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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the Quarterly period ended September 30, 2004

OR

For the transition period from              to             

Commission file number 33-22224-B

Beverly National Corporation

(Name of registrant as specified in its charter)

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 an accelerated filer (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 the latest practicable date: as of November 2, 2004 there were 1,861,332 shares outstanding.

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BEVERLY NATIONAL CORPORATION

INDEX

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BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

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BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

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BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2004 and 2003

(Unaudited)

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BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2004 and 2003

(Unaudited)

(Continued)

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

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BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The interim condensed consolidated financial statements contained herein are unaudited but, in the opinion of management, include all adjustments which 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, 2004.

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.

Earnings per share 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.

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

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability; (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee.

The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the initial recognition and initial measurement provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure requirements effective as of December 31, 2002. The adoption of this interpretation did not have a material effect on the Company’s financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

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SFAS No. 149 (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of an underlying to conform to language used in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” and (d) amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Company’s consolidated financial statements on adoption of this Statement.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any material effect on the Company’s consolidated financial statements.

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

In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106” (“SFAS No. 132 (revised 2003)”). This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” This Statement retains the disclosure requirements contained in SFAS No. 132, “Employers’ Disclosures About Pensions and Other Postretirement Benefits,” which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of this Statement did not have a material impact on the Company’s consolidated financial statements.

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

At September 30, 2004, the Company has four stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Accordingly, no compensation cost has been recognized for its fixed stock option plans. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

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

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The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003, which are contained in the Form 10-K for the period then ended, that it expected pension plan contributions to be $400,000 in 2004. The actual contribution to the pension plan was $293,258. There may be additional contributions to the pension plan in 2004, but it is undetermined at present.

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 subsidiaries, Beverly National Bank (“Bank”), Cabot Street Realty Trust (“CSRT”) and the Bank’s wholly owned subsidiaries, Hannah Insurance Agency, Inc. (“Hannah”), Beverly National Security Corporation (“BNSC”) and Beverly Community Development Corporation (“CDC”). The purpose of the CDC is to promote lending in Beverly’s low and moderate-income census tracks. The purpose of the BNSC is to hold, buy, or sell securities.

Critical Accounting Estimates

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

Summary

Net interest and dividend income after provision for loan losses increased $367,069 and non-interest income increased $204,406 during the nine months ended September 30, 2004, as compared with the nine months ended September 30, 2003. However, non-interest expense increased $963,250 compared to the corresponding period in 2003. This increase was partially offset by reduced income tax expense which decreased $365,014 compared to the corresponding period in 2003. As a result, the Company’s net income for the nine months ended September 30, 2004, was $1,681,166, as compared to net income of $1,707,927 for the nine month period ended September 30, 2003. This is a decrease of $26,761 or 1.6%. Basic earnings per share totaled $.91 for the nine months ended September 30, 2004, as compared to earnings per share of $.94 for the nine months ended September 30, 2003. On a fully diluted basis,

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earnings per share for the first nine months of 2004 amounted to $.87 as compared with $.90 for the same period in 2003. The Company declared and paid quarterly dividends of $.20 in January, April and July 2004 totaling $.60 per share, which was the same as the amount paid for the comparable period in 2003.

During the first nine months of 2004, the Company’s total assets grew $46,800,580 and amounted to $393,975,348 at September 30, 2004. Federal funds sold increased $4,000,000 or 100.0% from December 31, 2003, and investment securities decreased $13,260,927 or 9.5% compared to December 31, 2003. For the first nine months of 2004 as compared to December 31, 2003 net loans increased $49,319,749 or 28.3% due to the increased size of the Bank’s lending staff and expanded marketing efforts. The Bank purchased $4.8 million in bank owned life insurance during 2004.

Deposits increased $32,003,688 or 10.4% during the first nine months of 2004, to $340,284,504 at September 30, 2004. This growth is a result of expanding the base of core deposits and increased deposit activity associated with the trust department. Non-interest bearing deposits increased from $61,442,551 at December 31, 2003 to $73,360,581 at September 30, 2004. A sweep product, which is reported as securities sold under agreements to repurchase, was introduced during the third quarter of 2003. The balance of these borrowings increased from $9,943,208 at December 31, 2003 to $15,129,093 at September 30, 2004. Federal Home Loan Bank borrowings totaled $8,000,000 at September 30, 2004 versus $-0- at December 31, 2003.

NINE MONTHS ENDED SEPTEMBER 30, 2004

AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003

Net Interest and Dividend Income

Net interest and dividend income after provision for loan losses for the nine months ended September 30, 2004 totaled $9,404,419, representing an increase of $367,069 or 4.1% from the same period in 2003. Total interest and dividend income equaled $11,598,057 for the nine months ended September 30, 2004, representing an increase of $227,441 or 2.0% from the same period in 2003. Loan income for the nine months ended September 30, 2004, totaled $8,408,498, representing a decrease of $796,202 or 8.7% from the same period in 2003. Such decrease reflects the re-pricing of the loan portfolio in a low interest rate environment. Interest and dividends on taxable securities for the nine months ended September 30, 2004 totaled $3,066,942, an increase of $1,102,183 or 56.1% from the same period in 2003, and is attributable to a higher volume of investment balances. Other interest earned, including Federal Funds Sold, decreased $101,535 or 62.1% for the nine months ended September 30, 2004 when compared to the same time period in 2003 due to the lower volume of short term investments.

Deposit interest expense equaled $1,709,356 for the nine months ended September 30, 2004, a decrease of $492,414 or 22.4% as compared to the same period in 2003, reflecting the current strategy of managing the cost of funds of the Bank in the current rate environment. The Bank generally pays competitive rates for its deposit base in the local market.

Interest on short-term borrowings totaled $164,282 for the nine months ended September 30, 2004 as compared to $11,496 for the same time period in 2003 primarily due to a new sweep product and the Federal Home Loan Bank borrowings in 2004.

The Bank’s average net interest margin for the nine months ended September 30, 2004 yielded 3.88% in comparison to the 4.16% net interest margin yield for the nine months ended September 30, 2003. This is due to a faster re-pricing of interest earning assets than re-pricing of interest sensitive liabilities and a change in composition of assets.

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Non-interest Income

Non-interest income totaled $2,881,805 for the nine months ended September 30, 2004, an increase of $204,406 or 7.6% from the nine months ended September 30, 2003. Income from fiduciary activities totaled $1,255,263 for the nine months ended September 30, 2004, an increase of $100,421 or 8.7% as compared to $1,154,842 for the nine months ended September 30, 2003. This increase is attributed to an increased fee schedule and the higher market values of the trust department’s holdings upon which trust fees are based. Income from sale of non-deposit products totaled $77,859 for the nine months ended September 30, 2004, as compared to $-0- for the nine months ended September 30, 2003. This increase is due to the introduction of a new product line. Service charges on deposit accounts decreased $25,030 or 5.1% for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003. Other deposit fees increased $130,546 or 44.3% for the nine months ended September 30, 2004 as compared to the same time period in 2003. Gains on sales of securities totaled $73,811 for the nine months ending September 30, 2004 as compared to gains on sales of securities of $247,982 for the corresponding period in 2003. Gains on sales of loans totaled $54,182 for the nine months ended September 30, 2004 as compared to gains on sales of loans of $329,301 for the corresponding period in 2003. This variance is primarily due to higher sales of mortgages in 2003 in comparison to 2004. Other income for the nine-month period ended September 30, 2004 totaled $528,880, an increase of $369,900 or 232.7%, as compared to $158,980 for the nine-month period ended September 30, 2003. This variance is primarily due to the earnings derived from bank owned life insurance in 2004.

Non-interest Expense

Non-interest expense totaled $9,899,476 for the nine months ended September 30, 2004, an increase of $963,250 or 10.8% as compared to the same time period in 2003. This increase is primarily attributed to salaries, directors fees, consulting fees, software expense and check fraud expenses. Salaries and benefits totaled $5,885,901 for the nine months ended September 30, 2004, an increase of $511,830 or 9.5% from the same time period in 2003, due to increased staff in lending and introduction of a formal incentive plan. The costs of equipment totaled $339,290 for the nine months ended September 30, 2004, a decrease of $77,471 or 18.6%, as compared to $416,761 for the same period in 2003, which is due to decreased equipment depreciation and maintenance costs. Professional fees increased $123,317 or 39.4% due to higher consulting expenses in connection with the Bank’s retail banking function. Other expenses totaled $1,537,110 for the nine months ended September 30, 2004, an increase of $412,293 or 36.7% as compared to $1,124,817 for the same period in 2003, due to insurance expense, software expense, check fraud expense, directors’ fees and a lower return on investments funding certain non-qualified supplemental executive retirement plans.

Income Taxes

The income tax provision for the nine months ended September 30, 2004 totaled $705,582 in comparison to an income tax provision of $1,070,596 for the same time period in 2003. This is a result of decreased taxable income combined with a lowered state tax rate. The Bank established a security corporation, “to hold investment securities, BNSC” which helped reduce the effective state tax rate.

Net Income

Net income amounted to $1,681,166 for the nine months ended September 30, 2004 as compared to net income of $1,707,927 for the same period in 2003, which is a decrease of $26,761 or 1.6%. The earnings decrease is primarily due to increased non-interest expense, as well as lower gains on mortgage sales and lower gains on sales of securities, in the first nine months of 2004 as compared to the corresponding period in 2003.

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THREE MONTHS ENDED SEPTEMBER 30, 2004

AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003

Net Interest and Dividend Income

Net interest and dividend income after provision for loan losses for the three months ended September 30, 2004 totaled $3,370,918, representing an increase of $300,691 or 9.8% from the same period in 2003. Total interest and dividend income equaled $4,247,319 for the three months ended September 30, 2004, representing an increase of $520,111 or 14.0% from the same period in 2003. Loan income for the three months ended September 30, 2004, totaled $3,128,509, an increase of $187,368 or 6.4% from the same period in 2003 reflecting the higher loan volume and re-pricing of the portfolio in a low interest rate environment. Interest and dividends on taxable securities for the three months ended September 30, 2004 totaled $1,078,922, an increase of $360,715 or 50.2% from the same period in 2003, and is attributable to a higher volume of investment balances in a low interest rate environment. The other interest earned, including Federal Funds Sold, decreased $35,247 or 64.2% for the three months ended September 30, 2004 when compared to the same time period in 2003 due to a low interest rate environment and the lower volume of short term investments.

Deposit interest expense equaled $594,500 for the three months ended September 30, 2004, a decrease of $51,300 or 7.9% as compared to the same period in 2003, reflecting the current strategy of managing the cost of funds of the Bank in the current rate environment. The Bank generally pays competitive rates for its deposit base in the local market.

Interest on short-term borrowings totaled $91,901 for the three months ended September 30, 2004 as compared to $11,181 for the same time period in 2003 due to a sweep product introduced during the third quarter of 2003 and Federal Home Loan Bank borrowings in 2004.

Non-interest Income

Non-interest income totaled $1,001,271 for the three months ended September 30, 2004, an increase of $356,923 or 55.4% from the three months ended September 30, 2003. Income from fiduciary activities totaled $414,869 for the three months ended September 30, 2004, an increase of $43,095 or 11.6% as compared to $371,774 for the three months ended September 30, 2003, which is attributed to an increased fee schedule and the higher market values of the trust department’s holdings upon which trust fees are based. Income from sale of non-deposit products such as insurance and securities sold through third-party network arrangements, totaled $56,037 for the three months ended September 30, 2004, as compared to $-0- for the three months ended September 30, 2003. Service charges on deposit accounts decreased $13,147 or 8.0% for the three months ended September 30, 2004 as compared to the same time period in 2003. Other deposit fees increased $61,197 or 63.8% for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 due to per unit fee increases in 2004. Gains on sales of securities totaled $14,359 for the three months ending September 30, 2004 as compared to gains on sales of securities of $27,379 for the corresponding period in 2003. Other income for the three-month period ended September 30, 2004 totaled $180,592, an increase of $219,235 or 567.3%, as compared to a net other expense of $38,643 for the three-month period ended September 30, 2003. This variance is primarily due to earnings derived from bank owned life insurance.

Non-interest Expense

Non-interest expense totaled $3,415,905 for the three months ended September 30, 2004, an increase of $603,599 or 21.5% as compared to the same time period in 2003. This increase is primarily attributed to the increase in salary and benefits as well as other expenses including insurance expense, software expense, check fraud expense, directors’ fees and lower return on investments funding certain non-qualified supplemental executive retirement plans. Salaries and benefits totaled $2,080,081 for the three months ended September 30, 2004, an increase of $436,092 or 26.5% from the same time period in 2003, due to increased staff in lending, salary increases and a formal introduction

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of an incentive plan. The costs of equipment totaled $114,162 for the three months ended September 30, 2004, a decrease of $10,330 or 8.3%, as compared to $124,492 for the same period in 2003, which is due to decreased equipment depreciation and maintenance costs. Marketing and public relations expense increased $25,940 or 24.8% for the three months ended September 30, 2004 as compared to the same time period in 2003 due to the timing of marketing programs. Other expenses totaled $496,818 for the three months ended September 30, 2004, an increase of $146,506 or 41.8% as compared to $350,312 for the same period in 2003, due to insurance expense, software expense, check fraud expense, directors’ fees and a lower return on investments funding certain non-qualified supplemental executive retirement plans.

Income Taxes

The income tax provision for the three months ended September 30, 2004 totaled $299,200 in comparison to an income tax provision of $343,500 for the same time period in 2003. Although taxable income increased, it was offset by a lower state tax rate. The Bank established BNSC to hold investment securities, which helped reduce the effective state tax rate.

Net Income

Net income amounted to $657,084 for the three months ended September 30, 2004 as compared to net income of $558,769 for the same period in 2003, which is an increase of $98,315 or 17.6%. The earnings increase is primarily due to a stronger net interest income and stronger non-interest income from wealth management, non-deposit fees and bank owned life insurance, in the third quarter 2004 as compared to the corresponding period in 2003.

Provisions and Allowance for Loan Losses

Credit risk is inherent in the business of extending loans. The Bank maintains an allowance for credit losses through charges to earnings.

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 Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS 114”). Impaired loans receive individual evaluation of the allowance necessary on a quarterly basis. Impaired loans are defined in the Bank’s Loan Policy as those instances in which it is probable that the Bank will not be able to collect all principal and interest due according to the terms of the note.

Commercial loans and residential mortgages are considered to be impaired under any one of the following circumstances: placement on non-accrual status; exceeding 90 days delinquent; troubled debt restructure consummated after December 31, 1994; or classified as “doubtful,” meaning that they have weaknesses which make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

An individual allowance for an impaired loan is based upon an assessment of the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The loss factors applied as a general allowance are determined by a periodic analysis of the Allowance for Loan Losses. This analysis considers historical loan losses and delinquency figures. It also looks at delinquency trends.

Concentrations of credit and local economic factors are also evaluated on a

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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.

Loan loss provisions of $320,000 were made during the nine months ended September 30, 2004, as compared to $120,000 for the same period in 2003. At September 30, 2004, the allowance for loan losses totaled $2,152,797 representing 203.5% of non-performing loans. Non-performing loans totaled $1,058,099, which represented 0.47% of total loans, including mortgages held for sale. At September 30, 2003, the allowance for loan losses amounted to $2,207,196, representing 352.2% of non-performing loans. At September 30, 2003, non-performing loans totaled $626,627, which represented 0.34% of total loans, including mortgages held for sale. While non-performing loans increased in 2004, the ratio of non-performing loans to total loans remained low by industry standards. A total of $421,999 of loans were charged-off by the Bank during the first nine months of 2004 as compared to $44,709 charged off during the corresponding period in 2003. The Company had established reserves to cover the exposure of the charge off as the credits deteriorated. A total of $72,121 was recovered on previously charged-off loans during the nine months ended September 30, 2004 compared to $119,327 recovered during the corresponding period of 2003. The allowance for loan losses to loans is .95% at September 30, 2004 as compared to 1.24% at December 31, 2003. Management believes that the allowance for loan losses is adequate. Using the best available information, no assurances can be given that future additions to the allowance will not be necessary based on changes in economic and real estate market conditions, further 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. Additionally, with expectations of the Bank to grow its loan portfolio, ongoing periodic provisions to the allowance are likely to be necessary to maintain adequate coverage ratios.

Capital Resources

As of September 30, 2004, the Company had total capital in the amount of $27,476,403, an increase of $1,234,373 or 4.7% as compared with December 31, 2003.

Generally, banks are required to maintain Tier 1 capital at a level equal to or greater than 4.0% of their total assets. As of September 30, 2004, the Bank’s Tier 1 capital amounted to 6.49% of total assets. At September 30, 2004, the Bank’s ratio of risk-based capital to risk weighted assets amounted to 10.80%, which satisfies the applicable risk based capital requirements. As of December 31, 2003, the Bank’s Tier 1 capital amounted to 7.00% of average assets and risk-based capital amounted to 13.71% of total risk based assets.

Generally, bank holding companies are also required to maintain Tier 1 capital at a level equal to or greater than 4.0% of their total assets. As of September 30, 2004, the Company’s Tier 1 capital amounted to 7.27% of total assets. At September 30, 2004, the Company’s ratio of risk-based capital to risk weighted assets amounted to 12.00%, which satisfies the applicable risk based capital requirements. As of December 31, 2003, the Company’s Tier 1 capital amounted to 7.78% of average assets and risk-based capital amounted to 15.02% of total risk based assets.

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The capital ratios of the Company and the Bank exceed all regulatory requirements, and the Bank and the Company are considered to be “well capitalized” by their federal supervisory agencies.

Liquidity

The primary function of asset/liability management is to assure adequate liquidity and maintain an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company’s interest rate sensitivity management practices seek to provide consistency in the maintenance of net interest margins and to foster a sustainable growth of net interest income despite changing interest rates.

Certain marketable investment securities, particularly those of shorter maturities, are the principal source of asset liquidity. The Company maintains such securities in an available for sale account as a liquidity resource. Securities maturing in one year or less amounted to $5,747,209 of the investment securities portfolio at September 30, 2004; additionally, a minimum amount of contractual payments in the amount of $12,371,142 for the mortgage-backed securities portfolio is due within one year at September 30, 2004. Assets such as federal funds sold, mortgages held for sale, payments of mortgage-backed securities, as well as maturing loans, are also sources of liquidity. The Company’s objectives are to be substantially neutral with respect to interest rate sensitivity and maintain a net cumulative gap at one year of less than 15% of total earning assets. The Company’s current practices are consistent with these objectives.

Off Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. In the opinion of Management, these off-balance sheet arrangements are not likely to have a material effect on the Company’s financial condition, results of operations, or liquidity.

Forward-Looking Statements

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

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:

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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 Bank’s average net interest margin for the nine months ended September 30, 2004 yielded 3.88% in comparison to the 4.16% net interest margin yield for the nine months ended September 30, 2003. This is due to a faster re-pricing of interest earning assets than re-pricing of interest sensitive liabilities in an increasing interest rate environment and a change in composition of assets.

Interest rate risk is the exposure of net interest income to movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and re-financings, the carrying value of investment securities classified as available for sale and the flow and mix of deposits.

The Company’s Asset/Liability Management Committee, comprised of the President and Chief Executive Officer of the Company, the Senior Vice President and Chief Financial Officer, the Executive Vice President and Senior Loan Officer, the Executive Vice President of Retail Banking, and marketing, retail and finance officers, 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. This committee generally meets weekly and sets the rates paid on deposits, approves loan pricing and reviews investment transactions. This Asset/Liability Management Committee reports to the Board’s ALCO Committee, which is comprised of several Directors, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer.

The Company is subject to interest rate risk in the event that rates either increase or decrease. In the event that interest rates increase, the value of net assets (the liquidation value of stockholders’ equity) would (decrease) because the Company is liability sensitive, the liabilities will re-price faster than assets. As of September 30, 2004, it is estimated that an increase in interest rates of 200 basis points (for example, an increase in the prime rate from 4.75% to 6.75%) would (decrease) the value of net interest income by $330,902.

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If interest rates were to decrease, net interest income would decrease because the Company has more interest-earning assets, which would re-price downward than it has interest-bearing liabilities. As a result, net interest income is instead subject to the risk of a decline in rates. Not only are there fewer interest-bearing liabilities to re-price, but many of these liabilities could not re-price much lower because the rates paid on them are already low. Accordingly, if interest rates were to decrease by 100 basis points (for example, a decrease in the prime rate from 4.75% to 3.75%) it is estimated that net interest income would (decrease) by $151,391.

At September 30, 2004, it was estimated that the value of the net assets of the Company would decrease by $426,444 if interest rates were to increase by 200 basis points and that the Company’s net assets would increase by $2,749,698 if interest rates were to decline by 100 basis points. The year-to-year change in these estimates is a result of increased volume in longer term assets which would lengthen the duration of the net assets of the Company and the value of the core deposit liabilities.

ITEM 4. CONTROLS AND PROCEDURES

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

As of September 30, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2004, there were no changes in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Therefore, no corrective actions were taken.

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PART II - Other Information

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SIGNATURES

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

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