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

For the quarter ended: March 31, 2005 Commission File No. 841105-D

(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: (X) NO: ( )

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

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

The consolidated balance sheet at December 31, 2004 has been derived from audited consolidated financial statements at that date. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and notes thereto.

Note 2: Management’s Use of Estimates

The allowance for loan losses (the "allowance") at the Company’s wholly owned banking subsidiary Bar Harbor Bank & Trust (the "Bank") 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 available to absorb losses on loans. The allowance is maintained at a level that, in management’s judgment, is appropriate for the amount of risk inherent in the loan portfolio, given past and present conditions. Arriving at an appropriate level of allowance involves a high degree of judgment. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated regularly based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration. The ongoing evaluation process includes a formal analysis, which considers among other factors: the character and size of the loan portfolio, business and economic conditions, real estate market conditions, collateral values, changes in product offerings or loan terms, changes in underwriting and/or collection policies, loan growth, previous charge-off experience, delinquency trends, nonperforming loan trends, 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, and the amount and timing of realized losses and future allowance allocations could vary from current estimates. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the 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 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 income tax return and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from past taxes paid and/or future taxable income and, to the extent that the recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of March 31, 2005 and December 31, 2004, there was no valuation allowance for deferred tax assets.  Deferred tax assets are included in other assets on the consolidated balance sheet.

Interest on loans is accrued and credited to income based on the principal amount of loans outstanding. Residential real estate loans are generally placed on non-accrual status when they reach 90 days past due, are in process of foreclosure, or sooner if judged appropriate by management. All consumer loans are generally placed on non-accrual when they reach 90 days or more past due, or sooner if judged appropriate by management. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 days past due. Commercial real estate loans and commercial business loans that are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash, and the loan is in the process of collection. Commercial real estate and commercial business loans may be placed on non-accrual status prior to the 90 days delinquency date if considered appropriate by management. When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months.

In connection with acquisitions, the Company generally records as assets on its consolidated financial statements both goodwill and identifiable intangible assets, such as core deposit intangibles. The Company evaluates whether the carrying value of its goodwill has become impaired, in which case the value is reduced through a charge to its earnings. Goodwill is evaluated for impairment at least annually, or upon a triggering event as defined by Statement of Financial Accounting Standards ("SFAS") No. 142, using several fair value techniques, such as discounted future cash flows and multiples of revenues/earnings. The valuation techniques contain estimates such as discount rate, projected future cash flows and time period in their calculations, all of which are susceptible to change based upon changes in economic conditions and other factors. Identifiable intangible assets consist of core deposit intangibles amortized over their estimated useful lives on a straight-line method, which approximates the amount of economic benefits to the Company. These assets are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets. 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 consolidated results of operations.

Note 3: Goodwill and Other Intangible Assets

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

During the first quarter of 2004, the Company acquired $2,816 in goodwill in connection with the acquisition by the Bank of a branch in Rockland, Maine.

The Company has a finite-lived intangible asset capitalized on its consolidated balance sheet in the form of a core deposit intangible asset related to the Bank’s acquisition of the Rockland branch. The core deposit intangible asset is being amortized over an estimated useful life of six years, and is included in other assets on the consolidated balance sheets.

A summary of the core deposit intangible asset follows as of March 31, 2005 and December 31, 2004:

Amortization expense on the core deposit intangible asset is expected to total $50 for the remainder of 2005, and $67 for each year for years 2006 thru 2009.

The following is a reconciliation of basic and diluted earnings per share for the three-months ended March 31, 2005 and 2004:

Note 5: Stock Based Compensation

On October 3, 2000, the shareholders of the Company approved the Bar Harbor Bankshares and its Subsidiaries Incentive Stock Option Plan of 2000 for officers and employees, which is described more fully in Note 14 to the Consolidated Financial Statements in the Company’s 2004 Annual Report on Form 10-K.

SFAS No. 123, "Accounting for Stock-Based Compensation" encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the underlying stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock upon exercise of the stock option.

The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted. Had the Company determined cost based on the fair value at the grant date for its stock options and expense related to the employee stock option plan under SFAS No. 123, its net income and earnings per share data would have been reduced to the pro forma amounts indicated below:

The Company sponsors a limited post-retirement benefit program which funds medical coverage and life insurance benefits to a closed group of retired employees who meet minimum age and service requirements. It is the Company's policy to record the cost of postretirement health care and life insurance plans based on actuarial estimates, which are dependent on claims and premiums paid. The cost of providing these benefits was accrued during the active service period of the employee.

The Company has non-qualified supplemental executive retirement agreements for certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. The Company recognized the net present value of payments associated with the agreements over the service periods of the participating officers. Interest costs continue to be recognized on the benefit obligations.

The Company also has supplemental executive retirement plans for certain executive officers. These plans provide a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, or in the event that the executive leaves the Company following a change of control event.

The Company is expected to contribute $371 to the foregoing plans in 2005. As of March 31, 2005, the Company had contributed $114 to the plans.

Note 7: Commitments and Contingent Liabilities

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

Commitments to originate loans, including unused lines of credit, are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policy to make such commitments as it uses for on-balance-sheet items, such as loans. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are primarily issued in support of third party debt or obligations. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet instruments. Exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. Typically, these standby letters of credit have terms of five years or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.

The following table summarizes the contractual amounts of commitments and contingent liabilities as of March 31, 2005 and December 31, 2004:

As of March 31, 2005, and December 31, 2004, the fair value of the standby letters of credit were not significant to the Company’s consolidated financial statements.

As part of its overall asset liability/management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant effect on net income.

At March 31, 2005 the Bank had two outstanding derivative instruments with notional principal amounts totaling $20 million, both of which were interest rate swap agreements. The details are summarized as follows:

The 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 agreement.

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

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

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

At March 31, 2005 the unrealized gain (loss) on the interest rate swap agreements was ($590), compared with ($225) and $328 at December 31 and March 31, 2004, respectively. Unrealized gains and losses are included in other assets on the consolidated balance sheets.

At March 31, 2005 the net unrealized loss on interest rate swap agreements included in accumulated other comprehensive loss, net of tax, amounted to $389, compared with none at March 31, 2004 when hedge accounting was not applied. Also included in accumulated other comprehensive loss at March 31, 2005, was a net deferred loss, net of tax, of $14 related to the de-designation and re-designation of these swaps as cash flow hedges in 2004.

The change in the net loss on interest rate swap agreements included in accumulated other comprehensive income, net of taxes, for the quarter ended March 31, 2005 is summarized below:

For the three-months ended March 31, 2004, a period during which hedge accounting was not applied, the net unrealized gain on interest rate swap agreements recorded in non-interest income amounted to $328. During the year ended December 31, 2004 the total net unrealized gains on interest rate swap agreements recorded in non-interest income amounted to $29, during the periods in which hedge accounting was not applied. A summary of the total unrealized gains (losses) that were recorded in non-interest income during periods in which hedge accounting was not applied follows:

For the three-months ended March 31, 2005, the total net cash flows received from counterparties amounted to $22, compared with $167 during the same period in 2004. The net cash flows received from counterparties during the first quarter of 2005 were recorded in interest income (hedge accounting), whereas during the first quarter of 2004 the net cash flows were recorded in non-interest income (non-hedge accounting).

The Bank performs quarterly assessments of hedge effectiveness and measures any ineffective portion of its hedges as required by SFAS No. 133. The Bank did not recognize any amounts in earnings related to ineffectiveness of cash flow hedges during the three-months ended March 31, 2005.

An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company has determined that its operations are solely in the community banking industry and include traditional community banking services, including lending activities, acceptance of demand, savings and time deposits, business services, investment management, trust and third party brokerage services. These products and services have similar distribution methods, types of customers and regulatory responsibilities. Accordingly, disaggregated segment information is not presented in the notes to the financial statements.

