##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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

For the Quarterly period ended June 30, 2006

OR



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

For the transition period from  to

Commission file number 33-22224-B



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Beverly National Corporation

(Name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Massachusetts                                                  |  | 04-2832201                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|240 Cabot Street Beverly, Massachusetts                        |  | 01915                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

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



---

Indicate by check mark whether registrant
(l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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



|                         |  |                    |  |                         
|------------------------ |  | ------------------ |  | ------------------------
|Large Accelerated Filer ̈ |  | Accelerated Filer ̈ |  | Non-Accelerated Filer  x

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of August 9, 2006.
2,715,700 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 June 30, 2006 (Unaudited) and December 31, 2005                          |  | 3 
|                                                                                                                  | 
|Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited) |  | 4 
|                                                                                                                  | 
|Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (Unaudited)       |  | 5 
|                                                                                                                  | 
|Notes to Condensed Consolidated Financial Statements (Unaudited)                                                  |  | 6 
|                                                                                                                  | 
|Item 2.                                                                                                           |  |   
|                                                                                                                  | 
|Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 7 
|                                                                                                                  | 
|Item 3.                                                                                                           |  |   
|                                                                                                                  | 
|Quantitative and Qualitative Disclosures about Market Risk                                                        |  | 16
|                                                                                                                  | 
|Item 4.                                                                                                           |  |   
|                                                                                                                  | 
|Controls and Procedures                                                                                           |  | 17
|                                                                                                                  | 
|PART II. OTHER INFORMATION                                                                                        |  |   
|                                                                                                                  | 
|Item 1.                                                                                                           |  |   
|                                                                                                                  | 
|Legal Proceedings                                                                                                 |  | 18
|                                                                                                                  | 
|Item 1A.                                                                                                          |  |   
|                                                                                                                  | 
|Risk Factors                                                                                                      |  | 18
|                                                                                                                  | 
|Item 2.                                                                                                           |  |   
|                                                                                                                  | 
|Unregistered Sales of Equity Securities and Use of Proceeds                                                       |  | 18
|                                                                                                                  | 
|Item 3.                                                                                                           |  |   
|                                                                                                                  | 
|Defaults Upon Senior Securities                                                                                   |  | 18
|                                                                                                                  | 
|Item 4.                                                                                                           |  |   
|                                                                                                                  | 
|Submission of Matters to a Vote of Security Holders                                                               |  | 18
|                                                                                                                  | 
|Item 5.                                                                                                           |  |   
|                                                                                                                  | 
|Other Information                                                                                                 |  | 19
|                                                                                                                  | 
|Item 6.                                                                                                           |  |   
|                                                                                                                  | 
|Exhibits                                                                                                          |  | 19
|                                                                                                                  | 
|Signatures                                                                                                        |  | 20



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                                                              |  | June 30, 2006 |         |   | December 31, 2005 |  
|                                                                                                                                                                                                                                                              |  | (Unaudited)   |         |   |                   |  
|ASSETS                                                                                                                                                                                                                                                        |  |               |         |   |                   |   |         |  
|Cash and due from banks                                                                                                                                                                                                                                       |  | $             | 12,049  |   |                   | $ | 13,134  |  
|Interest bearing demand deposits with other banks                                                                                                                                                                                                             |  |               | 275     |   |                   |   | 306     |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                     |  |               | 12,324  |   |                   |   | 13,440  |  
|Investments in available-for-sale securities (at fair value)                                                                                                                                                                                                  |  |               | 46,891  |   |                   |   | 47,729  |  
|Investments in held-to-maturity securities                                                                                                                                                                                                                    |  |               | 63,012  |   |                   |   | 65,514  |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                                                                                         |  |               | 3,214   |   |                   |   | 1,872   |  
|Federal Reserve Bank stock, at cost                                                                                                                                                                                                                           |  |               | 188     |   |                   |   | 188     |  
|Loans, net of the allowance for loan losses of $2,801 and $2,514, respectively                                                                                                                                                                                |  |               | 297,895 |   |                   |   | 267,256 |  
|Premises and equipment                                                                                                                                                                                                                                        |  |               | 4,983   |   |                   |   | 4,577   |  
|Accrued interest receivable                                                                                                                                                                                                                                   |  |               | 1,703   |   |                   |   | 1,639   |  
|Other assets                                                                                                                                                                                                                                                  |  |               | 10,562  |   |                   |   | 10,297  |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total assets                                                                                                                                                                                                                                                  |  | $             | 440,772 |   |                   | $ | 412,512 |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                          |  |               |         |   |                   |   |         |  
|Deposits:                                                                                                                                                                                                                                                     |  |               |         |   |                   |   |         |  
|Noninterest-bearing                                                                                                                                                                                                                                           |  | $             | 75,013  |   |                   | $ | 78,218  |  
|Interest-bearing                                                                                                                                                                                                                                              |  |               | 270,896 |   |                   |   | 267,594 |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total deposits                                                                                                                                                                                                                                                |  |               | 345,909 |   |                   |   | 345,812 |  
|Federal Home Loan Bank advances                                                                                                                                                                                                                               |  |               | 50,250  |   |                   |   | 22,900  |  
|Securities sold under agreements to repurchase                                                                                                                                                                                                                |  |               | 12,052  |   |                   |   | 11,390  |  
|Other liabilities                                                                                                                                                                                                                                             |  |               | 3,266   |   |                   |   | 3,689   |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                                                                                             |  |               | 411,477 |   |                   |   | 383,791 |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Preferred stock, $1.00 par value per share;300,000 shares authorized; issued and outstanding none                                                                                                                                                             |  |               |        |   |                   |   |        |  
|Common stock, $2.50 par value per share;2,500,000 shares authorized; issued 2,003,928 shares as of June 30, 2006 and 1,993,200 shares
as of December 31, 2005; outstanding, 1,893,523 shares as of June 30, 2006 and 1,882,795 shares as of December 31, 2005 |  |               | 5,010   |   |                   |   | 4,983   |  
|Paid-in capital                                                                                                                                                                                                                                               |  |               | 6,937   |   |                   |   | 6,848   |  
|Retained earnings                                                                                                                                                                                                                                             |  |               | 19,693  |   |                   |   | 18,992  |  
|Treasury stock, at cost (110,405 shares as of June 30, 2006 and December 31, 2005)                                                                                                                                                                            |  |               | (1,495  | ) |                   |   | (1,495  | )
|Accumulated other comprehensive loss                                                                                                                                                                                                                          |  |               | (850    | ) |                   |   | (607    | )
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                                                                                    |  |               | 29,295  |   |                   |   | 28,721  |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                    |  | $             | 440,772 |   |                   | $ | 412,512 |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Book value per share                                                                                                                                                                                                                                          |  | $             | 15.47   |   |                   | $ | 15.25   |  
|                                                                                                                                                                                                                                                              |  |               |         |   |                   |   |         |  

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

(Dollars in thousands, except per share data)

(Unaudited)



|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|---------------------------------------------------------------- |  | ------------------ | --------- | ---------------- | - | ------------- |  | - | ------------- | - |  | - | ---------
|                                                                 |  | Three Months Ended |           | Six Months Ended
|                                                                 |  | June 30, 2006      |           | June 30, 2005    |   | June 30, 2006 |  |   | June 30, 2005
|Interest and dividend income:                                    |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Interest and fees on loans                                       |  | $                  | 4,674     |                  | $ | 3,629         |  | $ | 9,017         |   |  | $ | 7,147    
|Interest on debt securities:                                     |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Taxable                                                          |  |                    | 999       |                  |   | 1,003         |  |   | 2,025         |   |  |   | 2,014    
|Tax-exempt                                                       |  |                    | 23        |                  |   | 18            |  |   | 49            |   |  |   | 39       
|Dividends on marketable equity securities                        |  |                    | 62        |                  |   | 2             |  |   | 124           |   |  |   | 4        
|Other interest                                                   |  |                    | 1         |                  |   | 65            |  |   | 15            |   |  |   | 74       
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Total interest and dividend income                               |  |                    | 5,759     |                  |   | 4,717         |  |   | 11,230        |   |  |   | 9,278    
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Interest expense:                                                |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Interest on deposits                                             |  |                    | 1,338     |                  |   | 1,074         |  |   | 2,552         |   |  |   | 1,825    
|Interest on other borrowed funds                                 |  |                    | 755       |                  |   | 48            |  |   | 1,195         |   |  |   | 130      
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Total interest expense                                           |  |                    | 2,093     |                  |   | 1,122         |  |   | 3,747         |   |  |   | 1,955    
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Net interest and dividend income                                 |  |                    | 3,666     |                  |   | 3,595         |  |   | 7,483         |   |  |   | 7,323    
|Provision for loan losses                                        |  |                    | 150       |                  |   | 120           |  |   | 290           |   |  |   | 260      
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Net interest and dividend income after provision for loan losses |  |                    | 3,516     |                  |   | 3,475         |  |   | 7,193         |   |  |   | 7,063    
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Noninterest income:                                              |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Income from fiduciary activities                                 |  |                    | 489       |                  |   | 472           |  |   | 921           |   |  |   | 895      
|Fees from sale of non-deposit products                           |  |                    | 71        |                  |   | 67            |  |   | 122           |   |  |   | 131      
|Service charges on deposit accounts                              |  |                    | 141       |                  |   | 143           |  |   | 279           |   |  |   | 280      
|Other deposit fees                                               |  |                    | 159       |                  |   | 144           |  |   | 305           |   |  |   | 271      
|Gains on sales of loans, net                                     |  |                    |          |                  |   | 14            |  |   |              |   |  |   | 14       
|Income on cash surrender value of life insurance                 |  |                    | 52        |                  |   | 51            |  |   | 104           |   |  |   | 104      
|Other income                                                     |  |                    | 184       |                  |   | 296           |  |   | 422           |   |  |   | 448      
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Total noninterest income                                         |  |                    | 1,096     |                  |   | 1,187         |  |   | 2,153         |   |  |   | 2,143    
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Noninterest expense:                                             |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Salaries and employee benefits                                   |  |                    | 2,128     |                  |   | 2,274         |  |   | 4,366         |   |  |   | 4,434    
|Director fees                                                    |  |                    | 88        |                  |   | 69            |  |   | 167           |   |  |   | 143      
|Occupancy expense                                                |  |                    | 334       |                  |   | 344           |  |   | 673           |   |  |   | 731      
|Equipment expense                                                |  |                    | 200       |                  |   | 151           |  |   | 395           |   |  |   | 309      
|Data processing fees                                             |  |                    | 189       |                  |   | 202           |  |   | 394           |   |  |   | 430      
|Marketing and public relations                                   |  |                    | 93        |                  |   | 122           |  |   | 194           |   |  |   | 186      
|Professional fees                                                |  |                    | 156       |                  |   | 274           |  |   | 284           |   |  |   | 436      
|Other expense                                                    |  |                    | 378       |                  |   | 388           |  |   | 752           |   |  |   | 796      
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Total noninterest expense                                        |  |                    | 3,566     |                  |   | 3,824         |  |   | 7,225         |   |  |   | 7,465    
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Income before income taxes                                       |  |                    | 1,046     |                  |   | 838           |  |   | 2,121         |   |  |   | 1,741    
|Income taxes                                                     |  |                    | 327       |                  |   | 263           |  |   | 664           |   |  |   | 531      
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Net income                                                       |  | $                  | 719       |                  | $ | 575           |  | $ | 1,457         |   |  | $ | 1,210    
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Comprehensive income                                             |  | $                  | 585       |                  | $ | 777           |  | $ | 1,214         |   |  | $ | 1,046    
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Earnings per share:                                              |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Weighted average shares outstanding                              |  |                    | 1,893,343 |                  |   | 1,868,142     |  |   | 1,891,955     |   |  |   | 1,867,630
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Weighted average diluted shares outstanding                      |  |                    | 1,927,028 |                  |   | 1,932,301     |  |   | 1,931,343     |   |  |   | 1,932,033
|                                                                 |  |                    |           |                  |   |               |  |   |               |   |  |   |          
|Earnings per common share                                        |  | $                  | 0.38      |                  | $ | 0.31          |  | $ | 0.77          |   |  | $ | 0.65     
|Earnings per common share, assuming dilution                     |  | $                  | 0.37      |                  | $ | 0.30          |  | $ | 0.75          |   |  | $ | 0.63     
|Dividends per share                                              |  | $                  |          |                  | $ | 0.20          |  | $ | 0.40          | * |  | $ | 0.40     

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|* | The dividends declared in the 2006 periods include the first quarter dividend of $0.20 declared in January 2006 and the second quarter dividend of $0.20 declared in March 2006.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(In
thousands)

(Unaudited)



|                                                                                            |  |               |         |   |               |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                                            |  | June 30, 2006 |         |   | June 30, 2005 |  
|Cash flows from operating activities:                                                       |  |               |         |   |               |   |         |  
|Net income                                                                                  |  | $             | 1,457   |   |               | $ | 1,210   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |               |         |   |               |   |         |  
|Amortization of securities, net                                                             |  |               | 95      |   |               |   | 164     |  
|Provision for loan losses                                                                   |  |               | 290     |   |               |   | 260     |  
|Change in deferred loan costs, net                                                          |  |               | (66     | ) |               |   | 12      |  
|Net decrease in mortgages held-for-sale                                                     |  |               |        |   |               |   | 447     |  
|Depreciation and amortization                                                               |  |               | 330     |   |               |   | 315     |  
|Increase in interest receivable                                                             |  |               | (64     | ) |               |   | (105    | )
|Decrease in prepaid expenses                                                                |  |               | 38      |   |               |   | 210     |  
|Decrease in mortgage servicing rights                                                       |  |               | 18      |   |               |   | 37      |  
|Increase in cash surrender value of life insurance                                          |  |               | (103    | ) |               |   | (123    | )
|Decrease in RABBI Trust trading securities                                                  |  |               | 54      |   |               |   | 59      |  
|Decrease in taxes receivable                                                                |  |               | 55      |   |               |   | 78      |  
|Increase in other assets                                                                    |  |               | (161    | ) |               |   | (373    | )
|Increase in interest payable                                                                |  |               | 153     |   |               |   | 156     |  
|Decrease in accrued expenses                                                                |  |               | (369    | ) |               |   | (156    | )
|(Decrease) increase in other liabilities                                                    |  |               | (207    | ) |               |   | 54      |  
|                                                                                            |  |               |         |   |               |   |         |  
|Net cash provided by operating activities                                                   |  |               | 1,520   |   |               |   | 2,245   |  
|                                                                                            |  |               |         |   |               |   |         |  
|Cash flows from investing activities:                                                       |  |               |         |   |               |   |         |  
|Purchases of available-for-sale securities                                                  |  |               | (5,111  | ) |               |   | (4,619  | )
|Proceeds from maturities of available-for-sale securities                                   |  |               | 5,455   |   |               |   | 4,031   |  
|Purchases of held-to-maturity securities                                                    |  |               |        |   |               |   | (1,000  | )
|Proceeds from maturities of held-to-maturity securities                                     |  |               | 2,492   |   |               |   | 2,820   |  
|Purchase of Federal Home Loan Bank stock                                                    |  |               | (1,342  | ) |               |   |        |  
|Purchase of Federal Reserve Bank stock                                                      |  |               |        |   |               |   | (45     | )
|Loan originations and principal collections, net                                            |  |               | (30,868 | ) |               |   | (14,139 | )
|Recoveries of loans previously charged off                                                  |  |               | 5       |   |               |   | 15      |  
|Capital expenditures                                                                        |  |               | (736    | ) |               |   | (196    | )
|                                                                                            |  |               |         |   |               |   |         |  
|Net cash used in investing activities                                                       |  |               | (30,105 | ) |               |   | (13,133 | )
|                                                                                            |  |               |         |   |               |   |         |  
|Cash flows from financing activities:                                                       |  |               |         |   |               |   |         |  
|Net (decrease) increase in demand deposits, NOW, money market and savings accounts          |  |               | (4,319  | ) |               |   | 21,183  |  
|Net increase in time deposits                                                               |  |               | 4,416   |   |               |   | 16,696  |  
|Net increase in Federal Home Loan Bank advances                                             |  |               | 27,350  |   |               |   |        |  
|Increase (decrease) in securities sold under agreements to repurchase                       |  |               | 662     |   |               |   | (1,670  | )
|Proceeds from exercise of stock options                                                     |  |               | 116     |   |               |   | 69      |  
|Dividends paid                                                                              |  |               | (756    | ) |               |   | (747    | )
|                                                                                            |  |               |         |   |               |   |         |  
|Net cash provided by financing activities                                                   |  |               | 27,469  |   |               |   | 35,531  |  
|                                                                                            |  |               |         |   |               |   |         |  
|Net (decrease) increase in cash and cash equivalents                                        |  |               | (1,116  | ) |               |   | 24,643  |  
|Cash and cash equivalents at beginning of year                                              |  |               | 13,440  |   |               |   | 10,646  |  
|                                                                                            |  |               |         |   |               |   |         |  
|Cash and cash equivalents at June 30                                                        |  | $             | 12,324  |   |               | $ | 35,289  |  
|                                                                                            |  |               |         |   |               |   |         |  
|Supplemental disclosures:                                                                   |  |               |         |   |               |   |         |  
|Interest paid                                                                               |  | $             | 3,594   |   |               | $ | 1,800   |  
|Income taxes paid                                                                           |  |               | 577     |   |               |   | 810     |  

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



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##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | BASIS OF PRESENTATION
|-- | ---------------------

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

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



|2. | EARNINGS PER SHARE
|-- | ------------------

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

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



|3. | RECLASSIFICATION
|-- | ----------------

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



|4. | IMPACT OF NEW ACCOUNTING STANDARDS
|-- | ----------------------------------

In December 2004, the
Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised), Share-Based Payment (SFAS No. 123R). This Statement revises FASB Statement No. 123, Accounting for Stock Based Compensation
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the
consolidated financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based
payment transactions with employees except for equity instruments held by employee share ownership plans. SFAS No. 123R was effective for the Company as of 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.

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



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

The Company maintains five
stock-based employee compensation plans. Effective January 1, 2006, the Company adopted SFAS 123R. This Statement revised SFAS 123 and superseded APB No. 25. SFAS



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##### Table of Contents

123R requires that the cost resulting from all share-based payment transactions be recognized in the consolidated financial statements and establishes fair
value as the measurement objective in accounting for share-based payment arrangements. In the three and six months ended June 30, 2006, stock-based employee compensation costs recorded as expenses amounted to $7,107 and $16,370, respectively.
Prior to January 1, 2006, the Company accounted for the plans under the recognition and measurement principles of APB Opinion No. 25. No stock-based employee compensation cost had been recognized during periods prior to January 1,
2006 for the Companys fixed stock option plans. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based employee compensation
during the three and six month periods ended June 30, 2005.



|                                                                                                                                            |  |                                         |      |                                       |   |      
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ---- | ------------------------------------- | - | -----
|                                                                                                                                            |  | For the Three Months EndedJune 30, 2005 |      | For the Six Months EndedJune 30, 2005
|                                                                                                                                            |  | (in thousands)                          |      | (in thousands)                       
|Net income, as reported                                                                                                                     |  | $                                       | 575  |                                       | $ | 1,210
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                         | 12   |                                       |   | 24   
|                                                                                                                                            |  |                                         |      |                                       |   |      
|Pro forma net income                                                                                                                        |  | $                                       | 563  |                                       | $ | 1,186
|                                                                                                                                            |  |                                         |      |                                       |   |      
|Earnings per share:                                                                                                                         |  |                                         |      |                                       |   |      
|Basic - as reported                                                                                                                         |  | $                                       | 0.31 |                                       | $ | 0.65 
|Basic - pro forma                                                                                                                           |  | $                                       | 0.30 |                                       | $ | 0.64 
|Diluted - as reported                                                                                                                       |  | $                                       | 0.30 |                                       | $ | 0.63 
|Diluted - pro forma                                                                                                                         |  | $                                       | 0.29 |                                       | $ | 0.61 



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

The following summarizes the net
periodic cost for the three months and six months ended June 30:



|                                    |  |                                    |      |   |                                  |   |      |      |  |   |      |   |  |   |      |  
|----------------------------------- |  | ---------------------------------- | ---- | - | -------------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                    |  | For the Three MonthsEnded June 30, |      |   | For the Six MonthsEnded June 30, |  
|                                    |  | 2006                               |      |   | 2005                             |   |      | 2006 |  |   | 2005 |  
|Service cost                        |  | $                                  |     |   |                                  | $ | 96   |      |  | $ |     |   |  | $ | 193  |  
|Interest cost on benefit obligation |  |                                    | 118  |   |                                  |   | 137  |      |  |   | 236  |   |  |   | 274  |  
|Expected return on plan assets      |  |                                    | (150 | ) |                                  |   | (152 | )    |  |   | (300 | ) |  |   | (304 | )
|Amortization of prior service cost  |  |                                    |     |   |                                  |   | 14   |      |  |   |     |   |  |   | 28   |  
|                                    |  |                                    |      |   |                                  |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost           |  | $                                  | (32  | ) |                                  | $ | 95   |      |  | $ | (64  | ) |  | $ | 191  |  
|                                    |  |                                    |      |   |                                  |   |      |      |  |   |      |   |  |   |      |  

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



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

Introduction

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



7



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##### Table of Contents

Critical Accounting Estimates

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

Summary

At June 30, 2006 total assets had increased $28.3 million, or 6.9%, compared to total assets at December 31, 2005. Loans, net of the allowance for loan losses,
increased $30.1 million, or 11.5%, from December 31, 2005. The growth of the loan portfolio is the main focus on the asset side of the balance sheet. Investing the Banks assets in this area offers the greatest earnings potential, as it
provides a better spread against the Banks increasing cost of funds. Total deposits increased $97,000, or less than 1.0%, when compared to balances at December 31, 2005. The slowed deposit growth is a result of the current market for
deposits, which has become much more competitive as financial institutions have been more aggressive in pricing at current interest rate levels to gather and retain deposits. During the period, the Bank began to meet some of these competitive
pressures by offering certain special product promotions to match these competitors rates. Despite the expected negative impact this strategy had on the net interest margin, the Bank was able to maintain the deposit base it held at prior year
end. Federal Home Loan Bank advances increased $27.4 million, or 119.4%, to fund growth in the loan portfolio.

Net income for the quarter ended
June 30, 2006 was $719,000, or basic earnings per share of $0.38 and fully diluted earnings of $0.37 per share, compared to net income of $575,000, or basic earnings per share of $0.31 and fully diluted earnings of $0.30 per share for the same
period last year. These results for the quarter represent an increase in net income of $144,000, or 25.0%, and increases of 23.4% and 25.4% in basic and fully diluted earnings per share, respectively, compared to the same period last year.

During the first six months of 2006, the Company declared and paid total dividends of $0.40 per share for the six months ended June 30, 2006, which
is the same as the amount paid for the comparable period in 2005. The Companys policy has been to pay dividends out of funds in excess of the needs of the business. The Company has declared and paid cash dividends to shareholders on a
quarterly basis at a rate of $0.20 per share in each quarter of 2005 and 2004 and the first quarter of 2006. In addition, in March 2006, the Company declared a dividend of $0.20 for payment in the second quarter of 2006. In future quarters, the
Company expects to declare and pay dividends in the same quarter.



