Commission File Number: 841105-D

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

Inapplicable
(Former name, former address and former fiscal year, if changed since last report)

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 AND DECEMBER 31, 2007
(Dollars in thousands, except share data)
(unaudited)

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Dollars in thousands, except share data)
(unaudited)

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Dollars in thousands, except share data)
(unaudited)

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Dollars in thousands)
(unaudited)

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

The consolidated balance sheet at December 31, 2007 has been derived from audited consolidated financial statements at that date. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X (17 CFR Part 210). 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, 2007, and notes thereto.

Note 2: Management’s Use of Estimates

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

Arriving at an appropriate level of allowance for loan losses 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, non-performing loan trends, the performance of individual loans in relation to contract terms and estimated fair values of collateral.

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.

Goodwill and Identifiable Intangible Assets: 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 certain fair value techniques.

Identifiable intangible assets, included in other assets on the consolidated balance sheet, 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 management believes 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.

The following is a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2008 and 2007:

Prior to the first quarter of 2007, the Company sponsored a limited postretirement benefit program, which funded medical coverage and life insurance benefits to a closed group of active and retired employees who met minimum age and service requirements.

In the first quarter of 2007, the Company settled its limited postretirement benefit program. The Company voluntarily paid out $699 to plan participants, representing 64% of the accrued postretirement benefit obligation. This payment fully settled all Company obligations related to this program. In connection with the settlement of the postretirement program, the Company recorded a reduction in non-interest expense of $832, representing the elimination of the $390 remaining accrued benefit obligation included in other liabilities on the consolidated balance sheet, and the $442 actuarial gain ($291, net of tax) related to the program. The actuarial gain was previously included in accumulated other comprehensive income, net of tax.

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

The following table summarizes the net periodic benefit costs for the three months ended March 31, 2008 and 2007:

The Company is expected to recognize $379 of expense for the foregoing plans for the year ended December 31, 2008. The Company is expected to contribute $222 to the foregoing plans in 2008. As of March 31, 2008, the Company had contributed $58.

Note 5: Commitments and Contingent Liabilities

The Bank 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 Bank 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 Bank upon extension of credit, is based on management’s credit evaluation of the borrower.

The Bank 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 non-performance 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, 2008 and December 31, 2007:

As of March 31, 2008 and December 31, 2007, the fair value of the standby letters of credit was not significant to the Company’s consolidated financial statements.

As part of its overall asset and 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 repricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant effect on net income.

The Company recognizes all of its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.

Changes in fair value of derivative instruments that are highly effective and qualify as a cash flow hedge are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. For fair value hedges that are highly effective, the gain or loss on the hedge and the loss or gain on the hedged item attributable to the hedged risk are both recognized in earnings, with the differences (if any) representing hedge ineffectiveness. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.

At March 31, 2008, the Bank had three outstanding derivative instruments with notional amounts totaling $40,000. These derivative instruments were an interest rate swap agreement and interest rate floor agreements, with notional principal amounts totaling $10,000 and $30,000, respectively. The details are summarized as follows:

During 2003 an interest rate swap agreement was purchased to limit the Bank’s exposure to falling interest rates on a pool of loans indexed to the Prime interest rate. The Bank is required to pay to a counter-party monthly variable rate payments indexed to Prime, while receiving monthly fixed rate payments based upon an interest rate of 6.25% over the term of the agreement.

The interest rate swap agreement was designated as a cash flow hedge in accordance with 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."

At March 31, 2008, the fair value of the interest rate swap agreement was an unrealized gain of $106, compared with an unrealized loss of $34 at December 31, 2007. The fair value of the interest rate swap agreement was included in other assets on the consolidated balance sheets.

During the three months ended March 31, 2008, the total net cash flows received from (paid to) counter-parties amounted to $1, compared with ($105) during the same period in 2007. The net cash flows received from (paid to) counter-parties were recorded in interest income.

At March 31, 2008, the net unrealized gain on the interest rate swap agreement included in accumulated other comprehensive income, net of tax, amounted to $70 compared with an unrealized loss net of tax of $22 at December 31, 2007.

During 2005, interest rate floor agreements were purchased to limit the Bank’s exposure to falling interest rates on two pools of loans indexed to the Prime interest rate. Under the terms of the agreements, the Bank paid premiums of $186 and $69 for the right to receive cash flow payments if the Prime interest rate falls below the floors of 6.00% and 6.50%, thus effectively ensuring interest income on the pools of prime-based loans at minimum rates of 6.00% and 6.50% for the duration of the agreements. The interest rate floor agreements were designated as cash flow hedges in accordance with SFAS 133.

For the three months ended March 31, 2008, total cash flows received from counterparties amounted to $17, compared with none during the same period in 2007. The cash flows received from counterparties were recorded in interest income.

The premiums paid on the interest rate floor agreements are being recognized as reductions of interest income over the duration of the agreements using the floorlet method, in accordance with SFAS 133. During the three months ended March 31, 2008, $13 of the premium was recognized as a reduction of interest income. At March 31, 2008, the remaining unamortized premiums, net of tax, totaled $118, compared with $128 at December 31, 2007. During the next twelve months, $65 of the premiums will be recognized as reductions of interest income, decreasing the interest income related to the hedged pool of Prime-based loans.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

SFAS No. 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS No. 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, among other things, as well as other unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

• Securities Available For Sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, callable features, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things.
  
• Derivative Instruments: Derivative instruments are reported at fair value utilizing Level 2 inputs. The Company obtains dealer market price estimates to value its Prime interest rate swaps and floors. The fair values were determined using propriety models from independent third-party sources taking into account such factors as the size of the transaction, estimated future cash flows, custom tailored features of the transaction, and the estimated current replacement cost of the derivative.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

SFAS No. 157 also requires disclosure of assets and liabilities measured and recorded at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table summarizes financial assets and financial liabilities measured at fair value on a non recurring basis, for which fair value adjustments were made during the first quarter of 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

In accordance with the provisions of SFAS No. 114, during the first quarter of 2008 one collateral dependent impaired commercial real estate loan with a carrying amount of $994 was written down to its estimated fair value of $864, resulting in an impairment charge of $130, which was included in the Company’s consolidated statement of income. The Company determined the impairment charge based on the  fair value of collateral. Based on this technique, impaired loans are classified as Level 3 for valuation purposes.

The Company recently adopted the following accounting standards:

Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards: In June 2007, the FASB ratified a consensus reached by the Emerging Issues Task Force (the "EITF") on Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards," which clarifies the accounting for income tax benefits related to the payment of dividends on equity-classified employee share-based payment awards that are charged to retained earnings under SFAS No. 123(R). The EITF concluded that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified non-vested equity shares, non-vested equity share units and outstanding equity share options should be recognized as an increase to additional paid-in capital. EITF Issue No. 06-11 should be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Retrospective application to previously issued financial statements is prohibited. The Company’s adoption of EITF Issue No. 06-11 did not have an impact on its consolidated financial condition or results of operations.

Written Loan Commitments Recorded at Fair Value Through Earnings: In November 2007, the United States Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin ("SAB") No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings."  SAB No. 109 provides views on the accounting for written loan commitments recorded at fair value under GAAP. SAB No. 109 supersedes SAB No. 105, "Application of Accounting Principles to Loan Commitments."  Specifically, SAB No. 109 states that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB No. 109 are applicable on a prospective basis to written loan commitments recorded at fair value under GAAP that are issued or modified in fiscal quarters beginning after December 15, 2007 (January 1, 2008 for the Company). SAB No. 109 did not have an impact on the Company’s consolidated financial condition or results of operations.

Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards: In June 2007, the FASB ratified a consensus reached by the Emerging Issues Task Force (the "EITF") on Issue No. 06-01, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards," which clarifies the accounting for income tax benefits related to the payment of dividends on equity-classified employee share-based payment awards that are charged to retained earnings under SFAS No. 123(R). The EITF concluded that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified non-vested equity shares, non-vested equity share units and outstanding equity share options should be recognized as an increase to additional paid-in capital. EITF Issue No. 06-11 should be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Retrospective application to previously issued financial statements is prohibited. The Company’s adoption of EITF Issue No. 06-11 did not have an impact on its consolidated financial condition or results of operations.

Non-controlling interests in Consolidated Financial Statements: In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin ("ARB") No. 51", "Consolidated Financial Statements". SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other things, SFAS No. 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. SFAS No. 160 also amends SFAS No. 128, "Earnings per Share," so that earnings per share calculations in consolidated financial statements will continue to be based on amounts attributable to the parent. SFAS No. 160 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2008 (January 1, 2009 for the Company) and is applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. SFAS No. 160 is not expected to have an impact on the Company’s consolidated financial condition or results of operations.

Disclosures About Derivative Instruments and Hedging Activities: In March 2008, the FASB issued SFAS No. 161, "Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133." SFAS No. 161 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to amend and expand the disclosure requirements of SFAS No. 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk related features in derivative agreements. SFAS No. 161 must be applied prospectively for interim periods and fiscal years beginning after November 15, 2008 (January 1, 2009 for the Company). SFAS No.161 is not expected to have a significant impact on the Company's consolidated results of operation or financial condition.

Management’s discussion and analysis, which follows, focuses on the factors affecting the Company’s consolidated results of operations for the three months ended March 31, 2008 and 2007, and financial condition at March 31, 2008, and December 31, 2007, and where appropriate, factors that may affect future financial performance. The following discussion and analysis of financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this report on Form 10-Q.

Amounts in the prior period financial statements are reclassified whenever necessary to conform to current period presentation.

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

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.

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 and results of operations 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, 2007 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 (the "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 probable 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 below, 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, 2008 and December 31, 2007, there was no valuation allowance for deferred tax assets, which are included in other assets on the consolidated balance sheet.

Goodwill and Other Intangible Assets: The valuation techniques used by the Company to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based upon changes in economic conditions and other factors. Any changes in the estimates used by the Company to determine the carrying value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, may have an adverse effect on 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.