Accounting For Share-Based Payments: In December 2004, FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R") which requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees, including employee stock purchase plans. Current disclosure provisions under SFAS No. 123 continue to apply prior to adoption of SFAS 123R. In addition to stock option awards granted after the effective date, compensation expense on unvested equity-based awards that were granted prior to the effective date must be recognized in the consolidated income statement after the effective date.

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

The following discussion and analysis of the financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this report on 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 in the 2004 interim consolidated financial statements have been reclassified to conform to the presentation used in 2005.

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

Use of Non-GAAP Financial Measures: Certain information is discussed on a fully taxable equivalent basis. Specifically, included in first quarter 2005 and 2004 net interest income was $435 and $363, respectively, of tax-exempt interest income from certain 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 $202 and $154 in the first quarter of 2005 and 2004, respectively. The analysis of net interest income tables included in this Form 10-Q provide a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. 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.

FORWARD LOOKING STATEMENTS DISCLAIMER

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

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

The forward-looking statements contained herein represent the Company's judgment as of the date of this report on Form 10-Q, and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the succeeding discussion, or elsewhere in this report on 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 U.S. generally accepted accounting principles. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management evaluates its estimates, including those related to the allowance for loan losses, on an ongoing basis. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management’s estimates and assumptions under different assumptions or conditions.

The Company’s significant accounting policies are more fully enumerated in Note 1 to the Consolidated Financial Statements included in Item 8 of its December 31, 2004 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 a greater amount of provision for loan losses is necessary the result is lower net income. Refer to Part I, Item 2, Allowance for Loan Losses and Provision in this report on Form 10-Q, for further discussion and analysis concerning the allowance.

Income Taxes – The Company estimates its income taxes for each period for which a statement of income is presented. This involves estimating the Company’s actual current tax liability, as well as assessing temporary differences resulting from differing timing of recognition of expenses, income and tax credits, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from historical taxes paid and future taxable income and, to the extent that the recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of March 31, 2005 and December 31, 2004, 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 Note 2 of the consolidated financial statements in Part I, Item 1 of this report on Form 10-Q for further details of the Company’s accounting policies and estimates covering goodwill and other intangible assets.

SUMMARY OVERVIEW

The Company reported consolidated net income of $1,213 or fully diluted earnings per share of $0.38 for the three-months ended March 31, 2005 compared with $1,436 or fully diluted earnings per share of $0.45 for the same quarter in 2004, representing decreases of $223 and $0.07, or 15.5% and 14.6%, respectively. The annualized return on average assets ("ROA") and average shareholders’ equity ("ROE") amounted to 0.74% and 8.77%, respectively, compared with 0.97% and 10.88% for the same quarter in 2004.

As more fully enumerated below, the decline in first quarter 2005 earnings compared with the first quarter of 2004 was principally attributed to a decline in income on interest rate swap agreements related to a mark-to-market adjustment of $328 recorded in the first quarter of 2004, and a $172 decline in net gains on the sale of investment securities. In addition, during the first quarter of 2005 the Company recorded an employee severance payment of $238, made in connection with the Company’s previously announced resignation of Dean S. Read as President of the Bank. The foregoing items were offset in part by a $496 increase in net interest income and a $90 decline in the provision for loan losses compared with the first quarter of 2004.

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.

For the quarter ended March 31, 2005, net interest income on a fully tax equivalent basis amounted to $5,513, compared with $4,969 during the first quarter of 2004, representing an increase of $544, or 10.9%. The increase in net interest income was principally attributed to an increase in average earning assets of $62,466 or 11.0% and, to a lesser extent, a three basis point improvement in the net interest margin, when comparing the three-months ended March 31, 2005 with the same period in 2004.

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 table summarizes the Company’s average balance sheets and components of net interest income, including a reconciliation of tax equivalent adjustments, for the three-months ended March 31, 2005 and 2004, respectively:

Net Interest Margin: The net interest margin, expressed on a tax-equivalent basis, represents the difference between interest and dividends earned on interest-bearing assets and interest paid to depositors and other creditors, expressed as a percentage of average earning assets.

