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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2005

Commission File No. 0-28190

CAMDEN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (207) 236-8821

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, without par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨  No x

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 periods 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨  No x

The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant as of June 30, 2005 is: Common stock; $211,000,095. Shares of the Registrant’s common stock held by each executive officer and director and by each person who beneficially owns 5% or more of the Registrant’s outstanding common stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of each of the registrant’s classes of common stock, as of March 3, 2006 is: Common Stock: 7,519,629.

Listed hereunder are documents incorporated by reference and the relevant Part of the Form 10-K into which the document is incorporated by reference:

(1) Certain information required in response to Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference from Camden National Corporation’s Definitive Proxy Statement for the 2006 Annual Meeting of Shareholders to be filed with the Commission prior to March 15, 2006 pursuant to Regulation 14A of the General Rules and Regulations of the Commission.

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CAMDEN NATIONAL CORPORATION

2005 FORM 10-K ANNUAL REPORT

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FORWARD-LOOKING STATEMENTS

The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Company may make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “will,” “should” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause these differences include, but are not limited to, the following:

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in Item 1A. Risk Factors, beginning on page 11. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.

These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

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PART I

Overview. Camden National Corporation (the “Company”), with $1.7 billion in assets, is a publicly held, multi-bank and financial services holding company incorporated under the laws of the State of Maine and headquartered in Camden, Maine. The Company, as a diversified financial services provider, pursues the objective of achieving long-term sustainable growth by balancing growth opportunities against profit, while mitigating risks inherent in the financial services industry. The primary business of the Company and its subsidiaries is to attract deposits from consumer, institutional, non-profit and commercial customers and to extend loans to consumer, institutional, non-profit and commercial customers. The Company makes its commercial and consumer banking products and services available directly and indirectly through its subsidiaries, Camden National Bank (“CNB”), UnitedKingfield Bank (“UKB”), and its brokerage and insurance services through Acadia Financial Consultants (“AFC”), which operates as a division of the two banking subsidiaries. The Company also provides wealth management, trust and employee benefit products and services through its other subsidiary, Acadia Trust, N.A. (“AT”), a federally regulated, non-depository trust company headquartered in Portland, Maine. In addition to serving as a holding company, the Company provides managerial, operational, human resource, marketing and technology services to its subsidiaries. These services include general management, financial management, risk management and bank operations. The Consolidated Financial Statements of the Company accompanying this Form 10-K include the accounts of the Company, CNB, UKB and AT. All inter-company accounts and transactions have been eliminated in consolidation.

Descriptions of the Company and the Company’s Subsidiaries.

The Company. The Company was founded in January 1984 following a corporate reorganization in which the shareholders of CNB exchanged their shares of CNB stock for shares of stock in the Company. As a result of this share exchange, the Company became CNB’s sole parent. In December 1995, the Company merged with UnitedCorp, a bank holding company headquartered in Bangor, Maine, and acquired 100% of the outstanding stock of United Bank and 51% of the outstanding stock of the Trust Company of Maine, Inc. (“TCOM”). On December 20, 1999, the Company acquired KSB Bancorp, Inc., a publicly-held, bank holding company organized under the laws of the State of Delaware and having its principal office in the State of Maine, with one principal subsidiary, Kingfield Savings Bank (“KSB”), a Maine-chartered stock savings bank with its principal office in Kingfield, Maine. Effective February 4, 2000, United Bank and KSB were merged to form UKB. On July 19, 2001, the Company acquired AT and Gouws Capital Management, Inc., which was merged into AT on December 31, 2001. On October 24, 2001, the Company acquired the remaining minority interest in TCOM. On January 1, 2003, TCOM merged with AT, with AT remaining as the surviving entity.

As of December 31, 2005, the Company’s securities consisted of one class of common stock, no par value, of which there was 7,529,073 shares outstanding held of record by approximately 955 shareholders. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees, which is estimated to be 2,500 shareholders.

The Company is a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Company is also considered a Maine financial institution holding company for purposes of the laws of the State of Maine, and as such, is also subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions (the “Superintendent”).

The Company makes available, free of charge and as soon as reasonably practicable after electronically filing with the SEC, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, through the Investor Relations page of its subsidiary banks’ websites, as identified below. In addition, the Company makes available, free of charge, its Code of Ethics through the Investor Relations page of its subsidiary banks’ websites.

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Camden National Bank. CNB, a direct, wholly owned subsidiary of the Company, is a national banking association chartered under the laws of the United States and having its principal office in Camden, Maine. Originally founded in 1875, CNB became a direct, wholly owned subsidiary of the Company as a result of the January 1984 corporate reorganization in which the shareholders of CNB exchanged their shares of stock in CNB for shares of stock in the Company.

CNB offers its products and services primarily in the communities of Belfast, Bucksport, Camden, Damariscotta, Kennebunk, Portland, Rockland, Thomaston, Union, Vinalhaven and Waldoboro, Maine, and focuses primarily on attracting deposits from the general public through its branches, and then using such deposits to originate residential mortgage loans, commercial business loans, commercial real estate loans and a variety of consumer loans. AFC is a full-service brokerage and insurance division of CNB. CNB customers may also access these products and services using other media, including CNB’s internet website located at www.camdennational.com.

CNB is a member bank of the Federal Reserve System and is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the “OCC”). The Federal Deposit Insurance Corporation (the “FDIC”) insures the deposits of CNB up to the maximum amount permitted by law.

UnitedKingfield Bank. UKB, a direct, wholly owned subsidiary of the Company, is a financial institution chartered under the laws of the State of Maine and having its principal office in Bangor, Maine. UKB is subject to regulation, supervision and examination by the FDIC and the Superintendent. The FDIC insures the deposits of UKB up to the maximum amount permitted by law.

UKB offers its products and services primarily in the communities of Bangor, Bingham, Corinth, Dover-Foxcroft, Farmington, Greenville, Hampden, Hermon, Kingfield, Lewiston, Madison, Milo, Phillips, Rangeley and Stratton, Maine, and focuses primarily on attracting deposits from the general public through its branches, and then using such deposits to originate residential mortgage loans, commercial business loans, commercial real estate loans and a variety of consumer loans. AFC is a full-service brokerage and insurance division of UKB. UKB customers may also access these products and services using other media, including UKB’s internet website located at www.unitedkingfield.com.

Merger of Bank Franchises. On January 12, 2006, the Company announced that it would combine, subject to required regulatory approval, its two banking subsidiaries, CNB and UKB, under the Camden National Bank charter. This combination is intended to allow the Company to redirect resources from administrative efforts required to maintain two separate bank franchises, to areas that will improve the Customer Experience. The Company anticipates that there will be no job losses or branch closings as a result of combining the two banks.

Acadia Trust, N.A. AT, a direct, wholly owned subsidiary of the Company, is a national banking association chartered under the laws of the United States with trust powers chartered under the laws of the State of Maine and having its principal office in Portland, Maine, and an internet website located at www.acadiatrust.com.

AT provides a broad range of trust, trust-related, investment and wealth management services, in addition to retirement and pension plan management services, to both individual and institutional clients. The financial services provided by AT complement the services provided by the Company’s subsidiary banks by offering customers investment management services. AT is a member bank of the Federal Reserve System and is subject to supervision, regulation and examination by the OCC as well as to supervision, examination and reporting requirements under the BHC Act and the regulations of the FRB.

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Competition. The Company competes principally in midcoast and southern Maine through CNB, its largest subsidiary bank. CNB considers its primary market areas to be in Knox County and Waldo County, with a growing presence in Cumberland, Hancock, Lincoln and York counties, all in the State of Maine. The combined population of the two primary counties of Knox and Waldo is approximately 79,400 people, and their economies are based primarily on tourism, and supported by a substantial population of retirees. Major competitors in the Company’s market areas include local branches of large regional bank affiliates, as well as local independent banks, thrift institutions and credit unions. Other competitors for deposits and loans within CNB’s primary market areas include insurance companies, money market funds, consumer finance companies and financing affiliates of consumer durable goods manufacturers.

The Company, through UKB, also competes in both the central and western Maine areas. Most of UKB’s offices are located in communities that can generally be characterized as rural areas, with the exception of the cities of Bangor and Lewiston, which have populations of approximately 31,550 and 36,000, respectively. All UKB offices are located in the State of Maine. Major competitors in these market areas include local branches of large regional bank affiliates, as well as local independent banks, thrift institutions and credit unions. Other competitors for deposits and loans within UKB’s market area include insurance companies, money market funds, consumer finance companies and financing affiliates of consumer durable goods manufacturers.

The Company and its banking subsidiaries generally have been able to compete effectively with other financial institutions by emphasizing customer service, including local decision-making, by establishing long-term customer relationships and building customer loyalty and by providing products and services designed to address the specific needs of customers. No assurance can be given, however, that the Company and its banking subsidiaries will continue to be able to compete effectively with other financial institutions in the future.

The Company, through its non-bank subsidiary, AT, competes for trust, trust-related, investment management, retirement and pension plan management services with local banks and non-banks, which may now, or in the future, offer a similar range of services, as well as with a number of brokerage firms and investment advisors with offices in the Company’s market area. In addition, most of these services are widely available to the Company’s customers by telephone and over the Internet through firms located outside the Company’s market area.

The Company’s Philosophy. The Company is committed to the philosophy of serving the financial needs of customers in local communities. The Company, through CNB and UKB, has branches that are located in towns within the Company’s geographic market areas. The Company believes that its comprehensive retail, small business and commercial loan products, enable its subsidiary banks to compete effectively. No single person or group of persons provides a material portion of the Company’s deposits, the loss of any one or more of which would have a materially adverse effect on the business of the Company, and no material portion of the Company’s loans are concentrated within a single industry or group of related industries.

The Company’s Growth. The Company had consolidated asset growth of 11.0%, or $163.4 million, during 2005. The primary factor contributing to the growth was the increase in lending activity at the Company’s subsidiary banks. As the business continued to grow during this past year, each of the Company’s subsidiary banks focused on customer service. The Company’s performance-based compensation program also supported this growth by creating an environment where employees have a personal interest in the performance of the Company and are rewarded for balancing profit with growth and quality with productivity.

The financial services industry continues to experience consolidations through mergers that could create opportunities for the Company to promote its value proposition to customers. In addition, the Company continues to evaluate the possibilities of expansion into new markets through both de novo expansion and acquisitions. In the interim, the Company is focused on maximizing the potential for growth in existing markets, especially in markets where the Company has less of a presence. During 2004, CNB purchased an historic property in downtown Rockland, Maine that will allow for expansion of CNB’s busiest branch, which is located adjacent to the purchased property.

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The Company’s Employees. The Company employs approximately 320 people on a full-time equivalent basis. The Company’s management measures the corporate culture every 18 months, with the most recent rating coming in as positive. There are no known disputes between management and employees.

The Company’s Employee Incentives. All Company employees are eligible for participation in the Company’s Retirement Savings 401(k) Plan and Profit Sharing Plan, and certain officers of the Company may also participate in the Company’s 2003 Stock Option Plan, Supplemental Executive Retirement Plan, Executive Incentive Compensation Program and Deferred Compensation Plan.

In addition, the Company, as successor to KSB, maintains a Bank Recognition and Retention Plan (“BRRP”) as a method of providing certain officers and other employees of the Company with a proprietary interest in the Company. During 1994, the Company contributed funds to the BRRP to enable certain officers and employees to acquire, in the aggregate, 56,045 shares of common stock of the Company. Participants are vested at a rate of 20% per year commencing one year from the date of the award. All previous awards made under the BRRP were vested in 2003. The Company does not intend to make any additional awards under the BRRP.

Supervision and Regulation. The business in which the Company and its subsidiaries is engaged is subject to extensive supervision, regulation and examination by various federal and state bank regulatory agencies, including the FRB, the OCC, the FDIC and the Superintendent, as well as other governmental agencies in the State of Maine. The supervision, regulation and examination to which the Company and its subsidiaries are subject are intended primarily to protect depositors or are aimed at carrying out broad public policy goals, and not necessarily for the protection of shareholders.

Some of the more significant statutory and regulatory provisions applicable to banks and BHCs to which the Company and its subsidiaries are subject are described more fully below, together with certain statutory and regulatory matters concerning the Company and its subsidiaries. The description of these statutory and regulatory provisions does not purport to be complete and is qualified in its entirety by reference to the particular statutory or regulatory provision. Any change in applicable law or regulation may have a material effect on the Company’s business and operations, as well as those of its subsidiaries.

BHCs – Activities and Other Limitations. As a registered BHC and a Maine financial institution holding company, the Company is subject to regulation under the BHC Act and Maine law and to examination and supervision by the FRB and the Superintendent, and is required to file reports with, and provide additional information requested by, the FRB and the Superintendent. The FRB has the authority to issue orders to BHCs to cease and desist from unsafe and unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals that violate the BHC Act or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of BHCs, and to order termination of ownership and control of a non-banking subsidiary by a BHC.

Various other laws and regulations, including Sections 23A and 23B of the Federal Reserve Act, as amended (the “FRA”) and Federal Reserve Board Regulation W thereunder, generally limit borrowings, extensions of credit and certain other transactions between the Company and its non-bank subsidiaries and its affiliate insured depository institutions. Section 23A of the FRA also generally requires that an insured depository institution’s loans to non-bank affiliates be secured in appropriate amounts, and Section 23B of the FRA generally requires that transactions between an insured depository institution and its non-bank affiliates be on arm’s length terms. These laws and regulations also limit BHCs and their subsidiaries from engaging in certain tying arrangements in connection with any extension of credit, sale or lease of property or furnishing of services.

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The BHC Act prohibits a BHC from acquiring substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank or merging or consolidating with any BHC without prior FRB approval. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes BHCs to acquire banks located in any state, possibly subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate mergers and to a lesser extent, interstate branching.

Unless a BHC becomes a financial holding company (“FHC”) under the Gramm-Leach-Bliley Act (“GLBA”), the BHC Act also prohibits a BHC from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or BHC, and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the FRB determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In addition, Maine law imposes certain approval and notice requirements with respect to acquisitions of banks and other entities by a Maine financial institution holding company.

Further, the GLBA permits national banks and state banks, to the extent permitted under state law, to engage in certain new activities, which are permissible for subsidiaries of an FHC. Further, the GLBA expressly preserves the ability of national banks and state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a national bank or state bank must be well-capitalized, and such banks would be subject to certain capital deduction, risk management and affiliate transaction rules. Also, the FDIC’s final rules governing the establishment of financial subsidiaries adopt the position that activities that a national bank could only engage in through a financial subsidiary may only be conducted in a financial subsidiary by a state nonmember bank. However, activities that a national bank could not engage in through a financial subsidiary, such as real estate development or investment, continue to be governed by the FDIC’s standard activities rules. Moreover, to mirror the FRB’s actions with respect to state member banks, the final rules provide that a state bank subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed to be a financial subsidiary.

Declaration of Dividends. According to its Policy Statement on Cash Dividends Not Fully Covered by Earnings (the “FRB Dividend Policy”), the FRB considers adequate capital to be critical to the health of individual banking organizations and to the safety and stability of the banking system. Of course, one of the major components of the capital adequacy of a bank or a BHC is the strength of its earnings, and the extent to which its earnings are retained and added to capital or paid to shareholders in the form of cash dividends. Accordingly, the FRB Dividend Policy suggests that banks and BHCs generally should not maintain their existing rate of cash dividends on common stock unless the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FRB Dividend Policy reiterates the FRB’s belief that a BHC should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the BHC’s ability to serve as a source of strength.

Under Maine law, a corporation’s board of directors may declare, and the corporation may pay, dividends on its outstanding shares, in cash or other property, generally only out of the corporation’s unreserved and unrestricted earned surplus, or out of the unreserved and unrestricted net earnings of the current fiscal year and the next preceding fiscal year taken as a single period, except under certain circumstances, including when the corporation is insolvent or when the payment of the dividend would render the corporation insolvent or when the declaration would be contrary to the corporation’s charter. These same limitations generally apply to investor-owned Maine financial institutions, such as UKB.

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Dividend payments by national banks, such as CNB, also are subject to certain restrictions. For instance, national banks generally may not declare a dividend in excess of the bank’s undivided profits and, absent OCC approval, if the total amount of dividends declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date combined with its retained net income for the preceding two years. National banks also are prohibited from declaring or paying any dividend if, after making the dividend, the national bank would be considered “undercapitalized” (defined by reference to other OCC regulations).

Federal bank regulatory agencies also have authority to prohibit banking institutions from paying dividends if those agencies determine that, based on the financial condition of the bank, such payment would constitute an unsafe or unsound practice.

Capital Requirements.

FRB Guidelines. The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a BHC and in analyzing applications to it under the BHC Act. The FRB’s capital adequacy guidelines apply on a consolidated basis to BHCs with consolidated assets of $150 million or more; thus, these guidelines apply to the Company on a consolidated basis.

The FRB’s capital adequacy guidelines generally require BHCs to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items, with at least one-half of that amount consisting of Tier 1 or core capital and the remaining amount consisting of Tier 2 or supplementary capital. Tier 1 capital for BHCs generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other non-qualifying intangible assets. Tier 2 capital generally consists of hybrid capital instruments; perpetual preferred stock, which is not eligible to be included as Tier 1 capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan and lease losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics.

In addition to the risk-based capital requirements, the FRB requires BHCs to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to total assets of 3.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted from Tier 1 capital. The FRB has determined that the 3.0% leverage ratio requirement is the minimum for strong BHCs without any supervisory, financial or operational weaknesses or deficiencies or those that are not experiencing or anticipating significant growth. All other BHCs are required to maintain a minimum leverage ratio of at least 4.0%. BHCs with supervisory, financial, operational or managerial weaknesses, as well as BHCs that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. The Company’s risk-based capital ratio and leverage ratio currently are, and its management expects these ratios to remain, in excess of regulatory requirements.

OCC and FDIC Guidelines. The OCC and the FDIC each have promulgated regulations and adopted a statement of policy regarding the capital adequacy of, respectively, national banks and state-chartered banks that are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the FRB.

Moreover, the federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the Federal Deposit Insurance Act, as amended (the “FDIA”). Under the prompt correction action regulations, a bank generally shall be deemed to be:

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An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. An institution, which is required to submit a capital restoration plan, must concurrently submit a performance guaranty by each company that controls the institution. A critically undercapitalized institution generally is to be placed in conservatorship or receivership within 90 days unless the federal banking agency determines to take such other action (with the concurrence of the FDIC) that would better protect the deposit insurance fund.

Immediately upon becoming undercapitalized, the institution becomes subject to the provisions of Section 38 of the FDIA, including for example, (i) restricting payment of capital distributions and management fees, (ii) requiring that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital, (iii) requiring submission of a capital restoration plan, (iv) restricting the growth of the institution’s assets and (v) requiring prior approval of certain expansion proposals.

At December 31, 2005, each of the Company’s subsidiary banks was deemed to be a “well-capitalized” institution for the above purposes. The federal bank regulatory agencies may raise capital requirements applicable to banking organizations beyond current levels. The Company is unable to predict whether higher capital requirements will be imposed and, if so, at what levels and on what schedules. Therefore, the Company cannot predict what effect such higher requirements may have on it. As is discussed above, each of the Company’s subsidiary banks would be required to remain a well-capitalized institution at all times if the Company elected to be treated as an FHC.

Information concerning the Company and its subsidiaries with respect to capital requirements is incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the section entitled “Capital Resources,” and Item 8. Financial Statements and Supplementary Data, the section entitled Note 21 Regulatory Matters.

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) identifies five capital categories for insured depository institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and requires the respective U.S. federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank’s assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness related generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.

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The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, the Company is considered “well capitalized.”

Activities and Investments of Insured State-Chartered Banks. FDIC insured, state-chartered banks, such as UKB, are also subject to similar restrictions on their business and activities. Section 24 of the FDIA generally limits the activities as principal and equity investments of FDIC-insured, state-chartered banks to those that are permissible to national banks. In 1999, the FDIC substantially revised its regulations implementing Section 24 of the FDIA to ease the ability of state-chartered banks to engage in certain activities not permissible for national banks, and to expedite FDIC review of bank applications and notices to engage in such activities.

Activities and Investments of National Banking Associations. National banking associations must comply with the National Bank Act and the regulations promulgated thereunder by the OCC, which limit the activities of national banking associations to those that are deemed to be part of, or incidental to, the “business of banking.” Activities that are part of, or incidental to, the business of banking include taking deposits, borrowing and lending money and discounting or negotiating paper. Subsidiaries of national banking associations generally may only engage in activities permissible for the parent national bank.

Other Regulatory Requirements

Community Reinvestment Act. Both CNB and UKB are subject to the provisions of the Community Reinvestment Act (“CRA”). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a depository institution, to assess such institution’s record of meeting the credit needs of the communities served by the institution, including those of low and moderate income neighborhoods. The regulatory agency’s assessment of the institution’s record is made available to the public.

Customer Information Security. The OCC, the FDIC and other bank regulatory agencies have adopted final guidelines establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the “Guidelines”). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of, such information that could result in substantial harm or inconvenience to any customer.

Privacy. The OCC, the FDIC and other regulatory agencies have adopted final privacy rules pursuant to provisions of the GLBA (“Privacy Rules”). The Privacy Rules, which govern the treatment of nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to customers (and other consumers in some circumstances) about its privacy policies and practices, describe the conditions under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties and provide a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by “opting-out” of that disclosure, subject to certain exceptions.

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USA PATRIOT Act. The USA PATRIOT Act of 2001 (the “PATRIOT Act”), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The PATRIOT Act requires financial institutions to implement additional policies and procedures with respect to money laundering, suspicious activities, currency transaction reporting, customer identity notification and customer risk analysis. The PATRIOT Act also permits information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and requires the Federal Reserve Board (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHC Act or the Bank Merger Act. Management believes that it is currently in compliance with all currently effective requirements prescribed by the PATRIOT Act and all applicable final implementing regulations.

Deposit Insurance. The banks pay deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund (“BIF”) member institutions. The FDIC has established a risk-based premium system under which the FDIC classifies institutions based upon their capital ratios and other relevant factors and generally assesses higher rates on those institutions that tend to pose greater risks to the federal deposit insurance funds. The FDIA does not require the FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. However, as a result of general economic conditions and recent bank failures, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. A resumption of assessments of deposit insurance premiums charged to well capitalized institutions, such the Company’s subsidiary banks, could have an effect on the Company’s net earnings. The Company cannot predict whether the FDIC will be required to increase deposit insurance assessments above their current levels.

In February 2006, Congress enacted the Federal Deposit Insurance Reform Act of 2005 (the “FDIR Act”). As a result of the passage of the FDIR Act, over the course of the next year, among other things: (i) the BIF will be merged with the FDIC’s Savings Association Insurance Fund creating the Deposit Insurance Fund (the “DIF”); (ii) the $100,000 per account insurance level will be indexed to reflect inflation; (iii) deposit insurance coverage for certain retirement accounts will be increased to $250,000; and (iv) a cap will be placed on the level of the DIF and dividends will be paid to banks once the level of the DIF exceeds the specified threshold.

Interest rate volatility may reduce our profitability.

Our profitability depends to a large extent upon our net interest income, which is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Net interest income can be affected significantly by changes in market interest rates. In particular, changes in relative interest rates may reduce our net interest income as the difference between interest income and interest expense decreases. As a result, we have adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However, there can be no assurance that a change in interest rates will not negatively impact our results from operations or financial position. Since market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. An increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to our allowance for loan and lease losses.

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Our allowance for loan and lease losses may not be adequate to cover actual loan and lease losses.

We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for probable loan and lease losses based on a number of factors. Monthly, the Corporate Risk Management Group reviews the assumptions, calculation methodology and balance of the allowance for loan and lease losses (“ALLL”) with the board of directors for each bank subsidiary. On a quarterly basis, the Company’s Board of Directors, as well as the board of directors for each subsidiary bank, completes a similar review of the ALLL. If the assumptions are incorrect, the ALLL may not be sufficient to cover the losses we could experience, which would have an adverse effect on operating results, and may also cause us to increase the ALLL in the future. If additional amounts were provided to the ALLL, our net income would decrease.

Our loans are concentrated in certain areas of Maine and adverse conditions in those markets could adversely affect our operations.

We are exposed to real estate and economic factors in the central, southern, western and midcoast areas of Maine, as virtually the entire loan portfolio is concentrated among borrowers in these markets. Further, because a substantial portion of the loan portfolio is secured by real estate in this area, the value of the associated collateral is also subject to regional real estate market conditions. Adverse economic, political or business developments or natural hazards may affect these areas and the ability of property owners in these areas to make payments of principal and interest on the underlying mortgages. If these regions experience adverse economic, political or business conditions, we would likely experience higher rates of loss and delinquency on these mortgage loans than if the loans were more geographically diverse.

If we do not maintain net income growth, the market price of our common stock could be adversely affected.

Our return on shareholders’ equity and other measures of profitability, which affect the market price of our common stock, depend in part on our continued growth and expansion. Our growth strategy has two principal components—internal growth and external growth. Our ability to generate internal growth is affected by the competitive factors described below as well as by the primarily rural characteristics and related demographic features of the markets we serve. Our ability to continue to identify and invest in suitable acquisition candidates on acceptable terms is crucial to our external growth. In pursuing acquisition opportunities, we may be in competition with other companies having similar growth strategies. As a result, we may not be able to identify or acquire promising acquisition candidates on acceptable terms. Competition for these acquisitions could result in increased acquisition prices and a diminished pool of acquisition opportunities. An inability to find suitable acquisition candidates at reasonable prices could slow our growth rate and have a negative effect on the market price of our common stock.

We experience strong competition within our markets, which may impact our profitability.

Competition in the banking and financial services industry is strong. In our market areas, we compete for loans and deposits with local independent banks, thrift institutions, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally as well as nationally. Many of these competitors have substantially greater resources and lending limits than those of our subsidiaries and may offer services that our subsidiaries do not or cannot provide. Our long-term success depends on the ability of our subsidiaries to compete successfully with other financial institutions in their service areas. Because we maintain a smaller staff and have fewer financial and other resources than larger institutions with which we compete, we may be limited in our ability to attract customers. If we are unable to attract and retain customers, we may be unable to sustain growth in the loan portfolio and our results of operations and financial condition may otherwise be negatively impacted.

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Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures.

Our banking subsidiaries have traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a less costly source of funds than borrowings because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at our banking subsidiaries decreases relative to our overall banking operations, we may have to rely more heavily on borrowings as a source of funds in the future.

Our banking business is highly regulated.

Bank holding companies, national banking associations and state-chartered banks operate in a highly regulated environment and are subject to supervision, regulation and examination by various federal and state bank regulatory agencies, as well as other governmental agencies in the states in which they operate. Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and BHCs, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The OCC, the FDIC and the Superintendent possess cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to BHCs. These and other restrictions limit the manner in which we may conduct business and obtain financing.

Furthermore, our business is affected not only by general economic conditions, but also by the economic, fiscal and monetary policies of the United States and its agencies and regulatory authorities, particularly the FRB. The economic and fiscal policies of various governmental entities and the monetary policies of the FRB may affect the interest rates our bank subsidiaries must offer to attract deposits and the interest rates they must charge on loans, as well as the manner in which they offer deposits and make loans. These economic, fiscal and monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally, including our bank subsidiaries.

We could be held responsible for environmental liabilities of properties we acquire through foreclosure.

If we are forced to foreclose on a defaulted mortgage loan to recover our investment, we may be subject to environmental liabilities related to the underlying real property. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on properties during our ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that we would not be fully liable for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property, or that we could recoup any of the costs from any third party.

