XNAS:FNLC First Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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• SECOND QUARTER 10-Q FILING • CEO CERTIFICATION • CFO CERTIFICATION • CEO CERTIFICATION • CFO CERTIFICATION • EX-101.INS • EX-101.SCH • EX-101.CAL • EX-101.DEF • EX-101.LAB • EX-101.PRE • PURCHASE AND ASSUMPTION AGREEMENT • PURCHASE AND SALE AGREEMENT

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

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 August 1, 2012

Common Stock: 9,851,246 shares

Table of Contents

Part I. Financial Information	1
Selected Financial Data (Unaudited)	1
Item 1 - Financial Statements	2
Report of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Income and Comprehewnsive Income (Unaudited)	4
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)	5
Consolidated Statements of Cash Flows (Unaudited)	6
Notes to Consolidated Financial Statements	7
Note 1 - Basis of Presentation	7
Note 2 -Investment Securities	7
Note 3 - Loans	11
Note 4 - Allowance for Loan Losses	17
Note 5 - Stock Options and Stock and Stock Based Compensation	25
Note 6 - Preferred and Common Stock	26
Note 7 - Earnings Per Share	27
Note 8 - Employee Benefit Plans	27
Note 9 - Goodwill and Other Intangible Assets	29
Note 10 - Mortgage Servicing Rights	30
Note 11 - Income Taxes	30
Note 12 - Certificates of Deposit	31
Note 13 - Reclassifications	31
Note 14 - Fair Value Disclosures	31
Note 15 - Subsequent Event	37
Note 16 - Impact of Recently Issued Accounting Standards	37
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Forward-Looking Statements	38
Critical Accounting Policies	38
Use of Non-GAAP Financial Measures	39
Executive Summary	41
Net Interest Income	42
Average Daily Balance Sheets	45
Non-Interest Income	46
Non-Interest Expense	46
Income Taxes	46
Investments	46
Impaired Securities	48
Federal Home Loan Bank Stock	50
Loans and Loans Held for Sale	50
Credit Risk Management and Allowance for Loan Losses	52
Non-Performing Loans and Troubled Debt Restructured	56
Impaired Loans	57
Past Due Loans	58
Potential Problem Loans and Loans in Process of Foreclosure	58
Other Real Estate Owned	59
Goodwill	60
Liquidity Management	60
Deposits	60
Borrowed Funds	60
Shareholders' Equity	61
Off-Balance-Sheet Financial Instruments and Contractual Obligations	61
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	62
Market-Risk Management	62
Asset/Liability Management	62
Interest Rate Risk Management	63
Item 4: Controls and Procedures	64
Part II - Other Information	65
Item 1 - Legal Proceedings	65
Item 1a - Risk Factors	65
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3 - Default Upon Senior Securities	65
Item 4 - Other Information	65
Item 5 - Exhibits	66
Signatures	68

Part I. Financial Information

Selected Financial Data (Unaudited)

The First Bancorp, Inc. and Subsidiary

Dollars in thousands,	For the six months ended June 30,						For the quarters ended June 30,
except for per share amounts	2012			2011			2012			2011

