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

For the quarter ended: June 30, 2003 Commission File No. 841105-D

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: ( )

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:

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 June 30, 2003, and for the six-month and three-month periods ended June 30, 2003 and 2002. 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
August 7, 2003

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

Note 1: Basis of Presentation.

The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The income reported for the six months ended June 30, 2003 is not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

Certain financial information, which is normally included in financial statements in accordance with United States generally accepted accounting principles, but not required for interim reporting purposes, has been omitted. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

The preparation of financial statements in conformity with 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 and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties.

Diluted net income per share reflects the effect of stock options outstanding during the period.

Certain prior period balances have been reclassified to conform with the current financial presentation.

Statement of Financial Accounting Standards ("SFAS") No. 149 – This statement is effective for contracts entered into or modified after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively.

The provisions of SFAS No. 149 that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS No. 149 does not affect the Company's consolidated financial condition and results of operations.

SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. This Statement is not expected to have a material effect on the Company's consolidated financial statements.

Financial Accounting Standards Board (FASB) Interpretation Number 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34, was issued in November 2002.

The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.

Financial and standby letters of credit are included in the scope of FIN 45, while commercial letters of credit are not. A guarantor of financial and standby letters of credit is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.

This Interpretation contains disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation does not have a material effect on the Company’s consolidated financial statements.

Note 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.

 THREE MONTHS ENDED JUNE 30, 2003
(Dollars in thousands)
(Unaudited)

 THREE MONTHS ENDED JUNE 30, 2002
(Dollars in thousands)
(Unaudited)

 SIX MONTHS ENDED JUNE 30, 2003
(Dollars in thousands)
(Unaudited)

 SIX MONTHS ENDED JUNE 30, 2002
(Dollars in thousands)
(Unaudited)

Note 4: Goodwill

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, recorded during the quarter ended March 31, 2002. As of June 30, 2003 and 2002, in accordance with SFAS No. 142, the Company completed its annual review of the goodwill and determined there has been no additional impairment.

Note 6: Stock Options

The Bar Harbor Bankshares and Subsidiaries Incentive Stock Option Plan ("ISO") for officers and employees was established October 3, 2000, providing for the issuance of up to 450 thousand shares of common stock. The purchase price of the stock covered by each option shall be its fair market value, which must be equal to at least 100% of the fair market value on the date such option is granted. Initial option grants were made in 2001 totaling 224.8 thousand. During 2002 there were 161.6 thousand additional option grants. During 2003 there were 19 thousand additional option grants issued, bringing the total to 405.4 thousand options granted, all having a 5-7 year vesting schedule. No option shall be granted after October 3, 2010, ten years after the effective date of the ISO.

The Company accounts for these options in accordance with the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As the exercise price of each option equals the market price of the Company’s stock on the date of grant, no compensation cost has been recognized for the plan. 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, "Accounting for Stock-Based Compensation," the Company’s net income and earnings per share for the six-month periods would have been reduced to the pro forma amounts indicated below (in thousands except for per-share data):

The following discussion and analysis of 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.

Certain amounts for prior periods have been reclassified to conform with the presentation used currently.

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

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 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.

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;

(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 grow revenues and or control expenses; and

(vi) 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 foregoing discussion, or elsewhere in this Form 10-Q, except to the extent required by federal securities laws.

Management’s discussion and analysis of the Company’s financial condition are based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States. 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 and review of goodwill for impairment, 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.

Management utilizes numerous techniques to estimate the value of various assets held by the Company. Management utilized various methods to determine the appropriate carrying value of goodwill as required under Statement of Financial Accounting Standards ("SFAS") No. 142. At June 30, 2003, the carrying value of goodwill amounted to $375. Goodwill from a purchase acquisition is subject to ongoing periodic impairment tests. Goodwill is evaluated for impairment using several standard valuation techniques including discounted cash flow analyses, as well as an estimation of the impact of business conditions. Different estimates or assumptions are also utilized to determine the appropriate carrying value of other assets including, but not limited to, premises and equipment, mortgage servicing rights, and the overall collectibility of loans and receivables. The use of different estimates or assumptions could produce different estimates of carrying value.

