##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q



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



For the Quarterly period ended September 30, 2005



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



Beverly National Corporation

(Name
of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Massachusetts                                                 |  | 04-2832201                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



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



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



Indicate by
check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.



|Yes  x | No ̈
|------ | ---



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



|Yes ̈No  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 9, 2005. 1,879,740 shares.



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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, 2005 (Unaudited) and December 31, 2004                           |  | 3 
|                                                                                                                        | 
|Condensed Consolidated Statements of Income for the Nine and Three Months Ended September 30, 2005 and 2004 (Unaudited) |  | 4 
|                                                                                                                        | 
|Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 (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                                                              |  | 15
|                                                                                                                        | 
|Item 4.                                                                                                                 |  |   
|                                                                                                                        | 
|Controls and Procedures                                                                                                 |  | 16
|                                                                                                                        | 
|PART II. OTHER INFORMATION                                                                                              |  |   
|                                                                                                                        | 
|Item 1.                                                                                                                 |  |   
|                                                                                                                        | 
|Legal Proceedings                                                                                                       |  | 17
|                                                                                                                        | 
|Item 2.                                                                                                                 |  |   
|                                                                                                                        | 
|Unregistered Sales of Equity Securities and Use of Proceeds                                                             |  | 17
|                                                                                                                        | 
|Item 3.                                                                                                                 |  |   
|                                                                                                                        | 
|Defaults Upon Senior Securities                                                                                         |  | 17
|                                                                                                                        | 
|Item 4.                                                                                                                 |  |   
|                                                                                                                        | 
|Submission of Matters to a Vote of Security Holders                                                                     |  | 17
|                                                                                                                        | 
|Item 5.                                                                                                                 |  |   
|                                                                                                                        | 
|Other Information                                                                                                       |  | 17
|                                                                                                                        | 
|Item 6.                                                                                                                 |  |   
|                                                                                                                        | 
|Exhibits                                                                                                                |  | 17
|                                                                                                                        | 
|Signatures                                                                                                              |  | 18



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------



BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                                                                                                                                         |  | September 30, 2005 |             |   | December 31, 2004 |  
|                                                                                                                                                                                                                                                                         |  | (Unaudited)        |             |   |                   |  
|ASSETS                                                                                                                                                                                                                                                                   |  |                    |             |   |                   |   |             |  
|Cash and due from banks                                                                                                                                                                                                                                                  |  | $                  | 13,551,636  |   |                   | $ | 10,345,116  |  
|Interest bearing demand deposits with other banks                                                                                                                                                                                                                        |  |                    | 366,563     |   |                   |   | 300,845     |  
|Federal Home Loan Bank overnight deposits                                                                                                                                                                                                                                |  |                    | 785,848     |   |                   |   |            |  
|Federal funds sold                                                                                                                                                                                                                                                       |  |                    | 1,038,873   |   |                   |   |            |  
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                                                                |  |                    | 15,742,920  |   |                   |   | 10,645,961  |  
|Investments in available-for-sale securities (at fair value)                                                                                                                                                                                                             |  |                    | 44,964,119  |   |                   |   | 44,116,115  |  
|Investments in held-to-maturity securities                                                                                                                                                                                                                               |  |                    | 66,988,000  |   |                   |   | 70,712,919  |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                                                                                                    |  |                    | 1,872,400   |   |                   |   | 1,872,400   |  
|Federal Reserve Bank stock, at cost                                                                                                                                                                                                                                      |  |                    | 187,500     |   |                   |   | 142,500     |  
|Loans, net of the allowance for loan losses of $2,619,578 and $2,181,257, respectively                                                                                                                                                                                   |  |                    | 250,197,611 |   |                   |   | 234,661,889 |  
|Mortgages held-for-sale                                                                                                                                                                                                                                                  |  |                    |            |   |                   |   | 447,000     |  
|Premises and equipment                                                                                                                                                                                                                                                   |  |                    | 4,668,287   |   |                   |   | 4,816,777   |  
|Accrued interest receivable                                                                                                                                                                                                                                              |  |                    | 1,629,778   |   |                   |   | 1,356,474   |  
|Other assets                                                                                                                                                                                                                                                             |  |                    | 9,597,452   |   |                   |   | 9,352,897   |  
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|Total assets                                                                                                                                                                                                                                                             |  | $                  | 395,848,067 |   |                   | $ | 378,124,932 |  
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                     |  |                    |             |   |                   |   |             |  
|Deposits:                                                                                                                                                                                                                                                                |  |                    |             |   |                   |   |             |  
|Noninterest-bearing                                                                                                                                                                                                                                                      |  | $                  | 72,646,154  |   |                   | $ | 72,317,274  |  
|Interest-bearing                                                                                                                                                                                                                                                         |  |                    | 278,833,856 |   |                   |   | 264,842,515 |  
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|Total deposits                                                                                                                                                                                                                                                           |  |                    | 351,480,010 |   |                   |   | 337,159,789 |  
|Federal Home Loan Bank advances                                                                                                                                                                                                                                          |  |                    | 4,000,000   |   |                   |   |            |  
|Securities sold under agreements to repurchase                                                                                                                                                                                                                           |  |                    | 8,754,932   |   |                   |   | 10,496,482  |  
|Other liabilities                                                                                                                                                                                                                                                        |  |                    | 3,141,537   |   |                   |   | 2,456,626   |  
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|Total liabilities                                                                                                                                                                                                                                                        |  |                    | 367,376,479 |   |                   |   | 350,112,897 |  
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|Stockholders equity:                                                                                                                                                                                                                                                    |  |                    |             |   |                   |   |             |  
|Preferred stock, $2.50 par value per share; 300,000 shares authorized; issued and outstanding none                                                                                                                                                                       |  |                    |            |   |                   |   |            |  
|Common stock, $2.50 par value per share; 2,500,000 shares authorized; issued 1,990,645 shares as of September 30, 2005 and 1,972,357
shares as of December 31, 2004; outstanding, 1,879,740 shares as of September 30, 2005 and 1,861,332 shares as of December 31, 2004 |  |                    | 4,975,363   |   |                   |   | 4,930,893   |  
|Paid-in capital                                                                                                                                                                                                                                                          |  |                    | 6,761,190   |   |                   |   | 6,618,028   |  
|Retained earnings                                                                                                                                                                                                                                                        |  |                    | 18,628,334  |   |                   |   | 18,097,225  |  
|Treasury stock, at cost (110,905 shares as of September 30, 2005 and 111,025 shares as of December 31, 2004)                                                                                                                                                             |  |                    | (1,502,006  | ) |                   |   | (1,503,631  | )
|Accumulated other comprehensive loss                                                                                                                                                                                                                                     |  |                    | (391,293    | ) |                   |   | (130,480    | )
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|Total stockholders equity                                                                                                                                                                                                                                               |  |                    | 28,471,588  |   |                   |   | 28,012,035  |  
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                               |  | $                  | 395,848,067 |   |                   | $ | 378,124,932 |  
|                                                                                                                                                                                                                                                                         |  |                    |             |   |                   |   |             |  



