Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days: YES:  X   NO: ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. ___

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

The Company is a bank holding company ("BHC") registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the "FRB"). The Company is also a Maine Financial Institution Holding Company for the purposes of the laws of the State of Maine, and as such is subject to the jurisdiction of the Superintendent (the "Superintendent") of the Maine Bureau of Financial Institutions ("BFI").

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

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

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

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

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

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

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

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

Bar Harbor Trust Services

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Some of the more significant statutory and regulatory provisions applicable to banks and BHCs, to which the Company and its subsidiaries are subject, are described more fully below, together with certain statutory and regulatory matters concerning the Company and its subsidiaries. The description of these statutory and regulatory provisions does not purport to be complete and is qualified in its entirety by reference to the particular statutory or regulatory provision. Any change in applicable law or regulation may have a material effect on the Company’s business and operations, as well as those of its subsidiaries. The Company’s shareholders generally are not subject to these statutory and regulatory provisions.

Federal Reserve Act - Various other laws and regulations, including Sections 23A and 23B of the Federal Reserve Act, as amended (the "FRA"), generally limit borrowings, extensions of credit, and certain other transactions between the Company and its non-bank subsidiaries and its affiliate insured depository institutions. Section 23A of the FRA also generally requires that an insured depository institution’s loans to non-bank affiliates be secured in appropriate amounts, and Section 23B of the FRA generally requires that transactions between an insured depository institution and its non-bank affiliates be on market terms. These laws and regulations also limit BHCs and their subsidiaries from engaging in certain tying arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services.

 Further, GLBA permits state banks, to the extent permitted under state law, to engage in certain new activities that are permissible for subsidiaries of an FHC. GLBA expressly preserves the ability of state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a state bank must be well capitalized, and such banks would be subject to certain capital deduction, risk management, and affiliate transaction rules. Also, the FDIC’s final rules governing the establishment of financial subsidiaries adopt the position that a state nonmember bank may only conduct through a financial subsidiary activities that a national bank could only engage in through a financial subsidiary, such as real estate development or investment, continue to be governed by the FDIC’s standard activities rules. Moreover, to mirror the FRB’s actions with respect to state member banks, the final rules provide that a state bank subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed to be a financial subsidiary.

Until June 30, 2003, Maine law previously provided that a corporation’s board of directors could declare, and the corporation may pay, dividends on its outstanding shares in cash or other property, generally out of the corporation’s unreserved and unrestricted earned surplus, or out of the unreserved and unrestricted net earnings of the current fiscal year and the next preceding fiscal year taken as a single period, except under certain circumstances, including when the corporation is insolvent, or when the payment of the dividend would render the corporation insolvent, or when the declaration would be contrary to the corporation’s charter. These limitations were repealed effective as of July 1, 2003. Under current Maine corporation law, the directors of a corporation may make distributions to its shareholders (subject to restriction by the articles of incorporation) if, (1) the corporation’s assets exceed its liabilities (plus any amounts payable to preferred classes of stock), and (2) the corporation is able to pay its debts as they become due in the usual course of business (i.e., it must not be insolvent). These new limitations generally apply to investor owned Maine financial institutions and financial institution holding companies.

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

Activities and Investments of Insured State-Chartered Banks: FDIC insured, state-chartered banks, such as the Bank, are also subject to similar restrictions on their business and activities. Section 24 of the Federal Deposit Insurance Act ("FDIA"), generally limits the activities as principal and equity investments of FDIC insured, state-chartered banks to those activities that are permissible to national banks. In 1999, the FDIC substantially revised its regulations implementing Section 24 of the FDIA to ease the ability of state-chartered banks to engage in certain activities not permissible for national banks, and to expedite FDIC review of bank applications and notices to engage in such activities.

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

Customer Information Security: The FDIC and other bank regulatory agencies have published final guidelines establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the "Guidelines"). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of such information that could result in substantial harm or inconvenience to any customer.

USA Patriot Act: The USA Patriot Act of 2001 (the "Patriot Act"), designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The Patriot Act, together with the implementing regulations of various federal regulatory agencies, have caused financial institutions, including the Bank and Trust Services, to adopt and implement additional or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity and currency transaction reporting, customer identity verification and customer risk analysis. The statute and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions. It also requires the Federal Reserve Board (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money-laundering activities when considering applications filed under Section 3 of the BHC Act, or under the Bank Merger Act. Management believes the Company is in compliance with all of the requirements prescribed by the Patriot Act and all applicable final implementing regulations.

Deposit Insurance - The FDIA does not require the FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. However, as a result of general economic conditions and recent bank failures, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. A resumption of assessments of deposit insurance premiums charged to well-capitalized institutions, such as the Company’s subsidiary bank, could have an effect on the Company’s net earnings. The Company cannot predict whether the FDIC will be required to increase deposit insurance assessments above their current levels.

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

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

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

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

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

The Company maintains a website on the World Wide Web at http://www.bhbt.com. The Company makes available, free of charge, on its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at http://www.sec.gov. Information contained on the Company’s website does not constitute a part of this report.

ITEM 2. PROPERTIES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PART II

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

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

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

Dividends paid by the Company in 2004 and 2003:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Summary Results of Operations

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

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

• Net Interest Income: Net interest income continued to be the principal component of the Company’s income stream. Net interest income for the year ended December 31, 2004 amounted to $20.4 million, representing an increase of $959 thousand or 5% compared with 2003. The increase in net interest income was principally attributed to earning asset growth during 2004, as the Company’s net interest margin declined 35 basis points to 3.45%, compared with 2003. Following a long period of historically low interest rates, the net interest margin continued under pressure early in the year, but began to steadily strengthen as the Federal Reserve increased short-term interest rates five times during the second half of the year. The Company continues to maintain an asset sensitive balance sheet, and management believes it is well positioned for a variety of future interest rate scenarios.

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

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

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

Outlook

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

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

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

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

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

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

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

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

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

FINANCIAL CONDITION

Asset / Liability Management

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Credit Risk: Credit risk is managed through loan officer authorities, loan policies, the Bank's Senior Loan Officers 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.

Management recognizes that early and accurate recognition of risk is the best means to reduce credit losses and maximize earnings. The Bank employs a comprehensive risk management structure to identify and manage the risk of loss. For consumer loans, the Bank identifies loan delinquency beginning at 10-day delinquency and provides appropriate follow-up by written correspondence or personal contact. Non-residential mortgage consumer losses are recognized no later than the point at which a loan is 120 days past due. Residential mortgage losses are recognized during the foreclosure process, or sooner, when that loss is quantifiable and reasonably assured. For commercial loans the Bank applies a risk grading system, which stratifies the portfolio and allows management to focus appropriate efforts on the highest risk components of the portfolio. The risk grades include ratings that correlate with regulatory definitions of Pass, Other Assets Especially Mentioned, Substandard, Doubtful, and Loss.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Funding Sources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

(i) Any obligation under certain guarantee contracts;

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

(iii) Any obligation under certain derivative instruments;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

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

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

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

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

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