##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







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

For the Quarterly period ended September 30, 2008

OR



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

For the transition period from  to

Commission file number 33-22224-B





Beverly National Corporation

(Name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Massachusetts                                                  |  | 04-2832201                          
|(State or other jurisdiction 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, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of November 4, 2008: 2,663,545.









---

##### Table of Contents

BEVERLY NATIONAL CORPORATION

INDEX



|                              |  |                                                                                                                         |  |   
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                                        
|                              |  |                                                                                                                        
|Item 1.                       |  | Financial Statements                                                                                                    |  |   
|                              |  |                                                                                                                        
|                              |  | Condensed Consolidated Balance Sheets at September 30, 2008 (Unaudited) and December 31, 2007                           |  | 3 
|                              |  |                                                                                                                        
|                              |  | Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited) |  | 4 
|                              |  |                                                                                                                        
|                              |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)       |  | 5 
|                              |  |                                                                                                                        
|                              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                        |  | 6 
|                              |  |                                                                                                                        
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 9 
|                              |  |                                                                                                                        
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                              |  | 17
|                              |  |                                                                                                                        
|Item 4T.                      |  | Controls and Procedures                                                                                                 |  | 18
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                        
|                              |  |                                                                                                                        
|Item 1.                       |  | Legal Proceedings                                                                                                       |  | 19
|                              |  |                                                                                                                        
|Item 1A.                      |  | Risk Factors                                                                                                            |  | 19
|                              |  |                                                                                                                        
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                             |  | 19
|                              |  |                                                                                                                        
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                         |  | 19
|                              |  |                                                                                                                        
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                     |  | 19
|                              |  |                                                                                                                        
|Item 5.                       |  | Other Information                                                                                                       |  | 19
|                              |  |                                                                                                                        
|Item 6.                       |  | Exhibits                                                                                                                |  | 19
|                              |  |                                                                                                                        
|                              |  | Signatures                                                                                                              |  | 20



2



---

##### Table of Contents

PART I - FINANCIAL INFORMATION



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

BEVERLY
NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                                                         |  | September 30,2008 |         |   | December 31,2007 |  
|                                                                                                                                                                                                                                                                         |  | (unaudited)       |         |   |                  |  
|ASSETS                                                                                                                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Cash and due from banks                                                                                                                                                                                                                                                  |  | $                 | 10,482  |   |                  | $ | 10,752  |  
|Federal funds sold                                                                                                                                                                                                                                                       |  |                   | 3,633   |   |                  |   | 3,706   |  
|Interest-bearing demand deposits with other banks                                                                                                                                                                                                                        |  |                   | 758     |   |                  |   | 115     |  
|Short-term investments                                                                                                                                                                                                                                                   |  |                   | 363     |   |                  |   | 922     |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                                |  |                   | 15,236  |   |                  |   | 15,495  |  
|Investments in available-for-sale securities (at fair value)                                                                                                                                                                                                             |  |                   | 110,394 |   |                  |   | 114,793 |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                                                                                                    |  |                   | 4,086   |   |                  |   | 3,452   |  
|Federal Reserve Bank stock, at cost                                                                                                                                                                                                                                      |  |                   | 553     |   |                  |   | 553     |  
|Loans, net of the allowance for loan losses of $4,112 and $3,614, respectively                                                                                                                                                                                           |  |                   | 332,137 |   |                  |   | 318,356 |  
|Premises and equipment                                                                                                                                                                                                                                                   |  |                   | 7,773   |   |                  |   | 7,321   |  
|Bank owned life insurance                                                                                                                                                                                                                                                |  |                   | 6,876   |   |                  |   | 6,661   |  
|Accrued interest receivable                                                                                                                                                                                                                                              |  |                   | 1,898   |   |                  |   | 1,805   |  
|Other assets                                                                                                                                                                                                                                                             |  |                   | 5,758   |   |                  |   | 4,355   |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                                                                                             |  | $                 | 484,711 |   |                  | $ | 472,791 |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                                                                                                         |  |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                     |  |                   |         |   |                  |   |         |  
|Deposits:                                                                                                                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Noninterest-bearing                                                                                                                                                                                                                                                      |  | $                 | 72,216  |   |                  | $ | 72,425  |  
|Interest-bearing                                                                                                                                                                                                                                                         |  |                   | 285,121 |   |                  |   | 277,885 |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total deposits                                                                                                                                                                                                                                                           |  |                   | 357,337 |   |                  |   | 350,310 |  
|Federal Home Loan Bank advances                                                                                                                                                                                                                                          |  |                   | 70,326  |   |                  |   | 59,616  |  
|Securities sold under agreements to repurchase                                                                                                                                                                                                                           |  |                   | 10,763  |   |                  |   | 11,638  |  
|Other liabilities                                                                                                                                                                                                                                                        |  |                   | 5,006   |   |                  |   | 5,462   |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                                                                                        |  |                   | 443,432 |   |                  |   | 427,026 |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                                                                                                                                    |  |                   |         |   |                  |   |         |  
|Preferred stock, $1.00 par value per share; 300,000 shares authorized; issued and outstanding none                                                                                                                                                                       |  |                   |        |   |                  |   |        |  
|Common stock, $2.50 par value per share; 5,000,000 shares authorized; issued 2,912,437 shares as of September 30, 2008 and 2,890,690
shares as of December 31, 2007; outstanding, 2,663,545 shares as of September 30, 2008 and 2,641,798 shares as of December 31, 2007 |  |                   | 7,281   |   |                  |   | 7,227   |  
|Paid-in capital                                                                                                                                                                                                                                                          |  |                   | 22,913  |   |                  |   | 22,586  |  
|Retained earnings                                                                                                                                                                                                                                                        |  |                   | 18,411  |   |                  |   | 21,050  |  
|Treasury stock, at cost (248,892 shares as of September 30, 2008 and December 31, 2007)                                                                                                                                                                                  |  |                   | (4,370  | ) |                  |   | (4,370  | )
|Unearned shares, Restricted Stock Plan (15,755 shares as of September 30, 2008 and 9,005 shares as of December 31,
2007)                                                                                                                                                 |  |                   | (323    | ) |                  |   | (197    | )
|Accumulated other comprehensive loss                                                                                                                                                                                                                                     |  |                   | (2,633  | ) |                  |   | (531    | )
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                                                                                               |  |                   | 41,279  |   |                  |   | 45,765  |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                               |  | $                 | 484,711 |   |                  | $ | 472,791 |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Book value per share                                                                                                                                                                                                                                                     |  | $                 | 15.50   |   |                  | $ | 17.32   |  
|                                                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  

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



3



---

##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In
thousands, except share and per share data)

(unaudited)



