Bar Harbor Bankshares - 10-K annual report

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 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. ___

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): YES: X   
NO: ___

As of June 30, 2004, the aggregate market value of the 3,044,738 shares of Common Stock of the Registrant issued and outstanding on such date, excluding the approximately 59,277 shares held by all directors and executive officers of the Registrant as a group (which does not include unexercised stock options), was $3,044,738. This figure is based on the last sale price of $26 per share of the Registrant’s Common Stock on June 30, 2004, as reported in The Wall Street Journal on July 1, 2004. Although directors of the Registrant and executive officers of the Registrant and its subsidiaries were assumed to be "affiliates" of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.

Number of shares of Common stock par value $2.00 outstanding as of March 7, 2005:   3,076,748

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated.

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held in 2005 are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

FORWARD-LOOKING STATEMENTS DISCLAIMER

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

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

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

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

ORGANIZATION

Bar Harbor Bankshares (the "Company") was incorporated January 19, 1984. As of March 7, 2005, the Company’s securities consisted of one class of common stock, par value of $2.00 per share, of which there were 3,076,748 shares outstanding held of record by approximately 1,051 shareholders. The Company has one, wholly owned, first tier operating subsidiary, Bar Harbor Bank & Trust (the "Bank"), a community bank, which offers a wide range of deposit, loan, and related banking products, as well as brokerage services provided through a third-party brokerage arrangement. In addition, the Company offers trust and investment management services through its second tier subsidiary, Bar Harbor Trust Services ("Trust Services"), a Maine chartered non-depository trust company. These products and services are offered to individuals, businesses, not-for-profit organizations and municipalities.

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 a Maine Financial Institution Holding Company for the purposes of the laws of the State of Maine, and as such is subject to the jurisdiction of the Superintendent (the "Superintendent") of the Maine Bureau of Financial Institutions ("BFI").

Bar Harbor Bank & Trust

The Bank, originally founded in 1887 and now a direct, wholly owned subsidiary of the Company, is a Maine financial institution, and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum extent permitted by law. The Bank is subject to the supervision, regulation, and examination of the FDIC and the BFI. It is not a member of the Federal Reserve Bank.

The Bank has eleven branch offices located throughout Down East and Mid Coast Maine, including its principal office located at 82 Main Street, Bar Harbor. The Bank’s offices are located in Hancock, Washington, and Knox Counties, representing the Bank’s principal market areas. The Hancock County offices, in addition to Bar Harbor, are located in Blue Hill, Deer Isle, Ellsworth, Northeast Harbor, Southwest Harbor, and Winter Harbor. The Washington County offices are located in Milbridge, Machias, and Lubec. The Knox County office, acquired in February 2004, is located in Rockland. The Bank delivers its operations and technology support services from its operations center located in Ellsworth, Maine.

The Bank is a retail bank serving individual and business customers, retail establishments and restaurants, seasonal lodging and campgrounds, and a large contingent of retirees. As a coastal bank, it serves the tourism, hospitality, lobstering, fishing, boat building and marine services industries. It also serves Maine’s wild blueberry industry through its Hancock and Washington County offices. The Bank operates in a competitive market that includes other community banks, savings institutions, credit unions, and branch offices of statewide and interstate bank holding companies located in the Bank’s market area. The Bank continues to be one of the larger independent commercial banks in the state of Maine.

The Bank has a broad deposit base and loss of any one depositor or closely aligned group of depositors would not have a materially adverse effect on its business. Historically, the banking business in the Bank’s market area has been seasonal, with lower deposits in the winter and spring, and higher deposits in the summer and fall. These seasonal swings have been fairly predictable and have not had a materially adverse impact on the Bank. Approximately 86% of the Bank’s deposits are in interest bearing accounts. The Bank has paid, and anticipates that it will continue to pay, competitive interest rates on all of the deposit account products it offers and does not anticipate any material loss of these deposits.

The Bank emphasizes personal service to the community, with a concentration on retail banking. Customers are primarily individuals and small businesses to which the Bank offers a wide variety of products and services.

Retail Products and Services: The Bank offers a variety of consumer financial products and services designed to satisfy the deposit and borrowing needs of its retail customers. The Bank’s retail deposit products and services include interest bearing checking accounts, money market accounts, savings accounts, club accounts, short-term and long-term certificates of deposit, and Individual Retirement Accounts. Credit products and services include home mortgages, residential construction loans, home equity loans and lines of credit, student loans, credit cards, installment loans, and overdraft protection. Overdraft protection is offered via a standby line of credit product. Secured and unsecured installment loans are provided for new or used automobiles, boats, recreational vehicles, mobile homes and other personal needs. The Bank also offers other customary products and services such as safe deposit box rental, wire transfers, check collection services, foreign currency exchange, money orders, Travelers Checks, and U.S. Savings Bonds.

The Bank staffs a customer service center, providing customers with telephone and e-mail responses to their questions and needs. Free bank-by-mail services are also offered.

Retail Brokerage Services: During 2004 the Bank retained Infinex Investments, Inc, ("Infinex") as a full service third-party broker-dealer, conducting business as Bar Harbor Financial Services. Bar Harbor Financial Services is a branch office of Infinex, an independent registered broker-dealer offering securities and insurance products that is not affiliated with the Company or its subsidiaries. These products are not deposits, are not insured by the FDIC or any other any government agency, are not guaranteed by the bank or any affiliate, and may be subject to investment risk, including possible loss of value.

Bar Harbor Financial Services principally serves the brokerage needs of individuals, from first-time purchasers, to sophisticated investors. It also offers a line of life insurance, annuity, and retirement products, as well as financial planning services. Infinex was formed by a group of member banks, and is currently the largest provider of third party investment and insurance services to banks and their customers in New England. Through Infinex, the Bank is able to take advantage of the expertise, capabilities, and experience of a well-established third-party broker-dealer in a cost effective manner.

Electronic Banking Services: The Bank continues to offer free, on-line real-time Internet banking services, including free check image and electronic bill payment, through its dedicated website at http://www.bhbt.com. Additionally, the Bank offers TeleDirect, an interactive voice response system through which customers can check account balances and activity, as well as initiate money transfers between their accounts. Automated Teller Machines (ATMs) are located at each of the eleven branch locations, as well as two machines in non-Bank locations. These ATM’s access major networks throughout the United States, including Plus, NYCE, and other major ATM and credit card companies. The Bank is also a member of Maine Cash Access, providing customers with surcharge-free access to over 150 ATM’s throughout the state of Maine. Visa debit cards are also offered, providing customers with free access to their deposit account balances at point of sale locations throughout most of the world.

Commercial Products and Services: The Bank serves the small business market throughout Down East and Mid Coast Maine. It offers business loans to individuals, partnerships, corporations, and other business entities for capital construction, real estate purchases, working capital, real estate development, and a broad range of other business purposes. Business loans are provided primarily to organizations and individuals in the tourist, hospitality, health care, blueberry, shipbuilding, and fishing industries, as well as to other small and mid-size businesses associated with coastal communities. Certain larger loans, which exceed the Bank’s lending limits, are written on a participation basis with correspondent banks, whereby the Bank retains only such portions of those loans that are within its lending limits and credit risk tolerances.

The Bank offers a variety of commercial deposit accounts, most notably business checking and tiered money market accounts. These accounts are typically used as operating accounts or short-term savings vehicles. The Bank’s cash management services provide business customers with short-term investment opportunities through a cash management sweep program, whereby excess operating funds over established thresholds are swept into overnight securities sold under agreements to repurchase. The Bank also offers Premier E-corp, an on-line real-time Internet banking service for businesses. This service allows business clients to view their account histories, print statements, view check images, order stop payments, transfer funds between accounts, transmit Automated Clearing House (ACH) files, and order both domestic and foreign wire transfers. Other commercial banking services include merchant credit card processing, night depository, and coin and currency handling.

Bar Harbor Trust Services

Bar Harbor Trust Services ("Trust Services") is a Maine chartered, non-depository trust company and a wholly owned subsidiary of the Bank. Trust Services provides a comprehensive array of trust and investment management services to individuals, businesses, not-for-profit organizations, and municipalities of varying asset size.

Trust Services serves as trustee of both living trusts and trusts under wills, including revocable and irrevocable, charitable remainder and testamentary trusts, and in this capacity holds, accounts for and manages financial assets, real estate and special assets. Custody, estate settlement, and fiduciary tax services, among others, are also offered. Additionally, Trust Services offers employee benefit trust services for which it acts as trustee, custodian, administrator and/or investment advisor, among other things, for employee benefit plans and for corporate, self employed, municipal and not-for-profit employers located throughout the Company’s market areas.

The staff includes credentialed investment and trust professionals with extensive experience. At December 31, 2004, Trust Services served 720 client accounts, with assets under management and held in custody amounting to $196 million and $25 million, respectively.

ECONOMY

Maine is a state of approximately 1.3 million people inhabiting a space that is roughly the size of the other five New England states combined. Maine’s economy has long been based on the bounty of its natural resources, namely: fishing, farming, forestry, and tourism. The very nature of these industries has meant that a significant portion of Maine’s employment opportunity is seasonal, and overall earnings lag behind national averages. Maine’s population growth can be described in three ways: its population is growing slowly, it is growing older and it is growing unevenly. Poverty rates are relatively high at 11.5%, but vary dramatically by region, ranging from 8.0% in York County to 20.9% in Washington County. The market place served by the Company is driven, in part, by the tourism and hospitality industries, which represent one in ten jobs in the state of Maine.

Despite Maine’s strong natural resource heritage and the independent nature of its people, Maine’s economic vitality has become dependant on regional and national activity. As Maine’s economy has transitioned from an agricultural and industrial foundation towards a service and information-based economy, it has become increasingly dependant on the global market place. As in other states, Maine’s economy is being shaped and propelled by several factors including its population dynamics, the changing composition of the job base, globalization, fiscal devolution and technology.

The Maine economy has shown slow but steady improvement in a number of key areas over the past year, including employment, income, investment and consumer sales. By mid-2004, Maine recovered all of the jobs lost during the most recent recession, well ahead of the nation and other New England states except for Rhode Island. The latest data for Maine’s gross state product and personal income growth were well above the national averages, helping to raise Maine’s per capita income ranking from 35^thto 30^th over this period. However, the Maine Consensus Economic Forecasting Commission (October 2004 forecast) calls for relatively slower growth in 2005, including annual growth in personal income of 4.0% and wage and salary employment of 1.7%.

According to a January 2005 joint report published by Maine Revenue Services, the State Planning Office and the Maine Department of Labor, a number of key economic indicators used to monitor the state of Maine economy remained positive during 2004. Among these:

• Personal income grew 5.4% for the first three quarters of the year versus the same period last year, slightly outperforming New England (5.3%) and the U.S. (5.2%).

• Maine’s seasonally adjusted unemployment rate stood at 4.5% in November 2004, having dropped from 5.1% a year earlier, and remained below the national rate of 5.4%. Payroll employment numbers showed the addition of almost five thousand net new jobs through November of 2004. The largest job gains came in health care and social assistance, retail trade, construction, and leisure and hospitality sectors. The manufacturing sector showed job losses during this period, continuing a long-term trend. Maine’s unemployment rate has been below the national average for the past 5 years, and over the 2000-2003 period, payroll employment grew while it declined in New England and the U.S.

• Wage disbursements increased 4.2% during the first two quarters of 2004 and were on a faster pace than the 3.5% increase during all of 2003. Annual average total wages paid in Maine showed exceptionally strong gains of 6.4% between 2001 and 2003 while comparable wage gains for the U.S. were reported at 2.8% and the New England region reported at 0.8%.

• Maine’s retail sales year-to-date growth through the third quarter of 2004 was 6.1% over the same period of last year. Growth in 2003 was 4.6%. Business operating sales, including business-to-business transactions, increased by 10% during the July to September 2004 quarter. Growth for the 2004 calendar year through September was 11% higher the same period last year.

• Residential construction awards were strong throughout 2004, with year-over-year growth in the August through October period up nearly 18% from the same period last year.

Changes in the economy are difficult to predict, and the foregoing discussion may or may not be indicative of whether the northern New England economy, including the state of Maine, and particularly Down East and Mid Coast Maine, is improving or will continue to strengthen. A downturn in the local economies that the Company serves, or adverse changes in the real estate markets could negatively impact the Company’s business, financial condition, and results of operations.

The Company competes principally in Down East and Mid Coast Maine, which can generally be characterized as rural areas. The Company considers its primary market areas to be in Hancock, Knox, and Washington counties, each in the state of Maine. According to the most recent Census Bureau Report (2003), the population of these three counties is 52,792, 40,406 and 33,479 respectively, representing a combined population of approximately 126,677. Their economies are based primarily on tourism, health care, fishing, aquaculture, agriculture, and small local businesses, but are also supported by a large contingent of retirees. Major competitors in these market areas include local independent banks, local branches of large regional bank affiliates, thrift institutions, savings and loan institutions, and credit unions. Other competitors in the Company’s primary market area include financing affiliates of consumer durable goods manufacturers, insurance companies, brokerage firms, investment advisors, and other non-bank financial service providers.

Like most financial institutions in the United States of America, the Company competes with an ever-increasing array of financial service providers. As the national economy moves further towards a concentration of service companies and the overall health of the financial services industry continues to be strong, competitive pressures will mount.

As a bank holding company and state-chartered commercial bank, respectively, the Company and the Bank are subject to extensive regulation and supervision, including, in many cases, regulation that limits the type and scope of their activities. The non-bank financial service providers that compete with the Company and the Bank may not be subject to such extensive regulation, supervision, and tax burden. Competition from nationwide banks, as well as local institutions, continues to be aggressive.

The financial services industry is undergoing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Further technological advances are likely to intensify competition by enabling more companies to provide financial resources. Accordingly, the Company’s future success will depend in part on its ability to address customer needs by using technology. There is no assurance that the Company will be able to develop new technology-driven products and services or be successful in marketing these products to our customers. Many of the Company’s competitors have far greater resources to invest in technology.

The Company has generally been able to compete effectively with other financial institutions by emphasizing quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers; however, no assurance can be given that the Bank will continue to be able to compete effectively with other financial institutions in the future.

No material part of the Company’s business is dependent upon one, or a few customers, or upon a particular industry segment, the loss of which would have a material adverse impact on the operations of the Company.

MANAGEMENT AND EMPLOYEES

The Company has two principal officers: Joseph M. Murphy, President and Chief Executive Officer, and Gerald Shencavitz, Senior Vice President, Chief Financial Officer and Treasurer.

Joseph M. Murphy also serves as President and Chief Executive Officer of the Bank. Gerald Shencavitz also serves as Chief Financial Officer, Chief Operating Officer and Treasurer of the Bank. Mr. Dean S. Read formerly served as President of the Bank through 2004, but has resigned that position effective as of February 25, 2005. Other senior operating positions in the Company include a President of Trust Services, and Senior Vice Presidents in charge of retail banking, commercial lending, credit administration / risk management, operations, and human resources.

As of December 31, 2004, the Bank employed 140 full-time equivalent employees, Trust Services employed 12 full-time equivalent employees, and the holding company employed 4 full-time employees, representing a full-time equivalent complement of 156

The Company maintains comprehensive employee benefit programs, which provide health, dental, long-term and short-term disability, and life insurance. All Company employees are eligible for participation in the Bar Harbor Bankshares 401(k) Plan. Certain officers and employees of the Company and its subsidiaries also participate in the Company’s 2000 Stock Option Plan and/or have incentive bonus compensation plans, deferred compensation arrangements, Supplemental Executive Retirement Agreements and change in control, confidentiality and noncompete agreements.

The Company’s management believes that employee relations are good.

SUPERVISION AND REGULATION

The business in which the Company and its subsidiaries are engaged is subject to extensive supervision, regulation, and examination by various federal and state bank regulatory agencies, including the FRB, the FDIC, and the Superintendent, as well as other governmental agencies in the states in which the Company and its subsidiaries operate. The supervision, regulation, and examination to which the Company and its subsidiaries are subject are intended primarily to protect depositors and other customers, or are aimed at carrying out broad public policy goals, and are not necessarily for the protection of the 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. The Company’s shareholders generally are not subject to these statutory and regulatory provisions.

Bank Holding Company Act - 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 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 there under, 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 of a BHC.

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. Unless a BHC becomes a "financial holding company" (an "FHC") under the Gramm-Leach-Bliley Act ("GLBA"), as discussed below, 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 requires approval by the Superintendent prior to acquisition of more than 5% of the voting shares of a Maine financial institution or any financial institution holding company that controls a Maine financial institution. The Superintendent also must approve acquisition by a Maine financial institution holding company of more than 5% of a financial institution or financial institution holding company domiciled outside of the state of Maine.

Federal Reserve Act - Various other laws and regulations, including Sections 23A and 23B of the Federal Reserve Act, as amended (the "FRA"), 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 market 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.

Financial Services Modernization - The Gramm-Leach-Bliley Act ("GLBA"), which significantly altered banking laws in the United States, was signed into law in 1999. GLBA enabled combinations among banks, securities firms and insurance companies beginning in 2000. As a result of GLBA, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies, were repealed. Under GLBA, bank holding companies are permitted to offer their customers virtually any type of service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency), and merchant banking.

The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit BHC’s that qualify and elect to be treated as financial holding companies to engage in a range of financial activities broader than would be permissible for traditional BHC’s that have not elected to be treated as FHC’s, such as the Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

In order to elect to become an FHC, a BHC must meet certain tests and file an election form with the FRB. To qualify, all of a BHC’s subsidiary banks must be well capitalized and well managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the BHC’s banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act evaluation.

A BHC that elects to be treated as an FHC may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. The Company has not elected to become an FHC.

 Further, GLBA permits state banks, to the extent permitted under state law, to engage in certain new activities that are permissible for subsidiaries of an FHC. GLBA expressly preserves the ability of state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a 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 a state nonmember bank may only conduct through a financial subsidiary activities that a national bank could only 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.

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 - - 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 banking.

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.

Until June 30, 2003, Maine law previously provided that a corporation’s board of directors could declare, and the corporation may pay, dividends on its outstanding shares in cash or other property, generally 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 limitations were repealed effective as of July 1, 2003. Under current Maine corporation law, the directors of a corporation may make distributions to its shareholders (subject to restriction by the articles of incorporation) if, (1) the corporation’s assets exceed its liabilities (plus any amounts payable to preferred classes of stock), and (2) the corporation is able to pay its debts as they become due in the usual course of business (i.e., it must not be insolvent). These new limitations generally apply to investor owned Maine financial institutions and financial institution holding companies.

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 Adequacy 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.

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 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 announced that the 3.0% leverage ratio requirement is the minimum for the 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.

At December 31, 2004, and at the time of this report, the Company’s risk-based capital ratio and leverage ratio were well in excess of regulatory requirements, and its management expects these ratios to remain in excess of regulatory requirements. Separate, but substantially similar, capital requirements under FDIC regulations apply to the Company’s bank subsidiary, and these also exceed regulatory requirements at December 31, 2004, and at the time of this report.

Failure to meet capital guidelines could subject the Company or the Bank to a variety of FDIC corrective actions, 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.

Information concerning the Company and its subsidiaries with respect to capital requirements is incorporated by reference from Part II, Item 7, section entitled "Capital Resources" and from Part II, Item 8, Notes to Consolidated Financial Statements, Note 13 "Shareholders’ Equity," each in this Annual Report on Form 10-K for the year ended December 31, 2004.

Activities and Investments of Insured State-Chartered Banks: FDIC insured, state-chartered banks, such as the Bank, are also subject to similar restrictions on their business and activities. Section 24 of the Federal Deposit Insurance Act ("FDIA"), generally limits the activities as principal and equity investments of FDIC insured, state-chartered banks to those activities 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.

Safety and Soundness Standards: The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), as amended, directs each federal banking agency to prescribe safety and soundness standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk, asset growth, compensation, asset quality, earnings, and stock valuation. The Community Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing federal banking agencies to publish guidelines rather than regulations covering safety and soundness.

Community Reinvestment: Pursuant to the Community Reinvestment Act ("CRA") and similar provisions of Maine law, regulatory authorities review the performance of the Company and the Bank in meeting the credit needs of the communities served by the Bank. The applicable regulatory authorities consider compliance with this law in connection with the applications for, among other things, approval for branches, branch relocations, and acquisitions of banks and bank holding companies. The Bank received a "satisfactory" rating at its most recent CRA examination, May 28, 2002.

Customer Information Security: The FDIC and other bank regulatory agencies have published 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 FDIC and other regulatory agencies have published 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.

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 U.S. financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The Patriot Act, together with the implementing regulations of various federal regulatory agencies, have caused financial institutions, including the Bank and Trust Services, to adopt and implement additional or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity and currency transaction reporting, customer identity verification and customer risk analysis. The statute and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions. It also 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 under the Bank Merger Act. Management believes the Company is in compliance with all of the requirements prescribed by the Patriot Act and all applicable final implementing regulations.

Deposit Insurance - 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 as the Company’s subsidiary bank, 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.

Securities Regulation: The common stock of the Company is registered with the U. S. Securities and Exchange Commission ("SEC") under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Act"). Accordingly, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Act.

Sarbanes-Oxley Act of 2002 – On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley act of 2002 ("S-O Act"), which generally establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies, and strengthen the independence of auditors. Among other things the S-O Act provides for:

1. The creation on an independent, public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review. The new board is funded with mandatory fees paid by all public companies. The new legislation also improves the Financial Accounting Standards Board, giving it full financial independence from the accounting industry.
2. The strengthening of auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer public company audit clients.
3. A heightened responsibility of public company directors and senior managers for the quality of the financial reporting and disclosures made by their companies. Among other things, the new legislation provides for a strong public company audit committee that will be directly responsible for the appointment, compensation, and oversight of the work performed by the public company auditors.
4. Provisions which will deter wrongdoing. CEO’s and CFO’s now have to certify that company financial statements fairly represent the company’s financial condition. If a misleading financial statement later results in a restatement, the CEO and CFO must forfeit and return to the company any bonus, stock or stock option compensation received in the twelve months following the misleading financial report. The new legislation also prohibits any company officer or director from attempting to mislead or coerce an auditor. Among other reforms, the new legislation empowers the SEC to bar certain persons from serving as officers or directors of a public company; prohibits insider trades during pension fund "blackout periods"; directs the SEC to adopt rules requiring attorneys to report securities law violations; and requires that civil penalties imposed by the SEC go into a disgorgement fund to benefit harmed investors.
5. Requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the Company.
6. A prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, such as the Bank, on non-preferential terms and in compliance with other bank regulatory requirements;
7. The imposition of a broad range of new corporate disclosure requirements. Among other things, the new legislation requires public companies to report all off balance sheet transactions and conflicts, as well as to present any pro forma disclosures in a way that is not misleading and in accordance with requirements established by the SEC. The new legislation also accelerated the required reporting of insider transactions, which now generally must be reported by the end of the second business day following a covered transaction; requires that annual reports filed with the SEC include a statement by management asserting that they are responsible for creating and maintaining adequate internal controls and assessing the effectiveness of those controls; and requires companies to disclose whether or not they have adopted an ethics code for senior financial officers, and, if not, why not, and whether the audit committee includes at least one "financial expert", a term which has been defined by the SEC in accordance with specified requirements. The new legislation also requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.

Other Proposals - Other legislative and regulatory proposals regarding changes in banking, and the regulation of banks and other financial institutions, are regularly considered by the executive branch of the federal government, Congress and various state governments, including Maine and state and federal regulatory authorities. It cannot be predicted what additional legislative and/or regulatory proposals, if any, will be considered in the future, whether any such proposals will be adopted or, if adopted, how any such proposals would affect the Company or the Bank.

Taxation: The Company is subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code. The Company is also subject to state taxation under the laws of the State of Maine.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The information required under this item included in the Company's financial statements, which appear in Part II, Item 8 of this Annual Report on Form 10-K, and is incorporated herein by reference.

ITEM 2. PROPERTIES

The thirteen parcels of real estate owned and utilized by the Company for its operations are described below:

1. The principal office of the Bank is located at 82 Main Street, Bar Harbor, Maine, and includes a building, which houses its banking facilities and administrative offices, and an adjacent 35-car customer parking lot. The building was renovated in 1998.

2. An office is located at 111 Main Street, Northeast Harbor, Maine. This property consists of a building constructed in 1974 that underwent interior renovations in 1998 to better meet the Bank’s needs at that location.

3. An office is located at 314 Main Street, Southwest Harbor, Maine. This property consists of a building constructed in 1975, along with a parcel of land adjacent to the branch. The branch office was added to, and renovated in 1989, to better meet the needs at that location.

4. An office is located on 25 Church Street, Deer Isle, Maine. This property consists of a building constructed in 1974 that was added to and renovated in 1994 to better meet the needs at that location.

5. An office is located at 21 Main Street, Blue Hill, Maine. This property consists of a building constructed in 1960 that underwent renovations in 1989 to better meet the needs at that location. A parcel of land adjacent to the Blue Hill branch was purchased in 1981, but has not been developed. A second improved parcel of land contiguous to this branch was purchased in 2005. The Bank is currently evaluating expansion at its Blue Hill location.

6. An office is located at 2 Bridge Street, Milbridge, Maine. This property consists of a building constructed in 1974, to which a vestibule was added in 1994, to house an ATM that helps to better meet the needs at that location.

7. An office is located at 68 Washington Street, Lubec, Maine. This property consists of a building constructed in 1990 and is adequate for the Bank’s needs at that location.

8. An office is located 137 High Street, Ellsworth, Maine. This property consists of a building constructed in 1982. The Bank is currently evaluating expansion of the Ellsworth office.

9. An office is located at 385 Main Street, Winter Harbor, Maine. This property consists of a building constructed in 1995 and is adequate for the Bank’s needs at that location.

10. An office is located at 20 Main Street, Machias, Maine. This property consists of a building that was purchased from Key Bank of Maine in May 1990, and was renovated in 1995 to better meet the Bank’s needs at that location.

11. An office is located at 245 Camden St (Route 1), Rockland, Maine. The property consists of a building that was purchased from Androscoggin Savings Bank in February 2004. The branch facility was built in 1977 and is adequate for the Bank’s needs at that location.

12. An Operations Center is located in Ellsworth, Maine, that houses the Company’s operations and data centers. The building was constructed in 1996 and is currently adequate for the Company’s needs.

13. The Company owns and occupies a 22,000-square-foot office building at 135 High Street, Ellsworth, Maine. The Bank and its wholly owned subsidiary, Trust Services, occupy this facility. The facility was renovated in 2001.

Other real estate includes two out parcels (one improved) contiguous to the Company’s 135 High Street, Ellsworth location.

The Company believes that its offices are sufficient for its present operations. Additional information relating to the Company’s properties is provided in Item 8, Note 7 of the Consolidated Financial Statements contained in this Annual Report on Form 10-K and incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses, which in the opinion of Management will have no material effect on the Company's consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company’s security holders in the fourth quarter of 2004.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of the Company is traded on the American Stock Exchange ("AMEX") under the trading symbol BHB. Quarterly stock prices, and dividends paid during the last two years are summarized below. High and low stock prices are based on quotations provided by the American Stock Exchange.

QUARTERLY STOCK PRICES
2004 AND 2003

High and low stock prices are based on quotations provided by the American Stock Exchange. Prices of transactions between private parties may vary from the ranges quoted above.

DIVIDENDS PAID TO SHAREHOLDERS
2004 AND 2003

Dividends paid by the Company in 2004 and 2003:

As of March 7, 2005, the Company had 1,051 registered shareholders of record. The Company declared and distributed dividends totaling $0.80 per share during 2004, representing an earnings payout ratio of 43.2%. In the first quarter of 2005 the Company increased its quarterly dividend by 5.0% to $0.21 per common share. The dividend was paid March 15, 2005 to shareholders of record as of the close of business on February 18, 2005.

The Company has a history of paying quarterly dividends on its common stock. However, the Company’s ability to pay such dividends depends on a number of factors, including the Company’s financial condition, earnings, its needs for funds and restrictions on the Company’s ability to pay dividends under federal laws and regulations. Therefore, there can be no assurance that dividends on the Company’s common stock will be paid in the future.

Stock Repurchase Plan

As more fully enumerated under Item 7 of this report on Form 10-K, in November 1999 the Company announced a stock repurchase plan, authorizing open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 344,000 shares. As of the date of termination of this plan on December 31, 2003, the Company had repurchased 339,814 shares of stock under the plan, at a total cost of $6,151 and an average price of $18.10 per share. The Company recorded repurchased shares as treasury stock.

In March 2004, the Company announced a second stock repurchase plan, authorizing open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 310,000 shares. Purchases began on March 4, 2004 and will continue through December 31, 2005. As of December 31, 2004, the Company had repurchased 49,920 shares of stock under the plan, at a total cost of $1,349 and an average price of $27.03 per share. The Company records repurchased shares as treasury stock.

The following table sets forth information with respect to any purchase made by or on behalf of the Company or any "affiliated purchaser," as defined in Sec. 240.10b-18(a)(3) under the Exchange Act, of shares of the Company’s common stock during the periods indicated:

(1)  In February 2004, the Company’s Board of Directors approved a program to repurchase up to 10% of the Company’s outstanding shares of common stock,
       or approximately 310,000 shares. Purchases began March 4, 2004. This repurchase program is scheduled to terminate December 31, 2005, unless otherwise
       extended by the Company.

Incentive Stock Option Plan

On October 3, 2000, the shareholders of the Company approved the Bar Harbor Bankshares and its Subsidiaries Incentive Stock Option Plan of 2000 that is described more fully in Notes 1 and 14 to the Consolidated Financial Statements in this Annual Report on Form 10-K.

The following table provides information as of December 31, 2004 with respect to the shares of Common Stock that may be issued under the Company's Incentive Stock Option Plan.

American Stock Transfer & Trust Company provides transfer agent services for the Company. Inquiries may be directed to: American Stock Transfer & Trust Company, 6201 15^th Avenue, 3^rd Floor, Brooklyn, NY, 11219, telephone: 1-800-937-5449, Internet address: http://www.amstock.com.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The supplementary financial data presented in the following tables contain information highlighting certain significant trends in the Company’s financial condition and results of operations over an extended period of time.

The following information should be analyzed in conjunction with Item 7 - - Management’s Discussion and Analysis of Financial Condition and Results of Operations, and with the audited consolidated financial statements included in this Annual Report on Form 10-K.

FIVE YEAR SUMMARY OF FINANCIAL DATA
At or For the Years Ended December 31,
(Dollars in thousands, except per share data):

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations of the Company and its subsidiaries for the years ended December 31, 2004, 2003 and 2002 should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this Annual Report on Form 10-K. The purpose of this discussion is to highlight significant changes in the financial condition and results of operations of the Company and its subsidiaries during the past three years, and provide supplemental information and analysis.

Certain amounts in the 2003 and prior years financial statements have been reclassified to conform to the presentation used in 2004.

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

Use of Non-GAAP Financial Measures: Certain information discussed below is presented on a fully taxable equivalent basis. Specifically, included in 2004, 2003 and 2002 net interest income was $1,653, $1,602 and $1,488 of tax-exempt interest income from certain tax-exempt investment securities and loans.

An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income and net interest income totals discussed in this Management’s Discussion and Analysis, resulting in tax equivalent adjustments of $721, $684 and $613, in 2004, 2003 and 2002, respectively. The analysis of net interest income tables included in this Annual Report on Form 10-K provide a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices.

EXECUTIVE OVERVIEW

General Information

Bar Harbor Bankshares is a Maine corporation and a registered bank holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2004 the Company had consolidated assets of $667 million and was one of the larger independent community banking institutions in Maine.

The Company’s principal asset is all of the capital stock of the Bar Harbor Bank & Trust (the "Bank"), a community bank incorporated in the late 19^th century. With eleven branch office locations, the Company is a diversified financial services provider, offering a full range of banking services and products to individuals, businesses, governments, and not-for-profit organizations throughout Down East and Mid Coast Maine.

The Company attracts deposits from the general public in the markets it serves and uses such deposits and other sources of funds to originate commercial business loans, commercial real estate loans, residential mortgage and home equity loans, and a variety of consumer loans. The Company also invests in mortgage-backed securities, obligations of state and political subdivisions, as well as other securities. In addition to community banking, the Company provides a comprehensive array of trust and investment management services through its second tier subsidiary, Bar Harbor Trust Services ("Trust Services") a Maine chartered non-depository trust Company.

Major Sources of Revenue

The principal source of the Company’s revenue is net interest income generated, representing the difference or spread between interest income from its earning assets and the interest expense paid on deposits and borrowed funds. In addition to net interest income, non-interest income is a significant source of revenue for the Company and an important factor in its results of operations. The Company’s non-interest income is principally derived from financial services including trust, investment management and third-party brokerage services, as well as service charges on deposit accounts, merchant credit card processing fees,  gains and losses on the sale of investment securities, and a variety of other miscellaneous product and service fees.

Business Strategy

The Company, as a diversified financial services provider, pursues a strategy of achieving long-term sustainable growth, profitability, and shareholder value, without sacrificing its soundness. The Company works toward achieving this goal by focusing on increasing its loan and deposit market share in the coastal communities of Maine, either organically or by way of strategic acquisitions. The Company believes one of its more unique strengths is an understanding of the financial needs of coastal communities and the businesses vital to Maine’s coastal economy, namely: tourism, hospitality, retail establishments and restaurants, seasonal lodging and campgrounds, fishing, lobstering, boat building, and marine services. Consistent with this strategy, in February 2004 the Company expanded into Knox County, Maine, with the Bank’s acquisition of an existing branch banking office in the vibrant community of Rockland.

The Company’s key strategic focus is vigorous financial stewardship, deploying investor capital safely yet efficiently for the highest possible returns. The Company strives to provide unmatched service to its customers, while maintaining strong asset quality and a focus towards improving operating efficiencies. In managing its earning asset portfolios, the Company seeks to utilize funding and capital resources within well-defined credit, investment, interest-rate and liquidity guidelines. In managing its balance sheet the Company seeks to preserve the sensitivity of net interest income to changes in interest rates, and to enhance profitability through strategies that promise sufficient reward for understood and controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity, under prevailing and expected conditions, and strives to maintain a balanced and appropriate mix of loans, core deposits, and borrowed funds.

Material Risks and Challenges

In its normal course of its business, the Company faces many risks inherent with providing banking and financial services. Among the more significant risks managed by the Company are losses arising from loans not being repaid, commonly referred to as "credit risk", and losses of income arising from movements in interest rates, commonly referred to as "interest rate and market risk". The Company is also exposed to national and local economic conditions, downturns in the economy, or adverse changes in real estate markets, which could negatively impact its financial condition and results of operations.

Management has numerous policies and control processes in place which provide for the monitoring and mitigation of risks based upon and driven by a variety of assumptions and actions, which if were changed or altered, could impact the Company’s financial condition and results of operations. The foregoing matters are more fully discussed throughout this Annual Report on Form 10-K.

Summary Financial Condition

The Company’s total assets increased 14% during 2004, ending the year at $667 million. Asset growth continued to be driven by consumer and commercial lending activities.

Summary Results of Operations

Net income for the year ended December 31, 2004 amounted to $5.7 million, or fully diluted earnings per share of $1.79, compared with $5.2 million or fully diluted earnings per share of $1.63 for the year ended December 31, 2003, each representing an increase of 10%.

The Company’s return on average equity ("ROE") amounted to 10.58% during 2004, compared with 9.66% during 2003.

• Non-interest Income:
Non-interest income for the year ended December 31, 2004 amounted to $6.6 million, representing a decrease of $502 thousand or 7% compared with 2003. The decline in non-interest income was principally attributed to a reduced level of net gains on the sale of investment securities, which amounted to $497 thousand during 2004 compared with $1.3 million during 2003. Income from trust and financial services declined 12% to $1.9 million during 2004 compared with 2003, reflecting declines in average managed assets and revenue from third-party brokerage activities. Included in 2004 non-interest income was $404 thousand in income from interest rate swap agreements, of which $375 thousand represented net cash flows received from counterparties. In 2004, these interest rate swap agreements were de-designated as cash flow hedges and the cash flows received from counterparties were recorded as non-interest income, whereas in 2003 these cash flows were recorded as interest income. In September 2004, the interest rate swap agreements were re-designated as cash flow hedges and, prospectively, the net cash flows received from counterparties are being recorded as interest income. Service charges on deposit accounts declined $46 thousand or 3% during 2004, while credit card and merchant processing fees increased $73 thousand or 5%.

• Non-interest Expense:
Non-interest expense for the year ended December 31, 2004 amounted to $18.9 million, representing an increase of $61 thousand, or less than 1%, compared with 2003. A variety of factors contributed to 2004 non-interest expense year-over-year results. Included in 2004 non-interest expense were costs associated with the Company’s corporate re-branding initiative, other-than-temporary impairment write-downs of certain non-marketable equity investments, and costs related to integration activities associated with the Rockland branch acquisition. Non-interest expenses also included costs related to the Company’s compliance with the sweeping changes in U.S. securities laws enacted under the Sarbanes-Oxley Act of 2002, particularly Section 404, which establishes extensive new requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting. The Company’s success in containing the increase in 2004 non-interest expense at less than 1% was attributed in part to a variety of previously reported expenses incurred during 2003 related to organizational restructuring activities in the Company’s financial services division, certain legal settlements, and adjustments to the workforce. Salaries and employee benefits declined $148 thousand to $9.3 million during 2004, reflecting current and prior year changes to staffing levels and compensation mix.

Other 2004 Financial Highlights

• Cash Dividends:
In the first quarter of 2004 the Company increased its quarterly dividend by 5.3%, to 20 cents per share. In the first quarter of 2005 the dividend was increased by 5.0%, to 21 cents per share.

• Branch Acquisition
: In February 2004, the Bank completed its acquisition of a branch office in the community of Rockland, Maine. This transaction included approximately $21 million in deposits and $12 million in loans.

Outlook

The challenges facing the Company as we entered 2005 were similar to those identified in the prior year, namely: loan and deposit growth, credit quality, interest rate risk, and risk management processes. In addition to these challenges, the Company must grow revenues and control expenses while managing an increasing regulatory burden. These are challenges the Company has met for many years while serving the citizens and businesses in the markets it serves, and the Company expects similar results over the next twelve months.

The year 2004 brought the banking world much volatility and uncertainty. Short-term interest rates increased with the Fed tightening five times, while the 10-year Treasury fluctuated between 3.65% and 4.95%, ending the year at 4.30%. While short-term interest rates were increasing during the second half of the year, the opposite was true for longer term rates, causing a dramatic flattening of the U.S. Treasury yield curve as we ended 2004. As we head into 2005, growth in net interest income will depend on many factors including: how quickly, and by how much, the Federal Reserve will continue to tighten and the effect on the rest of the yield curve; whether the economy will continue on the road to recovery and at what pace; and the impact of a potentially inverted yield curve on the net interest margin. The current and projected shape of the yield curve will be key factors driving the Company’s net interest income in 2005, and continued earning asset growth will likely be necessary in generating meaningful increases. Though these developments have not had a materially adverse affect on the Company to date, the Company continues to monitor them closely and believes it is adequately positioned for a variety of future interest rate scenarios.

Reflecting trends in the National and Regional economies, the Company’s market area generally witnessed steady economic growth during 2004. As we head into 2005, the economies and real estate markets in the Company’s primary market areas will continue to be significant determinants of the quality of the Company’s assets in future periods and, thus, its results of operations, liquidity, and financial condition. The Company believes future economic activity will in part depend on stronger employment, consumer confidence, personal consumption expenditures, and business expenditures for new capital equipment.

Other factors, which could affect the Company’s financial performance and that of its common stock, are more fully enumerated in the "Forward-Looking Statements" discussion at the beginning of this Annual Report on Form 10-K.

APPLICATION OF 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 U.S. generally accepted accounting principles. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management evaluates its estimates, including those related to the allowance for loan losses, on an ongoing basis. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management’s estimates and assumptions under different assumptions or conditions.

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

Allowance for Loan Losses - Management believes the allowance for loan losses ("allowance") is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The allowance, which is established through a provision for loan loss expense, is based on management’s evaluation of the level of allowance required in relation to the estimated inherent risk of loss in the loan portfolio. Management regularly evaluates the allowance for loan losses for adequacy by taking into consideration factors such as previous loss experience, the size and composition of the portfolio, current economic and real estate market conditions and the performance of individual loans in relation to contract terms and estimated fair values of collateral. The use of different estimates or assumptions could produce different provisions for loan losses. A smaller provision for loan losses results in higher net income and when larger provisions for loan losses are necessary, the result is lower net income. Refer to Part II, Item 7, Allowance for Loan Losses and Provision,in this Annual Report on Form 10-K, for further discussion and analysis concerning the allowance.

Income Taxes – The Company estimates its income taxes for each period for which a statement of income is presented. This involves estimating the Company’s actual current tax liability, as well as assessing temporary differences resulting from differing timing of recognition of expenses, income and tax credits, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from historical taxes paid and future taxable income and, to the extent that the recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of December 31, 2004 and 2003, there was no valuation allowance for deferred tax assets, which are included in other assets on the consolidated balance sheet.

Interest Income Recognition on Loans - Interest income on loans is included in income as earned based upon the unpaid principal balance of the loan. The Company’s policy is to discontinue the accrual of interest, and to reverse any uncollected interest recorded on loans, when scheduled payments become contractually past due in excess of 90 days or, in the judgment of management, the ultimate collectibility of principal or interest becomes doubtful.

Goodwill and Other Intangible Assets - The valuation technique used by the Company to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based upon changes in economic conditions and other factors.  Any changes in the estimates used by the Company to determine the carrying value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, would adversely affect the Company's results of operations. Refer to Notes 1 and 8 of the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for further details of the Company’s accounting policies and estimates covering goodwill and other intangible assets.

FINANCIAL CONDITION

Asset / Liability Management

In managing its asset portfolios, the Bank utilizes funding and capital resources within well-defined credit, investment, interest rate, and liquidity risk guidelines. Loans and investment securities are the Bank’s primary earning assets with additional capacity invested in money market instruments. Average earning assets represented 94.7% and 94.3% of total average assets during 2004 and 2003, respectively.

The Company, through its management of liabilities, attempts to provide stable and flexible sources of funding within established liquidity and interest rate risk guidelines. This is accomplished through core deposit products offered within the markets served, as well as through the prudent use of borrowed funds.

The Company’s objectives in managing its balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promise sufficient reward for understood and controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity, under prevailing and forecasted economic conditions, and to maintain an efficient and appropriate mix of core deposits and borrowed funds.

The tax-equivalent yield on total average earning assets amounted to 5.33% in 2004, compared with 5.90% in the prior year, representing a decline of 57 basis points. The decline in earning asset yields was principally attributed to the continuation of historically low interest rates, particularly during the first six months of 2004 when the federal funds targeted rate stood at 1.00%, representing a forty-five year low. Long-term interest rates also continued at historically low levels during 2004, with the 10-year U.S. Treasury note yielding below 4.40% for the most of the year, declining to as low as 3.68%, and ending the year at 4.22%. The Bank’s earning asset yields began to strengthen during the second half of 2004 as the Federal Reserve increased the federal funds rate five times, ending the year at 2.25% and favorably impacting the yields on the Bank’s variable rate earning assets.

Total interest earned during 2004 amounted to $32,643 compared with $31,177 in 2003, representing an increase of $1,466 or 4.7%, all of which was attributed to earning asset growth.

Total Assets

The Company’s assets principally consist of loans and investment securities, which at December 31, 2004 represented 66.5% and 26.4% of total assets, respectively.

At December 31, 2004 the Company’s total assets stood at $666,811, representing an increase of $83,065, or 14.2%, compared with December 31, 2003. The increase in total assets was principally attributed to loan growth of $65,070 or 17.0%, followed by growth in investment securities amounting to $17,950, or 11.3%.

Loans

The loan portfolio is primarily secured by real estate in the counties of Hancock, Washington and Knox, Maine. The following table summarizes the components of the Bank’s loan portfolio, net of loan origination fees and costs, as of December 31^stover the past five years.

SUMMARY OF LOAN PORTFOLIO AT DECEMBER 31

Total Loans: At December 31, 2004 total loans amounted to $448,478, compared with $383,408 at December 31, 2003, representing an increase of $65,070, or 17.0%. Commercial loans contributed 54.6% to this growth; consumer loans contributed 48.0% offset in part by a decline of 2.6% in tax-exempt loans to municipalities.

The 2004 increase in total loans reflects $12,343 in loans acquired in connection with the Bank’s acquisition of a branch office in the community of Rockland, Maine, principally consumer real estate loans. Excluding the acquired Rockland branch loan portfolio, 2004 loan growth amounted to $52,727, or 13.8%.

At December 31, 2004 total consumer loans amounted to $282,413, representing an increase of $31,244 or 12.4%, compared with December 31, 2003.

At December 31, 2004 total commercial loans amounted to $163,433, representing an increase of $35,532 or 27.8% compared with December 31, 2003. The 2004 growth in commercial loans represented a five year high, attributed in part to a stable local economy, a still-favorable market interest rate environment, and initiatives designed to strengthen the Bank’s commercial loan origination activities. Commercial loan originations were particularly strong in Knox County, a new market area forged in 2004, by way of the Bank’s acquisition of a branch office in the community of Rockland, Maine.

In April of 2004, the Bank opened a loan production office in Bangor, Maine, augmenting the Company’s long-standing Trust and Financial Services presence in this major market area. During 2004, the Bangor loan production office generated significant new commercial relationships, which benefited from a strong, locally based commercial lender. The Bank anticipates continued loan growth in this market area.

At December 31, 2004, consumer and commercial real estate loans comprised 85.7% of the loan portfolio, compared with 87.4% at December 31, 2003. The continued strength in the local real estate markets, both residential and commercial, has led to historically high property values in the Bank’s market area. Recognizing the impact this trend may have on the loan portfolio and origination pipeline, the Bank periodically reviews its underwriting standards in an effort to ensure that the quality of the loan portfolio is not jeopardized by unrealistic loan to value ratios or debt service levels. To date, there has been no significant deterioration in the performance or risk characteristics of the real estate loan portfolio.

Construction and Development Loans: Construction and development loans are both consumer and commercial in nature and represented 4.8% of total loans at December 31, 2004, compared with 3.3% at December 31, 2003.

Total construction and development loans amounted to $21,339 at December 31, 2004 compared with $12,639 at December 31, 2003, representing an increase of $8,700, or 68.8%. The increase in these types of  loans was attributed in part to a higher level of commercial construction loan activity at the close of 2004. Construction and development loans generally migrate from construction status to completed projects with permanent financing arrangements within one year.

Mortgage Loans: Mortgage loans, which include consumer real estate, home equity and commercial, accounted for 81.0% of total loans at December 31, 2004, compared with 84.1% at December 31, 2003.

At December 31, 2004, total mortgage loans amounted to $363,179, compared with $322,579 at December 31, 2003, representing an increase of $40,600, or 12.6%. The increase in mortgage loans was principally attributed to strong commercial real estate loan originations, loans acquired in connection with the Rockland branch office acquisition, and continued demand for real estate in the communities served by the Bank.

Loans to Finance Agricultural Production and Other Loans to Farmers: Agricultural loans amounted to $15,077 at December 31, 2004 compared with $11,719 at December 31, 2003, representing an increase of $3,358 or 28.7%. This category of loans represented 3.4% of the loan portfolio at December 31, 2004, compared with 3.1% at the same date in 2003. The communities served by the Bank present limited opportunities for lending in this industry sector.

Commercial and Industrial Loans: Commercial and industrial loans represented 7.9% of the loan portfolio at December 31, 2004, compared with 5.0% at December 31, 2003. Included in this category of loans are certain loans related to the Maine’s wild blueberry industry. The Bank’s market area demographics have historically limited the growth potential in this particular category of loans. During 2004 this trend did not continue. At December 31, 2004, commercial and industrial loans totaled $35,574, compared with $19,167 at the same date in 2003, representing an increase of $16,407, or 85.6%.

Loans to Individuals for Household, Family and Other Personal Expenditures: Personal consumer loans, including credit card loans and student loans, totaled $11,156 at December 31, 2004 compared with $11,775 at December 31, 2003, representing a year-over-year decline of $619, or 5.3%. This category of loans represented 2.5% of the portfolio at December 31, 2004, compared with 3.1% at December 31, 2003.

Given strong competition from the financing affiliates of consumer durable goods manufacturers, among other considerations, the Bank has not campaigned aggressively for consumer installment loans over the past few years.

The Bank continues to be one of relatively few community banks with its own credit card loan portfolio, as large credit card processing companies continue to acquire credit card portfolios and associated sources of non-interest income from smaller organizations, particularly community banks.

All Other Loans: All other loans represented 0.5% of the loan portfolio at December 31, 2004 compared with 1.2% in 2002. The balance of all other loans at December 31, 2004 totaled $2,153 compared with $4,554 at December 31, 2003, representing a decrease of $2,401, or 52.7%.

This category of loans principally includes loans to government municipalities and, to a lesser extent, not-for-profit organizations. Government municipality loans typically have short maturities and low interest rate risk characteristics. Government municipality loans are typically available through a bid process among local financial institutions and are aggressively priced, thus generating narrow net interest income margins.

Real Estate Loans Under Foreclosure: At December 31, 2004, real estate loans under foreclosure totaled $477 compared with $975 at December 31, 2003, representing a decline of $498, or 51.1%. At December 31, 2004 real estate loans under foreclosure were represented by six consumer mortgage loans totaling $420 and one commercial mortgage loan totaling $57. At December 31, 2003, real estate loans under foreclosure were represented by six commercial mortgage loans amounting to $544

Loan Concentrations: Loan concentrations continued to reflect the Bank’s business region. At December 31, 2004, approximately 6.8% or $30,535 of the loan portfolio was represented by loans to the hospitality industry, compared with 8.3% or $31,493 at December 31, 2003.  At December 31, 2004 loans related to Maine’s wild blueberry industry amounted to approximately $4,676 or 1.0% of total loans compared with $7,116, or 1.9% at December 31, 2003.

Other Real Estate Owned: When the Bank takes ownership of collateral property upon foreclosure of a real estate secured loan, the property is transferred from the loan portfolio to Other Real Estate Owned ("OREO") at its fair value. If the loan balance is higher than the fair value of the property, the difference is charged to the allowance for loan losses at the time of the transfer. Other Real Estate Owned is classified on the balance sheet with Other Assets. At December 31, 2004 there was no other real estate owned compared with $34 at December 31, 2003. One residential property comprised the December 31, 2003 balance and this property was sold during 2004.

Mortgage Loan Servicing: The Bank from time to time will sell mortgage loans to other institutions, and investors. The sale of loans allows the Bank to make more funds available to customers in its servicing area, while the retention of servicing rights provides an additional source of income. At December 31, 2004, the unpaid balance of mortgage loans serviced for others totaled $9,935 compared with $12,334 at December 31, 2003, representing a decrease of $2,399, or 19.5%. The decline in 2004 balances was attributed to serviced mortgage loan principal payments, as well as prepayments resulting from loan refinancing activity. Pursuant to the Bank’s asset and liability management strategy, its need for interest earning assets, and its strong capital position, loans originated during 2004 were almost entirely held in the Bank’s loan portfolio.

Loan Maturities and Re-pricing Distribution: The following table shows fixed rate loans reported by remaining maturity, and floating rate loans by next re-pricing date, as of December 31, 2004, and 2003. Actual maturity dates may differ from contractual maturity dates due to prepayments or loan re-financings.

Loan Portfolio Composition: The following table summarizes the fixed and variable rate composition of the loan portfolio as of December 31, 2004 and 2003:

Non-performing Loans: Non-performing loans ("NPLs") include loans on non-accrual status, loans that have been treated as troubled debt restructurings, and loans past due 90 days or more and still accruing interest. There were no troubled debt restructurings in the loan portfolio during the last five years.

The following table sets forth the details of non-performing loans over the last five years.

TOTAL NON-PERFORMING LOANS
AT DECEMBER 31

At December 31, 2004, total non-performing loans amounted to $723 compared with $1,494 as of December 31, 2003, representing a decline of $771, or 51.6%. At December 31, 2004 non-performing loans represented 0.16% of total loans compared with 0.39% at December 31, 2003.

During 2004, the Bank maintained its non-performing loans at significantly lower levels compared with prior years. The Bank attributes this success to a continued strengthening of its credit administration processes and underwriting standards, aided by a stable local economy and a still favorable interest rate environment. The Bank maintains a centralized loan collection and managed asset department, providing timely and effective collection efforts for problem loans.

While the non-performing loan ratios continued to reflect the favorable quality of the loan portfolio during the year ended December 31, 2004, the Bank is cognizant of soft economic conditions overall, and is managing credit risk accordingly. Future levels of non-performing loans may be influenced by economic conditions, including the impact of those conditions on the Bank's customers, interest rates, and other factors existing at the time. Management believes the economic activity and conditions in the local real estate markets will continue to be significant determinants of the quality of the loan portfolio in future periods and, thus, the Company’s results of operations and financial condition.

Allowance for Loan Losses: At December 31, 2004 the allowance for loan losses ("allowance") stood at $4,829, compared with $5,278 at December 31, 2003, representing a decrease of $449, or 8.5%.

The allowance is available to absorb losses on loans. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated quarterly based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration. The Bank’s Board of Directors reviews the evaluation of the allowance to ensure its adequacy.

The allowance is maintained at a level that, in management’s judgment, is appropriate for the amount of risk inherent in the current loan portfolio, and adequate to provide for estimated losses. Reserves are established for specific loans including impaired loans, a pool of reserves based on historical charge-offs by loan types, and supplemental reserves that adjust historical loss experience to reflect current economic conditions, industry specific risks, and other observable data.

Loan loss provisions are recorded based upon overall aggregate data, and the allowance is increased when, on an aggregate basis, additional estimated losses are identified and deemed likely. No portion of the allowance is restricted to any loan or group of loans, and the entire allowance is available to absorb realized losses. The amount and timing of realized losses and future allowance allocations could vary from current estimates.

While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance, which also may necessitate future additions or reductions to the allowance, based on information available to them at the time of their examination.

The following table details changes in the allowance for loan losses and summarizes loan loss experience by loan type over the past five years.

ALLOWANCE FOR LOAN LOSSES
SUMMARY OF LOAN LOSS EXPERIENCE

The Bank's loan loss experience showed an increase during 2004 compared with  2003 experience. Net charge-offs during 2004 amounted to $629, representing an increase of $392 compared with 2003. The increase in net charge-offs was principally attributed to two relationships amounting to $506, and these were adequately provided for in the Bank’s previously recorded allowance.

Expressed as a percentage of total average loans outstanding, 2004 net charge-offs amounted to 0.15%, compared with 0.06% in 2003.

The following table presents the five-year summary of the allowance   by loan type at each respective year-end.

At December 31, 2004, the loan loss adequacy analysis resulted in a need for specific reserves of $3,579, general reserves of $982, impaired reserves of $14 and other reserves of $254. Specific reserves are determined by way of individual review of commercial loan relationships in excess of $250, combined with reserves calculated against total outstandings by category using the Bank’s historical loss experience and other observable data.

General reserves account for the risk and estimated loss inherent in certain pools of industry and geographic loan concentrations within the loan portfolio. There were no major changes loan concentrations during 2004. The December 31, 2004 allowance calculation incorporates loss estimates relating to loans to borrowers involved in the Maine wild blueberry industry, principally centered in Washington County, Maine. During the fourth quarter of 2003, certain legal matters developed regarding the blueberry industry, the uncertainties of which warranted recognition of certain increases in credit risk. While recent developments have been favorable, at December 31, 2004 the adequacy analysis of the allowance incorporated management’s estimate of inherent risk of loss with respect to loans associated with this industry segment.

Specific reserves for impaired loans are determined in accordance with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors For Impairment of a Loan-Income Recognition and Disclosures." The amount of loans considered to be impaired totaled $93 as of December 31, 2004, compared with $596 as of December 31, 2003.

Management reviews impaired loans to ensure such loans are transferred to interest non-accrual status, and written down when necessary. The amount of interest income not recorded on impaired loans amounted to $3 and $23 for the years ended December 31, 2004 and 2003, respectively.

Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, the Company considers the allowance for loan losses at December 31, 2004 to be appropriate for the risks inherent in the loan portfolio, and resident in the local and national economy as of that date.

Investment Securities

The investment securities portfolio represented 29.7% of the Company’s average earning assets during 2004 and generated 25.1% of total interest income, compared with 23.7% and 26.5% in 2003, respectively.

The investment securities portfolio is primarily comprised of mortgaged-backed securities issued by U.S. government sponsored enterprises and agencies, and other corporate issuers. The portfolio also includes tax-exempt obligations of state and political subdivisions, and obligations of other government sponsored enterprises.

The overall objective of the Bank’s strategy for the investment securities portfolio is to maintain an appropriate level of liquidity, diversify earning assets, manage interest rate risk, leverage the Bank’s strong capital position, and generate acceptable levels of net interest income. The investment securities portfolio is managed under the policy guidelines established by the Bank’s Board of Directors.

Total Investment Securities: At December 31, 2004 total investment securities stood at $176,337 compared with $158,387 at December 31, 2003, representing an increase of $17,950, or 11.3%.

The 2004 average investment securities balance amounted to $181,778, compared with $149,294 in 2003, representing an increase of $32,484, or 21.8%.

Comparing 2004 with 2003, the year-over-year growth in average investment securities outpaced the period end growth, reflecting a redeployment of cash flows from the securities portfolio in support of strong loan growth and expected seasonal deposit outflows.

The 2004 growth in average investment securities principally occurred during the second quarter of 2004. Securities added to the portfolio predominately consisted of mortgage-backed securities with average durations ranging between two and three years. This action was taken as market yields climbed to a two-year high, presenting some patiently awaited opportunities for the Bank to increase its earning assets and leverage its strong capital position. Given the historically low interest rate environment and the associated level of interest rate risk, during 2003 the Bank exercised restraint by not increasing the investment securities portfolio compared with 2002.

In light of the low interest rate environment over the past few years and the historically high degree of interest rate volatility, the Bank’s investment strategy has been focused on maintaining a securities portfolio with an overall relatively short average duration, thereby reducing the exposures associated with sustained increases in interest rates. This was accomplished through investments in securities with predictable cash flows and relatively short average lives such as, 10-year fully amortizing mortgage-backed securities and other high coupon mortgage-backed securities. The Bank’s strategy has been to position the securities portfolio defensively with a steady stream of future cash flows. While sacrificing some yield in the near-term, the Bank’s objectives were to maintain a reasonable level of net interest income, manage longer-term interest rate and market risks, and position the portfolio for a rising interest rate environment and an improving economy.

Trading Securities: Trading securities are securities bought and held principally for the purpose of selling them in the near term with the objective of generating profits on short-term differences in price. As of December 31, 2004 and 2003, the Bank did not have any trading securities.

Securities Available-for-Sale: The designation of securities "available-for-sale" is made at the time of purchase, based upon management’s intent to hold the securities for an indefinite time; however, these securities would be available for sale in response to changes in market interest rates, related changes in the securities’ prepayment risk, needs for liquidity, or changes in the availability of and yield on alternative investments.

Investment securities classified as available-for-sale are reported at their fair value with unrealized gains or losses, net of taxes, excluded from earnings but shown separately as a component of shareholders’ equity. Gains and losses on the sale of securities available-for-sale are determined using the specific-identification method and are shown separately in the statement of income.

The securities available-for-sale portfolio is managed on a total return basis with the objective of exceeding the return that would be experienced if investing solely in U.S. Treasury instruments. The securities available-for-sale portfolio is used for liquidity purposes while simultaneously producing earnings.

Securities available-for-sale totaled $176,337 at December 31, 2004, compared with $124,422 at December 31, 2003, representing an increase of $51,916, or 41.7%. Securities available-for-sale represented 100% of total investment securities at December 31, 2004, compared with 78.6% at December 31, 2003.

As permitted by Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", during the fourth quarter of 2004 the Bank transferred into the available-for-sale securities portfolio all of its held-to-maturity investment securities. Securities transferred consisted of longer term, tax-exempt securities representing obligations of state and political subdivisions. The held-to-maturity securities were transferred to available-for sale at their fair value of $36,100, with an unrealized gain on these securities, net of taxes, amounting to $1,191 recorded in other comprehensive income, a separate component of shareholders’ equity.

The transfer of held-to-maturity securities to available-for-sale was consistent with the Bank’s asset and liability management strategies, particularly the management of interest rate risk and the need for adequate liquidity. The majority of the held-to-maturity securities transferred to available-for-sale were purchased in 2001, during a period of higher long-term interest rates, and then-current projections for even higher rates in the near future. Given the current interest rate environment and the shortening of maturities since their date of purchase, the degree of interest rate risk associated with the held-to-maturity securities transferred to available-for-sale has diminished significantly. Management believes the transfer of held-to-maturity securities to available-for-sale will provide the Bank with additional liquidity reserves and a higher degree of flexibility in managing the overall balance sheet. Management does not intend to utilize the held-to-maturity classification in the foreseeable future.

The balances of securities available-for-sale are stated on the consolidated balance sheet net of fair value adjustments, reflecting net unrealized gains of $1,941 and $692 at December 31, 2004 and 2003, respectively. The 2004 increase in unrealized gains was principally attributed to the transfer of held-to-maturity securities to available-for-sale, which at December 31, 2004 amounted to $1,804.

The following table summarizes the securities available-for-sale portfolio as of December 31, 2004, and 2003:

Securities Held to Maturity: The securities held to maturity ("HTM") portfolio has historically been managed for yield and earnings generation, liquidity through cash flow, and interest rate risk characteristics within the framework of the entire balance sheet. Investment securities held to maturity are those where the Bank has the positive intent and ability to hold until maturity. Held to maturity investments are reported at their aggregate cost, adjusted for amortization of premiums and accretion of discounts.

As previously discussed, during the fourth quarter of 2004 the Bank transferred all securities held-to-maturity to available-for-sale. At December 31, 2003, securities held-to-maturity totaled $33,965 representing 21.4% of total investment securities at that date.

The following table summarizes the securities held-to-maturity portfolio since 2002:

SECURITIES HELD TO MATURITY AT DECEMBER 31
(at book value)

At December 31, 2003, the HTM portfolio consisted exclusively of long-term, tax-exempt municipal bonds, with one exception; namely, one $591 mortgage-backed security ("MBS") originally purchased in 2002 for Community Reinvestment Act ("CRA") benefits, with an original par value of $1,518. The underlying collateral consisted of low-income housing loans in the state of Maine. By their nature, CRA investments typically have higher purchase premiums because of the positive CRA effect. Subsequent to the purchase, the Bank’s primary regulator advised that the MBS did not qualify for CRA credit because the loans were not in the Bank’s immediate market area, in effect diminishing the value of the investment security to the Bank. During 2004, the Bank sold this CRA investment security, which had a then current book value of $476, realizing a gain of $16.

Purchase Premiums and Discounts: Securities are typically purchased at premium or discounted price, depending on the coupon of the security and prevailing interest rates. The Company recognizes the amortization of premiums and accretion of discounts in interest income using the interest method over the estimated life of the security. Purchase premiums are amortized to the earliest call date, while purchase discounts are accreted to maturity. Premiums paid on mortgage backed securities are amortized proportionate to the three-month trailing average Constant Payment Rate (CPR) of each securitized pool of mortgages.

Securities Credit Risk: The Bank evaluates and monitors the credit risk of its investment securities utilizing a variety of resources including external credit rating agencies, predominantly Moody’s and Standard and Poor’s. At December 31, 2004, 95.1% of the investment portfolio was rated "AAA". The Bank held no investment securities having a credit rating below "A" as of December 31, 2004.

Securities Interest Income: During 2004 the total aggregate tax-equivalent yield on the investment securities portfolio amounted to 4.51%, compared with 4.95% in 2003, representing a decline of 44 basis points. The declining interest rate environment over the past few years has prompted increases in prepayment speeds on mortgage backed securities particularly those with higher coupons, an acceleration of premium amortization, and the exercise of call features on certain securities. Securities replaced or incrementally added to the investment securities portfolio during 2003 and 2004 had relatively short average lives and consequently, were lower yielding compared with historical levels.

Total tax-equivalent interest income from investment securities amounted to $8,197 in 2004, compared with $7,385 in 2003, representing an increase of $812, or 11.0%. The impact of the 2004 decrease in yields on interest income was more than offset by a year-over-year increase in the volume of average investment securities.

Securities Maturity Distribution: The following table summarizes the maturity distribution of the amortized cost of the Bank’s investment securities and weighted average yields of such securities an a fully tax-equivalent basis as of December 31, 2004, based upon the final maturity date of the securities. Expected maturities may differ from contractual maturities because issuers may have the right to call or pre-pay certain securities. In the case of mortgage-backed securities, actual maturities may also differ from expected maturities due to the amortizing nature of the underlying mortgage collateral, and the fact that borrowers in most cases have the right to prepay.

MATURITY SCHEDULE FOR INVESTMENT SECURITIES
DECEMBER 31, 2004
(at fair value)

Securities Concentrations: The Bank does not hold any securities for a single issuer, other than U. S. Government agencies and sponsored enterprises, where the aggregate book value of the securities exceed 10% of the Company’s shareholders’ equity.

Impaired Securities: The securities portfolio contains certain investments where amortized cost exceeds fair market value, which at December 31, 2004 amounted to $559, compared with $648 at December 31, 2003, representing a decline of $89 or 13.7%.

Unrealized losses that are considered other-than-temporary are recorded as a loss on the Company’s consolidated statement of income. In evaluating whether an impairment is other-than-temporary, management considers a variety of factors including the nature of the investment, the cause of the impairment, and the severity and duration of the impairment. Other data considered by management includes, for example, sector credit ratings, volatility of the security’s market price, and any other information considered relevant in determining whether other-than-temporary impairment has occurred.

At December 31, 2004, management determined there were no unrealized losses in the investment securities portfolio that were other-than-temporary.

The following table summarizes temporarily impaired investment securities and their approximate fair values at December 31, 2004. All securities referenced are debt securities. At December 31, 2004 the Bank did not hold any common stock or equity securities in its investment securities portfolio.

TEMPORARILY IMPAIRED INVESTMENT SECURITIES
DECEMBER 31, 2004

At December 31, 2004, the total unrealized losses on temporarily impaired investments amounted to $559, representing 0.9% of their carrying value. At December 31, 2004 there were no individual investment positions where the unrealized loss exceeded 5% of its carrying value.

As of December 31, 2004, unrealized losses on investment securities that had been in an unrealized loss position more than twelve-months amounted to $244, or 1.5% of their carrying value at December 31, 2004. At December 31, 2004 there were a total of thirty-one investment securities in an unrealized loss position more than twelve months, represented by twenty-nine mortgage backed-securities and two debt securities issued by government sponsored enterprises.

For securities with unrealized losses, the following information was considered in determining that the impairments are not other-than-temporary. U.S. government securities are backed by the full faith and credit of the United States and therefore bear no credit risk. U.S. Government sponsored enterprises have minimal credit risk as they play a vital role in the nation’s financial markets. Other bonds and notes are generally comprised of corporate mortgage-backed securities and all investments maintain a credit rating of at least "A" by one of the nationally recognized rating agencies. Mortgage-backed securities and collateralized mortgage obligations are either issued by federal government agencies and sponsored enterprises, or by private issuers, all with security ratings of AAA.

Management believes the unrealized losses in the investment portfolio at December 31, 2004 were attributed to interest rates, and reflected the volatile movements in the U.S. Treasury curve over the past few years. Specifically, certain debt securities were purchased in an interest rate environment lower than where the U.S. Treasury yield curve stood on December 31, 2004.

Management believes the extent of unrealized losses on mortgage-backed securities will diminish over time as principal payments and pre-payments are received and maturities continue to shorten. In the case of debt securities, management believes unrealized losses will diminish over time as maturity dates continue to shorten. Management also believes that any declines in the U.S. Treasury yield curve will further diminish the extent of unrealized losses in the securities portfolio, as market values typically increase in a declining interest rate environment. Subsequent to December 31, 2004 the yield curve posted declines, with the 10-year Treasury, for example, closing as low as 3.99%, or 23 basis points lower than where it stood at year-end.

Funding Sources

The Bank utilizes various traditional sources of funding to support its earning asset portfolios. Funding sources principally consist of customer deposits and, to a lesser extent, borrowings from the Federal Home Loan Bank of Boston ("FHLB") of which it is a member, and certificates of deposit obtained from the national market.

Historically, the banking business in the Bank’s market area has been seasonal, with lower deposits in the winter and spring and higher deposits in the summer and fall. These seasonal swings have been fairly predictable and have not had a materially adverse impact on the Bank. Seasonal swings in deposits have been typically absorbed by the Bank’s strong liquidity position, including borrowing lines from the FHLB and cash flows from the investment securities portfolio.

Among Maine banks, strong loan growth has not been matched by core deposit growth, which according to a recent report prepared by the Maine Bureau of Financial Institutions, increased a relatively anemic 4% during the twelve-months ended June 30, 2004, the lowest growth rate in five years. As a consequence, among Maine banks, the loan-to-core deposit ratio rose to a record high of 117%, well above the national average of 90% and up from 110% one year earlier. During 2004, the Bank’s average loan-to-core deposit ratio amounted to 114%, compared with 116% in 2003. At December 31, 2004 the Bank’s loan-to-core deposit ratio stood at 120%, in part reflecting the seasonality of customer deposits and fourth-quarter 2004 loan growth of $18,926.

According to the Maine Bureau of Finanical Institutions, because core deposit growth has not kept pace with earning asset growth, Maine banks have had to rely increasingly on borrowings and other types of non-core funding, which supported 27% of Maine bank assets as of June 30, 2004, compared with the national average of 16%. During 2004 the Bank’s non-core funding averaged 31.8% of total average assets, compared with 30.3% in 2003. At December 31, 2004 the Bank’s non-core funding stood at 32.3%, compared with 30.2% at December 31, 2003.

Looking forward, management believes that the Bank’s success in growing core funding will be a determinant factor in its ability to grow earning assets and leverage its strong capital position.

Deposits

During 2004 the most significant source of funding for the Bank’s earning assets continued to be customer deposits, gathered throughout its network of eleven banking offices throughout Down East and Mid Coast Maine. Total average customer deposits accounted for 69.8% of the funding required in supporting the Bank’s earning asset portfolios during 2004, unchanged compared with 2003.

Total Deposits: At December 31, 2004 total deposits amounted to $398,272, compared with $339,080 at December 31, 2003, representing an increase of $59,192, or 17.5%.

Savings and money market accounts led 2004 growth with an increase of $29,870 or 27.3%, followed by time deposits, demand deposits, and NOW accounts, posting increases of $21,375, $4,699, and $3,248, or 17.9%, 9.4%, and 5.4%, respectively, compared with December 31, 2003. Deposit growth was bolstered by $20,459 in deposits acquired in connection with the Rockland branch acquisition, a new institutional money market product accounting for $17,437 of the increase, and $17,712 in certificates of deposit obtained from the national market.

Total average deposits amounted to $377,721 during 2004, compared with $322,414 in 2003, representing an increase of $55,307 or 17.2%.

The following table summarizes the components of the Bank’s total average deposit portfolio:

SUMMARY OF DEPOSIT PORTFOLIO

Demand Deposits: Non-interest bearing demand deposits, which are principally commercial in nature, totaled $54,579 at December 31, 2004, compared with $49,880 at December 31, 2003, representing an increase of $4,699, or 9.4%. Total average demand deposits amounted to $51,382 during 2004, compared with $45,607 in 2003, representing an increase of $5,775, or 12.7%. Demand deposits represented 13.6% of total average deposits during 2004, compared with 14.1% in 2003.

The Bank offers its business customers with a variety of cash management products including a Cash Management Sweep Account. Customers are able to automatically transfer their excess demand deposit balances, over certain thresholds established with an earnings credit rate, to interest bearing, overnight securities repurchase agreements. Demand deposits also include balances generated by way of the Bank’s Merchant Credit Card Processing Program. The Bank strives to attract demand deposits in connection with its commercial lending activities, on a total relationship basis.

NOW Accounts: The Bank offers NOW accounts to individuals and not-for-profit organizations. At December 31, 2004, total NOW accounts stood at $63,535, compared with $60,287 at December 31, 2003, representing an increase of $3,248 or 5.4%. During 2004 total average NOW accounts amounted to $63,119, compared with $54,221 in 2003, representing an increase of $8,898, or 16.4%. NOW accounts represented 16.7% of total average deposits during 2004, compared with 16.8% in 2003.

During 2004, the Bank’s most successful NOW account product continued to be Gold Wave Checking, a relationship product designed for its elderly and retired customers. The Bank also introduced two new deposit products during 2004, Ideal Checking and Simple Checking, relationship products designed for families and individuals.

Savings And Money Market Accounts: At December 31, 2004, total savings and money accounts amounted to $139,179, compared with $109,309 at December 31, 2003, representing an increase of $29,870, or 27.3%. Total average savings and money market accounts amounted to $132,091 during 2004, compared with $104,275 in 2003, representing an increase of $27,816, or 26.7%. Savings and money market accounts represented 35.0% of total average deposits during 2004, compared with 32.3% in 2003.

The Bank offers statement savings accounts, and as a community oriented financial institution, continues to offer the more traditional passbook savings accounts. The Bank also offers a tiered-rate, competitively priced money market account, Investors Choice, providing businesses and individuals with short-term investment alternatives.

During 2004, the Bank began offering a new institutional money market product to clients of Bar Harbor Trust Services, the Bank’s wholly owned subsidiary. During 2004 the balance of this new money market product averaged $14,449, and at December 31, 2004, totaled $17,437. The 2004 growth in savings and money market accounts was also driven by the deposits acquired in connection with the Bank’s acquisition of a branch office in the community of Rockland, Maine.

During 2004, which saw a continuation of historically low interest rates, customers appeared to demonstrate a desire for the higher liquidity offered through savings and money market accounts, versus more traditional, longer-term certificates of deposit.

Time Deposits: At December 31, 2004 total time deposits stood at $140,979, compared with $119,604 at December 31, 2003, representing an increase of $21,375, or 17.9%. Total average time deposits amounted to $131,129 during 2004 compared with $118,311 in 2003, representing an increase of $12,818, or 10.8%. Time deposits represented 34.7% of total average deposits during 2004, compared with 36.7% in 2003.

Total time deposits include brokered time deposits obtained from the national market, which during 2004 averaged $11,658, representing an increase of $5,670 compared with 2003. At December 31, 2004, time deposits obtained from the national market amounted to $23,700, or 6.0% of total deposits, compared with $5,988 at December 31, 2003, or 1.8% of total deposits at that date. The increase in deposits obtained from the national market was primarily attributed to the funding needs associated with the Bank’s strong earning asset growth, principally loans, which outpaced core customer deposit growth during 2004. The rates of interest paid on time deposits obtained from the national market were generally more favorable than advances from the Federal Home Loan Bank, a secondary source of funding used by the Bank.

Excluding time deposits obtained from the national market, total time deposits at December 31, 2004 represented an increase $3,663, or 3.2%, compared with December 31, 2003. This increase was principally attributed to deposits acquired in connection with the Bank’s acquisition of a branch office in the community of Rockland, Maine.

The sluggish organic growth in customer time deposits was due in part to depositors’ apparent hesitation to invest in longer-term fixed rate certificates of deposits, while yields remained at historically low levels. Additionally, in light of the extended low interest rate environment and its resulting pressure on the Bank’s net interest margin, during 2004 the Bank did not compete for time deposits as aggressively as it has in the past, with respect to pricing. In pricing time deposits, particularly non-relationship time deposits, the Bank will consider other sources of funding which may be offered at more attractive terms and prices, including borrowed funds and time deposits available in the national market.

Time deposits in denominations of $100 or greater totaled $19,405 at December 31, 2004, compared with $18,784 at December 31, 2003, representing an increase of $621, or 3.3%.

The following schedule summarizes the maturity distribution of time deposits of $100 or greater:

MATURITY SCHEDULE
TIME DEPOSITS $100 THOUSAND OR GREATER
DECEMBER 31, 2004

Borrowed Funds

Borrowed funds principally consist of advances from the Federal Home Loan Bank of Boston ("FHLB") and, to a lesser extent, securities sold under agreements to repurchase. Advances from the FHLB are secured by stock in the FHLB, mortgage-backed securities, and blanket liens on qualifying first mortgage loans.

The Bank utilizes borrowed funds in leveraging its strong capital position and supporting its earning asset portfolios. Borrowed funds are principally utilized to support the Bank’s investment securities portfolio and, to a lesser extent, fund loan growth. Borrowed funds also provide a means to help manage balance sheet interest rate risk, given the Bank’s ability to select desired amounts, terms and maturities on a daily basis.

Borrowings From the Federal Home Loan Bank: At December 31, 2004, borrowings from the FHLB totaled $191,846, compared with $170,506 at December 31, 2003, representing an increase of $21,340, or 12.5%. During 2004, borrowings from the FHLB averaged $193,927, compared with $163,724 in 2003, representing an increase of $30,203, or 18.4%.

During the fourth quarter of 2004, the Bank replaced a portion of its maturing FHLB borrowings with certificates of deposit obtained in the national market, causing the balance of FHLB borrowings at December 31, 2004 to fall below the 2004 average balance.

The 2004 increase in borrowings from the FHLB was utilized to fund earning asset growth, particularly the growth in the Bank’s investment securities portfolio.

Borrowings from the FHLB expressed as a percentage of total assets amounted to 28.8% at December 31, 2004, compared with 29.2% at December 31, 2003.

Borrowing Maturities: Borrowing maturities are managed in concert with the Bank’s asset and liability management strategies, and are closely aligned with the ongoing management of balance sheet interest rate risk. Over the past few years, the Bank has added longer-term borrowings to the balance sheet in order to hedge the interest rate risk associated with the growth in longer-term, fixed rate, earning assets generated during periods of historically low interest rates. While this strategy has pressured net interest income in the short-term, management believes it better positions the Bank for rising interest rates and an improving economy.

As of December 31, 2004, total short-term borrowings, including securities sold under repurchase agreements, amounted to $89,851, compared with $58,525 at December 31, 2003, or 43.4% and 31.4% of total borrowings, respectively. Conversely, long-term borrowings at December 31, 2004 totaled $117,072, compared with $127,906 at December 31, 2003, or 56.6% and 68.6% of total borrowings, respectively.

Capital Resources

Consistent with its long-term goal of operating a sound and profitable organization, the Company continues to be a "well capitalized" bank holding company according to applicable regulatory standards. In 2004, the Company continued to maintain a strong capital position, which is vital in promoting depositor and investor confidence and providing a solid foundation for future growth. Historically, most of the Company’s capital requirements have been provided through retained earnings and this continued to be the case during the year ended December 31, 2004.

Stock Repurchase Plans: In November 1999, the Company announced a stock repurchase plan. The Board of Directors of the Company at that time authorized open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 344,000 shares. The Board of Directors subsequently authorized the continuance of that program through December 31, 2003. As of December 31, 2003, the Company had repurchased 339,814 shares of stock under the plan, at a total cost of $6,151 and an average price of $18.10 per share. The share repurchase program terminated on December 31, 2003. The Company records the repurchased shares as treasury stock.

In March 2004, the Company announced a second stock repurchase plan. The Board of Directors of the Company authorized open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 310,000 shares. Purchases began on March 4, 2004 and will continue through December 31, 2005. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time-to-time, without prior notice. As of December 31, 2004, the Company had repurchased 49,920 shares of stock under this plan, at a total cost of $1,349 and an average price of $27.03 per share.

The Company believes that a stock repurchase plan is a prudent use of capital at this time. Management anticipates the stock repurchase plan will be accretive to the return on average shareholders’ equity and earnings per share.

Cash Dividends: The Company has historically paid regular quarterly cash dividends on its common stock. Each quarter the Board of Directors declares the payment of regular quarterly cash dividends, subject to adjustment from time to time, based on the Company’s earnings outlook, the strength of the balance sheet and other relevant factors.

In the first quarter of 2004, the Company increased its quarterly dividend by 5.3% to $0.20 per common share. The dividend was paid March 15, 2004 to shareholders of record as of the close of business on February 20, 2004. Quarterly dividends continued at this rate through 2004.

The Company’s 2004 dividend payout ratio amounted to 43.2%, compared with 45.8% in 2003.

In the first quarter of 2005, the Company increased its quarterly dividend by 5.0% to $0.21 per common share. The dividend was payable to all shareholders of record as of February 18, 2005, and was paid on March 15, 2005.

Capital Ratios: The Company and its banking subsidiary are subject to the risk based capital guidelines administered by the Bank's principal regulators. The risk based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of risk weighted assets and off-balance sheet items. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk based capital to risk weighted assets of 8%, including a minimum ratio of Tier I capital to total risk weighted assets of 4% and a Tier I capital to average assets of 4% ("Leverage Ratio"). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the Company's financial statements.

As of December 31, 2004, the Company and the Bank are considered well capitalized under the regulatory framework for prompt corrective action. Under the capital adequacy guidelines, a well capitalized institution must maintain a minimum total risk based capital to total risk weighted assets ratio of at least 10%, a minimum Tier I capital to total risk weighted assets ratio of at least 6%, and a minimum Tier I Leverage ratio of at least 5%.

At December 31, 2004, the Company’s total risk based capital was $56,260 or 13.0% of risk-weighted assets, compared with $56,403, or 14.7% of total risk-weighted assets at December 31, 2003.

At December 31, 2004, the Company’s Tier I capital totaled $51,431 or 11.9% of risk-weighted assets, compared with 51,601, or 13.5% of total risk weighted assets at December 31, 2003. The ratio of Tier I capital to average weighted assets, or Leverage Ratio, at December 31, 2004 was 7.8%, compared with 8.9% at December 31, 2003.

The following table sets forth the Company's regulatory capital at December 31, 2004 and December 31, 2003, under the rules applicable at that date.

As more fully disclosed in Note 13 of the Consolidated Financial Statements in this Annual Report on Form 10-K, during 2004 the Bank also maintained its standing as a well capitalized institution as defined by applicable regulatory standards. At December 31, 2004, the Bank’s Tier I Leverage, Tier I Risk Based and Total Risk Based capital ratios stood at 8.0%, 12.2% and 12.8%, respectively.

There are no known trends, events or uncertainties, nor any recommendations by any regulatory authority, that are reasonably likely to have a material effect on the Company’s capital resources, liquidity, or financial condition.

The Company is a party to certain contractual obligations under which it is obligated to make future payments. These principally include borrowings from the FHLB, consisting of short and long-term fixed rate borrowings, and collateralized by all stock in the FHLB, a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one-to-four family properties, and certain pledged investment securities. The Company has an obligation to repay all borrowings from the FHLB.

The Company is also obligated to make payments on an operating lease for its office at One Cumberland Place in Bangor, Maine.

The following table summarizes the Company’s contractual obligations at December 31, 2004. Borrowings are stated at their contractual maturity due dates and do not reflect call features on certain borrowings.

CONTRACTUAL OBLIGATIONS
(Dollars in thousands)

In the normal course of its banking and financial services business, and in connection with providing products and services to its customers, the Company has entered into a variety of traditional third party contracts for support services. Examples of such contractual agreements would include services providing ATM, Visa Debit and Credit Card processing, trust services accounting support, student loan servicing, check printing, and the leasing of T-1 telecommunication lines supporting the Company’s wide area technology network.

The majority of the Company’s core operating systems and software applications are maintained "in-house" with traditional third party maintenance agreements of one year or less.

Off-Balance Sheet Arrangements

The Company is, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors. "Off-balance sheet arrangements" include any transactions, agreements, or other contractual arrangements to which an entity unconsolidated with the Company is a party, under which the Company has:

(i) Any obligation under certain guarantee contracts;

(ii) A retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

(iii) Any obligation under certain derivative instruments;

(iv) Any obligation under a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging, or research and development services with the Company.

At December 31, 2004 the Company had the following Off-Balance Sheet Arrangements:

Standby Letters of Credit: The Bank guarantees the obligations or performance of certain customers by issuing standby letters of credit to third parties. These letters of credit are sometimes issued in support of third party debt. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.

At December 31, 2004, commitments under existing standby letters of credit totaled $1,155, compared with $2,205 at December 31, 2003. The fair value of the standby letters of credit was not significant as of December 31, 2004 and 2003.

Other Off-Balance Sheet Arrangements: At December 31, 2004 and 2003, the Company did not have any other "off-balance sheet arrangements".

Off Balance Sheet Risk

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and interest rate swap agreements.

Commitments to Extend Credit: Commitments to extend credit represent agreements by the Bank to lend to a customer provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis using the same credit policies as it does for its balance sheet instruments, such as loans. The amount of collateral obtained, if deemed necessary by the Bank upon the issuance of commitment, is based on management's credit evaluation of the customer.

The following table summarizes the Bank’s commitments to extend credit as of December 31:

Derivative Instruments / Counter-party Risk: As part of the Bank’s overall asset liability/management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on net income. Derivative instruments that management periodically uses as part of its interest rate risk management strategy include interest rate swap agreements. A policy statement, approved by the Board of Directors of the Bank, governs use of derivative instruments.

At December 31, 2004 the Bank had two outstanding derivative instruments, both interest rate swap agreements. The details are summarized as follows:

The Bank is required to pay a counter-party monthly variable rate payments indexed to prime, while receiving monthly fixed rate payments based upon interest rates of 6.04% and 6.25%, respectively, over the term of each respective agreement.

The following table summarizes the contractual cash flows of the interest rate swap agreements outstanding at December 31, 2004, based upon the then-current Prime interest rate of 5.25%:

The notional amounts of the agreements do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. Management does not anticipate non-performance by the counter-party to the agreements, and regularly reviews the credit quality of the counter-party from which the instruments have been purchased.

As more fully enumerated in Part II, Item 8, Notes to the Consolidated Financial Statements, Note 16, in this Annual Report on report Form 10-K, during the third quarter of 2004, the Bank designated its interest rate swap agreements as cash flow hedges and, prospectively from the time of this designation, changes in their fair value are being recorded on the consolidated balance sheet in other comprehensive income, while current period net cash flows representing net amounts received from or paid to counter-parties are recorded in interest income. During the first quarter of 2004, these interest rate swap agreements had been de-designated as cash flow hedges and, from the time of de-designation, changes in their fair value and current period net cash flows related to these agreements were recorded in the consolidated statement of income and included as part of non-interest income.

At December 31, 2004 and December 31, 2003, the unrealized (loss) gain on the interest rate swap agreements was ($225) and $86, respectively, and included in other assets on the consolidated balance sheets.

At December 31, 2004, the unrealized loss on these interest rate swap agreements included in other comprehensive income, net of tax, amounted to $149, compared with an unrealized gain of $57 at December 31, 2003. Also included in other comprehensive income for the year ended December 31, 2004 was a net deferred loss, net of tax, of $15 related to the de-designation and re-designation of these swaps as cash flow hedges in 2004. There were no deferred gains or losses recorded in other comprehensive income in 2003.

During 2004, the net unrealized gains on interest rate swap agreements recorded in non-interest income amounted to $29 during the period in which hedge accounting was not applied.

During, 2004, the total net cash flows received from counterparties amounted to $455, compared with $498 and $117 in 2003 and 2002, respectively. Of the $455 in net cash flows received from counterparties during 2004, $375 was recorded in non-interest income (non-hedge period) and $80 in interest income (hedge period). The net cash flows received from counterparties during 2003 and 2002 were recorded in interest income.

Liquidity is measured by the Company’s ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.

The Bank actively manages its liquidity position through target ratios established under its asset/liability management policy approved by the Bank’s Board of Directors. Continual monitoring of these ratios, both historical and through forecasts under multiple rate scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity.

The Bank uses a basic surplus model to measure its liquidity over 30 and 90-day time horizons. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement are routinely monitored. The Bank’s policy is to maintain its liquidity position at approximately 5% of total assets. At December 31, 2004, liquidity, as measured by the basic surplus model, was 4.6% over the 30-day horizon and 3.8% over the 90-day horizon. Including its available lines from the FHLB, at December 31, 2004 the Bank’s basic surplus amounted to 5.6% over the 30-day horizon and 4.1% over the 90-day horizon.

The basic surplus model does not incorporate the short-term liquidity generated by cash flows from the investment securities portfolio, which during the first quarter of 2005 are expected to generate approximately $13,000 in additional liquidity, available to absorb anticipated deposit outflows. In this regard, a portion of the Bank’s deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank’s liquidity position tightens.

At December 31, 2004, the Bank had unused lines of credit and net unencumbered qualifying collateral availability to support its credit line with the FHLB approximating $48 million. The Bank also had capacity to borrow funds on a secured basis utilizing certain un-pledged securities in its investment securities portfolio. The Bank’s loan portfolio and investment portfolio provide a source of contingent liquidity that could be accessed in a reasonable time period through sales. The Bank also has access to the national brokered deposit market.

Changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company’s liquidity position.

The Bank maintains a liquidity contingency plan approved by the Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements presented elsewhere in this report have been prepared in accordance with U.S. generally accepted accounting principles, 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 U.S. Treasury yield curve may not necessarily move in the same direction or in the same magnitude as inflation.

While the financial nature of the Company’s consolidated balance sheets and statements of income is more clearly affected by changes in interest rates than by inflation, inflation does affect the Company because as prices increase the money supply tends to increase, the size of loans requested tends to increase, total Company assets increase, and interest rates are affected by inflationary expectations. In addition, operating expenses tend to increase without a corresponding increase in productivity. There is no precise method, however, to measure the effects of inflation on the Company’s financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation.

RESULTS OF OPERATIONS

Net Interest Income

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

Total Net Interest Income: For the year ended December 31, 2004, net interest income on a fully tax- equivalent basis amounted to $21,098 compared with $20,102 and $20,190 in 2003 and 2002, representing an increase of $996 or 5.0%, and a decrease of $88 or 0.4%, respectively.

The increase in 2004 net interest income was entirely attributed to an $83,240 or 15.7% increase in average earning assets during the year, as the 2004 net interest margin declined 35 basis points to 3.45%, compared with 2003. Likewise, the decline in net interest income during 2003 was also entirely attributed to the net interest margin, which declined 34 basis points to 3.80% during 2003, compared with 4.14% in 2002.

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

Net Interest Income Analysis: The following tables summarize the Company’s average balance sheets and the components of net interest income, including a reconciliation of tax equivalent adjustments, for the years ended December 31, 2004, 2003 and 2002:

AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 2004

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

AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 2003

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

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

The net interest margin is determined by dividing tax-equivalent net interest income by average interest-earning assets. The interest rate spread represents the difference between the average tax-equivalent yield earned on interest earning-assets and the average rate paid on interest bearing liabilities. The net interest margin is generally higher than the interest rate spread due to the additional income earned on those assets funded by non-interest bearing liabilities, primarily demand deposits and shareholders’ equity.

The following table summarizes the net interest margin components, on a quarterly basis, over the past two years. Factors contributing to the changes in the net interest margin are enumerated in the following discussion and analysis.

NET INTEREST MARGIN ANALYSIS
FOR QUARTER ENDED

(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, reported on a tax equivalent basis

The prolonged, historically low interest rate environment during the past few years caused sharp yield declines on the Bank’s variable rate earning assets and accelerated prepayment speeds on fixed rate earning assets, driven in part by loan refinancing activity and accelerated cash flows from the investment securities portfolio.

The yield on average earning assets amounted to 5.33% during 2004, compared with 5.90% and 6.76% in 2003 and 2002, representing declines of 57 and 86 basis points, respectively. Similarly, the cost of interest bearing liabilities amounted to 2.16% in 2004, compared with 2.44% and 3.06% in 2003 and 2002, representing declines of 28 and 62 basis points, respectively. Driven by loan refinancing activity and accelerated cash flows from the investment portfolio, during 2004 and 2003, the declines in yields on earning assets exceeded the declines in the cost of interest bearing liabilities by 29 and 24 basis points, respectively.

During 2004 and 2003, the Bank pursued a number of strategies to achieve a reasonably stable net interest margin in an extended low interest rate environment, while it continued to manage exposure to rising rates over the longer-term horizon. These strategies included a repositioning of a portion of the investment securities portfolio, utilization of interest rate swap agreements, and effective loan and deposit pricing strategies, orchestrated within well-established asset/liability management policies and the overall management of balance sheet interest rate risk.

During 2003, the Bank successfully marketed 10-year, fully amortizing 10-year mortgage products, including a bi-weekly payment 10-year mortgage product. In 2004, the loan products of choice included adjustable rate mortgages and commercial loans. While the foregoing types of products typically generate lower yields than longer maturity, fixed rate products, their cash flow and adjustable rate characteristics diminish the degree of long-term interest rate risk, and better positions the Bank for rising interest rates in the future.

The Bank has utilized longer-term borrowings to fund a portion of earning asset growth over the past few years. While the use of longer-term borrowing maturities naturally resulted in higher funding costs and less net interest income, they more closely matched the maturities of fixed rate earning assets that were being added to the Bank’s balance sheet, thereby preserving the sensitivity of net interest income in a rising interest rate environment.

The Bank has been deliberate in its efforts to hedge the interest rate risk associated with the addition of long term, fixed rate earning assets to the balance sheet during a period of historically low interest rates. Management believes the strategy of maintaining an asset sensitive balance sheet has contributed to the net interest margin declines over the past two years. While an asset sensitive balance sheet pressures the net interest margin and net interest income in an extended flat or declining interest rate environment, it typically strengthens it in a rising rate environment, a scenario management anticipated was more likely to occur. The Bank has been deliberate in its efforts to manage the interest rate risk associated with the addition of fixed rate earning assets to the balance sheet during a period of historically low interest rates. Management believes that its strategy of maintaining an asset sensitive balance sheet is important to the Company’s long-term success and such posture better positions it for rising interest rates and an improving economy.

During the six-months ended June 30, 2004, the Bank continued to experience considerable margin erosion in the low interest rate environment compared with prior years. In the second half of 2004, the Board of Governors of the Federal Reserve System (the "Federal Reserve") increased short-term interest rates five times, with the Fed funds targeted rate ending the year at 2.25%. As management anticipated, these increases favorably impacted the Bank’s net interest margin during this period of time, with the yield on average earning assets increasing 34 basis points to 5.48%, and the cost of interest bearing funds increasing only 13 basis points to 2.23%. Consequently, the net interest margin increased to 3.55% in fourth quarter of 2004, compared with the two-year low of 3.28% experienced during the quarter ended June 30, 2004, representing an improvement of 27 basis points. In line with the current interest rate environment, management anticipates the net interest margin will continue to stabilize into the first quarter of 2005.

The Bank’s interest rate sensitivity position is more fully described in Part II, Item 7a of this Annual Report on Form 10-K, Quantitative and Qualitative Disclosures About Market Risk.

Interest Income: Total interest income, on a fully tax-equivalent basis, for the year ended December 31, 2004 amounted to $32,643, compared with $31,177 and $32,965 in 2003 and 2002, representing an increase of $1,466 or 4.7%, and a decrease of $1,788 or 5.4%, respectively.

Yield declines on the Bank’s earning assets slowed during 2004, compared with the declines experienced in 2003 when loan refinancing activities and prepayment speeds on investment securities reached historical highs.

The increase in 2004 interest income was principally attributed to average earning asset growth of $83,240, as the yield on total earning assets declined 57 basis points. Comparing 2003 with 2002, the decline in interest income was principally attributed to an 86 basis point decline in earning asset yields, but largely offset by 2003 earning asset growth of $40,980.

As depicted on the  rate / volume analysis tables below, the increased volume of average earning assets on the balance sheet during 2004 contributed $4,416 to the increase in 2004 interest income, offset in part by a decline of $2,950 attributed to the impact of lower yields. During 2003, the decline in interest income attributed to the impact of lower yields amounted to $4,731; offset in part by $2,943 attributed the increased volume of average earning assets.

Interest Expense: Total interest expense for the year ended December 31, 2004 amounted to $11,545 compared with $11,075 and $12,775 in 2003 and 2002, representing an increase of $470 or 4.2%, and a decrease of $1,700 or 13.3%, respectively.

The increase in 2004 interest expense was principally attributed to an increase of $36,665 in average interest bearing liabilities, as the cost of average interest bearing liabilities declined 28 basis points compared with 2003. The decline in 2003 interest expense compared with 2002 was principally attributed to a 62 basis point decline in the cost of interest bearing liabilities, offset in part by a $36,665 increase in average interest bearing liabilities.

The declines in the average cost of interest bearing funds was principally attributed to the historically low interest rate environment, prompting management to reduce rates on non-maturity deposits while maturing time deposits were being replaced at prevailing lower rates.

As depicted on the  rate / volume tables below, the volume of interest bearing liabilities on the balance sheet during 2004 contributed $1,852 to the increase in 2004 interest expense, offset in part by a decline of $1,382 attributed to the impact of the decline in the cost of interest bearing liabilities. During 2003, the decline in interest expense attributed to the impact of the decline in the cost of interest bearing liabilities amounted to $2,908, offset in part by $1,208 attributed to the increased volume of average interest bearing liabilities.

Rate / Volume Analysis: The following tables set forth a summary analysis of the relative impact on net interest income of changes in the average volume of interest earning assets and interest bearing liabilities, and changes in average rates on such assets and liabilities. The income from tax-exempt assets has been adjusted to a fully tax equivalent basis, thereby allowing uniform comparisons to be made. Because of the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes to volume or rate. For presentation purposes, changes which are not solely due to volume changes or rate changes have been allocated to these categories in proportion to the relationships of the absolute dollar amounts of the change in each.

ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2004 VERSUS DECEMBER 31, 2003
INCREASES (DECREASES) DUE TO:

(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, interest income is reported on a tax-equivalent basis.

ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2003 VERSUS DECEMBER 31, 2002
INCREASES (DECREASES) DUE TO:

(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, interest income is reported on a tax-equivalent basis.

In addition to net interest income, non-interest income is a significant source of revenue for the Company and an important factor in its results of operations.

For the year ended December 31, 2004 total non-interest income amounted to $6,572, compared with $7,074 and $6,322 in 2003 and 2002, representing a decrease of $502 or 7.1% and an increase of $752 or 11.9%, respectively.

Trust and Financial Services Income: During 2004, income from trust and financial services represented 29.4% of the Company’s total non-interest income, compared with 31.0% and 35.8% in 2003 and 2002, respectively.

For the year ended December 31, 2004, income generated from trust and financial services amounted to $1,929, compared with $2,192 and $2,261 in 2003 and 2002, representing declines of $263 and $69, or 12.0% and 3.1%, respectively.

Income from trust and financial services is principally derived from fee income based on a percentage of the market value of client assets under management, and to a lesser extent, revenue from third-party brokerage services.

The declines in 2004 and 2003 fee income from trust and financial services reflected declines in average managed assets, combined with pricing strategies designed to remain competitive while attracting new business. During 2004, Trust Services introduced a new high yield money market product for its clients, and eliminated certain 12b-1 fees, which in 2003 and 2002 amounted to $35 and $53, respectively. During the fourth quarter of 2004, assets under management posted an increase of $16,421, ending the year at $196,070 and, if sustained, positioned the portfolio for higher fee income returns in 2005.

Revenue from brokerage activities (attributable in 2003 and part of 2004 to activities of the now dissolved BTI Financial Group and in 2004 to the Company’s third-party brokerage relationship with Bar Harbor Financial Services) also posted a 2004 revenue decline, following a moderate increase in 2003, principally reflecting lower trading volumes, including sales of mutual funds and annuity products. The Company does not anticipate significant future increases in this source of revenue.

Service Charges on Deposit Accounts: This income is principally derived from monthly deposit account maintenance and activity fees, overdraft fees, and a variety of other deposit account related fees. Income from service charges on deposit accounts represented 22.3% of total 2004 non-interest income, compared with 21.3% and 23.5% in 2003 and 2002, respectively.

For the year ended December 31, 2004, income generated from service charges on deposit accounts amounted to $1,463, compared with $1,509 and $1,483 in 2003 and 2002, representing declines of $46 and $26, or 3.0% and 2.7%, respectively.

As was the case during 2003, the growth in service charges on deposit accounts continued under pressure during 2004. Given aggressive competitive pricing in the markets served by the Bank, it has not increased its service charge fees on deposit accounts over the past few years, while customers have been closing or consolidating small balance accounts, migrating to relationship products that have lower fees, and reducing their volume of account overdraft activity.

The Bank expects aggressive competitive pricing of deposit products will continue in the future, as financial institutions compete for deposit balances and market share, and continue to offer a variety of "no fee" products. In the first quarter of 2005, the Bank increased selected fees on deposit accounts and anticipates this will help stem further declines in this particular source of non-interest income.

Credit Card Service Charges and Fees: This income is principally derived from the Bank’s merchant credit card processing services and, to a lesser extent, fees associated with its Visa credit card product. Income from credit card service charges and fees represented 25.7% of total 2004 non-interest income, compared with 21.3% and 23.5% in 2003 and 2002, respectively.

For the year ended December 31, 2004, income generated from credit card service charges and fees amounted to $1,687, compared with $1,614 and $1,654 in 2003 and 2002, representing an increase of $73 or 4.5%, and a decrease of $40 or 2.4%, respectively.

While merchant credit card processing profit margins have tightened over the past few years and competition from large regional processors has intensified, the Bank has been able to sustain comparable levels of revenue through increased volumes of transactions, competitive pricing strategies, and the local customer-centric support offered by a community bank.

Net Securities Gains: This source of non-interest income represents net gains on the sale of investment securities. Net gains on the sale of investment securities represented 7.6% of total 2004 non-interest income, compared with 17.8% and 7.1% in 2003 and 2002, respectively.

For the year ended December 31, 2004 net gains on the sale of investment securities amounted to $497, compared with $1,257 and $450 in 2003 and 2002, representing a decline of $760 or 60.5%, and an increase of $807 or 179.3%, respectively.

The interest rate environment during 2004, combined with the characteristics of the Bank’s securities portfolio, did not present as much need or opportunity for securities repositioning transactions, as was the case during 2003, when mortgage-backed security pre-payment speeds reached historical highs. The sale of securities during 2004 was in part driven by strong loan growth, the timing and extent of seasonal deposit flows, and the Bank’s need for adequate liquidity.

There is no assurance that the recording of securities gains will continue in future reporting periods at 2004 and 2003 levels. It is important to note, however, that the available for sale investment securities portfolio is managed on a total return basis, in concert with well-structured asset/liability management policies. Bank management will continue to respond to changes in market interest rates, changes in securities pre-payment or extension risk, changes in the availability of and yields on alternative investments, and the Bank’s need for adequate liquidity.

Net Income on Interest Rate Swap Agreements: As part of its overall asset liability/management strategy, the Bank periodically uses interest rate swap agreements to minimize significant unanticipated fluctuations in earnings and cash flows caused by interest rate volatility.

As more fully enumerated in Part II, Notes 1 and 16 of the consolidated financial statements of this Annual Report on Form 10-K, in the first quarter of 2004 the Bank de-designated its interest rate swap agreements as cash flow hedges. In prior reporting periods, changes in the fair value of the interest rate swap agreements were recorded on the consolidated balance sheet in other comprehensive income, while current period net cash flows representing net amounts received from or paid to counter-parties were recorded as interest income. From the time of their de-designation, changes in their fair value and current period net cash flows were recorded in non-interest income.

In July 2004, the Financial Accounting Standards Board ("FASB") issued guidance regarding SFAS No. 133 Implementation Issue No. G25, "Cash Flow Hedges:  Using the First-Payments Received Technique in Hedging the Variable Interest Payments on a Group of Non-Benchmark-Rate-Based Loans", in which the FASB indicated the first-payments-received technique for identifying the hedged forecasted transactions (that is, the hedged interest payments) can be used in a cash flow hedge of the variable prime-rate-based or other variable non-benchmark-rate-based interest payments for a rolling portfolio of pre-payable interest-bearing loans, provided all other conditions for a cash flow hedge have been met. During the third quarter of 2004, the Bank re-designated its interest rate swap agreements as cash flow hedges and, from the time of this designation, changes in their fair value are being recorded on the consolidated balance sheet in other comprehensive income, while current period net cash flows representing net amounts received from or paid to counter-parties are recorded as interest income.

For the year ended December 31, 2004, non-interest income on interest rate swap agreements amounted to $404, whereas no such non-interest income was recorded in 2003 and 2002. Of the $404 in non-interest income on interest rate swap agreements recorded during 2004, $375 represented net cash flows received from counterparties, and $29 represented net unrealized gains.

The Bank’s interest rate swap agreements are discussed in further detail under Item 7 of this Annual Report on Form 10-K, Derivative Instruments.

Other Operating Income: Other operating income represented 5.4% of total 2004 non-interest income, compared with 4.3% and 5.4% in 2003 and 2002, respectively. For the year ended December 31, 2004 total other operating income amounted to $356, compared with $302 and $340 in 2003 and 2002, representing an increase of $54 or 17.9%, and a decrease of $38 or 11.2%.

Other operating income is principally derived from bank-owned life insurance ("BOLI"), representing increases in the cash surrender value of life insurance policies on the lives of certain retired employees who had provided positive consent allowing the Bank to be the beneficiary of such policies. Income from BOLI amounted to $222 in 2004 compared with $204 and $221 in 2003 and 2002, representing 62.4%, 67.5%, and 65.0% of other operating income, respectively.

Non-interest Expense

For the year ended December 31, 2004, total non-interest expense amounted to $18,914, compared with $18,853 and $18,245 in 2003 and 2002, representing increases of $61 and $508, or 0.3% and 3.3%, respectively.

A variety of factors, both favorable and unfavorable, contributed to 2004 non-interest expense year-over-year results.

As more fully enumerated below, included in 2004 non-interest expense were costs associated with the Company’s corporate re-branding initiative, other-than-temporary impairment write-downs of certain non-marketable equity investments, and costs related to integration activities associated with the Rockland branch acquisition. Non-interest expenses also included a variety of costs related to the Sarbanes-Oxley Act of 2002, which, among other things, established extensive new requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting.

The Company’s success in containing the increase in 2004 non-interest expense at less than 1% was attributed in part to a variety of previously reported expenses incurred during 2003 related to organizational restructuring activities in the Company’s financial services division including certain legal expenses and settlements, an other-than-temporary impairment write-down of goodwill, and adjustments to the workforce including employee severance payments. Salaries and employee benefits declined during 2004, reflecting current and prior year changes to staffing levels and compensation mix.

Salaries and Employee Benefits: For the year ended December 31, 2004, total salaries and benefit expenses amounted to $9,335, compared with $9,483 and $9,235 in 2003 and 2004, representing a decrease of $148 or 1.6%, and an increase of $248 or 2.7%, respectively.

Over the past two years the Company has made a number of strategic adjustments to the workforce, the results of which continued to be reflected in the 2004 and 2003 year-over-year salary and employee benefit expense levels. The decline in 2004 salaries and employee benefits expense was attributed in part to certain staffing adjustments made in 2003, including employee relocation expenses and the payment of employee severance.

As previously reported, on March 2, 2005, Dean S. Read Resigned from his position as President of the Bank.  In conncection with Mr. Read's resignation, the Company and Mr. Read have entered into a severance agreement purusant to which, among other things, the Company will pay Mr. Read a severance payment and a portion of Mr. Read's health benefits for a limited period of time.  The Company estimates that approximately $238 in salaries and benefits expense will be recorded in the first quarter of 2005 related to Mr. Read's severance agreement.

Occupancy Expenses: For the year ended December 31, 2004, total occupancy expenses amounted to $1,170, compared with $1,058 and $1,020 in 2003 and 2002, representing increases of $112 and $38, or 10.6% and 3.7%, respectively.

The 2004 increase in occupancy expenses were attributed to a number of factors including both initial and ongoing expenses associated with the Bank’s acquisition of the Rockland branch office, and expenses associated with the Company’s re-branding initiative. Both the 2004 and 2003 increases in occupancy expenses reflected normal increases in a variety of occupancy related costs.

Furniture and Equipment Expenses: For the year ended December 31, 2004, total furniture and equipment expenses amounted to $1,716, compared with $1,540 and $1,535 in 2003 and 2002, representing increases of $176 and $5, or 11.4% and 0.3%, respectively.

The increase in 2004 furniture and equipment expenses was principally attributed to certain costs associated with the Rockland branch acquisition, as well as costs associated with upgrades to the Company’s technology infrastructure.

Credit Card Expenses: For the year ended December 31, 2004, total credit card expenses amounted to $1,249, compared with $1,187 and $1,224 in 2003 and 2002, representing an increase of $62 or 5.2%, and a decrease of $37 or 3.0%, respectively.

Credit card expenses principally relate to the Bank’s merchant credit card processing activities, and to a lesser extent its Visa credit card portfolio. The $62 increase in 2004 credit card expenses compared with 2003, was principally attributed to increases in merchant credit card processing volumes, which favorably impacted the corresponding 2004 non-interest income derived from these activities by $73. Likewise, the $37 decrease in 2003 credit card expenses compared with 2002 was principally attributed to declines in merchant credit card processing volumes, and also contributed to the corresponding decline in 2003 non-interest income derived from merchant credit card processing activities.

Other Operating Expenses: For the year ended December 31, 2004, total other operating expenses amounted to $5,444, compared with $5,585 and $5,231 in 2003 and 2002, representing a decrease of $141 or 2.5%, and an increase of $354 or 6.8%, respectively.

A variety of factors, both favorable and unfavorable, contributed to the 2004 year-over-year increase in other operating expenses.

Included in 2004 other operating expenses were a variety of costs associated with the Company’s previously announced corporate re-branding and market research initiatives. The Company introduced updated logos and simplified corporate identities, together with a comprehensive marketing program promoting the Company’s new image and certain new banking product packages such as  Home Plus andIdeal Checking. Total 2004 marketing and public relations expenses amounted to $830 compared with $468 in 2003, representing an increase of $361, or 77.2%.

Included in 2004 other operating expenses, was the write-down of certain non-marketable venture capital equity investment funds considered other-than-temporarily impaired amounting to $197. No impairment write-downs were recorded during 2003 or 2002. These investment funds, originating as far back as 1987 and in some cases qualifying for Community Reinvestment Act credit, generally represent socially responsible venture capital investments in small businesses throughout Maine and New England. The total amount of the 2004 impairment write-downs represented 28.1% of their recorded book value.

Included in 2004 other operating expenses were certain costs related to the Company’s compliance with the sweeping changes in U.S. securities laws and regulations enacted under the Sarbanes-Oxley Act of 2002, particularly Section 404, which establishes extensive new requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting. Included in 2004 other operating expenses were a variety of audit fees amounting to $425, representing an increase of $133, or 45%, compared with 2003.

The Company’s success in containing the increase in 2004 other operating expenses at 2.5% was attributed in part to a variety of previously reported expenses incurred during 2003 related to organizational restructuring activities in the Company’s financial services division, including certain legal expenses and settlements, and an other-than-temporary impairment write-down of goodwill related to its second-tier brokerage subsidiary. The foregoing expenses also represented the major factors underlying the $354 or 6.8% increase in other operating expenses experienced in 2003 compared with 2002, as well as the $508 or 3.3% increase in total non-interest expenses in 2003 compared with 2002.

Income Taxes

For the year ended December 31, 2004 total income tax expense amounted to $2,123, compared with $1,892 and $1,742 in 2003 and 2002, representing increases of $231 and $150, or 12.2% and 8.6%, respectively.

Effective Income Tax Rate: The Company’s effective income tax rate in 2004 amounted to 27.0%, compared with 26.7% and 26.6% in 2003 and 2002, respectively. The income tax provisions for these periods were less than the expense that would result from applying the federal statutory rate of 34% to income before income taxes, principally because of the impact of tax-exempt income on certain investment securities, loans and bank owned life insurance.

Fluctuations in the Company’s effective tax rate can occur based upon the percentage of non-taxable income in relation to income before income taxes, during any given reporting period.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk do not arise in the normal course of the Company’s business activities.

The responsibility for interest rate risk management oversight is the function of the Bank’s Asset/Liability Committee ("ALCO"), chaired by the Chief Financial Officer and composed of various members of corporate senior management. ALCO meets regularly to review balance sheet structure, formulate strategy in light of current and expected economic conditions, adjust product prices as necessary, implement policy, monitor liquidity, and review performance against guidelines established to control exposure to the various types of inherent risk.

Interest Rate Risk: Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank's net interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity and/or cash flow characteristics of assets and liabilities. Management's objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank's balance sheet. The objectives in managing the Bank's balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promise sufficient reward for understood and controlled risk.

The Bank's interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off balance sheet instruments as they relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by the Bank’s ALCO and Board of Directors.

The Bank's Asset Liability Management Policy, approved annually by the Bank’s Board of Directors, establishes interest rate risk limits in terms of variability of net interest income under rising, flat, and decreasing rate scenarios. It is the role of ALCO to evaluate the overall risk profile and to determine actions to maintain and achieve a posture consistent with policy guidelines.

Interest rate risk is monitored through the use of two complementary measures: static gap analysis ("gap") and interest rate sensitivity modeling. While each measurement may have its limitations, taken together they form a reasonably comprehensive view of the magnitude of the Bank’s interest rate risk, the level of risk over time, and the quantification of exposure to changes in certain interest rate relationships.

Static Gap Analysis: Interest rate gap analysis provides a static view of the maturity and re-pricing characteristics of the Bank’s on and off-balance sheet positions. Gap is defined as the difference between assets and liabilities re-pricing or maturing within specified periods. An asset-sensitive position, or "positive gap," indicates that there are more rate sensitive assets than rate-sensitive liabilities re-pricing or maturing within a specified time period, which would imply a favorable impact on net interest income during periods of rising interest rates. Conversely, a liability-sensitive position, or "negative gap," generally implies a favorable impact on net interest income during periods of falling interest rates.

There are certain limitations inherent in static gap analysis. These limitations include the fact that it is a static measurement and it does not reflect the degrees to which interest earning assets and interest bearing liabilities may respond non-proportionally to changes in market interest rates. Although the ALCO reviews all assumptions used in the model in detail, assets and liabilities do not always have clear re-pricing dates, and re-pricing may occur earlier or later than assumed in the model.

The Bank’s static interest rate sensitivity gap is summarized below:

INTEREST RATE RISK
CUMULATIVE STATIC GAP POSITION
December 31, 2004 and 2003

The Bank’s December 31, 2004 cumulative interest rate risk sensitivity static gap position indicates the Bank’s balance sheet is asset sensitive over all future periods. The December 31, 2003 gap position indicated the Bank’s balance sheet was asset sensitive, but not to the same degree as of December 31, 2004. Changes in the Bank’s cumulative static gap position principally reflect a higher level of variable rate earning assets at December 31, 2004 compared with the same date in 2003.

Based in part upon the cumulative static gap position, management believes that the Bank’s balance sheet is favorably positioned for rising rates and an improving economy, but is moderately exposed to declining rates and a stalled economy.

Interest Rate Sensitivity Modeling: The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The model simulates the behavior of interest income and expense of all balance sheet and off-balance sheet instruments, under different interest rate scenarios together with a dynamic future balance sheet. Interest rate risk is measured in terms of potential changes in net interest income based upon shifts in the yield curve.

The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product specific assumptions for deposits accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with call provisions, are examined on an individual basis in each rate environment to estimate the likelihood of a call. Prepayment assumptions for mortgage loans and mortgage backed securities are developed from industry median estimates of prepayment speeds, based upon similar coupon ranges and seasoning. Cash flows and maturities are then determined, and for certain assets, prepayment assumptions are estimated under different interest rate scenarios. Interest income and interest expense are then simulated under several hypothetical interest rate conditions including:

• A flat interest rate scenario in which current prevailing rates are locked in and the only balance sheet fluctuations that occur are due to cash flows, maturities, new volumes, and re-pricing volumes consistent with this flat rate assumption.

Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken to maintain the balance sheet interest rate risk within established policy guidelines.

The following table summarizes the Bank's net interest income sensitivity analysis as of December 31, 2004, over one and two year horizons and under different interest rate scenarios. Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken in order to maintain the balance sheet interest rate risk within established policy guidelines.

INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENARIO
DECEMBER 31, 2004

The foregoing interest rate sensitivity modeling results indicate that the Bank’s balance sheet is about evenly matched in a variety of interest rate scenarios. Accordingly, management believes interest rate risk will not have a material adverse impact on future net interest income.

The foregoing interest rate sensitivity modeling results indicate that the Bank’s balance sheet is about evenly matched over the one-year horizon. Beyond the one-year horizon, the model results indicate the Bank is positively positioned for a rising interest rate environment without assuming interest rate risk exposure should interest rates remain flat or begin to decline. Accordingly, management believes interest rate risk will not have a material adverse impact on future net interest income. Management also believes the Bank's balance sheet is well positioned for rising interest rates and an improving economy.

Assuming interest rates remain at or near their current levels and the Bank maintains a static balance sheet, the interest rate sensitivity simulation model suggests that the net interest margin will slowly trend upward, as most of the Bank’s asset base has already re-cycled into the current interest rate environment while most of the funding base has already reset to low interest rate levels. The upward trend principally results from the re-investment of security and loan cash flows into higher current interest rate levels. Although short-term market interest rates have risen with the recent increases in the Federal Funds rate, the Bank has successfully lagged the market with the pricing of deposit rates without any material run-off in balances. However, margins could narrow if the Bank is eventually forced to increase deposit interest rates in response to competitive market pricing pressures. Management anticipates continued balance sheet growth will be needed to meaningfully increase the Bank’s net interest income, should interest rates remain at current levels.

Assuming interest rates decline from current levels and the Bank maintains a static balance sheet, management believes net interest income will decline slightly but remain relatively stable over the one and two-year horizons. The interest rate sensitivity simulation model suggests that funding cost reductions will essentially keep pace with falling asset yields, without significantly impacting margins and net interest income, however, as funding costs reach their assumed floors, asset yields will continue to decline as cash flows from securities and loans are reinvested into the low rate environment and variable rate assets will adjust downward, resulting in lower levels of net interest income. Management anticipates continued balance sheet growth will be needed to sustain the Bank’s current level of net interest income, should interest rates decline.

While the simulated interest rate decline of 100 basis points would mildly reduce net interest income over the two-year horizon, Management believes that such a decline in interest rates, to a Federal Funds Targeted rate of 1.25%, represents a scenario that is not likely to occur. Further, a repositioning of the balance sheet to manage such a decline, would likely have an adverse impact on net interest income in a rising or flat interest rate environment, scenarios management believes are more likely to occur over the longer term.

In a rising rate environment with the Bank maintaining a static balance sheet, management anticipates net interest income will begin increasing over the one-year horizon and continue to accelerate in year two and subsequent years. The interest rate sensitivity simulation model suggests that as interest rates rise, the Bank’s asset base will re-price more quickly than funding costs, principally due to a large floating rate loan base, combined with the re-investment of cash flows from the securities and loan portfolios in a higher interest rate environment. Over the two-year horizon and beyond, the model suggests assets yields will continue to reset at higher levels and margins will widen as funding costs begin to stabilize more quickly. Management believes rising interest rates will increase net interest income without continued balance sheet growth.

Since June of 2004 through December 31, 2004, the U.S. Treasury yield curve (the "yield curve") has flattened substantially. While the Federal Reserve has increased short-term interest rates by 125 basis points, the 10-year U.S. Treasury note has declined 65 basis points from its 2004 high, thus flattening the yield curve by 190 basis points. Management models the Bank’s interest rate risk sensitivity position under a variety of future interest rate scenarios, including a flattening of the yield curve. The interest rate sensitivity simulation model suggests that if short-term interest rates continue to rise and the yield curve flattens further, the Bank’s net interest income will increase mildly over the one-year horizon and will continue to accelerate in year two and subsequent years, but not to the same degree as would a parallel shift in the yield curve. This increase is principally attributed to the Bank’s large floating rate loan base. Management believes continued increases in short-term interest rates will increase net interest income, particularly over the two-year horizon, without continued balance sheet growth.

Following the short-term interest rate increases by the Federal Reserve in the second half of 2004, as was anticipated by management through use of the interest rate sensitivity model, during the six months ended December 31, 2004 the Bank’s net interest margin increased 27 basis points, compared with the quarter ended June 30, 2004.

The following table summarized the Bank’s net interest income sensitivity analysis as of December 31, 2003, over one and two-year horizons, and assuming a parallel shift in the yield curve. The table also summarized net interest income sensitivity under a non-parallel shift in the yield curve, whereby short-term rates rise by 200 and 400 basis points.

INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENARIO
DECEMBER 31, 2003

As was anticipated by Management through use of the interest rate sensitivity model, the Bank’s net interest income was moderately impacted and this trend continued into the first six-months of 2004. Management believes that were it not for the growth in earning assets during this period of time combined with a variety of strategies designed to adjust the posture of the balance sheet, net interest income would have posted declines.

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: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment / replacement of asset and liability cash flows, and others. 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.

As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment/refinancing levels deviating from those assumed; the impact of interest rate change caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis does not reflect additional actions that ALCO might take in responding to or anticipating changes in interest rates.

The Bank engages an independent consultant to periodically review its interest rate risk position and the reasonableness of assumptions used, with periodic reports provided to the Bank’s Board of Directors. At December 31, 2004, there were no significant differences between the views of the independent consultant and management regarding the Bank’s interest rate risk exposure.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Bar Harbor Bankshares:

We have audited the accompanying consolidated balance sheet of Bar Harbor Bankshares and subsidiaries (the Company) as of December 31, 2004, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bar Harbor Bankshares and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the year then ended, in conformity with U. S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Albany, New York
March 14, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Dollars in thousands, except share and per share data)

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