Two Maine community banks are back at the negotiating table a year after preliminary merger discussions led nowhere, officials said.

FNB Bankshares of Bar Harbor, recently approached $386-million-asset Camden National Corp., Portland, one of the state's largest community banks, to discuss again the possibility of joining forces.

Officials at both banks stressed the talks are still very early.

"There is an interest on behalf of both banks to put something together," Camden president and chief executive Keith C. Patten said.

No formal offers have been made by either side, but negotiations are continuing and Camden expects a possible offer by the end of the month, Mr. Patten said.

"Both banks have a strong tradition of service to communities," said FNB president and chief executive Peter F. Reilly. "Any decision that's made is going to be decided in terms of the best interests of the stockholders."

In the event of a merger, Camden is expected to be the surviving entity, buying $115.6-million-asset FNB in a likely stock deal.

Camden's stock, which was selling for $17.50 after a 30-1o-1 stock split in 1993, is now selling at $35.50.

Mr. Reilly stressed that only the holding companies would be merged. Each bank would continue separate operations.

"We certainly would consolidate some back room operations, but as far as the customers are concerned, we want to keep it as transparent as possible and keep the decisions, especially the lending decisions, at the local level," Mr. Patten said.

Mr. Reilly downplayed the talks, describing them as "two institutions sitting down and seeing if it makes sense to combine forces."

The banks are considering a merger because it was the best way to grow and compete, both presidents said.

"We're overcapitalized, if anything, and our attempt would be to put that excess capitalization to work," Mr. Patten said. A merger "would give us an expanded market."

Currently, Camden controls 53% of the market share in its home market of Knox County, leaving little room to expand.

FNB has "a much lower market share in its market, so we could see the potential opportunity there," Mr. Patten said.

Mr. Reilly said the bank is in negotiations because, "It's just a time when all banks are looking at how they operate and how they can best ensure the [growth] of the institutions as they go forward."

Camden reported earnings of $5.3 million in the first eight months of the year, which is 18% higher than last year's $4.4 million. The bank's return on assets is 2.10%, while return on equity is 20.03%.

The merger discussions follow a particularly bad year for FNB, when the bank discovered underwriting problems in almost $25 million worth of mortgages sold to the Federal Home Loan Mortgage Corp., or Freddie Mac, and the Federal National Mortgage Association, known as Fannie Mae.

About $22 million of the bad loans were sold to Freddie Mac, leading the corporation to cancel its contract with FNB even after the bank bought back the loans. The bank had sold as much as $60 million to the quasigovernmental agency by early 1993.

FNB retained its contract with Fannie Mae, which had only about $2.5 million of bad loans. The bank agreed to buy back the flawed credits.

Federal investigators have been looking into the underwriting problems since May 1992, but no action has been taken. The loan officers involved left the bank before the problems were discovered.

The problems also prompted the Office of the Comptroller of the Currency to examine the bank, leading to a formal agreement in August 1993.

The agreement required FNB to increase its liquidity and capital levels, review its accounting procedures, maintain a 6% capital ratio and seek written permission before authorizing any dividends.

The bank, which now has a capital ratio of 7.5%, has since shifted to doing the initial work at the bank, but having the final underwriting done by the Portfolio Assistance Corp. in New York.

"It allows you to handle the highs and lows without putting more people on staff," Mr. Reilly said. "We're in a low period [of demand] right now and it hasn't affected us as far as staffing goes."

FNB opted to keep all of the loans after fixing them, instead of selling them to Fannie. Most are now performing normally, Mr. Reilly said.

"We're pleased with the progress we've made ourselves with respect to the agreement and other problems at the bank," Mr. Reilly said.

"The bank is on a firm footing right now from a financial perspective and operationally."

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