|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|---------------------------------------------------------------- |  | ------------------ | --------- | ----------------- | ------------------ | - | ------------------ |  | - | ------------------ | - |  | - | ---------
|                                                                 |  | Three Months Ended |           | Nine Months Ended
|                                                                 |  | September 30, 2008 |           |                   | September 30, 2007 |   | September 30, 2008 |  |   | September 30, 2007
|Interest and dividend income:                                    |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Interest and fees on loans                                       |  | $                  | 5,026     |                   |                    | $ | 5,272              |  | $ | 15,218             |   |  | $ | 15,440   
|Interest on debt securities:                                     |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Taxable                                                          |  |                    | 1,147     |                   |                    |   | 1,160              |  |   | 3,442              |   |  |   | 3,426    
|Tax-exempt                                                       |  |                    | 120       |                   |                    |   | 120                |  |   | 361                |   |  |   | 339      
|Dividends on marketable equity securities                        |  |                    | 285       |                   |                    |   | 162                |  |   | 878                |   |  |   | 477      
|Other interest                                                   |  |                    | 64        |                   |                    |   | 131                |  |   | 203                |   |  |   | 349      
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Total interest and dividend income                               |  |                    | 6,642     |                   |                    |   | 6,845              |  |   | 20,102             |   |  |   | 20,031   
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Interest expense:                                                |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Interest on deposits                                             |  |                    | 1,498     |                   |                    |   | 2,119              |  |   | 5,035              |   |  |   | 5,797    
|Interest on other borrowed funds                                 |  |                    | 710       |                   |                    |   | 784                |  |   | 2,138              |   |  |   | 2,329    
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Total interest expense                                           |  |                    | 2,208     |                   |                    |   | 2,903              |  |   | 7,173              |   |  |   | 8,126    
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Net interest and dividend income                                 |  |                    | 4,434     |                   |                    |   | 3,942              |  |   | 12,929             |   |  |   | 11,905   
|Provision for loan losses                                        |  |                    | 225       |                   |                    |   | 75                 |  |   | 588                |   |  |   | 325      
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Net interest and dividend income after provision for loan losses |  |                    | 4,209     |                   |                    |   | 3,867              |  |   | 12,341             |   |  |   | 11,580   
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Noninterest (charge) income:                                     |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Income from fiduciary activities                                 |  |                    | 438       |                   |                    |   | 486                |  |   | 1,379              |   |  |   | 1,427    
|Fees from sale of non-deposit products                           |  |                    | 79        |                   |                    |   | 60                 |  |   | 219                |   |  |   | 190      
|Service charges on deposit accounts                              |  |                    | 166       |                   |                    |   | 157                |  |   | 485                |   |  |   | 452      
|Other deposit fees                                               |  |                    | 223       |                   |                    |   | 198                |  |   | 661                |   |  |   | 700      
|Write-down of available-for-sale securities                      |  |                    | (3,724    | )                 |                    |   |                   |  |   | (3,724             | ) |  |   |         
|Gain on sales of loans, net                                      |  |                    | 6         |                   |                    |   |                   |  |   | 6                  |   |  |   | 6        
|Income on cash surrender value of life insurance                 |  |                    | 77        |                   |                    |   | 54                 |  |   | 225                |   |  |   | 165      
|Other income                                                     |  |                    | 142       |                   |                    |   | 304                |  |   | 531                |   |  |   | 760      
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Total noninterest (charge) income                                |  |                    | (2,593    | )                 |                    |   | 1,259              |  |   | (218               | ) |  |   | 3,700    
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Noninterest expense:                                             |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Salaries and employee benefits                                   |  |                    | 2,235     |                   |                    |   | 2,185              |  |   | 6,696              |   |  |   | 6,460    
|Director fees                                                    |  |                    | 76        |                   |                    |   | 68                 |  |   | 219                |   |  |   | 233      
|Occupancy expense                                                |  |                    | 465       |                   |                    |   | 389                |  |   | 1,396              |   |  |   | 1,164    
|Equipment expense                                                |  |                    | 213       |                   |                    |   | 216                |  |   | 690                |   |  |   | 638      
|Data processing fees                                             |  |                    | 298       |                   |                    |   | 290                |  |   | 897                |   |  |   | 854      
|Marketing and public relations                                   |  |                    | 100       |                   |                    |   | 102                |  |   | 320                |   |  |   | 344      
|Professional fees                                                |  |                    | 155       |                   |                    |   | 186                |  |   | 486                |   |  |   | 752      
|Other expense                                                    |  |                    | 356       |                   |                    |   | 412                |  |   | 1,145              |   |  |   | 1,249    
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Total noninterest expense                                        |  |                    | 3,898     |                   |                    |   | 3,848              |  |   | 11,849             |   |  |   | 11,694   
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|(Loss) income before income taxes                                |  |                    | (2,282    | )                 |                    |   | 1,278              |  |   | 274                |   |  |   | 3,586    
|Income taxes                                                     |  |                    | 392       |                   |                    |   | 357                |  |   | 1,022              |   |  |   | 976      
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Net (loss) income                                                |  | $                  | (2,674    | )                 |                    | $ | 921                |  | $ | (748               | ) |  | $ | 2,610    
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Comprehensive (loss) income                                      |  | $                  | (3,576    | )                 |                    | $ | 1,760              |  | $ | (2,850             | ) |  | $ | 2,513    
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|(Loss) earnings per share:                                       |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Weighted average shares outstanding                              |  |                    | 2,663,545 |                   |                    |   | 2,748,336          |  |   | 2,660,035          |   |  |   | 2,755,340
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|Weighted average diluted shares outstanding                      |  |                    | 2,663,545 |                   |                    |   | 2,764,357          |  |   | 2,660,035          |   |  |   | 2,770,712
|                                                                 |  |                    |           |                   |                    |   |                    |  |   |                    |   |  |   |          
|(Loss) earnings per common share                                 |  | $                  | (1.00     | )                 |                    | $ | 0.34               |  | $ | (0.28              | ) |  | $ | 0.95     
|(Loss) earnings per common share, assuming dilution              |  | $                  | (1.00     | )                 |                    | $ | 0.33               |  | $ | (0.28              | ) |  | $ | 0.94     
|Dividends per share                                              |  | $                  | 0.20      |                   |                    | $ | 0.20               |  | $ | 0.60               |   |  | $ | 0.60     

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



4



---

##### Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In
thousands)

(unaudited)



|                                                                                         |  |                    |         |   |                    |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|                                                                                         |  | Nine Months Ended  |        
|                                                                                         |  | September 30, 2008 |         |   | September 30, 2007 |  
|Cash flows from operating activities:                                                    |  |                    |         |   |                    |   |         |  
|Net (loss) income                                                                        |  | $                  | (748    | ) |                    | $ | 2,610   |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |                    |         |   |                    |   |         |  
|Write-down of available-for-sale securities                                              |  |                    | 3,724   |   |                    |   |        |  
|Provision for loan losses                                                                |  |                    | 588     |   |                    |   | 325     |  
|Depreciation and amortization                                                            |  |                    | 578     |   |                    |   | 554     |  
|Decrease (increase) in taxes receivable                                                  |  |                    | 106     |   |                    |   | (33     | )
|Decrease in mortgage servicing rights                                                    |  |                    | 16      |   |                    |   | 27      |  
|Decrease (increase) in other assets                                                      |  |                    | 12      |   |                    |   | (99     | )
|Stock-based compensation                                                                 |  |                    | 6       |   |                    |   | 12      |  
|Increase in prepaid expenses                                                             |  |                    | (19     | ) |                    |   | (43     | )
|Change in deferred loan costs, net                                                       |  |                    | (30     | ) |                    |   | 13      |  
|Amortization of securities, net                                                          |  |                    | (64     | ) |                    |   | 32      |  
|Decrease in accrued expenses                                                             |  |                    | (74     | ) |                    |   | (485    | )
|(Increase) decrease in RABBI Trust trading securities                                    |  |                    | (90     | ) |                    |   | 70      |  
|Increase in interest receivable                                                          |  |                    | (93     | ) |                    |   | (129    | )
|Decrease in other liabilities                                                            |  |                    | (195    | ) |                    |   | (43     | )
|Increase in cash surrender value of life insurance                                       |  |                    | (225    | ) |                    |   | (165    | )
|(Decrease) increase in interest payable                                                  |  |                    | (431    | ) |                    |   | 439     |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|Net cash provided by operating activities                                                |  |                    | 3,061   |   |                    |   | 3,085   |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|Cash flows from investing activities:                                                    |  |                    |         |   |                    |   |         |  
|Proceeds from maturities of available-for-sale securities                                |  |                    | 19,642  |   |                    |   | 11,157  |  
|                                                                                         |  |                   
|Recoveries of loans previously charged off                                               |  |                    | 59      |   |                    |   | 188     |  
|Redemption of Federal Home Loan Bank stock                                               |  |                    |        |   |                    |   | 371     |  
|Purchase of Federal Reserve Bank stock                                                   |  |                    |        |   |                    |   | (365    | )
|Purchases of Federal Home Loan Bank stock                                                |  |                    | (634    | ) |                    |   | (320    | )
|Capital expenditures                                                                     |  |                    | (1,030  | ) |                    |   | (1,713  | )
|Loan originations and principal collections, net                                         |  |                    | (14,398 | ) |                    |   | (15,233 | )
|Purchases of available-for-sale securities                                               |  |                    | (22,439 | ) |                    |   | (13,932 | )
|                                                                                         |  |                    |         |   |                    |   |         |  
|Net cash used in investing activities                                                    |  |                    | (18,800 | ) |                    |   | (19,847 | )
|                                                                                         |  |                    |         |   |                    |   |         |  
|Cash flows from financing activities:                                                    |  |                    |         |   |                    |   |         |  
|Advances from Federal Home Loan Bank                                                     |  |                    | 19,877  |   |                    |   | 25,500  |  
|Net increase (decrease) in demand deposits, NOW, money market and savings accounts       |  |                    | 13,410  |   |                    |   | (7,926  | )
|Proceeds from exercise of stock options                                                  |  |                    | 200     |   |                    |   | 645     |  
|Purchase of treasury stock                                                               |  |                    |        |   |                    |   | (1,407  | )
|Decrease in securities sold under agreements to repurchase                               |  |                    | (875    | ) |                    |   | (5,431  | )
|Dividends paid                                                                           |  |                    | (1,582  | ) |                    |   | (1,657  | )
|Payments on Federal Home Loan Bank advances                                              |  |                    | (1,737  | ) |                    |   | (1,648  | )
|Net (decrease) increase in time deposits                                                 |  |                    | (6,383  | ) |                    |   | 13,362  |  
|Net decrease in short term Federal Home Loan Bank advances                               |  |                    | (7,430  | ) |                    |   | (20,000 | )
|                                                                                         |  |                    |         |   |                    |   |         |  
|Net cash provided by financing activities                                                |  |                    | 15,480  |   |                    |   | 1,438   |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|Net decrease in cash and cash equivalents                                                |  |                    | (259    | ) |                    |   | (15,324 | )
|Cash and cash equivalents at beginning of period                                         |  |                    | 15,495  |   |                    |   | 29,723  |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|Cash and cash equivalents at end of period                                               |  | $                  | 15,236  |   |                    | $ | 14,399  |  
|                                                                                         |  |                    |         |   |                    |   |         |  
|Supplemental disclosures:                                                                |  |                    |         |   |                    |   |         |  
|Interest paid                                                                            |  | $                  | 7,605   |   |                    | $ | 7,686   |  
|Income taxes paid                                                                        |  |                    | 916     |   |                    |   | 1,009   |  