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To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions.

Although we do not have an aggressive acquisition strategy, we have acquired, and in the future, will continue to consider the acquisition of, other financial services companies. To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. These risks include the following:

Due to the nature of our business, we may be subject to litigation from time to time, some of which may not be covered by insurance.

Through our bank subsidiaries, we operate in a highly regulated industry, and as a result, are subject to various regulations related to disclosures to our customers, our lending practices, and other fiduciary responsibilities. From time to time, we have been, and may become, subject to legal actions relating to our operations that have had, or could, involve claims for substantial monetary damages. Although we maintain insurance, the scope of this coverage may not provide us with full, or even partial, coverage in any particular case. As a result, a judgment against us in any such litigation could have a material adverse effect on our financial condition and results of operation.

Changes in tax legislation could have a material impact on our results of operations.

Changes in tax legislation could have a material impact on our results of operations. The State of Maine may replace its current franchise tax on financial institutions with a corporate-based tax.

We are subject to inherent risks related to the merger of our bank franchises.

During 2006, we plan to merge our two banking subsidiaries to operate under the CNB charter. Our business may be negatively impacted by certain risks inherent with such transactions, such as the risk that the merged bank will not perform in accordance with management’s expectations, the risk that difficulties will arise in connection with the integration of the operations of the banks, the risk that management will divert its attention from other aspects of our business, and the risk that we may lose key employees of the merged banks.

There are no material unresolved written comments relating to our periodic or current reports under the Securities Exchange Act of 1934 that were received from the SEC staff 180 days or more before the end of our fiscal year.

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The Company operates in 28 facilities. The headquarters of the Company and the headquarters and main office of CNB are located at 2 Elm Street, Camden, Maine, and CNB owns this property. The building has 15,500 square feet of space on three levels. CNB also owns seven of its branch facilities, none of which is subject to a mortgage. CNB also leases five branches and parking spaces associated with those branches under long-term leases, which expire in 2006, 2008, 2010 and 2077. During 2004, CNB purchased a three-level, 21,000 square foot building in downtown Rockland, Maine, which is adjacent to our existing Rockland branch and will be used for its expansion. The building, which is owned by CNB, currently has 2,400 square feet of finished space that is subdivided and leased to three tenants.

The main office of UKB is located at 145 Exchange Street, Bangor, Maine, and is owned by UKB. The building has 25,600 square feet of space on two levels. UKB occupies 16,975 square feet of space on both floors. AT leases 1,110 square feet on the first floor and 535 square feet of space on the second floor of this building. The law firm of Russell, Silver & Silverstein P.A., Professional Information Networks, and Ledgewood Construction also lease 2,896 square feet, 1,920 square feet and 2,110 square feet, respectively, on the second floor. Actuarial Designs & Solutions, Inc. leases 143 square feet on the first floor. The Company also utilizes 2,042 square feet for off-site computer processing, with the remaining square footage as common space. UKB also owns 12 of its other facilities, none of which is subject to a mortgage. UKB also leases three branches, a parcel of land, and a parking lot, which expire in 2006, 2008, 2009 and 2014.

In August 2005, AT renewed its facility lease at 511 Congress Street, Portland, Maine, under a long-term lease, which expires in May 2012. AT leases and occupies 11,523 square feet on the 9th floor and 192 square feet on the 8th floor. In October 2005, AT terminated its sub-lease agreements with the Law Office of David Hunt, Strategic Media, and Hopkinson & Abbondanza. AT entered into a two-year lease agreement in February 2005 with UKB, an affiliated organization, located at 145 Exchange Street, Bangor, Maine, consisting of 1,645 square feet of office space.

The Company’s service center is located at 245 Commercial Street, Rockport, Maine, and is owned by the Company. The building has 32,360 square feet of space on two levels.

The Company is a party to litigation and claims arising in the normal course of business. In addition to the routine litigation incidental to its business, CNB was a defendant in a lawsuit brought by a former commercial customer, Steamship Navigation Company. The former customer claimed CNB broke a verbal promise for a $300,000 loan to fund operating expenses of its ski resort. As a result of this litigation, 20 of the original 21 counts were dismissed, leaving only the single breach of oral contract count, on which the jury returned a verdict against CNB and awarded damages of $1.5 million. Management of CNB and the Company reviewed this matter with counsel and the Company’s outside auditors. Management believed that the allegations were unfounded and that it was probable that the judgment would be reversed upon appeal. As such, the Company filed a motion asking the judge to reverse the jury verdict and accompanying award of damages. On January 11, 2005, the motion was denied. On February 1, 2005, CNB filed an appeal of the verdict with the Law Court. On October 20, 2005, oral arguments were held to determine if the jury verdict should be upheld. On February 7, 2006, the Maine Supreme Judicial Court upheld a judgment for the plaintiff, in the principal amount of $1.5 million. CNB has also obtained and recorded judgments in the principal amount of $865,000 against Steamship Navigation Company, which partially set off the awarded damages, and as a result, management believes the net settlement will not be material to the Company’s results of operations, financial condition or cash flows. The attorneys for both parties continue to negotiate the details of the final settlement, which will be recorded in 2006.

None

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PART II

The Company stock is traded on the American Stock Exchange (AMEX) under the ticker symbol ‘CAC.’ The Company has paid quarterly dividends since its inception in 1985. The high and low sales prices (as quoted by AMEX) and cash dividends paid per share of the Company’s common stock, by calendar quarter for the past two years were as follows:

As of December 31, 2005, there were 7,529,073 shares of the Company’s common stock outstanding. As of March 3, 2006, there were 7,519,629 shares of the Company’s common stock outstanding held of record by approximately 965 shareholders. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees, which is estimated to be 2,500 shareholders.

Although the Company has historically paid quarterly dividends on its common stock (as disclosed in the table above), the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will be paid in the future. For further information, refer to Item 6. Selected Financial Data for dividend related ratios and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, specifically the ‘Capital Resources’ section, for dividend restrictions.

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Securities authorized for issuance under equity compensation plans are as follows:

Refer to Notes 1 and 15 within the Notes to Consolidated Financial Statements within Item 8. Financial Statements and Supplementary Data for further information related to the Company’s equity compensation plans.

On July 26, 2005, the Board of Directors of the Company voted to authorize the Company to purchase up to 750,000 shares of its authorized and issued common stock. The authority, which expires on July 1, 2006, may be exercised from time to time and in such amounts as market conditions warrant. Any repurchases are intended to make appropriate adjustments to the Company’s capital structure, including meeting share requirements related to employee benefit plans and for general corporate purposes. During the fourth quarter of 2005, the Company made the following purchases under this plan:

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Management’s discussion and analysis, which follows, focuses on the factors affecting the Company’s consolidated results of operations for the years ended December 31, 2005, 2004 and 2003 and financial condition at December 31, 2005 and 2004, and where appropriate, factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data.

Executive Overview

Net income for 2005 increased $1.9 million, or 9.7%, over net income reported in 2004. Net income per diluted share was $2.80, a 10.7% increase over the $2.53 reported for 2004. The following were significant factors related to the results of fiscal year 2005 compared to fiscal year 2004:

Results of Operations

Comparison of 2005 to 2004

The Company reported net income of $21.4 million, or $2.80 per diluted share, for 2005 compared to $19.5 million and $2.53 per diluted share in 2004. Return on average assets was 1.34% in 2005, compared to 1.40% in 2004 and return on average shareholders’ equity was 16.99% in 2005, compared to 15.97% in 2004. The decrease in return on average assets was primarily a result of a flattening yield curve, as longer duration earning assets (loans and investments) booked during 2005 experienced less of an increase in yields compared to the 200 basis point increase in short-term funding costs, thus the Company did not produce the same level of net interest spread (yield on earning assets less cost on associated funding liabilities) compared to the prior year. The return on average assets was also negatively affected by the decline in non-interest income in 2005 compared to 2004. The increase in the return on average equity was primarily due to a 9.7% increase in net income, while total equity only increased 2.5% due to the impact of dividends, stock repurchases and an accumulated other comprehensive loss.

Net Interest Income

Net interest income accounted for 84.6% of total revenues for the Company, and is the Company’s largest source of revenue. Net interest income reflects revenues generated through income from earning assets plus loan fees, less interest paid on interest-bearing deposits and borrowings. Net interest income was $55.7 million on a fully-taxable

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equivalent basis in 2005, compared to $49.4 million in 2004, an increase of 12.7%. The Company’s level of net interest income fluctuates over time for three primary reasons: 1.) Interest earned from earning assets and expenses from interest-bearing deposits and borrowings fluctuate due to changes in interest rates. This is referred to as the “yield” or “rate” component of net interest income. 2.) Net interest income changes due to the amount of earning assets the Company maintains, as well as the amount of non-interest bearing deposits, interest bearing deposits and borrowings the Company holds. This is referred to as the “volume” component of net interest income. 3.) Net interest income fluctuates as a result of the change over time in the components of earning assets, non-interest bearing deposits, interest bearing deposits and borrowings. This is referred to as the “mix” component of net interest income. It is the Company’s goal to maximize net interest income by providing competitive products to its customers that, within various risk parameters, maximize interest income while minimizing interest expense. Management uses several analytical models, including those illustrated by Tables 1 & 2 on pages 33 and 34 below, to assess and monitor those factors that affect net interest income, to assess the Company’s performance in meeting its goals, and to determine future strategies.

Impact of Rates. During 2005, interest rates in the United States continued to increase with eight quarter percentage point increases in the Federal Funds Discount Rate, which followed five quarter percentage point increases in the second half of 2004, and culminated at 4.25% at December 31, 2005. During 2005, the earnings on the Company’s interest-bearing assets, which contractually re-price based on various benchmarks such as the Prime Rate and the London Inter-Bank Offer Rate (“LIBOR”) (these products are also referred to as “variable” or “floating” rate instruments), increased in response to the changes in the underlying benchmark rates resulting in an overall increase in yields. Interest income on securities was negatively impacted during 2005 as a result of new investments being added to the portfolio at lower yields than maturing investments. For the Company’s interest-bearing liabilities, the higher rate environment during 2005 had a negative impact as maturing deposit products and term borrowings re-priced upward upon maturity. As a result of the rate increases and the highly competitive environment in which it competes, the Company raised the rates paid on certain deposit products, primarily certificates of deposit and money market accounts, as competitors also raised rates paid on such products. In addition, the Company was negatively impacted $2.8 million in 2005 due to increases in short-term borrowing rates (primarily overnight funds from the Federal Home Loan Bank of Boston [“FHLBB”]), and the maturity of interest rate swap agreements on February 1, 2005 (for more information, refer to the Market Risk section and the Notes to the Consolidated Financial Statements), which decreased the swap contribution to net interest income to $31,000 in 2005 from $752,000 in 2004. Overall, during 2005 compared to 2004, the Company’s net interest income was positively impacted $800,000 due to rate changes, with increased earning asset yields contributing $7.2 million, while increased funding costs decreased net interest income $6.4 million.

Impact of Volume. During 2005, loan volume increases contributed $7.0 million to net interest income as residential mortgages increased $53.2 million, or 16.5%, commercial loan balances increased $31.4 million, or 5.5%, and consumer loans (including home equities) increased $20.2 million, or 11.9%. The significant increase in new residential loans was the result of longer-term mortgage rates remaining low due to the relatively flat yield curve. During 2005, deposits (excluding brokered certificates of deposits) increased 10.1%, or $87.6 million. In order to fund balance sheet growth experienced during 2005, the Company increased its use of brokered certificates of deposit $61.7 million, or 42.4%. The Company utilizes brokered certificates of deposit when it determines that the “all in” cost of the brokered certificates of deposit is comparable to the borrowing cost for FHLBB advances with similar maturities or to simply diversify its funding mix. Overall, during 2005 compared to 2004, the Company’s net interest income was positively impacted $5.5 million due to volume changes, with earning asset growth contributing $10.6 million, while the need for increased funding to support the asset growth decreased net interest income $5.1 million.

Information on average balances, yields and rates for the past three years can be found in Table 1 below. Table 2 below shows the changes from 2004 to 2005 in tax equivalent net interest income by category due to changes in rate and volume. Information on interest rate sensitivity can be found in the Market Risk section below.

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Provision for Loan and Lease Losses

During 2005, the Company provided $1.3 million of expense to its provision for loan and lease losses compared to the recovery of $685,000 for 2004. The increase to the allowance for loan and lease losses (“ALLL”) for 2005 was primarily due to the growth in the Company’s loan portfolio, which increased $112.9 million, or 10.6% from December 31, 2004 to December 31, 2005. In 2005, the ratio of non-performing loans to total loans slightly increased to 0.79% from 0.60% in 2004. In addition, the Company had net charge-offs of $739,000 during 2005 versus net recoveries of $191,000 during 2004. The ALLL as a percentage of total loans was 1.20% at December 31, 2005, a decrease from 1.28% at December 31, 2004. For further discussion of the ALLL, refer to Critical Accounting Policies section below, Item 1A. Risk Factors and the Footnotes to the Consolidated Financial Statements.

Non-interest Income

Non-interest income decreased to $10.1 million for the year ended December 31, 2005, from $11.4 million in 2004, which was a decline of $1.3 million, or 11.8%. The major contributing factor to this decrease was a $332,000 loss on the sale of securities in 2005 compared to a $684,000 gain on the sale of securities in 2004. Service charges on deposit accounts decreased $267,000, or 7.2%, primarily due to declining overdraft charge assessments. Earnings on bank-owned life insurance decreased $285,000, or 30.7%, primarily due to final adjustments to prior year performance. Mortgage servicing income, which is derived from the sale of residential real estate loans and the retention of the related servicing rights, declined $164,000, or 59.2%, in 2005 compared to 2004, as the Company sold fewer mortgages. Other income declined $85,000, or 19.3%, primarily due to a gain on the sale of property of $71,300 recorded in 2004. Other service charges and fees increased $238,000, or 21.6%, as debit card income increased due to growth in transaction volumes. Income from fiduciary services at AT increased $95,000 due to increased assets under management, and brokerage and insurance commission income at AFC increased $135,000 due to increased sales volumes, thus representing a combined increase of 5.4%.

Non-interest Expenses

Non-interest expenses increased to $32.5 million for the year ended December 31, 2005, from $31.9 million in 2004, a change of $579,000, or 1.8%. Salaries and employee benefits increased $1.2 million, or 7.1%, due to investments in human resources, annual salary increases and higher employee benefit and incentive costs. Furniture, equipment and data processing costs increased $76,000 as a result of increased amortization and depreciation costs associated with technology purchases (software and hardware) necessary to support the Company’s growth initiatives. Other expenses decreased $741,000 primarily due to a decline in director fees of $348,000 as a portion of director fees are benchmarked to the stock price and the stock price has declined since December 31, 2004, and an abatement of penalties of $269,000 related to a 2004 Form 945 withholding remittance issue. These reductions in other non-interest expenses were somewhat offset by increases in marketing, postage and debit card costs.

Comparison 2004 to 2003

The Company reported net income of $19.5 million, or $2.53 per diluted share, for 2004 compared to $18.9 million and $2.38 per diluted share in 2003. Return on average assets was 1.40% in 2004, compared to 1.48% in 2003, and return on average shareholders’ equity was 15.97% in 2004, compared to 15.85% in 2003.

Net Interest Income

Net interest income was $49.4 million on a fully-taxable equivalent basis in 2004 compared to $48.0 million in 2003, an increase of 2.8%. Interest rates remained at cyclical and historical lows for the first half of 2004, then began to increase as the Federal Funds Discount Rate increased five times in the second half of the year, by a quarter percentage point at each rate increase, beginning July 1 and ending at 2.25% at December 31, 2004. During the first half of 2004, income from the portfolio of interest-earning assets continued to decline as the amortization and pay-off

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of existing loans and investments resulted in the reinvestment of those cash flows in either additional loans or other securities, at primarily lower rates of interest than the previous holdings due to the historic low interest rate environment. Specifically, interest income on securities and loans during 2004 compared to 2003 was negatively impacted $1.8 million and $4.2 million, respectively, due to the rate environment. For the Company’s interest-bearing liabilities, the low rate environment during 2004 had a positive impact as non-maturing deposit rates remained low, maturing deposit products and term borrowings re-priced downward upon maturity as existing rates for such products were lower than in previous years. During the second half of the year, the earnings on the Company’s variable rate loans slowly increased in response to the changes in the underlying benchmark rates. As a result of the rate increases, the Company gradually raised the rates paid on certain deposit products, primarily certificates of deposit and money market accounts. During 2004, residential mortgages increased $34.1 million, or 11.8%, commercial loans increased $33.5 million, or 6.3%, and consumer loans (including home equities) increased $41.2 million, or 32.1%. Deposits in 2004 (excluding brokered certificates of deposits) increased 5.7%, or $46.9 million. Overall, during 2004 compared to 2003, the Company’s net interest income was positively impacted $1.3 million with a positive $4.6 million due to volume changes, decreased by $3.3 million due to a decrease in earning asset yields somewhat offset by a decrease in rates paid for funding.

Provision for Loan and Lease Losses

During 2004, the Company recovered $685,000 of expense from its provision for loan and lease losses compared to the recovery of $150,000 for 2003. The credit to the ALLL was due primarily to improved asset quality in the Company’s loan portfolio. The ratio of non-performing loans to total loans decreased in 2004 to 0.60% from 0.70% in 2003. In addition, the Company had net recoveries of $191,000 during 2004 versus net charge-offs of $957,000 in 2003. The ALLL as a percentage of total loans was 1.28% at December 31, 2004, a decrease from 1.46% at December 31, 2003.

Non-interest Income

Non-interest income increased to $11.4 million for the year ended December 31, 2004, from $10.8 million in 2003, a $570,000, or 5.3% increase. Trust and investment management fee income at AT increased $425,000 due to increased assets under management, and brokerage and insurance commission income at AFC increased $11,000 due to increased sales volumes, thus representing a combined increase of 11.4%. The Company recorded $684,000 of gains on the sale of securities in 2004, compared to $301,000 in 2003, an increase of $383,000. Other service charges and fees decreased $204,000, or 15.6%, in 2004 compared to 2003, primarily due to the fact that the Company sold its credit card business to Elan Financial Services (“Elan”) in October 2003, resulting in a $202,000 reduction of the associated processing fee income, and a reduction of $51,000 related to mortgage servicing activity. Mortgage servicing rights income declined as the Company sold fewer mortgages in 2004 compared to 2003. Offsetting this negative impact to income was the fact that the amortization of the capitalized mortgage servicing rights assets, which offset against servicing rights income, slowed considerably in 2004, as the Company experienced a decrease of prepayments on previously sold residential real estate loans that it services. Earnings on bank-owned life insurance increased $201,000 in 2004 compared to 2003 as rates paid on the cash surrender values of the policies increased. Other income decreased $166,000 in 2004 compared to 2003 primarily due to the 2003 gain of $575,000 on the sale of the Company’s credit card business, which did not recur in 2004. In 2004, the Company recorded a $71,300 gain on the sale of property, income of $59,600 from a revenue sharing agreement resulting from the sale of the credit card portfolio, and a decrease in losses on the sale of loans of $225,700, all of which partially offset the nonrecurring 2003 gain.

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Non-interest Expenses

Non-interest expenses increased to $31.9 million for the year ended December 31, 2004 from $30.4 million in 2003, a change of approximately $1.5 million, or 4.8%. Salaries and employee benefits increased $472,000, or 2.8%, primarily due to annual salary increases and higher employee benefit costs. Furniture, equipment and data processing costs increased $82,000 as a result of increased amortization and depreciation costs. Other expenses increased $976,000 due to increases of $463,000 in professional fees primarily due to the costs of outsourcing the retirement plan administrative services at AT, $130,000 in amortized brokered deposit fees due to the increased use of brokered certificates of deposit as a funding source, $143,000 in debit card processing expenses due to a significant increase in transaction volume in 2004, and $406,000 in federal and state tax penalties and interest related to Form 945 tax withholding remittance issues. These increases were slightly offset by a $194,000 decrease in credit cardholder expenses in 2004 due to the October 2003 sale of the credit card business to Elan.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in Item 8. Financial Statements and Supplementary Data have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the general level of inflation. Over short periods of time, interest rates and the yield curve may not necessarily move in the same direction or in the same magnitude as inflation.

Financial Condition

Overview

Total assets at December 31, 2005 were $1.65 billion, an increase of $163.4 million, or 11.0%, from December 31, 2004. The change in assets consisted primarily of a $112.4 million increase in net loans, a $43.6 million increase in investment securities, a $8.1 million increase in other assets and a $1.1 million increase in federal funds sold, all of which were partially offset by a $1.3 million decrease in cash and due from banks, a $884,000 decrease in the core deposit intangible and a $425,000 decrease in net premises and equipment. The asset growth was supported by an increase of $149.3 million in total deposits, which was comprised of a $17.0 million increase in transaction accounts (demand deposits and NOW), a $29.9 million increase in money market accounts, a $51.7 million increase in certificates of deposit and a $61.7 million increase in brokered certificates of deposit, offset by a decrease of $11.0 million in savings accounts. Borrowings increased $10.2 million and accrued interest and other liabilities increased $736,000. In addition, total shareholders’ equity increased $3.1 million as a result of current year earnings less common stock repurchases, shareholder dividends paid and changes in accumulated other comprehensive income.

Investment Securities

Investments in U.S. government securities, U.S. government agency securities, securities of states and political subdivisions, highly rated corporate bonds and equities are used by the Company to diversify its revenues, provide interest rate and credit risk diversification and to provide for its liquidity and funding needs. Total investment securities increased $43.6 million, or 13.5%, to $367.6 million at December 31, 2005. The Company has investment securities in both the available-for-sale and held-to-maturity categories.

The Company conforms to SFAS No. 115, which requires all investments to be categorized as “trading securities,” “available for sale” or “held to maturity.” All realized gains or losses from investments in any category are recorded as an effect to net income in the period incurred. Unrealized gains or losses from investments are recorded based on

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its respective classification. Unrealized gains or losses from investments categorized as “trading securities” are immediately recorded in the Company’s current year’s earnings. During 2005 and 2004, the Company did not hold any securities classified as “trading securities.” Unrealized gains or losses from investments categorized as “held to maturity” are only recorded when, and if, the gain or loss is recognized. During 2005, the Company purchased additional securities of state and political subdivisions (“municipal bonds”) and classified them as “held to maturity.” Unrealized gains or losses on securities classified as “available for sale” are recorded as adjustments to shareholders’ equity, net of related deferred income taxes and are a component of the Company’s other comprehensive income contained in the Consolidated Statement of Changes in Shareholders’ Equity. At December 31, 2005, the Company had $3.6 million of unrealized losses on securities available for sale, net of the deferred taxes, compared to $751,000 of unrealized gains, net of deferred taxes at December 31, 2004. The change from unrealized gains at December 31, 2004 to unrealized losses at December 31, 2005, is attributed to a rising interest rate environment that has negatively impacted the fair value of securities with lower than current market yields.

Loans

The Company’s bank subsidiaries provide loans primarily to customers located within the banks’ geographic market area. Loans totaled $1.18 billion at December 31, 2005, a 10.6% increase from total loans of $1.07 billion at December 31, 2004. This reflects the continuation of strong loan growth experienced in the commercial, residential real estate and consumer loan portfolios.

In 2005, residential real estate mortgage loans increased by $53.2 million, or 16.5%, as a result of consumers taking advantage of the continued low long-term interest rate environment. During 2005, the Company originated and sold $900,000 of fixed-rate residential mortgage loans on the secondary market to Freddie Mac. The Company receives annual servicing fees for servicing the outstanding balances. These loans were sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) without recourse, which results in Freddie Mac assuming the risk of loss from borrower defaults subject to the terms and conditions of the purchase documents. Residential real estate mortgage loans increased by $34.1 million, or 11.8%, in 2004. During 2004, the Company originated and sold $11.5 million of fixed-rate residential mortgage loans on the secondary market to Freddie Mac under similar terms as those sold in the current year. The Company receives annual servicing fees for servicing the outstanding balances. Residential real estate loans consist of loans secured by one-to-four family residences. The Company generally retains adjustable-rate mortgages in its portfolio and will, from time to time, retain fixed-rate mortgages based on market risk assessments.

Commercial loans consist of loans secured by various corporate assets, as well as loans to provide working capital in the form of lines of credit, which may be secured or unsecured, and includes commercial real estate loans secured by income producing commercial real estate. The Company focuses on lending to financially sound business customers within its geographic marketplace as well as offering loans for the acquisition, development and construction of commercial real estate. Commercial loans increased by $31.4 million, or 5.5%, during 2005. In 2004, commercial loans increased by $33.5 million, or 6.3%, over 2003.

Consumer loans are originated by the Company for a wide variety of purposes designed to meet the needs of customers. Consumer loans include overdraft protection, automobile, boat, recreation vehicle, and mobile home loans, home equity loans and lines, and secured and unsecured personal loans. In 2005, consumer loans increased by $20.2 million, or 11.9%, as consumers continued to utilize home equity loans for home improvement, to consolidate debt and for general consumer purposes. In 2004, consumer loans increased by $41.2 million, or 32.1%, over 2003.

Non-performing loans, defined as non-accrual loans plus accruing loans 90 days or more past due, totaled $9.4 million, or 0.79%, of total loans at December 31, 2005, compared to $6.4 million, or 0.60%, of total loans at December 31, 2004.

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Allowance for Loan and Lease Losses / Provision for Loan and Lease Losses

During 2005, the Company provided $1.3 million of expense to the ALLL compared to recoveries of $685,000 and $150,000 of expense in 2004 and 2003, respectively. Provisions are made to the ALLL in order to maintain the ALLL at a level which management believes is reasonable and reflective of the overall risk of loss inherent in the loan portfolio. The Company recorded net charge-offs of $739,000 in 2005, compared to net recoveries of $191,000 in 2004. In addition, non-performing assets increased from $6.4 million, or 0.60%, of total loans at December 31, 2004, to $9.4 million, or 0.79% of total loans at December 31, 2005. The determination of an appropriate level of ALLL, and subsequent provision for loan and lease losses which would affect earnings, is based on management’s judgment of the adequacy of the reserve based on analysis of various economic factors and review of the Company’s loan portfolio, which may change due to numerous factors including loan growth, payoffs of lower quality loans, recoveries on previously charged-off loans, improvement in the financial condition of the borrowers, risk rating downgrades/upgrades and charge-offs. During the fourth quarter of 2004, the Company implemented a new comprehensive approach toward determining its ALLL. This change provides for an expanded risk rating system that enables the Company to more adequately identify the risks being undertaken as well as migration within the overall loan portfolio. Management believes that the ALLL at December 31, 2005 of $14.2 million, or 1.20%, of total loans outstanding was adequate given the current economic conditions in the Company’s service area and the condition of the loan portfolio. As a percentage of total loans outstanding, the ALLL was 1.28% in 2004.

Net Premises and Equipment

Net premises and equipment decreased $425,000, to $16.0 million, at December 31, 2005, primarily due to an overall decline in purchases of premises and equipment for 2005, which resulted in current year additions to accumulated depreciation exceeding current year asset purchases.

Other Assets

Other assets increased $8.1 million, or 16.4 %, during 2005. The largest contributing factors to the increase were an increase of $3.5 million in FHLBB stock, as the Company is required to maintain a certain ratio of FHLBB stock ownership to borrowings, and an increase of $2.0 million in deferred taxes related to the unrealized loss positions of the available for sale investment portfolio and floor contract. Also contributing to the increase in other assets was accounts receivable of $647,000 for principal payments on investment securities due to an overall increase in the securities portfolio and increase in principal pay-downs in the mortgage-backed securities portfolio, bank-owned life insurance of $643,000 due to current year earnings on the cash surrender value of the policies, floor contracts of $236,000 representing the fair value of the contracts at year end, and limited partnership investments of $162,000 which were made in several Maine Housing Funds to support affordable housing in the State of Maine.

Liquidity

The liquidity needs of the Company require the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. Liquidity is defined as the Company’s ability to maintain availability of funds to meet customer needs as well as to support its asset base. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet the cash flow needs of the Company in the most economical and expedient manner. Due to the potential for unexpected fluctuations in both deposits and loans, active management of the Company’s liquidity is necessary. The Company maintains various sources of funding and levels of liquid assets in excess of regulatory guidelines in order to satisfy its varied liquidity demands. The Company monitors its liquidity in accordance with its internal guidelines and all applicable regulatory requirements. As of December 31, 2005 and 2004, the Company’s level of liquidity exceeded its target levels. Management believes that the Company currently has appropriate liquidity available to respond to liquidity demands. Sources of funds utilized by the Company consist of deposits, borrowings from the FHLBB and other sources, cash flows from operations, prepayments and maturities of outstanding loans, investments and mortgage-backed securities and the sales of mortgage loans.

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Deposits continue to represent the Company’s primary source of funds. In 2005, total deposits increased $149.3 million, or 14.7%, over 2004, ending the year at $1.16 billion. The Company experienced growth in all deposit categories except savings in 2005 and in all categories in 2004. Comparing 2005 to 2004 year end balances, transaction accounts (demand deposit and NOW accounts) increased by $17.0 million, money market accounts by $29.9 million, and certificates of deposit by $113.4 million, while savings accounts declined $11.0 million. The $113.4 million growth in total certificates of deposit during 2005 was made up of a $61.7 million increase in brokered certificates of deposit used to support asset growth, and $51.7 million in regular certificates of deposit. In 2004, total deposits increased by $113.6 million, or 12.6%, over 2003, ending the year at $1.0 billion. Borrowings supplement deposits as a source of liquidity. In addition to borrowings from the FHLBB, the Company purchases federal funds, sells securities under agreements to repurchase and utilizes treasury tax and loan accounts. Total borrowings were $347.0 million at December 31, 2005, compared to $336.8 million at December 31, 2004, an increase of $10.2 million. The modest increase in borrowings primarily was the result of significant increases in deposit balances, including brokered certificates of deposit, thus the Company needed to borrow less to support the increase in its earning assets. The majority of the borrowings were from the FHLBB, whose advances remained the largest non-deposit-related, interest-bearing funding source for the Company. Qualified residential real estate loans, certain investment securities and certain other assets available to be pledged secure these borrowings. The carrying value of loans pledged as collateral at the FHLBB was $258.8 million and $316.7 million at December 31, 2005 and 2004, respectively. The Company also pledges securities as collateral at the FHLBB depending on its borrowing needs. The carrying value of securities pledged as collateral at the FHLBB was $188.6 million and $93.7 million at December 31, 2005 and 2004, respectively. The Company, through its bank subsidiaries, has an available line of credit with FHLBB of $13.0 million at December 31, 2005 and 2004. The Company had no outstanding balance on its line of credit with the FHLBB at December 31, 2005 or 2004.

In addition to the liquidity sources discussed above, the Company believes the investment portfolio and residential loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. The Company also believes that it has additional untapped access to the national brokered deposit market. These sources are considered as liquidity alternatives in the Company’s contingent liquidity plan. The Company believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer saving habits and availability or access to the national brokered deposit market, could significantly impact the Company’s liquidity position.

Capital Resources

Under FRB guidelines, bank holding companies such as the Company are required to maintain capital based on risk-adjusted assets. These capital requirements represent quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

The Company’s capital classification is also subject to qualitative judgments by its regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). These guidelines apply to the Company on a consolidated basis. Under the current guidelines, banking organizations must maintain a risk-based capital ratio of 8.0%, of which at least 4.0% must be in the form of core capital (as defined). The risk-based ratios of the Company and its subsidiaries exceeded regulatory guidelines at December 31, 2005 and December 31, 2004. The Company’s Tier 1 capital to risk weighted assets was 10.7% and 11.3% at December 31, 2005 and 2004, respectively (see Item 8, Note 21, Regulatory Matters, of the Notes to Consolidated Financial Statements). In addition to risk-based capital requirements, the FRB requires bank holding companies to maintain a minimum leverage capital ratio of core capital to total assets of 4.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted. The Company’s leverage ratio was 7.6% and 8.1% at December 31, 2005 and 2004, respectively.

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As part of the Company’s goal to operate a safe, sound and profitable financial organization, the Company is committed to maintaining a strong capital base. Shareholders’ equity totaled $129.5 million and $126.4 million, or 7.8% and 8.5%, of total assets at December 31, 2005 and 2004, respectively. The $3.1 million, or 2.5%, increase in shareholders’ equity in 2005 was primarily attributable to net income of $21.4 million, less the costs associated with open market repurchases of approximately $3.9 million of the Company’s common stock in compliance with the Company’s previously announced stock repurchase plan, $9.9 million in cash dividends to the Company’s shareholders, and $4.5 million in unrealized losses on securities available for sale and derivative instruments, net of deferred taxes.

The principal cash requirement of the Company is the payment of dividends on the Company’s common stock, as and when declared by the Board of Directors. Dividends paid per share during the year ended December 31, 2005 increased by 62.5% over the corresponding period in 2004. The Company is primarily dependent upon the payment of cash dividends by its subsidiaries to service its commitments. The Company, as the sole shareholder of its subsidiaries, is entitled to dividends, when and as declared by each subsidiary’s Board of Directors from legally available funds. CNB declared dividends in the aggregate amount of $9.0 million and $4.2 million in 2005 and 2004, respectively. UKB declared dividends in the aggregate amount of $3.9 million and $1.7 million in 2005 and 2004, respectively. As of December 31, 2005, and subject to the limitations and restrictions under applicable law, CNB and UKB had a total of $14.4 million available for dividends to the Company, although there is no assurance that dividends will be paid at any time in any amount (refer to Note 15 within the Notes to Consolidated Financial Statements of Item 8. Financial Statements and Supplementary Data, for additional information).

In July 2005, the Board of Directors of the Company voted to authorize the Company to purchase up to 750,000 shares of its outstanding common stock for a period of one year, expiring July 1, 2006. The authority may be exercised from time to time and in such amounts as market conditions warrant. Any purchases are intended to make appropriate adjustments to the Company’s capital structure, including meeting share requirements related to employee benefit plans and for general corporate purposes. As of December 31, 2005, the Company has repurchased 57,267 shares of common stock at an average price of $35.37 under the current plan. In July 2004, the Board of Directors of the Company voted to authorize the Company to purchase up to 383,500 shares or approximately 5% of its outstanding common stock for reasons similar to the 2005 plan. Under the 2004 plan, the Company repurchased 94,907 shares of common stock at an average price of $32.15, of which 58,935 shares were repurchased during 2005 at an average price of $32.03. The stock repurchase plans resulted in the use of $3.9 million of capital during 2005.

On April 29, 2003, the shareholders of the Company approved the 2003 Stock Option and Incentive Plan (the “Plan”). The maximum number of shares of stock reserved and available for issuance under this Plan is 800,000 shares. Awards may be granted in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, deferred stock, unrestricted stock, performance share and dividend equivalent rights, or any combination of the preceding, and the exercise price shall not be less than 100% of the fair market value on the date of grant in the case of incentive stock options, or 85% of the fair market value on the date of grant in the case of non-qualified stock options. No stock options shall be exercisable more than ten years after the date the stock option is granted. Prior to April 29, 2003, the Company had three stock option plans. Under all three plans, the options were immediately vested when granted, and expire ten years from the date the option was granted. The exercise price of all options equaled the market price of the Company’s stock on the date of grant. For further information on equity compensation plans and related accounting treatment, refer to Note 1. Summary of Significant Accounting Policies and Note 15. Shareholders’ Equity within the Notes to Consolidated Financial Statements of Item 8.

Contractual Obligations and Commitments

In the normal course of business, the Company is a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the Consolidated Statements of Condition. These financial instruments include lending commitments and letters of credit. Those instruments involve varying degrees of credit risk in excess of the amount recognized in the Consolidated Statements of Condition.

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The Company follows the same credit policies in making commitments to extend credit and conditional obligations as it does for on-balance sheet instruments, including requiring similar collateral or other security to support financial instruments with credit risk. The Company’s exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. At December 31, 2005, the Company had the following levels of commitments to extend credit.

The Company is a party to several off-balance sheet contractual obligations through lease agreements on a number of branch facilities. The Company has an obligation and commitment to make future payments under these contracts. Borrowings from the FHLBB consist of short- and long-term fixed and variable rate borrowings and are collateralized by all stock in the FHLBB and a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one-to-four family properties, certain pledged investment securities and other qualified assets. The Company has an obligation and commitment to repay all borrowings from the FHLBB. These commitments, borrowings and the related payments are made during the normal course of business. At December 31, 2005, the Company had the following levels of contractual obligations.

The Company may use derivative instruments as partial hedges against large fluctuations in interest rates. The Company may use interest rate swap and floor instruments to partially hedge against potentially lower yields on the variable prime rate loan category in a declining rate environment. If rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap and floor instruments. The Company may also use cap instruments to partially hedge against increases in short-term borrowing rates. If rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the cap instruments. These financial instruments are factored into the Company’s overall interest rate risk position. The Company regularly reviews the credit quality of the counterparty from which the instruments have been purchased. At December 31, 2005, the Company had only floor agreements with a notional amount of $50.0 million.

Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process, which is governed by policies established by the subsidiaries’ Boards of Directors that are reviewed and approved annually. Each bank subsidiary’s Board of Directors’ Asset/Liability Committee (“Board ALCO”) delegates responsibility for carrying out the asset/liability management policies to the Company’s Management Asset/Liability Committee (“Management ALCO”). In this capacity, Management ALCO develops guidelines and strategies impacting the Company’s asset/liability management-related

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activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. The Management ALCO and Board ALCO jointly meet on a quarterly basis to review strategies, policies, economic conditions and various activities as part of the management of these risks.

Interest Rate Risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, thereby impacting net interest income (“NII”), the primary component of the Company’s earnings. Board and Management ALCO utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While Board and Management ALCO routinely monitor simulated NII sensitivity over a rolling 2-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company’s balance sheet as well as for derivative financial instruments. None of the assets used in the simulation were held for trading purposes. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 basis point (“bp”) upward and 200 bp downward shift in interest rates for 2005, and a 200 bp upward and 100 bp downward shift in interest rates for 2004. A parallel and pro rata shift in rates over a 12-month period is assumed. The following discloses the Company’s NII sensitivity analysis, as measured over the past two years, reflecting the quarterly high, low and average percentage of exposure over a 1-year horizon for each year.

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

The most significant factors affecting the changes in market risk exposure during 2005 compared to 2004 were the continued rise in interest rates, with eight quarter percentage point increases in the Federal Funds Discount Rate, the increase in variable rate residential, commercial real estate and consumer loans, and the level of short-term FHLBB borrowings. If rates remain at or near current levels and the balance sheet mix remains similar, net interest income is expected to improve as asset cash flows are replaced at rates higher than current yields. In a sustained rising interest rate environment, net interest income benefits from the Company’s asset sensitive profile beyond the first year, once funding cost increases subside and asset yields continue to improve as cash flow is replaced at higher rates. In a falling interest rate environment, net interest income is expected to trend downward during the first year as asset yields decline more quickly than the funding costs. Should the yield curve steepen as rates fall, exposure to a

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declining rate environment would result in slightly less exposure as compared to the parallel shift in rates. The risk in the various rate scenarios is well within the Company’s policy limits.

The Company periodically, if deemed appropriate, uses interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge interest rate risk position. The Board of Directors has approved hedging policy statements governing the use of these instruments by the bank subsidiaries. As of December 31, 2005, the Company had a notional principal amount of $50.0 million in floor agreements. Board and Management ALCO monitor derivative activities relative to its expectation and the Company’s hedging policies. These instruments are more fully described in Item 8, Note 5, Derivative Financial Instruments, of the Notes to Consolidated Financial Statements.

In 2002, the Company, in order to protect a portion of its interest income revenue stream against a decreasing rate environment, acquired interest rate swap agreements to convert a portion of the loan portfolio from a variable rate, based upon the Prime Rate, to a fixed rate of 6.9%. These instruments involved only the exchange of fixed- and variable-rate interest payments based upon a notional principal amount and maturity date. The $30.0 million of interest rate swap agreements matured in February 2005. In a purchased interest rate swap agreement, cash interest payments are exchanged between the Company and counterparty. The estimated effects of these derivative financial instruments on the Company’s earnings were included in the sensitivity analysis presented above. The risks associated with entering into this transaction were the risk of default from the counterparty with which the Company has entered into agreement, and poor correlation between the rate being swapped and the liability cost of the Company. The counterparty to these agreements had an investment grade rating by Moody’s and Standard and Poor’s rating agencies. The Company’s risk from default of a counterparty was limited to the expected cash flow anticipated from the counterparty, not the notional value.

Recent Accounting Pronouncements

The FASB has issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) (SFAS No. 123(R)), Share-Based Payment. SFAS No. 123(R) will, with certain exceptions, require entities that grant stock options and shares to employees to recognize the fair value of those options and shares as compensation cost over the service (vesting) period in their financial statements. The measurement of that cost will be based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) will be effective for the Company’s quarterly interim financial reporting period ending March 31, 2006. Management expects that the adoption of SFAS No. 123(R) will not have a material effect on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3, which changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this Statement, as applicable. Management expects this Statement will not have a material effect on the financial condition and results of operations of the Company.

FASB Staff Position (“FSP”) 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, was issued on November 3, 2005. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Guidance in the FSP shall be applied to reporting periods beginning after December 15, 2005, with earlier application permitted. Management expects that application of this FSP will not have a material effect on the consolidated financial condition and results of operations of the Company.

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Related Party Transactions

As a bank holding company, the Company’s banking subsidiaries are permitted, in their normal course of business, to make loans to certain officers and directors of the Company and its subsidiaries under terms that are consistent with the Company’s lending policies and regulatory requirements. In addition to extending loans to certain officers and directors of the Company and its subsidiaries on terms consistent with the Company’s lending policies, federal banking regulations also requires training, audit and examination of the Company’s adherence to this policy by representatives of the Company’s federal, national and state regulators (also known as “Reg. O” requirements). As described more fully in Item 8, Note 18, Related Parties, of the Notes to Consolidated Financial Statements, the Company has not entered into significant non-lending related party transactions.

Critical Accounting Policies

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

Allowance for Loan and Lease Losses. In preparing the Consolidated Financial Statements, the ALLL requires the most significant amount of management estimates and assumptions. Management regularly evaluates the ALLL for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management’s estimation of probable losses. The use of different estimates or assumptions could produce different provisions for loan and lease losses, which would affect the earnings of the Company. A smaller provision for loan and lease losses results in higher net income, and when a greater amount of provision for loan and lease losses is necessary the result is lower net income. Monthly, the Corporate Risk Management Group reviews the ALLL with the board of directors for each bank subsidiary. On a quarterly basis, a more in-depth review of the ALLL, including the methodology for calculating and allocating the ALLL, is reviewed with the Company’s Board of Directors, as well as the board of directors for each subsidiary bank. For further ALLL information, refer to Item 1A. Risk Factors and the Notes to Consolidated Financial Statements.

Periodically the Company acquires property in connection with foreclosures or in satisfaction of debt previously contracted. The valuation of this property is accounted for individually at the lower of the “book value of the loan satisfied” or its net realizable value on the date of acquisition. At the time of acquisition, if the net realizable value of the property is less than the book value of the loan, a change or reduction in the ALLL is recorded. If the value of the property becomes permanently impaired, as determined by an appraisal or an evaluation in accordance with the Company’s appraisal policy, the Company will record the decline by showing a charge against current earnings. Upon acquisition of a property valued at $25,000 or more, a current appraisal or a broker’s opinion must substantiate “market value” for the property.

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Mortgage Servicing Rights. Servicing assets are recognized as separate assets when servicing rights are acquired through sale of residential mortgage assets. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial residential mortgage assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized costs. Fair value is determined based upon discounted cash flows using market-based assumptions. In periods of falling market interest rates, accelerated loan prepayment speeds can adversely impact the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets were to increase in the future, the Company can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. When the book value exceeds the fair value, an impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds and other factors, could impact the Company’s financial condition and results of operations either positively or adversely. Management has engaged a recognized third party to periodically evaluate the valuation of the Company’s mortgage servicing rights asset.

Valuation of Acquired Assets and Liabilities. Management utilizes numerous techniques to estimate the value of various assets held by the Company. As previously discussed, management utilized various methods to determine the appropriate carrying value of goodwill as required under SFAS No. 142. In addition, goodwill from a purchase acquisition is subject to ongoing periodic impairment tests. Goodwill is evaluated for impairment using several standard valuation techniques including discounted cash flow analyses, as well as an estimation of the impact of business conditions. Different estimates or assumptions are also utilized to determine the appropriate carrying value of other assets including, but not limited to, property, plant and equipment, overall collectibility of loans and receivables. The use of different estimates or assumptions could produce different estimates of carrying value. Management prepares the valuation analyses, which are then reviewed by the Board of Directors of the Company.

Interest Income Recognition. Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on loans 90 days or more past due unless they are adequately secured and in the process of collection or on other loans when management believes collection is doubtful. All loans considered impaired are non-accruing. Interest on non-accruing loans is recognized as income when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current-period interest income; therefore, an increase in loans on non-accrual status reduces interest income. If a loan is removed from non-accrual status, all previously unrecognized interest is collected and recorded as interest income.

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Financial Tables

Table 1—Three-Year Average Balance Sheet

The following table sets forth, for the periods indicated, information regarding amount of interest income on interest-earning assets and the average yields, the amount of interest expense on interest-bearing liabilities and average costs, net interest income, net interest spread and net interest margin.

Analysis of Change in Net Interest Margin on Earning Assets

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Table of Contents

Table 2—Changes in Net Interest Income

The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to rate and volume.

Analysis of Volume and Rate Changes on Net Interest Income