Table of Contents

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Table of Contents

Table of Contents

Table of Contents

Table of Contents

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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 June 30, 2009

¨	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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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).

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 July 22, 2009: 2,685,472.

BEVERLY NATIONAL CORPORATION

INDEX


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets at June 30, 2009 (Unaudited) and December 31, 2008				3

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)				4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)				5

Notes to Condensed Consolidated Financial Statements (Unaudited)				6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations				10

Item 3.

Quantitative and Qualitative Disclosures About Market Risk				18

Item 4.

Controls and Procedures				19

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings				20

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds				20

Item 3.

Defaults Upon Senior Securities				20

Item 4.

Submission of Matters to a Vote of Security Holders				20

Item 5.

Other Information				20

Item 6.

Exhibits				20

Signatures				21

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)


	June 30, 2009			December 31, 2008
ASSETS
Cash and due from banks	$	11,118		$	9,046
Federal funds sold		7,390			6,550
Interest-bearing demand deposits with other banks		22,176			591
Short-term investments		913			363

Cash and cash equivalents		41,597			16,550
Investments in available-for-sale securities (at fair value)		103,415			103,623
Federal Home Loan Bank stock, at cost		4,171			4,086
Federal Reserve Bank stock, at cost		554			553
Loans, net of the allowance for loan losses of $4,493 and $4,127, respectively		321,695			334,639
Premises and equipment		8,277			8,386
Bank owned life insurance		7,093			6,950
Accrued interest receivable		1,689			1,769
Other assets		9,169			8,949

Total assets	$	497,660		$	485,505


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	74,058		$	74,872
Interest-bearing		296,256			264,661

Total deposits		370,314			339,533
Federal Home Loan Bank advances		57,087			84,425
Securities sold under agreements to repurchase		20,680			13,289
Other liabilities		7,612			7,220

Total liabilities		455,693			444,467

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 2,934,364 shares as of June 30, 2009 and December 31, 2008; outstanding, 2,685,472 shares as of June 30, 2009 and 2,663,545 as of December 31, 2008		7,336			7,281
Paid-in capital		23,228			22,917
Retained earnings		18,986			18,459
Treasury stock, at cost (248,892 shares as of June 30, 2009 and December 31, 2008)		(4,370	)		(4,370	)
Unearned shares, Restricted Stock Plan (30,180 shares as of June 30, 2009 and 15,755 shares as of December 31, 2008)		(550	)		(323	)
Accumulated other comprehensive loss		(2,663	)		(2,926	)

Total stockholders’ equity		41,967			41,038

Total liabilities and stockholders’ equity	$	497,660		$	485,505


Book value per share	$	15.63		$	15.41

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

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share data)

(unaudited)


	Three Months Ended					Six Months Ended
	June 30, 2009		June 30, 2008			June 30, 2009		June 30, 2008
Interest and dividend income:
Interest and fees on loans	$	4,727	$	5,064		$	9,561	$	10,192
Interest on debt securities:
Taxable		1,003		1,173			2,114		2,295
Tax-exempt		123		120			247		241
Dividends on marketable equity securities		195		344			396		593
Other interest		16		51			26		139

Total interest and dividend income		6,064		6,752			12,344		13,460

Interest expense:
Interest on deposits		1,056		1,606			2,071		3,538
Interest on other borrowed funds		537		732			1,089		1,427

Total interest expense		1,593		2,338			3,160		4,965

Net interest and dividend income		4,471		4,414			9,184		8,495
Provision for loan losses		150		235			375		363

Net interest and dividend income after provision for loan losses		4,321		4,179			8,809		8,132

Noninterest income:
Income from fiduciary activities		380		467			766		941
Fees from sale of non-deposit products		45		90			69		140
Service charges on deposit accounts		154		159			305		318
Other deposit fees		176		212			358		438
Income on cash surrender value of life insurance		74		75			148		148
Other income		215		190			362		390

Total noninterest income		1,044		1,193			2,008		2,375

Noninterest expense:
Salaries and employee benefits		2,214		2,246			4,425		4,461
Director fees		95		66			181		143
Occupancy expense		453		466			947		931
Equipment expense		188		231			367		477
Data processing fees		269		311			621		600
Marketing and public relations		86		115			187		220
Professional fees		415		164			632		330
FDIC insurance assessments		376		10			511		20
Other expense		407		400			792		769