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



3



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##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|-------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- | ------------------ | - | ------------------ |  | ------------------ | ---------- |  | - | ----------
|                                                                     |  | Three Months Ended |           | Nine Months Ended
|                                                                     |  | September 30, 2005 |           |                   | September 30, 2004 |   | September 30, 2005 |  | September 30, 2004
|Interest and dividend income:                                        |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Interest and fees on loans                                           |  | $                  | 3,814,506 |                   |                    | $ | 3,128,509          |  | $                  | 11,088,077 |  | $ | 8,408,498 
|Interest on debt securities:                                         |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Taxable                                                              |  |                    | 1,035,705 |                   |                    |   | 1,078,922          |  |                    | 3,049,862  |  |   | 3,066,942 
|Tax-exempt                                                           |  |                    | 25,167    |                   |                    |   | 18,081             |  |                    | 64,242     |  |   | 52,056    
|Dividends on marketable equity securities                            |  |                    | 5,994     |                   |                    |   | 2,169              |  |                    | 10,332     |  |   | 8,703     
|Other interest                                                       |  |                    | 68,531    |                   |                    |   | 19,638             |  |                    | 142,414    |  |   | 61,858    
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Total interest and dividend income                                   |  |                    | 4,949,903 |                   |                    |   | 4,247,319          |  |                    | 14,354,927 |  |   | 11,598,057
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Interest expense:                                                    |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Interest on deposits                                                 |  |                    | 1,098,236 |                   |                    |   | 594,500            |  |                    | 2,923,220  |  |   | 1,709,356 
|Interest on Federal Home Loan Bank advances and other borrowed funds |  |                    | 65,461    |                   |                    |   | 91,901             |  |                    | 195,448    |  |   | 164,282   
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Total interest expense                                               |  |                    | 1,163,697 |                   |                    |   | 686,401            |  |                    | 3,118,668  |  |   | 1,873,638 
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Net interest and dividend income                                     |  |                    | 3,786,206 |                   |                    |   | 3,560,918          |  |                    | 11,236,259 |  |   | 9,724,419 
|Provision for loan losses                                            |  |                    | 180,000   |                   |                    |   | 190,000            |  |                    | 440,000    |  |   | 320,000   
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Net interest and dividend income after provision for loan losses     |  |                    | 3,606,206 |                   |                    |   | 3,370,918          |  |                    | 10,796,259 |  |   | 9,404,419 
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Noninterest income:                                                  |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Income from fiduciary activities                                     |  |                    | 414,841   |                   |                    |   | 414,869            |  |                    | 1,309,471  |  |   | 1,255,263 
|Fees from sale of non-deposit products                               |  |                    | 59,014    |                   |                    |   | 56,037             |  |                    | 189,972    |  |   | 77,859    
|Service charges on deposit accounts                                  |  |                    | 152,869   |                   |                    |   | 152,287            |  |                    | 433,039    |  |   | 466,562   
|Other deposit fees                                                   |  |                    | 161,327   |                   |                    |   | 157,154            |  |                    | 432,266    |  |   | 425,248   
|Gains on sales of securities, net                                    |  |                    |          |                   |                    |   | 14,359             |  |                    |           |  |   | 73,811    
|(Losses) gains on sales of loans, net                                |  |                    | (1,195    | )                 |                    |   | 25,973             |  |                    | 13,163     |  |   | 54,182    
|Income on cash surrender value of life insurance                     |  |                    | 53,269    |                   |                    |   | 57,120             |  |                    | 157,162    |  |   | 158,172   
|Other income                                                         |  |                    | 145,161   |                   |                    |   | 122,742            |  |                    | 454,726    |  |   | 368,521   
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Total noninterest income                                             |  |                    | 985,286   |                   |                    |   | 1,000,541          |  |                    | 2,989,799  |  |   | 2,879,618 
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Noninterest expense:                                                 |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Salaries and employee benefits                                       |  |                    | 2,651,992 |                   |                    |   | 2,079,352          |  |                    | 7,079,296  |  |   | 5,883,714 
|Director fees                                                        |  |                    | 77,663    |                   |                    |   | 61,620             |  |                    | 221,081    |  |   | 190,342   
|Occupancy expense                                                    |  |                    | 319,181   |                   |                    |   | 264,770            |  |                    | 1,050,383  |  |   | 785,227   
|Equipment expense                                                    |  |                    | 136,574   |                   |                    |   | 114,162            |  |                    | 348,018    |  |   | 339,290   
|Data processing fees                                                 |  |                    | 142,694   |                   |                    |   | 142,320            |  |                    | 433,782    |  |   | 422,056   
|Marketing and public relations                                       |  |                    | 66,389    |                   |                    |   | 130,655            |  |                    | 252,135    |  |   | 334,036   
|Stationery and supplies                                              |  |                    | 57,845    |                   |                    |   | 58,803             |  |                    | 179,433    |  |   | 159,574   
|Professional fees                                                    |  |                    | 232,804   |                   |                    |   | 128,296            |  |                    | 578,428    |  |   | 436,282   
|Other expense                                                        |  |                    | 332,412   |                   |                    |   | 435,197            |  |                    | 1,328,490  |  |   | 1,346,768 
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Total noninterest expense                                            |  |                    | 4,017,554 |                   |                    |   | 3,415,175          |  |                    | 11,471,046 |  |   | 9,897,289 
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Income before income taxes                                           |  |                    | 573,938   |                   |                    |   | 956,284            |  |                    | 2,315,012  |  |   | 2,386,748 
|Income taxes                                                         |  |                    | 130,550   |                   |                    |   | 299,200            |  |                    | 661,462    |  |   | 705,582   
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Net Income                                                           |  | $                  | 443,388   |                   |                    | $ | 657,084            |  | $                  | 1,653,550  |  | $ | 1,681,166 
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Earnings per share:                                                  |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Weighted average shares outstanding                                  |  |                    | 1,876,941 |                   |                    |   | 1,848,408          |  |                    | 1,870,768  |  |   | 1,841,870 
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Weighted average diluted shares outstanding                          |  |                    | 1,933,094 |                   |                    |   | 1,925,294          |  |                    | 1,932,371  |  |   | 1,922,340 
|                                                                     |  |                    |           |                   |                    |   |                    |  |                    |            |  |   |           
|Earnings per common share                                            |  | $                  | 0.24      |                   |                    | $ | 0.35               |  | $                  | 0.88       |  | $ | 0.91      
|Earnings per common share, assuming dilution                         |  | $                  | 0.23      |                   |                    | $ | 0.34               |  | $                  | 0.86       |  | $ | 0.87      
|Dividends per share                                                  |  | $                  | 0.20      |                   |                    | $ | 0.20               |  | $                  | 0.60       |  | $ | 0.60      



