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

For the quarterly period ended: September 30, 2002.

Commission File No. 841105-D

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

Maine                                                                 01-0393663
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                             Identification No.)

PO Box 400
82 Main Street, Bar Harbor, ME                         04609-0400
(Address of principal executive offices)                       (Zip Code)

(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: ( )

Number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

TABLE OF CONTENTS

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

The Board of Directors
Bar Harbor Bankshares

We have reviewed the accompanying interim consolidated financial information of Bar Harbor Bankshares and Subsidiaries as of September 30, 2002, and for the three and nine-month periods ended September 30, 2002 and 2001. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with United States generally accepted auditing standards, the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with United States generally accepted accounting principles.

/s/ BERRY, DUNN, McNEIL & PARKER

Portland, Maine
November 5, 2002

See Independent Accountants’ Review Report. The accompanying notes are an integral part of these consolidated financial statements.

See Independent Accountants’ Review Report. The accompanying notes are an integral part of these consolidated financial statements.

The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The income reported for the nine months ended September 30, 2002 is not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" addresses financial accounting and reporting for costs associated with exit or disposal activities.

SFAS No. 147, "Acquisitions of Certain Financial Institutions" amends SFAS 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" to exclude from its scope most acquisitions of financial institutions. Such transactions should be accounted for in accordance with SFAS No. 141, "Business Combinations". SFAS No 147 is effective on October 1, 2002.

The company does not expect these statements to have a material effect on the financial condition and results of operation.

3. Line of Business Reporting

The Company manages and operates two major lines of business: Community Banking and Financial Services. Community Banking, through the wholly owned subsidiary Bar Harbor Banking and Trust Company (the "Bank"), includes lending and deposit-gathering activities and related services to businesses and consumers. Financial Services, through the wholly owned subsidiary BTI Financial Group (BTI) and its three operating subsidiaries, includes Dirigo Investments, Inc., a NASD registered broker-dealer; Block Capital Management, an SEC registered investment advisor; and Bar Harbor Trust Services, a Maine chartered trust company. The business lines are identified by the entities through which the product or service is delivered.

The reported lines of business results reflect the underlying core operating performance within the business units. Other is comprised of inter-company eliminations and parent company only items. Selected segment information is included in the following tables.

4. Goodwill

The Company has goodwill with a carrying amount of $375 thousand as of September 30, 2002, and $750 thousand as of December 31, 2001. Upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002, amortization of goodwill was discontinued and the goodwill is now evaluated for impairment. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over 10 to 15 years.

During the first half of 2002, the Company completed implementation of SFAS No. 142, "Goodwill and Other Intangible Assets" which requires most goodwill to be tested for impairment at least annually, rather than amortized over a period of time. The Company estimated the value of goodwill utilizing several standard valuation techniques, including discounted cash flow analysis, as well as an estimation of the impact of current business conditions on the long-term value of the goodwill carried on the balance sheet. Management and the Board of Directors determined the impact of the overall deterioration of the stock and bond markets on investor activities within its target market area had negatively impacted the value of the Company’s goodwill balance related to the acquisition of Dirigo Investments, Inc., its broker dealer subsidiary of BTI. This resulted in an estimation of impairment of $247 thousand, net of tax. As permitted by SFAS No. 142, the Company conducted its valuation during the second quarter, for an estimate of value on January 1, 2002. Under generally accepted accounting principles, this had the result of impacting year-to-date performance without affecting second quarter results.

The following is the effect on net income and earnings per share if amortization of goodwill had not been recorded in each period presented.

The Company has an interest rate swap agreement with a notional amount of $10 million at September 30, 2002 to hedge floating rate loans. The swap agreement is designated as a cash flow hedge since it converts a portion of the loan portfolio from a variable rate, based upon the prime rate, to a fixed rate. The hedge relationship is estimated to be 100% effective; therefore, there is no impact on the statement of income. The fair value of the swap agreement is recorded in the balance sheet with the offset recorded in the statement of changes in shareholders' equity.

Various legal claims arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

7. Income Taxes

The income tax provision for all periods presented differs from the expense that would result from applying the federal statutory rate of 34% to income before income taxes principally because of tax exempt interest income.

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 the Private Securities Litigation and Reform Act of 1995 (the "PSLRA"). 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. 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 business of the Company and its subsidiaries which are subject to change based on the impact of various factors that could cause actual results to differ materially from those estimated. Those factors include but are not limited to: changes in general, economic and market conditions; the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the operation and investments of the financial services group and/or the Bank; significant changes in the economic scenario from that anticipated which could materially change credit quality trends and the ability to generate loans; significant delay in or inability to execute strategic initiatives designed to grow revenues and/or control expenses; and significant changes in accounting, tax, or regulatory practices or requirements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the foregoing discussion, or elsewhere in this Form 10-Q.

Certain amounts in the 2001 financial statements have been reclassified to conform to the presentation used in 2002. Unless otherwise noted, all dollars are expressed in thousands except per share data.

The Company reported net income of $1.15 million, or diluted earnings per share of 35 cents, for the three months ended September 30, 2002, compared with $1.22 million, or diluted earnings per share of 37 cents for the same period a year earlier. The return on average assets and return on average shareholders’ equity for the third quarter of 2002 were 0.90% and 8.60% respectively, compared with 1.04% and 9.29% for the third quarter of 2001.

Earnings for the nine months ended September 30, 2002 were $3.24 million or diluted earnings per share of 99 cents, compared with $2.68 million or diluted earnings per share of 81 cents for the same period in 2001, representing increases of $555 thousand and 18 cents, or 20.7% and 22.2% respectively. The returns on average assets and average shareholders’ equity for the nine months ended September 30, 2002, were 0.85% and 8.20% respectively, compared with 0.77% and 6.91% for the same period in 2001.

As more fully described in footnote 3 of the financial statements, during the first half of 2002 the Company completed implementation of SFAS No. 142, "Goodwill and Other Intangible Assets", resulting in a one time after tax adjustment of $247. As provided for under SFAS No. 142, the Company conducted its valuation during the second quarter, for an estimate of value on January 1, 2002. For the nine months ended September 30, 2002, net income before the cumulative effect of the change in accounting for goodwill was $3.48 million or $1.06 per diluted share, representing increases of $802 or 29.9% and 25 cents or 30.9% respectively, compared with the same period in 2001.

Net interest income, which represents the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities, is the primary source of earnings. Net interest income is affected by the level and composition of assets, liabilities and equity, as well as changes in market interest rates.

The Company’s net interest income, on a fully tax equivalent basis, for the three months ended September 30, 2002 was $5,101, representing an increase of $301, or 6.3%, compared with the same quarter in 2001.

For the nine-month period ended September 30, 2002, net interest income on a fully tax equivalent basis amounted to $14,982, representing an increase of $1,748, or 13.2%, compared with the same period in 2001. The increase in net interest income was principally attributed to $47,576 in average earning asset growth between periods and, to a lesser extent, an 8 basis point improvement in the Company’s net interest margin, from 4.09% to 4.17%.

The net interest margin was 4.06% for the quarter, an 7 basis point decline from the quarter ended June 30, 2002. The Company’s net interest margin is being impacted by the continuation of the historically low interest rate environment. The resetting of rates on earning assets and the increasing level of securities prepayments, continue to exert pressure on net interest income and the margin. The Company continues to focus on the interest rate risk associated with the re-pricing of its assets and liabilities, and the management of its potential exposure to rising rates over the longer term.

Interest Income - Interest income, on a fully tax equivalent basis, amounted to $8,368 for the quarter ended September 30, 2002, representing a decrease of $147, or 1.7%, when compared with $8,515 for the same quarter in 2001.

For the nine-month period ending September 30, 2002, fully tax equivalent interest income amounted to $24,605 compared with $25,705 for the same period in 2001, representing a decrease of $1,100, or 4.3%. Contributing to this change was a 109 basis point decline in the yield on average earning assets between periods, from 7.95% to 6.86%. The decrease in interest income resulting from declining yields was largely offset by an 11.0% increase in average earning assets, from $432,310 for the nine months ended September 30, 2001 to $479,886 for the same period in the current year. Average earning assets, as a percent of average total assets, were 94.3% for the nine months ended September 30, 2002, compared with 93.4% for the same period in 2001.

Loans - Average loans for the quarter ended September 30, 2002 totaled $331,480, representing an increase of $41,244, or 14.2%, when compared with the same quarter in 2001. Over the same period, the tax equivalent yield on average loans declined 146 basis points to 7.19% for the third quarter of 2002. The decline in yields was reflective of the historically low interest rate environment and accelerated loan re-financing activity.

For the nine months ended September 30, 2002, average loans totaled $318,639, representing an increase of $38,419, or 13.7%, compared with the same period in 2001. The tax equivalent yield on average loans declined 133 basis points or 15.2% between periods, from 8.73% to 7.40%. The increase in average loans was principally due to strong growth in consumer real estate loans.

Investment Securities - Average investment securities, including federal funds sold, money market funds and time deposits with other banks, totaled $167,467 for the quarter ended September 30, 2002, representing an increase of $26,811, or 19.1% compared with the same quarter in 2001. The tax equivalent yield on investment securities declined 59 basis points to 5.59%, when compared with the same quarter in 2001.

For the nine months ended September 30, 2002, average investment securities totaled $161,247 compared with $152,090 for the same period in 2001, representing an increase of $9,157 or 6.0%. The tax equivalent yield on investment securities declined 73 basis points or 11.2% between periods, from 6.51% to 5.78%. The yield on the investment securities portfolio has been impacted by historically low market interest rates and accelerated principal cash flows. In managing its risk to rising rates over the longer term, investment security purchases by the Company during 2002 have generally been variable rate instruments or securities with relatively short maturities, consequently contributing further to the year-over-year decline in yields.

Interest Expense - Interest expense for the quarter ended September 30, 2002 amounted to $3,267, representing a decrease of $448, or 12.1%, compared with the same quarter in 2001. The decrease in interest expense was principally attributed to a 103 basis point decline in the cost of interest bearing liabilities, from 4.11% to 3.07%, partially offset by a $62,916 increase in average interest bearing liabilities.

For the nine-month period ending September 30, 2002, total interest expense amounted to $9,623, compared with $12,471 for the same period in 2001, representing a decrease of $2,848 or 22.8%. The decrease in interest expense was principally the result of a 141 basis point, or 30.9%, decline in the cost of interest bearing liabilities between periods, from 4.56% to 3.15%. The decrease in interest expense attributed to declining rates was partially offset by an 11.7% increase in average interest bearing liabilities between periods, from $365,905 to $408,679.

Deposits - Average deposit balances for the three months ended September 30, 2002 totaled $314,048, representing an increase of $25,936, or 9.0%, compared with the same period in 2001. Interest bearing deposits, which represent 84.6% of total deposits, increased $26,176, or 10.9%, compared with the same period in 2001. For the quarter ended September 30, 2002, the average cost of interest bearing deposits amounted to 2.25% compared with 3.35% for the same quarter in 2001, representing a decrease of 110 basis points, or 32.8%.

For the nine months ended September 30, 2002, average deposit balances totaled $295,694, compared with $275,727 for the same period in 2001, representing an increase of $19,967, or 7.2%. The average cost of interest bearing deposits declined 140 basis points or 37.1% between periods, from 3.77% to 2.37%. This decrease was reflective of the declining interest rate environment and the continued replacement of maturing time deposits at lower rates.

The growth in total deposits between periods was led by money market accounts, which are classified with savings, posting an increase of $22,608, followed by NOW accounts, posting an increase $9,678. Time deposit balances essentially remained the same between periods. Brokered certificates of deposits totaled $5,988, whereas none were outstanding in 2001.

Borrowed Funds - Average borrowings for the quarter ended September 30, 2002 increased $36,740 or 30.8%, while borrowing costs declined 116 basis points or 20.6%, compared with the third quarter of 2001.

For the nine months ended September 30, 2002, average borrowings totaled $154,865 compared with $131,153 during the same period in 2001, representing an increase of $23,712 or 18.1%. The increase in borrowings between periods was principally utilized to fund loan growth and, to a lesser extent, growth in the investment securities portfolio. Borrowing costs declined 154 basis points or 25.8% between periods, from 5.96% to 4.42%. Further fluctuations in borrowing costs will be more moderate, as the Company extended the maturities on a portion of its borrowings to better match the funding of interest earning assets, and provide protection against the risks associated with rising rates.

The following tables set forth an analysis of net interest income by each major category of interest earning assets on a fully tax equivalent basis, and interest bearing liabilities for the three and nine months ended September 30, 2002, and 2001 respectively.

(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, reported on a tax equivalent basis.

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.

                                                    (1) Reported on tax equivalent basis.

In addition to net interest income, non-interest income is a significant source of revenue for Bar Harbor Bankshares and an important factor in the Company’s results of operations. Likewise, non-interest expense represents a significant category of expense for the Company.

For the quarter ended September 30, 2002, non-interest income amounted to $2,116 compared with $2,125 for the same quarter in 2001, representing a decrease of $9, or 0.4%. Total non-interest expense amounted to $5,120 compared with $4,813 in the third quarter of 2001, representing an increase of $307, or 6.4%.

For the nine months ended September 30, 2002, total non-interest income amounted to $4,939, representing a decrease of $726, or 12.8%, compared with the same period in 2001. Total non-interest expense amounted to $13,797 compared with $13,152 for the nine months ended September 30,2001, representing an increase of $645, or 4.9%.

As more fully disclosed in Note 2 to the consolidated financial statements, the Company manages and operates two major lines of business: Community Banking and Financial Services. The following discussion and analysis of other operating income and expenses focuses on each business segment separately:

Non-interest Income: Non-interest income from Community Banking represented 75.7% of the Company’s total third quarter non-interest income. For the quarter ended September 30, 2002, the Bank’s non-interest income amounted to $1,601, compared with $1,477 during the same quarter in 2001, representing an increase of $124, or 8.4%.

For the nine months ended September 30, 2002, the Bank’s non-interest income amounted to $3,176, representing a decrease of $76, or 2.3%, compared with the same period in 2001. The decline in non-interest income was principally attributed to a $348 decline in service charges on deposit accounts between periods. In December of 2000 the Bank implemented various product and service fee enhancements and improved its management over fee waivers. These actions substantially improved non-interest income during the first half of 2001. However, as was generally anticipated, the initial impact on fee income was not fully sustained in the months following implementation, as small accounts were consolidated and certain customer habits, including overdraft activity, showed a substantial change. The decline in service charge income was substantially offset by revenue from credit card processing and net gains on the sale of securities, posting increases of $106 and $319 respectively, compared with the same period in the prior year.

Non-interest Expense: Non-interest expense from Community Banking represented 78.7% of the Company’s total third quarter non-interest expense. For the quarter ended September 30, 2002, the Bank’s non-interest expense amounted to $4,027, compared with $3,805 during the same quarter in 2001, representing an increase of $222, or 5.8%.

For the nine months ended September 30, 2002, the Bank’s non-interest expense amounted to $10,520, representing an increase of $576, or 5.8%, compared with the same period in 2001. The increase in non-interest expense was principally attributed to employee compensation increases, increases in subsidized employee health insurance, deferred executive compensation and, to a lesser extent, certain additions to the Bank’s workforce.

Non-interest income: Non-interest income from Financial Services (BTI Financial Group) represented 24.1% of the Company’s total third quarter non-interest income. For the nine months ended September 30, 2002, non-interest income at BTI Financial Group (BTI) amounted to $511, compared with $728 during the same quarter in 2001, representing a decrease of $217, or 29.8%.

Non-interest expense: Non-interest expense from Financial Services represented 15.9% of the Company’s third quarter non-interest expense. For the quarter ended September 30, 2002, BTI’s non-interest expense amounted to $813, compared with $1,042 during the same quarter in 2001, representing a decrease of $229, or 22.0%.

For the nine months ended September 30, 2002, BTI’s non-interest expense amounted to $2,600, representing a decrease of $559, or 17.7%, compared with the same period in 2001. Salaries and employee benefit expenses declined $215 between periods, or 13.8%, and were the result of management and staffing changes. Marketing expense declined $244 between periods, and was principally attributed to marketing campaigns conducted in early 2001, shortly following the formation of BTI and, to a lesser extent, more effective utilization of marketing dollars during the current year. With the Company’s adoption of SFAS 142, "Goodwill and Other Intangible Assets", the amortization of goodwill ceased. For the nine months ended September 30, 2001, the amortization of intangible assets amounted to $49, compared with none recorded in the current year. Occupancy expenses for the nine month period ended September 30, 2002 were $158 greater than the same period in 2001, and were principally the result of BTI’s purchase and renovation of a new headquarters complex located in Ellsworth, Maine, and occupied in May 2001.

The effective tax rate for the three and nine month periods ended September 30, 2002 were 30.9% and 27.5% respectively, compared with 34.0% and 33.3% for the same periods in 2001. The decreases in 2002 were principally attributed to the addition of $26,516 in tax-exempt securities to the Bank’s investment securities portfolio.

The loan portfolio is primarily secured by real estate in the counties of Hancock and Washington, Maine. The following table represents the components of the Bank’s loan portfolio as of September 30, 2002 and December 31, 2001.

Total Loans – Total loans at September 30, 2002 amounted to $338,537 as compared with $297,970 at December 31, 2001, representing an increase of $40,567, or 13.6%. The growth in the loan portfolio was the principal factor underlying the $12.6% increase in the Company’s total assets compared with December 31, 2001.

Loan growth during the nine months ended September 30, 2002 was principally attributed to real estate loans, particularly consumer, posting an increase over 2001 year-end of $40,211, or 16.1%. Mortgage origination volume continued strong during the period, due in part to the impact of current market interest rates and a healthy local economy.

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, 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:

The Company continued to maintain its non-performing loans at significantly lower levels than in prior years and attributes this success to the strengthening of its credit administration process and underwriting standards, aided by a healthy local economy. At September 30, 2002, total non-performing loans amounted to $1,034, or 0.31% of total loans, compared with 0.79% at December 31, 2001 and 1.10% at the same date last year. At September 30, 2002, the Company’s reserve for possible loan losses expressed as a percent of non-performing loans was 466%, compared with 124% at the same date last year and 178% at December 31, 2001.

Other real estate owned – When a real estate loan goes to foreclosure and the Bank purchases the property, 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. Along with using conservative fair market valuations of OREO properties, reserves are established to allow for selling expenses that can be reasonably estimated. At September 30, 2002, Other Real Estate Owned amounted to $100 thousand, compared with $54 thousand at December 31, 2001.

Allowance for loan losses and provision – The allowance for loan losses ("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 allowance is maintained at a level that is, in management’s judgment, appropriate for the amount of risk inherent in the loan portfolio given past, present and expected conditions, and adequate to provide for probable losses that have already occurred. Reserves are established for specific loans including impaired loans, a pool of reserves based on historical charge-offs by loan types, and supplemental reserves to reflect current economic conditions, industry specific risks, and other observable data. Loan loss provisions are recorded and the allowance is increased when loss is identified and deemed likely.

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.

During the nine month period ended September 30, 2002, the Company provided $875 to the allowance for loan losses compared with $1,650 for the same period in 2001, representing a decrease of $775 or 47.0%. The decrease in the provision for loan losses was primarily attributed to one large credit exceeding $1,000 that was charged off in the second quarter of 2001 combined with an overall strengthening of credit quality in the Bank’s loan portfolio.

The Bank’s loan loss experience continued its positive trend between reporting periods. Net loans charged off during the nine months ended September 30, 2002 amounted to $221 compared with $1,899 for the same period in 2001. Net charge offs expressed as a percent of average loans outstanding amounted to 0.07% for the nine months ended September 30, 2002, compared with 0.68% for the same period in 2001.

The following table details changes in the allowance and summarizes loan loss experience for nine-month periods ended September 30, 2002 and 2001.

At September 30, 2002, the adequacy analysis resulted in a need for specific reserves of $3,426, general reserves of $806 thousand, impaired reserves of $122 thousand, and other reserves of $183 thousand.

Specific reserves are determined by way of individual review of commercial loan relationships in excess of $250, combined with reserves calculated against total outstanding loans by category using the Company’s historical loss experience and other observable data. General reserves account for the risk and probable loss inherent in certain pools of industry and geographic concentrations within the portfolio. Impaired reserves consider all consumer loans over 90 days past due and impaired commercial loans which are fully reserved within the specific reserves via individual review and specific allocation of probable loss for loan relationships over $250, and pool reserves for smaller impaired loans. The Bank had no troubled debt restructurings during the nine months ended September 30, 2002, and all of its impaired loans were considered collateral dependent and were adequately reserved.

Loan delinquency levels have remained at low levels between reporting periods. However, existing loan documentation and/or structural weaknesses for certain loans written in prior years continue to impede collection efforts in certain cases and have impacted the level of probable losses. These weaknesses are historical in nature and do not necessarily reflect current loan underwriting and documentation standards. The extent of these problems in the entire loan portfolio is not entirely known; however, it is known that such problems exist and, accordingly, the allowance incorporates this knowledge.

Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management considers the allowance for loan losses at September 30, 2002 to be appropriate for the risks inherent in the loan portfolio and resident in the local and national economy as of that date.

The Company and its banking subsidiary are subject to the risk based capital guidelines administered by the Bank regulatory agencies. 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 September 30, 2002, the Company and its banking subsidiary 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 leverage ratio of at least 5%.

The following table sets forth the Company’s regulatory capital at September 30, 2002 and December 31, 2001, under the rules applicable at that date.