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



5



---

##### 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, 2008.

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 June 2006 the FASB
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Companys financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting
principles (GAAP) and enhances disclosures about fair value measurements. SFAS 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Companys consolidated financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. The
adoption of this statement did not have a material impact on the Companys financial condition and results of operations.

In September
2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue No. 06-4 Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements, (EITF Issue 06-4). EITF 06-4 requires companies with an endorsement split-dollar life insurance arrangement to recognize a liability for future postretirement benefits. The effective date is for fiscal years beginning
after December 15, 2007, with earlier application permitted. Companies should recognize the effects of applying this issue through either (a) a change in accounting principle through a cumulative effect adjustment to retained earnings or
(b) a change in accounting principle through retrospective application to all periods. The adoption of this issue did not have a material impact on the Companys financial position and results of operations.



6



---

##### Table of Contents

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be
measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and
liabilities. The new standard is effective at the beginning of the Companys fiscal year beginning January 1, 2008, and early application may be elected in certain circumstances. The adoption of this statement did not have a material
impact on the Companys financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 141 (Revised
2008), Business Combinations (SFAS 141(R)). SFAS 141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes a substantial
number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The Company does not expect the adoption of this statement to have a material
impact on its financial condition and results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments
and related hedged items affect an entitys financial position, financial performance, and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company does not expect the adoption of this statement to have a material impact on its
financial condition and results of operations.



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

The Company maintains five
stock-based employee compensation plans. Effective January 1, 2006, the Company adopted SFAS 123R. For the nine months ended September 30, 2008, stock-based employee compensation costs recorded as expenses amounted to $66,000, compared to
$47,000 for the same period last year. These figures include compensation costs for grants made to employees pursuant to the Companys Restricted Stock Plan.



7



---

##### Table of Contents

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

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



|                                    |  |                                         |      |   |                                        |   |      |      |  |   |      |   |  |   |      |  
|----------------------------------- |  | --------------------------------------- | ---- | - | -------------------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                    |  | For the Three MonthsEnded September 30, |      |   | For the Nine MonthsEnded September 30, |  
|                                    |  | 2008                                    |      |   | 2007                                   |   |      | 2008 |  |   | 2007 |  
|                                    |  | (in thousands)                          |      |   | (in thousands)                         |  
|Service cost                        |  | $                                       |     |   |                                        | $ |     |      |  | $ |     |   |  | $ |     |  
|Interest cost on benefit obligation |  |                                         | 125  |   |                                        |   | 123  |      |  |   | 375  |   |  |   | 369  |  
|Expected return on plan assets      |  |                                         | (161 | ) |                                        |   | (161 | )    |  |   | (483 | ) |  |   | (484 | )
|Amortization of prior service cost  |  |                                         |     |   |                                        |   |     |      |  |   |     |   |  |   |     |  
|                                    |  |                                         |      |   |                                        |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost           |  | $                                       | (36  | ) |                                        | $ | (38  | )    |  | $ | (108 | ) |  | $ | (115 | )
|                                    |  |                                         |      |   |                                        |   |      |      |  |   |      |   |  |   |      |  

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



|7. | ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
|-- | --------------------------------------------------

The
following summarizes assets measured at fair value for the period ending September 30, 2008 (in thousands):



|                                                                                                                                                                                                                |  |                                                                       |         |                                                             |       |                                             |        |   |                                         |  |  |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------- | ------- | ----------------------------------------------------------- | ----- | ------------------------------------------- | ------ | - | --------------------------------------- |  |  | - | ------ | 
|                                                                                                                                                                                                                |  |                                                                       |         | Fair Value Measurements at Reporting Date Using:            |      
|                                                                                                                                                                                                                |  | September 30, 2008                                                    |         | Quoted Prices inActive Markets forIdentical Assets(Level 1) |       | Significant OtherObservable Inputs(Level 2) |        |   | SignificantUnobservable Inputs(Level 3) | 
|Available-for-sale securities                                                                                                                                                                                   |  | $                                                                     | 110,394 |                                                             | $     | 27,999                                      |        | $ | 71,671                                  |  |  | $ | 10,724 | 
|Trading securities                                                                                                                                                                                              |  |                                                                       | 241     |                                                             |       | 241                                         |        |   |                                        |  |  |   |       | 
|                                                                                                                                                                                                                |  |                                                                       |         |                                                             |       |                                             |        |   |                                         |  |  |   |        | 
|Total                                                                                                                                                                                                           |  | $                                                                     | 110,635 |                                                             | $     | 28,240                                      |        | $ | 71,671                                  |  |  | $ | 10,724 | 
|                                                                                                                                                                                                                |  |                                                                       |         |                                                             |       |                                             |        |   |                                         |  |  |   |        | 
|                                                                                                                                                                                                                | 
|                                                                                                                                                                                                                |  | Fair Value MeasurementsUsing Significant Unobservable Inputs(Level 3) |        
|                                                                                                                                                                                                                |  | Available-for-saleSecurities                                          |         |                                                             | Total |                                            
|Beginning balance, July 1, 2008                                                                                                                                                                                 |  | $                                                                     | 7,707   |                                                             |       | $                                           | 7,707  |  
|Total gains or losses (realized/unrealized)                                                                                                                                                                     |  |                                                                       |         |                                                             |       |                                             |        |  
|Included in earnings (or changes in net assets)                                                                                                                                                                 |  |                                                                       |        |                                                             |       |                                             |       |  
|Included in other comprehensive income                                                                                                                                                                          |  |                                                                       | (360    | )                                                           |       |                                             | (360   | )
|Amortization of securities, net                                                                                                                                                                                 |  |                                                                       | (20     | )                                                           |       |                                             | (20    | )
|Transfers in and/or out of Level 3                                                                                                                                                                              |  |                                                                       | 3,397   |                                                             |       |                                             | 3,397  |  
|                                                                                                                                                                                                                |  |                                                                       |         |                                                             |       |                                             |        |   |                                         |  |  |   |        | 
|Ending balance, September 30, 2008                                                                                                                                                                              |  | $                                                                     | 10,724  |                                                             |       | $                                           | 10,724 |  
|                                                                                                                                                                                                                |  |                                                                       |         |                                                             |       |                                             |        |   |                                         |  |  |   |        | 
|The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in
unrealized gains or losses relating to assets still held at the reporting date |  | $                                                                     |        |                                                             |       | $                                           |       |  
|                                                                                                                                                                                                                |  |                                                                       |         |                                                             |       |                                             |        |   |                                         |  |  |   |        | 



8



---

##### Table of Contents

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

Introduction

The following discussion includes Beverly National Corporation (Company) and its
subsidiary, Beverly National Bank (Bank) and the Banks wholly owned subsidiary, Beverly National Security Corporation (BNSC). BNSC was established to buy, sell and hold securities for the Banks investment
portfolios.