Summary of Operations
Interest Income	$	26,239		$	28,251		$	13,133		$	13,997
Interest Expense		6,515			7,523			3,215			3,774
Net Interest Income		19,724			20,728			9,918			10,223
Provision for Loan Losses		4,900			4,100			2,800			2,000
Non-Interest Income		6,064			4,511			3,896			2,234
Non-Interest Expense		12,908			12,738			6,730			6,250
Net Income		6,236			6,336			3,323			3,193
Per Common Share Data
Basic Earnings per Share	$	0.60		$	0.58		$	0.32		$	0.29
Diluted Earnings per Share		0.60			0.58			0.32			0.29
Cash Dividends Declared		0.390			0.390			0.195			0.195
Book Value per Common Share		14.32			13.42			14.32			13.42
Tangible Book Value per Common Share		11.51			10.60			11.51			10.60
Market Value		17.00			14.86			17.00			14.86
Financial Ratios
Return on Average Equity¹		8.84	%		9.90	%		9.38	%		9.78	%
Return on Average Tangible Equity^1,2		10.35	%		11.26	%		11.01	%		11.09	%
Return on Average Assets¹		0.88	%		0.90	%		0.93	%		0.89	%
Average Equity to Average Assets		10.84	%		10.78	%		10.73	%		10.80	%
Average Tangible Equity to Average Assets²		8.89	%		8.84	%		8.81	%		8.88	%
Net Interest Margin Tax-Equivalent^1,2		3.19	%		3.31	%		3.16	%		3.22	%
Dividend Payout Ratio		65.00	%		67.24	%		60.94	%		67.24	%
Allowance for Loan Losses/Total Loans		1.63	%		1.70	%		1.63	%		1.70	%
Non-Performing Loans to Total Loans		2.49	%		2.49	%		2.49	%		2.49	%
Non-Performing Assets to Total Assets		1.91	%		2.10	%		1.91	%		2.10	%
Efficiency Ratio²		50.74	%		48.29	%		51.06	%		48.30	%
At Period End
Total Assets	$	1,424,757		$	1,417,690		$	1,424,757		$	1,417,690
Total Loans		881,814			886,929			881,814			886,929
Total Investment Securities		457,570			442,691			457,570			442,691
Total Deposits		1,005,274			998,838			1,005,274			998,838
Total Shareholders' Equity		153,405			156,210			153,405			156,210

¹Annualized using a 366-day basis in 2012 and 365-day basis in 2011

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 June 30, 2012 and 2011 and for the three-month and six-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

August 9, 2012

Page 2

Consolidated Balance Sheets (Unaudited)

The First Bancorp, Inc. and Subsidiary

	June 30, 2012			December 31, 2011			June 30, 2011
Assets
Cash and cash equivalents	$	14,192,000		$	14,115,000		$	14,322,000
Interest bearing deposits in other banks		-			-			100,000
Securities available for sale		307,347,000			286,202,000			304,278,000
Securities to be held to maturity (fair value of $143,628,000 at June 30, 2012, $130,677,000 at December 31, 2011 and $128,426,000 at June 30, 2011)		135,775,000			122,661,000			122,970,000
Restricted equity securities, at cost		14,448,000			15,443,000			15,443,000
Loans held for sale		378,000			-			419,000
Loans		881,814,000			864,988,000			886,929,000
Less allowance for loan losses		14,384,000			13,000,000			15,034,000
Net loans		867,430,000			851,988,000			871,895,000
Accrued interest receivable		6,024,000			4,835,000			6,511,000
Premises and equipment, net		18,500,000			18,842,000			18,351,000
Other real estate owned		5,188,000			4,094,000			7,723,000
Goodwill		27,684,000			27,684,000			27,684,000
Other assets		27,791,000			27,003,000			27,994,000
Total assets	$	1,424,757,000		$	1,372,867,000		$	1,417,690,000
Liabilities
Demand deposits	$	77,019,000		$	75,750,000		$	71,517,000
NOW deposits		123,897,000			122,775,000			117,064,000
Money market deposits		71,009,000			79,015,000			69,681,000
Savings deposits		119,471,000			114,617,000			107,278,000
Certificates of deposit		613,878,000			549,176,000			633,298,000
Total deposits		1,005,274,000			941,333,000			998,838,000
Borrowed funds - short term		118,767,000			135,500,000			119,170,000
Borrowed funds - long term		130,159,000			130,163,000			130,166,000
Other liabilities		17,152,000			15,013,000			13,306,000
Total liabilities		1,271,352,000			1,222,009,000			1,261,480,000
Shareholders' equity
Preferred stock, $1,000 preference value per share		12,352,000			12,303,000			24,754,000
Common stock, one cent par value per share		98,000			98,000			98,000
Additional paid-in capital		46,110,000			45,829,000			45,629,000
Retained earnings		87,396,000			85,314,000			83,594,000
Accumulated other comprehensive income (loss)
Net unrealized gain on securities available-for-sale		7,526,000			7,401,000			2,198,000
Net unrealized loss on postretirement benefit costs		(77,000	)		(87,000	)		(63,000	)
Total shareholders' equity		153,405,000			150,858,000			156,210,000
Total liabilities & shareholders' equity	$	1,424,757,000		$	1,372,867,000		$	1,417,690,000
Common Stock
Number of shares authorized		18,000,000			18,000,000			18,000,000
Number of shares issued and outstanding		9,847,159			9,812,180			9,793,706
Book value per common share	$	14.32		$	14.12		$	13.42
Tangible book value per common share	$	11.51		$	11.30		$	10.60

