UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarter ended: September 30, 2004                      Commission File No. 841105-D

BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter)

(207) 288-3314
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES: (X) NO: ( )

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).

YES: ( ) NO: (X)

Number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JuneSEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Dollars in thousands, except per share data)
(unaudited)

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003
(Dollars in thousands, except per share data)
(unaudited)

The accompanying notes are anintegral part of these unaudited consolidated interim consolidated financial statementsstatements.

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003
(Dollars in thousands)
(unaudited)

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003
(Dollars in thousands, except per share data)
(unaudited)

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003
(Dollars in thousands)
(unaudited)

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
JuneSeptember 30, 2004
(Dollars in thousands, except per share data)
(unaudited)(unaudited)

Note 1: Basis of Presentation

The accompanying consolidated interim financial statements are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All inter-company transactions have been eliminated in consolidation. Amounts in the prior period financial statements are reclassified whenever necessary to conform with current period presentation. The net income reported for the six-monthsthree and nine-months ended JuneSeptember 30, 2004 is not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or any other interim periods.

The consolidated balance sheet at December 31, 2003 has been derived from audited consolidated financial statements at that date. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements included in the Registrant's annual reportAnnual Report on Form 10-K for the year ended December 31, 2003, and notes thereto.

Note 2: Management’s Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, income tax estimates, and interest income recognition on loans, and the valuation of intangible assets.

Management believes the allowance for loan losses is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The allowance for loan losses, 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, collateral values, the performance of individual loans in relation to contract terms, and estimated fair values of properties to be foreclosed. The use of different estimates or assumptions could produce different provisions for loan losses. Referlosses, and 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 discussionallowance. In addition, various regulatory agencies, as an integral part of Allowance for Loan Losses andProvision in Part I, Item 2 of this report on Form 10-Q for a detailed description of management’s estimationtheir examination process, and methodology relatedperiodically review the Bank’s allowance, which also may necessitate future additions or reductions to the reserve for loan losses.allowance, based on information available to them at the time of their examination.

The Company estimates its income taxes for each period for which a statement of operations 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 income tax return and accountingfinancial reporting 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 past taxes paid and/or 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 JuneSeptember 30, 2004 and December 31, 2003, there was no valuation allowance for deferred tax assets, which are included in other assets and amounted to $1,908 and $700, respectively.on the consolidated balance sheet.

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 the 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.

In connection with acquisitions, the Company generally records as assets on its financial statements both goodwill and identifiable intangible assets such as core deposit intangibles. The Company evaluates whether the carrying value of its goodwill has become impaired, in which case the value is reduced through a charge to its earnings. Core deposit and other identifiable intangible assets are amortized to expense over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The valuation techniques used by the Company to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based upon changes in economic conditions and other factors. Any changes in the estimates used by the Company to determine the carrying value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, would adversely affect the Company’s results of operations.

Note 3: Goodwill and Other Intangible Assets

A summary of goodwill, by subsidiary, capitalized on the Company’s consolidated balance sheet follows:

During the first quarter of 2004, the Company acquired $2,858 in goodwill in connection with the acquisition of a branch in Rockland, Maine by its wholly owned subsidiary, Bar Harbor Bank & Trust (the "Bank").

The Company has a finite-lived intangible asset capitalized on its consolidated balance sheet in the form of a core deposit intangible asset related to the Bank’s acquisition of the Rockland branch. The core deposit intangible asset is being amortized over an estimated useful life of six years,six-years, and is included in other assets on the JuneSeptember 30, 2004 consolidated balance sheet. There was no such intangible asset at December 31, 2003.

A summary of the core deposit intangible asset follows as of JuneSeptember 30, 2004:

Amortization expense on the core deposit intangible asset is expected to total $34$17 for the remainder of 2004, $67 for each year 2005 thru 2009.

Note 4: Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity, such as the Company’s dilutive stock options.

The following is a reconciliation of basic and diluted earnings per share for the three and six monthsnine-months ended JuneSeptember 30, 2004 and 2003:

Note 5: Stock Based Compensation

TheOn October 3, 2000, the shareholders of the Company has a stock-based compensation planapproved the Bar Harbor Bankshares and its Subsidiaries Incentive Stock Option Plan of 2000 that is described more fully in Notes 1 and 16 to the Consolidated Financial Statements in the Company’s 2003 Annual Report on Form 10-K. The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-based compensation cost hascosts have been reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date.

Had compensation costs for the plan been determined based on the fair value of the options at the grant dates consistent with the method described in SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except for per-share data):

Note 6: Employee BenefitsRetirement Plans

The Company sponsors a post retirement benefit plan, which provides medical and life insurance to eligible employees. The Company also has non-qualified supplemental retirement agreements for certain active and retired officers.

The following tables provide the net periodic benefit costs for the three and six monthsnine-months ended JuneSeptember 30, 2004 and 2003:

The Company is expected to contribute $454 to the foregoing plans in 2004. As of JuneSeptember 30, 2004, the Company had contributed $234$343 to the plans.

Note 7: Commitments and Contingencies

The Company is a party to financial instruments in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit.

Exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for commitments to make loans, unused lines of credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policy to make such commitments as it uses for on-balance-sheet items, such as loans. At JuneSeptember 30, 2004 and December 31, 2003, commitments to extend credit and unused lines of credit totaled $110,627$115,405 and $98,874, respectively. Since commitments to extend credit and unused lines of credit may expire without being fully drawn upon, these amounts do not necessarily represent future cash commitments. Collateral obtained upon funding of the commitment is determined on a case-by-case basis using management’s credit evaluation of the borrower.

The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are frequentlyprimarily issued in support of third party debt or obligations. 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 credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet instruments. Typically, these standby letters of credit have terms of five years or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters of credit totaled $1,657$1,155 at JuneSeptember 30, 2004 and $5,050$2,205 at December 31, 2003. As of JuneSeptember 30, 2004, the fair value of the standby letters of credit was not materialsignificant to the Company’s consolidated financial statements.

Note 8: Financial Derivative Instruments

At JuneSeptember 30, 2004 the Company had two outstanding derivative instruments with notional principal amounts totaling $20 million, both of which were interest rate swap agreements. The details are summarized as follows:

The Company 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 agreement.

Financial instruments are reviewed as part of the asset/liability management process and are factored into the Company’s overall interest rate risk position. The Company regularly reviews the credit quality of the counter-party from which the interest rate swap agreements have been purchased. The notional amounts of the agreements do not represent exposure to credit loss. The Company 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.

These interest rate swap agreements were designated as cash flow hedges at December 31, 2003 and had total unrealized gains of $86. The fair value of these instruments, net of tax, was recorded as a component of accumulated other comprehensive income on the consolidated balance sheet. Changes in fair value were recorded as a component of other comprehensive income. Current period net cash flows representing net amounts received from or paid to counter-parties were recorded as interest income.

During the first quarter of 2004, these interest rate swap agreements were de-designated as cash flow hedges and, prospectively from the time of de-designation, changes in their fair value and current period net cash flows relatedrepresenting net amounts received from or paid to thesecounterparties agreements arewere recorded in the consolidated statement of income and included as part of noninterestnon-interest income. The unrealized gain on these interest rate swap agreements at December 31, 2003 of $86 remained in accumulated other comprehensive income, net of tax, and is beingto be accreted into interest income over the remaining terms of the respective swap agreements.

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 Company 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 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.

At September 30, 2004, December 31, 2003 and September 30, 2003, the fair value of the interest rate swap agreements were $28, $86 and $388, respectively, and included in other assets on the consolidated balance sheet.

At September 30, 2004 the net unrealized loss on these interest rate swap agreements included in other comprehensive income, net of tax, amounted to $1. At December 31, 2003 and September 30, 2003 the net unrealized gains on these interest rate swap agreements included in other comprehensive income, net of tax, amounted to $57 and $256, respectively.

During the quarter ended September 30, 2004, the Company recorded in non-interest income unrealized appreciation of $428 representing a mark-to-market adjustment for interest rate swap agreements prior to their designation as cash flow hedges, compared with an unrealized loss of $728 recorded in the quarter ended June 30, 2004, and an unrealized gain of $328 recorded in the Company recorded a loss of $727 related toquarter ended March 31, 2004. For the nine-months ended September 30, 2004, the net unrealized depreciation of thesegain on interest rate swap agreements recorded in non-interest income amounted to $29. No such amounts were recorded in non-interest income during 2003.

For the three and $129 in income related tonine-months ended September 30, 2004, the total net cash flows received from counter-parties amounted to $89 and $386, respectively, compared with $128 and $324 during the quarter resulting fromsame periods in 2003. Of the agreements. As of June 30, 2004, net unrealized loss on the agreements stood at $399. For the six months ended June 30, 2004, the income related to the$89 in net cash flows amounted to $296.received from counter-parties during the three-months ended September 30, 2004, $79 was recorded in non-interest income and $10 in interest income. Of the $386 in net cash flows received from counter-parties during the nine-months ended September 30, 2004, $376 was recorded in non-interest income and $10 in interest income. The $324 in net cash flows received during the nine-months ended September 30, 2003 was recorded in interest income.

Note 9: Business Segments

The Company has determined that its operations are solely in the community banking industry and include the traditional community banking services, including lending activities, acceptance of demand, savings and time deposits, business services, investment management, trust and third party brokerage services. These products and services have similar distribution methods, types of customers and regulatory responsibilities.

SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information" requires public companies to report certain financial information about operating segments for which such information is available and utilized by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has determined that its operations are solely in the community banking industry, and include the traditional commercial banking services. In prior reporting periods the Company had also included Financial Services as a business segment and, accordingly, provided segment reporting for that segment. For the year ended December 31, 2003 revenue from Financial Services represented only 5.8% of the Company’s total revenue.

As more fully described in Part I, Item 1 of the Company’s Annual Report on Form 10-K, and Part I, Item 2, Other Events of the Company’s March 31, 2004 Form 10-Q, in December 2003 the Company’s Board of Directors approved a restructuring plan for its wholly owned subsidiary, BTI Financial Group ("BTI"). The restructuring plan simplified and aligned BTI’s brand names and operating model with the Bank. During the first quarter of 2004 the principal elements of the plan were completed, with the results of all operations now viewed as a single strategic unit by the chief operating decision maker.

The Company has determined that its operations are solely in For the community banking industry and includeyear ended December 31, 2003 revenue from Financial Services represented only 5.8% of the traditional community banking services, including lending activities, acceptance of demand, savings and time deposits, business services, investment management, trust and brokerage services. These products and services have similar distribution methods, types of customers and regulatory responsibilities. Accordingly,Company’s total revenue. In these circumstances, segment information is not required with respect to investment management, trust and third party brokerage services provided by the Company (which total less than 10% of total revenue).Company.

Note 10: Recently Issued Accounting Pronouncements

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 interes-bearinginterest-bearing loans (or other interest-bearing financial assets), provided all other conditions for a cash flow hedge have been met.   Entities that choose to use the first-payments-received technique are still required by SFAS 133 (as amended) to assess the effectiveness of the cash flow hedging relationship and to recognize ineffectiveness in earnings, attributable to overhedges.if any.    The effective date of the guidance for each reporting entity is the first day of the first fiscal quarter beginning after August 9, 2004.  Early application of the guidance covering this Implementation Issue is permitted.  ImplementationDuring the third quarter of 2004 the Company implemented this guidance and designated it prime-rate-based interest rate swap agreements as cash flow hedges. The adoption of this guidance coulddid not have a significant impact on the Company's consolidated financial statements or results of operations when adopted.for the periods ended September 30, 2004, however, prospectively the adoption of the guidance could have a significant impact on the Company’s consolidated financial position.

In MayMarch 2004, the FASB Emerging Issues Task Force ("EITF") reached a consensus on Issue 03-1, "The Meaning of Other Than Temporary Impairment (Issue 03-1)". The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired is as follows: Step 1: Determine whether an investment is impaired. An investment is considered impaired if its fair value is less than its cost. Step 2: Evaluate whether an impairment is other-than-temporary. For equity securities and debt securities that can contractually be prepaid or otherwise settled in such a way that the investor would not recover substantially all of its cost, an impairment is presumed to be other-than-temporary unless: the investor has the ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted market price recovery of the investment, and evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. For other debt securities, an impairment is deemed other-than-temporary if: the investor does not have the ability and intent to hold the investment until a forecasted market price recovery (may mean until maturity), or it is probable that the investor will be unable to collect all amounts due according to the contractual terms of the debt security. Step 3: If the impairment is other-than-temporary, recognize in earnings an impairment loss equal to the difference between the investments cost and its fair value. The fair value of the investment then becomes the new cost basis of the investment and cannot be adjusted for subsequent recoveries in fair value, unless required by other authoritative literature.

On September 30, 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2. The FSP supersedes FSP No. 106-1,EITF Issue 03-01-1, which was issued to addressdelayed the accounting impacteffective date for the measurement and recognition guidance of an impairment loss that is other-than-temporary (i.e. steps 2 and 3 of the Medicare Prescription Drug, Improvement and Modernization Actimpairment model) contained in paragraphs 10-20 of 2003 (the Act).EITF 03-1. Application of these paragraphs is deferred pending issuance of proposed FSP EITF Issue 03-1a. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The Act includes a prescription drug benefit under Medicare Part D and a federal subsidyguidance in paragraphs 6 to sponsors9 of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FSP No. 106-2 applies only to sponsors of single-employer plans for which (1) the employer concludes that prescription drug benefits under the plan are actuarially equivalent to Medicare Part D and thus qualify for the subsidy, and (2) the expected amountEITF 03-1 (i.e. steps of the subsidy will offset or reduceimpairment model), as well as the employer-sponsor's sharedisclosure requirements in paragraphs 21 and 22 have not been deferred and should be applied based on the transition provisions in EITF 03-1. Based on the composition of the plan's prescription drug coverage. The FSP provides accounting guidance and required disclosures. For public companies, the FSP is effective for the first interim or annual period beginning after June 15, 2004. The effects of the Act on the accumulated projected benefit obligation or net periodic postretirement benefit cost are not reflected in the Financial Statements or accompanying notes. FSP No. 106-2investment portfolio held at September 30, 2004, EITF 03-1 is not expected to have a material effect on the Company's consolidated financial statementsposition or results of operations.

Statement of Financial Accounting Standards ("SFAS") No. 133 Implementation Issue C13, "When a loanLoan Commitment Is Included in the Scope of Statement 133", requires commitments to originate mortgage loans that will be held for sale upon origination to be accounted for as derivatives, but does not provide guidance on how the fair value of those commitments should be measured. In a December 2003 speech, the SEC staff indicated it believes loan commitments are written options and therefore should never result in the recognition of an asset under SFAS No. 133. Rather, the staff indicated lenders should initially recognize a liability for loan commitments, with the offsetting debit recognized as a derivative loss to the extent a premium is not received from the potential borrower. The staff indicated it would not object to a registrants recognizing loan commitments as assets provided itsuch registrant discontinues that practice for commitments entered into in the first reporting period beginning after March 15, 2004 and provided assets recorded on loan commitments entered into prior to that date are reversed when the related loan closes or the commitment expires. The guidance did not have a significant impact on the Company’s consolidated financial statements or results of operations.

At its March 2004 meeting, the Emerging Issues Task Force ("EITF") ratified the consensus reached with regard to Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus provides guidance regarding the meaning of other-than-temporary impairment and its application to investments accounted for under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. The consensus also requires certain quantitative and qualitative disclosures relating to investments with unrealized losses that have not been recognized as other-than-temporary impairments.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, (or VIEs). The objective of this interpretation is to provide guidance on how to identify a VIE and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in the company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. FIN 46 was effective for all VIE’s created after January 31, 2003. However, the FASB postponed that effective dates to December 31, 2003. In December 2003, the FASB issued a revised FIN 46 (FIN 46 R), which has an effective date of March 31, 2004 for VIE’s created prior to February 1, 2003, except for special purpose entities, which much adopt either FIN 46 or FIN 46 R as of December 31, 2003. The adoption of FIN 46 did not have an impact on the Company's financial position or results of operations.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this Form 10-Q. The purpose of this discussion is to highlight significant changes in the financial condition and results of operations of the Company and its subsidiaries.

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

Use of Non-GAAP Financial Measures: Certain information is discussed on a fully taxable equivalent basis. Specifically, included in secondthird quarter 2004 and 2003 net interest income was $419$437 and $404,$416, respectively, of tax-exempt interest income from certain investment securities and loans. For the six-monthsnine-months ended JuneSeptember 30, 2004 and 2003, the amount of tax-exempt income included in net interest income was $782$1,219 and $802,$1,218, respectively. 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 $184$193 and $173$179 in the secondthird quarter of 2004 and 2003 respectively, and $338$531 and $343$522 in tax-equivalent adjustments for the six-monthsnine-months ended JuneSeptember 30, 2004 and 2003, respectively. The analysis of net interest income tables included in this Form 10-Q provide a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Net interest income is commonly presented by other financial institutions 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, tax-equivalent net interest income is generally used by institutions to provide a better basis of comparison from institution to institution. The Company follows these practices.

FORWARD LOOKING STATEMENTS DISCLAIMER

The following discussion, as well as certain other statements contained in this Form 10-Q, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of Section 27A of the Private Securities Litigation and Reform Act of 1995 (the "PSLRA").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. For these statements, the Company claims the protection of the safe harbor for forward-looking statements provided by the PSLRA.

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

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

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

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

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

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

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

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

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

The Company’s significant accounting policies are more fully enumerated in Note 1 to the Consolidated Financial Statements included in Item 8 of its December 31, 2003 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: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 a greater amount of provisions for loan losses is necessary the result is lower net income. Refer to Part I, Item 2, Allowance for Loan Losses and Provision in this Report on Form 10-Q, for further discussion and analysis concerning the allowance.

Income Taxes – The Company estimates its income taxes for each period for which a statement of income is presented. This involves estimating the Company’s actual current tax liability, as well as assessing temporary differences resulting from differing timing of recognition of expenses, income and tax credits, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from historical taxes paid and future taxable income and, to the extent that the recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of JuneSeptember 30, 2004 and December 31, 2003, there was no valuation allowance for deferred tax assets, which are included in other assets and amounted to $1,908 and $700, respectively.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 Note 2 of the consolidated financial statements in Part I, Item 1 of this Form 10-Q for further details of the Company’s accounting policies and estimates covering goodwill and other intangible assets.

RESULTS OF OPERATIONS

OverviewSUMMARY OVERVIEW

The Company reported consolidated net income of $803$1,943 or fully diluted earnings per share of 25 cents$0.61 for the three-months ended JuneSeptember 30, 2004, compared with $1,412$1,229 or fully diluted earnings per share of 43 cents$0.38 for the same quarter in 2003, representing decreasesincreases of $609$714 and 18 cents,$0.23, or 43.1%58.1% and 41.9%60.5%, respectively. The annualized return on average assets ("ROA") and average shareholders’ equity ("ROE") amounted to 0.50%1.15% and 5.78%13.71%, respectively, compared with 1.03%0.87% and 10.57%9.29% for the same quarter in 2003.

ForAs more fully enumerated below, several factors contributed favorably to the six-months ended June 30, 2004, consolidated net income amounted to $2,239 or fully diluted earnings per share of 70 cents,Company’s third quarter performance compared with $2,716 or fully diluted earnings per share of 84 cents for the same periodquarter in 2003, representing decreasesthe more significant of $477 and 14 cents, or 17.6% and 16.7%, respectively. The ROA and ROE amounted to 0.72% and 7.45% respectively, compared with 1.00% and 10.20% forwhich included: a $551 increase in net interest income; the first six-monthsrecording of 2003.

A variety of factors impacted the Company’s second quarter and year-to-date results of operations, including$428 a mark-to-market adjustment of $727 in the second quarter  and $399 for the first six-months of 2004, representing unrealized depreciationappreciation on interest rate swap agreements; a year-to-date decline of $572$136 increase in net gains on the sale of investment securities; and a $90 decline in the impactprovision for loan losses.

For the nine-months ended September 30, 2004, consolidated net income amounted to $4,182 or fully diluted earnings per share of continued low interest rates on net interest income. In addition, second quarter$1.30, compared with $3,945 or fully diluted earnings per share of $1.23 for the same period in 2003, representing increases of $237 and $0.07, or 6.0% and 5.7%, respectively. The ROA and ROE amounted to 0.87% and 9.52% respectively, compared with 0.95% and 9.85% for the first nine-months of 2003.

As more fully enumerated below, the more significant factors unfavorably impacting the Company’s year-to-date results includeof operations compared with the same period in 2003 included: a varietydecline of atypical expenses including:$436 in net gains on the sale of investment securities; a $317 increase in marketing and public relations costs principally related to the Company’s recentlypreviously announced corporate re-branding and market research initiatives amounting to $200; "other-than-temporary"initiatives; other-than-temporary impairment write-downs of certain non-marketable equity investments amounting to $174;$189 compared with none during 2003; and the recording of a $160 loss allowance associated with certain trust activities;activities. The foregoing items were offset in part by a $465 increase in net interest income and $120 in costs associated with the Bank’s previously announced completion of a branch office acquisition$270 decline in the community of Rockland, Maine.provision for loan losses.

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 incurred on deposits and borrowed funds. Net interest income is entirely generated by the Bank. Fluctuations in market interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.

For the quarter ended JuneSeptember 30, 2004, net interest income on a fully tax equivalent basis amounted to $5,008,$5,505, compared with $5,032$4,940 during the secondthird quarter of 2003, representing a decreasean increase of $24,$565, or 0.5%11.4%. The increase in net interest income was principally attributed to the $97,418 or 18.1% increase in average earning assets when comparing the three-months ended September 30, 2004 with the same period in 2003, as the net interest margin declined 20 basis points between periods.

For the six monthsnine-months ended JuneSeptember 30, 2004, net interest income on a fully tax-equivalent basis amounted to $9,977,$15,482, compared with $10,068$15,008 during the same period in 2003, representing a decreasean increase of $91,$474, or 0.9%3.2%.

The declineincrease in net interest income was principally attributed to declines induring the net interest margin, as total average earning assets for the six monthsnine-months ended JuneSeptember 30, 2004 increased $75,503 or 14.6%, compared with the same period in 2003. For the three and six months ended June 30, 2004,2003 was principally attributed to an $81,304 or 15.5% increase in average earning assets, as the net interest margin amounted to 3.28% and 3.39% respectively, compared with 3.88% and 3.93% during the same periods in 2003, representing declines of 60 and 54declined 41 basis points respectively.between these two periods.

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

Net Interest Income Analysis: The following tables set forth an analysis of net interest income by each major category of interest earning assets and interest bearing liabilities for the three and six-monthsnine-months ended JuneSeptember 30, 2004, and 2003, respectively:

AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
THREE MONTHS ENDED
JuneSEPTEMBER 30, 2004 AND 2003

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

AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
SIXNINE MONTHS ENDED
JuneSEPTEMBER 30, 2004 AND 2003

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

Net Interest Margin: The net interest margin, expressed on a tax-equivalent basis, 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.

During the three and six-monthsnine-months ended JuneSeptember 30, 2004, the Bank continued to experience considerable margin erosion in the low interest rate environment.environment compared with the same periods in 2003. The net interest margin amounted to 3.28%3.45% during the secondthird quarter of 2004 compared with 3.65% during the same quarter in 2003, representing a decline of 2720 basis points compared with the prior quarter, and a decline of 60 basis points compared with the second quarter of 2003.points. For the six monthsnine-months ended JuneSeptember 30, 2004 the net interest margin amounted to 3.39%,3.41% compared with 3.82% during the same period in 2003, representing a decline of 5441 basis points compared with the same period in 2003.points.

The prolonged, historically low interest rate environment has caused sharp yield declines on the Bank’s variable rate earning assets and accelerated prepayment speeds on fixed rate earning assets. Drivenassets, driven in part by record loan refinancing activity and accelerated cash flows from the investment securities portfolio, fromportfolio. Comparing the second quarter ofnine-months ended September 30, 2004 with the same period in 2003, through the period covered by this report, the decline in the average yield on interest earning assets exceeded the decline in the rate paid on interest bearing liabilities by 4632 basis points. OverDuring the past twelve months ended September 30, 2004, the Bank’s earning asset base continued to cycle into the current rate environment while most of the funding base had already reset to current interest rate levels or reached their assumed floors.

TheManagement believes the Bank’s strategy of maintaining an asset sensitive balance sheet has contributed to the net interest margin decline over the past year, as interest rates declined to forty-five year lows.year. 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 anticipates is 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 current 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.

In late June of 2004, the Board of Governors of the Federal Reserve System (the "Federal Reserve") began increasing short-term interest rates. As management anticipated, the three recent increases in the Federal Funds rate totaling 75 basis points favorably impacted the Bank’s net interest margin during the three-months ended September 30, 2004. For the quarter ended September 30, 2004 the Bank’s net interest margin was 3.45% compared with 3.28% during the quarter ended June 30, 2004, representing an improvement of 17 basis points.

The Bank’s interest rate sensitivity position is more fully described in Part I, Item 3 of this report on Form 10-Q, Quantitative and Qualitative Disclosures About Market Risk.

Interest Income: For the quarter ended JuneSeptember 30, 2004, total interest income, on a fully tax equivalent basis, amounted to $7,848$8,448 compared with $7,869$7,668 for the same quarter in 2003, representing a declinean increase of $21,$780, or 0.3%10.2%. For the six monthsnine-months ended JuneSeptember 30, 2004 total interest income, on a fully tax equivalent basis amounted to $15,525$23,973 compared with $15,746$23,414 during the same period in 2003, representing a declinean increase of $221,$559, or 1.4%2.4%.

The declinesincreases in interest income were principally attributed to 92 and 88 basis point decreasesthe growth in the yield on average earning assets between reporting periods, as earning asset yields posted declines of 37 and 68 basis when comparing the three and six-monthnine-month periods ended JuneSeptember 30, 2004 with the same periods in 2003. Offsetting most but not all ofPrincipally reflecting the impact of declining yields, was strong earning asset growth between periods.

The June 2003 declineFederal Reserve’s recent increases in short-term interest rates, the Fed Funds targeted rate to 1.00% resulted in lower yieldsyield on variable rate earning assets between reporting periods. In addition, sharp declines inamounted to 5.28% during the U.S Treasury yield curve stimulated an acceleration of prepayment speeds oncurrent quarter ended September 30, 2004, compared with 5.14% during the Bank’s higher yielding fixed rate earning assets; namely, loans and investment securities. These earning assets were principally replaced at prevailing low market yields. During the three-monthsquarter ended June 30, 20042004.

As discussed above, the prepayment speeds on the Bank’s fixed rate earning assets slowed, as yields on the 10-year U.S. Treasury note climbed to a two-year high.

The declinethree and nine-month declines in total interest income attributed to lower yields waswere largely offset by growth in average earning assets, which increased $93,830 and $75,503, or 18.0% and 14.6%, when comparing the three and six month periods ended June 30, 2004 with the same periods in 2003, respectively.assets. As depicted on the succeedingfollowing rate / volume analysis tables, the volume of interest earning assets added to the balance sheet since the secondthird quarter of 2003 contributed $4,721$2,824 to secondthird quarter 2004 interest income, offset by a reductiondecline of $4,742 due$2,044 attributed to the impact of lower yields and interest rates. For the six-monthsnine-months ended JuneSeptember 30, 2004, the volume of interest earning assets contributed $4,308$4,202 to interest income, offset by a reductiondecline of $4,529 due$3,643 attributed to the impact of lower yields and interest rates.

Interest Expense - Total interest expense for the quarter ended JuneSeptember 30, 2004 amounted to $2,840$2,943 compared with $2,837 for$2,728 during the same quarter in 2003, representing an increase of $3,$215, or 0.1%7.9%. For the six monthsnine-months ended JuneSeptember 30, 2004, total interest expense amounted to $5,548$8,491 compared with $5,678 for$8,406 during the same period in 2003, representing a declinean increase of $130,$85, or 2.3%1.0%.

The decreaseincrease in interest expense during the three and nine-months ended September 30, 2004 was principally attributed to a 42 basis point declinethe increases in average interest bearing liabilities amounting to $95,216 or 20.9%, and $81,349 or 18.1%, compared with the same periods in 2003, respectively. These increases were substantially offset by declines in the average cost of interest bearing liabilities between periods, from 2.57%funds which during the first six-months of 2003three and nine-month periods ended September 30, 2004 amounted to 2.15% for2.12% and 2.14%, compared with 2.37% and 2.50% during the same periodperiods in 2004. 2003, representing declines of 25 and 36 basis points, respectively.

The declinedeclines 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. TheDuring the three and nine-months ended September 30, 2004, the total average cost of interest bearing deposits amounted to 1.34% and 1.33% during the six-months ended June 30, 2004,, compared with 1.71%1.49% and 1.64% during the same periodperiods in 2003, representing a declinedeclines of 3815 and 31 basis points.points, respectively.

TheDuring the three and nine-months ended September 30, 2004, the average cost of borrowings amounted to 3.28% in the current quarter,3.33% and 3.38%, compared with 3.83%3.74% and 3.85% during the same periods in the second quarter of 2003, representing a declinedeclines of 5541 and 47 basis points. The decline waspoints, respectively. These declines were principally attributed to the replacement of maturing borrowed funds at prevailing low interest rates. The disproportionate rate of decline in the current quarter compared with the nine-months ended September 30, 2004, reflects the impact of recent interest rate increases by the Federal Reserve on the Bank’s short-term borrowing base.

Consistent with the Bank’s asset and liability management strategies, a portion of the Bank’s borrowings have longer maturities than the funding provided by traditional deposits in order to preserve the sensitivity of net interest income in a rising interest rate environment. While the use of longer maturity borrowings to fund earning assets naturally results in less net interest income, they more closely match the maturities of fixed rate earning assets being added to the balance sheet, and lessen the degree of exposure to interest rate risk.

The declineAs discussed above, the three and nine-month declines in total interest expense resulting from lower interest rates waswere largely offset by increases in interest bearing liabilities of $93,575 and $73,560, or 20.8% and 16.5%, when comparing the three and six month periods ended June 30, 2004, respectively.liabilities. As depicted on the rate / volume analysis tables below, the volume of interest bearing liabilities added to the balance sheet since the third quarter of 2003 contributed $2,155$1,820 to secondthird quarter 2004 interest expense, offset by a reduction of $2,152$1,605 due to lower interest rates. For the six monthsnine-months ended JuneSeptember 30, 2004, the impact of lower interest rates reduced interest expense by $1,976,$1,850, offset by an increase of $1,846 due$1,935 attributed to the volume of 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
THREE MONTHS ENDED JUNE 31,SEPTEMBER 30, 2004 VERSUS JUNESEPTEMBER 30, 2003
INCREASES (DECREASES) DUE TO:

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

ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
SIXNINE MONTHS ENDED JUNE 31,SEPTEMBER 30, 2004 VERSUS JUNESEPTEMBER 30, 2003
INCREASES (DECREASES) DUE TO:

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

Non-interest Income

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 quarter ended JuneSeptember 30, 2004, total non-interest income amounted to $811$2,498 compared with $1,703$1,919 for the same quarter in 2003, representing a decreasean increase of $892,$579, or 52.4%30.2%. For the six monthsnine-months ended JuneSeptember 30, 2004, total non-interest income amounted to $2,652$5,150 compared with $3,438$5,357 during the same period in 2003, representing a decline of $786,$207, or 22.9%3.9%.

Net Gains on the Sale of Securities: During the second quarter of 2004, yields on the five and ten-year U.S. Treasury notes climbed to two year highs, reducing the unrealized gains in the Bank’s available for sale securities portfolio. During the three-months ended June 30, 2004 there were no net gains on the sale of securities recorded, compared with $203 during the second quarter of 2003. For the six-months ended JuneSeptember 30, 2004 net gains on the sale of securities amounted to $193$239 compared with $765$103 during the same period in 2003, representing an increase of $136, or 132.0%. During the nine-months ended September 30, 2004, net gains on the sale of securities amounted to $432 compared with $868 during the same period in 2003, representing a decline of $572,$436, or 74.8%50.2%. The interest rate environment during the first six-monthsnine-months of 2004 and characteristics of the Bank’s securities portfolio did not present as much opportunity or need for securities repositioning transactions, as was the case during the first six-months ofsame period in 2003.

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. The 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 itsthe Bank’s needs for adequate liquidity.

Net LossIncome on Interest Rate Swap Agreements: During the three-monthsthree and nine-months ended JuneSeptember 30, 2004, the Bank recorded a net lossincome on interest rate swap agreements amounting to $598. For the six-months ended June 30, 2004, the net loss amounted to $103. No such$507 and $404, respectively, whereas no income or loss waslosses were recorded in non-interest income during the same periods in 2003.

As more fully enumerated in Part I, Note 8 of the consolidated interim financial statements of this report on Form 10-Q, in the first quarter of 2004 the Company 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. Prospectively, fromFrom the time of their de-designation, changes in their fair value and current period net cash flows are beingwere recorded in non-interest income. This change may createincome, creating potential earnings volatility, over the remaining life of the agreements, consistent with volatility in the U.S. Treasury curve.

ForIn 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 Company 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.

During the quarter ended JuneSeptember 30, 2004, the Company recorded in non-interest income an unrealized depreciationgain of $727$428 representing a mark-to-market adjustment for interest rate swap agreements prior to their designation as cash flow hedges, compared with an unrealized loss of $728 recorded in the quarter ended June 30, 2004, and an unrealized gain of $328 recorded in the prior quarter. Forquarter ended March 31, 2004. These changes reflected the six-months ended June 30, 2004 the total unrealized loss on interest rate swap agreements amounted to $399. The size of the second quarter mark-to-market adjustment reflects the significant upward shiftmovements in the U.S.U.S Treasury yield curve between reporting periods. For example, the three-year U.S. Treasury note closed the quarter ending Junenine-months ended September 30, 2004, 114 basis points higher than where it stoodthe net unrealized gain on March 31, 2004. Short-term increases in U.S. Treasury yields will tend to increase the unrealized loss, while declines will decrease the unrealized losses. However, if the interest rate swap agreements are held to maturity, all cumulative unrealized appreciation or depreciation recorded in non-interest income will netamounted to zero and have no cumulative impact on earnings.$29. No interest rate swap agreement mark-to-market gains or losses were recorded in non-interest income during 2003.

DuringFor the three and six-monthsnine-months ended JuneSeptember 30, 2004, the net positive cash flows received from the interest rate swap agreementscounter-parties and recorded in non-interest income amounted to $129$79 and $296, compared with $105 and $196 during$376. During the same periods in 2003. Innine-months ended September 30, 2003, this income was recorded in interest income, whereas in 2004 this income wasthere were no net cash flows received from counter-parties recorded in non-interest income.

The Bank’s interest rate swap agreements are discussed in further detail under Item 2 of this Form 10-Q, Derivative Instruments / Counter-party Risk and is incorporated herein by reference.

Trust and Other Financial Services: For the three and six-monthsnine-months ended JuneSeptember 30, 2004 income from trust and other financial services amounted to $507$429 and $990$1,419 compared with $629$490 and $1,203$1,693 during the same periods in 2003, representing declines of $122$61 and $213,$274, or 19.4%12.5% and 17.7%16.2%, respectively.

Income from trust and other financial services is principally derived from fee income related to the market value of client assets managed and held in custody and, to a lesser extent, third party brokerage services. The decrease in fee income in part reflects a decline of $9,376, or 5.0%, in the market value ofaverage managed assets when comparing Junethe nine-months ended September 30, 2004 with the same dateperiod in 2003. While the total returns on the managed asset portfolio and new client relationships were accretive to the managed asset portfolio over the past twelve months, this growth was more than offset by closed accounts, including two large relationships amounting to approximately $14,000. Revenue from third party brokerage activities also posted three and six-monthnine-month declines compared with 2003 levels, principally reflecting lower trading volume,volumes, including sales of mutual funds and annuity products.

At JuneSeptember 30, 2004, total managed assets at Bar Harbor Trust Services, a wholly ownedMaine non-depository trust company and second tier subsidiary of the Bank,Company, stood at $178,002,$179,658, compared with $176,127 at December 31, 2003, and $187,378$171,017 at the JuneSeptember 30, 2003.

Other Non-interest Income:Service Charges on Deposits: Income generated from service charges on deposit accounts merchanttotaled $395 and visa credit card processing,$1,149 during the three and miscellaneous service fees, collectively grew $77 on a year-over-year basis, posting increases of 5.2%, 4.8%, and 16.2% respectively, compared with the first six-months of 2003. During the three-monthsnine-months ended JuneSeptember 30, 2004, growth in service charges on deposit accountsrepresenting a decrease of $24 or 5.7% and merchant and visa credit card processing slowed to 0.8%, and 0.6% respectively,an increase of $13 or 1.1% compared with the same quarterperiods in 2003, respectively. The Bank has not increased its service charge fees on deposit accounts over the past few years, while customers have been closing and consolidating small accounts, moving to relationship products having lower fees, and reducing their volume of account overdrafts.

Credit Card Service Charges and Fees: This income is principally generated from merchant credit card processing fees. During the three and nine-months ended September 30, 2004 these fees amounted to $787 and $1,311 respectively, representing increases of 1.4% and 2.7% compared with the same periods in 2003.

Non-interest Expense

For the three and six-monthsnine-months ended JuneSeptember 30, 2004, total non-interest expenses amounted to $4,620$5,032 and $9,217$14,249 compared with $4,448$4,920 and $9,100 for$14,020 during the same periods in 2003, representing increases of $172$112 and $117,$229, or 3.9%2.3% and 1.3%1.6%, respectively.

Salaries and Employee Benefits:Benefit Expenses: For the three and six-monthsnine-months ended JuneSeptember 30, 2004, salaries and employee benefit expenses amounted to $2,092$2,297 and $4,526$6,823 compared with $2,367$2,305 and $4,825$7,130 during the same periods in 2003, representing declines of $275$8 and $299,$307, or 11.6%0.4% and 6.2%4.3%, respectively. The year-over-year declines in salaries and benefit expenses were principally attributed to lower employee incentive compensation and staffing levels and a decreasecompared with the same periods in employee incentive compensation.2003.

Branch AcquisitionOffice Integration Expenses: Included in first quarter and year-to date 2004 non-interest expenses were a variety of non-recurring costs related to integration activities associated with the Bank’s acquisition of a branch office in the community of Rockland, Maine, amounting to approximately $120. These expenses are included in salaries and benefits, occupancy, furniture and equipment, and other operating expenses.

Re-brandingOccupancy, Furniture and Market ResearchEquipment Expenses: For the three and nine-months ended September 30, 2004, occupancy, furniture and equipment expenses amounted to $709 and $2,141 compared with $682 and $1,977 during the same periods in 2003, representing increases of $27 and $164, or 4.0% and 8.3%, respectively. The increases were attributed to a number of factors including both one-time and ongoing expenses associated with the Bank’s acquisition of the Rockland branch office, expenses associated with the Company’s re-branding initiative, and normal increases in a variety of occupancy related costs.

Other Operating Expenses: For the three and nine-months ended September 30, 2004, other operating expenses amounted to $1,445 and $4,341 compared with $1,434 and $4,084 during the same periods in 2003, representing increases of $11 and $257, or 0.8% and 6.3%, respectively.

Included in secondthird quarter and year-to-date 2004 non-interestother operating expenses were a variety of costs associated with the Company’s recentlypreviously announced corporate re-branding and market research initiatives amounting to $200, of which $160 was recorded in other operating expense and the balance recorded in occupancy expense. initiatives. The Company introduced updated logos and simplified corporate identities, together with a comprehensive marketing program offering certain new banking product packages such as Home Plus and Ideal Checking.

Occupancy, Furniture and Equipment Expenses: For the three and six-monthsnine-months ended JuneSeptember 30, 2004 occupancy, furnituremarketing and equipmentpublic relations expenses amounted to $723 and $1,432$651 compared with $653 and $1,295$334 during the same periodsperiod in 2003, representing increasesan increase of $70 and $137,$317, or 10.7% and 10.6%, respectively. The increases were attributed to a number of factors including both one-time and ongoing expenses associated with the Rockland branch acquisition, expenses associated with the Company’s re-branding initiative, and normal increases in a variety of occupancy related costs.

Other Operating Expenses: For the three and six-months ended June 30, 2004, other operating expenses amounted to $1,567 and $2,896 compared with $1,218 and $2,650 during the same periods in 2003, representing increases of $349 and $246, or 28.7% and 9.3%, respectively.94.9%.

Included in 2004 year-to-date other operating expenses were the write-down of certain non-marketable venture capital equity investment funds considered "other-than-temporarily"other-than-temporarily impaired amounting to $174,$189, of which $120$15 was recorded during the secondthird quarter. No impairment write-downs were recorded during 2003. These investment funds, originating as far back as 1987 and in some cases qualifying for Community Reinvestment Act credit, generally represent "socially responsible"socially responsible venture capital investments in small businesses throughout Maine and New England, with the objective of generating gains through the subsequent sale of those investments, as well as periodic dividends to investors.England. The total amount of the 2004 impairment write-downs represented 25.3%28.1% of their book value.value recorded at cost.

DuringIncluded in year-to-date other operating expenses was a loss recorded during the three months ended June 30,second quarter of 2004 at Bar Harbor Trust Services, a second tier subsidiary of the Company, recorded a loss amounting to $160 and associated with a trust account investment authorized by the beneficiaries of the trust, however subsequently deemed by management as inappropriate. Second quarter 2004 other operating expenses also included $53 in non-recurring systems conversion expenses associated with the Company’s previously announced restructuring of BTI Financial Group, a wholly owned subsidiary of the Company, as well as the previously discussed costs associated with the Company’s re-branding and market research initiatives.

Provision For Loan Losses

During the three and six-monthsnine-months ended JuneSeptember 30, 2004 the Bank recorded provisions for loan losses amounting to $30 and $120$150 compared with $150$120 and $300$420 during the same periods in 2003, representing decreases of $120$90 and $180,$270, or 80.0%75.0% and 60.0%64.3%, respectively.

The provision for loan losses reflects the amount necessary to maintain the Allowance for Loan Losses ("allowance") at a level that, in management’s judgment, is appropriate for the amount of inherent risk of loss in the current loan portfolio. Non-performing loans have declined $239$644 and $1,196,$703, or 16.0%43.1% and 48.8%45.3% compared with December 31, 2003 and JuneSeptember 30, 2003, respectively, and remain at low levels. While year-to-date 2004 net charge-offs of $467 have shown an increase compared with the first six-months of 2003, they are not considered reflective of the overall credit quality of the loan portfolio, as $313 of year-to-date charge offs were attributed to one relationship. The allowance for loan losses expressed as a percentage of non-performing loans strengthened to 393%563% at JuneSeptember 30, 2004, compared with 353% and 215%339% at December 31, 2003 and JuneSeptember 30, 2003. While year-to-date 2004 net charge-offs of $645 have shown an increase of $515 compared with the first nine-months of 2003, management does not consider these as being reflective of the overall credit quality of the loan portfolio, as $506 of year-to-date charge offs were attributed to two relationships and were adequately provided for in the Bank’s previously recorded allowance for loan losses.

Based upon the continued high qualityperformance of the loan portfolio, combined with certain improvements with respect to specific credit relationships, the provision was decreased induring the firstthree and second quarters ofnine-months ended September 30, 2004 as compared with the same periods in the prior year as noted above. Refer to Part I, Item 2, Allowance for Loan Losses and Provision, in this Form 10-Q for further discussion and analysis regarding the provision for loan losses, which is incorporated herein by reference.

Income Taxes

Income taxes amounted to $182$805 and $715$1,520 for the three and six-monthsnine-months ended JuneSeptember 30, 2004, representing declinesincreases of $370$394 and $332,$62, or 67.0%95.9% and 31.7%,4.3% compared with the same periods in 2003, respectively. The declinesFor the three-months ended September 30, 2004 the increase in income taxes outpaced the declinesincrease in pre-tax earnings principally due the disproportionate amounts ofto non-taxable income generated from a portion of the Bank’s securities and loan portfolios and includedbearing a smaller percentage of income before income taxes than the comparable period in pre-tax earnings.2003.

The Company's effective tax rate for the three and six-monthnine-month periods ended JuneSeptember 30, 2004 amounted to 18.5%29.3% and 24.2%26.7%, compared with 28.1%25.1% and 27.8%27.0% for the same periods in 2003, respectively. The income tax provisions for these periods are less than the expense that would result from applying the federally statutory rate of 34% to income before income taxes principally because of the impact of tax exempt interest income on certain investment securities, loans and bank owned life insurance. TheFor the three-months ended September 30, 2004, the effective tax ratesrate posted year-over-year declines,a decline compared with the same quarter in 2003, principally due to the disproportionate amounts of non-taxable income includedbearing a smaller percentage of income before income taxes than the comparable period in pre-tax earnings.2003.

FINANCIAL CONDITION

Total Assets

The Company’s assets principally consist of loans and investment securities, representing 62.1%which at September 30, 2004 represented 65.6% and 30.4%26.9% of total assets, respectively. At JuneSeptember 30, 2004 total assets amounted to $671,110$654,699 compared with $583,746 at December 31, 2003 and $555,727$578,944 at JuneSeptember 30, 2003, representing increases of $87,364$70,953 and $115,383,$75,755, or 15.0%12.2% and 20.8%13.1%, respectively.

The increase in total assets from December 31, 2003 was driven by a $45,575$46,149 or 12.0% increase in securities,loans, combined with $33,532a $17,810 or 11.2% increase in loaninvestment securities. The Company’s year- to-date asset growth including loans acquiredwas funded with a $58,095 or 17.1% increase in connection with the Bank’s acquisition of a branch officedeposits, and an $11,115 or 6.0% increase in the community of Rockland, Maine.borrowed funds.

Loan Portfolio

The loan portfolio is primarily secured by real estate in the counties of Hancock, Washington and Knox, Maine. The following table represents the components of the Bank's loan portfolio, net of deferred loan origination fees and costs, as of JuneSeptember 30, 2004, December 31, 2003 and JuneSeptember 30, 2003.

LOAN PORTFOLIO SUMMARY

Total Loans: Total loans at JuneSeptember 30, 2004 amounted to $416,940,$429,557, representing an increase of $33,532$46,149 or 8.7%12.0% compared with December 31, 2003, and an increase of $45,706$50,819 or 12.3%13.4%, compared with JuneSeptember 30, 2003.

The increase in loan balances compared with December 31, 2003 reflects $12,343 in loans acquired in connection with the February 13, 2004 Rockland branch acquisition, principally consumer real estate loans. At June 30, 2004

Excluding the acquired Rockland branch loan portfolio, totaled $17,320, representing post-acquisition loan growth of $4,977 at that branch, or 40.3%, the majority of which was attributed to commercial lending. The Rockland branch loan portfolio contributed 51.7% to the Bank’s year to date loan growth.

Excluding the Rockland branch loan portfolio, the $16,212 increase inSeptember 30, 2004 total loans during the first six-months of 2004 was led by stronghave increased $33,806 or 8.8% compared with December 31, 2003. Commercial lending contributed 62.7% to this growth in commercial lending. while consumer lending contributed 37.3%.

Following record refinancing activity over the past two yearstwo-years and a rise in interest rates that began in the latter part of 2003, consumer real estate loan originations slowed during the first halfnine-months of 2004, but growth continued as new purchase transactions regained their dominance inaccounted for an increasing proportion of the loan origination pipeline. In addition, home equity loan activity has been strong, accounting for almost half of the year-to-date 2004 increase in consumer real estate loans.

Loan origination activity has benefited from a still favorablestill-favorable market interest rate environment, a stable local economy, and initiatives designed to expand the Bank's product offerings and attract new customers while continuing to leverage its existing customer base.

At JuneSeptember 30, 2004 real estate loans comprised 84.4%85.7% of the loan portfolio, compared with 87.4% at December 31, 2003 and 83.1%83.9% at JuneSeptember 30, 2003. The continued strength in the local real estate markets, both residential and commercial, has led to recordhistorically 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.

Credit Risk: Credit risk is managed through loan officer authorities, loan policies, the Bank's Senior Loan Committee, oversight from the Bank's Senior Credit Officer, the Director's Loan Committee, and the Bank's Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent review, subsequent to Management's review, of individual credits is performed by an independent loan review function, which reports to the Audit Committee of the Board of Directors.

Non-performing Loans: Non-performing loans include loans on non-accrual status, loans which have been treated as troubled debt restructurings and loans past due 90 days or more and still accruing interest. The following table sets forth the details of non-performing loans at the dates indicated:

TOTAL NONPERFORMINGNON-PERFORMING LOANS