Total noninterest expense		4,503		4,009			8,663		7,951

Income before income taxes		862		1,363			2,154		2,556
Income taxes		196		347			563		630

Net income	$	666	$	1,016		$	1,591	$	1,926


Comprehensive income	$	635	$	(287	)	$	1,840	$	726


Earnings per share:
Weighted average shares outstanding		2,667,204		2,663,448			2,665,384		2,658,261

Weighted average diluted shares outstanding		2,669,032		2,667,014			2,666,409		2,662,035

Earnings per common share	$	0.25	$	0.38		$	0.60	$	0.72
Earnings per common share, assuming dilution	$	0.25	$	0.38		$	0.60	$	0.72
Dividends per share	$	0.20	$	0.20		$	0.40	$	0.40

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

BEVERLY NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Six Months Ended
	June 30, 2009			June 30, 2008
Cash flows from operating activities:
Net income	$	1,591		$	1,926
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net		(87	)		(38	)
Provision for loan losses		375			363
Change in deferred loan costs, net		20			(35	)
Depreciation and amortization		389			386
Increase in cash surrender value of life insurance		(146	)		(141	)
Decrease (increase) in interest receivable		80			(31	)
Decrease (increase) in prepaid expenses		111			(18	)
Decrease in RABBI Trust trading securities		40			65
Increase in taxes receivable		(407	)		(40	)
Decrease in mortgage servicing rights		12			11
(Increase) decrease in other assets		(122	)		18
Increase (decrease) in accrued expenses		522			(256	)
Decrease in interest payable		(68	)		(305	)
Increase in other liabilities		27			24
Stock-based compensation		2			3


Net cash provided by operating activities		2,339			1,932


Cash flows from investing activities:
Purchases of available-for-sale securities		(18,401	)		(22,433	)
Proceeds from maturities of available-for-sale securities		19,108			14,098
Purchases of Federal Home Loan Bank stock		(85	)		(634	)
Purchases of Federal Reserve Bank stock		(1	)		—
Loan originations and principal collections, net		12,473			(15,562	)
Recoveries of loans previously charged off		76			2
Capital expenditures		(280	)		(435	)


Net cash provided (used) by investing activities		12,890			(24,964	)


Cash flows from financing activities:
Net increase in demand deposits, NOW, money market and savings accounts		26,175			16,664
Net increase (decrease) in time deposits		4,606			(1,792	)
Advances from Federal Home Loan Bank		12,000			20,434
Payments on Federal Home Loan Bank advances		(7,438	)		(1,151	)
Net decrease in short term Federal Home Loan Bank advances		(31,900	)		(12,330	)
Increase (decrease) in securities sold under agreements to repurchase		7,391			(288	)
Proceeds from exercise of stock options		48			200
Dividends paid		(1,064	)		(1,049	)


Net cash provided by financing activities		9,818			20,688


Net increase (decrease) in cash and cash equivalents		25,047			(2,344	)
Cash and cash equivalents at beginning of period		16,550			15,495

Cash and cash equivalents at end of period	$	41,597		$	13,151


Supplemental disclosures:
Interest paid	$	3,229		$	5,271
Income taxes paid		971			717

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

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, 2009.

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 Financial Accounting Standards Board (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, 2007. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

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. The Company 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 the new issue did not have a material impact on the Company’s financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. The FASB’s FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, defers until January 1, 2009, the application of SFAS 157 to nonfinancial assets and nonfinancial liabilities not recognized or disclosed at least annually at fair value. This includes nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods. The Company adopted this statement on January 1, 2008.