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 six months ended June 30,				For the quarters ended June 30,
	2012		2011		2012		2011
Interest income
Interest and fees on loans	$	18,759,000	$	20,128,000	$	9,367,000	$	9,955,000
Interest on deposits with other banks		1,000		-		1,000		-
Interest and dividends on investments		7,479,000		8,123,000		3,765,000		4,042,000
Total interest income		26,239,000		28,251,000		13,133,000		13,997,000
Interest expense
Interest on deposits		4,297,000		5,081,000		2,104,000		2,518,000
Interest on borrowed funds		2,218,000		2,442,000		1,111,000		1,256,000
Total interest expense		6,515,000		7,523,000		3,215,000		3,774,000
Net interest income		19,724,000		20,728,000		9,918,000		10,223,000
Provision for loan losses		4,900,000		4,100,000		2,800,000		2,000,000
Net interest income after provision for loan losses		14,824,000		16,628,000		7,118,000		8,223,000
Non-interest income
Investment management and fiduciary income		844,000		782,000		448,000		358,000
Service charges on deposit accounts		1,351,000		1,351,000		713,000		711,000
Net securities gains		1,967,000		229,000		1,444,000		229,000
Mortgage origination and servicing income		304,000		652,000		460,000		193,000
Other operating income		1,598,000		1,497,000		831,000		743,000
Total non-interest income		6,064,000		4,511,000		3,896,000		2,234,000
Non-interest expense
Salaries and employee benefits		6,202,000		6,005,000		3,118,000		2,928,000
Occupancy expense		819,000		827,000		405,000		378,000
Furniture and equipment expense		1,123,000		1,111,000		550,000		561,000
FDIC insurance premiums		606,000		806,000		305,000		405,000
Amortization of identified intangibles		141,000		141,000		70,000		70,000
Other operating expense		4,017,000		3,848,000		2,282,000		1,908,000
Total non-interest expense		12,908,000		12,738,000		6,730,000		6,250,000
Income before income taxes		7,980,000		8,401,000		4,284,000		4,207,000
Applicable income taxes		1,744,000		2,065,000		961,000		1,014,000
NET INCOME	$	6,236,000	$	6,336,000	$	3,323,000	$	3,193,000
Basic earnings per common share	$	0.60	$	0.58	$	0.32	$	0.29
Diluted earnings per common share	$	0.60	$	0.58	$	0.32	$	0.29
Other comprehensive income, net of tax
Net unrealized gain on securities available for sale	$	125,000	$	4,255,000	$	438,000	$	3,587,000
Unrecognized postretirement benefits transition obligation		10,000		10,000		5,000		5,000
Other comprehensive income	$	135,000	$	4,265,000	$	443,000	$	3,592,000
Comprehensive income	$	6,371,000	$	10,601,000	$	3,766,000	$	6,785,000

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

											Accumulated
			Common stock and								other			Total
	Preferred		additional paid-in capital					Retained			comprehensive			shareholders'
	stock		Shares		Amount			earnings			income (loss)			equity
Balance at December 31, 2010	$	24,705,000		9,773,025	$	45,572,000		$	81,701,000		$	(2,130,000	)	$	149,848,000
Net income		-		-		-			6,336,000			-			6,336,000
Net unrealized gain on securities available for sale, net of taxes of $2,291,000		-		-		-			-			4,255,000			4,255,000
Unrecognized transition obligation for postretirement benefits, net of taxes of $4,000		-		-		-			-			10,000			10,000
Comprehensive income		-		-		-			6,336,000			4,265,000			10,601,000
Cash dividends declared		-		-		-			(4,443,000	)		-			(4,443,000	)
Equity compensation expense		-		-		11,000			-			-			11,000
Amortization of premium for preferred stock issuance		49,000		-		(49,000	)		-			-			-
Proceeds from sale of common stock		-		20,681		193,000			-			-			193,000
Balance at June 30, 2011	$	24,754,000		9,793,706	$	45,727,000		$	83,594,000		$	2,135,000		$	156,210,000