The Company reported net income of $1,412 or fully diluted earnings per share of 43 cents, for the three months ended June 30, 2003, compared with $1,127, or fully diluted earnings per share of 34 cents for the same period a year earlier, representing increases of 25.3% and 26.5%, respectively. The return on average assets and average shareholders’ equity amounted to 1.03% and 10.57% respectively, compared with 0.89% and 8.62% for the second quarter of 2002.

For the six months ended June 30, 2003, net income amounted to $2,716 or fully diluted earnings per share of 84 cents, compared with $2,090 or fully diluted earnings per share of 63 cents for the same period in 2002, representing increases of $626 and 21 cents, or 30.0% and 33.3% respectively. The return on average assets and average shareholders’ equity amounted to 1.00% and 10.20% respectively, compared with 0.84% and 8.08% for the first six months of 2002.

Included in prior year earnings was an after tax charge of $247 recorded in the first quarter, resulting from the cumulative effect of a change in accounting required by the adoption of a new accounting standard, SFAS No. 142, "Goodwill and Other Intangible Assets". Excluding this adjustment, the increases in net income and fully diluted earnings per share for the six months ended June 30, 2003 compared with the same period in 2002 amounted to 16.2% and 18.3%, respectively.

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 three and six month periods ended June 30, 2003 net interest income represented 73.4% and 73.2% of total revenue respectively, compared with 75.3% and 76.1% for the same periods in 2002.

For the quarter ended June 30, 2003, net interest income on a fully tax equivalent basis amounted to $5,070, compared with $4,847 during the same quarter in 2002, representing an increase of $223, or 4.6%.

For the six month period ended June 30, 2003, net interest income on a fully tax equivalent basis amounted to $10,120, compared with $9,735 for the same period in 2002, representing an increase of $385, or 4.0%. The increase in net interest income was principally attributed to average earning asset growth of $46,398 or 10.0% between periods, as the net interest margin declined 24 basis points.

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

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 months ended June 30, 2003, and 2002, respectively:

Net Interest Margin Summary: The following table summarizes the net interest margin components over the last six quarters. Factors contributing to the changes in net interest income and the net interest margin are outlined in the succeeding discussion and analysis.

During the quarter ended June 30, 2003 the net interest margin amounted to 3.97%, representing a decline of 6 basis points from the prior quarter and a decline of 17 basis points compared with the same quarter in 2002. For the six months ended June 30, 2003, the net interest margin amounted to 4.01%, compared with 4.25% for the same period in 2002.

The Company’s asset sensitive balance sheet has pressured the net interest margin over the past several quarters as interest rates declined to historical lows. This trend continued during the quarter ended June 30, 2003, with the yield on the benchmark 10-year Treasury note dropping to as low as 3.07% and the federal funds targeted rate falling to 1.00%, in both cases representing forty-five year lows. The prolonged, historically low interest rate environment has caused sharp yield declines on the Company’s variable rate earning assets and accelerated payment speeds on fixed rate earning assets. From the second quarter of 2002 to the current quarter, the decline in the average yield on interest earning assets exceeded the decline in the rate paid on interest bearing liabilities by 6 basis points.

During the first six months of 2003 the Company pursued a number of strategies to ensure a reasonably stable net interest margin in an extended low interest rate environment, while continuing to manage exposure to rising rates over the longer-term horizon. These strategies included a repositioning of a portion of the investment securities portfolio, the addition of a $10 million interest rate swap agreement, the successful marketing of a 10-year fully amortizing mortgage product, and a reinforcement of the Company’s conservative posture with respect to the pricing of loan and deposit products.

Interest Income: For the quarter ended June 30, 2003, total interest income, on a fully tax equivalent basis, amounted to $7,907, compared with $8,054 for the same quarter in 2002, representing a decline of $147, or 1.8%.