8



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##### Table of Contents

Investment Portfolio

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



|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       
|------------------------------------------------------------------- |  | ------------------- | ------ | -------------------- | - | --------------------- |  | ---------- | ----- |  | - | ------
|                                                                    |  | AmortizedCost Basis |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|                                                                    |  | (in thousands)     
|Available-for-sale securities:                                      |  |                     |        |                      |   |                       |  |            |       |  |   |       
|June 30, 2006:                                                      |  |                     |        |                      |   |                       |  |            |       |  |   |       
|Debt securities issued by U.S. government corporations and agencies |  | $                   | 15,248 |                      | $ |                      |  | $          | 454   |  | $ | 14,794
|Debt securities issued by states of the                             |  |                     |        |                      |   |                       |  |            |       |  |   |       
|United States or political subdivisions of the states               |  |                     | 972    |                      |   |                      |  |            | 38    |  |   | 934   
|Corporate debt securities                                           |  |                     | 2,968  |                      |   |                      |  |            | 20    |  |   | 2,948 
|Trust preferred securities                                          |  |                     | 3,393  |                      |   |                      |  |            | 93    |  |   | 3,300 
|Marketable equity securities                                        |  |                     | 1,494  |                      |   | 212                   |  |            | 25    |  |   | 1,681 
|Mortgage-backed securities                                          |  |                     | 24,248 |                      |   |                      |  |            | 1,014 |  |   | 23,234
|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       
|                                                                    |  | $                   | 48,323 |                      | $ | 212                   |  | $          | 1,644 |  | $ | 46,891
|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       
|December 31, 2005:                                                  |  |                     |        |                      |   |                       |  |            |       |  |   |       
|Debt securities issued by U.S. government corporations and agencies |  | $                   | 13,494 |                      | $ |                      |  | $          | 355   |  | $ | 13,139
|Debt securities issued by states of the                             |  |                     |        |                      |   |                       |  |            |       |  |   |       
|United States or political subdivisions of the states               |  |                     | 975    |                      |   |                      |  |            | 29    |  |   | 946   
|Corporate debt securities                                           |  |                     | 4,999  |                      |   |                      |  |            | 29    |  |   | 4,970 
|Trust preferred securities                                          |  |                     | 3,415  |                      |   | 20                    |  |            |      |  |   | 3,435 
|Marketable equity securities                                        |  |                     | 1,374  |                      |   | 188                   |  |            | 9     |  |   | 1,553 
|Mortgage-backed securities                                          |  |                     | 24,495 |                      |   |                      |  |            | 809   |  |   | 23,686
|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       
|                                                                    |  | $                   | 48,752 |                      | $ | 208                   |  | $          | 1,231 |  | $ | 47,729
|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       
|                                                                    |  |                     |        |                     
|Held-to-maturity securities:                                        |  |                     |        |                      |   |                       |  |            |       |  |   |       
|June 30, 2006:                                                      |  |                     |        |                      |   |                       |  |            |       |  |   |       
|Debt securities issued by U.S. government corporations and agencies |  | $                   | 39,013 |                      | $ |                      |  | $          | 1,152 |  | $ | 37,861
|Debt securities issued by states of the                             |  |                     |        |                      |   |                       |  |            |       |  |   |       
|United States and political subdivisions of the states              |  |                     | 1,660  |                      |   | 2                     |  |            | 25    |  |   | 1,637 
|Debt securities issued by foreign governments                       |  |                     | 400    |                      |   |                      |  |            | 6     |  |   | 394   
|Mortgage-backed securities                                          |  |                     | 21,939 |                      |   |                      |  |            | 996   |  |   | 20,943
|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       
|                                                                    |  | $                   | 63,012 |                      | $ | 2                     |  | $          | 2,179 |  | $ | 60,835
|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       
|December 31, 2005:                                                  |  |                     |        |                      |   |                       |  |            |       |  |   |       
|Debt securities issued by U.S. government corporations and agencies |  | $                   | 39,013 |                      | $ |                      |  | $          | 841   |  | $ | 38,172
|Debt securities issued by states of the                             |  |                     |        |                      |   |                       |  |            |       |  |   |       
|United States and political subdivisions of the states              |  |                     | 1,927  |                      |   | 3                     |  |            | 9     |  |   | 1,921 
|Debt securities issued by foreign governments                       |  |                     | 400    |                      |   |                      |  |            | 1     |  |   | 399   
|Mortgage-backed securities                                          |  |                     | 24,174 |                      |   |                      |  |            | 771   |  |   | 23,403
|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       
|                                                                    |  | $                   | 65,514 |                      | $ | 3                     |  | $          | 1,622 |  | $ | 63,895
|                                                                    |  |                     |        |                      |   |                       |  |            |       |  |   |       



9



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##### Table of Contents

Loan Portfolio

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



|                                                |  |                |         |   |            |        |   |                   |   |         |            |  |        |  
|----------------------------------------------- |  | -------------- | ------- | - | ---------- | ------ | - | ----------------- | - | ------- | ---------- |  | ------ | -
|                                                |  | June 30, 2006  |         |   | % of Total |        |   | December 31, 2005 |   |         | % of Total | 
|                                                |  | (in thousands) |         |   |            |        |   | (in thousands)    |   |         |            | 
|                                                |  | (unaudited)    |         |   |            |        |   |                   |   |         |            | 
|Commercial, financial and agricultural          |  | $              | 49,811  |   |            | 16.72  | % |                   | $ | 42,034  |            |  | 15.73  | %
|Real estate - construction and land development |  |                | 19,482  |   |            | 6.54   | % |                   |   | 16,413  |            |  | 6.14   | %
|Real estate - residential                       |  |                | 106,671 |   |            | 35.81  | % |                   |   | 98,007  |            |  | 36.67  | %
|Real estate - commercial                        |  |                | 111,543 |   |            | 37.44  | % |                   |   | 98,761  |            |  | 36.95  | %
|Consumer                                        |  |                | 3,670   |   |            | 1.23   | % |                   |   | 4,949   |            |  | 1.85   | %
|Other                                           |  |                | 8,815   |   |            | 2.96   | % |                   |   | 8,968   |            |  | 3.36   | %
|                                                |  |                |         |   |            |        |   |                   |   |         |            |  |        |  
|                                                |  |                | 299,992 |   |            | 100.70 | % |                   |   | 269,132 |            |  | 100.70 | %
|Allowance for loan losses                       |  |                | (2,801  | ) |            | -0.94  | % |                   |   | (2,514  | )          |  | -0.94  | %
|Deferred loan costs, net                        |  |                | 704     |   |            | 0.24   | % |                   |   | 638     |            |  | 0.24   | %
|                                                |  |                |         |   |            |        |   |                   |   |         |            |  |        |  
|Net Loans                                       |  | $              | 297,895 |   |            | 100.00 | % |                   | $ | 267,256 |            |  | 100.00 | %
|                                                |  |                |         |   |            |        |   |                   |   |         |            |  |        |  

Deposits

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



|                      |  |                |         |            |        |   |                   |   |            |  |        |  
|--------------------- |  | -------------- | ------- | ---------- | ------ | - | ----------------- | - | ---------- |  | ------ | -
|                      |  | June 30, 2006  |         | % of Total |        |   | December 31, 2005 |   | % of Total | 
|                      |  | (in thousands) |         |            |        |   | (in thousands)    |   |            | 
|                      |  | (unaudited)    |         |            |        |   |                   |   |            | 
|Demand Deposits       |  | $              | 75,013  |            | 21.69  | % |                   | $ | 78,218     |  | 22.62  | %
|NOW Accounts          |  |                | 67,048  |            | 19.38  | % |                   |   | 59,507     |  | 17.21  | %
|Money Market Accounts |  |                | 74,538  |            | 21.55  | % |                   |   | 78,487     |  | 22.70  | %
|Savings Deposits      |  |                | 56,695  |            | 16.39  | % |                   |   | 61,401     |  | 17.75  | %
|Time Deposits         |  |                | 72,615  |            | 20.99  | % |                   |   | 68,199     |  | 19.72  | %
|                      |  |                |         |            |        |   |                   |   |            |  |        |  
|Total                 |  | $              | 345,909 |            | 100.00 | % |                   | $ | 345,812    |  | 100.00 | %
|                      |  |                |         |            |        |   |                   |   |            |  |        |  

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

Net income for the quarter of $719,000, or basic earnings per share of $0.38 and fully diluted earnings of $0.37 per share,
increased compared to net income of $575,000, or basic earnings per share of $0.31 and fully diluted earnings of $0.30 per share for the same period last year. The results for last year included a non-recurring charge, net of tax, of $106,000
related to severance and consulting payments to the former CFO. After adjusting for the one-time charge, net income would have been $681,000, or basic earnings per share of $0.36 and fully diluted earnings of $0.35 per share for the 2005 period. The
2006 results represent an increase in net income of $38,000, or 5.6%, and increases of 5.6% and 5.7% in basic and fully diluted earnings per share, respectively, compared to the same period last year after adjusting for the non-recurring charge.

Total interest and dividend income, when compared to the same period last year, increased by $1.04 million, or 22.1%. Interest and fees on loans, which
increased by $1.05 million, or 28.8%, from the same period last year, accounted for this increase. The current rising interest rate environment has led to the increase in the Companys yield on assets. This has been perpetuated by growth in the
loan portfolio, the area that is responsible for the Companys highest asset yields. Additionally, total interest and dividend income was negatively affected by the Federal Home Loan Banks decision to postpone declaring their quarterly
dividend to the third quarter of 2006. Without a dividend declaration in the second quarter of 2006, the Company was unable to recognize approximately $40,000 of dividend income for the quarter.

Total interest expense increased by $971,000, or 86.5%, compared to the same period last year. The increase was partially comprised of a $264,000, or 24.6%, increase in
deposit interest expense, which was fueled by an increase in the average interest rate paid on deposits, necessitated by the current rate environment. The increase in interest expense was primarily attributed to interest on other borrowed funds,
primarily consisting of Federal Home Loan Bank advances. Interest paid on these borrowings increased $707,000, or 1,472.9%, from the same period last year. This was due to an increase in the amount of borrowings by the Bank to fund loan portfolio
growth and deposit outflow.



10



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##### Table of Contents

The current interest rate and operating environment are presenting the Bank with a number of challenges. Interest rates
have continued to rise, increasing the Banks cost of funds and compressing the Banks net interest margin. The additional loan growth, while at smaller margins, has allowed the Bank to offset the increased interest costs and improve the
core earnings of the Bank.

The Companys net interest margin decreased by approximately 33 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:



|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|-------------------------------------------------- |  | --------------------------------------- | ------- | ---------------- | --------------------------------------- | ----- | ---------- |  | ---- | -------------- |  | ---------------- | ------- |  | ---------- | ----- | -- |  | ---- | -
|                                                   |  | For the Three Months EndedJune 30, 2006 |         |                  | For the Three Months EndedJune 30, 2005 |      
|                                                   |  | AverageBalance                          |         | Interest Inc/Exp |                                         |       | Yield/Rate |  |      | AverageBalance |  | Interest Inc/Exp |         |  | Yield/Rate |      
|                                                   |  | (in thousands)                          |         | (in thousands)   |                                         |       |            |  |      | (in thousands) |  | (in thousands)   |         |  |            |      
|                                                   |  | (unaudited)                             |         | (unaudited)      |                                         |       |            |  |      | (unaudited)    |  | (unaudited)      |         |  |            |      
|Assets                                             |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Federal funds sold and interest - bearing deposits |  | $                                       | 453     |                  | $                                       | 5     |            |  | 3.98 | %              |  | $                | 9,258   |  | $          | 74    |    |  | 3.24 | %
|Investments                                        |  |                                         | 112,854 |                  |                                         | 1,092 | *          |  | 3.88 | %              |  |                  | 113,275 |  |            | 1,023 | *  |  | 3.66 | %
|Loans                                              |  |                                         | 292,133 |                  |                                         | 4,732 | **         |  | 6.50 | %              |  |                  | 245,129 |  |            | 3,678 | ** |  | 6.09 | %
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Total interest-earning assets                      |  | $                                       | 405,440 |                  |                                         | 5,829 |            |  | 5.77 | %              |  | $                | 367,662 |  |            | 4,775 |    |  | 5.27 | %
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Liabilities                                        |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Savings deposits                                   |  | $                                       | 58,221  |                  |                                         | 78    |            |  | 0.54 | %              |  | $                | 67,707  |  |            | 106   |    |  | 0.63 | %
|NOW accounts                                       |  |                                         | 58,624  |                  |                                         | 38    |            |  | 0.26 | %              |  |                  | 66,013  |  |            | 59    |    |  | 0.36 | %
|Money market accounts                              |  |                                         | 78,444  |                  |                                         | 608   |            |  | 3.11 | %              |  |                  | 78,098  |  |            | 396   |    |  | 2.06 | %
|Time deposits                                      |  |                                         | 67,730  |                  |                                         | 613   |            |  | 3.63 | %              |  |                  | 74,314  |  |            | 514   |    |  | 2.81 | %
|FHLB advances                                      |  |                                         | 53,075  |                  |                                         | 671   |            |  | 5.07 | %              |  |                  | 913     |  |            | 12    |    |  | 5.39 | %
|Repurchase agreements                              |  |                                         | 10,460  |                  |                                         | 85    |            |  | 3.25 | %              |  |                  | 6,160   |  |            | 36    |    |  | 2.38 | %
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Total interest-bearing liabilities                 |  |                                         | 326,554 |                  |                                         | 2,093 |            |  | 2.57 | %              |  |                  | 293,205 |  |            | 1,123 |    |  | 1.55 | %
|Non-interest-bearing deposits                      |  |                                         | 73,059  |                  |                                         |      |            |  |      |                |  |                  | 73,336  |  |            |      |    |  |      |  
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Total deposits                                     |  | $                                       | 399,613 |                  |                                         | 2,093 |            |  | 2.10 | %              |  | $                | 366,541 |  |            | 1,123 |    |  | 1.24 | %
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Net interest income                                |  |                                         |         |                  | $                                       | 3,736 |            |  |      |                |  |                  |         |  | $          | 3,652 |    |  |      |  
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Net interest spread                                |  |                                         |         |                  |                                         |       |            |  | 3.67 | %              |  |                  |         |  |            |       |    |  | 4.03 | %
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Net interest margin                                |  |                                         |         |                  |                                         |       |            |  | 3.70 | %(1)           |  |                  |         |  |            |       |    |  | 4.03 | %
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Tax Equivalent Income Adjustment:                  |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|State and Muncipal Investment Income               |  |                                         |         |                  | $                                       | 12    | *          |  |      |                |  |                  |         |  | $          | 9     | *  |  |      |  
|Industrial Revenue Bond Income                     |  |                                         |         |                  |                                         | 58    | **         |  |      |                |  |                  |         |  |            | 48    | ** |  |      |  
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Total Tax Equivalent Income Adjustment             |  |                                         |         |                  | $                                       | 70    |            |  |      |                |  |                  |         |  | $          | 57    |    |  |      |  
|                                                   |  |                                         |         |                  |                                         |       |            |  |      |                |  |                  |         |  |            |       |    |  |      |  

---

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

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

|(1) | During the second quarter of 2006, the Federal Home Loan Bank did not declare a dividend on
its stock. Excluding FHLB stock from earning assets would have resulted in a net interest margin of 3.73%.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total noninterest income for the
three months ended June 30, 2006 was $1.10 million, a decrease of approximately $91,000 from the same period last year. The decrease was mainly in other income, primarily due to prior year vendor contract renegotiations that resulted in
recoveries by the Bank.

Total noninterest expense decreased by $258,000, or 6.8%, when compared to the same period last year. This decrease is partially
attributed to salaries and employee benefits, which decreased $146,000, or 6.4%. This decrease is a result of the Banks efforts to improve overall efficiency. Another area where the Bank decreased expenses was in professional fees, which
decreased by $118,000, or 43.1%, from the same period last year. This is due to decreased consulting expenses in the area of Sarbanes-Oxley compliance and other one-time items.



11



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##### Table of Contents

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



|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|------------------------------------------------ |  | ---------------------- | ----- | ------------------- | - | ----- |  | - | ---- | - |  | ------- | -
|                                                 |  | June 30,               |       | Increase (Decrease) |  
|                                                 |  | 2006                   |       | 2005                |   | $     |  |   | %    |  
|                                                 |  | (Dollars in thousands) |      
|Noninterest income:                              |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Income from fiduciary activities                 |  | $                      | 489   |                     | $ | 472   |  | $ | 17   |   |  | 3.60    | %
|Fees from sale of non-deposit products           |  |                        | 71    |                     |   | 67    |  |   | 4    |   |  | 5.97    | %
|Service charges on deposit accounts              |  |                        | 141   |                     |   | 143   |  |   | (2   | ) |  | -1.40   | %
|Other deposit fees                               |  |                        | 159   |                     |   | 144   |  |   | 15   |   |  | 10.42   | %
|Gains on sales of loans, net                     |  |                        |      |                     |   | 14    |  |   | (14  | ) |  | -100.00 | %
|Income on cash surrender value of life insurance |  |                        | 52    |                     |   | 51    |  |   | 1    |   |  | 1.96    | %
|Other income                                     |  |                        | 184   |                     |   | 296   |  |   | (112 | ) |  | -37.84  | %
|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Total noninterest income                         |  | $                      | 1,096 |                     | $ | 1,187 |  | $ | (91  | ) |  | -7.67   | %
|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Noninterest expense:                             |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Salaries and employee benefits                   |  | $                      | 2,128 |                     | $ | 2,274 |  | $ | (146 | ) |  | -6.42   | %
|Director fees                                    |  |                        | 88    |                     |   | 69    |  |   | 19   |   |  | 27.54   | %
|Occupancy expense                                |  |                        | 334   |                     |   | 344   |  |   | (10  | ) |  | -2.91   | %
|Equipment expense                                |  |                        | 200   |                     |   | 151   |  |   | 49   |   |  | 32.45   | %
|Data processing fees                             |  |                        | 189   |                     |   | 202   |  |   | (13  | ) |  | -6.44   | %
|Marketing and public relations                   |  |                        | 93    |                     |   | 122   |  |   | (29  | ) |  | -23.77  | %
|Professional fees                                |  |                        | 156   |                     |   | 274   |  |   | (118 | ) |  | -43.07  | %
|Other expense                                    |  |                        | 378   |                     |   | 388   |  |   | (10  | ) |  | -2.58   | %
|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Total noninterest expense                        |  | $                      | 3,566 |                     | $ | 3,824 |  | $ | (258 | ) |  | -6.75   | %
|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  

The income tax provision for the three months ended June 30, 2006 increased by $64,000, or 24.3%, from the
same period last year. This is simply a result of increased net income, as the effective tax rate is consistent with that of the same period last year.

Comparison of operating results for the six months ended June 30, 2006 and June 30, 2005

Net income for
the six months ended June 30, 2006 of $1.5 million, or basic earnings per share of $0.77 and fully diluted earnings of $0.75 per share, increased compared to net income of $1.2 million, or basic earnings per share of $0.65 and fully diluted
earnings of $0.63 per share for the same period last year. After adjusting for the non-recurring charge for severance and consulting payments to the former CFO, net of tax, of $106,000, net income would have been $1.3 million, or basic earnings per
share of $0.70 and fully diluted earnings of $0.68 per share for the 2005 period. The 2006 results represent an increase in net income of $141,000, or 10.7%, and increases of 10.0% and 10.3% in basic and fully diluted earnings per share,
respectively, compared to the same period last year after adjusting for the non-recurring charge.

Total interest and dividend income, when compared to the
same period last year, increased by $1.95 million, or 21.0%. Interest and fees on loans, which increased by $1.87 million, or 26.2%, from the same period last year, accounted for this increase. As stated with the results for the quarter, the current
rising interest rate environment and loan portfolio growth are the cause for the increase in interest and dividend income.

Total interest expense
increased by $1.79 million, or 91.7%, compared to the same period last year. The increase was partially comprised of a $727,000, or 39.8%, increase in deposit interest expense, which was fueled by an increase in the average interest rate paid on
deposits, necessitated by the current rate environment. The remaining increase in interest expense was attributed to interest on other borrowed funds, primarily consisting of Federal Home Loan Bank advances. Interest paid on these borrowings
increased $1.07 million, or 819.2%, from the same period last year. This was due to an increase in the amount of borrowings by the Bank to fund loan portfolio growth and deposit outflow.

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



12



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##### Table of Contents

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



|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|------------------------------------------------ |  | ------------------------------------- | ------- | ---------------- | ------------------------------------- | ------ | ---------- |  | ---- | -------------- |  | ---------------- | ------- |  | ---------- | ----- | -- |  | ---- | -
|                                                 |  | For the Six Months EndedJune 30, 2006 |         |                  | For the Six Months EndedJune 30, 2005 |       
|                                                 |  | AverageBalance                        |         | Interest Inc/Exp |                                       |        | Yield/Rate |  |      | AverageBalance |  | Interest Inc/Exp |         |  | Yield/Rate |      
|                                                 |  | (in thousands)                        |         | (in thousands)   |                                       |        |            |  |      | (in thousands) |  | (in thousands)   |         |  |            |      
|                                                 |  | (unaudited)                           |         | (unaudited)      |                                       |        |            |  |      | (unaudited)    |  | (unaudited)      |         |  |            |      
|Assets                                           |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Federal funds sold and interest-bearing deposits |  | $                                     | 361     |                  | $                                     | 8      |            |  | 4.33 | %              |  | $                | 5,542   |  | $          | 74    |    |  | 2.69 | %
|Investments                                      |  |                                       | 113,517 |                  |                                       | 2,230  | *          |  | 3.96 | %              |  |                  | 114,547 |  |            | 2,117 | *  |  | 3.73 | %
|Loans                                            |  |                                       | 283,136 |                  |                                       | 9,134  | **         |  | 6.51 | %              |  |                  | 242,609 |  |            | 7,241 | ** |  | 6.02 | %
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Total interest-earning assets                    |  | $                                     | 397,014 |                  |                                       | 11,372 |            |  | 5.78 | %              |  | $                | 362,698 |  |            | 9,432 |    |  | 5.24 | %
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Liabilities                                      |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Savings deposits                                 |  | $                                     | 59,627  |                  |                                       | 161    |            |  | 0.54 | %              |  | $                | 68,914  |  |            | 202   |    |  | 0.59 | %
|NOW accounts                                     |  |                                       | 57,905  |                  |                                       | 71     |            |  | 0.25 | %              |  |                  | 65,782  |  |            | 98    |    |  | 0.30 | %
|Money market accounts                            |  |                                       | 80,473  |                  |                                       | 1,181  |            |  | 2.96 | %              |  |                  | 75,767  |  |            | 670   |    |  | 1.78 | %
|Time deposits                                    |  |                                       | 67,634  |                  |                                       | 1,139  |            |  | 3.40 | %              |  |                  | 66,778  |  |            | 855   |    |  | 2.58 | %
|FHLB advances                                    |  |                                       | 42,897  |                  |                                       | 1,034  |            |  | 4.86 | %              |  |                  | 3,555   |  |            | 54    |    |  | 3.04 | %
|Repurchase agreements                            |  |                                       | 10,111  |                  |                                       | 161    |            |  | 3.21 | %              |  |                  | 6,852   |  |            | 76    |    |  | 2.25 | %
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Total interest-bearing liabilities               |  |                                       | 318,647 |                  |                                       | 3,747  |            |  | 2.37 | %              |  |                  | 287,648 |  |            | 1,955 |    |  | 1.37 | %
|Non-interest-bearing deposits                    |  |                                       | 72,412  |                  |                                       |       |            |  |      |                |  |                  | 72,006  |  |            |      |    |  |      |  
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Total deposits                                   |  | $                                     | 391,059 |                  |                                       | 3,747  |            |  | 1.93 | %              |  | $                | 359,654 |  |            | 1,955 |    |  | 1.10 | %
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Net interest income                              |  |                                       |         |                  | $                                     | 7,625  |            |  |      |                |  |                  |         |  | $          | 7,477 |    |  |      |  
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Net interest spread                              |  |                                       |         |                  |                                       |        |            |  | 3.85 | %              |  |                  |         |  |            |       |    |  | 4.14 | %
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Net interest margin                              |  |                                       |         |                  |                                       |        |            |  | 3.87 | %              |  |                  |         |  |            |       |    |  | 4.16 | %
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Tax Equivalent Income Adjustment:                |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|State and Muncipal Investment Income             |  |                                       |         |                  | $                                     | 25     | *          |  |      |                |  |                  |         |  | $          | 20    | *  |  |      |  
|Industrial Revenue Bond Income                   |  |                                       |         |                  |                                       | 117    | **         |  |      |                |  |                  |         |  |            | 94    | ** |  |      |  
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  
|Total Tax Equivalent Income Adjustment           |  |                                       |         |                  | $                                     | 142    |            |  |      |                |  |                  |         |  | $          | 114   |    |  |      |  
|                                                 |  |                                       |         |                  |                                       |        |            |  |      |                |  |                  |         |  |            |       |    |  |      |  

---

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

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

Total noninterest income for the six
months ended June 30, 2006 was $2.15 million, consistent with the total from the same period last year.

Total noninterest expense decreased by
$240,000, or 3.2%, when compared to the same period last year. While the company realized increases in certain operating expenses, such as equipment and marketing, these increases were anticipated, as they are inherent in the strategy of growing the
Bank. Most other operating expenses have decreased from the amount reported for the comparable period last year, a result of the Banks focus on improving its overall efficiency.

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



|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|------------------------------------------------ |  | ---------------------- | ----- | ------------------- | - | ----- |  | - | ---- | - |  | ------- | -
|                                                 |  | June 30,               |       | Increase (Decrease) |  
|                                                 |  | 2006                   |       | 2005                |   | $     |  |   | %    |  
|                                                 |  | (Dollars in thousands) |      
|Noninterest income:                              |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Income from fiduciary activities                 |  | $                      | 921   |                     | $ | 895   |  | $ | 26   |   |  | 2.91    | %
|Fees from sale of non-deposit products           |  |                        | 122   |                     |   | 131   |  |   | (9   | ) |  | -6.87   | %
|Service charges on deposit accounts              |  |                        | 279   |                     |   | 280   |  |   | (1   | ) |  | -0.36   | %
|Other deposit fees                               |  |                        | 305   |                     |   | 271   |  |   | 34   |   |  | 12.55   | %
|Gains on sales of loans, net                     |  |                        |      |                     |   | 14    |  |   | (14  | ) |  | -100.00 | %
|Income on cash surrender value of life insurance |  |                        | 104   |                     |   | 104   |  |   |     |   |  | 0.00    | %
|Other income                                     |  |                        | 422   |                     |   | 448   |  |   | (26  | ) |  | -5.80   | %
|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Total noninterest income                         |  | $                      | 2,153 |                     | $ | 2,143 |  | $ | 10   |   |  | 0.47    | %
|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Noninterest expense:                             |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Salaries and employee benefits                   |  | $                      | 4,366 |                     | $ | 4,434 |  | $ | (68  | ) |  | -1.53   | %
|Director fees                                    |  |                        | 167   |                     |   | 143   |  |   | 24   |   |  | 16.78   | %
|Occupancy expense                                |  |                        | 673   |                     |   | 731   |  |   | (58  | ) |  | -7.93   | %
|Equipment expense                                |  |                        | 395   |                     |   | 309   |  |   | 86   |   |  | 27.83   | %
|Data processing fees                             |  |                        | 394   |                     |   | 430   |  |   | (36  | ) |  | -8.37   | %
|Marketing and public relations                   |  |                        | 194   |                     |   | 186   |  |   | 8    |   |  | 4.30    | %
|Professional fees                                |  |                        | 284   |                     |   | 436   |  |   | (152 | ) |  | -34.86  | %
|Other expense                                    |  |                        | 752   |                     |   | 796   |  |   | (44  | ) |  | -5.53   | %
|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  
|Total noninterest expense                        |  | $                      | 7,225 |                     | $ | 7,465 |  | $ | (240 | ) |  | -3.22   | %
|                                                 |  |                        |       |                     |   |       |  |   |      |   |  |         |  



13



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##### Table of Contents

The income tax provision for the six months ended June 30, 2006 increased by $133,000, or 25.1%, from the same
period last year. This is simply a result of increased net income, as the effective tax rate is consistent with that of the same period last year.

Provisions and Allowance for Loan Losses

Credit risk is inherent in the business of extending loans. The Bank
maintains an allowance for credit losses through charges to earnings. A loan loss provision of $150,000 was made during the three months ended June 30, 2006, compared to $120,000 for the same period last year. The total loan loss provision for
the six months ended June 30, 2006 was $290,000, compared to $260,000 for the same period in 2005. The total allowance for loan losses was 0.94% of total loans at June 30, 2006 and December 31, 2005.

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

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

A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future
cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

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 six months ended June 30, 2006 and 2005:



|                                           |  |                |       |   |                |   |       |  
|------------------------------------------ |  | -------------- | ----- | - | -------------- | - | ----- | -
|                                           |  | 2006           |       |   | 2005           |  
|                                           |  | (in thousands) |       |   | (in thousands) |  
|                                           |  | (unaudited)    |      
|Balance as of January 1st                  |  | $              | 2,514 |   |                | $ | 2,181 |  
|Loans charged off                          |  |                | (8    | ) |                |   | (9    | )
|Provision for loan losses                  |  |                | 290   |   |                |   | 260   |  
|Recoveries of loans previously charged off |  |                | 5     |   |                |   | 16    |  
|                                           |  |                |       |   |                |   |       |  
|Balance as of June 30th                    |  | $              | 2,801 |   |                | $ | 2,448 |  
|                                           |  |                |       |   |                |   |       |  

At June 30, 2006, the allowance for loan losses represented 14,742.1% of non-performing loans, which totaled
$19,000. Non-performing loans represented less than 0.01% of total loans and mortgages held-for-sale at June 30, 2006. At June 30, 2005, the allowance for loan loss represented 1,390.9% of non-performing loans, which totaled $176,000.
Non-performing loans represented 0.1% of total loans and mortgages held-for-sale. The decrease in non-performing loans is a result of several loans that were either brought current or paid off.



14



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##### Table of Contents

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 June 30, 2006, the Company had total capital of $29.3 million, an increase of $574,000, or 2.0%, from total capital as of December 31, 2005. The net change in the Banks capital reflects current
year income, reduced by dividends declared, and the increase in the net unrealized loss on securities available-for-sale.

The Companys policy has
been to pay dividends out of funds in excess of the needs of the business. The Company has declared and paid cash dividends to shareholders on a quarterly basis at a rate of $0.20 per share in each quarter of 2005 and 2004 and the first quarter of
2006. In addition, in March 2006, the Company declared a dividend of $0.20 for payment in the second quarter of 2006. In future quarters, the Company expects to declare and pay dividends in the same quarter. Generally, banks are required to maintain
Tier 1 capital at a level equal to or greater than 4.0% of their average total assets. As of June 30, 2006, the Banks Tier 1 capital amounted to 6.45% of average total assets. At June 30, 2006, the Banks ratio of risk-based
capital to risk-weighted assets amounted to 9.74%, which satisfies the applicable risk-based capital requirements. As of December 31, 2005, the Banks Tier 1 capital amounted to 6.75% of average assets and risk-based capital amounted to
10.47% of total risk-based assets.

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 June 30, 2006, the Companys Tier 1 capital amounted to 6.97% of average total assets. At June 30, 2006, the Companys ratio of risk-based capital to risk weighted assets amounted to 10.43%,
which satisfies the applicable risk-based capital requirements. As of December 31, 2005, the Companys Tier 1 capital amounted to 6.84% of average assets and risk-based capital amounted to 11.19% of total risk-based assets.

To provide for its future capital needs, the Company took the steps necessary to increase the authorized number of its shares of common stock. On July 19, 2006, the
Company completed the sale of 805,000 shares of its common stock, including 105,000 shares of common stock sold pursuant to the exercise of the underwriters over-allotment option, at an offering price of $22.00 per share in a public offering
underwritten by Sandler ONeill & Partners, L.P. Of the more than $16 million in net proceeds from the offering, the Company contributed $12 million in additional capital to the Bank to assist in funding its growth and expansion plans.
The financial statements and results of operations contained in this report do not reflect the results of such offering, which was completed in the third calendar quarter of 2006.

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

Liquidity

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

Certain marketable investment securities,
particularly those of shorter maturities, are the principal source of asset liquidity. The Company maintains such securities in an available-for-sale account as a liquidity resource. Securities maturing in one year or less amounted to $7.7 million
at June 30, 2006; additionally, a minimum amount of contractual payments in the amount of $10.2 million for the mortgage-backed securities portfolio is due within one year at June 30, 2006. Assets such as federal funds sold, mortgages held
for sale, pre-payments and payoffs on mortgage-backed securities, as well as maturing loans, are also sources of liquidity. The Companys objectives are to be substantially neutral with respect to interest rate sensitivity and maintain a net
cumulative gap at one year of less than 15% of total earning assets. The Companys current practices are consistent with these objectives.



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Off Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. In the opinion of
Management, these off-balance sheet arrangements are not likely to have a material effect on the Companys financial condition, results of operations, or liquidity. As of June 30, 2006, total off-balance sheet financial commitments
amounted to approximately $68.3 million.

Forward-Looking Statements

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



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



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

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

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 six months ended June 30, 2006 was 3.87%, in comparison to the 4.16% net interest margin for the six months ended June 30, 2005. Interest rate risk is the exposure of net interest income to movements in interest rates. In addition to
directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and re-financings, the carrying value of
investment securities classified as available for sale and the flow and mix of deposits.

The Companys Asset/Liability Management Committee is
comprised of the President and Chief Executive Officer of the Company, the Executive Vice President and Chief Financial Officer, the Executive Vice President and Senior Loan Officer, the Executive Vice President of Retail Banking, the Senior Vice
President and Chief Operations Officer, the Senior Vice President and Chief Risk Officer and various lending, retail and finance officers. The Committee is responsible for managing interest rate risk in accordance with policies approved by the Board
of



16



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##### Table of Contents

Directors regarding acceptable levels of interest rate risk, liquidity and capital. The Committee meets weekly and develops new products, sets the rates paid
on deposits, approves loan pricing and reviews investment transactions. This Asset/Liability Management Committee reports to the Board of Directors ALCO Committee, which is comprised of several Directors and the President and Chief Executive
Officer.

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

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

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

As of June 30, 2006, the capital ratio of the Company on an EVE basis, at current rate levels, is 11.5%. Based on the most recent analysis it is estimated that an increase in interest rates over the next year of
200 basis points (for example, an increase in the prime rate from 8.25% to 10.25%) would result in an EVE capital ratio of 12.2%. Alternatively, if interest rates were to decrease over the next year by 200 basis points, the EVE capital ratio is
estimated to be 9.7%. 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.



|                    |  |                             |        |                             |                   |      |                             |  |                             |   |  |   |        |  |   |      |   |  |       |  
|------------------- |  | --------------------------- | ------ | --------------------------- | ----------------- | ---- | --------------------------- |  | --------------------------- | - |  | - | ------ |  | - | ---- | - |  | ----- | -
|                    |  | June 30, 2006               |        |                             | December 31, 2005 |     
|                    |  | Projectednet interestincome |        | Change fromyear 1 base case |                   |      | Projectednet interestincome |  | Change fromyear 1 base case |  
|Year 1 projections: |  |                             |        |                             |                   |      |                             |  |                             |   |  |   |        |  |   |      |   |  |       |  
|Down 200BP          |  | $                           | 15,783 |                             | $                 | 296  |                             |  | 1.91                        | % |  | $ | 15,743 |  | $ | 18   |   |  | 0.11  | %
|Base                |  |                             | 15,487 |                             |                   |     |                             |  |                            |   |  |   | 15,725 |  |   |     |   |  |      |  
|Up 200BP            |  |                             | 14,886 |                             |                   | (601 | )                           |  | -3.88                       | % |  |   | 15,346 |  |   | (379 | ) |  | -2.41 | %
|                    |  |                             |        |                             |                   |     
|Year 2 projections: |  |                             |        |                             |                   |      |                             |  |                             |   |  |   |        |  |   |      |   |  |       |  
|Down 200BP          |  | $                           | 15,921 |                             | $                 | 434  |                             |  | 2.80                        | % |  | $ | 15,426 |  | $ | (299 | ) |  | -1.90 | %
|Base                |  |                             | 16,220 |                             |                   | 733  |                             |  | 4.73                        | % |  |   | 16,151 |  |   | 426  |   |  | 2.71  | %
|Up 200BP            |  |                             | 15,913 |                             |                   | 426  |                             |  | 2.75                        | % |  |   | 16,169 |  |   | 444  |   |  | 2.82  | %

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

ITEM 4. CONTROLS AND PROCEDURES.

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

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

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



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##### Table of Contents

PART II  OTHER INFORMATION



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

The Companys Annual Meeting of Shareholders was held at the Danvers office of Beverly National Bank,
Danvers, Massachusetts, on the 25th day of April, 2006 at 9:00 a.m. At the Meeting, the following matters were submitted to a vote with the results as follows:

1. The proposal to fix the number of directors at eleven (11) who shall constitute the full Board of Directors was approved by the requisite majority vote of shareholders. The votes for fixing the number of directors were as follows:



|               |  |                    |  |          
|-------------- |  | ------------------ |  | ---------
|FOR APPROVAL |  | AGAINST APPROVAL |  | ABSTAIN
|               |  |                   
|1,466,657      |  | 5,364              |  | 4,450    
|Number         |  | Number             |  | Number   

2. All of the four (4) nominees for director received in excess of the requisite plurality of the votes cast
at the meeting and were elected and qualified. The votes cast FOR, AGAINST and ABSTAIN on the proposal to elect each of the following four (4) Directors of the Company, who, together with the Directors whose
terms of office do not expire at this meeting, will constitute the full Board of Directors and will serve for a term of three (3) years were as follows:



|                    |  |                |  |                    |  |          
|------------------- |  | -------------- |  | ------------------ |  | ---------
|                    |  | FOR APPROVAL |  | AGAINST APPROVAL |  | ABSTAIN
|                    |  |                | 
|John N. Fisher      |  | 1,327,252      |  | 147,503            |  | 1,715    
|                    |  |                |  |                    |  |          
|                    |  | Number         |  | Number             |  | Number   
|                    |  |                | 
|Alice B. Griffin    |  | 1,295,878      |  | 179,192            |  | 1,400    
|                    |  |                |  |                    |  |          
|                    |  | Number         |  | Number             |  | Number   
|                    |  |                | 
|Robert W. Luscinski |  | 1,309,516      |  | 165,554            |  | 1,400    
|                    |  |                |  |                    |  |          
|                    |  | Number         |  | Number             |  | Number   
|                    |  |                | 
|Pamela C. Scott     |  | 1,282,332      |  | 38,511             |  | 155,627  
|                    |  |                |  |                    |  |          
|                    |  | Number         |  | Number             |  | Number   

3. The appointment of Shatswell, MacLeod & Company, P.C. as independent auditors for the Company for the
year ending December 31, 2006 was ratified because the votes for such appointment exceeded the votes against such appointment. The votes cast FOR, AGAINST and ABSTAIN on the proposal to ratify the appointment
of Shatswell, MacLeod & Company, P.C. to act as independent auditors for the fiscal year ended December 31, 2006 are as follows:



|               |  |                    |  |          
|-------------- |  | ------------------ |  | ---------
|FOR APPROVAL |  | AGAINST APPROVAL |  | ABSTAIN
|               |  |                   
|1,468,749      |  | 862                |  | 6,860    
|Number         |  | Number             |  | Number   



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##### Table of Contents

4. The proposal to amend the Restated Articles of Organization to increase the authorized number of shares of the
Companys common stock to 5,000,000 was approved by the requisite majority vote of shareholders. The votes cast FOR, AGAINST and ABSTAIN on the proposal to amend the Companys Restated Articles of
Organization to increase the authorized number of shares of common stock from 2,500,000 to 5,000,000 are as follows:



|               |  |                    |  |          
|-------------- |  | ------------------ |  | ---------
|FOR APPROVAL |  | AGAINST APPROVAL |  | ABSTAIN
|               |  |                   
|1,205,278      |  | 262,027            |  | 9,165    
|Number         |  | Number             |  | Number   



|        |  |                    |  |               
|------- |  | ------------------ |  | --------------
|Item 5. |  | Other Information. |  | Not applicable
|        |  |                   
|Item 6. |  | Exhibits.          |  |               



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



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##### 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: August 10, 2006 |  | By:                          |  | /s/ Donat A. Fournier                               
|                      |  |                              |  | Donat A. Fournier                                   
|                      |  |                              |  | President and Chief Executive Officer               
|                      |  |                             
|Date: August 10, 2006 |  | By:                          |  | /s/ Michael O. Gilles                               
|                      |  |                              |  | Michael O. Gilles                                   
|                      |  |                              |  | Executive Vice President and Chief Financial Officer



20