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		-		-		-			6,236,000			-			6,236,000
Net unrealized gain on securities available for sale, net of taxes of $67,000		-		-		-			-			125,000			125,000
Unrecognized transition obligation for postretirement benefits, net of taxes of $4,000		-		-		-			-			10,000			10,000
Comprehensive income		-		-		-			6,236,000			135,000			6,371,000
Cash dividends declared		-		-		-			(4,154,000	)		-			(4,154,000	)
Equity compensation expense		-		-		40,000			-			-			40,000
Amortization of premium for preferred stock issuance		49,000		-		(49,000	)		-			-			-
Proceeds from sale of common stock		-		34,979		290,000			-			-			290,000
Balance at June 30, 2012	$	12,352,000		9,847,159	$	46,208,000		$	87,396,000		$	7,449,000		$	153,405,000

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 six months ended
	June 30, 2012			June 30, 2011
Cash flows from operating activities
Net income	$	6,236,000		$	6,336,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		663,000			681,000
Change in deferred taxes		(688,000	)		(374,000	)
Provision for loan losses		4,900,000			4,100,000
Loans originated for resale		(13,273,000	)		(20,502,000	)
Proceeds from sales and transfers of loans		13,089,000			22,889,000
Net gain on sale or call of securities		(1,967,000	)		(229,000	)
Net loss on sale of other real estate owned		39,000			47,000
Provision for losses on other real estate owned		198,000			145,000
Equity compensation expense		40,000			11,000
Net increase in other assets and accrued interest		(1,831,000	)		(482,000	)
Net increase in other liabilities		2,243,000			66,000
Net loss on disposal of premises and equipment		-			5,000
Net amortization of premiums on investments		1,482,000			2,048,000
Amortization of investment in limited partnership		238,000			195,000
Net acquisition amortization		103,000			103,000
Net cash provided by operating activities		11,472,000			15,039,000
Cash flows from investing activities
Proceeds from maturities, payments and calls of securities available for sale		26,024,000			26,723,000
Proceeds from sales of securities available for sale		25,137,000			75,176,000
Proceeds from maturities, payments and calls of securities to be held to maturity		21,871,000			10,441,000
Proceeds from sales of other real estate owned		667,000			992,000
Purchases of securities available for sale		(71,706,000	)		(107,910,000	)
Purchases of securities to be held to maturity		(35,101,000	)		(26,342,000	)
Redemption of restricted equity securities		995,000			-
Net increase in loans		(22,340,000	)		(5,693,000	)
Capital expenditures		(321,000	)		(57,000	)
Net cash used in investing activities		(54,774,000	)		(26,670,000	)
Cash flows from financing activities
Net decrease in demand, savings, and money market accounts		(761,000	)		(789,000	)
Net increase in certificates of deposit		64,734,000			25,141,000
Net decrease in short-term borrowings		(16,730,000	)		(7,987,000	)
Proceeds from sale of common stock		290,000			193,000
Dividends paid		(4,154,000	)		(4,443,000	)
Net cash provided by financing activities		43,379,000			12,115,000
Net increase in cash and cash equivalents		77,000			484,000
Cash and cash equivalents at beginning of period		14,115,000			13,838,000
Cash and cash equivalents at end of period	$	14,192,000		$	14,322,000
Interest paid	$	6,640,000		$	7,594,000
Income taxes paid		869,000			1,297,000
Non-cash transactions
Net transfer from loans to other real estate owned		1,998,000			3,978,000

See Report of Independent Registered Public Accounting Firm.

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

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 2012 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

Subsequent Events

Events occurring subsequent to June 30, 2012, 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 June 30, 2012:

	Amortized		Unrealized		Unrealized			Fair Value
	Cost		Gains		Losses			(Estimated)
Securities available for sale
U.S. Treasury and agency	$	-	$	-	$	-		$	-
Mortgage-backed securities		201,552,000		5,677,000		(250,000	)		206,979,000
State and political subdivisions		92,353,000		6,291,000		(51,000	)		98,593,000
Corporate securities		-		-		-			-
Other equity securities		1,863,000		47,000		(135,000	)		1,775,000
	$	295,768,000	$	12,015,000	$	(436,000	)	$	307,347,000
Securities to be held to maturity
U.S. Treasury and agency	$	41,197,000	$	282,000	$	(33,000	)	$	41,446,000
Mortgage-backed securities		49,992,000		3,524,000		(8,000	)		53,508,000
State and political subdivisions		44,286,000		4,088,000		-			48,374,000
Corporate securities		300,000		-		-			300,000
	$	135,775,000	$	7,894,000	$	(41,000	)	$	143,628,000
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