For the six months ended June 30, 2003, total interest income, on a tax equivalent basis, amounted to $15,798, compared with $16,090 for the same period in 2002, representing a decline of $292, or 1.8%.

Contributing to this change was a 76 basis point decrease in the yield on average earning assets between periods, reflecting declines in the Fed Funds targeted rate and a parallel shift in the U.S. Treasury yield curve. The decline in total interest income attributed to lower yields was largely offset by growth in average earning assets, principally loans, which increased $46,398 or 10.0%, compared with the same period in 2002.

Average earning assets as a percent of average total assets increased between periods, amounting to 93.3% for the six months ended June 30, 2003, compared with 92.5% for the same period in 2002.

Interest Expense – Total interest expense for the quarter ended June 30, 2003 amounted to $2,837 compared with $3,207 for the same quarter in 2002, representing a decrease of $370, or 11.5%.

For the six months ended June 30, 2003, total interest expense amounted to $5,678 compared with $6,356 for the same period in 2002, representing a decrease of $678, or 10.7%. The decrease in interest expense was principally attributed to a 62 basis point decline in the average cost of interest bearing liabilities between periods, from 3.19% during the first six months of 2002 to 2.57% for the same period in 2003.

The cost of interest bearing deposits declined 75 basis points between periods to 1.67% in the current quarter, and was reflective of the declining interest rate environment including the continued replacement of maturing time deposits at lower rates.

The cost of borrowings declined 48 basis points to 3.99% in the current quarter, compared with the second quarter of 2002. Consistent with its asset and liability management strategies, the Company’s borrowings generally have longer maturities than the funding provided by deposits in order to preserve the sensitivity of net interest income in a rising 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 Company’s balance sheet. The Company has been deliberate in its efforts to hedge 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, and is positioned to benefit from rising rates and an improving economy.

Comparing the second quarter 2003 with 2002, the decline in total interest expense resulting from lower interest rates was offset in part by a $42,775 increase in total average interest bearing liabilities.

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

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. Likewise, non-interest expense represents a significant category of expense for the Company.

For the quarter ended June 30, 2003, total non-interest income amounted to $1,776 compared with $1,551 for the same quarter in 2002, representing an increase of $225, or 14.5%. For the six months ended June 30, 2003 total non-interest income amounted to $3,580, compared with $2,969 for the same period in 2003, representing an increase of $611, or 20.6%.

As more fully disclosed in Note 3 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: For the three and six months ended June 30, 2003, non-interest income from Community Banking represented 66.6% and 68.3% of the Company’s total non-interest income, respectively, compared with 64.6% and 60.8% during the same periods in 2002.

For the quarter ended June 30, 2003, the Bank’s non-interest income amounted to $1,182, compared with $1,002 during the same quarter in 2002, representing an increase of $180, or 18.0%. For the six months ended June 30, 2003, total non-interest income amounted to $2,446, representing an increase of $642, 35.6%.

For the three and six months ended June 30, 2003, non-interest income benefited from increases in net gains on the sale of investment securities amounting to $137 and $660 respectively, compared with the same periods in 2002. Market interest rates presented opportunities to reposition a portion of the Bank’s investment securities portfolio, particularly in light of accelerated payment speeds on certain mortgaged backed securities held in the available for sale portfolio. There is no assurance that the recording gains on the sale of securities will continue in future periods at these 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 and liability management policies established by the Bank’s Board of Directors. The Bank 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 its needs for liquidity.

For the three and six months ended June 30, 2003, service charges on deposit accounts declined $3 and $22, or 0.8% and 3% respectively, compared with the same periods in 2002. Depositors continued to consolidate small balance accounts and modify their behavior with respect to overdraft activity. Income from mortgage servicing declined between periods, as the Bank has been holding originated mortgages while the payment speeds on its serviced mortgage loan portfolio have increased dramatically in reaction to historically low interest rates.

Non-interest Expense: For the three and six months ended June 30, 2003, non-interest expense from Community Banking represented 80.0% and 78.7% of the Company’s total non-interest expense respectively, compared with 75.0% and 75.6% for the same periods in 2002.

For the three months ended June 20, 2003, the Bank’s total non-interest expense amounted to $3,646 compared with $3,359 during the second quarter of 2002, representing an increase of $287, or 8.5%. For the six months ended June 30, 2003, total non-interest expense amounted to $7,310 compared with $6,558 during the same period in 2002, representing an increase of $752, or 11.5%.

The increase in non-interest expense was principally attributed to salary and employee benefits expenses, reflecting strategic additions to staff, employee compensation increases, and increases in subsidized employee health insurance and deferred compensation. Current year non-interest expense was also impacted by a $60 write-down of obsolete supplies inventory, recorded in the first quarter. For the six months ended June 30, 2003, occupancy expenses increased $45 or 10.8%, compared with the same period in 2002. This increase was principally attributed to the Bank’s occupation of office space at its affiliate, BTI Financial Group in Ellsworth, Maine.

Non-interest income: For the three and six months ended June 30, 2003, non-interest income from Financial Services (BTI Financial Group) represented 37.3% and 35.5% of the Company’s total non-interest income respectively, compared with 39.1% and 43.1% during the same periods in 2002.

For the three months ended June 30, 2003, non-interest income at BTI amounted to $663, compared with $607 during the same quarter in 2002, representing an increase of $56, or 9.2%. The increase was principally attributed to the recording of $91 in client tax preparation fees at Bar Harbor Trust Services ("Trust"), whereas none were recorded during the same period in 2002. During 2002 the accounting treatment for these fees was changed to an accrual basis, in order to match revenues and expenses more closely in conformance with generally accepted accounting principles. Tax preparation fee income has little impact on BTI’s net income, as the fees generally represent third party pass through expenses that are recorded in non-interest expense.

For the six months ended June 30, 2003, non-interest income amounted to $1,272, representing a decline of $7 or 0.5%, compared with the same period in 2002.

Fee income at Trust and Block Capital Management ("Block") has been impacted by a year-over-year decline in the market values of assets under management, which at June 30, 2003 stood at $187.4 million, representing a decline of $23.4 million or 11.1%, compared with the same date in 2002. Declines in the stock market, restrained investor confidence in the markets, and lost business were attributed to the decrease in managed assets. Fees charged to clients are derived principally from the market values of assets managed. For the six months ended June 30, 2003, total earned fees at Block and Trust amounted to $844, compared with $998 for the same period during 2002, representing a decline of $154, or 15.4%.

Total second quarter revenue at Dirigo Investments, Inc. ("Dirigo"), amounted to $135, compared with $126 during the second quarter of 2002, representing an improvement of $9, or 7.2%. For the six months ended June 30, 2003, revenue at Dirigo amounted to $261, representing an increase of $16, or 6.5%.

Non-interest expense: For the three and six months ended June 30, 2003, non-interest expense from Financial Services represented 16.0% and 17.3% of the Company’s total non-interest expense, compared with 21.3% and 21.8% during the same periods in 2002, respectively.

For the quarter ended June 30, 2003, BTI’s non-interest expense amounted to $730, compared with $955 during the same quarter in 2002, representing a decrease of $225, or 23.6%. The decline was principally attributed to the adjustment of previously recorded legal expenses amounting to $138, the reimbursement of which from the Company’s insurance carrier is deemed highly probable.

For the six months ended June 30, 2003, total non-interest expense amounted to $1,610, compared with $1,892 during the same period in 2002, representing a decrease of $282, or 14.9%. The decline in non-interest expense between periods was attributed to a combination of factors. Salaries and employee benefit expenses declined $226 or 24.9% compared with the same period in 2002, and were principally the result of management and staffing changes. Occupancy expenses declined between periods, resulting from the downsizing of the Bangor, Maine office in late 2002 and the Banks recent occupation of office space in the BTI headquarters complex in Ellsworth, Maine. Expense reductions were also achieved in a variety of other operating areas as BTI continued pursuing austerity initiatives to more closely align income opportunities with operating costs.