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

Total assets as of September 30, 2008 were $484.7
million, compared to $472.8 million at December 31, 2007, an increase of $11.9 million, or 2.5%. Loans, net of the allowance for loan losses, increased $13.8 million, or 4.3% from $318.4 million at December 31, 2007. Investments in
available-for-sale securities decreased $4.4 million, or 3.8% from $114.8 million at December 31, 2007. The Bank has been able to maintain steady asset growth over the last nine months, mainly using increases in deposit levels to fund expansion
of the loan portfolio. Deposits increased $7.0 million, or 2.0%, and Federal Home Loan Bank advances increased $10.7 million, or 18.0% from $59.6 million at December 31, 2007. This growth in deposits reflects the Banks expanded retail
operations and the introduction of an enhanced line of deposit products. The book value of the Companys stock has decreased slightly as a result of the other than temporarily impaired (OTTI) write-down of Fannie Mae and Freddie Mac
preferred stock and the increase in unrealized losses on available-for-sale securities. The Company and the Bank met all of the regulatory capital requirements of a well capitalized institution at September 30, 2008. Managements focus
continues to be on maintaining the appropriate strategic direction during these challenging and uncertain economic times and resources are allocated to areas providing the most beneficial returns, without compromising the Banks high standards
for strong asset quality. Emphasis on business development, improvement in operating efficiencies, identifying sound growth opportunities and closely monitoring managements strategic focus in this ever-changing economic environment are also
key components of the Banks strategy.



9



---

##### 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
September 30, 2008 (unaudited) and December 31, 2007:



|                                                                                               |  |                     |         |                      |   |                       |  |           |       |  |   |        
|---------------------------------------------------------------------------------------------- |  | ------------------- | ------- | -------------------- | - | --------------------- |  | --------- | ----- |  | - | -------
|                                                                                               |  | AmortizedCost Basis |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairValue
|                                                                                               |  | (in thousands)     
|Available-for-sale securities:                                                                 |  |                     |         |                      |   |                       |  |           |       |  |   |        
|September 30, 2008 (unaudited):                                                                |  |                     |         |                      |   |                       |  |           |       |  |   |        
|Debt securities issued by U.S. government corporations and agencies                            |  | $                   | 11,690  |                      | $ | 30                    |  | $         | 157   |  | $ | 11,563 
|Debt securities issued by states of the United States and political subdivisions of the states |  |                     | 12,321  |                      |   | 10                    |  |           | 978   |  |   | 11,353 
|Corporate debt securities                                                                      |  |                     | 1,926   |                      |   |                      |  |           | 31    |  |   | 1,895  
|Preferred stocks                                                                               |  |                     | 15,087  |                      |   | 6                     |  |           | 2,148 |  |   | 12,945 
|Marketable equity securities                                                                   |  |                     | 577     |                      |   | 1                     |  |           | 10    |  |   | 568    
|Mortgage-backed securities                                                                     |  |                     | 72,190  |                      |   | 235                   |  |           | 754   |  |   | 71,671 
|Debt securities issued by foreign governments                                                  |  |                     | 400     |                      |   |                      |  |           | 1     |  |   | 399    
|                                                                                               |  |                     |         |                      |   |                       |  |           |       |  |   |        
|                                                                                               |  | $                   | 114,191 |                      | $ | 282                   |  | $         | 4,079 |  | $ | 110,394
|                                                                                               |  |                     |         |                      |   |                       |  |           |       |  |   |        
|December 31, 2007:                                                                             |  |                     |         |                      |   |                       |  |           |       |  |   |        
|Debt securities issued by U.S. government corporations and agencies                            |  | $                   | 12,690  |                      | $ | 127                   |  | $         | 8     |  | $ | 12,809 
|Debt securities issued by states of the United States and political subdivisions of the states |  |                     | 12,325  |                      |   | 24                    |  |           | 155   |  |   | 12,194 
|Preferred stocks                                                                               |  |                     | 12,407  |                      |   | 91                    |  |           | 382   |  |   | 12,116 
|Marketable equity securities                                                                   |  |                     | 560     |                      |   | 2                     |  |           | 7     |  |   | 555    
|Mortgage-backed securities                                                                     |  |                     | 76,672  |                      |   | 383                   |  |           | 335   |  |   | 76,720 
|Debt securities issued by foreign governments                                                  |  |                     | 400     |                      |   |                      |  |           | 1     |  |   | 399    
|                                                                                               |  |                     |         |                      |   |                       |  |           |       |  |   |        
|                                                                                               |  | $                   | 115,054 |                      | $ | 627                   |  | $         | 888   |  | $ | 114,793
|                                                                                               |  |                     |         |                      |   |                       |  |           |       |  |   |        

Loan Portfolio

The following table summarizes the distribution of the Banks loan portfolio as of September 30, 2008 and December 31, 2007:



|                                                |  |                    |         |   |            |        |   |                   |   |         |            |  |        |  
|----------------------------------------------- |  | ------------------ | ------- | - | ---------- | ------ | - | ----------------- | - | ------- | ---------- |  | ------ | -
|                                                |  | September 30, 2008 |         |   | % of Total |        |   | December 31, 2007 |   |         | % of Total | 
|                                                |  | (in thousands)     |         |   |            |        |   | (in thousands)    |   |         |            | 
|                                                |  | (unaudited)        |         |   |            |        |   |                   |   |         |            | 
|Commercial, financial and agricultural          |  | $                  | 46,835  |   |            | 14.10  | % |                   | $ | 39,343  |            |  | 12.36  | %
|Real estate - construction and land development |  |                    | 8,383   |   |            | 2.52   | % |                   |   | 17,042  |            |  | 5.35   | %
|Real estate - residential                       |  |                    | 124,941 |   |            | 37.62  | % |                   |   | 120,512 |            |  | 37.85  | %
|Real estate - commercial                        |  |                    | 139,224 |   |            | 41.92  | % |                   |   | 127,819 |            |  | 40.15  | %
|Consumer                                        |  |                    | 2,379   |   |            | 0.72   | % |                   |   | 2,392   |            |  | 0.76   | %
|Other                                           |  |                    | 13,788  |   |            | 4.15   | % |                   |   | 14,193  |            |  | 4.46   | %
|                                                |  |                    |         |   |            |        |   |                   |   |         |            |  |        |  
|                                                |  |                    | 335,550 |   |            | 101.03 | % |                   |   | 321,301 |            |  | 100.93 | %
|Allowance for loan losses                       |  |                    | (4,112  | ) |            | -1.24  | % |                   |   | (3,614  | )          |  | -1.14  | %
|Deferred loan costs, net                        |  |                    | 699     |   |            | 0.21   | % |                   |   | 669     |            |  | 0.21   | %
|                                                |  |                    |         |   |            |        |   |                   |   |         |            |  |        |  
|Net Loans                                       |  | $                  | 332,137 |   |            | 100.00 | % |                   | $ | 318,356 |            |  | 100.00 | %
|                                                |  |                    |         |   |            |        |   |                   |   |         |            |  |        |  



10



---

##### Table of Contents

Deposits

The
following table summarizes deposits as of September 30, 2008 and December 31, 2007:



|                      |  |                    |         |            |        |   |                   |   |            |  |        |  
|--------------------- |  | ------------------ | ------- | ---------- | ------ | - | ----------------- | - | ---------- |  | ------ | -
|                      |  | September 30, 2008 |         | % of Total |        |   | December 31, 2007 |   | % of Total | 
|                      |  | (in thousands)     |         |            |        |   | (in thousands)    |   |            | 
|                      |  | (unaudited)        |         |            |        |   |                   |   |            | 
|Demand Deposits       |  | $                  | 72,216  |            | 20.21  | % |                   | $ | 72,425     |  | 20.67  | %
|NOW Accounts          |  |                    | 58,012  |            | 16.23  | % |                   |   | 58,841     |  | 16.80  | %
|Money Market Accounts |  |                    | 86,475  |            | 24.21  | % |                   |   | 81,585     |  | 23.29  | %
|Savings Deposits      |  |                    | 57,894  |            | 16.20  | % |                   |   | 48,336     |  | 13.80  | %
|Time Deposits         |  |                    | 82,740  |            | 23.15  | % |                   |   | 89,123     |  | 25.44  | %
|                      |  |                    |         |            |        |   |                   |   |            |  |        |  
|Total                 |  | $                  | 357,337 |            | 100.00 | % |                   | $ | 350,310    |  | 100.00 | %
|                      |  |                    |         |            |        |   |                   |   |            |  |        |  

Comparison of operating results for the three months ended September 30, 2008 and 2007

The Company reported a net loss for the quarter ended September 30, 2008 of $2.7 million, or a basic and fully diluted loss of $1.00 per share, compared to net
income of $921,000, or basic and fully diluted earnings of $0.34 per share, for the same quarter last year. Net income for the quarter was impacted by charges, pre-tax, of $3,724,000 related to the write-down of the Companys investment in
Fannie Mae and Freddie Mac preferred stocks as other than temporarily impaired. No tax benefit was recognized on these charges as changes signed into law that would allow financial institutions to treat these as ordinary losses was not signed and
made effective until October 3, 2008. Therefore, a tax benefit of approximately $1.5 million was not recognized in the period ended September 30, 2008, and will be recognized in the period ending December 31, 2008. This tax benefit,
had it been recognized in the same quarter as the losses were taken, would have added approximately $0.57 to the Companys book value and would have reduced the third quarter loss by $0.57 per share.

Excluding these charges, the Companys core net income for the quarter would have been $1.05 million, or basic and fully diluted earnings per share of $0.39. The
adjusted results for the quarter would represent a 14.0% increase in net income and a 17.6% increase in earnings per share, compared to results for the same quarter last year. The primary reason for the increase in the core net income and earnings
per share for the periods presented, before the charges, is the increase in net interest and dividend income after the provision for loan losses, which increased $342,000, or 8.8%, for the three months ended September 30, 2008 from the same
period last year. The improvement is a result of the growth in earning assets, the reduction in cost of funds and the replacement of maturing certificates of deposit and FHLB advances at lower interest rates. The net interest margin improved to
3.96% for the quarter ended September 30, 2008, compared to 3.66% for the same period last year.



11



---

##### 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 Three Months Ended September 30, 2008 |         |                 | For the Three Months Ended September 30, 2007 |      
|                                                 |  | AverageBalance                                |         | InterestInc/Exp |                                               |       | Yield/Rate |  |      | AverageBalance |  | InterestInc/Exp |         |  | Yield/Rate |      
|                                                 |  | (in thousands)                                |         | (in thousands)  |                                               |       |            |  |      | (in thousands) |  | (in thousands)  |         |  |            |      
|                                                 |  | (unaudited)                                   |         | (unaudited)     |                                               |       |            |  |      | (unaudited)    |  | (unaudited)     |         |  |            |      
|Assets                                           |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Federal funds sold and interest-bearing deposits |  | $                                             | 5,984   |                 | $                                             | 24    |            |  | 1.61 | %              |  | $               | 4,510   |  | $          | 53    |    |  | 4.66 | %
|Investments                                      |  |                                               | 120,848 |                 |                                               | 1,668 | *          |  | 5.49 | %              |  |                 | 119,788 |  |            | 1,582 | *  |  | 5.24 | %
|Loans                                            |  |                                               | 334,535 |                 |                                               | 5,110 | **         |  | 6.08 | %              |  |                 | 319,014 |  |            | 5,358 | ** |  | 6.66 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Total interest-earning assets                    |  | $                                             | 461,367 |                 |                                               | 6,803 |            |  | 5.87 | %              |  | $               | 443,312 |  |            | 6,993 |    |  | 6.26 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|                                                 |  |                                               |         |                 |                                               |      
|Liabilities                                      |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Savings deposits                                 |  | $                                             | 56,406  |                 |                                               | 171   |            |  | 1.21 | %              |  | $               | 48,670  |  |            | 107   |    |  | 0.87 | %
|NOW accounts                                     |  |                                               | 51,843  |                 |                                               | 79    |            |  | 0.61 | %              |  |                 | 57,545  |  |            | 120   |    |  | 0.83 | %
|Money market accounts                            |  |                                               | 96,144  |                 |                                               | 544   |            |  | 2.25 | %              |  |                 | 88,980  |  |            | 823   |    |  | 3.67 | %
|Time deposits                                    |  |                                               | 85,388  |                 |                                               | 704   |            |  | 3.28 | %              |  |                 | 89,030  |  |            | 1,069 |    |  | 4.76 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Total interest-bearing deposits                  |  |                                               | 289,781 |                 |                                               | 1,498 |            |  | 2.06 | %              |  |                 | 284,225 |  |            | 2,120 |    |  | 2.96 | %
|Non-interest-bearing deposits                    |  |                                               | 72,560  |                 |                                               |      |            |  |     |                |  |                 | 74,164  |  |            |      |    |  |     |  
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Total deposits                                   |  |                                               | 362,341 |                 |                                               | 1,498 |            |  | 1.64 | %              |  |                 | 358,389 |  |            | 2,120 |    |  | 2.35 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|FHLB advances                                    |  |                                               | 65,924  |                 |                                               | 648   |            |  | 3.91 | %              |  |                 | 58,523  |  |            | 719   |    |  | 4.87 | %
|Repurchase agreements                            |  |                                               | 10,990  |                 |                                               | 62    |            |  | 2.25 | %              |  |                 | 7,201   |  |            | 64    |    |  | 3.53 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Total other borrowed funds                       |  |                                               | 76,914  |                 |                                               | 710   |            |  | 3.67 | %              |  |                 | 65,724  |  |            | 783   |    |  | 4.73 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Total interest-bearing liabilities               |  |                                               | 366,695 |                 |                                               | 2,208 |            |  | 2.40 | %              |  |                 | 349,949 |  |            | 2,902 |    |  | 3.29 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Total deposits and interest-bearing liabilities  |  | $                                             | 439,255 |                 |                                               | 2,208 |            |  | 2.00 | %              |  | $               | 424,113 |  |            | 2,903 |    |  | 2.72 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Net interest income                              |  |                                               |         |                 | $                                             | 4,594 |            |  |      |                |  |                 |         |  | $          | 4,091 |    |  |      |  
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Net interest spread                              |  |                                               |         |                 |                                               |       |            |  | 3.87 | %              |  |                 |         |  |            |       |    |  | 3.55 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Net interest margin                              |  |                                               |         |                 |                                               |       |            |  | 3.96 | %              |  |                 |         |  |            |       |    |  | 3.66 | %
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|                                                 |  |                                               |         |                 |                                               |      
|Tax Equivalent Income Adjustment:                |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|State and Municipal Investment Income            |  |                                               |         |                 | $                                             | 62    | *          |  |      |                |  |                 |         |  | $          | 62    | *  |  |      |  
|Dividends Received Deduction Eligible Securities |  |                                               |         |                 |                                               | 15    | *          |  |      |                |  |                 |         |  |            |      | *  |  |      |  
|Industrial Revenue Bond Income                   |  |                                               |         |                 |                                               | 84    | **         |  |      |                |  |                 |         |  |            | 87    | ** |  |      |  
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  
|Total Tax Equivalent Income Adjustment           |  |                                               |         |                 | $                                             | 161   |            |  |      |                |  |                 |         |  | $          | 149   |    |  |      |  
|                                                 |  |                                               |         |                 |                                               |       |            |  |      |                |  |                 |         |  |            |       |    |  |      |  



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

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

The following table sets forth the
various components of noninterest income and noninterest expense for the quarters ended September 30, 2008 and 2007 and the dollar amount and percentage change between the periods:



|                                                 |  |                        |        |                     |      |   |       |  |   |        |   |  |         |  
|------------------------------------------------ |  | ---------------------- | ------ | ------------------- | ---- | - | ----- |  | - | ------ | - |  | ------- | -
|                                                 |  | September 30,          |        | Increase (Decrease) |     
|                                                 |  | 2008                   |        |                     | 2007 |   | $     |  |   | %      |  
|                                                 |  | (Dollars in thousands) |       
|                                                 |  | (unaudited)            |       
|Noninterest (charge) income:                     |  |                        |        |                     |      |   |       |  |   |        |   |  |         |  
|Income from fiduciary activities                 |  | $                      | 438    |                     |      | $ | 486   |  | $ | (48    | ) |  | -9.88   | %
|Fees from sale of non-deposit products           |  |                        | 79     |                     |      |   | 60    |  |   | 19     |   |  | 31.67   | %
|Service charges on deposit accounts              |  |                        | 166    |                     |      |   | 157   |  |   | 9      |   |  | 5.73    | %
|Other deposit fees                               |  |                        | 223    |                     |      |   | 198   |  |   | 25     |   |  | 12.63   | %
|Write-down of available-for-sale securities      |  |                        | (3,724 | )                   |      |   |      |  |   | (3,724 | ) |  |        |  
|Gain on sales of loans, net                      |  |                        | 6      |                     |      |   |      |  |   | 6      |   |  |        |  
|Income on cash surrender value of life insurance |  |                        | 77     |                     |      |   | 54    |  |   | 23     |   |  | 42.59   | %
|Other income                                     |  |                        | 142    |                     |      |   | 304   |  |   | (162   | ) |  | -53.29  | %
|                                                 |  |                        |        |                     |      |   |       |  |   |        |   |  |         |  
|Total noninterest (charge) income                |  | $                      | (2,593 | )                   |      | $ | 1,259 |  | $ | (3,852 | ) |  | -305.96 | %
|                                                 |  |                        |        |                     |      |   |       |  |   |        |   |  |         |  
|Noninterest expense:                             |  |                        |        |                     |      |   |       |  |   |        |   |  |         |  
|Salaries and employee benefits                   |  | $                      | 2,235  |                     |      | $ | 2,185 |  | $ | 50     |   |  | 2.29    | %
|Director fees                                    |  |                        | 76     |                     |      |   | 68    |  |   | 8      |   |  | 11.76   | %
|Occupancy expense                                |  |                        | 465    |                     |      |   | 389   |  |   | 76     |   |  | 19.54   | %
|Equipment expense                                |  |                        | 213    |                     |      |   | 216   |  |   | (3     | ) |  | -1.39   | %
|Data processing fees                             |  |                        | 298    |                     |      |   | 290   |  |   | 8      |   |  | 2.76    | %
|Marketing and public relations                   |  |                        | 100    |                     |      |   | 102   |  |   | (2     | ) |  | -1.96   | %
|Professional fees                                |  |                        | 155    |                     |      |   | 186   |  |   | (31    | ) |  | -16.67  | %
|Other expense                                    |  |                        | 356    |                     |      |   | 412   |  |   | (56    | ) |  | -13.59  | %
|                                                 |  |                        |        |                     |      |   |       |  |   |        |   |  |         |  
|Total noninterest expense                        |  | $                      | 3,898  |                     |      | $ | 3,848 |  | $ | 50     |   |  | 1.30    | %
|                                                 |  |                        |        |                     |      |   |       |  |   |        |   |  |         |  

The income tax provision for the quarter increased by $35,000, or 9.8%, compared to the same period last year. The
increase is due to the increase in income before income taxes, as the effective rate is consistent for the quarters ended September 30, 2008 and 2007.



12



---

##### Table of Contents

Comparison of operating results for the nine months ended September 30, 2008 and 2007

The Company reported a net loss for the nine months ended September 30, 2008 of $748,000, or a basic and fully diluted loss of $0.28 per share, compared to net
income of $2.6 million, or basic and fully diluted earnings of $0.95 and $0.94 per share, respectively, for the same period last year. Net income for the period was impacted by charges, pre-tax, of $3,724,000 related to the write-down of the
Companys investment in Fannie Mae and Freddie Mac preferred stocks as other than temporarily impaired. No tax benefit was recognized on these charges as changes signed into law that would allow financial institutions to treat these as ordinary
losses was not signed and made effective until October 3, 2008. Therefore, a tax benefit of approximately $1.5 million was not recognized in the quarter ended September 30, 2008, and will be recognized in the quarter ending
December 31, 2008. This tax benefit, had it been recognized in the same period as the losses were taken, would have added approximately $0.57 to the Companys book value and would have reduced the loss for the nine months ended
September 30, 2008 by $0.57 per share.

Net income for the nine months ended September 30, 2008, excluding the charges, would have been $2.98
million, with basic and fully diluted earnings per share of $1.12. These results would represent a 14.0% increase in net income and an 18.1% increase in earnings per share, compared to the same period last year. The primary reason for the increase
in the core net income and earnings per share for the periods presented, before the charges, is the increase in net interest and dividend income after the provision for loan losses, which increased $761,000, or 6.6%, for the nine months ended
September 30, 2008 from the same periods last year. The improvement is a result of the growth in earning assets, the reduction in cost of funds and the replacement of maturing certificates of deposit and FHLB advances at lower interest rates.
The net interest margin improved to 3.91% for the nine months ended September 30, 2008, compared to 3.78% for the same 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 Nine Months Ended September, 2008 |         |                 | For the Nine Months Ended September 30, 2007 |       
|                                                 |  | AverageBalance                            |         | InterestInc/Exp |                                              |        | Yield/Rate |  |      | AverageBalance |  | InterestInc/Exp |         |  | Yield/Rate |       
|                                                 |  | (in thousands)                            |         | (in thousands)  |                                              |        |            |  |      | (in thousands) |  | (in thousands)  |         |  |            |       
|                                                 |  | (unaudited)                               |         | (unaudited)     |                                              |        |            |  |      | (unaudited)    |  | (unaudited)     |         |  |            |       
|Assets                                           |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Federal funds sold and interest-bearing deposits |  | $                                         | 3,762   |                 | $                                            | 52     |            |  | 1.83 | %              |  | $               | 2,836   |  | $          | 102    |    |  | 4.81 | %
|Investments                                      |  |                                           | 123,339 |                 |                                              | 5,095  | *          |  | 5.52 | %              |  |                 | 119,635 |  |            | 4,663  | *  |  | 5.21 | %
|Loans                                            |  |                                           | 332,624 |                 |                                              | 15,470 | **         |  | 6.21 | %              |  |                 | 314,402 |  |            | 15,701 | ** |  | 6.68 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Total interest-earning assets                    |  | $                                         | 459,725 |                 |                                              | 20,617 |            |  | 5.99 | %              |  | $               | 436,873 |  |            | 20,466 |    |  | 6.26 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|                                                 |  |                                           |         |                 |                                              |       
|Liabilities                                      |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Savings deposits                                 |  | $                                         | 53,238  |                 |                                              | 470    |            |  | 1.18 | %              |  | $               | 48,323  |  |            | 266    |    |  | 0.74 | %
|NOW accounts                                     |  |                                           | 54,211  |                 |                                              | 260    |            |  | 0.64 | %              |  |                 | 58,784  |  |            | 347    |    |  | 0.79 | %
|Money market accounts                            |  |                                           | 94,152  |                 |                                              | 1,816  |            |  | 2.58 | %              |  |                 | 86,102  |  |            | 2,334  |    |  | 3.62 | %
|Time deposits                                    |  |                                           | 87,133  |                 |                                              | 2,489  |            |  | 3.82 | %              |  |                 | 82,122  |  |            | 2,849  |    |  | 4.64 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Total interest-bearing deposits                  |  |                                           | 288,734 |                 |                                              | 5,035  |            |  | 2.33 | %              |  |                 | 275,331 |  |            | 5,796  |    |  | 2.81 | %
|Non-interest-bearing deposits                    |  |                                           | 70,103  |                 |                                              |       |            |  |     |                |  |                 | 73,451  |  |            |       |    |  |     |  
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Total deposits                                   |  |                                           | 358,837 |                 |                                              | 5,035  |            |  | 1.87 | %              |  |                 | 348,782 |  |            | 5,796  |    |  | 2.22 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|FHLB advances                                    |  |                                           | 64,842  |                 |                                              | 1,931  |            |  | 3.98 | %              |  |                 | 56,873  |  |            | 2,107  |    |  | 4.95 | %
|Repurchase agreements                            |  |                                           | 10,882  |                 |                                              | 207    |            |  | 2.54 | %              |  |                 | 8,253   |  |            | 222    |    |  | 3.60 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Total other borrowed funds                       |  |                                           | 75,724  |                 |                                              | 2,138  |            |  | 3.77 | %              |  |                 | 65,126  |  |            | 2,329  |    |  | 4.78 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Total interest-bearing liabilities               |  |                                           | 364,458 |                 |                                              | 7,173  |            |  | 2.63 | %              |  |                 | 340,457 |  |            | 8,125  |    |  | 3.19 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Total deposits and interest-bearing liabilities  |  | $                                         | 434,561 |                 |                                              | 7,173  |            |  | 2.20 | %              |  | $               | 413,908 |  |            | 8,125  |    |  | 2.62 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Net interest income                              |  |                                           |         |                 | $                                            | 13,444 |            |  |      |                |  |                 |         |  | $          | 12,341 |    |  |      |  
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Net interest spread                              |  |                                           |         |                 |                                              |        |            |  | 3.79 | %              |  |                 |         |  |            |        |    |  | 3.64 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Net interest margin                              |  |                                           |         |                 |                                              |        |            |  | 3.91 | %              |  |                 |         |  |            |        |    |  | 3.78 | %
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|                                                 |  |                                           |         |                 |                                              |       
|Tax Equivalent Income Adjustment:                |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|State and Municipal Investment Income            |  |                                           |         |                 | $                                            | 186    | *          |  |      |                |  |                 |         |  | $          | 174    | *  |  |      |  
|Dividends Received Deduction Eligible Securities |  |                                           |         |                 |                                              | 77     | *          |  |      |                |  |                 |         |  |            |       | *  |  |      |  
|Industrial Revenue Bond Income                   |  |                                           |         |                 |                                              | 253    | **         |  |      |                |  |                 |         |  |            | 261    | ** |  |      |  
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  
|Total Tax Equivalent Income Adjustment           |  |                                           |         |                 | $                                            | 516    |            |  |      |                |  |                 |         |  | $          | 435    |    |  |      |  
|                                                 |  |                                           |         |                 |                                              |        |            |  |      |                |  |                 |         |  |            |        |    |  |      |  



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

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



13



---

##### Table of Contents

The following table sets forth the various components of noninterest income and noninterest expense for the nine months
ended September 30, 2008 and 2007 and the dollar amount and percentage change between the periods:



|                                                 |  |                        |        |                     |      |   |        |  |   |        |   |  |         |  
|------------------------------------------------ |  | ---------------------- | ------ | ------------------- | ---- | - | ------ |  | - | ------ | - |  | ------- | -
|                                                 |  | September 30,          |        | Increase (Decrease) |     
|                                                 |  | 2008                   |        |                     | 2007 |   | $      |  |   | %      |  
|                                                 |  | (Dollars in thousands) |       
|                                                 |  | (unaudited)            |       
|Noninterest (charge) income:                     |  |                        |        |                     |      |   |        |  |   |        |   |  |         |  
|Income from fiduciary activities                 |  | $                      | 1,379  |                     |      | $ | 1,427  |  | $ | (48    | ) |  | -3.36   | %
|Fees from sale of non-deposit products           |  |                        | 219    |                     |      |   | 190    |  |   | 29     |   |  | 15.26   | %
|Service charges on deposit accounts              |  |                        | 485    |                     |      |   | 452    |  |   | 33     |   |  | 7.30    | %
|Other deposit fees                               |  |                        | 661    |                     |      |   | 700    |  |   | (39    | ) |  | -5.57   | %
|Write-down of available-for-sale securities      |  |                        | (3,724 | )                   |      |   |       |  |   | (3,724 | ) |  | 0.00    | %
|Gain on sales of loans, net                      |  |                        | 6      |                     |      |   | 6      |  |   |       |   |  | 0.00    | %
|Income on cash surrender value of life insurance |  |                        | 225    |                     |      |   | 165    |  |   | 60     |   |  | 36.36   | %
|Other income                                     |  |                        | 531    |                     |      |   | 760    |  |   | (229   | ) |  | -30.13  | %
|                                                 |  |                        |        |                     |      |   |        |  |   |        |   |  |         |  
|Total noninterest (charge) income                |  | $                      | (218   | )                   |      | $ | 3,700  |  | $ | (3,918 | ) |  | -105.89 | %
|                                                 |  |                        |        |                     |      |   |        |  |   |        |   |  |         |  
|Noninterest expense:                             |  |                        |        |                     |      |   |        |  |   |        |   |  |         |  
|Salaries and employee benefits                   |  | $                      | 6,696  |                     |      | $ | 6,460  |  | $ | 236    |   |  | 3.65    | %
|Director fees                                    |  |                        | 219    |                     |      |   | 233    |  |   | (14    | ) |  | -6.01   | %
|Occupancy expense                                |  |                        | 1,396  |                     |      |   | 1,164  |  |   | 232    |   |  | 19.93   | %
|Equipment expense                                |  |                        | 690    |                     |      |   | 638    |  |   | 52     |   |  | 8.15    | %
|Data processing fees                             |  |                        | 897    |                     |      |   | 854    |  |   | 43     |   |  | 5.04    | %
|Marketing and public relations                   |  |                        | 320    |                     |      |   | 344    |  |   | (24    | ) |  | -6.98   | %
|Professional fees                                |  |                        | 486    |                     |      |   | 752    |  |   | (266   | ) |  | -35.37  | %
|Other expense                                    |  |                        | 1,145  |                     |      |   | 1,249  |  |   | (104   | ) |  | -8.33   | %
|                                                 |  |                        |        |                     |      |   |        |  |   |        |   |  |         |  
|Total noninterest expense                        |  | $                      | 11,849 |                     |      | $ | 11,694 |  | $ | 155    |   |  | 1.33    | %
|                                                 |  |                        |        |                     |      |   |        |  |   |        |   |  |         |  

The income tax provision for the nine months ended September 30, 2008 increased by $46,000, or 4.7%, compared
to the same period last year despite the 14.0% increase in net income before non-recurring, pre-tax charges. This is primarily due to the increase in assets eligible for preferential tax treatment. As a result, the effective tax rate decreased by
1.6% for the nine months ended September 30, 2008, compared to the same period last year.

Provisions and Allowance for Loan Losses

Credit risk is inherent in the business of extending loans. The Bank maintains an allowance for loan losses through charges to earnings. Provisions of $225,000 and
$588,000 were made to the allowance for loan losses during the three and nine months ended September 30, 2008, respectively, compared to $75,000 and $325,000 for the same periods last year. The allowance for loan losses was equivalent to 1.22%
and 1.11% of total loans at September 30, 2008 and 2007, respectively. The increase was driven by growth in the loan portfolio, uncertain economic conditions, concerns over further potential reduction in real estate values and the impact a
prolonged recession or economic downturn would have on the Companys commercial and small business loan portfolios.

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.



14



---

##### Table of Contents

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 loans consisting of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, as a general rule, 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 and trends.

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

Changes
in the allowance for loan losses were as follows for the nine months ended September 30, 2008 and 2007:



|                                           |  |                |       |   |      |   |       |  
|------------------------------------------ |  | -------------- | ----- | - | ---- | - | ----- | -
|                                           |  | 2008           |       |   | 2007 |  
|                                           |  | (in thousands) |      
|                                           |  | (unaudited)    |      
|Balance as of January 1st                  |  | $              | 3,614 |   |      | $ | 3,044 |  
|Loans charged off                          |  |                | (149  | ) |      |   | (5    | )
|Provision for loan losses                  |  |                | 588   |   |      |   | 325   |  
|Recoveries of loans previously charged off |  |                | 59    |   |      |   | 190   |  
|                                           |  |                |       |   |      |   |       |  
|Balance as of September 30th               |  | $              | 4,112 |   |      | $ | 3,554 |  
|                                           |  |                |       |   |      |   |       |  

The allowance for loan losses represented 1,613% and 13,669% of non-performing loans, which totaled $255,000 and
$26,000, at September 30, 2008 and 2007, respectively. Non-performing loans represented less than 0.1% of total loans and mortgages held-for-sale at September 30, 2008 and 2007.

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

Capital Resources

As of September 30, 2008, the Company had
total capital of $41.3 million, a decrease of $4.5 million, or 9.8%, from total capital as of December 31, 2007. The net change in the Companys capital reflects current year income, dividends paid, an entry made for the cumulative effect
of a change in accounting principle, the decrease in accumulated other comprehensive loss, the granting of stock awards and the exercise of stock options.

The Companys policy has been to pay dividends out of funds in excess of the needs of the business. The Company declared and paid cash dividends to shareholders on a quarterly basis at a rate of $0.20 per share during 2007 and for each
quarter of 2008.

Generally, banks are required to maintain Tier 1 capital at a level equal to or greater than 4.0% of their average total assets. As of
September 30, 2008, the Banks Tier 1 capital amounted to 8.96% of average total assets. At September 30, 2008, the Banks ratio of risk-based capital to risk-weighted assets amounted to 13.40%, which satisfies the applicable
risk-based capital requirements. As of December 31, 2007, the Banks Tier 1 capital amounted to 9.39% of average assets and risk-based capital amounted to 14.07% of total risk-based assets.

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



15



---

##### Table of Contents

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
$4.5 million at September 30, 2008; additionally, a minimum amount of contractual payments in the amount of $12.6 million for the mortgage-backed securities portfolio is due within one year at September 30, 2008. Assets such as federal
funds sold, mortgages held for sale, pre-payments and payoffs on mortgage-backed securities, as well as maturing loans, are also sources of liquidity. The Companys objectives are to be substantially neutral with respect to interest rate
sensitivity and maintain a net cumulative gap at one year of less than 15% of total earning assets. The Companys current practices are consistent with these objectives.

Off Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financial needs of its customers. In the opinion of Management, these off-balance sheet arrangements are not likely to have a material effect on the Companys financial condition, results of operations, or
liquidity. As of September 30, 2008, total off-balance sheet financial commitments, which include unadvanced funds on loans and commitments to fund loans and letters of credit, amounted to approximately $61.0 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.



16



---

##### Table of Contents

|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 three and nine months ended September 30, 2008 was 3.96% and 3.91%, respectively, in comparison to 3.66% and 3.78%, respectively, for the three and nine months ended September 30,
2007. 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 Asset/Liability Management Committee is comprised of the President and Chief Executive Officer of the Company; the Senior Executive Vice President, Chief Financial
Officer and Chief Operating Officer; the Executive Vice President and Senior Loan Officer; the Executive Vice President of Retail Banking; the Senior Vice President, Secretary and Chief Operations Officer; the Senior Vice President and Chief Risk
Officer; and various lending, retail and finance officers. The Committee is responsible for managing interest rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity and
capital. The Committee meets bi-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
Asset/Liability Management 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 a consultant
to calculate and review these various measurements.

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

As of September 30, 2008, the capital ratio of the Company on an EVE basis, at current rate levels, is 11.73%. 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 5.00% to 7.00%) would result in an EVE capital ratio of 10.63%. Alternatively, if interest rates were to decrease
over the next year by 100 basis points, the EVE capital ratio is estimated to be 11.53%. 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.



17



---

##### Table of Contents

The following table summarizes the net interest income simulation as of September 30, 2008:



|                    |  |                             |        |                             |   |      |   |  |        |  
|------------------- |  | --------------------------- | ------ | --------------------------- | - | ---- | - |  | ------ | -
|                    |  | September 30, 2008          |       
|                    |  | Projectednet interestincome |        | Change fromyear 1 base case |  
|                    |  | (Dollars in thousands)      |       
|Year 1 projections: |  |                             |        |                             |   |      |   |  |        |  
|Down 100BP          |  | $                           | 18,101 |                             | $ | 136  |   |  | 0.76   | %
|Base                |  |                             | 17,965 |                             |   |     |   |  |       |  
|Up 200BP            |  |                             | 17,719 |                             |   | (246 | ) |  | - 1.37 | %
|                    |  |                             |       
|Year 2 projections: |  |                             |        |                             |   |      |   |  |        |  
|Down 100BP          |  | $                           | 17,946 |                             | $ | (19  | ) |  | - 0.11 | %
|Base                |  |                             | 18,232 |                             |   | 267  |   |  | 1.49   | %
|Up 200BP            |  |                             | 18,165 |                             |   | 200  |   |  | 1.11   | %



|ITEM 4T. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

The Companys Chief Executive Officer and
Chief Financial Officer concluded that based upon an evaluation as of September 30, 2008, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), the Companys disclosure controls and procedures
as defined in Rule 13a-15(e) of the Exchange Act are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed 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. 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.

During the quarter ended September 30, 2008, there were no changes in the
Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



18



---

##### Table of Contents

PART II - OTHER INFORMATION



|         |  |                                                              |  |               
|-------- |  | ------------------------------------------------------------ |  | --------------
|Item 1.  |  | Legal Proceedings.                                           |  | None          
|         |  |                                                             
|Item 1A. |  | Risk Factors                                                 |  | Not applicable
|         |  |                                                             
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds. |  | None          
|         |  |                                                             
|Item 3.  |  | Defaults Upon Senior Securities.                             |  | None          
|         |  |                                                             
|Item 4.  |  | Submission of Matters to a Vote of Security Holders.         |  | None          
|         |  |                                                             
|Item 5.  |  | Other Information.                                           |  | None          
|         |  |                                                             
|Item 6.  |  | Exhibits.                                                    |  |               



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



19



---

##### Table of Contents

SIGNATURES

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



|                        |  |  |  |                              |  |                                                             
|----------------------- |  |  |  | ---------------------------- |  | ------------------------------------------------------------
|                        |  |  |  | BEVERLY NATIONAL CORPORATION
|                        |  |  |  | (Registrant)                
|                        |  |  | 
|Date: November 13, 2008 |  |  |  | By:                          |  | /s/ Donat A. Fournier                                       
|                        |  |  |  |                              |  | Donat A. Fournier                                           
|                        |  |  |  |                              |  | President and Chief Executive Officer                       
|                        |  |  | 
|Date: November 13, 2008 |  |  |  | By:                          |  | /s/ Michael O. Gilles                                       
|                        |  |  |  |                              |  | Michael O. Gilles                                           
|                        |  |  |  |                              |  | Senior Executive Vice President, Chief Financial Officer and
|                        |  |  |  |                              |  | Chief Operating Officer                                     



20