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

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

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

In June of 2004, the Board of Governors of the Federal Reserve System (the "Federal Reserve") began increasing short-term interest rates. Over the past nine-months, the Fed funds targeted rate was increased seven times, ending the first quarter of 2005 at 2.75%. These rate increases favorably impacted the Bank’s net interest margin during this period of time, with the yield on average earning assets increasing 47 basis points to 5.61%, and the cost of interest bearing funds increasing only 27 basis points to 2.37%. Consequently, the net interest margin increased to 3.54% in first quarter of 2005, compared with the two-year low of 3.28% experienced during the quarter ended June 30, 2004, representing an improvement of 26 basis points.

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

The increase in interest income was attributed to earning asset growth of $62,466 combined with an 18 basis point increase in average earning asset yields, when comparing the three-month period ended March 31, 2005 with the same period in 2004. Principally reflecting the Federal Reserve’s increases in short-term interest rates, the yield on average earning assets amounted to 5.61% during the current quarter ended March 31, 2005, compared with 5.43% during the same quarter in 2004.

Interest Expense: Total interest expense for the quarter ended March 31, 2005 amounted to $3,230 compared with $2,708 during the same quarter in 2004, representing an increase of $522, or 19.3%.

The increase in interest expense was attributed to the $68,690 increase in average interest bearing liabilities combined with a 12 basis point increase in the average cost of funds, when comparing the three-month period ended March 31, 2005 with the same period in 2004. The increase in the average cost of interest bearing funds was principally attributed to the increases in short-term interest rates between periods.

Rate / Volume Analysis: The following table sets 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.

Provision for Loan Losses

For the three-months ended March 31, 2005, the Bank did not record a provision for loan losses, compared with $90 during the first quarter of 2004.

The provision for loan losses reflects the amount necessary to maintain the Allowance for Loan Losses ("allowance") at a level that, in management’s judgment, is appropriate for the amount of inherent risk of loss in the current loan portfolio. In prior reporting periods the allowance for loan losses incorporated loss estimates relating to borrowers in the Maine wild blueberry industry that were involved in extensive legal matters, which warranted recognition of increased credit risk. During the first quarter of 2005, these matters were, in the opinion of management, satisfactorily resolved, thus improving the overall credit risk profile of the Bank’s loan portfolio.

The Bank’s non-performing loans remained at low levels during the current quarter. Non-performing loans at March 31, 2005 amounted to $527, representing a decline of $196 or 27.1% compared with December 31, 2004, and a decline of $1,185 or 69.2% compared with the same date in 2004. The allowance for loan losses expressed as a percentage of non-performing loans strengthened to 911% at March 31, 2005, compared with 668% and 301% at December 31 and March 31, 2004, respectively.

The Bank's loan loss experience showed an improvement during the first three-months of 2005 compared with the same period in 2004. Net charge-offs amounted to $30, or annualized net charge offs to average loans outstanding of 0.03%, compared with net charge-offs of $209, or annualized net charge offs to average loans outstanding of 0.21% during the three-months ended March 31, 2004.

Although somewhat offset by the continued increases in the loan portfolio, as well as a variety of other risk related attributes, the improved credit risk related to borrowers in the Maine wild blueberry industry was the principal reason underlying the zero provision for the quarter ended March 31, 2005.

Refer to Part I, Item 2, Allowance for Loan Losses, in this report on form 10-Q for further discussion and analysis regarding the provision and allowance for loan losses.

Based upon the continued performance of the loan portfolio, combined with certain improvements with respect to specific credit relationships, the Bank did not record a provision for loan losses during the first quarter of 2005. Refer to Part I, Item 2, Allowance for Loan Losses, in this report on Form 10-Q for further discussion and analysis regarding the provision and allowance for loan losses.

In addition to net interest income, non-interest income is a significant source of revenue for the Company and an important factor in its results of operations. For the quarter ended March 31, 2005, total non-interest income amounted to $1,103 compared with $1,841 for the same quarter in 2004, representing a decrease of $738, or 40.1%.

Trust and Other Financial Services: For the three months ended March 31, 2005 income from trust and other financial services amounted to $475 compared with $483 during the same period in 2004, representing a decline of $8, or 1.7%.

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

The decline in fee income was in part attributed to third-party brokerage activities, which generated lower trading volumes during the first quarter of 2005 compared with the same quarter in 2004.

At March 31, 2005, total managed assets at Bar Harbor Trust Services, a Maine chartered non-depository trust company and second tier subsidiary of the Company, stood at $198,362, compared with $196,079 and $177,179 at December 31 and March 31, 2004, respectively. While managed assets have increased on an overall basis, the revenue derived from trust and investment management services was essentially unchanged when comparing the first quarter of 2005 with the same quarter in 2004, reflecting pricing strategies designed to remain competitive while attracting new business.

Service Charges on Deposits: This income is principally derived from monthly deposit account maintenance and activity fees, overdraft fees, and a variety of other deposit account related fees.

Income generated from service charges on deposit accounts totaled $289 during the three-months ended March 31, 2005 compared with $364 during the same period in 2004, representing a decline of $75 or 20.6%.

As was the case during 2004, income generated from service charges on deposit accounts continued under pressure into the first quarter of 2005. Given aggressive competitive pricing in the markets served by the Bank, it has not increased its service charge fees on deposit accounts over the past few years, while customers have been closing or consolidating small balance accounts, migrating to relationship products that have lower fees, and reducing their volume of account overdraft activity.

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

Credit Card Service Charges and Fees: This income is principally derived from the Bank’s merchant credit card processing services and, to a lesser extent, fees associated with its Visa credit card product.

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

Net Gains on the Sale of Securities: During the three-months ended March 31, 2005, net gains on the sale of securities amounted to $21 compared with $193 during the same period in 2004, representing a decline of $172. The interest rate environment during the first three-months of 2005 and characteristics of the Bank’s securities portfolio did not present as much opportunity or need for securities repositioning transactions, as was the case during the same period in 2004.

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

Income on Interest Rate Swap Agreements: As part of its overall asset liability/management strategy, the Bank periodically uses interest rate swap agreements to minimize significant unanticipated fluctuations in earnings and cash flows caused by interest rate volatility. At March 31, 2005 the Bank had two outstanding interest rate swap agreements with notional principal amounts totaling $20,000.

As more fully enumerated in Part I, Note 8 of the consolidated interim financial statements of this report on Form 10-Q, during the first quarter of 2004, the Bank de-designated its interest rate swap agreements as cash flow hedges and, from the time of de-designation, changes in their fair value and current period net cash flows representing net amounts received from or paid to counterparties agreements were recorded in the consolidated statement of income and included as part of non-interest income.

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

As more fully discussed below, for the three-months ended March 31, 2005, there were no income or losses recorded in non-interest income, compared with $495 during the same period in 2004.

For the three-months ended March 31, 2005, the net unrealized (loss) gain on interest rate swap agreements totaled ($590), compared with $328 during the same period in 2004, reflecting the upward movement in the U.S. Treasury yield curve between these reporting periods. During the three months ended March 31, 2005 the net unrealized loss, net of tax, was recorded in accumulated other comprehensive income (hedge accounting), whereas during the same period in 2004 the net unrealized gain was recorded in non-interest income (non-hedge accounting).

For the three-months ended March 31, 2005, the total net cash flows received from counterparties amounted to $22, compared with $167 during the same period in 2004, reflecting a 1.75% increase in the Prime interest rate between reporting periods. The net cash flows received from counterparties during the first quarter of 2005 were recorded in interest income (hedge accounting), whereas during the first quarter of 2004 the net cash flows were recorded in non-interest income (non-hedge accounting).

Other Operating Income: For the three-months ended March 31, 2005 total other operating income amounted to $67, compared with $72 during the same period in 2004, representing a decrease of $5 or 6.9%.

Other operating income is principally derived from bank-owned life insurance ("BOLI"), representing increases in the cash surrender value of life insurance policies on the lives of certain retired employees who had provided positive consent allowing the Bank to be the beneficiary of such policies. Income from BOLI amounted to $55 in the first quarter of 2005 compared with $50 in the first quarter of 2004.

For the three-months ended March 31, 2005, total non-interest expenses amounted to $4,783 compared with $4,597 during the same period in 2004, representing an increase of $186, or 4.1%.

Salaries and Employee Benefit Expenses: For the three-months ended March 31, 2005, salaries and employee benefit expenses amounted to $2,614, compared with $2,434 during the same period in 2004, representing an increase of $180, or 7.4%. The increase in salaries and employee benefit expenses was principally attributed to the recording of an employee severance payment of $238 made in connection with the Company’s previously announced resignation of Dean S. Read as President of the Bank, offset in part by lower compensation and staffing levels compared with the same period in 2004.

Occupancy, Furniture and Equipment Expenses: For the three-months ended March 31, 2005, occupancy, furniture and equipment expenses amounted to $738 compared with $709 during the same period in 2004, representing an increase of $29, or 4.1%. The increase was attributed in part to ongoing operating expenses associated with the Bank’s acquisition of the Rockland branch office in the first quarter of 2004, combined with normal increases in a variety of occupancy related costs.

The Company's effective tax rate for the three-month period ended March 31, 2005 amounted to 25.6%, compared with 27.1% for the same period in 2004. The income tax provisions for these periods are less than the expense that would result from applying the federal statutory rate of 34% to income before income taxes principally because of the impact of tax exempt interest income on certain investment securities, loans and bank owned life insurance. For the three-months ended March 31, 2005, the effective tax rate posted a decline compared with the same quarter in 2004, principally due to non-taxable income bearing a larger percentage of income before income taxes than the comparable period in 2004.

The Company’s assets principally consist of loans and investment securities, which at March 31, 2005 represented 68.9% and 24.6% of total assets, respectively. At March 31, 2005 total assets amounted to $663,937 compared with $666,811 at December 31, 2004 and $616,238 at March 31, 2004, representing a decline of $2,874 or 0.4%, and an increase of $47,699 or 7.7%, respectively.

The increase in total assets from March 31, 2004 was principally driven by a $52,207 or 12.9% increase in total loans, which were funded with a $20,223 or 5.6% increase in deposits, and a $28,847 or 15.2% increase in borrowed funds.

The investment securities portfolio is primarily comprised of mortgage-backed securities issued by U.S. government agencies, U.S. government sponsored enterprises, and other corporate issuers. The portfolio also includes tax-exempt obligations of state and political subdivisions, and obligations of other U.S. government sponsored enterprises. The overall objective of the Bank’s strategy for the investment securities portfolio is to maintain an appropriate level of liquidity, diversify earning assets, manage interest rate risk, leverage the Bank’s strong capital position, and generate acceptable levels of net interest income.

At March 31, 2005, total investment securities amounted to $163,429, compared with $176,337 and $164,494 at December 31, 2004 and March 31, 2004, representing declines of $12,908 and $1,065, or 7.3% and 0.7%, respectively.

During the first quarter of 2005, cash flows from the securities portfolio, principally representing pay downs on mortgage-backed securities, were not re-invested. Cash flows from the portfolio were principally utilized to offset the seasonal deposit outflows associated with the Bank’s market area and, to a lesser extent, fund loan growth.

While the steady stream of cash flows from the securities portfolio have been reinvested over the past twelve-months, comparing March 31, 2005 with the same date in 2004 total investment securities remained essentially unchanged. These actions were taken in light of exceptionally strong loan growth, a flattening U.S. Treasury yield curve, still historically low market yields, and management’s expectation of higher yields in the not too distant future.

In light of the historically low interest rate environment over the past few years and the high degree of interest rate volatility, the Bank’s investment strategy has been principally focused on maintaining a securities portfolio with a 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 risk, and position the portfolio for a rising interest rate environment and an improving economy.

Loans

The loan portfolio is primarily secured by real estate in the counties of Hancock, Washington and Knox, Maine. The following table summarizes the components of the Bank's loan portfolio, net of deferred loan origination fees and costs, as of the dates indicated.

Total Loans: Total loans at March 31, 2005 amounted to $457,766, compared with $448,478 and $405,559 at December 31, 2004 and March 31, 2004, representing increases of $9,288 and $52,207, or 2.1% and 12.9%, respectively.

Commercial loans represented 75.0% and 59.0% of total loan growth during the three and twelve-months ended March 31, 2005, respectively. Commercial loan originations have been 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. Additionally, 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. The Bangor loan production office has generated significant new commercial relationships, which benefited from a strong, locally based commercial lender. Bank management anticipates continued loan growth in these market areas.

In general, loan origination activity has benefited from a still-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.

Non-performing Loans: Non-performing loans include loans on non-accrual status, loans that have been treated as troubled debt restructurings and loans past due 90 days or more and still accruing interest. There were no troubled debt restructurings in the loan portfolio during 2004 and this continued to be the case in the first quarter of 2005. The following table sets forth the details of non-performing loans at the dates indicated:

TOTAL NON-PERFORMING LOANS

During the quarter ended March 31, 2005, non-performing loans remained at relatively low levels. 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.

At March 31, 2005, total non-performing loans amounted to $527, or 0.12% of total loans, compared with $723 or 0.16% at December 31, 2004, and $1,712 or 0.42% at March 31, 2004.

While the non-performing loan ratios continued to reflect the favorable quality of the loan portfolio during the three-month period ended March 31, 2005, Bank management is cognizant of soft economic conditions overall, and believes it 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.

Other Real Estate Owned: When the Bank takes ownership of collateral property upon foreclosure of a real estate secured loan, the property is transferred from the loan portfolio to Other Real Estate Owned ("OREO") at its fair value. If the loan balance is higher than the fair value of the property, the difference is charged to the allowance for loan losses at the time of the transfer. OREO is classified on the consolidated balance sheet with Other Assets. At March 31, 2005, there was no OREO, unchanged from December 31, 2004, and compared with $34 at March 31, 2004.

The allowance is maintained at a level that, in management’s judgment, is appropriate for the amount of risk inherent in the current loan portfolio, and adequate to provide for estimated losses.

Specific reserves for impaired loans are determined in accordance with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors For Impairment of a Loan-Income Recognition and Disclosures." The amount of loans considered to be impaired totaled $138 as of March 31, 2005, compared with $93 as of December 31, 2004. The related allowances for loan losses on these impaired loans amounted to $21 and $14, as of March 31, 2005 and December 31, 2004, respectively.

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.

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

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

The Bank's loan loss experience showed an improvement during the first three-months of 2005 compared with the same period in 2004. Net charge-offs amounted to $30, or annualized net charge offs to average loans outstanding of 0.03%, compared with net charge-offs of $209, or annualized net charge offs to average loans outstanding of 0.21% during the three-months ended March 31, 2004.

The following table details changes in the allowance for loan losses and summarizes loan loss experience by loan type for the three-month periods ended March 31, 2005 and 2004.

In prior reporting periods the allowance incorporated loss estimates relating to borrowers in the Maine wild blueberry industry, principally centered in Washington County, Maine. During the fourth quarter of 2003 certain legal matters developed regarding the blueberry industry, the uncertainties of which Bank management believed warranted recognition of certain increases in credit risk. During the first quarter of 2005, these matters were, in the opinion of management, satisfactorily resolved. At March 31, 2005 the adequacy analysis of the allowance incorporates a revised estimate of inherent risk of loss with respect to this industry segment.

There were no material changes in loan concentrations during the three-month period ended March 31, 2005.

Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management considers the allowance for loan losses at March 31, 2005, to be appropriate for the risks inherent in the loan portfolio and resident in the local and national economy as of that date.

Deposits

The most significant funding source for earning assets continues to be core customer deposits that are gathered through the Bank's retail network of eleven banking offices throughout Down East and Mid Coast Maine.

At March 31, 2005 total deposits amounted to $384,204 compared with $398,272 at December 31, 2004, representing a decrease of $14,068, or 3.5%.

A portion of the Bank’s deposit base has historically been seasonal in nature, with balances declining during winter and early spring while peaking in the fall. As was the case during the first quarter of 2005, the seasonal outflow of deposits has typically been replaced with cash flows from the securities portfolio and short-term borrowings.

Comparing March 31, 2005 with the same date in 2004, total deposits increased $20,223, or 5.6%. While all categories of deposits showed increases, the overall growth in total deposits was principally attributed to certificates of deposit obtained from the national market, representing $16,904 of the total deposit growth during this period.

Borrowed Funds

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.

At March 31, 2005 total borrowings amounted to $219,063 compared with $206,923 at December 31, 2004, representing an increase of $12,140, or 5.9%. The increase in borrowed funds was utilized to replace the seasonal deposit outflows associated with the Bank’s market area, as well as funding first quarter 2005 loan growth.

Comparing March 31, 2005 with the same date in 2004, total borrowings increased $28,847, or 15.2%. The increase in borrowings was utilized to fund loan growth, which outpaced deposit growth by $31,984 during this period.

At March 31, 2005, total borrowings expressed as a percent of total assets amounted to 33.0%, compared with 31.0% and 30.9% at December 31 and March 31, 2004, respectively.

Borrowing maturities are managed in concert with the Bank’s asset and liability management strategy, 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 positions the Company well for rising interest rates and an improving economy.

As more fully described in Part I, Item 3 of this report on Form 10-Q, Quantitative and Qualitative Disclosures About Market Risk, as of March 31, 2005, the Bank maintained its asset sensitive balance sheet.

Capital Resources

Consistent with its long-term goal of operating a sound and profitable organization, during the first quarter of 2005 the Company maintained its strong capital position and continued to be a "well capitalized" financial institution according to applicable regulatory standards. Management believes this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth.

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 March 31, 2005, 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 leverage ratio of at least 5%.

The following table sets forth the Company's regulatory capital at March 31, 2005 and December 31, 2004, under the rules applicable at that date.

The Company's principal source of funds to pay cash dividends and support its commitments is derived from Bank operations. The Company declared dividends in the aggregate amount of $646 and $621 during the three-months ended March 31, 2005 and 2004, at a rate of $0.21 per share and $0.20 per share, respectively.

In March 2004, the Company announced its 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 March 31, 2005, the Company had repurchased 59,276 shares of stock under the plan, or 19.1% of the total authorized, at a total cost of $1,612 and an average price of $27.19. The Company records the repurchased shares as treasury stock.

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.

The following table summarizes the Company’s contractual obligations at March 31, 2005. Borrowings are stated at their contractual maturity due dates and do not reflect call features on certain borrowings.

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

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

Off-Balance Sheet Arrangements

The Company is, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

At March 31, 2005 the Company’s off-balance sheet arrangements were limited to 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 March 31, 2005, commitments under existing standby letters of credit totaled $1,284, compared with $1,155 and $2,205 at December 31 and March 31, 2004, respectively. The fair value of the standby letters of credit was not significant as of the foregoing dates.

Off Balance Sheet Risk

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

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

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

The following table summarizes the Bank's commitments to extend credit:

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

At March 31, 2005 the Bank had two outstanding derivative instruments, both interest rate swap agreements. The details are summarized as follows:

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

The following table summarizes the contractual cash flows of the interest rate swap agreements outstanding at March 31, 2005, based upon the then current Prime interest rate of 5.75%: