest income and expense resulted in an increase in net interest income of $148,000, or 4.0%, from the comparable period last
year.



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The current interest rate environment has continued to present the Bank with a number of challenges as it has become a
much more competitive market and the Bank has worked hard to maintain its current deposit base and portfolio mix. Interest rate pressure on deposits has continued and, as a result, the Bank has been forced to raise deposit rates to meet these
competitive pressures and customers have been more active in shifting from non-interest bearing and low cost deposit accounts to other types of accounts with higher rates. These conditions have impacted the Banks cost of funds and net interest
margin, which continues to come under pressure. The additional loan growth, while at smaller margins, and the continued focus on improving operating efficiencies, has helped to offset the increased interest costs and enabled the Bank to increase
earnings.

The Companys net interest margin decreased by approximately 30 basis points, from 4.06% to 3.76%, from the comparable period last year.

The following table summarizes the components and activity with respect to the Companys net interest and dividend income and interest rate spread
and margin for the periods presented:



|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|------------------------------------------------ |  | --------------------------------------------- | ------- | ---------------- | --------------------------------------------- | ----- | ----------- |  | ---- | --------------- |  | ---------------- | ------- |  | ----------- | ----- | -- |  | ---- | -
|                                                 |  | For the Three Months Ended September 30, 2006 |         |                  | For the Three Months Ended September 30, 2005 |      
|                                                 |  | Average Balance                               |         | Interest Inc/Exp |                                               |       | Yield/ Rate |  |      | Average Balance |  | Interest Inc/Exp |         |  | Yield/ Rate |      
|                                                 |  | (in thousands)                                |         | (in thousands)   |                                               |       |             |  |      | (in thousands)  |  | (in thousands)   |         |  |             |      
|                                                 |  | (unaudited)                                   |         | (unaudited)      |                                               |       |             |  |      | (unaudited)     |  | (unaudited)      |         |  |             |      
|Assets                                           |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Federal funds sold and interest-bearing deposits |  | $                                             | 1,151   |                  | $                                             | 16    |             |  | 5.37 | %               |  | $                | 7,259   |  | $           | 69    |    |  | 3.77 | %
|Investments                                      |  |                                               | 115,238 |                  |                                               | 1,261 | *           |  | 4.34 | %               |  |                  | 115,829 |  |             | 1,079 | *  |  | 3.70 | %
|Loans                                            |  |                                               | 300,465 |                  |                                               | 4,940 | **          |  | 6.52 | %               |  |                  | 247,701 |  |             | 3,811 | ** |  | 6.10 | %
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Total interest-earning assets                    |  | $                                             | 416,854 |                  |                                               | 6,217 |             |  | 5.92 | %               |  | $                | 370,789 |  |             | 4,959 |    |  | 5.31 | %
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Liabilities                                      |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Savings deposits                                 |  | $                                             | 54,808  |                  |                                               | 76    |             |  | 0.55 | %               |  | $                | 66,393  |  |             | 89    |    |  | 0.53 | %
|NOW accounts                                     |  |                                               | 58,241  |                  |                                               | 60    |             |  | 0.41 | %               |  |                  | 63,129  |  |             | 40    |    |  | 0.25 | %
|Money market accounts                            |  |                                               | 82,227  |                  |                                               | 692   |             |  | 3.34 | %               |  |                  | 77,315  |  |             | 428   |    |  | 2.20 | %
|Time deposits                                    |  |                                               | 73,698  |                  |                                               | 742   |             |  | 3.99 | %               |  |                  | 74,511  |  |             | 541   |    |  | 2.88 | %
|FHLB advances                                    |  |                                               | 44,098  |                  |                                               | 593   |             |  | 5.34 | %               |  |                  | 864     |  |             | 8     |    |  | 3.76 | %
|Repurchase agreements                            |  |                                               | 11,993  |                  |                                               | 101   |             |  | 3.34 | %               |  |                  | 9,648   |  |             | 58    |    |  | 2.36 | %
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Total interest-bearing liabilities               |  |                                               | 325,065 |                  |                                               | 2,264 |             |  | 2.76 | %               |  |                  | 291,860 |  |             | 1,164 |    |  | 1.58 | %
|Non-interest-bearing deposits                    |  |                                               | 71,074  |                  |                                               |      |             |  |      |                 |  |                  | 75,507  |  |             |      |    |  |      |  
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Total deposits                                   |  | $                                             | 396,139 |                  |                                               | 2,264 |             |  | 2.27 | %               |  | $                | 367,367 |  |             | 1,164 |    |  | 1.26 | %
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Net interest income                              |  |                                               |         |                  | $                                             | 3,953 |             |  |      |                 |  |                  |         |  | $           | 3,795 |    |  |      |  
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Net interest spread                              |  |                                               |         |                  |                                               |       |             |  | 3.65 | %               |  |                  |         |  |             |       |    |  | 4.05 | %
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Net interest margin                              |  |                                               |         |                  |                                               |       |             |  | 3.76 | %               |  |                  |         |  |             |       |    |  | 4.06 | %
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Tax Equivalent Income Adjustment:                |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|State and Muncipal Investment Income             |  |                                               |         |                  | $                                             | 12    | *           |  |      |                 |  |                  |         |  | $           | 13    | *  |  |      |  
|Industrial Revenue Bond Income                   |  |                                               |         |                  |                                               | 58    | **          |  |      |                 |  |                  |         |  |             | 47    | ** |  |      |  
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  
|Total Tax Equivalent Income Adjustment           |  |                                               |         |                  | $                                             | 70    |             |  |      |                 |  |                  |         |  | $           | 60    |    |  |      |  
|                                                 |  |                                               |         |                  |                                               |       |             |  |      |                 |  |                  |         |  |             |       |    |  |      |  

---

|* | Amount included in investment income.
|- | -------------------------------------

|** | Amount included in loan income.
|-- | -------------------------------

Total noninterest income for the three
months ended September 30, 2006 was $1.1 million, consistent with the total from the same period last year.

Total noninterest expense decreased by
$337,000, or 8.4%, when compared to the same period last year. While the company realized increases in certain operating expenses, such as marketing and other expenses, including insurance expense, these increases were anticipated, as they are
inherent in the strategy of growing the Bank. Other operating expenses have decreased from the amount reported for the comparable period last year. These expenses include salaries and benefits, which decreased $492,000, or 18.6%, and professional
fees, which decreased $63,000, or 23.3%. These decreases, as well as the overall decrease in operating expenses, are a result of the Banks focus on improving its overall efficiency and the non-recurring charge occurring during the comparable
period last year related to the curtailment of the Companys defined benefit plan.



11



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##### Table of Contents

The following table sets forth the various components of noninterest income and noninterest expense for the three months
ended September 30, 2006 and 2005 and the dollar amount and percentage change between the periods:



|                                                 |  |                        |       |      |                     |       |   |  |   |      |   |  |         |  
|------------------------------------------------ |  | ---------------------- | ----- | ---- | ------------------- | ----- | - |  | - | ---- | - |  | ------- | -
|                                                 |  | September 30,          |       |      | Increase (Decrease) |      
|                                                 |  | 2006                   |       | 2005 |                     |       | $ |  |   | %    |  
|                                                 |  | (Dollars in thousands) |      
|                                                 |  | (unaudited)            |      
|Noninterest income:                              |  |                        |       |      |                     |       |   |  |   |      |   |  |         |  
|Income from fiduciary activities                 |  | $                      | 424   |      | $                   | 415   |   |  | $ | 9    |   |  | 2.17    | %
|Fees from sale of non-deposit products           |  |                        | 45    |      |                     | 59    |   |  |   | (14  | ) |  | -23.73  | %
|Service charges on deposit accounts              |  |                        | 137   |      |                     | 153   |   |  |   | (16  | ) |  | -10.46  | %
|Other deposit fees                               |  |                        | 216   |      |                     | 161   |   |  |   | 55   |   |  | 34.16   | %
|Gains on sales of loans, net                     |  |                        |      |      |                     | (1    | ) |  |   | 1    |   |  | -100.00 | %
|Income on cash surrender value of life insurance |  |                        | 58    |      |                     | 53    |   |  |   | 5    |   |  | 9.43    | %
|Other income                                     |  |                        | 176   |      |                     | 206   |   |  |   | (30  | ) |  | -14.56  | %
|                                                 |  |                        |       |      |                     |       |   |  |   |      |   |  |         |  
|Total noninterest income                         |  | $                      | 1,056 |      | $                   | 1,046 |   |  | $ | 10   |   |  | 0.96    | %
|                                                 |  |                        |       |      |                     |       |   |  |   |      |   |  |         |  
|Noninterest expense:                             |  |                        |       |      |                     |       |   |  |   |      |   |  |         |  
|Salaries and employee benefits                   |  | $                      | 2,160 |      | $                   | 2,652 |   |  | $ | (492 | ) |  | -18.55  | %
|Director fees                                    |  |                        | 65    |      |                     | 78    |   |  |   | (13  | ) |  | -16.67  | %
|Occupancy expense                                |  |                        | 329   |      |                     | 319   |   |  |   | 10   |   |  | 3.13    | %
|Equipment expense                                |  |                        | 203   |      |                     | 184   |   |  |   | 19   |   |  | 10.33   | %
|Data processing fees                             |  |                        | 208   |      |                     | 206   |   |  |   | 2    |   |  | 0.97    | %
|Marketing and public relations                   |  |                        | 137   |      |                     | 66    |   |  |   | 71   |   |  | 107.58  | %
|Professional fees                                |  |                        | 208   |      |                     | 271   |   |  |   | (63  | ) |  | -23.25  | %
|Other expense                                    |  |                        | 380   |      |                     | 251   |   |  |   | 129  |   |  | 51.39   | %
|                                                 |  |                        |       |      |                     |       |   |  |   |      |   |  |         |  
|Total noninterest expense                        |  | $                      | 3,690 |      | $                   | 4,027 |   |  | $ | (337 | ) |  | -8.37   | %
|                                                 |  |                        |       |      |                     |       |   |  |   |      |   |  |         |  

The income tax provision for the three months ended September 30, 2006 increased by $208,000, or 158.8%, from
the same period last year. This increase was primarily a result of the increase in net income.

Comparison of operating
results for the nine months ended September 30, 2006 and September 30, 2005

Net income for the nine months ended September 30, 2006 of
$2.2 million, or basic earnings per share of $1.05 and fully diluted earnings of $1.03 per share, increased compared to net income of $1.7 million, or basic earnings per share of $0.88 and fully diluted earnings of $0.86 per share for the same
period last year. After adjusting for total non-recurring charges, net of tax, net income would have been $2.0 million, or basic earnings per share of $1.04 and fully diluted earnings of $1.01 per share for the 2005 period. The 2006 results
represent an increase in net income of $161,000, or 8.3%, compared to the same period last year after adjusting for the non-recurring charges.

Total
interest and dividend income, when compared to the same period last year, increased by $3.2 million, or 22.6%. Interest and fees on loans, which increased by $3.0 million, or 27.4%, from the same period last year, accounted for this increase. As
stated with the results for the quarter, the current rising interest rate environment and loan portfolio growth are the cause for the increase in interest and dividend income.

Total interest expense increased by $2.9 million, or 92.7%, compared to the same period last year. The increase was partially comprised of a $1.2 million, or 41.0%, increase in deposit interest expense, which was
fueled by an increase in the average interest rate paid on deposits, caused by the current rate environment. The remaining increase in interest expense was primarily attributed to interest on Federal Home Loan Bank advances. Interest paid on these
borrowings increased $1.7 million, or 863.8%, from the same period last year. As stated with the results for the quarter, the increase in the amount of borrowings by the Bank to fund loan portfolio growth and deposit outflow are the cause for the
increase in interest paid on borrowings.

The above changes in interest income and expense resulted in an increase in net interest income of $308,000, or
2.8%, from the comparable period last year.

The Companys net interest margin decreased by approximately 29 basis points, from 4.12% to 3.83%, from
the comparable period last year.



12



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##### Table of Contents

The following table summarizes the components and activity with respect to the Companys net interest and dividend
income and interest rate spread and margin for the periods presented:



|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|------------------------------------------------ |  | -------------------------------------------- | ------- | ---------------- | -------------------------------------------- | ------ | ----------- |  | ---- | --------------- |  | ---------------- | ------- |  | ----------- | ------ | -- |  | ---- | -
|                                                 |  | For the Nine Months Ended September 30, 2006 |         |                  | For the Nine Months Ended September 30, 2005 |       
|                                                 |  | Average Balance                              |         | Interest Inc/Exp |                                              |        | Yield/ Rate |  |      | Average Balance |  | Interest Inc/Exp |         |  | Yield/ Rate |       
|                                                 |  | (in thousands)                               |         | (in thousands)   |                                              |        |             |  |      | (in thousands)  |  | (in thousands)   |         |  |             |       
|                                                 |  | (unaudited)                                  |         | (unaudited)      |                                              |        |             |  |      | (unaudited)     |  | (unaudited)      |         |  |             |       
|Assets                                           |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Federal funds sold and interest-bearing deposits |  | $                                            | 627     |                  | $                                            | 23     |             |  | 4.97 | %               |  | $                | 5,399   |  | $           | 143    |    |  | 3.54 | %
|Investments                                      |  |                                              | 114,097 |                  |                                              | 3,492  | *           |  | 4.09 | %               |  |                  | 115,622 |  |             | 3,157  | *  |  | 3.65 | %
|Loans                                            |  |                                              | 288,976 |                  |                                              | 14,075 | **          |  | 6.51 | %               |  |                  | 243,876 |  |             | 11,052 | ** |  | 6.06 | %
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Total interest-earning assets                    |  | $                                            | 403,700 |                  |                                              | 17,590 |             |  | 5.83 | %               |  | $                | 364,897 |  |             | 14,352 |    |  | 5.26 | %
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Liabilities                                      |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Savings deposits                                 |  | $                                            | 58,003  |                  |                                              | 237    |             |  | 0.55 | %               |  | $                | 68,001  |  |             | 291    |    |  | 0.57 | %
|NOW accounts                                     |  |                                              | 58,018  |                  |                                              | 131    |             |  | 0.30 | %               |  |                  | 64,888  |  |             | 138    |    |  | 0.28 | %
|Money market accounts                            |  |                                              | 81,064  |                  |                                              | 1,873  |             |  | 3.09 | %               |  |                  | 76,289  |  |             | 1,098  |    |  | 1.92 | %
|Time deposits                                    |  |                                              | 69,677  |                  |                                              | 1,881  |             |  | 3.61 | %               |  |                  | 69,384  |  |             | 1,396  |    |  | 2.69 | %
|FHLB advances                                    |  |                                              | 43,302  |                  |                                              | 1,627  |             |  | 5.02 | %               |  |                  | 2,648   |  |             | 62     |    |  | 3.12 | %
|Repurchase agreements                            |  |                                              | 10,745  |                  |                                              | 262    |             |  | 3.26 | %               |  |                  | 7,795   |  |             | 134    |    |  | 2.29 | %
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Total interest-bearing liabilities               |  |                                              | 320,809 |                  |                                              | 6,011  |             |  | 2.51 | %               |  |                  | 289,005 |  |             | 3,119  |    |  | 1.44 | %
|Non-interest-bearing deposits                    |  |                                              | 71,961  |                  |                                              |       |             |  |      |                 |  |                  | 73,336  |  |             |       |    |  |      |  
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Total deposits                                   |  | $                                            | 392,770 |                  |                                              | 6,011  |             |  | 2.05 | %               |  | $                | 362,341 |  |             | 3,119  |    |  | 1.15 | %
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Net interest income                              |  |                                              |         |                  | $                                            | 11,579 |             |  |      |                 |  |                  |         |  | $           | 11,233 |    |  |      |  
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Net interest spread                              |  |                                              |         |                  |                                              |        |             |  | 3.78 | %               |  |                  |         |  |             |        |    |  | 4.11 | %
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Net interest margin                              |  |                                              |         |                  |                                              |        |             |  | 3.83 | %               |  |                  |         |  |             |        |    |  | 4.12 | %
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Tax Equivalent Income Adjustment:                |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|State and Muncipal Investment Income             |  |                                              |         |                  | $                                            | 37     | *           |  |      |                 |  |                  |         |  | $           | 33     | *  |  |      |  
|Industrial Revenue Bond Income                   |  |                                              |         |                  |                                              | 175    | **          |  |      |                 |  |                  |         |  |             | 141    | ** |  |      |  
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  
|Total Tax Equivalent Income Adjustment           |  |                                              |         |                  | $                                            | 212    |             |  |      |                 |  |                  |         |  | $           | 174    |    |  |      |  
|                                                 |  |                                              |         |                  |                                              |        |             |  |      |                 |  |                  |         |  |             |        |    |  |      |  

---

|* | Amount included in investment income.
|- | -------------------------------------

|** | Amount included in loan income.
|-- | -------------------------------

Total noninterest income for the nine
months ended September 30, 2006 was $3.2 million, consistent with the total from the same period last year.

Total noninterest expense decreased by
$577,000, or 5.0%, when compared to the same period last year. While the company realized increases in certain operating expenses, such as equipment and marketing, these increases were anticipated, as they are inherent in the strategy of growing the
Bank. Most other operating expenses have decreased from the amount reported for the comparable period last year. These expenses include salaries and benefits, which decreased $561,000, or 7.9%, and professional fees, which decreased $215,000, or
30.4%. These decreases, as well as the overall decrease in operating expenses, are a result of the Banks focus on improving its overall efficiency and the non-recurring charges occurring during the comparable period last year related to the
resignation of the former Chief Financial Officer and the curtailment of the Companys defined benefit plan.



13



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##### Table of Contents

The following table sets forth the various components of noninterest income and noninterest expense for the nine months
ended September 30, 2006 and 2005 and the dollar amount and percentage change between the periods:



|                                                 |  |                        |        |                     |   |        |  |   |      |   |  |         |  
|------------------------------------------------ |  | ---------------------- | ------ | ------------------- | - | ------ |  | - | ---- | - |  | ------- | -
|                                                 |  | September 30,          |        | Increase (Decrease) |  
|                                                 |  | 2006                   |        | 2005                |   | $      |  |   | %    |  
|                                                 |  | (Dollars in thousands) |       
|                                                 |  | (unaudited)            |       
|Noninterest income:                              |  |                        |        |                     |   |        |  |   |      |   |  |         |  
|Income from fiduciary activities                 |  | $                      | 1,344  |                     | $ | 1,310  |  | $ | 34   |   |  | 2.60    | %
|Fees from sale of non-deposit products           |  |                        | 168    |                     |   | 190    |  |   | (22  | ) |  | -11.58  | %
|Service charges on deposit accounts              |  |                        | 416    |                     |   | 433    |  |   | (17  | ) |  | -3.93   | %
|Other deposit fees                               |  |                        | 521    |                     |   | 432    |  |   | 89   |   |  | 20.60   | %
|Gains on sales of loans, net                     |  |                        |       |                     |   | 13     |  |   | (13  | ) |  | -100.00 | %
|Income on cash surrender value of life insurance |  |                        | 162    |                     |   | 157    |  |   | 5    |   |  | 3.18    | %
|Other income                                     |  |                        | 598    |                     |   | 654    |  |   | (56  | ) |  | -8.56   | %
|                                                 |  |                        |        |                     |   |        |  |   |      |   |  |         |  
|Total noninterest income                         |  | $                      | 3,209  |                     | $ | 3,189  |  | $ | 20   |   |  | 0.63    | %
|                                                 |  |                        |        |                     |   |        |  |   |      |   |  |         |  
|Noninterest expense:                             |  |                        |        |                     |   |        |  |   |      |   |  |         |  
|Salaries and employee benefits                   |  | $                      | 6,526  |                     | $ | 7,087  |  | $ | (561 | ) |  | -7.92   | %
|Director fees                                    |  |                        | 232    |                     |   | 221    |  |   | 11   |   |  | 4.98    | %
|Occupancy expense                                |  |                        | 1,001  |                     |   | 1,050  |  |   | (49  | ) |  | -4.67   | %
|Equipment expense                                |  |                        | 598    |                     |   | 494    |  |   | 104  |   |  | 21.05   | %
|Data processing fees                             |  |                        | 602    |                     |   | 635    |  |   | (33  | ) |  | -5.20   | %
|Marketing and public relations                   |  |                        | 332    |                     |   | 252    |  |   | 80   |   |  | 31.75   | %
|Professional fees                                |  |                        | 492    |                     |   | 707    |  |   | (215 | ) |  | -30.41  | %
|Other expense                                    |  |                        | 1,133  |                     |   | 1,047  |  |   | 86   |   |  | 8.21    | %
|                                                 |  |                        |        |                     |   |        |  |   |      |   |  |         |  
|Total noninterest expense                        |  | $                      | 10,916 |                     | $ | 11,493 |  | $ | (577 | ) |  | -5.02   | %
|                                                 |  |                        |        |                     |   |        |  |   |      |   |  |         |  

The income tax provision for the nine months ended September 30, 2006 increased by $342,000, or 51.7%, from
the same period last year. This is simply a result of increased net income, as the effective tax rate is consistent with that of the same period last year.

Provisions and Allowance for Loan Losses

Credit risk is inherent in the business of extending loans. The Bank maintains an allowance for credit losses through charges to earnings. A loan loss provision of $150,000 was made during the three months ended September 30, 2006,
compared to $180,000 for the same period last year. The total loan loss provision for the nine months ended September 30, 2006 and 2005 was $440,000. The total allowance for loan losses was 0.97% and 0.94% of total loans at September 30,
2006 and December 31, 2005, respectively.

The Bank formally determines the adequacy of the allowance for loan losses on a quarterly basis. This
determination is based on an assessment of credit quality or risk rating of loans. Loans are initially risk rated when originated and are reviewed periodically. If there is deterioration in the credit, the risk rating is adjusted
accordingly.

The allowance also includes a component resulting from the application of the measurement criteria of SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. Impaired loans receive individual evaluation of the allowance necessary on a quarterly basis. Impaired loans are defined in the Banks Loan Policy as those instances in which it is probable that the
Bank will not be able to collect all principal and interest due according to the terms of the note.

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. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent.



14



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##### Table of Contents

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company
does not separately identify individual consumer and residential loans for impairment disclosures. The loss factors applied as a general allowance are determined by a periodic analysis of the Allowance for Loan Losses. This analysis considers
historical loan losses and delinquency figures. It also looks at delinquency trends.

Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are examined and any identified trends are assessed. The Banks loan mix over that same period of time is also analyzed. A loan loss allocation is made for each type of
loan and multiplied by the loan mix percentage for each loan type to produce a weighted average factor.

Changes in the
allowance for loan losses were as follows for the nine months ended September 30, 2006 and 2005:



|                                            |  |                |       |   |      |   |       |  
|------------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -
|                                            |  | 2006           |       |   | 2005 |  
|                                            |  | (in thousands) |      
|                                            |  | (unaudited)    |      
|Balance as of January 1st                   |  | $              | 2,514 |   |      | $ | 2,181 |  
|Loans charged off                           |  |                | (9    | ) |      |   | (18   | )
|Provision for loan losses                   |  |                | 440   |   |      |   | 440   |  
|Recoveries of loans previously charged off  |  |                | 6     |   |      |   | 17    |  
|Reclass to reserve for unfunded commitments |  |                | (40   | ) |      |   |      |  
|                                            |  |                |       |   |      |   |       |  
|Balance as of September 30th                |  | $              | 2,911 |   |      | $ | 2,620 |  
|                                            |  |                |       |   |      |   |       |  

At September 30, 2006, the allowance for loan losses represented 17,123.5% of non-performing loans, which
totaled $17,000. Non-performing loans represented less than 0.01% of total loans and mortgages held-for-sale at September 30, 2006. At September 30, 2005, the allowance for loan losses represented 1,813.0% of non-performing loans, which
totaled $144,000. Non-performing loans represented 0.1% of total loans and mortgages held-for-sale. The decrease in non-performing loans is a result of several loans that were either brought current or paid off.

Management maintains the adequacy of the allowance through monthly provisions. The amount of the provision is based on changes in economic and real estate market
conditions; information obtained regarding problem loans, identification of additional problem loans and other factors, both within and outside of managements control. The overall level of non-performing loans remains low. Accordingly, while
the overall quality of the loan portfolio remains strong, management will continue to monitor economic conditions and the performance of the portfolio in order to maintain an adequate allowance for loan losses.

Capital Resources

As of
September 30, 2006, the Company had total capital of $46.7 million, an increase of $18.0 million, or 62.6%, from total capital as of December 31, 2005. The Companys issuance of 805,000 shares of common stock in July 2006, priced at
$22 per share, was the primary reason for the large increase in capital. The net change in the Banks capital also reflects current year income, reduced by dividends declared, the increase in the net unrealized loss on securities
available-for-sale and the exercise of stock options.

The Companys policy has been to pay dividends out of funds in excess of the needs of the
business. The Company has declared and paid cash dividends to shareholders on a quarterly basis at a rate of $0.20 per share in each quarter of 2005 and the first quarter of 2006. In addition, in March 2006, the Company declared a dividend of $0.20
for payment in the second quarter of 2006. The Company then continued its previous practice and declared and paid a dividend of $0.20 per share in the third quarter of 2006. In future quarters, the Company expects to declare and pay dividends in the
same quarter.

Generally, banks are required to maintain Tier 1 capital at a level equal to or greater than 4.0% of their average total assets. As of
September 30, 2006, the Banks Tier 1 capital amounted to 9.34% of average total assets. At September 30, 2006, the Banks ratio of risk-based capital to risk-weighted assets amounted to 13.44%, which satisfies the applicable
risk-based capital requirements. As of December 31, 2005, the Banks Tier 1 capital amounted to 6.75% of average assets and risk-based capital amounted to 10.47% of total risk-based assets.



15



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##### Table of Contents

Generally, bank holding companies are also required to maintain Tier 1 capital at a level equal to or greater than 4.0%
of their average total assets. As of September 30, 2006, the Companys Tier 1 capital amounted to 10.99% of average total assets. At September 30, 2006, the Companys ratio of risk-based capital to risk weighted assets amounted
to 15.59%, which satisfies the applicable risk-based capital requirements. As of December 31, 2005, the Companys Tier 1 capital amounted to 6.84% of average assets and risk-based capital amounted to 11.19% of total risk-based assets.

To provide for its future capital needs, the Company took the steps necessary to increase the authorized and issued number of its shares of common stock.
On July 19, 2006, the Company completed the sale of 805,000 shares of its common stock, including 105,000 shares of common stock sold pursuant to the exercise of the underwriters over-allotment option, at an offering price of $22.00 per
share in a public offering underwritten by Sandler ONeill & Partners, L.P. Of the $16.4 million in net proceeds from the offering, the Company contributed $12 million in additional capital to the Bank to assist in funding its growth
and expansion plans. The financial statements and results of operations contained in this report reflect the results of such offering, which was completed in the third calendar quarter of 2006.

The capital ratios of the Company and the Bank exceed all regulatory requirements, and each entity is considered well capitalized by their federal
supervisory agencies.

Liquidity

The primary function of asset/liability management is to assure adequate liquidity and maintain an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management
involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.

Certain marketable investment securities, particularly those of shorter maturities, are the principal source of asset liquidity. The Company maintains such securities in an available-for-sale account as a liquidity resource. Securities
maturing in one year or less amounted to $8.9 million at September 30, 2006; additionally, a minimum amount of contractual payments in the amount of $10.4 million for the mortgage-backed securities portfolio is due within one year at
September 30, 2006. Assets such as federal funds sold, mortgages held for sale, pre-payments and payoffs on mortgage-backed securities, as well as maturing loans, are also sources of liquidity. The Companys objectives are to be
substantially neutral with respect to interest rate sensitivity and maintain a net cumulative gap at one year of less than 15% of total earning assets. The Companys current practices are consistent with these objectives.