Page 7

The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2011:

	Amortized		Unrealized		Unrealized			Fair Value
	Cost		Gains		Losses			(Estimated)
Securities available for sale
U.S. Treasury and agency	$	-	$	-	$	-		$	-
Mortgage-backed securities		191,924,000		6,486,000		(178,000	)		198,232,000
State and political subdivisions		80,259,000		5,484,000		(17,000	)		85,726,000
Corporate securities		1,098,000		-		(287,000	)		811,000
Other equity securities		1,535,000		37,000		(139,000	)		1,433,000
	$	274,816,000	$	12,007,000	$	(621,000	)	$	286,202,000
Securities to be held to maturity
U.S. Treasury and agency	$	19,390,000	$	132,000	$	-		$	19,522,000
Mortgage-backed securities		56,800,000		3,900,000		(3,000	)		60,697,000
State and political subdivisions		46,171,000		4,159,000		(172,000	)		50,158,000
Corporate securities		300,000		-		-			300,000
	$	122,661,000	$	8,191,000	$	(175,000	)	$	130,677,000
Restricted equity securities
Federal Home Loan Bank Stock	$	14,031,000	$	-	$	-		$	14,031,000
Federal Reserve Bank Stock		1,412,000		-		-			1,412,000
	$	15,443,000	$	-	$	-		$	15,443,000

The following table summarizes the amortized cost and estimated fair value of investment securities at June 30, 2011:

	Amortized		Unrealized		Unrealized			Fair Value
	Cost		Gains		Losses			(Estimated)
Securities available for sale
U.S. Treasury and agency	$	15,324,000	$	799,000	$	-		$	16,123,000
Mortgage-backed securities		220,245,000		2,548,000		(1,269,000	)		221,524,000
State and political subdivisions		63,696,000		1,573,000		(107,000	)		65,162,000
Corporate securities		1,105,000		-		(169,000	)		936,000
Other equity securities		527,000		26,000		(20,000	)		533,000
	$	300,897,000	$	4,946,000	$	(1,565,000	)	$	304,278,000
Securities to be held to maturity
U.S. Treasury and agency	$	12,970,000	$	-	$	(186,000	)	$	12,784,000
Mortgage-backed securities		60,836,000		3,626,000		(37,000	)		64,425,000
State and political subdivisions		48,864,000		2,399,000		(346,000	)		50,917,000
Corporate securities		300,000		-		-			300,000
	$	122,970,000	$	6,025,000	$	(569,000	)	$	128,426,000
Restricted equity securities
Federal Home Loan Bank Stock	$	14,031,000	$	-	$	-		$	14,031,000
Federal Reserve Bank Stock		1,412,000		-		-			1,412,000
	$	15,443,000	$	-	$	-		$	15,443,000

Page 8

The following table summarizes the contractual maturities of investment securities at June 30, 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	$	4,296,000	$	4,328,000	$	1,382,000	$	1,399,000
Due in 1 to 5 years		55,317,000		56,358,000		13,556,000		14,134,000
Due in 5 to 10 years		23,143,000		24,034,000		21,137,000		22,958,000
Due after 10 years		211,149,000		220,852,000		99,700,000		105,137,000
Equity securities		1,863,000		1,775,000		-		-
	$	295,768,000	$	307,347,000	$	135,775,000	$	143,628,000

The following table summarizes the contractual maturities of investment securities at December 31, 2011:

	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	$	6,617,000	$	6,773,000	$	5,179,000	$	5,227,000
Due in 1 to 5 years		18,792,000		19,473,000		10,085,000		10,654,000
Due in 5 to 10 years		23,219,000		24,065,000		23,027,000		24,694,000
Due after 10 years		224,653,000		234,458,000		84,370,000		90,102,000
Equity securities		1,535,000		1,433,000		-		-
	$	274,816,000	$	286,202,000	$	122,661,000	$	130,677,000

The following table summarizes the contractual maturities of investment securities at June 30, 2011:

	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	$	5,032,000	$	4,941,000	$	227,000	$	227,000
Due in 1 to 5 years		7,623,000		7,904,000		10,633,000		11,147,000
Due in 5 to 10 years		25,845,000		26,099,000		23,562,000		24,623,000
Due after 10 years		261,870,000		264,801,000		88,548,000		92,429,000
Equity securities		527,000		533,000		-		-
	$	300,897,000	$	304,278,000	$	122,970,000	$	128,426,000

At June 30, 2012, securities with a fair value of $140,384,000 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 $141,506,000 as of December 31, 2011 and $132,827,000 at June 30, 2011, pledged for the same purposes.

