First Bancorp, Inc /ME/ - Quarter Report: 2013 March (Form 10-Q)

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 March 31, 2013

Commission File Number 0-26589

THE FIRST BANCORP, INC.

(Exact name of Registrant as specified in its charter)



MAINE	01-0404322
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)



MAIN STREET, DAMARISCOTTA, MAINE	04543
(Address of principal executive offices)	(Zip code)

(207) 563-3195

Registrant's telephone number, including area code

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

Yes [X] No[_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,

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 [X] No[_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [_] No [X]

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of May 1, 2013

Common Stock: 10,657,484 shares

Table of Contents



Part I. Financial Information	Page 1
Selected Financial Data (Unaudited)	Page 1
Item 1 – Financial Statements	Page 2
Report of Independent Registered Public Accounting Firm	Page 2
Consolidated Balance Sheets (Unaudited)	Page 3
Consolidated Statements of Income and Comprehensive Income (Unaudited)	Page 4
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)	Page 5
Consolidated Statements of Cash Flows (Unaudited)	Page 6
Notes to Consolidated Financial Statements	Page 7
Note 1 – Basis of Presentation	Page 7
Note 2 –Investment Securities	Page 7
Note 3 – Loans	Page 11
Note 4 – Allowance for Loan Losses	Page 16
Note 5 – Stock Options and Stock Based Compensation	Page 26
Note 6 – Preferred and Common Stock	Page 27
Note 7 – Earnings Per Share	Page 29
Note 8 – Employee Benefit Plans	Page 29
Note 9 - Other Comprehensive Income	Page 31
Note 10 – Acquisitions and Intangible Assets	Page 31
Note 11 – Mortgage Servicing Rights	Page 32
Note 12 – Income Taxes	Page 33
Note 13 - Certificates of Deposit	Page 33
Note 14 – Reclassifications	Page 33
Note 15 – Fair Value Disclosures	Page 33
Note 16 – Subsequent Event	Page 39
Note 17 – Impact of Recently Issued Accounting Standards	Page 39
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	Page 41
Forward-Looking Statements	Page 41
Critical Accounting Policies	Page 41
Use of Non-GAAP Financial Measures	Page 42
Executive Summary	Page 43
Net Interest Income	Page 44
Average Daily Balance Sheets	Page 46
Non-Interest Income	Page 46
Non-Interest Expense	Page 47
Income Taxes	Page 47
Investments	Page 47
Impaired Securities	Page 49
Federal Home Loan Bank Stock	Page 51
Loans and Loans Held for Sale	Page 51
Credit Risk Management and Allowance for Loan Losses	Page 52
Non-Performing Loans and Troubled Debt Restructured	Page 56
Impaired Loans	Page 59
Past Due Loans	Page 60
Potential Problem Loans and Loans in Process of Foreclosure	Page 60
Other Real Estate Owned	Page 60
Goodwill	Page 61
Liquidity Management	Page 62



Deposits	Page 62
Borrowed Funds	Page 63
Shareholders' Equity	Page 63
Off-Balance-Sheet Financial Instruments and Contractual Obligations	Page 63
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	Page 65
Market-Risk Management	Page 65
Asset/Liability Management	Page 65
Interest Rate Risk Management	Page 66
Item 4: Controls and Procedures	Page 66
Part II – Other Information	Page 68
Item 1 – Legal Proceedings	Page 68
Item 1a – Risk Factors	Page 68
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	Page 68
Item 3 – Default Upon Senior Securities	Page 68
Item 4 – Other Information	Page 68
Item 5 – Exhibits	Page 69
Signatures	Page 71

Part I. Financial Information

Selected Financial Data (Unaudited)

The First Bancorp, Inc. and Subsidiary



Dollars in thousands,	As of and for the three months ended March 31,
except for per share amounts	2013			2012

Summary of Operations
Interest Income	$	12,265		$	13,106
Interest Expense	3,102			3,300
Net Interest Income	9,163			9,806
Provision for Loan Losses	1,500			2,100
Non-Interest Income	3,288			2,168
Non-Interest Expense	7,389			6,178
Net Income	2,856			2,913
Per Common Share Data
Basic Earnings per Share	$	0.27		$	0.28
Diluted Earnings per Share	0.27			0.28
Cash Dividends Declared	0.195			0.195
Book Value per Common Share	14.43			14.15
Tangible Book Value per Common Share²	11.55			11.34
Market Value	18.01			14.83
Financial Ratios
Return on Average Equity¹	7.96		%	8.30		%
Return on Average Tangible Common Equity^1,2	9.45		%	9.68		%
Return on Average Assets¹	0.82		%	0.84		%
Average Equity to Average Assets	11.13		%	10.95		%
Average Tangible Equity to Average Assets²	8.96		%	8.98		%
Net Interest Margin Tax-Equivalent^1,2	3.06		%	3.22		%
Dividend Payout Ratio	72.22		%	69.64		%
Allowance for Loan Losses/Total Loans	1.47		%	1.49		%
Non-Performing Loans to Total Loans	2.42		%	2.81		%
Non-Performing Assets to Total Assets	2.00		%	2.01		%
Efficiency Ratio²	56.63		%	50.40		%
At Period End
Total Assets	$	1,416,787		$	1,423,792
Total Loans	863,477			870,892
Total Investment Securities	451,072			469,540
Total Deposits	975,861			1,015,835
Total Shareholders' Equity	163,671			151,593

¹Annualized using a 365-day basis in 2013 and 366-day basis in 2012

²These ratios use non-GAAP financial measures. See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional disclosures and information.

Page 1

Item 1 – Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

The First Bancorp, Inc.

We have reviewed the accompanying interim consolidated financial information of The First Bancorp, Inc. and Subsidiary as of March 31, 2013 and 2012 and for the three-month periods then ended. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

/s/ Berry Dunn McNeil & Parker, LLC

Portland, Maine

May 9, 2013

Page 2

Consolidated Balance Sheets (Unaudited)

The First Bancorp, Inc. and Subsidiary



	March 31, 2013			December 31, 2012			March 31, 2012
Assets
Cash and cash equivalents	$	16,523,000		$	14,958,000		$	12,123,000
Interest bearing deposits in other banks	5,941,000			1,638,000			1,532,000
Securities available for sale	286,369,000			291,614,000			317,111,000
Securities to be held to maturity (fair value of $156,552,000 at March 31, 2013, $150,247,000 at December 31, 2012 and $144,633,000 at March 31, 2012)	150,791,000			143,320,000			137,606,000
Restricted equity securities, at cost	13,912,000			14,448,000			14,823,000
Loans held for sale	244,000			1,035,000			184,000
Loans	863,477,000			869,284,000			870,892,000
Less allowance for loan losses	12,720,000			12,500,000			12,954,000
Net loans	850,757,000			856,784,000			857,938,000
Accrued interest receivable	5,709,000			4,912,000			5,690,000
Premises and equipment, net	22,867,000			22,988,000			18,722,000
Other real estate owned	7,387,000			7,593,000			4,214,000
Goodwill	29,805,000			29,805,000			27,684,000
Other assets	26,482,000			25,904,000			26,165,000
Total assets	$	1,416,787,000		$	1,414,999,000		$	1,423,792,000
Liabilities
Demand deposits	$	81,467,000		$	90,252,000		$	69,520,000
NOW deposits	137,356,000			147,309,000			120,844,000
Money market deposits	88,344,000			80,983,000			75,752,000
Savings deposits	141,541,000			135,250,000			118,946,000
Certificates of deposit	527,153,000			505,056,000			630,773,000
Total deposits	975,861,000			958,850,000			1,015,835,000
Borrowed funds – short term	121,031,000			142,750,000			109,990,000
Borrowed funds – long term	140,154,000			140,155,000			130,161,000
Other liabilities	16,070,000			16,921,000			16,213,000
Total liabilities	1,253,116,000			1,258,676,000			1,272,199,000
Shareholders' equity
Preferred stock, $1,000 preference value per share	9,926,000			12,402,000			12,328,000
Common stock, one cent par value per share	106,000			98,000			98,000
Additional paid-in capital	57,985,000			46,314,000			46,011,000
Retained earnings	90,299,000			89,692,000			86,150,000
Accumulated other comprehensive income (loss)
Net unrealized gain on securities available-for-sale	5,474,000			7,940,000			7,088,000
Net unrealized loss on postretirement benefit costs	(119,000		)	(123,000		)	(82,000		)
Total shareholders' equity	163,671,000			156,323,000			151,593,000
Total liabilities & shareholders' equity	$	1,416,787,000		$	1,414,999,000		$	1,423,792,000
Common Stock
Number of shares authorized	18,000,000			18,000,000			18,000,000
Number of shares issued and outstanding	10,653,799			9,859,914			9,839,760
Book value per common share	$	14.43		$	14.60		$	14.15
Tangible book value per common share	$	11.55		$	11.47		$	11.34

See Report of Independent Registered Public Accounting Firm.

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

Page 3

Consolidated Statements of Income and Comprehensive Income (Unaudited)

The First Bancorp, Inc. and Subsidiary



	For the three months ended March 31,
	2013			2012
Interest income
Interest and fees on loans	$	8,792,000		$	9,392,000
Interest on deposits with other banks	2,000			—
Interest and dividends on investments	3,471,000			3,714,000
Total interest income	12,265,000			13,106,000
Interest expense
Interest on deposits	1,987,000			2,193,000
Interest on borrowed funds	1,115,000			1,107,000
Total interest expense	3,102,000			3,300,000
Net interest income	9,163,000			9,806,000
Provision for loan losses	1,500,000			2,100,000
Net interest income after provision for loan losses	7,663,000			7,706,000
Non-interest income
Investment management and fiduciary income	449,000			396,000
Service charges on deposit accounts	648,000			638,000
Net securities gains	299,000			523,000
Mortgage origination and servicing income, net of amortization	896,000			(156,000		)
Other operating income	996,000			767,000
Total non-interest income	3,288,000			2,168,000
Non-interest expense
Salaries and employee benefits	3,474,000			3,084,000
Occupancy expense	547,000			414,000
Furniture and equipment expense	622,000			573,000
FDIC insurance premiums	290,000			301,000
Amortization of identified intangibles	82,000			71,000
Other operating expense	2,374,000			1,735,000
Total non-interest expense	7,389,000			6,178,000
Income before income taxes	3,562,000			3,696,000
Income tax expense	706,000			783,000
NET INCOME	$	2,856,000		$	2,913,000
Basic earnings per common share	$	0.27		$	0.28
Diluted earnings per common share	$	0.27		$	0.28
Other comprehensive income (loss), net of tax
Net unrealized loss on securities available for sale	(2,466,000		)	(313,000		)
Amortization of unrecognized postretirement benefits transition obligation	4,000			5,000
Other comprehensive loss	(2,462,000		)	(308,000		)
Comprehensive income	$	394,000		$	2,605,000

See Report of Independent Registered Public Accounting Firm.

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

Page 4

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

The First Bancorp, Inc. and Subsidiary



	Preferred stock			Common stock and additional paid-in capital				Retained earnings			Accumulated other comprehensive income			Total shareholders' equity
	Preferred stock			Shares	Amount			Retained earnings			Accumulated other comprehensive income			Total shareholders' equity
Balance at December 31, 2011	$	12,303,000		9,812,180	$	45,927,000		$	85,314,000		$	7,314,000		$	150,858,000
Net income	—			—	—			2,913,000			—			2,913,000
Net unrealized loss on securities available for sale, net of tax	—			—	—			—			(313,000		)	(313,000		)
Amortization of unrecognized transition obligation for postretirement benefits, net of tax	—			—	—			—			5,000			5,000
Comprehensive income	—			—	—			2,913,000			(308,000		)	2,605,000
Cash dividends declared ($0.195 per share)	—			—	—			(2,077,000		)	—			(2,077,000		)
Equity compensation expense	—			—	24,000			—			—			24,000
Amortization of premium for preferred stock issuance	25,000			—	(25,000		)	—			—			—
Proceeds from sale of common stock	—			27,580	183,000			—			—			183,000
Balance at March 31, 2012	$	12,328,000		9,839,760	$	46,109,000		$	86,150,000		$	7,006,000		$	151,593,000

Balance at December 31, 2012	$	12,402,000		9,859,914	$	46,412,000		$	89,692,000		$	7,817,000		$	156,323,000
Net income	—			—	—			2,856,000			—			2,856,000
Net unrealized loss on securities available for sale, net of tax	—			—	—			—			(2,466,000		)	(2,466,000		)
Amortization of unrecognized transition obligation for postretirement benefits, net of tax	—			—	—			—			4,000			4,000
Comprehensive income	—			—	—			2,856,000			(2,462,000		)	394,000
Cash dividends declared ($0.195 per share)	—			—	—			(2,249,000		)	—			(2,249,000		)
Equity compensation expense	—			—	54,000			—			—			54,000
Amortization of premium for preferred stock issuance	24,000			—	(24,000		)	—			—			—
Payment to repurchase preferred stock	(2,500,000		)	—	—			—			—			(2,500,000		)
Proceeds from sale of common stock	—			793,885	11,649,000			—			—			11,649,000
Balance at March 31, 2013	$	9,926,000		10,653,799	$	58,091,000		$	90,299,000		$	5,355,000		$	163,671,000

See Report of Independent Registered Public Accounting Firm.

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

Page 5

Consolidated Statements of Cash Flows (Unaudited)

The First Bancorp, Inc. and Subsidiary



	For the three months ended
	March 31, 2013			March 31, 2012
Cash flows from operating activities
Net income	$	2,856,000		$	2,913,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	405,000			333,000
Change in deferred taxes	(87,000		)	(644,000		)
Provision for loan losses	1,500,000			2,100,000
Loans originated for resale	(19,144,000		)	(1,550,000		)
Proceeds from sales and transfers of loans	20,506,000			1,443,000
Net gain on sales of loans	(571,000		)	(77,000		)
Net gain on sale or call of securities	(299,000		)	(523,000		)
Net amortization of premiums on investments	615,000			697,000
Net loss on sale of other real estate owned	49,000			43,000
Provision for losses on other real estate owned	9,000			—
Equity compensation expense	54,000			24,000
Net (increase) decrease in other assets and accrued interest	(1,491,000		)	417,000
Net increase in other liabilities	472,000			1,393,000
Amortization of investment in limited partnership	130,000			119,000
Net acquisition amortization	82,000			32,000
Net cash provided by operating activities	5,086,000			6,720,000
Cash flows from investing activities
Increase in interest-bearing deposits in other banks	(4,303,000		)	(1,532,000		)
Proceeds from sales of securities available for sale	4,965,000			10,943,000
Proceeds from maturities, payments and calls of securities available for sale	19,639,000			11,656,000
Proceeds from maturities, payments and calls of securities to be held to maturity	13,779,000			5,924,000
Proceeds from sales of other real estate owned	781,000			268,000
Purchases of securities available for sale	(23,484,000		)	(54,096,000		)
Purchases of securities to be held to maturity	(21,235,000		)	(20,936,000		)
Redemption of restricted equity securities	536,000			620,000
Net (increase) decrease in loans	3,894,000			(8,481,000		)
Capital expenditures	(284,000		)	(213,000		)
Net cash used in investing activities	(5,712,000		)	(55,847,000		)
Cash flows from financing activities
Net decrease in demand, savings, and money market accounts	(5,086,000		)	(7,095,000		)
Net increase in certificates of deposit	22,097,000			81,629,000
Net decrease in short-term borrowings	(21,720,000		)	(25,505,000		)
Repurchase of preferred stock	(2,500,000		)	—
Proceeds from sale of common stock	11,649,000			183,000
Dividends paid	(2,249,000		)	(2,077,000		)
Net cash provided by financing activities	2,191,000			47,135,000
Net increase (decrease) in cash and cash equivalents	1,565,000			(1,992,000		)
Cash and cash equivalents at beginning of period	14,958,000			14,115,000
Cash and cash equivalents at end of period	$	16,523,000		$	12,123,000
Interest paid	$	3,201,000		$	3,390,000
Income taxes paid	—			—
Non-cash transactions
Net transfer from loans to other real estate owned	$	633,000		$	431,000

See Report of Independent Registered Public Accounting Firm.

Page 6

Notes to Consolidated Financial Statements

The First Bancorp, Inc. and Subsidiary

Note 1 – Basis of Presentation

The First Bancorp, Inc. (the Company) is a financial holding company that owns all of the common stock of The First, N.A. (the Bank). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2013 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2012.

Subsequent Events

Events occurring subsequent to March 31, 2013, have been evaluated as to their potential impact to the financial statements.