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



4



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##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Unaudited)



|                                                                                            |  |                    |             |   |                    |   |             |  
|------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ----------- | -
|                                                                                            |  | September 30, 2005 |             |   | September 30, 2004 |  
|Cash flows from operating activities:                                                       |  |                    |             |   |                    |   |             |  
|Net income                                                                                  |  | $                  | 1,653,550   |   |                    | $ | 1,681,166   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                    |             |   |                    |   |             |  
|Amortization of securities, net                                                             |  |                    | 151,978     |   |                    |   | 586,776     |  
|Gains on sales of securities, net                                                           |  |                    |            |   |                    |   | (73,811     | )
|Provision for loan losses                                                                   |  |                    | 440,000     |   |                    |   | 320,000     |  
|Change in deferred loan costs, net                                                          |  |                    | 41,387      |   |                    |   | (94,096     | )
|Net decrease (increase) in mortgages held-for-sale                                          |  |                    | 447,000     |   |                    |   | (545,959    | )
|Depreciation and amortization                                                               |  |                    | 477,594     |   |                    |   | 448,224     |  
|Increase in interest receivable                                                             |  |                    | (273,304    | ) |                    |   | (293,890    | )
|Decrease (increase) in prepaid expenses                                                     |  |                    | 171,111     |   |                    |   | (39,906     | )
|Decrease in mortgage servicing rights                                                       |  |                    | 51,880      |   |                    |   | 40,037      |  
|Increase in cash surrender value of life insurance                                          |  |                    | (185,538    | ) |                    |   | (158,172    | )
|Decrease in RABBI Trust trading securities                                                  |  |                    | 81,661      |   |                    |   | 83,538      |  
|Increase in other assets                                                                    |  |                    | (325,105    | ) |                    |   | (5,496      | )
|Increase in interest payable                                                                |  |                    | 171,786     |   |                    |   | 43,508      |  
|Increase in accrued expenses                                                                |  |                    | 518,227     |   |                    |   | 336,269     |  
|Increase in taxes payable                                                                   |  |                    | 87,110      |   |                    |   | 85,710      |  
|(Decrease) increase in other liabilities                                                    |  |                    | (5,102      | ) |                    |   | 2,485       |  
|Stock award                                                                                 |  |                    | 12,925      |   |                    |   | 12,500      |  
|                                                                                            |  |                    |             |   |                    |   |             |  
|Net cash provided by operating activities                                                   |  |                    | 3,517,160   |   |                    |   | 2,428,883   |  
|                                                                                            |  |                    |             |   |                    |   |             |  
|Cash flows from investing activities:                                                       |  |                    |             |   |                    |   |             |  
|Purchases of available-for-sale securities                                                  |  |                    | (7,756,747  | ) |                    |   | (20,987,328 | )
|Proceeds from sales of available-for-sale securities                                        |  |                    |            |   |                    |   | 12,531,208  |  
|Proceeds from maturities of available-for-sale securities                                   |  |                    | 6,394,594   |   |                    |   | 20,268,542  |  
|Purchases of held-to-maturity securities                                                    |  |                    | (1,000,000  | ) |                    |   | (10,634,939 | )
|Proceeds from maturities of held-to-maturity securities                                     |  |                    | 4,700,603   |   |                    |   | 13,097,752  |  
|Purchase of Federal Reserve Bank stock                                                      |  |                    | (45,000     | ) |                    |   | (830,500    | )
|Loan originations and principal collections, net                                            |  |                    | (16,034,126 | ) |                    |   | (49,617,775 | )
|Recoveries of loans previously charged off                                                  |  |                    | 17,017      |   |                    |   | 72,121      |  
|Capital expenditures                                                                        |  |                    | (329,104    | ) |                    |   | (1,157,445  | )
|Purchase of life insurance policies                                                         |  |                    |            |   |                    |   | (4,788,636  | )
|                                                                                            |  |                    |             |   |                    |   |             |  
|Net cash used in investing activities                                                       |  |                    | (14,052,763 | ) |                    |   | (42,047,000 | )
|                                                                                            |  |                    |             |   |                    |   |             |  
|Cash flows from financing activities:                                                       |  |                    |             |   |                    |   |             |  
|Net (decrease) increase in demand deposits, NOW, money market and savings accounts          |  |                    | (1,084,907  | ) |                    |   | 30,876,474  |  
|Net increase in time deposits                                                               |  |                    | 15,405,128  |   |                    |   | 1,127,214   |  
|Net increase in Federal Home Loan Bank advances                                             |  |                    | 4,000,000   |   |                    |   | 8,000,000   |  
|(Decrease) increase in securities sold under agreements to repurchase                       |  |                    | (1,741,550  | ) |                    |   | 5,185,885   |  
|Proceeds from exercise of stock options                                                     |  |                    | 174,707     |   |                    |   | 134,014     |  
|Proceeds from issuance of treasury stock                                                    |  |                    | 1,625       |   |                    |   | 8,530       |  
|Dividends paid                                                                              |  |                    | (1,122,441  | ) |                    |   | (1,104,757  | )
|                                                                                            |  |                    |             |   |                    |   |             |  
|Net cash provided by financing activities                                                   |  |                    | 15,632,562  |   |                    |   | 44,227,360  |  
|                                                                                            |  |                    |             |   |                    |   |             |  
|Net increase in cash and cash equivalents                                                   |  |                    | 5,096,959   |   |                    |   | 4,609,243   |  
|Cash and cash equivalents at beginning of year                                              |  |                    | 10,645,961  |   |                    |   | 22,950,289  |  
|                                                                                            |  |                    |             |   |                    |   |             |  
|Cash and cash equivalents at September 30                                                   |  | $                  | 15,742,920  |   |                    | $ | 27,559,532  |  
|                                                                                            |  |                    |             |   |                    |   |             |  
|Supplemental disclosures:                                                                   |  |                    |             |   |                    |   |             |  
|Mortgages held-for-sale transferred to loans                                                |  | $                  |            |   |                    | $ | 1,885,282   |  
|Interest paid                                                                               |  |                    | 2,946,883   |   |                    |   | 1,830,130   |  
|Income taxes paid                                                                           |  |                    | 930,911     |   |                    |   | 619,872     |  



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



5



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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, 2005.



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 January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity, referred
to as variable interest entities. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) (FIN 46(R)). The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity
through voting interests. This interpretation changes that by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entitys activities
or entitled to receive a majority of the entitys residual returns or both. The Company was required to apply FIN 46(R) to all entities subject to it no later than the end of the first reporting period ending after March 15, 2004. However,
prior to the required application of FIN 46(R), the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or interim period ending after
December 15, 2003. The adoption of this interpretation did not have a material effect on the Companys consolidated financial statements.



In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised), Employers Disclosures
about Pensions and Other Postretirement Benefits - an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106 (SFAS No. 132 (revised)). This Statement revises employers disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 132 (revised) retains the
disclosure requirements contained in SFAS No. 132, Employers Disclosures About Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original SFAS No. 132
(revised) about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132 (revised) was effective for financial statements with



6



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##### Table of Contents

fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of SFAS No. 132 (revised) did not
have a material impact on the Companys consolidated financial statements.



In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-3 (SOP 03-3) Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 requires that loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, be recognized at their fair value.
The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances cannot be created nor carried over in the initial accounting for
loans acquired in a transfer on loans subject to SFAS 114, Accounting by Creditors for Impairment of a Loan. This SOP was effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption
encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Companys financial position or results of operations.



In December 2004, the 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 the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, since the issuance of SFAS No. 123R, the SEC has delayed the effective date. The new
effective date for the Company is 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 or results of operations.



|5. | STOCK BASED COMPENSATION
|-- | ------------------------



At September 30, 2005, the Company has five stock-based employee compensation plans. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, no compensation cost has been recognized for its 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 No. 123R, Share-Based Payment, to stock-based employee compensation.



|                                                                                                                                            |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                                                                                                            |  | Three Months Ended September 30, |           | Nine Months Ended September 30,
|                                                                                                                                            |  | 2005                             |           | 2004                            |   | 2005      |  | 2004
|Net income, as reported                                                                                                                     |  | $                                | 443,388   |                                 | $ | 657,084   |  | $    | 1,653,550 |  | $ | 1,681,166
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                  | 11,973    |                                 |   | 11,973    |  |      | 35,919    |  |   | 35,919   
|                                                                                                                                            |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Pro forma net income                                                                                                                        |  | $                                | 431,415   |                                 | $ | 645,111   |  | $    | 1,617,631 |  | $ | 1,645,247
|                                                                                                                                            |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Earnings per share:                                                                                                                         |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Basis - as reported                                                                                                                         |  | $                                | 0.24      |                                 | $ | 0.35      |  | $    | 0.88      |  | $ | 0.91     
|Basic - pro forma                                                                                                                           |  | $                                | 0.23      |                                 | $ | 0.35      |  | $    | 0.86      |  | $ | 0.89     
|Diluted - as reported                                                                                                                       |  | $                                | 0.23      |                                 | $ | 0.34      |  | $    | 0.86      |  | $ | 0.87     
|Diluted - pro forma                                                                                                                         |  | $                                | 0.22      |                                 | $ | 0.34      |  | $    | 0.84      |  | $ | 0.86     
|Weighted average shares outstanding                                                                                                         |  |                                  | 1,876,941 |                                 |   | 1,848,408 |  |      | 1,870,768 |  |   | 1,841,870
|Weighted average diluted shares outstanding                                                                                                 |  |                                  | 1,933,094 |                                 |   | 1,925,294 |  |      | 1,932,371 |  |   | 1,922,340



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##### Table of Contents

|6. | PENSION BENEFITS
|-- | ----------------



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



|                                                 |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|------------------------------------------------ |  | -------------------------------- | -------- | - | ------------------------------- | - | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                 |  | Three Months Ended September 30, |          |   | Nine Months Ended September 30, |  
|                                                 |  | 2005                             |          |   | 2004                            |   |          | 2005 |  |   | 2004     |  
|Service cost                                     |  | $                                | 96,587   |   |                                 | $ | 76,885   |      |  | $ | 289,760  |   |  | $ | 230,654  |  
|Interest cost on benefit obligation              |  |                                  | 137,004  |   |                                 |   | 129,997  |      |  |   | 411,011  |   |  |   | 389,993  |  
|Expected return on plan assets                   |  |                                  | (152,037 | ) |                                 |   | (128,038 | )    |  |   | (456,110 | ) |  |   | (384,113 | )
|Amortization of prior service cost               |  |                                  | 13,744   |   |                                 |   | 13,745   |      |  |   | 41,233   |   |  |   | 41,233   |  
|Adjustment for curtailment gain                  |  |                                  | (254,018 | ) |                                 |   |         |      |  |   | (254,018 | ) |  |   |         |  
|Adjustment for recognition of prior service cost |  |                                  | 756,499  |   |                                 |   |         |      |  |   | 756,499  |   |  |   |         |  
|                                                 |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  
|Net periodic benefit cost                        |  | $                                | 597,779  |   |                                 | $ | 92,589   |      |  | $ | 788,375  |   |  | $ | 277,767  |  
|                                                 |  |                                  |          |   |                                 |   |          |      |  |   |          |   |  |   |          |  



Effective
December 31, 2005, the Company froze its plan so that employees no longer earn additional defined benefits for future service. As of September 30, 2005, no contribution to the pension plan was required nor was one expected to be made by
the Company during the year ended December 31, 2005.



|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 subsidiaries, Hannah Insurance Agency, Inc. (Hannah) and Beverly National Security Corporation (BNSC). Hannah was established to sell annuities, life, long-term and
disability insurance. BNSC was established for the buying, selling and holding of securities.



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 future loan losses, relating to both 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



Net income for the quarter ended September 30, 2005 amounted to
$443,388, with basic earnings per share of $0.24 and fully diluted earnings of $0.23 per share. Net income for the quarter ended September 30, 2004 amounted to $657,084, with basic earnings per share of $0.35 and fully diluted earnings of $0.34
per share. The current period earnings were impacted by a one-time charge of $503,000, $296,481 after tax, relating to the Banks decision to freeze its defined benefit pension plan effective December 31, 2005. Net income for the period
before the one-time charge would have been $739,869, or basic earnings per share of $0.39 and fully diluted earnings of $0.38 per share, which represents an increase of 12.6% from the same period last year.



Net income for the nine-month period ending September 30, 2005 amounted to $1,653,550,
as compared to $1,681,166 for the same period of 2004. Basic earnings per share for the nine months ended September 30, 2005 were $0.88, versus $0.91 for the same period of 2004. Diluted earnings per share for the nine-month period ended
September 30, 2005 were $0.86, as compared to $0.87 for the nine months ended September 30, 2004. Net income for the period before the one-time adjustment would have been $1,950,031, or basic earnings per share of $1.04 and fully diluted
earnings of $1.01 per share, which represents an increase of 16% over the same period last year.



8



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##### Table of Contents

At September 30, 2005 total assets had increased $17,723,135, or 4.7%, compared to total assets at December 31,
2004. Cash and cash equivalents increased $5,096,959, or 47.9%. This increase was, in part, due to maturities of some available-for-sale securities, which decreased by $3,724,919, or 5.3%, from December 31, 2004. Loans, net of the allowance for
loan losses, increased $15,535,722, or 6.6%, from December 31, 2004 due to increases in commercial and residential loans. Total deposits increased $14,320,221, or 4.3%, when compared to balances at December 31, 2004. This increase is the
result of maximizing sales efforts, developing new products and the marketing of limited-time special offers. Federal Home Loan Bank advances increased $4,000,000 and is the result of temporary cash needs the Company had at September 30, 2005.



The Company declared and paid quarterly dividends of $0.20 per share in
January, April and July 2005, totaling $0.60 per share, which was the same as the amount paid for the comparable period in 2004.



