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 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 September 30, 2011, and December 31, 2010, by loan segment and allowance element, is presented in the following tables:

As of September 30, 2011	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	$	636,000	$	2,547,000	$	4,273,000	$	-	$	7,456,000
Construction		-		300,000		504,000		-		804,000
Other		352,000		952,000		1,597,000		-		2,901,000
Municipal		-		-		19,000		-		19,000
Residential
Term		398,000		553,000		493,000		-		1,444,000
Construction		82,000		20,000		18,000		-		120,000
Home Equity Line of Credit		95,000		130,000		349,000		-		574,000
Consumer		64,000		313,000		238,000		-		615,000
Unallocated		-		-		-		1,386,000		1,386,000
	$	1,627,000	$	4,815,000	$	7,491,000	$	1,386,000	$	15,319,000

As of December 31, 2010	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	$	192,000	$	2,183,000	$	2,885,000	$	-	$	5,260,000
Construction		152,000		370,000		490,000		-		1,012,000
Other		291,000		899,000		1,187,000		-		2,377,000
Municipal		-		-		19,000		-		19,000
Residential
Term		432,000		401,000		575,000		-		1,408,000
Construction		-		18,000		26,000		-		44,000
Home Equity Line of Credit		122,000		72,000		476,000		-		670,000
Consumer		67,000		324,000		255,000		-		646,000
Unallocated		-		-		-		1,880,000		1,880,000
	$	1,256,000	$	4,267,000	$	5,913,000	$	1,880,000	$	13,316,000

Commercial loans are comprised of three major categories, 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. Construction loans comprise a very small portion of the portfolio, and at 35.0% of capital are well under the regulatory guidance of 100.0% of capital. Construction and non-owner-occupied commercial real estate loans are at 99.0% of total capital, well under regulatory guidance of 300.0% of capital. Municipal loans are comprised of loans to municipalities in 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.

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. The 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 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 our ability to collect certain loans, we also consider the fair value of underlying collateral. The risk rating system has eight levels, defined as follows:

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.

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.

	Commercial Construction		Commercial Real Estate		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	-	$	28,000	$	351,000	$	2,214,000	$	2,593,000
2 Above Average		10,000		20,546,000		3,444,000		10,930,000		34,930,000
3 Satisfactory		1,665,000		36,693,000		14,408,000		3,896,000		56,662,000
4 Average		14,564,000		113,350,000		35,808,000		2,813,000		166,535,000
5 Watch		5,222,000		40,518,000		15,235,000		-		60,975,000
6 OAEM		4,007,000		14,964,000		4,522,000		-		23,493,000
7 Substandard		4,877,000		31,811,000		22,271,000		-		58,959,000
8 Doubtful		-		-		6,000		-		6,000
Total	$	30,345,000	$	257,910,000	$	96,045,000	$	19,853,000	$	404,153,000

	Commercial Construction		Commercial Real Estate		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	-	$	48,000	$	395,000	$	2,481,000	$	2,924,000
2 Above Average		10,000		20,365,000		4,483,000		11,453,000		36,311,000
3 Satisfactory		4,694,000		42,600,000		16,052,000		4,900,000		68,246,000
4 Average		22,177,000		107,167,000		41,972,000		2,999,000		174,315,000
5 Watch		6,347,000		27,898,000		12,203,000		-		46,448,000
6 OAEM		3,715,000		19,496,000		6,463,000		-		29,674,000
7 Substandard		4,926,000		27,966,000		19,894,000		-		52,786,000
8 Doubtful		-		-		-		-		-
Total	$	41,869,000	$	245,540,000	$	101,462,000	$	21,833,000	$	410,704,000

Residential loans are comprised of two categories: 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%-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 segments. Certain loans in the residential, home equity lines of credit and consumer segments 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 segments. 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.