Note 2 – Investment Securities

The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2013:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value (Estimated)
Securities available for sale
Mortgage-backed securities	$	153,477,000	$	4,028,000	$	(308,000	)	$	157,197,000
State and political subdivisions	122,893,000		5,866,000		(1,159,000		)	127,600,000
Other equity securities	1,578,000		46,000		(52,000		)	1,572,000
	$	277,948,000	$	9,940,000	$	(1,519,000	)	$	286,369,000
Securities to be held to maturity
U.S. Government-sponsored agencies	$	60,940,000	$	79,000	$	(289,000	)	$	60,730,000
Mortgage-backed securities	46,604,000		2,634,000		(218,000		)	49,020,000
State and political subdivisions	42,947,000		3,560,000		(5,000		)	46,502,000
Corporate securities	300,000		—		—			300,000
	$	150,791,000	$	6,273,000	$	(512,000	)	$	156,552,000
Restricted equity securities
Federal Home Loan Bank Stock	$	12,876,000	$	—	$	—		$	12,876,000
Federal Reserve Bank Stock	1,036,000		—		—			1,036,000
	$	13,912,000	$	—	$	—		$	13,912,000

Page 7

The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2012:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value (Estimated)
Securities available for sale
Mortgage-backed securities	$	164,752,000	$	4,636,000	$	(295,000	)	$	169,093,000
State and political subdivisions	113,069,000		8,074,000		(199,000		)	120,944,000
Other equity securities	1,578,000		43,000		(44,000		)	1,577,000
	$	279,399,000	$	12,753,000	$	(538,000	)	$	291,614,000
Securities to be held to maturity
U.S. Government-sponsored agencies	$	60,919,000	$	242,000	$	(182,000	)	$	60,979,000
Mortgage-backed securities	39,193,000		2,850,000		(19,000		)	42,024,000
State and political subdivisions	42,908,000		4,036,000		—			46,944,000
Corporate securities	300,000		—		—			300,000
	$	143,320,000	$	7,128,000	$	(201,000	)	$	150,247,000
Restricted equity securities
Federal Home Loan Bank Stock	$	13,412,000	$	—	$	—		$	13,412,000
Federal Reserve Bank Stock	1,036,000		—		—			1,036,000
	$	14,448,000	$	—	$	—		$	14,448,000

The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2012:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value (Estimated)
Securities available for sale
Mortgage-backed securities	$	226,671,000	$	5,805,000	$	(361,000	)	$	232,115,000
State and political subdivisions	77,672,000		5,540,000		(50,000		)	83,162,000
Other equity securities	1,863,000		44,000		(73,000		)	1,834,000
	$	306,206,000	$	11,389,000	$	(484,000	)	$	317,111,000
Securities to be held to maturity
U.S. Government-sponsored agencies	$	39,694,000	$	37,000	$	(435,000	)	$	39,296,000
Mortgage-backed securities	52,185,000		3,638,000		—			55,823,000
State and political subdivisions	45,427,000		3,941,000		(154,000		)	49,214,000
Corporate securities	300,000		—		—			300,000
	$	137,606,000	$	7,616,000	$	(589,000	)	$	144,633,000
Restricted equity securities
Federal Home Loan Bank Stock	$	13,412,000	$	—	$	—		$	13,412,000
Federal Reserve Bank Stock	1,411,000		—		—			1,411,000
	$	14,823,000	$	—	$	—		$	14,823,000

Page 8

The following table summarizes the contractual maturities of investment securities at March 31, 2013:



	Securities available for sale				Securities to be held to maturity
	Amortized Cost		Fair Value (Estimated)		Amortized Cost		Fair Value (Estimated)
Due in 1 year or less	$	13,854,000	$	14,054,000	$	3,034,000	$	3,065,000
Due in 1 to 5 years	24,804,000		25,288,000		22,651,000		23,118,000
Due in 5 to 10 years	13,683,000		14,560,000		27,914,000		30,237,000
Due after 10 years	224,029,000		230,895,000		97,192,000		100,132,000
Equity securities	1,578,000		1,572,000		—		—
	$	277,948,000	$	286,369,000	$	150,791,000	$	156,552,000

The following table summarizes the contractual maturities of investment securities at December 31, 2012:



	Securities available for sale				Securities to be held to maturity
	Amortized Cost		Fair Value (Estimated)		Amortized Cost		Fair Value (Estimated)
Due in 1 year or less	$	18,761,000	$	18,926,000	$	3,754,000	$	3,785,000
Due in 1 to 5 years	27,243,000		27,816,000		11,950,000		12,701,000
Due in 5 to 10 years	16,686,000		17,666,000		27,461,000		29,986,000
Due after 10 years	215,131,000		225,629,000		100,155,000		103,775,000
Equity securities	1,578,000		1,577,000		—		—
	$	279,399,000	$	291,614,000	$	143,320,000	$	150,247,000

The following table summarizes the contractual maturities of investment securities at March 31, 2012:



	Securities available for sale				Securities to be held to maturity
	Amortized Cost		Fair Value (Estimated)		Amortized Cost		Fair Value (Estimated)
Due in 1 year or less	$	5,894,000	$	5,948,000	$	4,663,000	$	4,710,000
Due in 1 to 5 years	59,887,000		60,971,000		12,173,000		12,940,000
Due in 5 to 10 years	13,014,000		13,442,000		35,563,000		38,100,000
Due after 10 years	225,548,000		234,916,000		85,207,000		88,883,000
Equity securities	1,863,000		1,834,000		—		—
	$	306,206,000	$	317,111,000	$	137,606,000	$	144,633,000

At March 31, 2013, securities with a fair value of $131,155,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a fair value of $154,817,000 as of December 31, 2012 and $136,156,000 at March 31, 2012, pledged for the same purposes.

Page 9

Gains and losses on the sale of securities available for sale are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the three months March 31, 2013 and 2012:



	For the three months ended March 31,
	2013		2012
Proceeds from sales of securities	$	4,965,000	$	10,943,000
Gross realized gains	299,000		812,000
Gross realized losses	—		(289,000		)
Net gain	$	299,000	$	523,000
Related income taxes	$	105,000	$	183,000

Management reviews securities with unrealized losses for other than temporary impairment. As of March 31, 2013, there were 116 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which seven had been temporarily impaired for 12 months or more. At the present time, there have been no material changes in the credit quality of these securities resulting in other than temporary impairment, and in Management's opinion, no additional write-down for other-than-temporary impairment is warranted. Information regarding securities temporarily impaired as of March 31, 2013 is summarized below:



	Less than 12 months					12 months or more					Total
	Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses
U.S. Government-sponsored agencies	$	35,681,000	$	(289,000	)	$	—	$	—		$	35,681,000	$	(289,000	)
Mortgage-backed securities	23,546,000		(457,000		)	1,652,000		(69,000		)	25,198,000		(526,000		)
State and political subdivisions	30,069,000		(1,164,000		)	—		—			30,069,000		(1,164,000		)
Other equity securities	—		—			282,000		(52,000		)	282,000		(52,000		)
	$	89,296,000	$	(1,910,000	)	$	1,934,000	$	(121,000	)	$	91,230,000	$	(2,031,000	)

As of December 31, 2012, there were 42 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 7 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2012 is summarized below:



	Less than 12 months					12 months or more					Total
	Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses
U.S. Government-sponsored agencies	$	15,817,000	$	(182,000	)	$	—	$	—		$	15,817,000	$	(182,000	)
Mortgage-backed securities	9,982,000		(231,000		)	2,534,000		(83,000		)	12,516,000		(314,000		)
State and political subdivisions	8,621,000		(199,000		)	—		—			8,621,000		(199,000		)
Other equity securities	—		—			222,000		(44,000		)	222,000		(44,000		)
	$	34,420,000	$	(612,000	)	$	2,756,000	$	(127,000	)	$	37,176,000	$	(739,000	)

Page 10

As of March 31, 2012, there were 42 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 8 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of March 31, 2012 is summarized below:



	Less than 12 months					12 months or more					Total
	Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses
U.S. Government-sponsored agencies	$	33,514,000	$	(435,000	)	$	—	$	—		$	33,514,000	$	(435,000	)
Mortgage-backed securities	35,242,000		(280,000		)	6,608,000		(81,000		)	41,850,000		(361,000		)
State and political subdivisions	4,924,000		(204,000		)	—		—			4,924,000		(204,000		)
Other equity securities	—		—			253,000		(73,000		)	253,000		(73,000		)
	$	73,680,000	$	(919,000	)	$	6,861,000	$	(154,000	)	$	80,541,000	$	(1,073,000	)

The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of March 31, 2013 and 2012, and December 31, 2012, the Bank's investment in FHLB stock totaled $12,875,000, $13,412,000 and $13,412,000, respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value.

Note 3 – Loans

The following table shows the composition of the Company's loan portfolio as of March 31, 2013 and 2012 and at December 31, 2012:



	March 31, 2013				December 31, 2012				March 31, 2012
Commercial
Real estate	$	250,180,000	29.0	%	$	251,335,000	28.9	%	$	254,708,000	29.3	%
Construction	17,090,000		2.0	%	22,417,000		2.6	%	30,828,000		3.5	%
Other	89,874,000		10.4	%	81,183,000		9.3	%	85,467,000		9.8	%
Municipal	15,017,000		1.7	%	14,704,000		1.7	%	15,961,000		1.8	%
Residential
Term	376,029,000		43.5	%	379,447,000		43.7	%	358,394,000		41.2	%
Construction	4,222,000		0.5	%	6,459,000		0.7	%	6,451,000		0.7	%
Home equity line of credit	96,536,000		11.2	%	99,082,000		11.4	%	103,372,000		11.9	%
Consumer	14,529,000		1.7	%	14,657,000		1.7	%	15,711,000		1.8	%
Total	$	863,477,000	100.0	%	$	869,284,000	100.0	%	$	870,892,000	100.0	%

Loan balances include net deferred loan costs of $1,901,000 as of March 31, 2013, $1,783,000 as of December 31, 2012, and $1,520,000 as of March 31, 2012. Pursuant to collateral agreements, qualifying first mortgage loans, which totaled $253,030,956 at March 31, 2013, $256,378,000 at December 31, 2012, and $229,448,000 at March 31, 2012, were used to collateralize borrowings from the Federal Home Loan Bank of Boston. In addition, commercial, construction and home equity loans totaling $233,980,000 at March 31, 2013, $220,520,000 at December 31, 2012, and $227,022,000 at March 31, 2012, were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston that is currently unused.

Loans on non-accrual status totaled $20,924,000 at March 31, 2013, $19,150,000 at December 31, 2012 and $24,438,000 at March 31, 2012. Loans past due 90 days or greater which are accruing interest totaled $389,000 at March 31, 2013, $1,051,000 at December 31, 2012 and $1,955,000 at March 31, 2012. The Company continues to accrue interest on these loans because it believes collection of principal and interest is reasonably assured.

Page 11

For all loan classes, loans over 30 days past due are considered deliquent. Information on the past-due status of loans by class of financing receivable as of March 31, 2013, is presented in the following table:



	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		All Past Due		Current		Total		90+ Days & Accruing
Commercial
Real estate	$	709,000	$	1,360,000	$	2,295,000	$	4,364,000	$	245,816,000	$	250,180,000	$	—
Construction	22,000		—		30,000		52,000		17,038,000		17,090,000		—
Other	1,403,000		2,828,000		2,464,000		6,695,000		83,179,000		89,874,000		—
Municipal	—		—		—		—		15,017,000		15,017,000		—
Residential
Term	1,496,000		3,032,000		8,844,000		13,372,000		362,657,000		376,029,000		233,000
Construction	189,000		—		—		189,000		4,033,000		4,222,000		—
Home equity line of credit	916,000		248,000		771,000		1,935,000		94,601,000		96,536,000		—
Consumer	100,000		67,000		156,000		323,000		14,206,000		14,529,000		156,000
Total	$	4,835,000	$	7,535,000	$	14,560,000	$	26,930,000	$	836,547,000	$	863,477,000	$	389,000

Information on the past-due status of loans by class of financing receivable as of December 31, 2012, is presented in the following table:



	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		All Past Due		Current		Total		90+ Days & Accruing
Commercial
Real estate	$	2,172,000	$	346,000	$	2,380,000	$	4,898,000	$	246,437,000	$	251,335,000	$	102,000
Construction	—		29,000		35,000		64,000		22,353,000		22,417,000		—
Other	658,000		218,000		2,306,000		3,182,000		78,001,000		81,183,000		2,000
Municipal	136,000		—		—		136,000		14,568,000		14,704,000		—
Residential
Term	2,404,000		1,082,000		9,298,000		12,784,000		366,663,000		379,447,000		363,000
Construction	188,000		—		—		188,000		6,271,000		6,459,000		—
Home equity line of credit	430,000		133,000		1,136,000		1,699,000		97,383,000		99,082,000		539,000
Consumer	101,000		70,000		45,000		216,000		14,441,000		14,657,000		45,000
Total	$	6,089,000	$	1,878,000	$	15,200,000	$	23,167,000	$	846,117,000	$	869,284,000	$	1,051,000

Information on the past-due status of loans by class of financing receivable as of March 31, 2012, is presented in the following table:



	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		All Past Due		Current		Total		90+ Days & Accruing
Commercial
Real estate	$	547,000	$	76,000	$	4,526,000	$	5,149,000	$	249,559,000	$	254,708,000	$	1,025,000
Construction	1,951,000		—		35,000		1,986,000		28,842,000		30,828,000		—
Other	956,000		622,000		1,869,000		3,447,000		82,020,000		85,467,000		563,000
Municipal	—		—		—		—		15,961,000		15,961,000		—
Residential
Term	3,324,000		—		9,299,000		12,623,000		345,771,000		358,394,000		359,000
Construction	492,000		—		1,454,000		1,946,000		4,505,000		6,451,000		—
Home equity line of credit	86,000		—		1,156,000		1,242,000		102,130,000		103,372,000		—
Consumer	154,000		19,000		8,000		181,000		15,530,000		15,711,000		8,000
Total	$	7,510,000	$	717,000	$	18,347,000	$	26,574,000	$	844,318,000	$	870,892,000	$	1,955,000

Page 12

For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.

Cash payments received on non-accrual loans, which includes impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of March 31, 2013 and 2012 and at December 31, 2012 is presented in the following table:



	March 31, 2013		December 31, 2012		March 31, 2012
Commercial
Real estate	$	4,599,000	$	4,603,000	$	7,160,000
Construction	1,045,000		101,000		946,000
Other	3,152,000		3,459,000		2,634,000
Municipal	—		—		—
Residential
Term	11,098,000		10,333,000		10,893,000
Construction	—		—		1,454,000
Home equity line of credit	1,030,000		654,000		1,336,000
Consumer	—		—		15,000
Total	$	20,924,000	$	19,150,000	$	24,438,000

Impaired loans include restructured loans and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference.

Page 13

A breakdown of impaired loans by class of financing receivable as of and for the period ended March 31, 2013, is presented in the following table:



	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Recognized Interest Income
With No Related Allowance
Commercial
Real estate	$	11,010,000	$	11,468,000	$	—	$	10,154,000	$	101,000
Construction	95,000		115,000		—		43,000		1,000
Other	3,580,000		4,315,000		—		3,695,000		27,000
Municipal	—		—		—		—		—
Residential
Term	13,611,000		15,476,000		—		13,078,000		98,000
Construction	—		—		—		—		—
Home equity line of credit	1,683,000		1,912,000		—		1,492,000		8,000
Consumer	—		—		—		—		—
	$	29,979,000	$	33,286,000	$	—	$	28,462,000	$	235,000
With an Allowance Recorded
Commercial
Real estate	$	6,524,000	$	7,217,000	$	1,473,000	$	6,800,000	$	62,000
Construction	2,252,000		2,252,000		760,000		2,975,000		26,000
Other	1,970,000		1,991,000		535,000		2,097,000		9,000
Municipal	—		—		—		—		—
Residential
Term	6,651,000		6,786,000		337,000		6,814,000		64,000
Construction	—		—		—		—		—
Home equity line of credit	—		—		—		174,000		—
Consumer	—		—		—		—		—
	$	17,397,000	$	18,246,000	$	3,105,000	$	18,860,000	$	161,000
Total
Commercial
Real estate	$	17,534,000	$	18,685,000	$	1,473,000	$	16,954,000	$	163,000
Construction	2,347,000		2,367,000		760,000		3,018,000		27,000
Other	5,550,000		6,306,000		535,000		5,792,000		36,000
Municipal	—		—		—		—		—
Residential
Term	20,262,000		22,262,000		337,000		19,892,000		162,000
Construction	—		—		—		—		—
Home equity line of credit	1,683,000		1,912,000		—		1,666,000		8,000
Consumer	—		—		—		—		—
	$	47,376,000	$	51,532,000	$	3,105,000	$	47,322,000	$	396,000

Substantially all interest income recognized on impaired loans for all classes of financing receivables was recognized on a cash basis as received.

Page 14

A breakdown of impaired loans by class of financing receivable as of and for the year ended December 31, 2012, is presented in the following table:



	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Recognized Interest Income
With No Related Allowance
Commercial
Real estate	$	9,386,000	$	9,963,000	$	—	$	10,102,000	$	199,000
Construction	101,000		115,000		—		2,533,000		—
Other	4,737,000		5,345,000		—		2,877,000		53,000
Municipal	—		—		—		—		—
Residential
Term	12,747,000		14,440,000		—		9,801,000		189,000
Construction	—		—		—		560,000		—
Home equity line of credit	1,311,000		1,440,000		—		961,000		27,000
Consumer	—		—		—		3,000		—
	$	28,282,000	$	31,303,000	$	—	$	26,837,000	$	468,000
With an Allowance Recorded
Commercial
Real estate	$	6,388,000	$	7,018,000	$	1,523,000	$	4,614,000	$	211,000
Construction	3,253,000		3,253,000		969,000		1,816,000		85,000
Other	1,124,000		1,126,000		652,000		1,974,000		38,000
Municipal	—		—		—		—		—
Residential
Term	6,697,000		6,842,000		395,000		9,066,000		237,000
Construction	—		—		—		261,000		—
Home equity line of credit	—		—		—		442,000		—
Consumer	—		—		—		9,000		—
	$	17,462,000	$	18,239,000	$	3,539,000	$	18,182,000	$	571,000
Total
Commercial
Real estate	$	15,774,000	$	16,981,000	$	1,523,000	$	14,716,000	$	410,000
Construction	3,354,000		3,368,000		969,000		4,349,000		85,000
Other	5,861,000		6,471,000		652,000		4,851,000		91,000
Municipal	—		—		—		—		—
Residential
Term	19,444,000		21,282,000		395,000		18,867,000		426,000
Construction	—		—		—		821,000		—
Home equity line of credit	1,311,000		1,440,000		—		1,403,000		27,000
Consumer	—		—		—		12,000		—
	$	45,744,000	$	49,542,000	$	3,539,000	$	45,019,000	$	1,039,000

Page 15

A breakdown of impaired loans by class of financing receivable as of and for the period ended March 31, 2012, is presented in the following table:



	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Recognized Interest Income
With No Related Allowance
Commercial
Real estate	$	10,704,000	$	10,704,000	$	—	$	8,445,000	$	40,000
Construction	1,362,000		1,362,000		—		2,983,000		13,000
Other	2,811,000		2,811,000		—		2,981,000		8,000
Municipal	—		—		—		—		—
Residential
Term	9,930,000		9,930,000		—		10,001,000		30,000
Construction	1,120,000		1,120,000		—		718,000		—
Home equity line of credit	774,000		774,000		—		776,000		—
Consumer	—		—		—		12,000		—
	$	26,701,000	$	26,701,000	$	—	$	25,916,000	$	91,000
With an Allowance Recorded
Commercial
Real estate	$	3,591,000	$	3,591,000	$	944,000	$	4,278,000	$	10,000
Construction	731,000		731,000		117,000		597,000		—
Other	1,075,000		1,075,000		480,000		2,223,000		5,000
Municipal	—		—		—		—		—
Residential
Term	8,124,000		8,124,000		592,000		7,449,000		59,000
Construction	334,000		334,000		49,000		598,000		—
Home equity line of credit	562,000		562,000		156,000		519,000		—
Consumer	15,000		15,000		10,000		15,000		—
	$	14,432,000	$	14,432,000	$	2,348,000	$	15,679,000	$	74,000
Total
Commercial
Real estate	$	14,295,000	$	14,295,000	$	944,000	$	12,723,000	$	50,000
Construction	2,093,000		2,093,000		117,000		3,580,000		13,000
Other	3,886,000		3,886,000		480,000		5,204,000		13,000
Municipal	—		—		—		—		—
Residential
Term	18,054,000		18,054,000		592,000		17,450,000		89,000
Construction	1,454,000		1,454,000		49,000		1,316,000		—
Home equity line of credit	1,336,000		1,336,000		156,000		1,295,000		—
Consumer	15,000		15,000		10,000		27,000		—
	$	41,133,000	$	41,133,000	$	2,348,000	$	41,595,000	$	165,000

Note 4. Allowance for Loan Losses

The Company provides for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. A systematic methodology is used for determining the allowance that includes a quarterly review process, risk rating changes, and adjustments to the allowance. The loan portfolio is classified in eight segments and credit risk is evaluated separately in each segment. The appropriate level of the allowance is evaluated continually based on a review of significant loans, with a particular emphasis on nonaccruing, past due, and other loans that may require special attention. Other factors include general conditions in local and national economies; loan portfolio composition and asset quality indicators; and internal factors such as changes in underwriting policies, credit administration practices, experience, ability and depth of lending management, among others. The allowance consists of four elements: (1) specific reserves for loans evaluated individually for

Page 16

impairment; (2) general reserves for each portfolio segment based on historical loan loss experience, (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies, and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance. A breakdown of the allowance for loan losses as of March 31, 2013, December 31, 2012, and March 31, 2012, by class of financing receivable and allowance element, is presented in the following tables:



As of March 31, 2013	Specific Reserves on Loans Evaluated Individually for Impairment		General Reserves on Loans Based on Historical Loss Experience		Reserves for Qualitative Factors		Unallocated Reserves		Total Reserves
Commercial
Real estate	$	1,473,000	$	2,177,000	$	2,229,000	$	—	$	5,879,000
Construction	760,000		150,000		154,000		—		1,064,000
Other	535,000		781,000		799,000		—		2,115,000
Municipal	—		—		18,000		—		18,000
Residential
Term	337,000		336,000		440,000		—		1,113,000
Construction	—		4,000		5,000		—		9,000
Home equity line of credit	—		522,000		337,000		—		859,000
Consumer	—		345,000		229,000		—		574,000
Unallocated	—		—		—		1,089,000		1,089,000
	$	3,105,000	$	4,315,000	$	4,211,000	$	1,089,000	$	12,720,000



As of December 31, 2012	Specific Reserves on Loans Evaluated Individually for Impairment		General Reserves on Loans Based on Historical Loss Experience		Reserves for Qualitative Factors		Unallocated Reserves		Total Reserves
Commercial
Real estate	$	1,523,000	$	2,369,000	$	1,973,000	$	—	$	5,865,000
Construction	969,000		213,000		177,000		—		1,359,000
Other	652,000		763,000		635,000		—		2,050,000
Municipal	—		—		18,000		—		18,000
Residential
Term	395,000		278,000		436,000		—		1,109,000
Construction	—		4,000		7,000		—		11,000
Home equity line of credit	—		315,000		339,000		—		654,000
Consumer	—		362,000		230,000		—		592,000
Unallocated	—		—		—		842,000		842,000
	$	3,539,000	$	4,304,000	$	3,815,000	$	842,000	$	12,500,000

Page 17



As of March 31, 2012	Specific Reserves on Loans Evaluated Individually for Impairment		General Reserves on Loans Based on Historical Loss Experience		Reserves for Qualitative Factors		Unallocated Reserves		Total Reserves
Commercial
Real estate	$	944,000	$	2,648,000	$	2,270,000	$	—	$	5,862,000
Construction	117,000		316,000		271,000		—		704,000
Other	480,000		886,000		759,000		—		2,125,000
Municipal	—		—		19,000		—		19,000
Residential
Term	592,000		185,000		459,000		—		1,236,000
Construction	49,000		2,000		8,000		—		59,000
Home equity line of credit	156,000		176,000		350,000		—		682,000
Consumer	10,000		319,000		239,000		—		568,000
Unallocated	—		—		—		1,699,000		1,699,000
	$	2,348,000	$	4,532,000	$	4,375,000	$	1,699,000	$	12,954,000

Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon our evaluation of various current conditions, including those listed below.


•	General economic conditions.


•	Credit quality trends with emphasis on loan delinquencies, nonaccrual levels and classified loans.


•	Recent loss experience in particular segments of the portfolio.


•	Loan volumes and concentrations, including changes in mix.


•	Other factors, including changes in quality of the loan origination; loan policy changes; changes in credit risk management processes; Bank regulatory and external loan review examination results.

The qualitative amount assigned to the substandard commercial loan segments increased between March 31, 2013 from December 31, 2012 to adjust historical loss averages for the impact of recent write downs taken on a large, atypical credit. Changes to qualitative adjustments for other major portfolio segments were not material at March 31, 2013. The unallocated component of the Allowance for Loan Losses totaled $1,089,000 at March 31, 2013. This compares to $842,000 as of December 31, 2012 and $1,699,000 as of March 31, 2012. Management views these fluctuations in the unallocated portion of the Allowance for Loan Losses to be immaterial. The unallocated amount was deemed appropriate due to the following:


•	In general, the unallocated component is available to cover imprecision or uncertainties to incorporate the range of probable outcomes inherent in estimates used for the allowance, which may change from period to period. An example of this could be a delay in receiving an updated appraisal on a troubled credit.


•	An internal analysis completed on foreclosed property found that when these properties are sold, on average, the selling price is approximately 20% below the appraised value of the property at the time of take in. The unallocated provides for uncertainty in the value of properties when in impaired loan status.


•	Watch-rated commercial loans have increased after bottoming out in late 2009 and early 2010. Additional losses may exist in this portfolio segment, yet are not identifiable at present. The unallocated portion provides some level of support for this.

Construction loans, both commercial and residential, comprise a very small portion of the portfolio, and at 17.0% of capital are well under the regulatory guidance of 100.0% of capital at March 31, 2013. Construction loans and non-owner-occupied commercial real estate loans are at 73.9% of total capital, well under regulatory guidance of 300.0% of capital at March 31, 2013.

Page 18

The process of establishing the allowance with respect to the commercial loan portfolio begins when a loan officer initially assigns each loan a risk rating, using established credit criteria. Approximately 50% of the outstanding loans and commitments are subject to review and validation annually by an independent consulting firm, as well as periodically by the Company's internal credit review function. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In determining the Company's ability to collect certain loans, Management also considers the fair value of underlying collateral. The risk rating system has eight levels, defined as follows:

1 Strong

Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral.

2 Above Average

Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings and/or cash flow with a consistent record of solid financial performance.

3 Satisfactory

Credits rated "3" are characterized by borrowers with favorable liquidity, profitability and financial condition with adequate cash flow to pay debt service.

4 Average

Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements.

5 Watch

Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.

6 Other Assets Especially Mentioned (OAEM)

Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date.

7 Substandard

Loans in this category are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank may sustain some loss if the deficiencies are not corrected.

8 Doubtful

Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

Page 19

The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of March 31, 2013:



	Commercial Real Estate		Commercial Construction		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	19,000	$	—	$	259,000	$	1,641,000	$	1,919,000
2 Above Average	12,288,000		271,000		6,262,000		7,589,000		26,410,000
3 Satisfactory	36,187,000		2,410,000		16,846,000		3,419,000		58,862,000
4 Average	103,957,000		9,505,000		32,430,000		2,368,000		148,260,000
5 Watch	37,703,000		22,000		15,679,000		—		53,404,000
6 OAEM	25,057,000		3,001,000		4,768,000		—		32,826,000
7 Substandard	34,530,000		1,881,000		13,628,000		—		50,039,000
8 Doubtful	439,000		—		2,000		—		441,000
Total	$	250,180,000	$	17,090,000	$	89,874,000	$	15,017,000	$	372,161,000

The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of December 31, 2012:



	Commercial Real Estate		Commercial Construction		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	19,000	$	—	$	271,000	$	1,731,000	$	2,021,000
2 Above Average	13,871,000		1,274,000		4,084,000		7,061,000		26,290,000
3 Satisfactory	34,454,000		2,312,000		14,578,000		3,487,000		54,831,000
4 Average	99,712,000		12,322,000		28,618,000		2,425,000		143,077,000
5 Watch	43,369,000		1,721,000		19,524,000		—		64,614,000
6 OAEM	26,302,000		79,000		5,300,000		—		31,681,000
7 Substandard	33,153,000		4,709,000		8,806,000		—		46,668,000
8 Doubtful	455,000		—		2,000		—		457,000
Total	$	251,335,000	$	22,417,000	$	81,183,000	$	14,704,000	$	369,639,000

The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of March 31, 2012:



	Commercial Real Estate		Commercial Construction		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	23,000	$	—	$	486,000	$	1,911,000	$	2,420,000
2 Above Average	19,788,000		—		4,418,000		7,602,000		31,808,000
3 Satisfactory	32,903,000		1,396,000		12,183,000		3,819,000		50,301,000
4 Average	105,446,000		19,130,000		31,412,000		2,629,000		158,617,000
5 Watch	42,680,000		3,530,000		19,473,000		—		65,683,000
6 OAEM	18,302,000		538,000		4,644,000		—		23,484,000
7 Substandard	34,887,000		6,234,000		12,158,000		—		53,279,000
8 Doubtful	679,000		—		693,000		—		1,372,000
Total	$	254,708,000	$	30,828,000	$	85,467,000	$	15,961,000	$	386,964,000

Page 20

Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral and other factors as applicable.

Residential loans are comprised of two classes: term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75% to 80% loan to value based upon current appraisal information at the time the loan is made. Home equity loans and lines of credit are typically written to the same underwriting standards. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value of 80% to 90% of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals.

Residential loans, consumer loans and home equity lines of credit are segregated into homogeneous pools with similar risk characteristics. Trends and current conditions are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for these segments are consistent with those for the commercial and municipal classes. Certain loans in the residential, home equity lines of credit and consumer classes identified as having the potential for further deterioration are analyzed individually to confirm impairment status, and to determine the need for a specific reserve; however there is no formal rating system used for these classes. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One- to four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off.

There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the three months ended March 31, 2013.

The following table presents allowance for loan losses activity by class for the three-months ended March 31, 2013, and allowance for loan loss balances by class and related loan balances by class as of March 31, 2013:



	Commercial						Municipal		Residential					Home Equity Line of Credit		Consumer		Unallocated		Total
	Real Estate		Construction		Other				Term		Construction
For the three months ended March 31, 2013
Beginning balance	$	5,865,000	$	1,359,000	$	2,050,000	$	18,000	$	1,109,000	$	11,000		$	654,000	$	592,000	$	842,000	$	12,500,000
Charge offs	54,000		403,000		288,000		—		200,000		—			362,000		127,000		—		1,434,000
Recoveries	—		—		103,000		—		2,000		—			1,000		48,000		—		154,000
Provision	68,000		108,000		250,000		—		202,000		(2,000		)	566,000		61,000		247,000		1,500,000
Ending balance	$	5,879,000	$	1,064,000	$	2,115,000	$	18,000	$	1,113,000	$	9,000		$	859,000	$	574,000	$	1,089,000	$	12,720,000
Allowance for loan losses as of March 31, 2013
Ending balance specifically evaluated for impairment	$	1,473,000	$	760,000	$	535,000	$	—	$	337,000	$	—		$	—	$	—	$	—	$	3,105,000
Ending balance collectively evaluated for impairment	$	4,406,000	$	304,000	$	1,580,000	$	18,000	$	776,000	$	9,000		$	859,000	$	574,000	$	1,089,000	$	9,615,000
Related loan balances as of March 31, 2013
Ending balance	$	250,180,000	$	17,090,000	$	89,874,000	$	15,017,000	$	376,029,000	$	4,222,000		$	96,536,000	$	14,529,000	$	—	$	863,477,000
Ending balance specifically evaluated for impairment	$	17,534,000	$	2,347,000	$	5,550,000	$	—	$	20,262,000	$	—		$	1,683,000	$	—	$	—	$	47,376,000
Ending balance collectively evaluated for impairment	$	232,646,000	$	14,743,000	$	84,324,000	$	15,017,000	$	355,767,000	$	4,222,000		$	94,853,000	$	14,529,000	$	—	$	816,101,000

Page 21

The following table presents allowance for loan losses activity by class for the year-ended December 31, 2012 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2012:



	Commercial						Municipal			Residential				Home Equity Line of Credit		Consumer		Unallocated			Total
	Real Estate		Construction		Other					Term		Construction
For the year ended December 31, 2012
Beginning balance	$	5,659,000	$	658,000	$	2,063,000	$	19,000		$	1,159,000	$	255,000	$	595,000	$	584,000	$	2,008,000		$	13,000,000
Charge offs	1,394,000		928,000		3,215,000		—			1,911,000		389,000		688,000		555,000		—			9,080,000
Recoveries	13,000		246,000		113,000		—			110,000		54,000		1,000		208,000		—			745,000
Provision	1,587,000		1,383,000		3,089,000		(1,000		)	1,751,000		91,000		746,000		355,000		(1,166,000		)	7,835,000
Ending balance	$	5,865,000	$	1,359,000	$	2,050,000	$	18,000		$	1,109,000	$	11,000	$	654,000	$	592,000	$	842,000		$	12,500,000
Allowance for loan losses as of December 31, 2012
Ending balance specifically evaluated for impairment	$	1,523,000	$	969,000	$	652,000	$	—		$	395,000	$	—	$	—	$	—	$	—		$	3,539,000
Ending balance collectively evaluated for impairment	$	4,342,000	$	390,000	$	1,398,000	$	18,000		$	714,000	$	11,000	$	654,000	$	592,000	$	842,000		$	8,961,000
Related loan balances as of December 31, 2012
Ending balance	$	251,335,000	$	22,417,000	$	81,183,000	$	14,704,000		$	379,447,000	$	6,459,000	$	99,082,000	$	14,657,000	$	—		$	869,284,000
Ending balance specifically evaluated for impairment	$	15,774,000	$	3,354,000	$	5,861,000	$	—		$	19,444,000	$	—	$	1,311,000	$	—	$	—		$	45,744,000
Ending balance collectively evaluated for impairment	$	235,561,000	$	19,063,000	$	75,322,000	$	14,704,000		$	360,003,000	$	6,459,000	$	97,771,000	$	14,657,000	$	—		$	823,540,000

Page 22

The following table presents allowance for loan losses activity by class for the three-months ended March 31, 2012 , and allowance for loan loss balances by class and related loan balances by class as of March 31, 2012:



	Commercial							Municipal		Residential					Home Equity Line of Credit		Consumer		Unallocated			Total
	Real Estate		Construction			Other				Term		Construction
For the three months ended March 31, 2012
Beginning balance	$	5,659,000	$	658,000		$	2,063,000	$	19,000	$	1,159,000	$	255,000		$	595,000	$	584,000	$	2,008,000		$	13,000,000
Charge offs	—		—			2,002,000		—		239,000		—			49,000		180,000		—			2,470,000
Recoveries	—		246,000			2,000		—		1,000		—			—		75,000		—			324,000
Provision	203,000		(200,000		)	2,062,000		—		315,000		(196,000		)	136,000		89,000		(309,000		)	2,100,000
Ending balance	$	5,862,000	$	704,000		$	2,125,000	$	19,000	$	1,236,000	$	59,000		$	682,000	$	568,000	$	1,699,000		$	12,954,000
Allowance for loan losses as of March 31, 2012
Ending balance specifically evaluated for impairment	$	944,000	$	117,000		$	480,000	$	—	$	592,000	$	49,000		$	156,000	$	10,000	$	—		$	2,348,000
Ending balance collectively evaluated for impairment	$	4,918,000	$	587,000		$	1,645,000	$	19,000	$	644,000	$	10,000		$	526,000	$	558,000	$	1,699,000		$	10,606,000
Related loan balances as of March 31, 2012
Ending balance	$	254,708,000	$	30,828,000		$	85,467,000	$	15,961,000	$	358,394,000	$	6,451,000		$	103,372,000	$	15,711,000	$	—		$	870,892,000
Ending balance specifically evaluated for impairment	$	14,295,000	$	2,093,000		$	3,886,000	$	—	$	18,054,000	$	1,454,000		$	1,336,000	$	15,000	$	—		$	41,133,000
Ending balance collectively evaluated for impairment	$	240,413,000	$	28,735,000		$	81,581,000	$	15,961,000	$	340,340,000	$	4,997,000		$	102,036,000	$	15,696,000	$	—		$	829,759,000

Troubled Debt Restructured

A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:


•	The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and


•	The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.

As of March 31, 2013, the Company had 106 loans with a value of $31,147,000 that have been classified as TDRs. This compares to 101 loans with a value of $29,955,000 and 71 loans with a value of $20,647,000 classified as TDRs as of December 31, 2012 and March 31, 2012, respectively. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the cashflow modification on the loan, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell.

Page 23

The following table shows TDRs by class and the specific reserve as of March 31, 2013:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	20	$	13,715,000	$	313,000
Construction	3	2,317,000		1,194,000
Other	24	3,063,000		40,000
Municipal	—	—		—
Residential
Term	54	11,195,000		1,034,000
Construction	—	—		—
Home equity line of credit	5	857,000		9,000
Consumer	—	—		—
	106	$	31,147,000	$	2,590,000

The following table shows TDRs by class and the specific reserve as of December 31, 2012:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	18	$	11,961,000	$	823,000
Construction	3	3,319,000		969,000
Other	23	3,074,000		574,000
Municipal	—	—		—
Residential
Term	53	10,945,000		224,000
Construction	—	—		—
Home equity line of credit	4	656,000		—
Consumer	—	—		—
	101	$	29,955,000	$	2,590,000

The following table shows TDRs by class and the specific reserve as of March 31, 2012:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	12	$	7,610,000	$	271,000
Construction	1	1,148,000		—
Other	12	1,919,000		85,000
Municipal	—	—		—
Residential
Term	46	9,970,000		250,000
Construction	—	—		—
Home equity line of credit	—	—		—
Consumer	—	—		—
	71	$	20,647,000	$	606,000

Page 24

As of March 31, 2013, 11 of the loans classified as TDRs with a total balance of $2,503,000 were more than 30 days past due. Of these loans, 2 loans with an outstanding balance of $409,000 had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of March 31, 2013:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	2	$	409,000	$	—
Construction	—	—		—
Other	—	—		—
Municipal	—	—		—
Residential
Term	9	2,094,000		421,000
Construction	—	—		—
Home equity line of credit	—	—		—
Consumer	—	—		—
	11	$	2,503,000	$	421,000

As of March 31, 2012, 11 of the loans classified as TDRs with a total balance of $2,258,000 were more than 30 days past due. Of these loans, 7 loans with an outstanding balance of $1,733,000 had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of March 31, 2012:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	—	$	—	$	—
Construction	—	—		—
Other	4	667,000		44,000
Municipal	—	—		—
Residential
Term	7	1,591,000		29,000
Construction	—	—		—
Home equity line of credit	—	—		—
Consumer	—	—		—
	11	$	2,258,000	$	73,000

For the three months ended March 31, 2013, 7 loans were placed on TDR status with an outstanding balance of $2,948,000, this compares to 14 loans placed on TDR status with an outstanding balance of $3,007,000 for the three months ended March 31, 2012. These were considered TDRs because concessions had been granted to borrowers experiencing financial difficulties. Concessions include reductions in interest rates, principal and/or interest forbearance, payment extensions, or combinations thereof.

Page 25

The following table shows loans placed on TDR status in the three months ended March 31, 2013 and 2012, by class of loan and the associated specific reserve included in the allowance for loan losses as of March 31, 2013 and 2012:



Three months ended March 31, 2013	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserves
Commercial
Real estate	2	$	1,897,000	$	1,897,000	$	—
Construction	—	—		—		—
Other	3	536,000		546,000		40,000
Municipal	—	—		—		—
Residential
Term	1	312,000		312,000		—
Construction	—	—		—		—
Home equity line of credit	1	203,000		204,000		—
Consumer	—	—		—		—
	7	$	2,948,000	$	2,959,000	$	40,000



Three months ended March 31, 2012	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserves
Commercial
Real estate	7	$	2,438,000	$	2,404,000	$	—
Construction	—	—		—		—
Other	3	12,000		12,000		—
Municipal	—	—		—		—
Residential
Term	4	557,000		557,000		16,000
Construction	—	—		—		—
Home equity line of credit	—	—		—		—
Consumer	—	—		—		—
	14	$	3,007,000	$	2,973,000	$	16,000

As of March 31, 2013, Management is aware of thirteen loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1,222,000. There were also 28 loans with an outstanding balance of $4,695,000 that were classified as TDRs and on non-accrual status, 4 of which, with an outstanding balance of $504,000, were in the process of foreclosure.

Note 5 – Stock Options and Stock-Based Compensation

At the 2010 Annual Meeting, shareholders approved the 2010 Equity Incentive Plan (the "2010 Plan"). This reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees and non-employee Directors and promote the success of our business. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2010 Plan will qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2010 Plan will qualify as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and will satisfy NASDAQ guidelines relating to equity compensation.

As of March 31, 2013, 46,841 shares of restricted stock had been granted under the 2010 Plan, as detailed in the following table:

Page 26



Year Granted	Vesting Term (In Years)	Shares	Remaining Term (In Years)
2011	4.0	1,500	2.1
2011	5.0	5,500	3.1
2012	3.0	2,027	2.2
2012	4.0	2,704	3.2
2012	5.0	7,996	4.2
2013	2.0	8,529	1.7
2013	3.0	8,886	2.7
2013	5.0	9,699	4.7
		46,841	3.2

The compensation cost related to these restricted stock grants was $756,000 and will be recognized over the vesting terms of each grant. In the first three months of 2013, $54,000 of expense was recognized for these restricted shares, leaving $594,000 in unrecognized expense as of March 31, 2013. In the first three months of 2012, $24,000 of expense was recognized for restricted shares, leaving $256,000 in unrecognized expense as of March 31, 2012.

The Company established a shareholder-approved stock option plan in 1995 (the "1995 Plan"), under which the Company granted options to employees for 600,000 shares of common stock. Only incentive stock options were granted under the 1995 Plan. The option price of each option grant was determined by the Options Committee of the Board of Directors, and in no instance was less than the fair market value on the date of the grant. An option's maximum term was ten years from the date of grant, with 50% of the options granted vesting two years from the date of grant and the remaining 50% vesting five years from the date of grant. As of January 16, 2005, all options under the 1995 Plan had been granted.

The Company applies the fair value recognition provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718 "Compensation – Stock Compensation", to stock-based employee compensation. As of March 31, 2013, all outstanding options were fully vested and all compensation cost for options had been recognized. A summary of the status of outstanding stock options as of March 31, 2013 and changes during the three-month period then ended, is presented below.



	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2012	42,000	$	18.00
Granted in 2013	—	—
Exercised in 2013	—	—			—
Forfeited in 2013	—	—
Outstanding at March 31, 2013	42,000	$	18.00	2.3	—
Exercisable at March 31, 2013	42,000	$	18.00	2.3	—

Note 6 – Preferred and Common Stock

Preferred Stock

On January 9, 2009, the Company issued $25,000,000 in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share, to the U.S. Treasury under the Capital Purchase Program ("the CPP Shares"). The CPP Shares call for cumulative dividends at a rate of 5.0% per year for the first five years, and at a rate of 9.0% per year in following years, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year.

On August 24, 2011, the Company repurchased $12,500,000 of the CPP Shares. The repurchase transaction was approved by the Federal Reserve Bank of Boston, the Company's primary regulator, as well as the Bank's primary regulator, the Office of the Comptroller of the Currency, based on continued strong capital ratios after the repayment. Almost all of the repayment was made from retained earnings accumulated since the preferred stock was issued in 2009. After the repurchase, $12,500,000 of the CPP shares remains outstanding. The Company may redeem the remaining CPP Shares at any time using any funds available, subject to the prior approval of the Federal Reserve Bank of Boston. The CPP Shares are "perpetual" preferred stock, which means that neither Treasury nor any subsequent holder would have a right to require that the Company redeem any of the shares.

Page 27

On March 27, 2013, the Company repurchased $2,500,000 of the CPP Shares with funds from it's operating account. After the repurchase, $10,000,000 of the CPP Shares remains outstanding.

Incident to such issuance of the CPP shares, the Company issued to the U.S. Treasury warrants (the "Warrants") to purchase up to 225,904 shares of the Company's common stock at a price per share of $16.60 (subject to adjustment). The CPP Shares and the related Warrants (and any shares of common stock issuable pursuant to the Warrants) are freely transferable by Treasury to third parties and the Company has filed a registration statement with the Securities and Exchange Commission to allow for possible resale of such securities. The CPP Shares qualify as Tier 1 capital on the Company's books for regulatory purposes and rank senior to the Company's common stock and senior or at an equal level in the Company's capital structure to any other shares of preferred stock the Company may issue in the future.

The Warrants issued in conjunction with the sale of the CPP Shares have a term of ten years and could be exercised by Treasury or a subsequent holder at any time or from time to time during their term. To the extent they had not previously been exercised, the Warrants would expire after ten years. Treasury will not vote any shares of common stock it receives upon exercise of the Warrants, but that restriction would not apply to third parties to whom Treasury transferred the Warrants. The Warrants (and any common stock issued upon exercise of the Warrants) could be transferred to third parties separately from the CPP Shares. The proceeds from the sale of the CPP Shares were allocated between the CPP Shares and Warrants based on their relative fair values on the issue date. The fair value of the Warrants was determined using the Black-Scholes model which includes the following assumptions: common stock price of $16.60 per share, dividend yield of 4.70%, stock price volatility of 24.43%, and a risk-free interest rate of 2.01%. The discount on the CPP Shares was based on the value that was allocated to the Warrants upon issuance, and is being accreted back to the value of the CPP Shares over a five-year period (the expected life of the shares upon issuance) on a straight-line basis. The Warrants were unchanged as a result of the CPP Shares repurchase transactions and remain outstanding.

As a condition to Treasury's purchase of the CPP Shares, during the time that Treasury holds any equity or debt instrument the Company issued, the Company is required to comply with certain restrictions and other requirements relating to the compensation of the Company's chief executive officer, chief financial officer and three other most highly compensated executive officers. These restrictions include a prohibition on severance payments to those executive officers upon termination of their employment and a $500,000 limit on the tax deductions the Company can take for compensation expense for each of those executive officers in a single year as well as a prohibition on bonus compensation to such officers other than limited amounts of long-term restricted stock.

Common Stock

On March 28, 2013, the Company consummated a fully underwritten offering for 760,771 shares of the Company's common stock, with net proceeds of $11,649,000. The Company intends to use these proceeds to repurchase the remaining $10,000,000 of CPP Shares, subject to receiving approval from the Federal Reserve Bank of Boston, the Company's principal regulator.

Page 28

Note 7 – Earnings Per Share

The following table sets forth the computation of basic and diluted EPS for the three months ended March 31, 2013 and 2012:



	Income (Numerator)		Shares (Denominator)	Per-Share Amount
For the quarter ended March 31, 2013
Net income as reported	$	2,856,000
Less dividends and amortization of premium on preferred stock	181,000
Basic EPS: Income available to common shareholders	2,675,000		9,869,177	$	0.27
Effect of dilutive securities: warrants and restricted stock			48,550
Diluted EPS: Income available to common shareholders plus assumed conversions	$	2,675,000	9,917,727	$	0.27
For the quarter ended March 31, 2012
Net income as reported	$	2,913,000
Less dividends and amortization of premium on preferred stock	181,000
Basic EPS: Income available to common shareholders	2,732,000		9,817,029	$	0.28
Effect of dilutive securities: restricted stock			11,196
Diluted EPS: Income available to common shareholders plus assumed conversions	$	2,732,000	9,828,225	$	0.28

All earnings per share calculations have been made using the weighted average number of shares outstanding during the period. The potentially dilutive securities are incentive stock options and unvested shares of restricted stock granted to certain key members of Management and warrants granted to the U.S. Treasury under the CPP. The number of dilutive shares is calculated using the treasury method, assuming that all options and warrants were exercisable at the end of each period. Options and warrants that are out-of-the-money are not considered in the calculation of dilutive earnings per share as the effect would be anti-dilutive.

The following table presents the number of options and warrants outstanding as of March 31, 2013 and 2012 and the amount for which the market price at period end is above or below the strike price:



	Outstanding	In-the-Money	Out-of-the-Money
As of March 31, 2013
Incentive stock options	42,000	—	42,000
Warrants issued to U.S. Treasury	225,904	225,904	—
Total dilutive securities	267,904	225,904	42,000
As of March 31, 2012
Incentive stock options	42,000	—	42,000
Warrants issued to U.S. Treasury	225,904	—	225,904
Total dilutive securities	267,904	—	267,904

Note 8 – Employee Benefit Plans

401(k) Plan

The Bank has a defined contribution plan available to substantially all employees who have completed 3 months of service. Employees may contribute up to IRS determined limits and the Bank may match employee contributions not to exceed 3.0% of compensation depending on contribution level. Subject to a vote of the Board of Directors, the Bank may also make a profit-sharing contribution to the Plan. Such contribution equaled 2.0% of each eligible employee's compensation in 2012. The amount for 2013 has not been established. The expense related to the 401(k) plan was $97,000 and $92,000 for the three months ended March 31, 2013 and 2012, respectively.

Supplemental Retirement Benefits

Page 29

The Bank also provides unfunded, non-qualified supplemental retirement benefits for certain officers, payable in installments over 20 years upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a postretirement plan. The costs for these benefits are recognized over the service periods of the participating officers in accordance with FASB ASC Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $77,000 for the three months ended March 31, 2013 and 2012. As of March 31, 2013, the associated accrued liability included in other liabilities in the balance sheet was $2,143,000 compared to $2,080,000 and $1,911,000 at December 31, 2012 and March 31, 2012, respectively.

Post-Retirement Benefit Plans

The Bank sponsors two post-retirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees and a future subsidy for seven active employees who were age 50 and over in 1996. These subsidies are based on years of service and range between $40 and $1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are pre-funded. The Company utilizes FASB ASC Topic 712 "Compensation – Nonretirement Postemployment Benefits" to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. The following table sets forth the accumulated postretirement benefit obligation and funded status:



	At or for the three months ended March 31,
	2013			2012
Change in benefit obligation
Benefit obligation at beginning of year	$	1,954,000		$	1,848,000
Service cost	4,000			17,000
Interest cost	26,000			28,000
Benefits paid	(34,000		)	(34,000		)
Benefit obligation at end of period	1,950,000			1,859,000
Funded status
Benefit obligation at end of period	(1,950,000		)	(1,859,000		)
Accrued benefit cost at end of period	$	(1,950,000	)	$	(1,859,000	)

The following table sets forth the net periodic pension cost:



	For the three months ended March 31,
	2013		2012
Components of net periodic benefit cost
Service cost	$	4,000	$	17,000
Interest cost	26,000		28,000
Amortization of unrecognized transition obligation	5,000		7,000
Amortization of accumulated losses	—		3,000
Net periodic benefit cost	$	35,000	$	55,000

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) are as follows:



	March 31, 2013			December 31, 2012			March 31, 2012
Unamortized net actuarial loss	$	(186,000	)	$	(186,000	)	$	(100,000	)
Unrecognized transition obligation	—			(5,000		)	(27,000		)
	(186,000		)	(191,000		)	(127,000		)
Deferred tax benefit at 35%	67,000			68,000			45,000
Net unrecognized postretirement benefits included in accumulated other comprehensive income (loss)	$	(119,000	)	$	(123,000	)	$	(82,000	)

Page 30

A weighted average discount rate of 4.5% was used in determining the accumulated benefit obligation and the net periodic benefit cost. The assumed health care cost trend rate is 7.0%. The measurement date for benefit obligations was as of year-end for prior years presented. The expected benefit payments for the first quarter of 2013 are $26,000 and the expected benefit payments for all of 2013 are $102,000. Plan expense for 2013 is estimated to be $112,000. A 1% change in trend assumptions would create an approximate change in the same direction of $100,000 in the accumulated benefit obligation, $7,000 in the interest cost and $1,000 in the service cost.

Note 9 - Other Comprehensive Income

The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income for the three months ended March 31, 2013 and 2012.



	For the three months ended March 31,
	2013			2012
Balance at beginning of period	$	7,940,000		$	7,401,000
Unrealized gains (losses) arising during the period	(3,495,000		)	42,000
Reclassification of realized gains during the period	(299,000		)	(523,000		)
Related deferred taxes	1,328,000			168,000
Net change	(2,466,000		)	(313,000		)
Balance at end of period	$	5,474,000		$	7,088,000

The reclassification of realized gains is included in the net securities gain line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement.

The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income for the three months ended March 31, 2013 and 2012.



	For the three months ended March 31,
	2013			2012
Unrecognized transition obligation at beginning of period	$	(123,000	)	$	(87,000	)
Amortization of unrecognized transition obligation	5,000			7,000
Related deferred taxes	(1,000		)	(2,000		)
Unrecognized transition obligation at end of period	$	(119,000	)	$	(82,000	)

The reclassification of unrecognized transition obligation is a component of net periodic benefit cost (see Note 8) and the income tax effect is included in the income tax expense line of the consolidated statements of income and comprehensive income.

Note 10 - Acquisitions and Intangible Assets

On October 26, 2012, the Bank completed the purchase of a branch at 63 Union Street in Rockland, Maine, from Camden National Bank that was formerly operated by Bank of America. As part of the transaction, the Bank acquired approximately $32,300,000 in deposits as well as a small volume of loans. On the same date, the Bank completed the purchase of a full-service bank building at 145 Exchange Street in Bangor, Maine, also from Camden National Bank, and expects to open a full-service branch in this building in the first quarter of 2013. The acquisition allows the Bank to expand its community banking franchise into eastern Maine and expand its presence in Rockland, Maine. The acquisition-date estimated fair values of assets acquired and liabilities assumed in Rockland and Bangor were as follows:

Page 31



Assets
Cash		$25,297,000
Loans	224,000
Bank premises and equipment	3,776,000
Accrued interest receivable and other assets	24,000
Core deposit intangible	432,000
Goodwill	2,121,000
Liabilities
Deposits		$31,858,000
Accrued interest and other liabilities	16,000

The purchase premium of $2,600,000 was allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. The fair value of the deposit accounts assumed was compared to the carrying amounts received and the difference of $432,000 was recorded as core deposit intangible. The core deposit intangible is subject to amortization over the estimated ten-year average life of the acquired core deposit base and will be evaluated for impairment periodically. The amortization expense is included in noninterest expense in the consolidated statements of income and comprehensive income and is deductible for tax purposes. As of December 31, 2012, the amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:



2013	$	43,000
2014	43,000
2015	43,000
2016	43,000
2017	43,000
Thereafter	217,000
Total	$	432,000

The banking facilities were valued at the most recent tax assessed value, which approximates fair value. The loans acquired were recorded at fair value at the time of acquisition. The estimated fair value of the loans acquired is equal to the carrying value. The excess of the purchase price over the fair value of the assets acquired, liabilities assumed, and the amount allocated for core deposit intangible totaled $2,121,000 and was recorded as goodwill. The goodwill is not amortizable but is deductible for tax purposes. Management periodically assesses qualitative factors to determine whether goodwill is impaired. Management is not aware of any such events or circumstances that would cause it to conclude that the goodwill is impaired.

On January 14, 2005, the Company acquired FNB Bankshares (“FNB”) of Bar Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor. The total value of the transaction was $47,955,000, and all of the voting equity interest of FNB was acquired in the transaction. The transaction was accounted for as a purchase and the excess of purchase price over the fair value of net identifiable assets acquired equaled $27,559,000 and was recorded as goodwill, none of which was deductible for tax purposes. The portion of the purchase price related to the core deposit intangible is being amortized over its expected economic life, and goodwill is evaluated annually for possible impairment under the provisions of FASB ASC Topic 350, “Intangibles – Goodwill and Other”. As of December 31, 2012, in accordance with Topic 350, the Company completed its annual review of goodwill and determined there has been no impairment. The Bank also carries $125,000 in goodwill for a de minimus transaction in 2001.

Note 11 – Mortgage Servicing Rights

FASB ASC Topic 940 "Financial Services – Mortgage Banking," requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-month moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of March 31, 2013, the prepayment assumption using the PSA model was 285, which translates into an anticipated prepayment

Page 32

rate of 17.08%. The discount rate is the quarterly average 10 year U.S. Treasury plus 4.79%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.

For the three months ended March 31, 2013 and 2012, servicing rights capitalized totaled $255,000 and $11,000, respectively. Servicing rights amortized for the three-month periods ended March 31, 2013 and 2012, were $136,000 and $172,000, respectively. The fair value of servicing rights was $1,702,000, $1,228,000 and 994,000 at March 31, 2013, December 31, 2012 and March 31, 2012, respectively. The Bank serviced loans for others totaling $208,683,000, $205,859,000 and $221,694,000 at March 31, 2013, December 31, 2012, and March 31, 2012, respectively. Mortgage servicing rights are included in other assets and detailed in the following table:



	March 31, 2013			December 31, 2012			March 31, 2012
Mortgage servicing rights	$	6,685,000		$	6,430,000		$	6,110,000
Accumulated amortization	(5,609,000		)	(5,473,000		)	(5,009,000		)
Impairment reserve	(16,000		)	(90,000		)	(300,000		)
	$	1,060,000		$	867,000		$	801,000

Note 12 – Income Taxes

FASB ASC Topic 740 "Income Taxes," defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2010 through 2011.

Note 13 - Certificates of Deposit

The following table represents the breakdown of Certificates of Deposit at March 31, 2013 and 2012, and at December 31, 2012:



	March 31, 2013		December 31, 2012		March 31, 2012
Certificates of deposit < $100,000	$	198,402,000	$	199,265,000	$	248,582,000
Certificates $100,000 to $250,000	293,049,000		277,571,000		349,643,000
Certificates $250,000 and over	35,702,000		28,220,000		32,548,000
	$	527,153,000	$	505,056,000	$	630,773,000

Note 14 – Reclassifications

Certain items from the prior year were reclassified in the financial statements to conform with the current year presentation. These do not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations.

Note 15 – Fair Value

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as, other real estate owned and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows.

Level 1 - Valuation is based upon quoted prices for identical instruments in active markets.

Page 33

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.

The fair value methods and assumptions for the Company's financial instruments are set forth below.

Cash, Cash Equivalents and Interest-Bearing Deposits in Other Banks

The carrying values of cash equivalents, due from banks and federal funds sold approximate their relative fair values. As such, the Company classifies these financial instruments as Level 1.

Investment Securities

The fair values of investment securities are estimated by independent providers. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. As such, the Company classifies investment securities as Level 2.

Loans Held for Sale

Loans held for sale are recorded at the lower of carrying value or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies mortgage loans held for sale as Level 2.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for impaired loans. Fair values of impaired loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral, less costs to sell. As such, the Company classifies impaired loans as Level 2.

Other Real Estate Owned

Real estate acquired through foreclosure is initially recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.

Mortgage Servicing Rights

Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2.

Accrued Interest Receivable

The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans for which it is probable that the interest is not collectible. Therefore, this financial instrument has been adjusted for estimated credit loss. As such, the Company classifies accrued interest receivable as Level 2.

Page 34

Deposits

The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company's net assets could increase. As such, the Company classifies deposits as Level 2.

Borrowed Funds

The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2.

Accrued Interest Payable

The fair value estimate approximates the carrying amount as this financial instrument has a short maturity. As such, the Company classifies accrued interest payable as Level 2.

Off-Balance-Sheet Instruments

Off-balance-sheet instruments include loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following table presents the balances of assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2013, December 31, 2012 and March 31, 2012.



	At March 31, 2013
	Level 1		Level 2		Level 3		Total
Securities available for sale
Mortgage-backed securities	$	—	$	157,197,000	$	—	$	157,197,000
State and political subdivisions	—		127,600,000		—		127,600,000
Other equity securities	—		1,572,000		—		1,572,000
Total assets	$	—	$	286,369,000	$	—	$	286,369,000



	At December 31, 2012
	Level 1		Level 2		Level 3		Total
Securities available for sale
Mortgage-backed securities	$	—	$	169,093,000	$	—	$	169,093,000
State and political subdivisions	—		120,944,000		—		120,944,000
Other equity securities	—		1,577,000		—		1,577,000
Total assets	$	—	$	291,614,000	$	—	$	291,614,000

Page 35



	At March 31, 2012
	Level 1		Level 2		Level 3		Total
Securities available for sale
Mortgage-backed securities	$	—	$	232,115,000	$	—	$	232,115,000
State and political subdivisions	—		83,162,000		—		83,162,000
Other equity securities	—		1,834,000		—		1,834,000
Total assets	$	—	$	317,111,000	$	—	$	317,111,000

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Other real estate owned is presented net of an allowance of $325,000, $373,000 and $367,000 at March 31, 2013, December 31, 2012, and March 31, 2012, respectively. Impaired loans measured at fair value only include impaired loans with a related specific allowance for loan losses and are presented net of specific allowances of $2,405,000, $3,539,000 and $2,348,000 at March 31, 2013, December 31, 2012, and March 31, 2012, respectively. The December 31, 2012 and March 31, 2012 non-recurring fair value table includes all impaired loans with a related allowance. The Company refined its process for identifying impaired loans for purposes of fair value disclosures; accordingly the March 31, 2013 fair value table only includes those impaired loans for which the related allowance results in a fair value measure, as described above.



	At March 31, 2013
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	7,387,000	$	—	$	7,387,000
Impaired loans	—		5,740,000		—		5,740,000
Total assets	$	—	$	13,127,000	$	—	$	13,127,000



	At December 31, 2012
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	7,593,000	$	—	$	7,593,000
Impaired loans	—		13,923,000		—		13,923,000
Total assets	$	—	$	21,516,000	$	—	$	21,516,000



	At March 31, 2012
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	4,214,000	$	—	$	4,214,000
Impaired loans	—		12,084,000		—		12,084,000
Total assets	$	—	$	16,298,000	$	—	$	16,298,000

Page 36

Fair Value of Financial Instruments

FASB ASC Topic 825 "Financial Instruments", requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The carrying amount and estimated fair values for financial instruments as of March 31, 2013 were as follows:



	Carrying value		Estimated fair value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	16,523,000	$	16,523,000	$	16,523,000	$	—	$	—
Interest bearing deposits in other banks	5,941,000		5,941,000		5,941,000		—		—
Securities available for sale	286,369,000		286,369,000		—		286,369,000		—
Securities to be held to maturity	150,791,000		156,552,000		—		156,552,000		—
Restricted equity securities	13,912,000		13,912,000		—		13,912,000		—
Loans held for sale	244,000		244,000		—		244,000		—
Loans (net of allowance for loan losses)
Commercial
Real estate	243,751,000		242,839,000		—		5,051,000		237,788,000
Construction	15,926,000		15,866,000		—		1,492,000		14,374,000
Other	87,561,000		87,774,000		—		1,435,000		86,339,000
Municipal	14,997,000		16,239,000		—		—		16,239,000
Residential
Term	374,812,000		385,526,000		—		6,314,000		379,212,000
Construction	4,212,000		4,201,000		—		—		4,201,000
Home equity line of credit	95,597,000		96,231,000		—		—		96,231,000
Consumer	13,901,000		14,073,000		—		—		14,073,000
Total loans	850,757,000		862,749,000		—		14,292,000		848,457,000
Mortgage servicing rights	1,060,000		1,702,000		—		1,702,000		—
Accrued interest receivable	5,709,000		5,709,000		—		5,709,000		—
Financial liabilities
Demand deposits	$	81,467,000	$	81,569,000	$	—	$	81,569,000	$	—
NOW deposits	137,356,000		130,054,000		—		130,054,000		—
Money market deposits	88,344,000		77,269,000		—		77,269,000		—
Savings deposits	141,541,000		130,206,000		—		130,206,000		—
Local certificates of deposit	223,122,000		227,882,000		—		227,882,000		—
National certificates of deposit	304,031,000		307,623,000		—		307,623,000		—
Total deposits	975,861,000		954,603,000		—		954,603,000		—
Repurchase agreements	91,031,000		91,031,000		—		91,031,000		—
Federal Home Loan Bank advances	170,154,000		177,356,000		—		177,356,000		—
Total borrowed funds	261,185,000		268,387,000		—		268,387,000		—
Accrued interest payable	635,000		635,000		—		635,000		—

Page 37

The carrying amounts and estimated fair values for financial instruments as of December 31, 2012 were as follows:



	Carrying value		Estimated fair value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	14,958,000	$	14,958,000	$	14,958,000	$	—	$	—
Interest bearing deposits in other banks	1,638,000		1,638,000		1,638,000		—		—
Securities available for sale	291,614,000		291,614,000		—		291,614,000		—
Securities to be held to maturity	143,320,000		150,247,000		—		150,247,000		—
Restricted equity securities	14,448,000		14,448,000		—		14,448,000		—
Loans held for sale	1,035,000		1,035,000		—		1,035,000		—
Loans (net of allowance for loan losses)
Commercial
Real estate	245,046,000		244,365,000		—		4,865,000		239,500,000
Construction	20,960,000		20,902,000		—		2,284,000		18,618,000
Other	78,985,000		79,312,000		—		472,000		78,840,000
Municipal	14,685,000		16,058,000		—		—		16,058,000
Residential
Term	378,258,000		390,223,000		—		6,302,000		383,921,000
Construction	6,447,000		6,430,000		—		—		6,430,000
Home equity line of credit	98,381,000		99,038,000		—		—		99,038,000
Consumer	14,022,000		14,392,000		—		—		14,392,000
Total loans	856,784,000		870,720,000		—		13,923,000		856,797,000
Mortgage servicing rights	867,000		1,228,000		—		1,228,000		—
Accrued interest receivable	4,912,000		4,912,000		—		4,912,000		—
Financial liabilities
Demand deposits	$	90,252,000	$	91,544,000	$	—	$	91,544,000	$	—
NOW deposits	147,309,000		141,436,000		—		141,436,000		—
Money market deposits	80,983,000		71,799,000		—		71,799,000		—
Savings deposits	135,250,000		126,142,000		—		126,142,000		—
Local certificates of deposit	218,571,000		223,748,000		—		223,748,000		—
National certificates of deposit	286,485,000		290,457,000		—		290,457,000		—
Total deposits	958,850,000		945,126,000		—		945,126,000		—
Repurchase agreements	101,504,000		101,504,000		—		101,504,000		—
Federal Home Loan Bank advances	181,401,000		189,321,000		—		189,321,000		—
Total borrowed funds	282,905,000		290,825,000		—		290,825,000		—
Accrued interest payable	619,000		619,000		—		619,000		—

Page 38

The carrying amount and estimated fair values for financial instruments as of March 31, 2012 were as follows:



	Carrying value		Estimated fair value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	12,123,000	$	12,123,000	$	12,123,000	$	—	$	—
Interest bearing deposits in other banks	1,532,000		1,532,000		1,532,000		—		—
Securities available for sale	317,111,000		317,111,000		—		317,111,000		—
Securities to be held to maturity	137,606,000		144,633,000		—		144,633,000		—
Restricted equity securities	14,823,000		14,823,000		—		14,823,000		—
Loans held for sale	184,000		184,000		—		184,000		—
Loans (net of allowance for loan losses)
Commercial
Real estate	247,962,000		248,737,000		—		2,647,000		246,090,000
Construction	30,018,000		30,018,000		—		614,000		29,404,000
Other	83,021,000		83,529,000		—		595,000		82,934,000
Municipal	15,939,000		17,471,000		—		—		17,471,000
Residential
Term	356,971,000		368,682,000		—		7,532,000		361,150,000
Construction	6,383,000		6,385,000		—		285,000		6,100,000
Home equity line of credit	102,587,000		102,581,000		—		406,000		102,175,000
Consumer	15,057,000		16,049,000		—		5,000		16,044,000
Total loans	857,938,000		873,452,000		—		12,084,000		861,368,000
Mortgage servicing rights	801,000		994,000		—		994,000		—
Accrued interest receivable	5,690,000		5,690,000		—		5,690,000		—
Financial liabilities
Demand deposits	$	69,520,000	$	67,807,000	$	—	$	67,807,000	$	—
NOW deposits	120,844,000		111,703,000		—		111,703,000		—
Money market deposits	75,752,000		64,795,000		—		64,795,000		—
Savings deposits	118,946,000		107,036,000		—		107,036,000		—
Local certificates of deposit	215,013,000		220,572,000		—		220,572,000		—
National certificates of deposit	415,760,000		420,850,000		—		420,850,000		—
Total deposits	1,015,835,000		992,763,000		—		992,763,000		—
Repurchase agreements	89,990,000		89,990,000		—		89,990,000		—
Federal Home Loan Bank advances	150,161,000		157,589,000		—		157,589,000		—
Total borrowed funds	240,151,000		247,579,000		—		247,579,000		—
Accrued interest payable	644,000		644,000		—		644,000		—

Note 16 – Subsequent Event

On May 8, 2013, the Company repurchased the remaining $10.0 million of the CPP Shares from the U.S. Treasury with proceeds received from the fully underwritten common stock offering consummated earlier in the year. The Warrants issued in conjunction with the sale of the CPP Shares were unchanged as a result of the repurchase transaction and remain outstanding.

Note 17 – Impact of Recently Issued Accounting Standards

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Comprehensive Income. The ASU adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (AOCI) and is intended to help entities improve the transparency of changes in other comprehensive income and items reclassified out of AOCI in their financial statements. The guidance is effective prospectively for reporting periods beginning after December 15, 2012, with early adoption permitted. Adoption of this new guidance did not have a material effect on the Company's consolidated financial statements.

Page 39

Page 40

Item 2 – Management's Discussion and Analysis of Financial Condition
and Results of Operations

The First Bancorp, Inc. and Subsidiary

Forward-Looking Statements

This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission ("SEC"), in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause these differences include the following: changes in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectability, default and charge-off rates, changes in the size and nature of the Company's competition, changes in legislation or regulation and accounting principles, policies and guidelines, and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC, may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this quarterly report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the facts that affect the Company's business.

Critical Accounting Policies

Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, goodwill, the valuation of mortgage servicing rights, and other-than-temporary impairment on securities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions.

Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it to determine the appropriate level by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and Management's estimation of potential losses. The use of different estimates or assumptions could produce different provisions for loan losses.

Goodwill. Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350 "Intangibles – Goodwill and Other." In addition, goodwill from a purchase acquisition is subject to ongoing periodic impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.

Page 41

Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Bank often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 0.25% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized at fair value when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The rights are subsequently carried at the lower of amortized cost or fair value. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value which is recorded on the balance sheet. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speed results in lower valuations of mortgage servicing rights. The valuation also includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.

Other-Than-Temporary Impairment on Securities. One of the significant estimates related to investment securities is the evaluation of other-than-temporary impairments. The evaluation of securities for other-than-temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities' market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest when due.

Use of Non-GAAP Financial Measures

Certain information in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Management uses these "non-GAAP" measures in its analysis of the Company's performance and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. Management believes that investors may use these non-GAAP financial measures to analyze financial performance without the impact of unusual items that may obscure trends in the Company's underlying performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

In several places net interest income is presented on a fully taxable-equivalent basis. Specifically included in interest income was tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income total, which adjustments increased net interest income accordingly. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another, as each will have a different proportion of tax-exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices. The following table provides a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements prepared in accordance with GAAP. A 35.0% tax rate was used in both 2013 and 2012.

Page 42



	For the three months ended March 31,
Dollars in thousands	2013		2012
Net interest income as presented	$	9,163	$	9,806
Effect of tax-exempt income	851		763
Net interest income, tax equivalent	$	10,014	$	10,569

The Company presents its efficiency ratio using non-GAAP information. The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income from the Consolidated Statements of Income and Comprehensive Income. The non-GAAP efficiency ratio excludes securities losses and other-than-temporary impairment charges from noninterest expenses, excludes securities gains from noninterest income, and adds the tax-equivalent adjustment to net interest income. The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:



	For the three months ended March 31,
Dollars in thousands	2013				2012
Non-interest expense, as presented	$	7,389			$	6,178
Net interest income, as presented	9,163				9,806
Effect of tax-exempt income	851				763
Non-interest income, as presented	3,288				2,168
Effect of non-interest tax-exempt income	44				43
Net securities gains	(299		)		(523		)
Adjusted net interest income plus non-interest income	$	13,047			$	12,257
Non-GAAP efficiency ratio	56.63			%	50.40			%
GAAP efficiency ratio	59.34			%	51.60			%

The Company presents certain information based upon average tangible shareholders' common equity instead of total average shareholders' equity. The difference between these measures is the Company's intangible assets, specifically goodwill from prior acquisitions. Management, banking regulators and many stock analysts use the tangible common equity ratio and the tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions. The following table provides a reconciliation of average tangible shareholders' common equity to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles:



	For the three months ended March 31,
Dollars in thousands	2013			2012
Average shareholders' equity as presented	$	157,844		$	153,544
Less preferred stock	(12,263		)	(12,304		)
Less intangible assets	(30,787		)	(28,522		)
Average tangible shareholders' common equity	$	114,794		$	112,718

Executive Summary

Net income for the first three months of 2013 was $2.9 million, down $57,000 or 2.0% from the same period in 2012. Earnings per common share on a fully diluted basis were $0.27 for the three months ended March 31, 2013, down $0.01 or 3.6% from the $0.28 posted for the same period in 2012. Compared to the previous quarter, net income was down $373,000 or 11.6% and earnings per common share on a fully diluted basis were down $0.04 or 12.9%.

Net interest income on a tax-equivalent basis was down $555,000 or 5.3% in the first three months of 2013 compared to the same period in 2012. Compression can be seen in our net interest margin, which dropped from 3.22% for the first three months of 2012 to 3.06% for same period in 2013. This is the result of the low interest rate environment, with a higher volume of assets continuing to reprice downward without the opportunity to reprice a comparable volume of liabilities. Compared to the previous quarter, net interest income on a tax-equivalent basis was down $289,000 or 2.8%. The decline in net interest income was offset by a $600,000 lower provision for loan losses for the first quarter 2013 compared to the first quarter 2012.

Page 43

Non-interest income in the first three months of 2013 was $3.3 million or 51.7% higher than in the first three months of 2012. This was attributable to an increase in origination income from the sale of refinanced mortgage loans into the secondary market. Non-interest expense was $1.2 million or 19.6% higher than in the same period in 2012, due to higher operating costs related to the opening of the de novo Bangor office, as well as from the Union Street Branch in Rockland that we also acquired in the fourth quarter 2012. The $1.1 million increase in non-interest income almost fully offset the $1.2 million increase in operating expenses.

The lower provision for loan losses for the first quarter of 2013 compared to the first quarter of 2012 is attributable to the improving trend in credit quality seen over the past several quarters. Net loan chargeoffs for the three months ended March 31, 2013, were $1.3 million or 0.60% of average loans on an annualized basis. This was down $868,000 from net chargeoffs of $2.1 million or 0.99% of average loans on an annualized basis for the first three months of 2012. We provisioned $1.5 million for loan losses in the first three months of 2013, down $600,000 from the amount provisioned in the first three months of 2012. The allowance for loan losses increased $220,000 between December 31, 2012 and March 31, 2013, and is 1.47% of loans outstanding compared to 1.44% at year end and 1.49% a year ago. Total past-due loans were 3.12% of total loans as of March 31, 2013, compared to 2.67% of total loans as of December 31, 2012, and 3.04% of total loans as of March 31, 2012. Non-performing assets stood at 2.00% of total assets as of March 31, 2013, well below 2.32% of total assets at December 31, 2011 and just below 2.01% a year ago.

Total assets have increased $1.8 million or 0.1% year-to-date. The loan portfolio decreased $5.8 million in the first three months of 2013 and $7.4 million from a year ago. The investment portfolio has increased $1.7 million or 0.4% year-to-date and decreased $18.5 million or 3.9% from a year ago. On the liability side of the balance sheet, low-cost deposits have decreased $12.4 million or 3.3% year-to-date, and increased $51.1 or 16.5% over the past year. The drop in the first quarter is consistent with the normal seasonal pattern. Local certificates of deposit (CDs) increased $4.0 million and wholesale CDs increased $17.8 million year-to-date.

Remaining well capitalized remains a top priority for The First Bancorp, Inc. Since December 31, 2008, the Company's total risk-based capital ratio has increased from 11.13% to 17.31%, well above the well-capitalized threshold of 10.0% set by the FDIC. In Management's view, participating in the U.S. Treasury Capital Purchase Program (the "CPP") was the right decision for The First Bancorp, Inc. The Company obtained additional capital at a relatively low cost and it provides us with greater ability to ride out the current economic storm and allows us more flexibility to work with individuals and businesses as they too struggle through these adverse economic conditions. During the quarter ended March 31, 2013, the Company repaid $2.5 million preferred stock issued by the U.S. Treasury under the CPP. After the repurchase, $10.0 million of CPP preferred stock remains outstanding.

The Company's operating ratios remain good, with a return on average tangible common equity of 9.45% for the three months ended March 31, 2013 compared to 9.68% for the same period in 2012. Based upon December 31, 2012 data, our return on average tangible common equity was in the top 40% of all banks in the UBPR peer group, which had an average return on equity of 9.18%. Our efficiency ratio continues to be an important component in our overall performance, and while up to 56.63% for the first three months of 2013, compared to 50.40% for the same period in 2012, due to the previously noted increased operating costs, it remains well below the UBPR peer group average of 66.39% as of December 31, 2012.

On February 25, 2013, the Bank opened its sixteenth branch at 145 Exchange Street in Bangor, Maine in the building purchased in the fourth quarter of 2012. This Bangor location offers an excellent opportunity to enter the expanding Northern Maine market.

Net Interest Income

Total interest income of $12.3 million for the three months ended March 31, 2013, was a decrease of $841,000 million or 6.4% compared to total interest income of $13.1 million for the same period of 2012. Total interest expense of $3.1 million for the first three months of 2013 is a $198,000 million or 6.0% decrease from total interest expense of $3.3 million for the first three months of 2012. As a result, net interest income decreased 6.6% or $643,000 million to $9.2 million for the three months ended March 31, 2013, from the $9.8 million reported for the same period in 2012. The Company's net interest margin on a tax-equivalent basis decreased from 3.22% in the first three months of 2012 to 3.06% for the three months ended March 31, 2013. This is the result of the low interest rate environment with a higher volume of assets continuing to reprice downward without the opportunity to reprice a comparable volume of liabilities. Tax-exempt interest income amounted to $1.6 million and $1.4 million for the three months ended March 31, 2013 and 2012, respectively.

Page 44

The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the three months ended March 31, 2013 and 2012. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2013 and 2012.



	For the three months ended
	March 31, 2013				March 31, 2012
Dollars in thousands	Amount of interest		Average Yield/Rate		Amount of interest		Average Yield/Rate
Interest on earning assets
Interest-bearing deposits	$	2	0.25	%	$	—	0.00	%
Investments	4,248		3.80	%	4,385		3.93	%
Loans held for sale	7		3.69	%	1		4.05	%
Loans	8,859		4.14	%	9,483		4.39	%
Total interest-earning assets	13,116		4.01	%	13,869		4.23	%
Interest-bearing liabilities
Deposits	1,987		0.90	%	2,193		0.96	%
Other borrowings	1,115		1.68	%	1,107		1.83	%
Total interest-bearing liabilities	3,102		1.08	%	3,300		1.14	%
Net interest income	$	10,014			$	10,569
Interest rate spread			2.93	%			3.09	%
Net interest margin			3.06	%			3.22	%

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the three months March 31, 2013 compared to 2012. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2013 and 2012.



For the three months ended March 31, 2013 compared to 2012
Dollars in thousands	Volume			Rate			Rate/Volume¹			Total
Interest on earning assets
Interest-bearing deposits	$	—		$	1		$	1		$	2
Investment securities	50			(185		)	(2		)	(137		)
Loans held for sale	7			—			(1		)	6
Loans	(19		)	(607		)	2			(624		)
Total interest income	38			(791		)	$	—		(753		)
Interest expense
Deposits	(65		)	(145		)	4			(206		)
Other borrowings	118			(100		)	(10		)	8
Total interest expense	53			(245		)	(6		)	(198		)
Change in net interest income	$	(15	)	$	(546	)	$	6		$	(555	)

¹ Represents the change attributable to a combination of change in rate and change in volume.

Page 45

Average Daily Balance Sheets

The following table shows the Company's average daily balance sheets for the three-month periods ended March 31, 2013 and 2012.



	For the three months ended
Dollars in thousands	March 31, 2013			March 31, 2012
Assets
Cash and cash equivalents	$	14,222		$	12,346
Interest-bearing deposits in other banks	3,209			1,848
Securities available for sale	289,744			304,867
Securities to be held to maturity	149,813			128,651
Restricted equity securities, at cost	14,323			15,286
Loans held for sale	769			67
Loans	867,490			869,224
Allowance for loan losses	(12,845		)	(12,909		)
Net loans	854,645			856,315
Accrued interest receivable	4,983			4,891
Premises and equipment	23,040			18,870
Other real estate owned	7,663			4,217
Goodwill	29,805			27,684
Other assets	25,489			26,781
Total Assets	$	1,417,705		$	1,401,823

Liabilities & Shareholders' Equity
Demand deposits	$	84,140		$	72,289
NOW deposits	140,791			120,546
Money market deposits	84,338			78,477
Savings deposits	139,263			116,346
Certificates of deposit	526,462			602,734
Total deposits	974,994			990,392
Borrowed funds – short term	129,308			109,990
Borrowed funds – long term	140,154			133,453
Dividends payable	931			1,025
Other liabilities	14,474			13,419
Total Liabilities	1,259,861			1,248,279
Shareholders' Equity:
Preferred stock	12,263			12,304
Common stock	99			98
Additional paid-in capital	46,890			45,970
Retained earnings	91,244			86,657
Net unrealized gain on securities available-for-sale	7,469			8,599
Net unrealized loss on postretirement benefit costs	(121		)	(84		)
Total Shareholders' Equity	157,844			153,544
Total Liabilities & Shareholders' Equity	$	1,417,705		$	1,401,823

Page 46

Non-Interest Income

Non-interest income of $3.3 million for the three months ended March 31, 2013, is an increase of $1.1 million compared to the same period in 2012. This increase was attributable to origination income from the sale of refinanced mortgage loans into the secondary market.

Non-Interest Expense

Non-interest expense of $7.4 million for the three months ended March 31, 2013 is an increase of 19.6% or $1.2 million compared to non-interest expense of $6.2 million for the same period in 2012. Much of this increase was attributable to higher operating costs due to the opening of the Company's sixteenth branch in Bangor, Maine on February 25, 2013. The Company's efficiency ratio was up slightly to 56.63% for the first three months of 2013 compared to 50.40% for the same period in 2012.

Income Taxes

Income taxes on operating earnings were $706,000 for the three months ended March 31, 2013, down $77,000 from the same period in 2012. This is in line with the decrease in the Company's level of income before taxes and a higher level of tax-exempt income.

FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2010 through 2011.

Investments

The Company's investment portfolio increased by $1.7 million or 0.4% between December 31, 2012, and March 31, 2013. As of March 31, 2013, mortgage-backed securities had a carrying value of $203.8 million and a fair value of $206.2 million. Of this total, securities with a fair value of $170.1 million or 82.5% of the mortgage-backed portfolio were issued by GNMA and securities with a fair value of $36.1 million or 17.5% of the mortgage-backed portfolio were issued by FHLMC and FNMA.

The Company's investment securities are classified into two categories: securities available for sale and securities to be held to maturity. Securities available for sale consist primarily of debt securities which Management intends to hold for indefinite periods of time. They may be used as part of the Company's funds management strategy, and may be sold in response to changes in interest rates, prepayment risk and liquidity needs, to increase capital ratios, or for other similar reasons. Securities to be held to maturity consist primarily of debt securities that the Company has acquired solely for long-term investment purposes, rather than for trading or future sale. For securities to be categorized as held to maturity Management must have the intent and the Company must have the ability to hold such investments until their respective maturity dates. The Company does not hold trading account securities.

All investment securities are managed in accordance with a written investment policy adopted by the Board of Directors. It is the Company's general policy that investments for either portfolio be limited to government debt obligations, time deposits, and corporate bonds or commercial paper with one of the three highest ratings given by a nationally recognized rating agency. The portfolio is currently invested primarily in U.S. Government agency securities and tax-exempt obligations of states and political subdivisions. The individual securities have been selected to enhance the portfolio's overall yield while not materially adding to the Company's level of interest rate risk.

Page 47

The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2013 and 2012 and December 31, 2012.



Dollars in thousands	March 31, 2013		December 31, 2012		March 31, 2012
Securities available for sale
Mortgage-backed securities	$	157,197	$	169,093	$	232,115
State and political subdivisions	127,600		120,944		83,162
Other equity securities	1,572		1,577		1,834
	$	286,369	$	291,614	$	317,111
Securities to be held to maturity
U.S. Treasury and agency	$	60,940	$	60,919	$	39,694
Mortgage-backed securities	46,604		39,193		52,185
State and political subdivisions	42,947		42,908		45,427
Corporate securities	300		300		300
	$	150,791	$	143,320	$	137,606
Restricted equity securities
Federal Reserve Bank Stock	$	1,036	$	1,036	$	1,411
Federal Home Loan Bank Stock	12,876		13,412		13,412
	$	13,912	$	14,448	$	14,823
Total securities	$	451,072	$	449,382	$	469,540

Page 48

The following table sets forth yields and expected maturities of the Company's investment securities as of March 31, 2013. Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 35%. Mortgage-backed securities are presented according to their final contractual maturity date, while the calculated yield takes into effect the intermediate cash flows from repayment of principal which results in a much shorter average life.



	Available For Sale				Held to Maturity
Dollars in thousands	Fair Value		Yield to maturity		Amortized Cost		Yield to maturity
U.S. Government-Sponsored Agency
Due in 1 year or less	$	—	0.00	%	$	—	0.00	%
Due in 1 to 5 years	—		0.00	%	—		0.00	%
Due in 5 to 10 years	—		0.00	%	—		0.00	%
Due after 10 years	—		0.00	%	60,940		3.22	%
Total	—		0.00	%	60,940		3.22	%
Mortgage-Backed Securities
Due in 1 year or less	12,385		2.94	%	2,087		2.54	%
Due in 1 to 5 years	25,182		2.64	%	16,850		3.39	%
Due in 5 to 10 years	13,219		3.15	%	5,699		4.00	%
Due after 10 years	106,411		2.22	%	21,968		4.49	%
Total	157,197		2.42	%	46,604		3.95	%
State & Political Subdivisions
Due in 1 year or less	1,669		6.89	%	647		5.97	%
Due in 1 to 5 years	106		7.05	%	5,801		6.63	%
Due in 5 to 10 years	1,341		6.21	%	22,215		6.26	%
Due after 10 years	124,484		5.56	%	14,284		6.19	%
Total	127,600		5.59	%	42,947		6.28	%
Corporate Securities
Due in 1 year or less	—		0.00	%	300		1.25	%
Due in 1 to 5 years	—		0.00	%	—		0.00	%
Due in 5 to 10 years	—		0.00	%	—		0.00	%
Due after 10 years	—		0.00	%	—		0.00	%
Total	—			%	300		1.25	%
Equity Securities	1,572		1.87	%				%
	$	286,369	3.83	%	$	150,791	4.31	%

Impaired Securities

The securities portfolio contains certain securities that the amortized cost of which exceeds fair value, which at March 31, 2013 amounted to $2.0 million, or 0.46% of the amortized cost of the total securities portfolio. At December 31, 2012 this amount was $739,000 million, or 0.17% of the total securities portfolio. As a part of the Company's ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. If a decline in the fair value of a debt security is judged to be other-than-temporary, the decline related to credit loss is recorded in net realized securities losses while the decline attributable to other factors is recorded in other comprehensive income or loss.

The Company's evaluation of securities for impairment is a quantitative and qualitative process intended to determine whether declines in the fair value of investment securities should be recognized in current period earnings. The primary factors considered in evaluating whether a decline in the fair value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity, and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred.

Page 49

The Company's best estimate of cash flows uses severe economic recession assumptions due to market uncertainty. The Company's assumptions include but are not limited to delinquencies, foreclosure levels and constant

default rates on the underlying collateral, loss severity ratios, and constant prepayment rates. If the Company does not expect to receive 100% of future contractual principal and interest, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral.

As of March 31, 2013, the Company had temporarily impaired securities with a fair value of $91.2 million and unrealized losses of $2.0 million, as identified in the table below. This was up from December 31, 2012 as a result of a shift in the yield curve and a corresponding decrease in value of investment securities. Securities in a continuous unrealized loss position more than twelve-months amounted to $1.9 million as of March 31, 2013, compared with $2.8 million at December 31, 2012. The Company has concluded that these securities were not other-than-temporarily impaired. This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence. The following table summarizes temporarily impaired securities and their approximate fair values at March 31, 2013.



	Less than 12 months					12 months or more					Total
Dollars in thousands	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury and government-sponsored agency	$	35,681	$	(289	)	$	—	$	—		$	35,681	$	(289	)
Mortgage-backed securities	23,546		(457		)	1,652		(69		)	25,198		(526		)
State and political subdivisions	30,069		(1,164		)	—		—			30,069		(1,164		)
Other equity securities	—		—			282		(52		)	282		(52		)
	$	89,296	$	(1,910	)	$	1,934	$	(121	)	$	91,230	$	(2,031	)

For securities with unrealized losses, the following information was considered in determining that the securities were not other-than-temporarily impaired:

Securities issued by U.S. Government-sponsored agencies and enterprises. As of March 31, 2013 there were $289,000 of unrealized losses on these securities compared to $182,000 unrealized losses as of December 31, 2012. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by the U.S. Treasury bear no credit risk because they are backed by the full faith and credit of the United States and that securities issued by U.S. Government-sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets.

Mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. As of March 31, 2013, there were $526,000 of unrealized losses on these securities compared with $314,000 at December 31, 2012. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government agencies bear no credit risk because they are backed by the full faith and credit of the United States and that securities issued by U.S. Government-sponsored enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets. Management believes that the unrealized losses at March 31, 2013 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at March 31, 2013. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Obligations of state and political subdivisions. As of March 31, 2013, the total unrealized losses on municipal securities amounted to $1,164,000, compared with $199,000 at December 31, 2012. Municipal securities are supported by the general taxing authority of the municipality and, in the cases of school districts, are generally supported by state aid. At March 31, 2013, all municipal bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized losses at March 31, 2013 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general. Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at March 31, 2013. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Corporate securities. There were no unrealized losses on corporate securities as of March 31, 2013, or at December 31, 2012. Corporate securities are dependent on the operating performance of the issuers. Corporate securities are dependent on the

Page 50

operating performance of the issuers. At March 31, 2013, all corporate bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized losses at March 31, 2013 to changes in prevailing market yields and pricing spreads since the dates the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general. Accordingly, the Company does not consider these corporate securities to be other-than-temporarily impaired at March 31, 2013. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Other Equity Securities. As of March 31, 2013, the total unrealized losses on other equity securities amounted to $52,000, compared with $44,000 at December 31, 2012. Other equity securities is comprised of common and preferred stock holdings. The unrealized losses were the result of normal market fluctuations for equity securities. Accordingly, the Company does not consider other equity securities to be other-than-temporarily impaired at March 31, 2013.

Federal Home Loan Bank Stock

The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of March 31, 2013 and December 31, 2012, the Bank's investment in FHLB stock totaled $12.9 million and $13.4 million, respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. As of March 31, 2013, the Bank had $244,000 in loans held for sale. This compares to $1,035,000 at December 31, 2012 and $184,000 at March 31, 2012. No recourse obligations have been incurred in connection with the sale of loans.

Loans

The loan portfolio decreased during the first three months of 2013, with total loans at $863.5 million at March 31, 2013, down $5.8 million or 0.7% from total loans of $869.3 million at December 31, 2012. Commercial loans increased $2.2 million or 0.6% between December 31, 2012 and March 31, 2013, municipal loans increased by $313,000 or 2.1% and residential term loans decreased $3.4 million or 0.9%.

Commercial loans are comprised of three major classes, commercial real estate loans, commercial construction loans and other commercial loans. Commercial real estate is primarily comprised of loans to small businesses collateralized by owner-occupied real estate, while other commercial is primarily comprised of loans to small businesses collateralized by plant and equipment, commercial fishing vessels and gear, and limited inventory-based lending. Commercial real estate loans typically have a maximum loan-to-value of 75% based upon current appraisal information at the time the loan is made. Land and land development loans typically have a maximum loan-to-value of 65% to 75% based upon current appraisal information at the time the loan is made. Construction loans, both commercial and residential, comprise a very small portion of the portfolio, and at 17.0% of capital are well under the regulatory guidance of 100.0% of capital. Construction loans and non-owner-occupied commercial real estate loans are at 73.9% of total capital, well under the regulatory guidance of 300.0% of capital. Municipal loans are comprised of loans to municipalities in the State of Maine for capitalized expenditures, construction projects or tax-anticipation notes. All municipal loans are considered general obligations of the municipality and as such are collateralized by the taxing ability of the municipality for repayment of debt.

Residential loans are also comprised of two classes, term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75% to 80% loan to value based upon current appraisal information at the time the loan is made. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value of 80% to 90% of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals.

Page 51

The following table summarizes the loan portfolio, by class, at March 31, 2013 and 2012 and December 31, 2012.



Dollars in thousands	March 31, 2013				December 31, 2012				March 31, 2012
Commercial
Real estate	$	250,180	29.0	%	$	251,335	28.9	%	$	254,708	29.3	%
Construction	17,090		2.0	%	22,417		2.6	%	30,828		3.5	%
Other	89,874		10.4	%	81,183		9.3	%	85,467		9.8	%
Municipal	15,017		1.7	%	14,704		1.7	%	15,961		1.8	%
Residential
Term	376,029		43.5	%	379,447		43.7	%	358,394		41.2	%
Construction	4,222		0.5	%	6,459		0.7	%	6,451		0.7	%
Home equity line of credit	96,536		11.2	%	99,082		11.4	%	103,372		11.9	%
Consumer	14,529		1.7	%	14,657		1.7	%	15,711		1.8	%
Total loans	$	863,477	100.0	%	$	869,284	100.0	%	$	870,892	100.0	%

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2013.



Dollars in thousands	< 1 Year		1 - 5 Years		5 - 10 Years		> 10 Years		Total
Commercial
Real estate	$	4,901	$	22,443	$	20,544	$	202,292	$	250,180
Construction	2,478		1,747		455		12,410		17,090
Other	14,702		20,516		17,011		37,645		89,874
Municipal	1,015		3,795		4,375		5,832		15,017
Residential
Term	2,447		11,327		19,453		342,802		376,029
Construction	1,833		—		—		2,389		4,222
Home equity line of credit	1,348		172		1,252		93,764		96,536
Consumer	6,740		4,932		741		2,116		14,529
Total loans	$	35,464	$	64,932	$	63,831	$	699,250	$	863,477

The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2013.



	Fixed-Rate				Adjustable-Rate				Total
Dollars in thousands	Amount		% of total		Amount		% of total		Amount		% of total
Commercial
Real estate	$	36,682	4.3	%	$	213,498	24.7	%	$	250,180	29.0	%
Construction	633		0.1	%	16,457		1.9	%	17,090		2.0	%
Other	32,250		3.7	%	57,624		6.7	%	89,874		10.4	%
Municipal	14,967		1.7	%	50		0.0	%	15,017		1.7	%
Residential
Term	195,610		22.6	%	180,419		20.9	%	376,029		43.5	%
Construction	2,980		0.4	%	1,242		0.1	%	4,222		0.5	%
Home equity line of credit	1,563		0.2	%	94,973		11.0	%	96,536		11.2	%
Consumer	8,349		1.0	%	6,180		0.7	%	14,529		1.7	%
Total loans	$	293,034	34.0	%	$	570,443	66.0	%	$	863,477	100.0	%

Loan Concentrations

As of March 31, 2013, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

Page 52

Credit Risk Management and Allowance for Loan Losses

Credit risk is the risk of loss arising from the inability of a borrower to meet its obligations. We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, Management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.