Investment Portfolio



Debt and equity securities have been classified in the consolidated balance sheets according to managements intent. The amortized cost of securities and their
approximate fair values are as follows as of September 30, 2005 and December 31, 2004:



|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           
|---------------------------------------------------------------------------------------------- |  | -------------------- | ---------- | ---------------------- | - | ----------------------- |  | ---------- | --------- |  | - | ----------
|                                                                                               |  | Amortized Cost Basis |            | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Fair Value
|Available-for-sale securities:                                                                 |  |                      |            |                        |   |                         |  |            |           |  |   |           
|September 30, 2005:                                                                            |  |                      |            |                        |   |                         |  |            |           |  |   |           
|Debt securities issued by U.S. government corporations and agencies                            |  | $                    | 11,989,859 |                        | $ | 6,438                   |  | $          | 238,147   |  | $ | 11,758,150
|Debt securities issued by states of the United States and political subdivisions of the states |  |                      | 975,934    |                        |   |                        |  |            | 14,216    |  |   | 961,718   
|Marketable equity securities                                                                   |  |                      | 1,334,614  |                        |   | 152,520                 |  |            | 6,123     |  |   | 1,481,011 
|Mortgage-backed securities                                                                     |  |                      | 26,252,755 |                        |   |                        |  |            | 491,990   |  |   | 25,760,765
|Corporate Securities                                                                           |  |                      | 5,018,336  |                        |   |                        |  |            | 15,861    |  |   | 5,002,475 
|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           
|                                                                                               |  | $                    | 45,571,498 |                        | $ | 158,958                 |  | $          | 766,337   |  | $ | 44,964,119
|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           
|December 31, 2004:                                                                             |  |                      |            |                        |   |                         |  |            |           |  |   |           
|Debt securities issued by U.S. government corporations and agencies                            |  | $                    | 10,997,236 |                        | $ | 630                     |  | $          | 118,596   |  | $ | 10,879,270
|Marketable equity securities                                                                   |  |                      | 571,906    |                        |   | 125,769                 |  |            |          |  |   | 697,675   
|Mortgage backed securities                                                                     |  |                      | 32,767,864 |                        |   | 33,574                  |  |            | 262,268   |  |   | 32,539,170
|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           
|                                                                                               |  | $                    | 44,337,006 |                        | $ | 159,973                 |  | $          | 380,864   |  | $ | 44,116,115
|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           
|                                                                                               |  |                      |            |                       
|                                                                                               |  | Amortized Cost Basis |            | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Fair Value
|Held-to-maturity securities:                                                                   |  |                      |            |                        |   |                         |  |            |           |  |   |           
|September 30, 2005:                                                                            |  |                      |            |                        |   |                         |  |            |           |  |   |           
|Debt securities issued by U.S. government corporations and agencies                            |  | $                    | 39,012,783 |                        | $ | 11,643                  |  | $          | 555,395   |  | $ | 38,469,031
|Debt securities issued by states of the United States and political subdivisions of the states |  |                      | 1,928,430  |                        |   | 15,926                  |  |            | 1,214     |  |   | 1,943,142 
|Debt securities issued by foreign governments                                                  |  |                      | 400,000    |                        |   |                        |  |            | 5         |  |   | 399,995   
|Mortgage-backed securities                                                                     |  |                      | 25,646,787 |                        |   |                        |  |            | 450,156   |  |   | 25,196,631
|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           
|                                                                                               |  | $                    | 66,988,000 |                        | $ | 27,569                  |  | $          | 1,006,770 |  | $ | 66,008,799
|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           
|December 31, 2004:                                                                             |  |                      |            |                        |   |                         |  |            |           |  |   |           
|Debt securities issued by U.S. government corporations and agencies                            |  | $                    | 38,011,806 |                        | $ | 58,816                  |  | $          | 132,422   |  | $ | 37,938,200
|Debt securities issued by states of the United States and political subdivisions of the states |  |                      | 1,932,265  |                        |   | 30,266                  |  |            |           |  |   | 1,962,531 
|Debt securities issued by foreign governments                                                  |  |                      | 500,000    |                        |   |                         |  |            | 2         |  |   | 499,998   
|Mortgage-backed securities                                                                     |  |                      | 30,268,848 |                        |   | 68,605                  |  |            | 95,930    |  |   | 30,241,523
|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           
|                                                                                               |  | $                    | 70,712,919 |                        | $ | 157,687                 |  | $          | 228,354   |  | $ | 70,642,252
|                                                                                               |  |                      |            |                        |   |                         |  |            |           |  |   |           



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##### Table of Contents

Loan Portfolio



The following table summarizes the distribution of the loan portfolio as of September 30, 2005 and
December 31, 2004:



|                                                |  |                    |             |   |            |        |   |                   |   |             |            |  |        |  
|----------------------------------------------- |  | ------------------ | ----------- | - | ---------- | ------ | - | ----------------- | - | ----------- | ---------- |  | ------ | -
|                                                |  | September 30, 2005 |             |   | % of Total |        |   | December 31, 2004 |   |             | % of Total | 
|Commercial, financial and agricultural          |  | $                  | 43,446,631  |   |            | 17.37  | % |                   | $ | 45,519,751  |            |  | 19.40  | %
|Real estate - construction and land development |  |                    | 13,672,601  |   |            | 5.46   | % |                   |   | 5,785,885   |            |  | 2.47   | %
|Real estate - residential                       |  |                    | 87,754,127  |   |            | 35.07  | % |                   |   | 83,954,297  |            |  | 35.78  | %
|Real estate - commercial                        |  |                    | 92,713,289  |   |            | 37.06  | % |                   |   | 87,365,949  |            |  | 37.23  | %
|Consumer                                        |  |                    | 5,349,037   |   |            | 2.14   | % |                   |   | 6,535,752   |            |  | 2.78   | %
|Other                                           |  |                    | 9,239,012   |   |            | 3.69   | % |                   |   | 6,997,635   |            |  | 2.98   | %
|                                                |  |                    |             |   |            |        |   |                   |   |             |            |  |        |  
|                                                |  |                    | 252,174,697 |   |            | 100.79 | % |                   |   | 236,159,269 |            |  | 100.64 | %
|Allowance for loan losses                       |  |                    | (2,619,578  | ) |            | -1.05  | % |                   |   | (2,181,257  | )          |  | -0.93  | %
|Deferred loan costs, net                        |  |                    | 642,492     |   |            | 0.26   | % |                   |   | 683,877     |            |  | 0.29   | %
|                                                |  |                    |             |   |            |        |   |                   |   |             |            |  |        |  
|Net Loans                                       |  | $                  | 250,197,611 |   |            | 100.00 | % |                   | $ | 234,661,889 |            |  | 100.00 | %
|                                                |  |                    |             |   |            |        |   |                   |   |             |            |  |        |  