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 six months and quarters ended June 30, 2012 and 2011:

	For the six months ended June 30,						For the quarters ended June 30,
	2012			2011			2012		2011
Proceeds from sales of securities	$	25,137,000		$	75,176,000		$	14,194,000	$	75,176,000
Gross realized gains		2,256,000			957,000			1,444,000		957,000
Gross realized losses		(289,000	)		(728,000	)		-		(728,000	)
Net gain	$	1,967,000		$	229,000		$	1,444,000	$	229,000
Related income taxes	$	688,000		$	80,000		$	505,000	$	80,000

Page 9

The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income for the six months and quarters ended June 30, 2012 and 2011.

	For the six months ended June 30,						For the quarters ended June 30,
	2012			2011			2012			2011
Balance at beginning of period	$	7,401,000		$	(2,057,000	)	$	7,088,000		$	(1,389,000	)
Unrealized gains arising during the period		2,159,000			6,775,000			2,118,000			5,747,000
Realized gains during the period		(1,967,000	)		(229,000	)		(1,444,000	)		(229,000	)
Related deferred taxes		(67,000	)		(2,291,000	)		(236,000	)		(1,931,000	)
Net change		125,000			4,255,000			438,000			3,587,000
Balance at end of period	$	7,526,000		$	2,198,000		$	7,526,000		$	2,198,000

Management reviews securities with unrealized losses for other than temporary impairment. As of June 30, 2012, there were 30 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 eight 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 June 30, 2012 is summarized below:

	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury and agency	$	7,942,000	$	(33,000	)	$	-	$	-		$	7,942,000	$	(33,000	)
Mortgage-backed securities		9,822,000		(110,000	)		5,137,000		(148,000	)		14,959,000		(258,000	)
State and political subdivisions		3,719,000		(51,000	)		-		-			3,719,000		(51,000	)
Corporate securities		-		-			-		-			-		-
Other equity securities		-		-			191,000		(135,000	)		191,000		(135,000	)
	$	21,483,000	$	(194,000	)	$	5,328,000	$	(283,000	)	$	26,811,000	$	(477,000	)

As of December 31, 2011, there were 29 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 11 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2011 is summarized below:

	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury and agency	$	-	$	-		$	-	$	-		$	-	$	-
Mortgage-backed securities		12,489,000		(25,000	)		6,780,000		(156,000	)		19,269,000		(181,000	)
State and political subdivisions		1,984,000		(17,000	)		1,667,000		(172,000	)		3,651,000		(189,000	)
Corporate securities		-		-			811,000		(287,000	)		811,000		(287,000	)
Other equity securities		154,000		(120,000	)		34,000		(19,000	)		188,000		(139,000	)
	$	14,627,000	$	(162,000	)	$	9,292,000	$	(634,000	)	$	23,919,000	$	(796,000	)

Page 10

As of June 30, 2011, there were 65 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 11 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of June 30, 2011 is summarized below:

	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury and agency	$	12,784,000	$	(186,000	)	$	-	$	-		$	12,784,000	$	(186,000	)
Mortgage-backed securities		71,157,000		(1,044,000	)		3,681,000		(262,000	)		74,838,000		(1,306,000	)
State and political subdivisions		12,050,000		(142,000	)		1,489,000		(311,000	)		13,539,000		(453,000	)
Corporate securities		-		-			936,000		(169,000	)		936,000		(169,000	)
Other equity securities		247,000		(15,000	)		48,000		(5,000	)		295,000		(20,000	)
	$	96,238,000	$	(1,387,000	)	$	6,154,000	$	(747,000	)	$	102,392,000	$	(2,134,000	)

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 June 30, 2012 and 2011, and December 31, 2011, the Bank's investment in FHLB stock totaled $13,412,000, $14,031,000 and $14,031,000 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 June 30, 2012 and 2011 and at December 31, 2011:

	June 30, 2012				December 31, 2011				June 30, 2011
Commercial
Real estate	$	253,193,000	28.7	%	$	255,424,000	29.5	%	$	263,337,000	29.7	%
Construction		33,072,000	3.8	%		32,574,000	3.8	%		29,386,000	3.3	%
Other		87,833,000	10.0	%		86,982,000	10.1	%		102,499,000	11.6	%
Municipal		16,089,000	1.8	%		16,221,000	1.9	%		19,974,000	2.3	%
Residential
Term		368,876,000	41.8	%		341,286,000	39.5	%		335,807,000	37.9	%
Construction		6,449,000	0.7	%		10,469,000	1.2	%		11,063,000	1.2	%
Home equity line of credit		100,689,000	11.4	%		105,244,000	12.1	%		107,224,000	12.0	%
Consumer		15,613,000	1.8	%		16,788,000	1.9	%		17,639,000	2.0	%
Total	$	881,814,000	100.0	%	$	864,988,000	100.0	%	$	886,929,000	100.0	%

Loan balances include net deferred loan costs of $1,664,000 as of June 30, 2012, $1,386,000 as of December 31, 2011, and $1,365,000 as of June 30, 2011. Pursuant to collateral agreements, qualifying first mortgage loans, which totaled $243,196,000 at June 30, 2012, $211,597,000 at December 31, 2011, and $180,839,000 at June 30, 2011, were used to collateralize borrowings from the Federal Home Loan Bank of Boston. In addition, commercial, construction and home equity loans totaling $232,598,000 at June 30, 2012, $218,417,000 at December 31, 2011, and $329,677,000 at June 30, 2011, 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 $21,958,000 at June 30, 2012, $27,806,000 at December 31, 2011 and $22,049,000 at June 30, 2011. Loans past due 90 days or greater which are accruing interest totaled $164,000 at June 30, 2012, $1,170,000 at December 31, 2011 and $355,000 at June 30, 2011. The Company continues to accrue interest on these loans because it believes collection of principal and interest is reasonably assured.

Page 11

Information on the past-due status of loans by class of financing receivable as of June 30, 2012, is presented in the following table:

	30-89 Days Past Due		90+ Days Past Due		All Past Due		Current		Total		90+ Days & Accruing
Commercial
Real estate	$	13,000	$	1,858,000	$	1,871,000	$	251,322,000	$	253,193,000	$	-
Construction		119,000		34,000		153,000		32,919,000		33,072,000		-
Other		443,000		1,398,000		1,841,000		85,992,000		87,833,000		-
Municipal		1,560,000		-		1,560,000		14,529,000		16,089,000		-
Residential
Term		3,191,000		7,878,000		11,069,000		357,807,000		368,876,000		-
Construction		-		1,336,000		1,336,000		5,113,000		6,449,000		-
Home equity line of credit		530,000		1,311,000		1,841,000		98,848,000		100,689,000		-
Consumer		189,000		180,000		369,000		15,244,000		15,613,000		164,000
Total	$	6,045,000	$	13,995,000	$	20,040,000	$	861,774,000	$	881,814,000	$	164,000

Information on the past-due status of loans by class of financing receivable as of December 31, 2011, is presented in the following table:

	30-89 Days Past Due		90+ Days Past Due		All Past Due		Current		Total		90+ Days & Accruing
Commercial
Real estate	$	2,872,000	$	3,992,000	$	6,864,000	$	248,560,000	$	255,424,000	$	-
Construction		174,000		1,603,000		1,777,000		30,797,000		32,574,000		-
Other		1,431,000		1,192,000		2,623,000		84,359,000		86,982,000		52,000
Municipal		-		-		-		16,221,000		16,221,000		-
Residential
Term		3,331,000		8,843,000		12,174,000		329,112,000		341,286,000		1,118,000
Construction		-		1,198,000		1,198,000		9,271,000		10,469,000		-
Home equity line of credit		480,000		1,134,000		1,614,000		103,630,000		105,244,000		-
Consumer		331,000		16,000		347,000		16,441,000		16,788,000		-
Total	$	8,619,000	$	17,978,000	$	26,597,000	$	838,391,000	$	864,988,000	$	1,170,000