The Company’s effective tax rate for the three and six-month periods ended June 30, 2003 amounted to 28.1% and 27.8% respectively, compared with 24.2% and 25.7% for the same periods in 2002. The income tax provisions for these periods is less than the expense that would result from applying the federally statutory rate of 34% to income before income taxes principally because of tax exempt interest income on certain investment securities and loans.

At June 30, 2003 total assets amounted to $555,727 representing a decrease of $1,909 or 0.3% compared with December 31, 2002, and an increase of $41,608 or 8.1% compared with the same date in 2002.

The banking business in the Bank’s market area historically has been seasonal, with lower deposits in the winter and spring and higher deposits in the summer and fall. These seasonal swings have been fairly predictable and have not had a material adverse impact on the Bank. The decline in total assets from year-end reflects a seasonal decline in total deposits of $4,937 or 1.5%. The Bank generally adjusts for seasonal deposit changes through the use of borrowed funds and/or cash flows from the investment securities portfolio. Loan growth during the first six months of 2002 amounted to $19,699 and was principally funded by cash flows from the investment portfolio, which declined $19,150 during the period.

The increase in total assets over June 30, 2002, was entirely attributed to growth in the Bank’s loan portfolio, amounting to $45,403 and primarily the result of strong consumer real estate loan growth.

LOAN PORTFOLIO SUMMARY

Total Loans: Total loans at June 30, 2003 amounted to $371,234, representing an increase of $19,699 or 5.6% compared with December 31, 2002, and an increase of $45,403 or 13.9%, compared with the same date in 2002.

The increase in loan balances compared with year-end in part reflects the seasonality of certain local businesses and their corresponding borrowing needs for carrying seasonal inventory and maintaining adequate operating cash flow. Loan growth during the first six months of 2003 was split about equally between consumer loans and commercial loans.

The 13.9% overall growth in the loan portfolio compared with June 30, 2002 levels was principally attributed to strong consumer real estate lending. Origination activity has benefited from a 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 June 30, 2003 real estate loans comprised 83.1% of the loan portfolio, compared with 86.6% at December 31, 2002 and 82.8% at the same date in 2002. The continued strength in the local real estate markets, both residential and commercial, has led to record 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 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, 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 NONPERFORMING LOANS

At June 30, 2003, total non-performing loans amounted to $2,451, or 0.66% of total loans, compared with $1,174 or 0.33% at December 31, 2002, and $1,557 or 0.48% at the same date last year. The $1,277 increase in non-performing loans from year-end was principally attributed to residential real estate secured loans involving a deceased borrower and their estate. These loans were paid in full during July 2003. While non-performing loans have increased moderately since year-end, they remain at relatively low levels and are not considered to be a reflection of an overall deterioration in the credit quality of loan portfolio.

While the non-performing loan ratios continued to reflect favorably on the quality of the loan portfolio, the Bank is cognizant of soft economic conditions overall and weakness in certain industry segments in particular, and is managing credit risk accordingly. Future levels of non-performing loans will be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, interest rates, and other factors existing at the time.

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. At June 30, 2003, Other Real Estate Owned amounted to $40, compared with $80 at December 31, 2002 and $0 at the same date a year earlier.

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. 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 three and six month periods ended June 30, 2003, the Bank provided $150 and $300 to the Allowance for loan losses respectively, compared with $300 and $600 for the same periods in 2002. The decrease in the provision for loan losses reflects an overall strengthening in credit quality between periods, aided by low net charge-off experience. Since June 30, 2002 the Allowance for loan losses has increased $739, or 16.2%

The Bank’s loan loss experience continued its positive trend between reporting periods. For the six months ended June 30, 2003, recoveries on previously charged off loans exceeded loans charged off by $1. Net loan charge offs for the same period in 2002 amounted to $232, or 0.07% of average loans outstanding.

The following table details changes in the allowance for loan losses and summarizes loan loss experience by loan type for six-month periods ended June 30, 2003 and 2002.