Off Balance Sheet Arrangements

The
Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. In the opinion of Management, these off-balance sheet arrangements are not likely to have a material
effect on the Companys financial condition, results of operations, or liquidity. As of September 30, 2006, total off-balance sheet financial commitments, which include unadvanced funds on loans, commitments to fund loans and letters of
credit, amounted to approximately $81.4 million.

Forward-Looking Statements

This Form 10-Q and future filings made by the Company with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by
the Company and the Bank, and oral statements made by executive officers of the Company and the Bank, may include forward-looking statements relating to such matters as:



| | (a) | assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which the Company and the Bank do business; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | expectations for increased revenues and earnings for the Company and Bank through growth resulting from acquisitions, attraction of new deposit and loan customers and the
introduction of new products and services.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Such forward-looking statements are based on assumptions rather than historical or current facts
and, therefore, are inherently uncertain and subject to risk. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Act of 1995.



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The Company notes that a variety of factors could cause the actual results or experience to differ materially from the
anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Companys and Banks business include
the following:



|(a) | the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(b) | changes in the legislative and regulatory environment that negatively impact the Company and Bank through increased operating expenses;
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|(c) | increased competition from other financial and non-financial institutions;
|--- | --------------------------------------------------------------------------



|(d) | the impact of technological advances; and
|--- | -----------------------------------------



|(e) | other risks detailed from time to time in the Companys filings with the Securities and Exchange Commission.
|--- | ------------------------------------------------------------------------------------------------------------

Such developments could have an adverse impact on the Companys and the Banks financial position and results of operation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk is the risk of loss from adverse changes in
market prices. In particular, the market price of interest-earning assets and liabilities may be affected by changes in interest rates. Since net interest income (the difference, or spread, between the interest earned on loans and investments and
the interest paid on deposits and borrowings) is the Companys primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in
interest rates as well as fluctuations in the level and duration of the Companys assets and liabilities.

The Companys net interest margin for
the nine months ended September 30, 2006 was 3.82%, in comparison to the 4.11% net interest margin for the nine months ended September 30, 2005. Interest rate risk is the exposure of net interest income to movements in interest rates. In
addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and re-financings, the carrying
value of investment securities classified as available for sale and the flow and mix of deposits.

The Companys Asset/Liability Management Committee
is comprised of the President and Chief Executive Officer of the Company, the Executive Vice President and Chief Financial Officer, the Executive Vice President and Senior Loan Officer, the Executive Vice President of Retail Banking, the Senior Vice
President and Chief Operations Officer, the Senior Vice President and Chief Risk Officer and various lending, retail and finance officers. The Committee is responsible for managing interest rate risk in accordance with policies approved by the Board
of Directors regarding acceptable levels of interest rate risk, liquidity and capital. The Committee meets weekly and develops new products, sets the rates paid on deposits, approves loan pricing and reviews investment transactions. This
Asset/Liability Management Committee reports to the Board of Directors ALCO Committee, which is comprised of several Directors and the President and Chief Executive Officer.

The Company is subject to interest rate risk in the event that rates either increase or decrease. The two primary measurements of exposure to changes in interest rates, which the Bank manages and monitors closely, are
net interest income simulation, using various interest rate scenarios, or rate shocks, and the impact on the economic value of equity, given those same interest rate scenarios.

The Bank works with an independent third party consultant to calculate and review these various measurements.

In the event
that interest rates increase or decrease, the economic value of equity (EVE) changes due to its inherent correlation to changes in the market value of the Companys assets and liabilities. The Company is considered liability
sensitive if changes in the interest rate would cause the assets of the Company to extend out, and as a result, liabilities would re-price faster than assets. Conversely, the Company is considered asset sensitive if interest rate
changes cause liabilities to extend out, thus making assets re-price faster than liabilities.

As of September 30, 2006, the capital ratio of the
Company on an EVE basis, at current rate levels, is 13.6%. Based on the most recent analysis it is estimated that an increase in interest rates over the next year of 200 basis points (for example, an increase in the prime rate from 8.25% to 10.25%)
would result in an EVE capital ratio of 13.6%. Alternatively, if interest rates were to decrease over the next year by 200 basis points, the EVE capital ratio is estimated to be 12.1%. These changes are within the risk tolerance levels established
by the Company policies.



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As part of its risk management practices the Company runs net interest income simulations to determine the impact on net
interest income given an increase or decrease in interest rates as these changes would have an impact on future levels of net interest income. These simulations require that estimates and assumptions be made with respect to deposit pricing;
including potential changes in non-maturity core deposits, and reinvestment of cash flows from the loan and investment portfolios given changes in rates both up and down.



|                    |  |                              |        |                             |                   |      |                              |  |                              |   |  |   |        |  |   |      |   |  |       |  
|------------------- |  | ---------------------------- | ------ | --------------------------- | ----------------- | ---- | ---------------------------- |  | ---------------------------- | - |  | - | ------ |  | - | ---- | - |  | ----- | -
|                    |  | September 30, 2006           |        |                             | December 31, 2005 |     
|                    |  | Projected net interestincome |        | Change from year 1base case |                   |      | Projected net interestincome |  | Change from year 1 base case |  
|                    |  | (Dollars in thousands)       |       
|Year 1 projections: |  |                              |        |                             |                   |      |                              |  |                              |   |  |   |        |  |   |      |   |  |       |  
|Down 200BP          |  | $                            | 15,787 |                             | $                 | 216  |                              |  | 1.39                         | % |  | $ | 15,743 |  | $ | 18   |   |  | 0.11  | %
|Base                |  |                              | 15,571 |                             |                   |     |                              |  |                             |   |  |   | 15,725 |  |   |     |   |  |      |  
|Up 200BP            |  |                              | 14,850 |                             |                   | (721 | )                            |  | -4.63                        | % |  |   | 15,346 |  |   | (379 | ) |  | -2.41 | %
|Year 2 projections: |  |                              |        |                             |                   |      |                              |  |                              |   |  |   |        |  |   |      |   |  |       |  
|Down 200BP          |  | $                            | 15,746 |                             | $                 | 175  |                              |  | 1.12                         | % |  | $ | 15,426 |  | $ | (299 | ) |  | -1.90 | %
|Base                |  |                              | 16,343 |                             |                   | 772  |                              |  | 4.96                         | % |  |   | 16,151 |  |   | 426  |   |  | 2.71  | %
|Up 200BP            |  |                              | 15,634 |                             |                   | 63   |                              |  | 0.40                         | % |  |   | 16,169 |  |   | 444  |   |  | 2.82  | %

As of September 30, 2006, net interest income increasing slightly in a declining rate scenario in both year 1
and year 2 is a result of the Banks effort to reduce exposure to falling interest rates. The cause for the change in the effect of rising rates from a negative impact in year 1 to a positive impact in year 2 is a result of the initial impact
of increasing core deposit rates which is then more than offset in year 2, as a greater level of assets re-price at current rates than liabilities. These changes are within the risk tolerance levels established by the Company policies.

ITEM 4. CONTROLS AND PROCEDURES.

The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of disclosure controls
and procedures in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on their evaluation, as of September 30, 2006, the Companys Chief Executive Officer and the Companys Chief Financial Officer concluded that the Companys disclosure controls and procedures
were effective.

In the quarter ended September 30, 2006, there have been no significant changes in the Companys internal control over financial
reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting subsequent to the date the Company completed its evaluation. Therefore, no corrective actions
were taken.



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##### Table of Contents

PART II  OTHER INFORMATION



|         |  |                                                              |  |               
|-------- |  | ------------------------------------------------------------ |  | --------------
|Item 1.  |  | Legal Proceedings.                                           |  | Not applicable
|         |  |                                                             
|Item 1A. |  | Risk Factors                                                 |  | Not applicable
|         |  |                                                             
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds. |  | Not applicable
|         |  |                                                             
|Item 3.  |  | Defaults Upon Senior Securities.                             |  | Not applicable
|         |  |                                                             
|Item 4.  |  | Submission of Matters to a Vote of Security Holders.         |  | Not applicable
|         |  |                                                             
|Item 5.  |  | Other Information.                                           |  | Not applicable
|         |  |                                                             
|Item 6.  |  | Exhibits.                                                    |  |               



|     |  |                                                                  
|---- |  | -----------------------------------------------------------------
|11   |  | Computation of Per Share Earnings                                
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|     | 
|32   |  | Section 1350 Certifications                                      



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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  |                              |  |                                                     
|----------------------- |  | ---------------------------- |  | ----------------------------------------------------
|                        |  | BEVERLY NATIONAL CORPORATION
|                        |  | (Registrant)                
|                        |  |                             
|Date: November 10, 2006 |  | By:                          |  | /s/ Donat A. Fournier                               
|                        |  |                              |  | Donat A. Fournier                                   
|                        |  |                              |  | President and Chief Executive Officer               
|                        |  |                             
|Date: November 10, 2006 |  | By:                          |  | /s/ Michael O. Gilles                               
|                        |  |                              |  | Michael O. Gilles                                   
|                        |  |                              |  | Executive Vice President and Chief Financial Officer



20