NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the Company's loan portfolio, excluding residential loans held for sale, at March 31, 2013 and December 31, 2012 was as follows:

	March 31, 2013			December 31, 2012
Residential real estate loans	$	572,562		$	572,768
Commercial real estate loans		505,992			506,231
Commercial loans		191,292			190,454
Home equity loans		291,690			278,375
Consumer loans		17,259			16,633
Deferred loan fees net of costs		(628	)		(595	)
Total loans	$	1,578,167		$	1,563,866

The Company's lending activities are primarily conducted in Maine. The Company originates single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy. During the first three months of 2013 and 2012, the Company sold $9.4 million and $5.4 million, respectively, of fixed-rate residential mortgage loans on the secondary market that resulted in net gains on the sale of loans of $307,000 and $319,000, respectively.

In connection with a branch acquisition in 2012, the Company acquired $6.0 million in performing commercial loans. The loans were recorded at fair value, which was determined by estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. As a result of this analysis, the Company recorded a fair value mark of $317,000, which will amortize over the estimated life of the loan. Additionally, the acquired loans did not have any related allowance for loan losses ("ALL") as they were recorded at fair value; however, an ALL will be established should the credit quality of these loans deteriorate subsequent to the acquisition. Based on the immateriality of the acquired loans and fair value mark, additional disclosures related to the acquired loans are not required.

The "ALL" is management's best estimate of the inherent risk of loss in the Company's loan portfolio as of the statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company's ability to collect loans and require an increase to the ALL in the future are: general real estate and economic conditions; regional credit concentration; industry concentration, for example in the hospitality, tourism and recreation industries; and a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.

The board of directors monitors credit risk management through the Directors' Loan Committee and the Corporate Risk Management group. The Directors' Loan Committee reviews large exposure credit requests, monitors asset quality on a regular basis and has approval authority for credit granting policies. The Corporate Risk Management group oversees management's systems and procedures to monitor the credit quality of the loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system and determine the adequacy of the ALL. The Company's practice is to identify problem credits early and take charge-offs as promptly as practicable. In addition, management continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. For purposes of determining the ALL, the Company disaggregates its portfolio loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, and consumer.

The following table presents activity in the ALL for the three months ended March 31, 2013:

	Residential Real Estate			Commercial Real Estate			Commercial			Home Equity			Consumer			Unallocated			Total
ALL:
Beginning balance	$	6,996		$	4,549		$	5,933		$	2,520		$	184		$	2,862		$	23,044
Loans charged off		(145	)		(80	)		(277	)		(28	)		(57	)		-			(587	)
Recoveries		3			75			129			2			19			-			228
Provision (reduction)		415			(942	)		415			864			76			(144	)		684
Ending balance	$	7,269		$	3,602		$	6,200		$	3,358		$	222		$	2,718		$	23,369
ALL balance attributable to loans:
Individually evaluated for impairment	$	2,468		$	197		$	325		$	469		$	82		$	-		$	3,541
Collectively evaluated for impairment		4,801			3,405			5,875			2,889			140			2,718			19,828
Total ending ALL	$	7,269		$	3,602		$	6,200		$	3,358		$	222		$	2,718		$	23,369
Loans:
Individually evaluated for impairment	$	13,754		$	7,633		$	3,329		$	1,855		$	488		$	-		$	27,059
Collectively evaluated for impairment		558,180			498,359			187,963			289,835			16,771			-			1,551,108
Total ending loans balance	$	571,934		$	505,992		$	191,292		$	291,690		$	17,259		$	-		$	1,578,167

The following table presents activity in the ALL for the three months ended March 31, 2012:

	Residential Real Estate			Commercial Real Estate			Commercial			Home Equity			Consumer			Unallocated		Total
ALL:
Beginning balance	$	6,398		$	5,702		$	4,846		$	2,704		$	420		$	2,941	$	23,011
Loans charged off		(308	)		(179	)		(191	)		(387	)		(24	)		-		(1,089	)
Recoveries		5			21			64			-			7			-		97
Provision (reduction)		8			169			474			157			120			63		991
Ending balance	$	6,103		$	5,713		$	5,193		$	2,474		$	523		$	3,004	$	23,010
ALL balance attributable to loans:
Individually evaluated for impairment	$	754		$	479		$	567		$	-		$	-		$	-	$	1,800
Collectively evaluated for impairment		5,349			5,234			4,626			2,474			523			3,004		21,210
Total ending ALL	$	6,103		$	5,713		$	5,193		$	2,474		$	523		$	3,004	$	23,010
Loans:
Individually evaluated for impairment	$	7,039		$	4,058		$	866		$	868		$	8		$	-	$	12,839
Collectively evaluated for impairment		566,245			476,004			178,931			269,454			12,708			-		1,503,342
Total ending loans balance	$	573,284		$	480,062		$	179,797		$	270,322		$	12,716		$	-	$	1,516,181