We provide for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. We deploy a systematic methodology for determining our allowance that includes a quarterly review process, risk rating, and adjustment to our allowance. We classify our portfolios as either commercial or residential and consumer and monitor credit risk separately as discussed below. We evaluate the appropriateness of our allowance continually based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that we believe require special attention.

The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for types or portfolios of loans based on historical loan loss experience; (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies, and underwriting standards, credit administration practices, and other factors as applicable; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance.

Appropriateness of the allowance for loan losses is determined using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectability of specific loans when determining the appropriateness of the allowance for loan losses, Management also takes into consideration other factors such as changes in the mix and size of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, economic trends, changes in credit policies, and experience, ability and depth of lending management. The appropriateness of the allowance for loan losses is assessed by an allocation process whereby specific reserve allocations are made against

certain adversely classified loans, and general reserve allocations are made against segments of the loan portfolio which have similar attributes. The Company's historical loss experience, industry trends, and the impact of the local and regional economy on the Company's borrowers, are considered by Management in determining the appropriateness of the allowance for loan losses.

The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when Management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. While Management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, growth in loan portfolios, or for other reasons. Any future additions to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Company's allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to record additions to the allowance based on judgments different from those of Management.

Commercial

Our commercial portfolio includes all secured and unsecured loans to borrowers for commercial purposes, including commercial lines of credit and commercial real estate. Our process for evaluating commercial loans includes performing updates on loans that we have rated for risk. Our non-performing commercial loans are generally reviewed individually to determine impairment, accrual status, and the need for specific reserves. Our methodology incorporates a variety of risk considerations, both qualitative and quantitative. Quantitative factors include our historical loss experience by loan type, collateral values, financial condition of borrowers, and other factors. Qualitative factors include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, and delinquency levels; these qualitative factors are also considered in connection with our unallocated portion of our allowance for loan losses.

The process of establishing the allowance with respect to our commercial loan portfolio begins when a loan officer initially assigns each loan a risk rating, using established credit criteria. Approximately 50% of our outstanding loans and commitments are subject to review and validation annually by an independent consulting firm, as well as periodically by our internal credit review function. Our methodology employs Management's judgment as to the level of losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers' current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. We also evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors.

Page 53

Residential, Home Equity and Consumer

Consumer, home equity and residential mortgage loans are generally segregated into homogeneous pools with similar risk characteristics. Trends and current conditions in these pools are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for the consumer, home equity and residential mortgage portfolios are consistent with those for the commercial portfolios. Certain loans in the consumer and residential portfolios identified as having the potential for further deterioration are analyzed individually to confirm the appropriate risk status and accrual status, and to determine the need for a specific reserve. Consumer loans that are greater than 120 days past due are generally charged off. Residential loans and home equity lines of credit that are greater than 90 days past due are evaluated for collateral adequacy and if deficient are placed on non-accrual status.

Unallocated

The unallocated portion of the allowance is intended to provide for losses that are not identified when establishing the specific and general portions of the allowance and is based upon Management's evaluation of various conditions that are not directly measured in the determination of the portfolio and loan specific allowances. Such conditions include general economic and business conditions affecting our lending area, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, duration of the current business cycle, bank regulatory examination results, findings of external loan review examiners, and Management's judgment with respect to various other conditions including loan administration and management and the quality of risk identification systems. Management reviews these conditions quarterly. We have risk management practices designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may exist inherently within the loan portfolio. The judgmental aspects involved in applying the risk grading criteria, analyzing the quality of individual loans, and assessing collateral values can also contribute to undetected, but probable, losses.

The allowance for loan losses includes reserve amounts assigned to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when Management believes it is probable that the Company will not collect all of the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based on internal risk ratings or non-accrual status. A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. At March 31, 2013, impaired loans with specific reserves totaled $17.4 and the amount of such reserves was $3.1 million. This compares to impaired loans with specific reserves of $17.5 million at December 31, 2012 and the amount of such reserves was $3.5 million.

All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition. Our total allowance at March 31, 2013 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date. Management views the level of the allowance for loan losses as appropriate. However, our determination of the appropriate allowance level is based upon a number of assumptions we make about future events, which we believe are reasonable, but which may or may not prove valid. Thus, there can be no assurance that our charge-offs in future periods will not exceed our allowance for loan losses or that we will not need to make additional increases in our allowance for loan losses.

The following table summarizes our allocation of allowance by loan class as of March 31, 2013 and 2012 and December 31, 2012. The percentages are the portion of each loan class to total loans.



Dollars in thousands	March 31, 2013				December 31, 2012				March 31, 2012
Commercial
Real estate	$	5,879	29.0	%	$	5,865	28.9	%	$	5,862	29.3	%
Construction	1,064		2.0	%	1,359		2.6	%	704		3.5	%
Other	2,115		10.4	%	2,050		9.3	%	2,125		9.8	%
Municipal	18		1.7	%	18		1.7	%	19		1.8	%
Residential
Term	1,113		43.5	%	1,109		43.7	%	1,236		41.2	%
Construction	9		0.5	%	11		0.7	%	59		0.7	%
Home equity line of credit	859		11.2	%	654		11.4	%	682		11.9	%
Consumer	574		1.7	%	592		1.7	%	568		1.8	%
Unallocated	1,089		0.0	%	842		0.0	%	1,699		0.0	%
Total	$	12,720	100.0	%	$	12,500	100.0	%	$	12,954	100.0	%

Page 54

The allowance for loan losses totaled $12.7 million at March 31, 2013, compared to $12.5 million and $13.0 million as of December 31, 2012 and March 31, 2012, respectively. Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves. These specific reserves decreased $434,000 million in the first three months of 2013 from $3.5 million at December 31, 2012 to $3.1 million at March 31, 2013. The specific loans that make up those categories change from period to period. Impairment on those loans, which would be reflected in the allowance for loan losses, might or might not exist, depending on the specific circumstances of each loan. The portion of the reserve based upon homogeneous pools of loans increased by $11,000 in the first three months of 2013. This was attributable to an increased level of classified loans during this period. The portion of the reserve based on qualitative factors increased by $396,000 in the first three months of 2013 as a result of adjustments for several qualitative factors. Despite the shifts in specific, pooled and qualitative reserves, Management feels that market trends and other internal factors justified the $247,000 increase in unallocated reserves in the first three months of 2013 from $842,000 million at December 31, 2012 to $1.1 million at March 31, 2013.

A breakdown of the allowance for loan losses as of March 31, 2013, by loan class and allowance element, is presented in the following table:



Dollars in thousands	Specific Reserves on Loans Evaluated Individually for Impairment		General Reserves Based on Historical Loss Experience		Reserves for Qualitative Factors		Unallocated Reserves		Total Reserves
Commercial
Real estate	$	1,473	$	2,177	$	2,229	$	—	$	5,879
Construction	760		150		154		—		1,064
Other	535		781		799		—		2,115
Municipal	—		—		18		—		18
Residential
Term	337		336		440		—		1,113
Construction	—		4		5		—		9
Home equity line of credit	—		522		337		—		859
Consumer	—		345		229		—		574
Unallocated	—		—		.		1,089		1,089
	$	3,105	$	4,315	$	4,211	$	1,089	$	12,720

Based upon Management's evaluation, provisions are made to maintain the allowance as a best estimate of inherent losses within the portfolio. The provision for loan losses to maintain the allowance was $1.5 million for the first three months of 2013, a decrease of $600,000 from the three months of 2012. Net chargeoffs were $1.3 million in the first three months of 2013 compared to net chargeoffs of $2.1 million in the first three months of 2012. Our allowance as a percentage of outstanding loans has increased from 1.44% as of December 31, 2012 to 1.47% as of March 31, 2013, reflecting the changes in our loss estimates and the increases resulting from the application of our loss estimate methodology.

Page 55

The following table summarizes the activities in our allowance for loan losses for the three months ended March 31, 2013 and 2012 and for the year ended December 31, 2012:



Dollars in thousands	March 31, 2013			December 31, 2012			March 31, 2012
Balance at beginning of year	$	12,500		$	13,000		$	13,000
Loans charged off:
Commercial
Real estate	54			1,394			—
Construction	403			928			—
Other	288			3,215			2,002
Municipal	—			—			—
Residential
Term	200			1,911			239
Construction	—			389			—
Home equity line of credit	362			688			49
Consumer	127			555			180
Total	1,434			9,080			2,470
Recoveries on loans previously charged off
Commercial
Real estate	—			13			—
Construction	—			246			246
Other	103			113			2
Municipal	—			—			—
Residential
Term	2			110			1
Construction	—			54			—
Home equity line of credit	1			1			—
Consumer	48			208			75
Total	154			745			324
Net loans charged off	1,280			8,335			2,146
Provision for loan losses	1,500			7,835			2,100
Balance at end of period	$	12,720		$	12,500		$	12,954
Ratio of net loans charged off to average loans outstanding¹	0.60		%	0.95		%	0.99		%
Ratio of allowance for loan losses to total loans outstanding	1.47		%	1.44		%	1.49		%

¹ Ratios for March 2013 and 2012 have been annualized on a 365-day basis and 366-day basis, respectively.

Management believes the allowance for loan losses is appropriate as of March 31, 2013. In Management's opinion, the level of the provision for loan losses and the corresponding increase in the allowance for loan losses during the first quarter of 2013 is directionally consistent with the overall credit quality of our loan portfolio and corresponding levels of nonperforming loans and unallocated reserves, as well as with the performance of the national and local economies, higher levels of unemployment and the outlook for the recession continuing for some time to come.

Nonperforming Loans

Nonperforming loans are comprised of loans, for which based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of

Page 56

collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through

collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.

When a loan becomes nonperforming (generally 90 days past due), it is evaluated for collateral dependency based upon the most recent appraisal or other evaluation method. If the collateral value is lower than the outstanding loan balance plus accrued interest and estimated selling costs, the loan is placed on non-accrual status, all accrued interest is reversed from interest income, and a specific reserve is established for the difference between the loan balance and the collateral value less selling costs. Concurrently, a new appraisal or valuation may be ordered, depending on collateral type, currency of the most recent valuation, the size of the loan, and other factors appropriate to the loan. Upon receipt and acceptance of the new valuation, the loan may have an additional specific reserve or write down based on the updated collateral value. On an ongoing basis, appraisals or valuations may be done periodically on collateral dependent non-performing loans and an additional specific reserve or write down will be made, if appropriate, based on the new collateral value.

Once a loan is placed on nonaccrual, it remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current. All payments made on nonaccrual loans are applied to the principal balance of the loan.

Nonperforming loans, expressed as a percentage of total loans, totaled 2.42% at March 31, 2013 compared to 2.20% at December 31, 2012 and 2.81% at March 31, 2012. The following table shows the distribution of nonperforming loans by class as of March 31, 2013 and 2012 and December 31, 2012:



Dollars in thousands	March 31, 2013		December 31, 2012		March 31, 2012
Commercial
Real estate	$	4,599	$	4,603	$	7,160
Construction	1,045		101		946
Other	3,152		3,459		2,634
Municipal	—		—		—
Residential
Term	11,098		10,333		10,893
Construction	—		—		1,454
Home equity line of credit	1,030		654		1,336
Consumer	—		—		15
Total non-performing loans	$	20,924	$	19,150	$	24,438

Total nonperforming loans does not include loans 90 or more days past due and still accruing interest. These are loans in which we expect to collect all amounts due, including past-due interest. As of March 31, 2013, loans 90 or more days past due and still accruing interest totaled $0.4 million, compared to $1.1 million and $2.0 million at December 31, 2012 and March 31, 2012, respectively.

Troubled Debt Restructured

A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:


•	The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and


•	The Bank has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.

Our efforts to assist homeowners and other borrowers increased our overall level of TDRs during the first three months of 2013. As of March 31, 2013 we had 106 loans with a value of $31.1 million that have been restructured. This compares to 101 loans with a value of $30.0 million and 71 loans with a value of $20.6 million classified as TDRs as of December 31, 2012 and March 31, 2012, respectively. The following table shows the activity in loans classified as TDRs between December 31, 2012 and March 31, 2013:

Page 57



Balance in Thousands of Dollars	Number of Loans		Aggregate Balance
Total at December 31, 2012	101		$	29,955
Added in 2013	7		2,948
Removed in 2013	(2	)	(499		)
Repayments in 2013	—		(1,257		)
Total at March 31, 2013	106		$	31,147

As of March 31, 2013, 72 loans with an aggregate balance of $24.6 million were performing under the modified terms, 6 loans with an aggregate balance of $1.8 million were more than 30 days past due and 28 loans with an aggregate balance of $4.7 million were on nonaccrual. As a percentage of aggregate outstanding balance, 79.1% was performing under the modified terms, 5.8% was more than 30 days past due and 15.1% was on nonaccrual. The performance status of all TDRs as of March 31, 2013, as well as the associated specific balance in the allowance for loan losses, is summarized by type of loan in the following table.



In thousands of dollars	Performing As Modified			30+ Days Past Due and Accruing			On Nonaccrual			All TDRs
Commercial
Real estate	$	12,677		$	257		$	781		$	13,715
Construction	1,302			—			1,015			2,317
Other	2,397			—			666			3,063
Municipal	—			—			—			—
Residential
Term	7,607			1,558			2,030			11,195
Construction	—			—			—			—
Home equity line of credit	654			—			203			857
Consumer	—			—			—			—
	$	24,637		$	1,815		$	4,695		$	31,147
Percent of balance	79.1		%	5.8		%	15.1		%	100.0		%
Number of loans	72			6			28			106
Associated specific balance	$	1,598		$	417		$	575		$	2,590

The majority of residential TDRs as of March 31, 2013, was comprised of 53 loans with an aggregate balance of $9.7 million, and the modifications granted fell into three major categories. Loans totaling $7.8 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. Loans totaling $2.1 million had interest capitalized, allowing the borrower to become current after unpaid interest was added to the balance of the loan and re-amortized over the remaining life of the loan. Short-term rate concessions were granted on loans totaling $1.5 million, with a rate concession typically of 1.0% or less. Certain residential TDRs had more than one modification.

Thecommercial TDRs as of March 31, 2013, was comprised of 54 loans with a balance of $21.4 million. Of this total, 30 loans with an aggregate balance of $9.0 million had an extended period of interest-only payments, deferring the start of principal repayment. Four loans with an aggregate balance of $3.9 million were modified by reducing the balance owed, taking into account the borrower's financial resources, and charging off the remaining balance. Four loans with an aggregate balance of $3.1 million were converted from interest-only to regular principal-and-interest payments based on the borrowers' ability to service the higher payment amount. Two loans with an aggregate balance of $2.7 million were consolidated into a one loan and re-amortized with an extended term, lowering the amount of regular debt service. Three loans with an aggregate balance of $1.7 million were granted a short-term predetermined period of interest-only payments, with regular principal-and-interest payments resuming after that time. Eleven loans with an aggregate balance of $1.0 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford,

In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR, however, it remains classified as such until the balance is fully repaid, despite whether the loan is performing under the modified terms. As of March 31, 2013, Management is aware of 13 loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1.2 million. There were also 28 loans with an outstanding balance of $4.7 million that were classified as TDRs and on non-accrual status, four of which, with an outstanding balance of $504,000, were in the process of foreclosure.

Page 58

Impaired Loans

Impaired loans include restructured loans and loans placed on non-accrual status. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference. Impaired loans totaled $47.4 million at March 31, 2013, and have increased $1.6 million from December 31, 2012. The number of loans increased by four from 231 to 235 during the same period. Impaired commercial loans increased $442,000 from December 31, 2012 to March 31, 2013. The specific allowance for impaired commercial loans decreased from $3.1 million at December 31, 2012 to $2.8 as of March 31, 2013, which represented the fair value deficiencies for loans where the fair value of the collateral was estimated at less than our carrying amount of the loan. From December 31, 2012 to March 31, 2013, impaired residential loans increased $818,000, impaired home equity lines of credit increased $372,000.

The following table sets forth impaired loans as of March 31, 2013 and 2012 and December 31, 2012:



Dollars in thousands	March 31, 2013		December 31, 2012		March 31, 2012
Commercial
Real estate	$	17,534	$	15,774	$	14,295
Construction	2,347		3,354		2,093
Other	5,550		5,861		3,886
Municipal	—		—		—
Residential
Term	20,262		19,444		18,054
Construction	—		—		1,454
Home equity line of credit	1,683		1,311		1,336
Consumer	—		—		15
Total	$	47,376	$	45,744	$	41,133

Page 59

Past Due Loans

The Bank's overall loan delinquency ratio was 3.12% at March 31, 2013, versus 2.67% at December 31, 2012 and 3.04% at March 31, 2012. Loans 90 days delinquent and accruing decreased from $1.1 million at December 31, 2012 to $0.4 million as of March 31, 2013. The total at March 31, 2013, is made up of six loans, with the largest loan totaling $96,000. We expect to collect all amounts due on these loans, plus any accrued interest. The following table sets forth loan delinquencies as of March 31, 2013 and 2012 and December 31, 2012:



Dollars in thousands	March 31, 2013			December 31, 2012			March 31, 2012
Commercial
Real estate	$	4,364		$	4,898		$	5,149
Construction	52			64			1,986
Other	6,695			3,182			3,447
Municipal	—			136			—
Residential
Term	13,372			12,784			12,623
Construction	189			188			1,946
Home equity line of credit	1,935			1,699			1,242
Consumer	323			216			181
Total	$	26,930		$	23,167		$	26,574
Loans 30-89 days past due to total loans	1.43		%	0.92		%	0.94		%
Loans 90+ days past due and accruing to total loans	0.05		%	0.12		%	0.22		%
Loans 90+ days past due on non-accrual to total loans	1.64		%	1.63		%	1.88		%
Total past due loans to total loans	3.12		%	2.67		%	3.04		%

Potential Problem Loans and Loans in Process of Foreclosure

Potential problem loans consist of classified accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in some amount of loss. At March 31, 2013, there were 13 potential problem loans with a balance of $5.3 million or 0.6% of total loans. This compares to 15 loans with a balance of $2.7 million or 0.3% of total loans at December 31, 2012.