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, at specified election dates, to choose to measure certain financial instruments at fair value that are not currently required to be measured at fair value. The fair value option is applied on an instrument-by-instrument basis, is irrevocable and can only be applied to an entire instrument and not to specified risks, specific cash flows, or portions of that instrument. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings at each subsequent reporting date and upfront fees and costs related to those items will be recognized in earnings as incurred and not deferred. SFAS No. 159 is effective in fiscal years beginning after November 15, 2007 and may not be applied retrospectively. The adoption of the new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements and Amendment of ARB No. 51 (“SFAS No. 160”). The pronouncement requires all entities to report noncontrolling (minority) interests in subsidiaries as a component of stockholders’ equity. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. Management does not anticipate that this statement will have a material impact on the Company’s financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS 141(R)). SFAS 141(R) significantly changes the accounting for business combinations. Under SFAS 141(R), an acquiring entity is 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 February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP provides guidance on how the transferor and transferee should separately account for a transfer of a financial asset and a related repurchase financing if certain criteria are met. This guidance became effective January 1, 2009. The adoption of this new FSP is not expected to have a material effect on the Company’s results of operations or financial position.

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. 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.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP provides guidance as to factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.” This guidance will be effective January 1, 2009. The adoption is not expected to have a material effect on the Company’s results of operations or financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This standard formalizes minor changes in prioritizing accounting principles used in the preparation of financial statements that are presented in conformity with GAAP. This standard became effective November 15, 2008.

In April 2009, the FASB issued FASB Staff Position 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value measurements in accordance with FASB Statement No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is currently evaluating the impact of the adoption of this FSP on its financial condition and results of operations.

In April 2009, the FASB issued FASB Staff Position 107-1 and Accounting Principles Board Opinion 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 amends FASB Statement No. 107, “Disclosures About Fair Value of Financial Instruments,” to require entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in both interim and annual financial statements. APB 28-1 amends APB Opinion No. 28, “Interim Financial Reporting” to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4. The Company is currently evaluating the impact of the adoption of this FSP on its financial condition and results of operations.

In April 2009, the FASB issued FASB Staff Position 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment (OTTI) guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to OTTI of equity securities. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is currently evaluating the impact of the adoption of this FSP on its financial condition and results of operations.

5.	STOCK BASED COMPENSATION

At June 30, 2009, the Company has five stock-based employee compensation plans. The Company accounts for the plans under SFAS No. 123(R) “Share-Based Payment.” During the six months ended June 30, 2009 and 2008, $2 and $3, respectively, in stock-based employee compensation was recognized. In addition, $46 and $38 of compensation cost was recognized in the same periods, respectively, for compensation costs related to the 2005 Restricted Stock Plan.

6.	PENSION BENEFITS

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2009			2008			2009			2008
	(in thousands)						(in thousands)
Service cost	$	—		$	—		$	—		$	—
Interest cost on benefit obligation		126			125			252			250
Expected return on plan assets		(114	)		(161	)		(228	)		(322	)
Amortization of prior service cost		—			—			—			—
Unrecognized net loss		46						92

Net periodic benefit cost	$	58		$	(36	)	$	116		$	(72	)

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

7.	FAIR VALUE MEASUREMENTS

The following summarizes assets measured at fair value for the period ending June 30, 2009 (in thousands):


			Fair Value Measurements at Reporting Date Using:
	June 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities	$	103,415	$	2,607	$	92,756	$	8,052
Impaired loans		163		—		163		—
Trading securities		310		310		—		—

Total	$	103,888	$	2,917	$	92,919	$	8,052


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for-sale Securities			Total
Beginning balance, January 1, 2009	$	8,502		$	8,502
Total gains or losses (realized/unrealized)
Included in earnings (or changes in net assets)		—			—
Included in other comprehensive income		(374	)		(374	)
Amortization of securities, net		(42	)		(42	)
Transfers in and/or out of Level 3		(34	)		(34	)

Ending balance, June 30, 2009	$	8,052		$	8,052


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	$	—		$	—

The estimated fair values (in thousands) of the Company’s financial instruments are as follows as of December 31:


	June 30, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	41,597	$	41,597	$	16,550	$	16,550
Trading securities		310		310		350		350
Available-for-sale securities		103,415		103,415		103,623		103,623
Federal Home Loan Bank stock		4,171		4,171		4,086		4,086
Federal Reserve Bank stock		554		554		553		553
Loans, net		321,695		323,834		334,639		336,729
Accrued interest receivable		1,689		1,689		1,769		1,769

Financial liabilities:
Deposits		370,314		370,858		339,533		340,121
Federal Home Loan Bank advances		57,087		59,681		84,425		87,695
Securities sold under agreements to repurchase		20,680		20,680		13,289		13,289

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions, except for trading securities which are included in other assets on the consolidated balance sheets. Accounting policies related to financial instruments are described in Note 4.