Information on the past-due status of loans by class of financing receivable as of June 30, 2011, is presented in the following table:

	30-89 Days Past Due		90+ Days Past Due		All Past Due		Current		Total		90+ Days & Accruing
Commercial
Real estate	$	2,227,000	$	4,051,000	$	6,278,000	$	257,059,000	$	263,337,000	$	-
Construction		117,000		-		117,000		29,269,000		29,386,000		-
Other		544,000		997,000		1,541,000		100,958,000		102,499,000		38,000
Municipal		-		-		-		19,974,000		19,974,000		-
Residential
Term		6,093,000		9,916,000		16,009,000		319,798,000		335,807,000		309,000
Construction		-		334,000		334,000		10,729,000		11,063,000		-
Home equity line of credit		868,000		740,000		1,608,000		105,616,000		107,224,000		-
Consumer		258,000		8,000		266,000		17,373,000		17,639,000		8,000
Total	$	10,107,000	$	16,046,000	$	26,153,000	$	860,776,000	$	886,929,000	$	355,000

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.

Information on nonaccrual loans as of June 30, 2012 and 2011 and at December 31, 2011 is presented in the following table:

	June 30, 2012		December 31, 2011		June 30, 2011
Commercial
Real estate	$	5,545,000	$	7,064,000	$	6,746,000
Construction		521,000		2,350,000		771,000
Other		2,361,000		5,784,000		2,095,000
Municipal		-		-		-
Residential
Term		10,723,000		10,194,000		11,260,000
Construction		1,336,000		1,198,000		334,000
Home equity line of credit		1,456,000		1,163,000		740,000
Consumer		16,000		53,000		103,000
Total	$	21,958,000	$	27,806,000	$	22,049,000

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 June 30, 2012, is presented in the following table:

							For six months ended June 30, 2012				For the quarter ended June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Recognized Interest Income		Average Recorded Investment		Recognized Interest Income
With No Related Allowance
Commercial
Real estate	$	10,313,000	$	10,313,000	$	-	$	9,729,000	$	111,000	$	11,013,000	$	71,000
Construction		1,464,000		1,464,000		-		2,189,000		26,000		1,395,000		13,000
Other		2,249,000		2,249,000		-		2,710,000		16,000		2,439,000		21,000
Municipal		-		-		-		-		-		-		-
Residential										-
Term		8,695,000		8,695,000		-		9,662,000		71,000		9,322,000		41,000
Construction		1,002,000		1,002,000		-		880,000		-		1,042,000		-
Home equity line of credit		740,000		740,000		-		758,000		-		740,000		-
Consumer		-		-		-		6,000		-		-		-
	$	24,463,000	$	24,463,000	$	-	$	25,934,000	$	224,000	$	25,951,000	$	146,000
With an Allowance Recorded
Commercial
Real estate	$	3,482,000	$	3,482,000	$	1,133,000	$	4,026,000	$	16,000	$	3,775,000	$	6,000
Construction		2,155,000		2,155,000		787,000		1,376,000		37,000		2,155,000		37,000
Other		1,851,000		1,851,000		932,000		2,013,000		18,000		1,802,000		13,000
Municipal		-		-		-		-		-		-		-
Residential
Term		10,357,000		10,357,000		966,000		8,487,000		127,000		9,525,000		68,000
Construction		334,000		334,000		48,000		466,000		-		334,000		-
Home equity line of credit		716,000		716,000		300,000		566,000		-		613,000		-
Consumer		16,000		16,000		11,000		15,000		-		15,000		-
	$	18,911,000	$	18,911,000	$	4,177,000	$	16,949,000	$	198,000	$	18,219,000	$	124,000
Total
Commercial
Real estate	$	13,795,000	$	13,795,000	$	1,133,000	$	13,755,000	$	127,000	$	14,788,000	$	77,000
Construction		3,619,000		3,619,000		787,000		3,565,000		63,000		3,550,000		50,000
Other		4,100,000		4,100,000		932,000		4,723,000		34,000		4,241,000		34,000
Municipal		-		-		-		-		-		-		-
Residential
Term		19,052,000		19,052,000		966,000		18,149,000		198,000		18,847,000