For the nine months ended	Commercial							Municipal			Residential				Home Equity		Consumer		Unallocated			Total
September 30, 2011	Real Estate		Construction			Other					Term		Construction		Line of Credit
Allowance for loan losses:
Beginning balance	$	5,260,000	$	1,012,000		$	2,377,000	$	19,000		$	1,408,000	$	44,000	$	670,000	$	646,000	$	1,880,000		$	13,316,000
Charge offs		835,000		-			942,000		13,000			1,013,000		505,000		240,000		298,000		-			3,846,000
Recoveries		8,000		-			33,000		14,000			5,000		-		1,000		188,000		-			249,000
Provision		3,023,000		(208,000	)		1,433,000		(1,000	)		1,044,000		581,000		143,000		79,000		(494,000	)		5,600,000
Ending balance	$	7,456,000	$	804,000		$	2,901,000	$	19,000		$	1,444,000	$	120,000	$	574,000	$	615,000	$	1,386,000		$	15,319,000
Ending balance specifically evaluated for impairment	$	636,000	$	-		$	352,000	$	-		$	398,000	$	82,000	$	95,000	$	64,000	$	-		$	1,627,000
Ending balance collectively evaluated for impairment	$	6,820,000	$	804,000		$	2,549,000	$	19,000		$	1,046,000	$	38,000	$	479,000	$	551,000	$	1,386,000		$	13,692,000
Related loan balances:
Ending balance	$	257,910,000	$	30,345,000		$	96,045,000	$	19,853,000		$	329,730,000	$	12,061,000	$	105,891,000	$	16,738,000	$	-		$	868,573,000
Ending balance specifically evaluated for impairment	$	7,739,000	$	792,000		$	1,940,000	$	-		$	16,067,000	$	396,000	$	1,234,000	$	102,000	$	-		$	28,270,000
Ending balance collectively evaluated for impairment	$	250,171,000	$	29,553,000		$	94,105,000	$	19,853,000		$	313,663,000	$	11,665,000	$	104,657,000	$	16,636,000	$	-		$	840,303,000

For the quarter ended	Commercial						Municipal			Residential				Home Equity		Consumer		Unallocated		Total
September 30, 2011	Real Estate		Construction		Other					Term		Construction		Line of Credit
Allowance for loan losses:
Beginning balance	$	6,927,000	$	702,000	$	3,323,000	$	19,000		$	1,356,000	$	35,000	$	652,000	$	664,000	$	1,356,000	$	15,034,000
Charge offs		-		-		623,000		-			316,000		-		195,000		142,000		-		1,276,000
Recoveries		3,000		-		12,000		2,000			1,000		-		-		43,000		-		61,000
Provision		526,000		102,000		189,000		(2,000	)		403,000		85,000		117,000		50,000		30,000		1,500,000
Ending balance	$	7,456,000	$	804,000	$	2,901,000	$	19,000		$	1,444,000	$	120,000	$	574,000	$	615,000	$	1,386,000	$	15,319,000
Ending balance specifically evaluated for impairment	$	636,000	$	-	$	352,000	$	-		$	398,000	$	82,000	$	95,000	$	64,000	$	-	$	1,627,000
Ending balance collectively evaluated for impairment	$	6,820,000	$	804,000	$	2,549,000	$	19,000		$	1,046,000	$	38,000	$	479,000	$	551,000	$	1,386,000	$	13,692,000
Related loan balances:
Ending balance	$	257,910,000	$	30,345,000	$	96,045,000	$	19,853,000		$	329,730,000	$	12,061,000	$	105,891,000	$	16,738,000	$	-	$	868,573,000
Ending balance specifically evaluated for impairment	$	7,739,000	$	792,000	$	1,940,000	$	-		$	16,067,000	$	396,000	$	1,234,000	$	102,000	$	-	$	28,270,000
Ending balance collectively evaluated for impairment	$	250,171,000	$	29,553,000	$	94,105,000	$	19,853,000		$	313,663,000	$	11,665,000	$	104,657,000	$	16,636,000	$	-	$	840,303,000

For the year ended	Commercial						Municipal			Residential				Home Equity		Consumer		Unallocated		Total
December 31, 2010	Real Estate		Construction		Other					Term		Construction		Line of Credit
Allowance for loan losses:
Beginning balance	$	4,986,000	$	807,000	$	3,363,000	$	23,000		$	1,198,000	$	174,000	$	515,000	$	717,000	$	1,854,000	$	13,637,000
Charge offs		4,005,000		175,000		1,125,000		-			392,000		2,361,000		8,000		951,000		-		9,017,000
Recoveries		4,000		-		69,000		-			4,000		-		-		219,000		-		296,000
Provision		4,275,000		380,000		70,000		(4,000	)		598,000		2,231,000		163,000		661,000		26,000		8,400,000
Ending balance	$	5,260,000	$	1,012,000	$	2,377,000	$	19,000		$	1,408,000	$	44,000	$	670,000	$	646,000	$	1,880,000	$	13,316,000
Ending balance specifically evaluated for impairment	$	192,000	$	152,000	$	291,000	$	-		$	432,000	$	-	$	122,000	$	67,000	$	-	$	1,256,000
Ending balance collectively evaluated for impairment	$	5,068,000	$	860,000	$	2,086,000	$	19,000		$	976,000	$	44,000	$	548,000	$	579,000	$	1,880,000	$	12,060,000
Related loan balances:
Ending balance	$	245,540,000	$	41,869,000	$	101,462,000	$	21,833,000		$	337,927,000	$	15,512,000	$	105,297,000	$	18,156,000	$	-	$	887,596,000
Ending balance specifically evaluated for impairment	$	5,946,000	$	937,000	$	1,753,000	$	-		$	12,455,000	$	3,567,000	$	519,000	$	106,000	$	-	$	25,283,000
Ending balance collectively evaluated for impairment	$	239,594,000	$	40,932,000	$	99,709,000	$	21,833,000		$	325,472,000	$	11,945,000	$	104,778,000	$	18,050,000	$	-	$	862,313,000

A troubled debt restructure (“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:

As of September 30, 2011 the Company had 45 loans with a value of $10.5 million that have been restructured. This compares to 32 loans with a value of $5.1 million classified as TDRs as of September 30, 2010. 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. The following table shows TDRs by class and the specific reserve as of September 30, 2011:

In the third quarter of 2011, 11 loans were placed on TDR status with an outstanding balance of $4.1 million. The commercial loans were classified as TDRs due to payment deferrals. The residential loans were classified as TDRs due to payment deferrals and extensions of maturity. The following table shows loans placed on TDR status by type of loan and the associated specific reserve included in the allowance for loan losses as of September 30, 2011:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserves
Commercial
Real estate		1	$	1,800,000	$	1,800,000	$	19,000
Construction		-		-		-		-
Other		4		686,000		686,000		61,000
Municipal		-		-		-		-
Residential
Term		6		1,660,000		1,660,000		99,000
Construction		-		-		-		-
Home Equity Line of Credit		-		-		-		-
Consumer		-		-		-		-
Unallocated		-		-		-		-
		11	$	4,146,000	$	4,146,000	$	179,000

In the first nine months of 2011, 15 loans were placed on TDR status with an outstanding balance of $5.5 million. The commercial loans were classified as TDRs due to payment deferrals. The residential loans were classified as TDRs due to payment deferrals and extensions of maturity. The following table shows loans placed on TDR status by type of loan and the associated specific reserve included in the allowance for loan losses as of September 30, 2011:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserves
Commercial
Real estate		1	$	1,800,000	$	1,800,000	$	19,000
Construction		-		-		-		-
Other		4		686,000		686,000		61,000
Municipal		-		-		-		-
Residential
Term		10		2,969,000		2,969,000		132,000
Construction		-		-		-		-
Home Equity Line of Credit		-		-		-		-
Consumer		-		-		-		-
Unallocated		-		-		-		-
		15	$	5,455,000	$	5,455,000	$	212,000

During the nine months ended September 30, 2011, 13 of the loans classified as TDRs with a total balance of $1.9 million were more than 30 days past due. Of these loans, four loans with an outstanding balance of $524,000 had been placed on TDR status in the previous 12 months. The following table shows these TDRs by type of loan and the associated specific reserves included in the allowance for loan losses as of September 30, 2011: