Management's discussion and analysis, which follows, focuses on the factors affecting the Company's consolidated results of operations for the three and nine months ended September 30, 2008 and 2007, and financial condition at September 30, 2008, and December 31, 2007, and where appropriate, factors that may affect future financial performance. The following discussion and analysis of financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this report on Form 10-Q.

Amounts in the prior period financial statements are reclassified whenever necessary to conform to current period presentation.

Unless otherwise noted, all dollars are expressed in thousands except share data.

Use of Non-GAAP Financial Measures: Certain information discussed below is presented on a fully taxable equivalent basis. Specifically, included in third quarter 2008 and 2007 interest income was $486 and $341, respectively, of tax-exempt interest income from certain investment securities and loans. For the nine months ended September 30, 2008 and 2007, the amount of tax-exempt income included in interest income was $1,473 and $1,132.

An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income totals discussed in certain sections of this Management's Discussion and Analysis, representing tax equivalent adjustments of $221 and $149, in the third quarter of 2008 and 2007, respectively, and $662 and $495 for the nine months ended September 30, 2008 and 2007, respectively, which increased net interest income accordingly. The analysis of net interest income tables included in this report on Form 10-Q provide a reconciliation of tax equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

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 institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios. 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.

FORWARD LOOKING STATEMENTS DISCLAIMER

Certain statements, as well as certain other discussions contained in this report on Form 10-Q, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by the use of words like "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

Investors are cautioned that forward-looking statements are inherently uncertain. Forward-looking statements include, but are not limited to, those made in connection with estimates with respect to the future results of operation, financial condition, and the business of the Company which are subject to change based on the impact of various factors that could cause actual results to differ materially from those projected or suggested due to certain risks and uncertainties. Those factors include but are not limited to:

(i) The Company's success is dependent to a significant extent upon general economic conditions in Maine, and Maine's ability to attract new business, as well as factors that affect tourism, a major source of economic activity in the Company's immediate market areas;

(ii) The Company's earnings depend to a great extent on the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and borrowings) generated by the Bank, and thus the Bank's results of operations may be adversely affected by increases or decreases in interest rates;

(iii) The banking business is highly competitive and the profitability of the Company depends on the Bank's ability to attract loans and deposits in Maine, where the Bank competes with a variety of traditional banking and non-traditional institutions, such as credit unions and finance companies;

(iv) A significant portion of the Bank's loan portfolio is comprised of commercial loans and loans secured by real estate, exposing the Company to the risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other intangible factors which are considered in making commercial loans and, accordingly, the Company's profitability may be negatively impacted by judgment errors in risk analysis, by loan defaults, and the ability of certain borrowers to repay such loans during a downturn in general economic conditions;

(v) A significant delay in, or inability to execute strategic initiatives designed to increase revenues and or control expenses;

(vi) The potential need to adapt to changes in information technology systems, on which the Company is highly dependent, could present operational issues or require significant capital spending;

(vii) Significant changes in the Company's internal controls, or internal control failures;

(viii) Acts or threats of terrorism and actions taken by the United States or other governments as a result of such threats, including military action, could further adversely affect business and economic conditions in the United States generally and in the Company's markets, which could have an adverse effect on the Company's financial performance and that of borrowers and on the financial markets and the price of the Company's common stock;

(ix) Significant changes in the extensive laws, regulations, and policies governing bank holding companies and their subsidiaries could alter the Company's business environment or affect its operations;

(x) Changes in general, national, international, regional or local economic conditions and credit markets which are less favorable than those anticipated by Company management, including fears of global economic recession and continued sub-prime loan and credit issues, impacting the Company's investment portfolio, quality of credits, or the overall demand for the Company's products or services; and

(xi) The Company's success in managing the risks involved in all of the foregoing matters.

The forward-looking statements contained herein represent the Company's judgment as of the date of this report on Form 10-Q and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the succeeding discussion, or elsewhere in this report on Form 10-Q, except to the extent required by federal securities laws.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of the Company's financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in accordance with U.S. generally accepted accounting principles. 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. Management evaluates its estimates, including those related to the allowance for loan losses, on an ongoing basis. Management bases its estimates on historical experience and 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.

The Company's significant accounting policies are more fully enumerated in Note 1 to the Consolidated Financial Statements included in Item 8 of its December 31, 2007 report on Form 10-K. The reader of the financial statements should review these policies to gain a greater understanding of how the Company's financial performance is reported. Management believes the following critical accounting policies represent the more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements:

Allowance for Loan Losses: The allowance for loan losses (the "allowance") is a significant accounting estimate used in the preparation of the Company's consolidated financial statements. The allowance, which is established through a provision for loan loss expense, is based on management's evaluation of the level of allowance required in relation to the estimated inherent risk of probable loss in the loan portfolio. Management regularly evaluates the allowance for loan losses for adequacy by taking into consideration factors such as previous loss experience, the size and composition of the portfolio, current economic and real estate market conditions and the performance of individual loans in relation to contract terms and estimated fair values of collateral. The use of different estimates or assumptions could produce different provisions for loan losses. A smaller provision for loan losses results in higher net income, and when a greater amount of provision for loan losses is necessary, the result is lower net income. Refer to Part I, Item 2 below, Allowance for Loan Losses and Provision, in this report on Form 10-Q, for further discussion and analysis concerning the allowance.

Income Taxes: The Company estimates its income taxes for each period for which a statement of income is presented. This involves estimating the Company's actual current tax liability, as well as assessing temporary differences resulting from differing timing of recognition of expenses, income and tax credits, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company's consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from historical taxes paid and future taxable income and, to the extent that the recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of September 30, 2008 and December 31, 2007, there was no valuation allowance for deferred tax assets, which are included in other assets on the consolidated balance sheet.

Goodwill and Other Intangible Assets: The valuation techniques used by the Company to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based upon changes in economic conditions and other factors. Any changes in the estimates used by the Company to determine the carrying value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, may have an adverse effect on the Company's results of operations. The Company's annual impairment test was performed as of December 31, 2007. Refer to Note 2 of the consolidated financial statements in Part I, Item 1 of this report on Form 10-Q for further details of the Company's accounting policies and estimates covering goodwill and other intangible assets.

EXECUTIVE OVERVIEW

Summary Results of Operations

The Company reported consolidated net income of $2,333 or fully diluted earnings per share of $0.78 for the three months ended September 30, 2008, compared with $2,147 or fully diluted earnings per share of $0.69 for the same quarter in 2007, representing increases of $186 and $0.09, or 8.7% and 13.0%, respectively. The annualized return on average shareholders' equity ("ROE") and average assets ("ROA") amounted to 14.46% and 0.99%, respectively, compared with 13.68% and 1.00% for the same quarter in 2007.

As more fully discussed below, the increase in third quarter 2008 earnings compared with the third quarter of 2007 was principally attributed to a $1,215 or 20.5% increase in net interest income, partially offset by a $646 increase in the provision for loan losses and a $142 decline in securities gains.

For the nine months ended September 30, 2008, consolidated net income amounted to $6,314 or fully diluted earnings per share of $2.09, compared with $5,365 or fully diluted earnings per share of $1.72 for the same period in 2007, representing increases of $949 and $0.37, or 17.7% and 21.5%, respectively. The annualized ROE and ROA amounted to 12.78% and 0.92%, compared with 11.52% and 0.86% for the same period in 2007, respectively.

As more fully discussed below, the increased level of earnings was attributed to a variety of factors including: a $3,161 or 18.8% increase in net interest income; a $1,275 increase in net securities gains (losses); a $313 gain representing the proceeds from shares redeemed in connection with the Visa Inc. initial public offering; and a $170 or 9.7% increase in trust and financial services fees. Partially offsetting the foregoing revenue increases was a $1,422 increase in the provision for loan losses and a $2,188 or 16.6% increase in non-interest expenses, which largely reflected a $1,048 or 15.2% increase in salaries and employee benefit expenses and the recording of a non-recurring $832 expense reduction recorded in the first quarter of 2007 related to the Company's settlement of its limited postretirement benefit program.

º Net Interest Income: For the three and nine months ended September 30, 2008, net interest income on a fully tax equivalent basis amounted to $7,349 and $20,614, representing increases of $1,287 and $3,328, or 21.2% and 19.3%, compared with the same periods in 2007, respectively. The increases in net interest income were principally attributed to an improved net interest margin and average earning asset growth. The decline in short-term interest rates over the past twelve months favorably impacted the Bank's net interest margin, as the cost of interest bearing liabilities declined faster and to a greater degree than the decline in earning asset yields. For the three and nine months ended September 30, 2008, the fully tax equivalent net interest margin amounted to 3.22% and 3.11%, representing improvements of 29 and 22 basis points compared with the same periods in 2007, respectively.

º Non-interest Income: For the quarter ended September 30, 2008, total non-interest income amounted to $2,224, representing a decline of $39, or 1.7%, compared with the same quarter in 2007. The decline in non-interest income was principally attributed to a $142 decline in securities gains, largely offset by a $75 or 13.3% increase in trust and other financial services fees. All other categories of non-interest income posted increases compared with the third quarter of 2007.

For the nine months ended September 30, 2008, total non-interest income amounted to $6,205, representing an increase of $1,906, or 44.3%, compared with the same period in 2007. During the first nine months of 2007 the Bank restructured a portion of its securities portfolio, recording net securities losses of $671, whereas during the same period in 2008 the Bank recorded securities gains of $604. Also included in non-interest income was a $313 gain recorded in the first quarter of 2008 representing the proceeds from shares redeemed in connection with the Visa, Inc. initial public offering.

For the nine months ended September 30, 2008, trust and other financial services fees and credit and debit card fees were up $170 and $137, or 9.7% and 8.7%, respectively, compared with the same period last year.

º Non-Interest Expense: For the quarter ended September 30, 2008, total non-interest expense amounted to $5,112 representing an increase of $316 or 6.6%, compared with the same quarter in 2007. The increase in non-interest expense was principally attributed to a $206, or 8.6%, increase in salaries and employee benefits, due to a variety of factors enumerated below. In connection with the previously reported Visa Reorganization, in the third quarter of 2008 the Bank increased its Visa indemnification and covered litigation liability by $68, based upon the terms of Visa's recent settlement in principle with Discover Financial Services. The Bank anticipates recovery of this amount in the fourth quarter of 2008 using Loss Shares that will be issued by VISA.

For the nine months ended September 30, 2008, total non-interest expense amounted to $15,334, representing an increase of $2,188, or 16.6%, compared with the same period in 2007. The increase in non-interest expense was largely attributed to the settlement of the Company's limited postretirement program in the first quarter of 2007, which reduced that reporting period's non-interest expense by $832. The increase in non-interest expense was also attributed to higher levels of salaries and employee benefits, which were up $1,048 or 15.2% compared with the first nine months of 2007. The increase in salaries and employee benefits was attributed to a variety of factors including: strategic additions to staff; normal increases in base salaries; higher levels of accrued incentive compensation; certain employee severance payments; and a non-recurring employee health insurance expense credit attained in the second quarter of 2007 based on favorable claims experience.

Summary Financial Condition

Total assets ended the third quarter at $942,004, representing an increase of $52,532, or 5.9%, compared with December 31, 2007. This increase was principally attributed to the growth of the Bank's loan portfolio.

º Loans: Total loans ended the third quarter at $624,205, representing an increase of $44,494, or 7.7%, compared with December 31, 2007. Business lending activity led the overall growth of the loan portfolio, as residential mortgage loan originations slowed.

º Credit Quality: The Bank's non-performing loans ended the third quarter at relatively low levels, representing $3,339 or 0.53% of total loans, compared with $2,062, or 0.36% at December 31, 2007. For the nine months ended September 30, 2008, net loan charge-offs amounted to $1,192, compared with $142 during the same period in 2007. For the three and nine months ended September 30, 2008, the Bank recorded provisions for loan losses of $860 and $1,669, representing increases of $646 and $1,422 compared with the same periods in 2007, respectively. The increases in the provision were largely attributed to the increase in net loan charge-offs, growth in the loan portfolio, generally declining real estate values in the markets served by the Bank, and other qualitative and environmental considerations.

º Securities: total securities ended the third quarter at $269,609, representing an increase of $4,992, or 1.9%, compared with December 31, 2007. The Company's solid earnings and strong loan growth lessened the need for further securities leverage.

º Deposits: Total deposits ended the third quarter at $578,163, representing an increase of $39,047 or 7.2% compared with December 31, 2007. Deposit growth was led by meaningful increases in retail time deposits and NOW accounts, offset in part by a $25,623 million or 24.7% decline in brokered time deposits.

º Borrowings: Total borrowings ended the third quarter at $295,572, representing an increase of $16,719, or 6.0%, compared with December 31, 2007. The increase in borrowings was principally used to support earning asset growth, as well as reducing the Bank's dependence on higher cost and more volatile brokered deposits.

º Capital: The Bank continued to exceed regulatory requirements for "well-capitalized" institutions. At September 30, 2008, the Bank's Tier I Leverage, Tier I Risk-based, and Total Risk-based Capital ratios were 7.05%, 10.55% and 11.78%, respectively. Under the capital adequacy guidelines administered by the Bank's principal regulators, "well-capitalized" institutions are those with Tier I leverage, Tier I Risk-based, and Total Risk-based ratios of at least 5%, 6% and 10%, respectively.

º Cash Dividends: The Company paid cash dividends of 26.0 cents per share of common stock in the third quarter of 2008, representing an increase of 2.0 cents, or 8.3%, compared with the same quarter in 2007. The Company's Board of Directors recently declared a fourth quarter dividend of 26.0 cents per share, unchanged from the prior quarter, but representing an increase of 1.5 cents, or 6.1%, compared with the dividend declared for the same quarter in 2007.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the principal component of the Company's income stream and represents the difference or spread between interest generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest income is entirely generated by the Bank. Fluctuations in market interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.

For the three months ended September 30, 2008, net interest income on a fully tax equivalent basis amounted to $7,349, compared with $6,062 in the third quarter of 2007, representing an increase of $1,287, or 21.2%. As more fully discussed below, the increase in the Bank's third quarter 2008 net interest income compared with the same quarter in 2007 was principally attributed to a 29 basis point improvement in the tax equivalent net interest margin, combined with average earning growth of $86,755, or 10.6%.

For the nine months ended September 30, 2008, net interest income on a fully tax equivalent basis amounted to $20,614, compared with $17,286 for the same period in 2007, representing an increase of $3,328, or 19.3%. As more fully discussed below, the increase in net interest income was principally attributed to earning asset growth of $87,121 or 10.9%, combined with a 22 basis point improvement in the tax equivalent net interest margin, compared with the nine months ended September 30, 2007.

Factors contributing to the changes in net interest income and the net interest margin are more fully enumerated in the following discussion and analysis.

Net Interest Income Analysis: The following tables summarize the Company's average balance sheets and components of net interest income, including a reconciliation of tax equivalent adjustments, for the three and nine months ended September 30, 2008 and 2007, respectively:

                           AVERAGE BALANCE SHEET AND
                        ANALYSIS OF NET INTEREST INCOME
                               THREE MONTHS ENDED
                          SEPTEMBER 30, 2008 AND 2007

                                        2008                                 2007
                             Average               Average       Average               Average
                             Balance     Interest   Rate         Balance      Interest   Rate
Interest Earning Assets:
Loans (1,3)                  $616,413     $ 9,439   6.09%        $559,499     $ 9,707   6.88%
Taxable securities (2)        240,673       3,564   5.89%         222,083   3,163       5.65%
Non-taxable securities
(2,3)                          35,842        620    6.88%          24,139   405         6.66%
   Total securities           276,515       4,184   6.02%         246,222   3,568       5.75%
Federal Home Loan Bank
stock                          13,928        105    3.00%          12,569   203         6.41%
Fed funds sold, money
market funds,
   and time deposits with
other banks                     1,018          8    3.13%           2,829   37          5.19%

   Total Earning Assets       907,874      13,736   6.02%         821,119   13,515      6.53%

Non-Interest Earning
Assets:
Cash and due from banks         6,442                               8,213
Allowance for loan losses       (5,411)                             (4,547)
Other assets (2)               28,844                              29,184
   Total Assets              $937,749                            $853,969

Interest Bearing
Liabilities:
Deposits                     $520,297     $ 3,551   2.72%        $463,273     $ 4,207   3.60%
Borrowings                    287,681       2,836   3.92%         261,981       3,246   4.92%
   Total Interest Bearing
Liabilities                   807,978       6,387   3.14%         725,254       7,453   4.08%
Rate Spread                                         2.88%                               2.45%

Non-Interest Bearing
Liabilities:
Demand and other
non-interest
   bearing deposits            60,469                              61,517
Other liabilities               5,112                               4,953
   Total Liabilities          873,559                             791,724
Shareholders' equity           64,190                              62,245
   Total Liabilities and
Shareholders' Equity         $937,749                            $853,969
Net interest income and
net
   interest margin (3)                      7,349   3.22%                       6,062   2.93%
Less: Tax Equivalent
adjustment                                   (221)                               (149)
   Net Interest Income                    $ 7,128   3.12%                     $ 5,913   2.86%

1. For purposes of these computations, non-accrual loans are included in average loans.
2. For purposes of these computations, unrealized gains (losses) on available-for-sale securities are recorded in other assets.
3. For purposes of these computations, net interest income and net interest margin are reported on a tax equivalent basis.

                           AVERAGE BALANCE SHEET AND
                        ANALYSIS OF NET INTEREST INCOME
                               NINE MONTHS ENDED
                          SEPTEMBER 30, 2008 AND 2007

                                              2008                                2007
                                Average               Average       Average               Average
                                Balance     Interest   Rate         Balance     Interest   Rate
Interest Earning Assets:
Loans (1,3)                     $605,505     $28,390   6.26%        $554,522     $28,358   6.84%
Taxable securities (2)           226,842       9,993   5.88%         202,438       8,406   5.55%
Non-taxable securities (2,3)      36,773       1,874   6.81%          27,110       1,370   6.76%
   Total securities              263,615      11,867   6.01%         229,548       9,776   5.69%
Federal Home Loan Bank stock      13,848         438   4.22%          12,483         607   6.50%
Fed funds sold, money market
funds, and time
    deposits with other banks      2,884         77    3.57%           2,178         86    5.28%

Total Earning Assets             885,852      40,772   6.15%         798,731      38,827   6.50%

Non-Interest Earning Assets:
Cash and due from banks            5,391                               6,983
Allowance for loan losses          (5,106)                             (4,549)
Other assets (2)                  31,390                               30,340
   Total Assets                 $917,527                             $831,505

Interest Bearing Liabilities:
. . .