Deposits



The following table shows the average deposits and
average interest rate paid for the nine months ended September 30, 2005 and the year ended December 31, 2004:



|                      |  |                    |             |              |                   |   |                 |   |              |  |      |  
|--------------------- |  | ------------------ | ----------- | ------------ | ----------------- | - | --------------- | - | ------------ |  | ---- | -
|                      |  | September 30, 2005 |             |              | December 31, 2004 |  
|                      |  | Average Balance    |             | Average Rate |                   |   | Average Balance |   | Average Rate | 
|Demand Deposits       |  | $                  | 73,335,856  |              |                  |   |                 | $ | 66,997,964   |  |     |  
|NOW Accounts          |  |                    | 64,887,795  |              | 0.28              | % |                 |   | 65,647,354   |  | 0.23 | %
|Money Market Accounts |  |                    | 76,288,755  |              | 1.92              | % |                 |   | 58,429,587   |  | 0.91 | %
|Savings Deposits      |  |                    | 68,001,399  |              | 0.57              | % |                 |   | 67,501,297   |  | 0.53 | %
|Time Deposits         |  |                    | 69,384,157  |              | 2.69              | % |                 |   | 60,211,309   |  | 2.21 | %
|                      |  |                    |             |              |                   |   |                 |   |              |  |      |  
|Total                 |  | $                  | 351,897,962 |              | 1.11              | % |                 | $ | 318,787,511  |  | 0.94 | %
|                      |  |                    |             |              |                   |   |                 |   |              |  |      |  



Comparison of operating results for the three months ended September 30, 2005 and September 30, 2004



Total interest and dividend income, when compared to the same period last year, increased by $702,584, or 16.5%. Interest and fees on loans, which increased by $685,997,
or 21.9%, from the same period last year, accounted for most of this increase. The interest rate environment and increased volume in the loan portfolio are the reasons the Bank has seen improved revenues in this area. An additional source of
increased interest income is the result of interest earned on Federal funds sold, which increased by $48,893 or 249% from the same period last year. This is due to the surplus in the average daily cash position of the Bank over recent months.



Deposit interest expense increased by $503,736, or 84.7%, compared to the same
period last year. This was due to both the increase in the average balance of total deposits and the increase in the average interest rate paid on those deposits, necessitated by the current rate environment.



The Companys net interest margin decreased by approximately 2 basis points 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:



10



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##### Table of Contents

|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|-------------------------------------------------- |  | ------------------------------------- | ------- | --------------- | ------------------------------------- | ---------- | -------------- | ---- | -------------- |  | --------------- | ------- | ---------- | - | ----- |  | ---- | -
|                                                   |  | Three Months Ended September 30, 2005 |         |                 | Three Months Ended September 30, 2004 |           
|                                                   |  | AverageBalance                        |         | InterestInc/Exp |                                       | Yield/Rate |                |      | AverageBalance |  | InterestInc/Exp |         | Yield/Rate |  
|                                                   |  | (in thousands)                        |         |                 |                                       |            | (in thousands) |      |                | 
|Assets                                             |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Federal funds sold                                 |  | $                                     | 7,259   |                 | $                                     | 63         |                | 3.43 | %              |  | $               | 4,995   |            | $ | 17    |  | 1.33 | %
|Investments (1)                                    |  |                                       | 115,829 |                 |                                       | 1,085      |                | 3.72 | %              |  |                 | 129,307 |            |   | 1,119 |  | 3.44 | %
|Loans (1)                                          |  |                                       | 247,701 |                 |                                       | 3,795      |                | 6.08 | %              |  |                 | 215,341 |            |   | 3,121 |  | 5.76 | %
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Total earning assets                               |  |                                       | 370,789 |                 |                                       | 4,943      |                | 5.29 | %              |  |                 | 349,643 |            |   | 4,257 |  | 4.84 | %
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Other non-interest-earning assets                  |  |                                       | 27,492  |                 |                                       |            |                |      |                |  |                 | 28,892  |            |   |       |  |      |  
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Total average assets                               |  | $                                     | 398,281 |                 |                                       |            |                |      |                |  | $               | 378,535 |            |   |       |  |      |  
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Liabilities and Stockholders Equity               |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Savings deposits                                   |  | $                                     | 66,393  |                 |                                       | 89         |                | 0.53 | %              |  | $               | 68,211  |            |   | 92    |  | 0.53 | %
|NOW accounts                                       |  |                                       | 63,129  |                 |                                       | 40         |                | 0.25 | %              |  |                 | 63,097  |            |   | 34    |  | 0.22 | %
|Money market accounts                              |  |                                       | 77,315  |                 |                                       | 428        |                | 2.19 | %              |  |                 | 61,050  |            |   | 139   |  | 0.91 | %
|Time deposits                                      |  |                                       | 74,511  |                 |                                       | 541        |                | 2.88 | %              |  |                 | 60,170  |            |   | 329   |  | 2.18 | %
|Short-term borrowings                              |  |                                       | 10,512  |                 |                                       | 65         |                | 2.47 | %              |  |                 | 29,083  |            |   | 92    |  | 1.26 | %
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Total interest-bearing liabilities                 |  |                                       | 291,860 |                 |                                       | 1,163      |                | 1.58 | %              |  |                 | 281,611 |            |   | 686   |  | 0.97 | %
|Non-interest-bearing deposits                      |  |                                       | 75,507  |                 |                                       |            |                |      |                |  |                 | 68,134  |            |   |       |  |      |  
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Total deposits                                     |  |                                       | 367,367 |                 |                                       | 1,163      |                | 1.26 | %              |  |                 | 349,745 |            |   | 686   |  | 0.78 | %
|Other non-interest-bearing liabilities             |  |                                       | 2,488   |                 |                                       |            |                |      |                |  |                 | 1,760   |            |   |       |  |      |  
|Stockholders equity                               |  |                                       | 28,426  |                 |                                       |            |                |      |                |  |                 | 27,030  |            |   |       |  |      |  
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Total average liabilities and stockholders equity |  | $                                     | 398,281 |                 |                                       |            |                |      |                |  | $               | 378,535 |            |   |       |  |      |  
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Net interest and dividend income                   |  |                                       |         |                 | $                                     | 3,780      |                |      |                |  |                 |         |            | $ | 3,571 |  |      |  
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Interest spread                                    |  |                                       |         |                 |                                       |            |                | 4.03 | %              |  |                 |         |            |   |       |  | 4.06 | %
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  
|Net interest margin                                |  |                                       |         |                 |                                       |            |                | 4.04 | %              |  |                 |         |            |   |       |  | 4.06 | %
|                                                   |  |                                       |         |                 |                                       |            |                |      |                |  |                 |         |            |   |       |  |      |  



|(1) | Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment for the three months ended September 30, 2005 and 2004 is $40 and $49
respectively. A federal tax rate of 34% was used in performing this calculation.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total non-interest income for the three months ended September 30, 2005 was $985,286, consistent with the total from the same period last year.



Total non-interest expense increased by $602,379, or 17.6%, compared to the same period last year. This increase is primarily attributed to
salaries and employee benefits, which increased $572,640, or 27.5%. The increased expense in this area is primarily due to the aforementioned charge related to the defined benefit plan, as well as staffing the new Danvers branch. Occupancy expense
increased by $54,411, or 20.6%, from the same period last year. This is mainly due to the addition of rent and related expenses for the Danvers Branch, which had not yet opened at this time last year. Expenses related to marketing and public
relations decreased from those of the comparable period last year. This decrease, $64,266, or 49.2%, is due to the Bank transitioning to a sales technique that includes a more direct sales approach. Professional fees increased by $104,508, or 87.5%,
from the same period last year. This is due to the rising costs the industry is experiencing in this area, for both Sarbanes-Oxley compliance and other increased regulation. Other non-interest expenses have decreased by $99,121, or 22.8%, from the
same period last year as a result of several cost reduction measures the Bank has undertaken to improve overall efficiency.



The income tax provision decreased by $168,650, or 56.4%, from the same period last year. This is due to decreased net income that resulted from the aforementioned
one-time charge associated with freezing the Banks defined benefit plan.



Comparison of operating results for the nine months ended September 30, 2005 and September 30, 2004



Total interest and dividend income, when compared to the same period last year, increased by
$2,756,870, or 23.8%. Interest and fees on loans, which increased by $2,679,579, or 31.9%, from the same period last year, accounted for most of this increase. The interest rate environment and increased volume in the loan portfolio are the reasons
the



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Bank has seen improved revenues in this area. An additional source of increased interest income is the result of interest earned on Federal funds sold, which
increased by $80,556, or 130% from the same period last year. This is due to the surplus in the average daily cash position of the Bank during the year.



Deposit interest expense increased by $1,213,864, or 71%, compared to the same period last year. This was due to both the increase in the average balance of total
deposits and the increase in the average interest rate paid on those deposits, necessitated by the current rate environment.



The Companys net interest margin increased by approximately 13 basis points from the comparable period last year.



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



|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|-------------------------------------------------- |  | ------------------------------------ | ------- | --------------- | ------------------------------------ | ---------- | -------------- | ---- | -------------- |  | --------------- | ------- | ---------- | - | ------ |  | ---- | -
|                                                   |  | Nine Months Ended September 30, 2005 |         |                 | Nine Months Ended September 30, 2004 |           
|                                                   |  | AverageBalance                       |         | InterestInc/Exp |                                      | Yield/Rate |                |      | AverageBalance |  | InterestInc/Exp |         | Yield/Rate |  
|                                                   |  | (in thousands)                       |         |                 |                                      |            | (in thousands) |      |                | 
|Assets                                             |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Federal funds sold                                 |  | $                                    | 5,399   |                 | $                                    | 126        |                | 3.11 | %              |  | $               | 7,401   |            | $ | 55     |  | 0.99 | %
|Investments (1)                                    |  |                                      | 115,622 |                 |                                      | 3,161      |                | 3.66 | %              |  |                 | 127,646 |            |   | 3,135  |  | 3.28 | %
|Loans (1)                                          |  |                                      | 243,876 |                 |                                      | 11,004     |                | 6.03 | %              |  |                 | 193,772 |            |   | 8,425  |  | 5.81 | %
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Total earning assets                               |  |                                      | 364,897 |                 |                                      | 14,291     |                | 5.24 | %              |  |                 | 328,819 |            |   | 11,615 |  | 4.72 | %
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Other non interest-earning assets                  |  |                                      | 28,022  |                 |                                      |            |                |      |                |  |                 | 30,050  |            |   |        |  |      |  
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Total average assets                               |  | $                                    | 392,919 |                 |                                      |            |                |      |                |  | $               | 358,869 |            |   |        |  |      |  
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Liabilities and Stockholders Equity               |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Savings deposits                                   |  | $                                    | 68,001  |                 |                                      | 291        |                | 0.57 | %              |  | $               | 67,130  |            |   | 269    |  | 0.53 | %
|NOW accounts                                       |  |                                      | 64,888  |                 |                                      | 138        |                | 0.28 | %              |  |                 | 64,601  |            |   | 112    |  | 0.23 | %
|Money market accounts                              |  |                                      | 76,289  |                 |                                      | 1,098      |                | 1.92 | %              |  |                 | 54,288  |            |   | 327    |  | 0.81 | %
|Time deposits                                      |  |                                      | 69,384  |                 |                                      | 1,396      |                | 2.69 | %              |  |                 | 60,334  |            |   | 1,001  |  | 2.22 | %
|Short-term borrowings                              |  |                                      | 10,443  |                 |                                      | 195        |                | 2.50 | %              |  |                 | 19,394  |            |   | 164    |  | 1.13 | %
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Total interest-bearing liabilities                 |  |                                      | 289,005 |                 |                                      | 3,118      |                | 1.44 | %              |  |                 | 265,747 |            |   | 1,873  |  | 0.94 | %
|Non-interest-bearing deposits                      |  |                                      | 73,336  |                 |                                      |           |                |      |                |  |                 | 64,604  |            |   |       |  |      |  
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Total deposits                                     |  |                                      | 362,341 |                 |                                      | 3,118      |                | 1.15 | %              |  |                 | 330,351 |            |   | 1,873  |  | 0.76 | %
|Other non-interest-bearing liabilities             |  |                                      | 2,336   |                 |                                      |            |                |      |                |  |                 | 1,659   |            |   |        |  |      |  
|Stockholders equity                               |  |                                      | 28,242  |                 |                                      |            |                |      |                |  |                 | 26,859  |            |   |        |  |      |  
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Total average liabilities and stockholders equity |  | $                                    | 392,919 |                 |                                      |            |                |      |                |  | $               | 358,869 |            |   |        |  |      |  
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Net interest and dividend income                   |  |                                      |         |                 | $                                    | 11,173     |                |      |                |  |                 |         |            | $ | 9,743  |  |      |  
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Interest spread                                    |  |                                      |         |                 |                                      |            |                | 4.09 | %              |  |                 |         |            |   |        |  | 3.96 | %
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  
|Net interest margin                                |  |                                      |         |                 |                                      |            |                | 4.09 | %              |  |                 |         |            |   |        |  | 3.96 | %
|                                                   |  |                                      |         |                 |                                      |            |                |      |                |  |                 |         |            |   |        |  |      |  



|(1) | Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment for the nine months ended September 30, 2005 and 2004 is $115 and $107,
respectively. A federal tax rate of 34% was used in performing this calculation.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total non-interest income remained consistent with the comparable period last year, increasing by $110,181, or 3.8%. Fee income from the sale of non-deposit products increased by $112,113, or 144%, mainly due to the
introduction of UVest as a new product line. UVest offers a variety of investment products and services, including brokerage, insurance and wealth management. Other non-interest income increased by $86,205, or 23.4%, compared to the same period last
year. This increase is mainly due to cost recoveries that resulted from the re-negotiation of existing contracts initiated by the Banks drive to improve overall efficiency.