As of March 31, 2013, there were 50 loans in the process of foreclosure with a total balance of $8.3 million. The Bank's foreclosure process begins when a loan becomes 45 days past due at which time a preliminary foreclosure letter is sent to the borrower. If the loan becomes 80 days past due, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review and an affidavit for a Motion for Summary Judgment is then prepared. An authorized Bank officer signs the affidavit certifying the validity of the documents and verification of the past due amount which is then forwarded to the court. Once a Motion for Summary Judgment is granted, a Period of Redemption (POR) begins which gives the customer 90 days to cure the default. A foreclosure auction date is then set 30 days from the POR expiration date if the default is not cured.

In July 2012, the Bank conducted a self-audit of its loans in foreclosure and its foreclosure process and found there were no deficiencies or areas to improve. For loans sold to the secondary market on which servicing is retained, the Bank follows Freddie Mac's and Fannie Mae's published guidelines and regularly reviews these guidelines for updates and changes to process. All secondary market loans have been sold without recourse in a non-securitized, one-on-one basis. As a result, the Bank has no liability for these loans in the event of a foreclosure.

Page 60

Other Real Estate Owned

Other real estate owned and repossessed assets ("OREO") are comprised of properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure. Real estate acquired through foreclosure is carried at the lower of fair value less estimated cost to sell or the cost of the asset and is not included as part of the allowance for loan loss totals. At March 31, 2013, there were 32 properties owned with a net OREO balance of $7.4 million, net of an allowance for losses of $324,000 million, compared to December 31, 2012 when there were 32 properties owned with a net OREO balance of $7.6 million, net of an allowance for losses of $373,000 million and March 31, 2012 when there were 15 properties owned with a net OREO balance of $4.2 million, net of an allowance for losses of $367,000 million.

The following table presents the composition of other real estate owned:



Dollars in thousands	March 31, 2013		December 31, 2012		March 31, 2012
Carrying Value
Commercial
Real estate	$	111	$	—	$	—
Construction	2,770		3,406		59
Other	1,373		1,617		1,504
Municipal	—		—		—
Residential	—
Term	3,457		2,943		3,018
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	7,711	$	7,966	$	4,581
Related Allowance
Commercial
Real estate	$	—	$	—	$	—
Construction	—		—		—
Other	100		158		127
Municipal	—		—		—
Residential	—
Term	224		215		240
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	324	$	373	$	367
Net Value
Commercial
Real estate	$	111	$	—	$	—
Construction	2,770		3,406		59
Other	1,273		1,459		1,377
Municipal	—		—		—
Residential	—
Term	3,233		2,728		2,778
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	7,387	$	7,593	$	4,214

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Goodwill

On October 26, 2012, the Bank completed the purchase of a branch at 63 Union Street in Rockland, Maine, from Camden National Bank that was formerly operated by Bank of America. As part of the transaction, the Bank acquired approximately $32.3 million in deposits as well as a small volume of loans. On the same date, the Bank completed the purchase of a full-service bank building at 145 Exchange Street in Bangor, Maine, also from Camden National Bank, and opened a full-service branch in this building in February of 2013. The banking facilities were valued at the most recent tax assessed value, which approximates fair value. The loans acquired were recorded at fair value at the time of acquisition. The estimated fair value of the loans acquired is equal to the carrying value. The excess of the purchase price over the fair value of the assets acquired, liabilities assumed, and the amount allocated for core deposit intangible totaled $2,121,000 and was recorded as goodwill. The goodwill is not amortizable but is deductible for tax purposes.

On January 14, 2005, the Company acquired FNB Bankshares of Bar Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor, which was merged into the Bank. The total value of the transaction was $48.0 million, and all of the voting equity interest of FNB Bankshares was acquired in the transaction. The transaction was accounted for as a purchase and the excess of purchase price over the fair value of net identifiable assets acquired equaled $27,559,000 and was recorded as goodwill, none of which was deductible for tax purposes.

The Bank also carries $125,000 in goodwill for a de minimus transaction in 2001. As of December 31, 2012, the Company completed its annual review of goodwill and determined there has been no impairment.

Liquidity Management

As of March 31, 2013, the Bank had primary sources of liquidity of $300.0 million. It is Management's opinion this is adequate. The Bank has an additional $311.6 million in contingent sources of liquidity, including the Federal Reserve Borrower in Custody program, municipal and corporate securities, and correspondent bank lines of credit. The Asset/Liability Committee ("ALCO") establishes guidelines for liquidity in its Asset/Liability policy and monitors internal liquidity measures to manage liquidity exposure. Based on its assessment of the liquidity considerations described above, Management believes the Company's sources of funding will meet anticipated funding needs.

Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Bank's primary source of liquidity is deposits, which funded 68.8% of total average assets in the first three months of 2013. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although Management has no intention to do so at this time.

The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management has developed quantitative models to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of "business as usual" cash flows. In Management's estimation, risks are concentrated in two major categories: runoff of in-market deposit balances and the inability to renew wholesale sources of funding. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our modeling attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other "business as usual" factors enter into the calculation of the adequacy of contingent liquidity including payment proceeds from loans and investment securities, maturing debt obligations and maturing time deposits. The Bank has established collateralized borrowing capacity with the Federal Reserve Bank of Boston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with two correspondent banks and availability through the Federal Reserve Bank Borrower in Custody program.

Deposits

During the first three months of 2013, total deposits increased by $17.0 million or 1.8% from December 31, 2012 levels. Low-cost deposits (demand, NOW, and savings accounts) decreased by $12.4 million or 3.3% in the first three months of 2013, money market deposits increased $7.4 million or 9.1%, and certificates of deposit increased $22.1 million or 4.4%. Between March 31, 2012 and March 31, 2013, total deposits decreased by $40.0 million or 3.9%. Low-cost deposits increased by $51.1 million or 16.5%, money market accounts increased $12.6 million or 16.6%, and certificates of deposit decreased $103.6 million or 16.4%. The majority of the change in certificates of deposit year-over-year, was the result from a shift in funding between borrowed funds and certificates of deposit. The increase in low-cost deposits year-over-year is due to an inflow of

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low-cost deposits due to the low interest rate environment and a net $25 million lift in low-cost deposits in the fourth quarter with the acquisition of the former Bank of America branch in Rockland.

Borrowed Funds

The Company uses funding from the Federal Home Loan Bank of Boston, the Federal Reserve Bank of Boston and repurchase agreements, enabling it to grow its balance sheet and its revenues. It may also be used to balance seasonal deposit flows or to carry out interest rate risk management strategies, and is increased to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the three months ended March 31, 2013, borrowed funds decreased $21.7 million or 7.7% from December 31, 2012. Between March 31, 2012 and March 31, 2013, borrowed funds increased by $21.0 million or 8.8%. This increase was due to the shift in funding mentioned above.

Shareholders' Equity

Shareholders' equity as of March 31, 2013 was $163.7 million, compared to $156.3 million as of December 31, 2012 and $151.6 million as of March 31, 2012. The Company raised $11.5 million through issuance of common stock in the first three months of 2013, and first quarter earnings, net of dividends paid, also added to shareholders' equity. The net unrealized gain on available-for-sale securities, presented in accordance with FASB ASC Topic 740 "Investments – Debt and Equity Securities", decreased by $2.5 million from December 31, 2012.

A cash dividend of 19.5 cents per share was declared in the first quarter of 2013, equal to the dividend declared in each of the past eighteen quarters. The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 72.22% for the first three months of 2013 compared to 69.64% for the same period in 2012. In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 2013 is this year's net income plus $6.8 million.

On November 21, 2008, the Company received approval for a $25 million investment in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, by the U.S. Treasury under the Capital Purchase Program ("the CPP Shares"). The Company completed the CPP investment transaction on January 9, 2009. The CPP Shares call for cumulative dividends at a rate of 5.0% per year for the first five years, and at a rate of 9.0% per year in following years. The CPP Shares qualify as Tier 1 capital on the Company's books for regulatory purposes and rank senior to the Company's common stock and senior or at an equal level in the Company's capital structure to any other shares of preferred stock the Company may issue in the future.

On August 24, 2011, the Company repurchased $12.5 million of the CPP Shares. The repurchase transaction was approved by the Federal Reserve Bank of Boston, the Company's primary regulator, as well as the Bank's primary regulator, the Office of the Comptroller of the Currency. These approvals were based on the Company's and the Bank's continued strong capital ratios after the repayment, and almost all of the repayment was made from retained earnings accumulated since the preferred stock was issued in 2009. After the repurchase, $12.5 million of CPP Shares remains outstanding. The warrant issued in conjunction with the CPP Shares for 225,904 shares of Common Stock at an exercise price of $16.60 per share was unchanged as a result of the repurchase transaction and remains outstanding.

On March 27, 2013, the Company repurchased $2.5 million of the CPP Shares with funds from its operating account. After the repurchase, $10.0 million of the CPP shares remains outstanding. On March 28, 2013, the Company consummated a fully underwritten offering for 760,771 shares of the Company's common stock, and Management plans to use the proceeds to repurchase the remaining $10.0 million of preferred stock. This is subject to approval from the Federal Reserve Bank of Boston, the Company's principal regulator, and we expect this will be completed during the second quarter 2013.

Regulatory leverage capital ratios for the Company were 9.19% and 8.46% at March 31, 2013 and December 31, 2012, respectively. The Company had a tier one risk-based capital ratio of 16.05% and a tier two risk-based capital ratio of 17.31% at March 31, 2013, compared to 14.80% and 16.05%, respectively, at December 31, 2012. These ratios are comfortably above the standards to be rated "well-capitalized" by regulatory authorities – qualifying for lower deposit-insurance premiums.

Off-Balance Sheet Financial Instruments

No material off-balance sheet risk exists that requires a separate liability presentation.

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Contractual Obligations

The following table sets forth the contractual obligations of the Company as of March 31, 2013:



Dollars in thousands	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Borrowed funds	$	261,185	$	121,032	$	50,000	$	80,000	$	10,153
Operating leases	757		158		262		234		103
Certificates of deposit	527,153		323,893		162,760		40,500		—
Total	$	789,095	$	445,083	$	213,022	$	120,734	$	10,256
Total loan commitments and unused lines of credit	$	116,166	$	116,166	$	—	$	—	$	—

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market-Risk Management

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. The First Bancorp, Inc.'s market risk is composed primarily of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. All guidelines and policies established by ALCO have been approved by the Board of Directors.

Asset/Liability Management

The primary goal of asset/liability management is to maximize net interest income within the interest rate risk limits set by ALCO. Interest rate risk is monitored through the use of two complementary measures: static gap analysis and earnings simulation modeling. While each measurement has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.

Static gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities that reprice within a specified time period. The Company's cumulative one-year gap at March 31, 2013 was +11.86% of total assets compared to +11.52% of total assets at December 31, 2012. Core deposits with non-contractual maturities are presented based upon historical patterns of balance attrition and pricing behavior, which are reviewed at least annually.

The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age.

A summary of the Company's static gap, as of March 31, 2013, is presented in the following table:



	0-90			90-365			1-5			5+
Dollars in thousands	Days			Days			Years			Years
Investment securities at amortized cost	$	29,051		$	53,367		$	153,418		$	201,324
Federal Home Loan Bank and Federal Reserve Bank Stock	12,875			—			—			1,037
Loans held for sale	—			—			—			—
Loans	437,729			152,123			212,422			61,203
Other interest-earning assets	—			10,510			—			—
Non-rate-sensitive assets	14,063			—			—			77,665
Total assets	493,718			216,000			365,840			341,229
Interest-bearing deposits	237,666			175,357			202,787			278,584
Borrowed funds	101,032			20,000			130,000			10,153
Non-rate-sensitive liabilities and equity	1,900			5,700			32,350			221,258
Total liabilities and equity	340,598			201,057			365,137			509,995
Period gap	$	153,120		$	14,943		$	703		$	(168,766	)
Percent of total assets	10.81		%	1.05		%	0.05		%	(11.91		)	%
Cumulative gap (current)	$	153,120		$	168,063		$	168,766		—
Percent of total assets	10.81		%	11.86		%	11.91		%	0.00			%

The earnings simulation model forecasts capture the impact of changing interest rates on one-year and two-year net interest income. The modeling process calculates changes in interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company's balance sheet. None of the assets used in the simulation are held for trading purposes. The modeling is done for a variety of scenarios that incorporate changes in the absolute level of interest rates as well as basis risk, as represented by changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effects on income of alternative interest rate scenarios against earnings in a stable interest rate environment. This analysis is also most useful in determining the short-run earnings exposures to changes in customer behavior involving loan payments and deposit additions and withdrawals.

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The Company's most recent simulation model projects net interest income would decrease by approximately 1.39% of stable-rate net interest income if short-term rates affected by Federal Open Market Committee actions fall gradually by one percentage point over the next year, and increase by approximately 0.62% if rates rise gradually by two percentage points. Both scenarios are well within ALCO's policy limit of a decrease in net interest income of no more than 10.0% given a 2.0% move in interest rates, up or down. Management believes this reflects a reasonable interest rate risk position. In year two, and assuming no additional movement in rates, the model forecasts that net interest income would be lower than that earned in a stable rate environment by 4.54% in a falling-rate scenario, and higher than that earned in a stable rate environment by 0.64% in a rising rate scenario, when compared to the year-one base scenario. A summary of the Bank's interest rate risk simulation modeling, as of March 31, 2013 and December 31, 2012 is presented in the following table:



Changes in Net Interest Income	March 31, 2013		December 31, 2012
Year 1
Projected change if rates decrease by 1.0%	-1.39	%	-1.50%
Projected change if rates increase by 2.0%	0.62	%	0.80%
Year 2
Projected change if rates decrease by 1.0%	-4.54	%	-6.10%
Projected change if rates increase by 2.0%	0.64	%	1.10%

This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. Loans and deposits are projected to maintain stable balances. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in similar assets. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Non-contractual deposit volatility and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed annually and reviewed by ALCO.

This sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, pricing decisions on loans and deposits, and reinvestment/ replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive ability of these assumptions, including how customer preferences or competitor influences might change.

Interest Rate Risk Management

A variety of financial instruments can be used to manage interest rate sensitivity. These may include investment securities, interest rate swaps, and interest rate caps and floors. Frequently called interest rate derivatives, interest rate swaps, caps and floors have characteristics similar to securities but possess the advantages of customization of the risk-reward profile of the instrument, minimization of balance sheet leverage and improvement of liquidity. As of March 31, 2013, the Company was using no interest rate derivatives for interest rate risk management.

The Company engages an independent consultant to periodically review its interest rate risk position, as well as the effectiveness of simulation modeling and reasonableness of assumptions used. As of March 31, 2013, there were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. As a result of recent statements made by the Federal Open Market Committee, Management expects interest rates will remain stable in the next ten-to-twelve quarters and believes that the current level of interest rate risk is acceptable.

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Item 4: Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of March 31, 2013, the end of the quarter covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company's management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business.

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Part II – Other Information

Item 1 – Legal Proceedings

The Company was not involved in any legal proceedings requiring disclosure under Item 103 of Regulation S-K during the reporting period.

Item 1A – Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company's Form 10-K for the year ended December 31, 2012.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

a. None

b. None

c. None

Item 3 – Default Upon Senior Securities

None.

Item 4 – Other Information

A. None.

B. None.

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Item 5 – Exhibits

Exhibit 2.1 Agreement and Plan of Merger With FNB Bankshares Dated August 25, 2004, incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated August 25, 2004, filed under item 1.01 on August 27, 2004.

Exhibit 3.1 Conformed Copy of the Registrant's Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed under item 5.03 on October 7, 2004).

Exhibit 3.2 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed under item 5.03 on May 1, 2008).

Exhibit 3.3 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to the Definitive Proxy Statement for the Company's 2008 Annual Meeting filed on March 14, 2008).

Exhibit 3.4 Amendment to the Registrant's Articles of Incorporation authorizing issuance of preferred stock (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on December 29, 2008).

Exhibit 3.5 Conformed Copy of the Company's Bylaws (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed under item 5.03 on October 31, 2012).

Exhibit 10.2(a) Specimen Employment Continuity Agreement entered into with Mr. McKim, incorporated by reference to Exhibit 10.2(a) to the Company's Form 8-K filed under item 1.01 on January 14, 2005.

Exhibit 10.2(b) Specimen Amendment to Employment Continuity Agreement entered into with Mr. McKim, incorporated by reference to Exhibit 10.2(b) to the Company's Form 8-K filed under item 1.01 on January 14, 2005.

Exhibit 10.2(c) Specimen Amendment to Employment Continuity Agreement entered into with Mr. McKim, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on January 31, 2006.

Exhibit 10.3(a) Specimen Split Dollar Agreement entered into with Mr. McKim with a death benefit of $250,000. Incorporated by reference to Exhibit 10.3(a) to the Company's Form 8-K filed under item 1.01 on January 14, 2005.

Exhibit 10.3(b) Specimen Amendment to Split Dollar Agreement entered into with Mr. McKim, incorporated by reference to Exhibit 10.3(b) to the Company's Form 8-K filed under item 1.01 on January 14, 2005.

Exhibit 10.4 Specimen Amendment to Supplemental Executive Retirement Plan entered into with Messrs. Daigneault and Ward changing the normal retirement age to receive the full benefit under the Plan from age 65 to age 63, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on December 30, 2008.

Exhibit 10.5 Purchase and Assumption Agreement between the Bank and Camden National Bank for the purchase of a bank branch, loans and deposits at 63 Union Street in Rockland, Maine, attached as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2012.

Exhibit 10.6 Purchase and Sale Agreement between the Bank and Camden National Bank for the purchase of a bank building at 145 Exchange Street in Bangor, Maine, attached as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2012.

Exhibit 10.7 Underwriting agreement for a public common stock offering between the Company and Keefe, Bruyette & Woods, Inc., a Stifel Company, incorporated by reference to Exhibit 1 to the Company's Form 8-K filed under item 1.01 on March 26, 2013.

Exhibit 10.8 Letter Agreement between the Company and the United States Treasury, dated March 27, 2013, to repurchase $2.5 million of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on March 28, 2013.

Exhibit 10.8 Letter Agreement between the Company and the United States Treasury, dated May 8, 2013, to repurchase $10.0 million of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on March 28, 2013.

Exhibit 14.1 Code of Ethics for Senior Financial Officers, adopted by the Board of Directors on September 19, 2003. Incorporated by reference to Exhibit 14.1 to the Company's Annual Report on Form 10-K filed on March 15, 2006.

Exhibit 14.2 Code of Business Conduct and Ethics, adopted by the Board of Directors on April 15, 2004. Incorporated by reference to Exhibit 14.2 to the Company's Annual Report on Form 10-K filed on March 15, 2006.

Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934

Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934

Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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Exhibit 101.INS XBRL Instance Document

Exhibit 101.SCH XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF XBRL Taxonomy Extension Definitions Linkbase

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Signatures

Pursuant to 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.

THE FIRST BANCORP, INC.

/s/ Daniel R. Daigneault

Daniel R. Daigneault

President & Chief Executive Officer

Date: May 9, 2013

/s/ F. Stephen Ward

F. Stephen Ward

Executive Vice President & Chief Financial Officer

Date: May 9, 2013

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