The following table presents the activity in the ALL and select loan information by portfolio segment for the year ended December 31, 2012:

	Residential Real Estate			Commercial Real Estate			Commercial			Home Equity			Consumer			Unallocated			Total
ALL:
Beginning balance	$	6,398		$	5,702		$	4,846		$	2,704		$	420		$	2,941		$	23,011
Loans charged off		(1,197	)		(593	)		(1,393	)		(1,234	)		(85	)		-			(4,502	)
Recoveries		73			222			406			23			20			-			744
Provision (reduction)		1,722			(782	)		2,074			1,027			(171	)		(79	)		3,791
Ending balance	$	6,996		$	4,549		$	5,933		$	2,520		$	184		$	2,862		$	23,044
ALL balance attributable to loans:
Individually evaluated for impairment	$	2,255		$	265		$	286		$	261		$	39		$	-		$	3,106
Collectively evaluated for impairment		4,741			4,284			5,647			2,259			145			2,862			19,938
Total ending ALL	$	6,996		$	4,549		$	5,933		$	2,520		$	184		$	2,862		$	23,044
Loans:
Individually evaluated for impairment	$	13,805		$	7,968		$	3,610		$	1,515		$	259		$	-		$	27,157
Collectively evaluated for impairment		558,368			498,263			186,844			276,860			16,374			-			1,536,709
Total ending loans balance	$	572,173		$	506,231		$	190,454		$	278,375		$	16,633		$	-		$	1,563,866

The ALL for the Company's portfolio segments is determined based on loan balances and the historical performance factor of each portfolio segment. The significant changes in the ALL for the first three months ended March 31, 2013, compared to the year ended December 31, 2012, were within the home equity and commercial real estate portfolio segments. The increase in the allocation of ALL for home equity was primarily due to the 5% increase in loan balances and its historical performance, while the decrease in commercial real estate was due to the improvement of the historical performance factor.

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored by the Credit Risk Policy Committee. As of March 31, 2013, the two most significant industry exposures within the commercial real estate loan portfolio were non-residential building operators (operators of commercial and industrial buildings, retail establishments, theaters, banks and insurance buildings) and lodging (inns, bed & breakfasts, ski lodges, tourist cabins, hotels and motels). At March 31, 2013, exposure to these two industries as a percentage of total commercial real estate loans, was 30% and 22%, respectively.

To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial, commercial real estate and residential real estate loans are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:

Grade 1 through 6 - Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risk which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.

Grade 7 - Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor's financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.

Grade 8 - Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. This classification is used if borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.

Grade 9 - Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that 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.

Grade 10 - Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.

Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company's loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans are considered non-performing.

The following table summarizes credit risk exposure indicators by portfolio segment as of the following dates:

	Residential Real Estate		Commercial Real Estate		Commercial		Home Equity		Consumer
March 31, 2013
Pass (Grades 1-6)	$	554,001	$	443,508	$	167,725	$	-	$	-
Performing		-		-		-		289,835		16,773
Special Mention (Grade 7)		2,749		16,875		7,603		-		-
Substandard (Grade 8)		15,184		45,609		15,964		-		-
Non-performing		-		-		-		1,855		486
Total	$	571,934	$	505,992	$	191,292	$	291,690	$	17,259
December 31, 2012
Pass (Grades 1-6)	$	555,444	$	440,610	$	165,460	$	-	$	-
Performing		-		-		-		276,742		16,376
Special Mention (Grade 7)		1,291		17,069		7,449		-		-
Substandard (Grade 8)		15,438		48,552		17,545		-		-
Non-performing		-		-		-		1,633		257
Total	$	572,173	$	506,231	$	190,454	$	278,375	$	16,633

The Company closely monitors the performance of its loan portfolio. Loans past due 30 days or more are considered delinquent. In general, consumer loans will be charged off if the loan is delinquent for 90 consecutive days. Commercial and real estate loans may be charged off in part or in full if they appear uncollectible. A loan is placed on non-accrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is well-secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is assured by a specific event, such as the closing of a pending sale contract. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. Interest payments received on non-accrual loans (including impaired loans) are applied as a reduction of principal. A loan remains on non-accrual status until all principal and interest amounts contractually due are brought current and future payments are reasonably assured. A loan may be returned to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period. Unsecured loans, however, are not normally placed on non-accrual status because they are charged-off once their collectability is in doubt.