Total non-interest expense increased by $1,573,757, or 15.9%, compared to the same period last year. This increase is primarily attributed
to salaries and employee benefits, which increased $1,195,582, or 20.3%. The increased expense in this area is due to the aforementioned charge related to the defined benefit plan, as well as staffing the new Danvers branch. Occupancy expense
increased by $265,156, or 33.8%, from the same period last year. This increase is mainly due to the addition of rent and related expenses associated with the new Danvers Branch. Expenses related to marketing and public relations decreased from those
of the comparable period last year. This decrease, $81,901, or 24.5%, is due to the Bank transitioning to a sales technique that includes less marketing and more direct sales. Professional fees increase by $142,146, or 32.6%, over the same period
last year. This is due to the rising costs the industry is experiencing in this area, for both Sarbanes-Oxley compliance and other increased regulation. Other non-interest expenses have decreased by $49,459, or 3.7%, from the same period last year
as a result of several cost reduction measures the Bank has undertaken to improve overall efficiency.



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The income tax provision decreased by $44,120, or 6.3%, when compared to 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 $180,000 was made during the three months ended September 30, 2005, compared to $190,000 for the same period last year. The total loan loss provision for the nine
months ended September 30, 2005 was $440,000, compared to $320,000 for the same period in 2004. The increased level of provision was directly related to the increase in size and changing mix of the loan portfolio. This includes increased volume
and percentage of commercial and home equity loans, consistent with the Banks short and long-term strategies. As of September 30, 2005 the total allowance for loan losses was 1.05 % of total loans, compared to 0.93% at
December 31, 2004.



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 (SFAS No. 114). 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.



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, 2005 and 2004:



|                                           |  |      |           |   |      |   |           |  
|------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                           |  | 2005 |           |   | 2004 |  
|Balance as of January 1st                  |  | $    | 2,181,257 |   |      | $ | 2,182,675 |  
|Loans charged off                          |  |      | (18,696   | ) |      |   | (421,999  | )
|Provision for loan losses                  |  |      | 440,000   |   |      |   | 320,000   |  
|Recoveries of loans previously charged off |  |      | 17,017    |   |      |   | 72,121    |  
|                                           |  |      |           |   |      |   |           |  
|Balance as of September 30th               |  | $    | 2,619,578 |   |      | $ | 2,152,797 |  
|                                           |  |      |           |   |      |   |           |  



At September 30, 2005, the
allowance for loan losses represented 1,813% of non-performing loans, which totaled $144,488. Non-performing loans represented 0.06% of total loans and mortgages held-for-sale. At September 30, 2004, the allowance for loan loss represented
203.5% of non-performing loans, which totaled $1,058,099. Non-performing loans represented 0.47% 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.



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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, 2005, the Company had total capital of
$28,471,588, an increase of $459,553, or 1.64%, from total capital as of December 31, 2004. The net change in the Banks capital reflects the current year income reduced by dividends paid and the increase in the net unrealized loss on
securities available-for-sale.



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, 2005, the Banks Tier 1 capital amounted to 6.74% of average total assets. At September 30, 2005, the Banks ratio of
risk-based capital to risk-weighted assets amounted to 10.86%, which satisfies the applicable risk-based capital requirements. As of December 31, 2004, the Banks Tier 1 capital amounted to 6.82% of average assets and risk-based capital
amounted to 11.48% of total risk-based assets.



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, 2005, the Companys Tier 1 capital amounted to 7.24% of average total assets. At
September 30, 2005, the Companys ratio of risk-based capital to risk weighted assets amounted to 11.56%, which satisfies the applicable risk-based capital requirements. As of December 31, 2004, the Companys Tier 1 capital
amounted to 7.31% of average assets and risk-based capital amounted to 12.24% of total risk-based assets.



The capital ratios of the Company and the Bank exceed all regulatory requirements, and the Bank 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. The Companys interest rate sensitivity management practices seek to provide consistency in the maintenance of net interest margins and to
foster a sustainable growth of net interest income despite 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 $2,265,000 from the investment securities portfolio at September 30, 2005; additionally, a minimum amount of contractual payments in the amount of $11,209,422 for the mortgage-backed securities portfolio
is due within one year at September 30, 2005. Assets such as federal funds sold, mortgages held for sale, payments 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.



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
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (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.



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, 2005 was 4.09%, in comparison to the 3.96% net interest margin yield for the nine months ended September 30, 2004. 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, and various lending, marketing, 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 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.



15



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##### Table of Contents

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, 2005, the capital ratio of the Company on an EVE basis, at current
rate levels, is 14.4%. 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 7.00% to 9.00%) would result in an EVE capital ratio
of 15.9%. Alternatively, if interest rates were to decrease over the next year by 200 basis points, the EVE capital ratio is estimated to be 11.0%. These changes are within the risk tolerance levels established by the Company policies.



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.



As of September 30, 2005 the simulations indicate that an increase in interest rates of
200 basis points over the next year would result in a decrease of 1.05% in net interest income in year one and an increase of 5.19% in year 2. If the rates were to decease by the same amount over the next year, 200bp, net interest income would
decrease by 1.10% in year 1 and decrease 5.08% in year 2. The above information would indicate that as of September 30, 2005, the Company is slightly asset sensitive. The reason that net interest income declines slightly in both an up and down
rate scenario in year 1 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.



As of September 30, 2005, the Company carried out an
evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on the foregoing, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective.



During the quarter ended September 30, 2005, there were no changes in the Companys
internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.



16



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##### Table of Contents

PART II  OTHER INFORMATION



|                                                                           |  |     
|-------------------------------------------------------------------------- |  | ----
|Item 1.       Legal Proceedings.                                           |  | None
|                                                                           | 
|Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds. |  | None
|                                                                           | 
|Item 3.       Defaults Upon Senior Securities.                             |  | None
|                                                                           | 
|Item 4.       Submission of Matters to a Vote of Security Holders.         |  | None
|                                                                           | 
|Item 5.       Other Information.                                           |  | None
|                                                                           | 
|Item 6.       Exhibits.                                                    |  |     



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



17



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##### Table of Contents

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 9, 2005 |  |  |  | By: |  | /s/    DONAT A. FOURNIER
|                       |  |  |  |     |  |                          |  | Donat A. Fournier                    
|                       |  |  |  |     |  |                          |  | President and Chief Executive Officer



|                       |  |  |  |     |  |                          |  |                                                     
|---------------------- |  |  |  | --- |  | ------------------------ |  | ----------------------------------------------------
|                       |  |  | 
|Date: November 9, 2005 |  |  |  | By: |  | /s/    MICHAEL O. GILLES
|                       |  |  |  |     |  |                          |  | Michael O. Gilles                                   
|                       |  |  |  |     |  |                          |  | Executive Vice President and Chief Financial Officer



18