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 June 30, 2009 amounted to $497.7 million, an increase of $12.2 million, or 2.5%, compared to $485.5 million at December 31, 2008. Cash and cash equivalents totaled $41.6 million, an increase of $25.0 million, or 150.6%, from $16.6 million at December 31, 2008. Loans, net of the allowance for loan losses, totaled $321.7 million, a decrease of $12.9 million, or 3.9%, from $334.6 million at December 31, 2008. Deposits increased $30.8 million, or 9.1%, and Federal Home Loan Bank advances decreased $27.3 million, or 32.3%, from $84.4 million at December 31, 2008. Securities sold under agreements to repurchase increased $7.4 million, or 55.6%, from $13.3 million at December 31, 2008. Total stockholders’ equity was $42.0 million, or 8.4% of total assets, and the book value increased from $15.41 at December 31, 2008 to $15.63 at June 30, 2009, a result of the Company’s net income and the decrease in unrealized losses on available-for-sale securities. The major changes in the balance sheet were a result of the increase in deposits and securities sold under agreements to repurchase, in combination with the decrease in the loan portfolio, creating cash flows used to pay off all short-term borrowings from the Federal Home Loan Bank and building increased cash reserves. Net income for the quarter was impacted by pre-tax charges of

$443,000 for transaction-related expenses and the FDIC’s special assessment, which was applicable to all FDIC insured institutions. During the quarter, the Company evaluated several potential affiliation transactions and on June 16, 2009 the Company entered into an Agreement and Plan of Merger, which provides for the proposed merger of the Company with and into Danvers Bancorp, Inc. Consummation of the merger transaction is subject to a number of customary conditions including receipt of all necessary regulatory and shareholder approvals. Aggregate transaction related expenses for the above matters for the quarter totaled $217,000. Management’s focus continues to be on maintaining asset quality, improvement in operating efficiencies, and closely monitoring its strategic focus and changes in the economic condition of the areas in which the Bank operates. As of June 30, 2009, the Bank continued to meet the definitions and regulatory capital requirements of a well-capitalized institution.

Investment Portfolio

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent. The following table presents the amortized cost of securities and their approximate fair values as of June 30, 2009 (unaudited) and December 31, 2008:


	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Available-for-sale securities:
June 30, 2009 (unaudited):
Debt securities issued by U.S. government corporations and agencies	$	14,682	$	68	$	64	$	14,686
Debt securities issued by states of the United States and political subdivisions of the states		12,599		39		621		12,017
Corporate debt securities		4,063		63		26		4,100
Trust preferred securities		11,718		—		1,654		10,064
Marketable equity securities		593		1		3		591
Mortgage-backed securities		60,835		1,707		1,085		61,457
Debt securities issued by foreign governments		500		—		—		500

	$	104,990	$	1,878	$	3,453	$	103,415

December 31, 2008:
Debt securities issued by U.S. government corporations and agencies	$	8,190	$	97	$	1	$	8,286
Debt securities issued by states of the United States and political subdivisions of the states		12,319		24		608		11,735
Corporate debt securities		1,955		—		10		1,945
Trust preferred securities		11,699		3		1,192		10,510
Marketable equity securities		681		1		7		675
Mortgage-backed securities		70,366		1,431		1,725		70,072
Debt securities issued by foreign governments		400		—		—		400

	$	105,610	$	1,556	$	3,543	$	103,623

Loan Portfolio

The following table summarizes the distribution of the Bank’s loan portfolio as of June 30, 2009 and December 31, 2008:


	June 30, 2009			% of Total		December 31, 2008			% of Total
	(in thousands) (unaudited)					(in thousands)
Commercial, financial and agricultural	$	50,325		15.64	%	$	50,952		15.23	%
Real estate - construction and land development		4,412		1.37	%		4,326		1.29	%
Real estate - residential		121,736		37.84	%		125,281		37.44	%
Real estate - commercial		133,922		41.63	%		141,497		42.28	%
Consumer		2,235		0.69	%		2,398		0.72	%
Other		12,922		4.02	%		13,656		4.08	%