The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include troubled debt restructured loans ("TDRs"), and loans past due over 90 days and accruing as of the following dates:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Outstanding		Loans > 90 Days Past Due and Accruing		Non-Accrual Loans
March 31, 2013
Residential real estate	$	1,404	$	615	$	7,955	$	9,974	$	561,960	$	571,934	$	-	$	10,311
Commercial real estate		3,125		797		4,781		8,703		497,289		505,992		49		5,782
Commercial		769		490		2,434		3,693		187,599		191,292		-		3,134
Home equity		983		101		1,602		2,686		289,004		291,690		-		1,855
Consumer		37		14		486		537		16,722		17,259		-		486
Total	$	6,318	$	2,017	$	17,258	$	25,593	$	1,552,574	$	1,578,167	$	49	$	21,568
December 31, 2012
Residential real estate	$	1,459	$	850	$	8,410	$	10,719	$	561,454	$	572,173	$	193	$	10,584
Commercial real estate		896		2,227		5,380		8,503		497,728		506,231		138		6,719
Commercial		1,079		68		2,969		4,116		186,338		190,454		160		3,409
Home equity		2,230		355		1,105		3,690		274,685		278,375		118		1,514
Consumer		342		199		259		800		15,833		16,633		2		257
Total	$	6,006	$	3,699	$	18,123	$	27,828	$	1,536,038	$	1,563,866	$	611	$	22,483

The Company takes a conservative approach in credit risk management and remains focused on community lending and reinvesting. The Company's Credit Administration group works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDRs consist of loans where the Company, for economic or legal reasons related to the borrower's financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will continue to remain in a restructured status until paid in full.

At March 31, 2013 and December 31, 2012, the allowance related to TDRs was $542,000 and $494,000, respectively. The specific reserve component was determined by discounting the total expected future cash flows from the borrower, or if the loan is currently collateral-dependent, using the fair value of the underlying collateral, which was obtained through independent appraisals and internal evaluations. At March 31, 2013, the Company did not have any commitments to lend additional funds to borrowers with loans classified as TDRs.

During the first three months of 2013, the Company modified four loans as TDRs, which had current balances of $638,000 at March 31, 2013. During the first three months of 2012, the Company did not modify any loans as TDRs. The modification of these loans as TDRs did not have a material financial effect on the Company. Loans restructured due to credit difficulties that are now performing were $5.5 million at March 31, 2013 and $4.7 million at December 31, 2012. The Company did not have any TDRs that subsequently defaulted during the first three months of 2013 and 2012.

The following is a summary of accruing and non-accruing TDRs by portfolio segment as of the following dates:

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Current Balance
March 31, 2013
Residential real estate		21	$	3,538	$	3,669	$	3,508
Commercial real estate		9		2,919		2,968		2,734
Commercial		4		284		284		228
Consumer		1		3		3		2
Total		35	$	6,744	$	6,924	$	6,472
December 31, 2012
Residential real estate		20	$	3,305	$	3,434	$	3,286
Commercial real estate		6		2,602		2,649		2,344
Commercial		3		303		303		236
Consumer		1		3		3		2
Total		30	$	6,213	$	6,389	$	5,868

Impaired loans consist of non-accrual and TDRs. All impaired loans are allocated a portion of the allowance to cover potential losses.

The following is a summary of impaired loan balances and associated allowance by portfolio segment as of the following dates and for the periods then ended:

							Three Months Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2013
With an allowance recorded:
Residential real estate	$	10,904	$	10,904	$	2,468	$	8,689	$	29
Commercial real estate		3,680		3,680		197		4,343		3
Commercial		3,002		3,002		325		2,788		2
Home equity		1,319		1,319		469		1,528		-
Consumer		486		486		82		457		-
Ending Balance	$	19,391	$	19,391	$	3,541	$	17,805	$	34
Without allowance recorded:
Residential real estate	$	2,850	$	3,672	$	-	$	5,028	$	7
Commercial real estate		3,953		4,217		-		3,516		22
Commercial		327		421		-		558		1
Home equity		536		807		-		364		-
Consumer		2		2		-		2		-
Ending Balance	$	7,668	$	9,119	$	-	$	9,468	$	30
Total impaired loans	$	27,059	$	28,510	$	3,541	$	27,273	$	64

							Year Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2012
With related allowance recorded:
Residential real estate	$	11,021	$	11,021	$	2,255	$	10,585	$	114
Commercial real estate		4,296		4,296		265		5,551		-
Commercial		2,971		2,971		286		3,927		-
Home equity		1,236		1,236		261		1,289		-
Consumer		257		257		39		239		-
Ending Balance	$	19,781	$	19,781	$	3,106	$	21,591	$	114
Without related allowance recorded:
Residential real estate	$	2,784	$	3,841	$	-	$	2,548	$	26
Commercial real estate		3,672		4,127		-		2,056		33
Commercial		639		956		-		389		13
Home equity		279		550		-		617		-
Consumer		2		2		-		6		-
Ending Balance	$	7,376	$	9,476	$	-	$	5,616	$	72
Total impaired loans	$	27,157	$	29,257	$	3,106	$	27,207	$	186