		325,552		101.19	%		338,110		101.04	%
Allowance for loan losses		(4,493	)	-1.40	%		(4,127	)	-1.24	%
Deferred loan costs, net		636		0.21	%		656		0.20	%

Net Loans	$	321,695		100.00	%	$	334,639		100.00	%

Deposits

The following table summarizes deposits as of June 30, 2009 and December 31, 2008:


	June 30, 2009		% of Total		December 31, 2008		% of Total
	(in thousands) (unaudited)				(in thousands)
Demand Deposits	$	74,058	20.00	%	$	74,872	22.05	%
NOW Accounts		55,383	14.96	%		52,380	15.43	%
Money Market Accounts		79,410	21.44	%		80,085	23.59	%
Savings Deposits		84,829	22.91	%		60,168	17.72	%
Time Deposits		76,634	20.69	%		72,028	21.21	%

Total	$	370,314	100.00	%	$	339,533	100.00	%

Comparison of operating results for the three months ended June 30, 2009 and 2008

The Company reported net income for the quarter ended June 30, 2009 of $666,000, or basic and fully diluted earnings of $0.25 per share, compared to net income of $1.0 million, or basic and fully diluted earnings of $0.38 per share, for the same quarter last year. Net income for the quarter was impacted by pre-tax charges of $443,000 for transaction-related expenses and the FDIC’s special assessment, which was applicable to all FDIC insured institutions. During the quarter, the Company evaluated several potential affiliation transactions and on June 16, 2009 the Company entered into an Agreement and Plan of Merger which provides for the proposed merger of the Company with and into Danvers Bancorp, Inc. Consummation of the merger transaction is subject to a number of customary conditions including receipt of all necessary regulatory and shareholder approvals. Aggregate transaction related expenses for the above matters for the quarter totaled $217,000.

The period presented reveals an increase in net interest and dividend income after the provision for loan losses, a reduction in noninterest income and a higher level of noninterest expense. The slight improvement in net interest and dividend income after the provision for loan losses is primarily a result of the reduction in cost of funds, spurred by lower interest rates than those in the comparable period last year. This decline outweighed the lower yields on the Bank’s interest-earning assets, as the Bank’s liabilities were set to reprice in a more accelerated manner than its assets. The net interest margin for the three months ended June 30, 2009 was 3.99%, compared to 3.97% 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 Three Months Ended June 30, 2009							For the Three Months Ended June 30, 2008
	Average Balance		Interest Inc/Exp			Yield/ Rate		Average Balance		Interest Inc/Exp			Yield/ Rate
	(in thousands) (unaudited)		(in thousands) (unaudited)					(in thousands) (unaudited)		(in thousands) (unaudited)
Assets
Federal funds sold and interest-bearing deposits	$	23,654	$	6		0.11	%	$	1,335	$	6		1.79	%
Investments		110,531		1,394	*	5.06	%		127,412		1,782	*	5.62	%
Loans		330,210		4,808	**	5.84	%		337,216		5,147	**	6.14	%

Total interest-earning assets	$	464,395		6,208		5.36	%	$	465,963		6,935		5.99	%


Liabilities
Savings deposits	$	81,267		214		1.06	%	$	54,210		163		1.21	%
NOW accounts		52,333		58		0.44	%		55,219		82		0.60	%
Money market accounts		82,187		292		1.43	%		90,562		532		2.36	%
Time deposits		76,700		491		2.57	%		88,532		828		3.76	%

Total interest-bearing deposits		292,487		1,055		1.45	%		288,523		1,605		2.24	%
Non-interest-bearing deposits		74,719		—		—			71,701		—		—

Total deposits		367,206		1,055		1.15	%		360,224		1,605		1.79	%

FHLB advances		57,504		498		3.47	%		69,590		671		3.88	%
Repurchase agreements		20,567		40		0.78	%		10,660		62		2.32	%

Total other borrowed funds		78,071		538		2.76	%		80,250		733		3.67	%

Total interest-bearing liabilities		370,558		1,593		1.72	%		368,773		2,338		2.55	%

Total deposits and interest-bearing liabilities	$	445,277		1,593		1.43	%	$	440,474		2,338		2.13	%

Net interest income			$	4,615						$	4,597

Net interest spread						3.64	%						3.44	%

Net interest margin						3.99	%						3.97	%


Tax Equivalent Income Adjustment:
State and Municipal Investment Income			$	64	*					$	62	*
Dividends Received Deduction Eligible Securities				—							37	*
Industrial Revenue Bond Income				81	**						84	**

Total Tax Equivalent Income Adjustment			$	145						$	183

*	Amount included in investment income.

**	Amount included in loan income.

Noninterest income decreased for the three ended June 30, 2009 as compared to the same period last year, as fees collected on deposit and loan services declined. Income from wealth management services and the sale of non-deposit products also declined, as they were impacted by the current economic environment and a decline in the market value of assets under management. Noninterest expenses increased, primarily a result of an industry-wide increase in FDIC insurance assessments, which rose from $10,000 for the three months ended June 30, 2008 to $376,000 for the three months ended June 30, 2009. The current year amount includes the June 30, 2009 special assessment, a charge to the Bank of an estimated $226,000. It is generally anticipated that the FDIC regular assessment will continue at increased rates due to significant decreases in the reserves of the FDIC’s Deposit Insurance Fund and that another special assessment charge may be necessary later in 2009.

The following table sets forth the various components of noninterest income and noninterest expense for the quarters ended June 30, 2009 and 2008 and the dollar amount and percentage change between the periods:


	June 30,				Increase (Decrease)
	2009		2008		$			%
	(Dollars in thousands)
	(unaudited)
Noninterest income:
Income from fiduciary activities	$	380	$	467	$	(87	)	-18.63	%
Fees from sale of non-deposit products		45		90		(45	)	-50.00	%
Service charges on deposit accounts		154		159		(5	)	-3.14	%
Other deposit fees		176		212		(36	)	-16.98	%
Income on cash surrender value of life insurance		74		75		(1	)	-1.33	%
Other income		215		190		25		13.16	%

Total noninterest income	$	1,044	$	1,193	$	(149	)	-12.49	%

Noninterest expense:
Salaries and employee benefits	$	2,214	$	2,246	$	(32	)	-1.42	%
Director fees		95		66		29		43.94	%
Occupancy expense		453		466		(13	)	-2.79	%
Equipment expense		188		231		(43	)	-18.61	%
Data processing fees		269		311		(42	)	-13.50	%
Marketing and public relations		86		115		(29	)	-25.22	%
Professional fees		415		164		251		153.05	%
FDIC insurance assessments		376		10		366		3660.00	%
Other expense		407		400		7		1.75	%

Total noninterest expense	$	4,503	$	4,009	$	494		12.32	%

The effective income tax rate decreased to 22.7% for the quarter ended June 30, 2009 from 25.5% for the same period last year. This, combined with the decrease in income before income taxes, generated a $151,000, or 43.5%, decrease in income tax expense for the periods presented.

Comparison of operating results for the six months ended June 30, 2009 and 2008

The Company reported net income for the six months ended June 30, 2009 of $1.6 million, or basic and fully diluted earnings of $0.60 per share, compared to net income of $1.9 million, or basic and fully diluted earnings of $0.72 per share, for the same period last year. As stated in the comparison of quarterly results, net income for the period was impacted by the FDIC’s special assessment, which was applicable to all FDIC insured institutions and pre-tax charges related to transaction-related expenses.

The period presented reveals an increase in net interest and dividend income after the provision for loan losses, a reduction in noninterest income and a higher level of noninterest expense. The reasons for the changes are consistent with those stated in the comparison of quarterly results. The net interest margin for the six months ended June 30, 2009 was 4.16%, compared to 3.88% 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 Six Months Ended June 30, 2009							For the Six Months Ended June 30, 2008
	Average Balance		Interest Inc/Exp			Yield/ Rate		Average Balance		Interest Inc/Exp			Yield/ Rate
	(in thousands)		(in thousands)					(in thousands)		(in thousands)
	(unaudited)		(unaudited)					(unaudited)		(unaudited)
Assets
Federal funds sold and interest-bearing deposits	$	13,458	$	8		0.11	%	$	2,218	$	27		2.48	%
Investments		111,891		2,903	*	5.23	%		124,599		3,427	*	5.53	%
Loans		333,532		9,723	**	5.88	%		331,657		10,361	**	6.28	%

Total interest-earning assets	$	458,881		12,634		5.55	%	$	458,474		13,815		6.06	%


Liabilities
Savings deposits	$	73,272		374		1.03	%	$	51,636		299		1.16	%
NOW accounts		52,239		105		0.41	%		55,408		181		0.66	%
Money market accounts		81,311		595		1.48	%		93,146		1,272		2.75	%
Time deposits		74,183		997		2.71	%		88,015		1,785		4.08	%

Total interest-bearing deposits		281,005		2,071		1.49	%		288,205		3,537		2.47	%
Non-interest-bearing deposits		73,985		—		—			68,860		—		—

Total deposits		354,990		2,071		1.18	%		357,065		3,537		1.99	%

FHLB advances		67,522		1,012		3.02	%		64,296		1,283		4.01	%
Repurchase agreements		17,666		77		0.87	%		10,827		144		2.68	%

Total other borrowed funds		85,188		1,089		2.58	%		75,123		1,427		3.82	%

Total interest-bearing liabilities		366,193		3,160		1.74	%		363,328		4,964		2.75	%

Total deposits and interest-bearing liabilities	$	440,178		3,160		1.45	%	$	432,188		4,964		2.31	%

Net interest income			$	9,474						$	8,851

Net interest spread						3.81	%						3.31	%

Net interest margin						4.16	%						3.88	%


Tax Equivalent Income Adjustment:
State and Municipal Investment Income			$	127	*					$	124	*
Dividends Received Deduction Eligible Securities				—	*						62	*
Industrial Revenue Bond Income				162	**						169	**

Total Tax Equivalent Income Adjustment			$	289						$	355

*	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 six months ended June 30, 2009 and 2008 and the dollar amount and percentage change between the periods:


	June 30,				Increase (Decrease)
	2009		2008		$			%
	(Dollars in thousands)
	(unaudited)
Noninterest income:
Income from fiduciary activities	$	766	$	941	$	(175	)	-18.60	%
Fees from sale of non-deposit products		69		140		(71	)	-50.71	%
Service charges on deposit accounts		305		318		(13	)	-4.09	%
Other deposit fees		358		438		(80	)	-18.26	%
Income on cash surrender value of life insurance		148		148		—		0.00	%
Other income		362		390		(28	)	-7.18	%

Total noninterest income	$	2,008	$	2,375	$	(367	)	-15.45	%


Noninterest expense:
Salaries and employee benefits	$	4,425	$	4,461	$	(36	)	-0.81	%
Director fees		181		143		38		26.57	%
Occupancy expense		947		931		16		1.72	%
Equipment expense		367		477		(110	)	-23.06	%
Data processing fees		621		600		21		3.50	%
Marketing and public relations		187		220		(33	)	-15.00	%
Professional fees		632		330		302		91.52	%
FDIC insurance assessments		511		20		491		2455.00	%
Other expense		792		769		23		2.99	%

Total noninterest expense	$	8,663	$	7,951	$	712		8.95	%

The effective income tax rate increased to 26.1% for the six months ended June 30, 2009 from 24.6% for the same period last year. This increase is due to the lack of tax-exempt income generated from securities eligible for the dividends received deduction, which were present during the prior period.

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. The Company’s provision for loan losses was $150,000 and $375,000 and for the quarter and six months ended June 30, 2009, respectively, compared to $235,000 and $363,000, respectively, for the same periods last year. The allowance for loan losses totaled $4.5 million, or 1.38%, of total loans at June 30, 2009, an increase from 1.22% at December 31, 2008. The level of provision in 2009 has been driven by the decrease in the size of the loan portfolio, reduced charge-offs, reduced non-paying loans and increased recoveries and the resulting increase in the coverage ratio. The quality of the loan portfolio has remained strong despite continued challenging economic conditions, concerns over potential reduction in real estate collateral values and the potential impact of the economic downturn on the Company’s loan portfolio.

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 and trends within the portfolio or “risk rating” of loans by senior management, which is submitted to the Board of Directors for approval. 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.

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

Large groups of 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 six months ended June 30, 2009 and 2008:


	2009			2008
	(in thousands)
	(unaudited)
Balance as of January 1st	$	4,127		$	3,614
Loans charged off		(85	)		(149	)
Provision for loan losses		375			363
Recoveries of loans previously charged off		76			2

Balance as of June 30th	$	4,493		$	3,830

The allowance for loan losses represented 2,756% and 1,644% of non-performing loans, which totaled $163,000 and $233,000, at June 30, 2009 and 2008, respectively. Non-performing loans represented less than 0.1% of total loans and mortgages held-for-sale at June 30, 2009 and 2008.

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

Capital Resources

As of June 30, 2009, the Company had total capital of $42.0 million, an increase of $929,000, or 2.3%, from total capital as of December 31, 2008. The net change in the Company’s capital reflects current year income, dividends paid, the exercise of stock options, the granting and vesting of restricted stock and the decrease in accumulated other comprehensive loss.

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 for each quarter of 2008 and the first and second quarter of 2009.

As of June 30, 2009, the Bank’s Tier 1 capital amounted to 7.93% of average total assets. At June 30, 2009, the Bank’s ratio of risk-based capital to risk-weighted assets amounted to 12.22%, which satisfies the applicable risk-based capital requirements. As of December 31, 2008, the Bank’s Tier 1 capital amounted to 8.69% of average assets and risk-based capital amounted to 12.61% 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.

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 $5.4 million at June 30, 2009; additionally, a minimum amount of contractual payments in the amount of $17.6 million for the mortgage-backed securities portfolio is due within one year at June 30, 2009. 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 June 30, 2009, total off-balance sheet financial commitments, which include unadvanced funds on loans and commitments to fund loans and letters of credit, amounted to approximately $61.5 million.

Forward-Looking Statements

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

(a)

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

(b)

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

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

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

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

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

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

(d)	the impact of technological advances; and

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

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

The Company’s net interest margin for the three and six months ended June 30, 2009 was 3.99% and 4.16%, respectively, in comparison to 3.97% and 3.88%, respectively, for the three and six months ended June 30, 2008. 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 also utilizes consultants to assist with the calculation and review of these various measurements.

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

As of June 30, 2009, the capital ratio of the Company on an EVE basis, at current rate levels, is 11.53%. 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 3.25% to 5.25%) would result in an EVE capital ratio of 12.00%. Alternatively, if interest rates were to decrease over the next year by 100 basis points, the EVE capital ratio is estimated to be 11.38%. 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.

The following table summarizes the net interest income simulation as of June 30, 2009:


	June 30, 2009
	Projected net interest income		Change from year 1 base case
	(Dollars in thousands)
Year 1 projections:
Down 100BP	$	17,816	$	144		0.81	%
Base		17,672		—		—
Up 200BP		17,903		231		1.31	%

Year 2 projections:
Down 100BP	$	17,006	$	(666	)	-3.77	%
Base		17,540		(132	)	-0.75	%
Up 200BP		18,882		1,210		6.85	%

ITEM 4.

CONTROLS AND PROCEDURES.

The Company’s Chief Executive Officer and Chief Financial Officer concluded that based upon an evaluation as of June 30, 2009, 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 June 30, 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.

PART II – OTHER INFORMATION


Item 1.	Legal Proceedings.	None

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	None

Item 3.	Defaults Upon Senior Securities.	None

Item 4.	Submission of Matters to a Vote of Security Holders.	None

Item 5.	Other Information.	None

Item 6.	Exhibits.


11		Computation of Per Share Earnings

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32		Section 1350 Certifications

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: July 30, 2009	By:	/s/ Donat A. Fournier
		Donat A. Fournier
		President and Chief Executive Officer

Date: July 30, 2009	By:	/s/ Michael O. Gilles
		Michael O. Gilles
		Senior Executive Vice President, Chief Financial Officer and Chief Operating Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

BEVERLY NATIONAL CORP 10-Q