As more fully enumerated below, the increase in first quarter earnings compared with the first quarter of 2007 was attributed to variety of factors including: a $1.0 million or 19.1% increase in net interest income; a $1.3 million increase in net securities gains; and a $313 thousand gain representing the proceeds from shares redeemed in connection with the Visa, Inc. initial public offering. Partially offsetting the foregoing increases was a $512 thousand increase in the provision for loan losses. In addition, in the first quarter of 2007 the Company recorded an $832 thousand reduction in non-interest expense related to the Company’s settlement of its limited postretirement benefit program.

• Net Interest Income: For the quarter ended March 31, 2008, net interest income on a fully tax equivalent basis amounted to $6.5 million, representing an increase of $1.1 million, or 19.5%, compared with the same quarter in 2007. The increase in net interest income was principally attributed to a 24 basis point improvement in the fully tax equivalent net interest margin, combined with average earning asset growth of $70.9 million, or 8.9%. Since September of 2007, the Federal Reserve has lowered short term interest rates 300 basis points. These actions favorably impacted the Bank’s net interest margin and net interest income, reflecting its liability sensitive balance sheet.
  
• Non- interest Income: For the quarter ended March 31, 2008, total non-interest income amounted to $2.0 million, representing an increase of $1.7 million, or 442%, compared with the same quarter in 2007. The increase in non-interest income was principally attributed to a $1.3 million increase in net securities gains. In the first quarter of 2007, the Bank restructured a portion of its securities portfolio, recording net securities losses of $920 thousand, whereas in the first quarter of 2008 the Bank recorded securities gains of $377 thousand. Also included in first quarter 2008 non-interest income was a $313 thousand gain representing the proceeds from shares redeemed in connection with the Visa, Inc. initial public offering.
  
• Non-Interest Expense: For the quarter ended March 31, 2008, total non-interest expense amounted to $5.0 million, representing an increase of $1.2 million, or 31.4%, compared with the same quarter in 2007. The increase in non-interest expense was principally attributed to the settlement of the Company’s limited postretirement program in the first quarter of 2007, the financial impact of which reduced that quarter’s non-interest expense by $832 thousand. The increase in first quarter non-interest expense was also attributed to higher levels of salaries and employee benefit expenses, which were up $312 thousand or 13.3% compared with the first quarter of 2007. The increase in salaries and employee benefits was attributed to a variety of factors including strategic additions to staff, normal increases in base salaries, and higher levels of accrued incentive compensation.

Total assets ended the first quarter at $911 million, representing increases of $21 million and $84 million, or 2.4% and 10.1%, compared with December 31 and March 31, 2007, respectively.

• Loans: Total loans ended the first quarter at $607 million, representing increases of $27 million and $55 million, or 4.7% and 9.9%, compared with December 31 and March 31, 2007, respectively. Business lending activity continued at a healthy pace during the first quarter, leading the overall growth in the loan portfolio.
  
• Credit Quality: The Bank’s non-performing loans ended the first quarter at $2.3 million, or 0.38% of total loans, compared with $2.1 million or 0.36% at December 31, 2007. One problem loan accounted for $864 of non-performing loans at quarter end and $1,144 at December 31, 2007. Net charge-offs amounted to $300 thousand during the quarter, or annualized net charge-offs to average loans outstanding of 0.20%. The aforementioned problem loan was accountable for $280 thousand of first quarter charge-offs. The real estate securing this loan was sold during the second quarter of 2008 and no further losses were sustained.

The Bank’s provision for loan losses amounted to $512 thousand in the first quarter of 2008 compared with no provision in the first quarter of last year. The increase in the provision principally reflects continued growth in the loan portfolio, declining real estate values in much of the Bank’s market area, and other qualitative and environmental considerations.

• Securities: Total securities ended the first quarter at $257 million, representing a decline of $8 million or 3.0% and an increase of $29 million or 12.9%, compared with December 31 and March 31, 2007, respectively. The decline in the securities portfolio during the first quarter was principally attributed to securities where call options were exercised, paydowns on mortgage-backed securities and sales of securities, the cash flows from which were not fully reinvested, largely due to prevailing market conditions and strong first quarter loan growth.
  
• Deposits: Total deposits ended the first quarter at $558 million, representing increases of $19 million and $52 million, or 3.6% and 10.2%, compared with December 31 and March 31, 2007, respectively. Total deposits included brokered certificates of deposit, which declined $5 million and $21 million compared with December 31 and March 31, 2007, respectively.

At March 31, 2008, total retail deposits stood at $460 million, representing increases of $25 million and $73 million, or 5.6% and 18.8%, compared with December 31 and March 31, 2007, respectively. Historically, the banking business in the Bank’s market area has been seasonal, with lower deposits in winter and spring, and higher deposits in summer and autumn. Consequently, during the first quarter of 2008, demand deposits and NOW accounts declined $17 million and $3 million compared with December 31, 2007, respectively. However, comparing March 31, 2008 with the same date last year, all categories of retail deposits were showing increases, led by time deposits and savings and money market accounts.

• Borrowings: Total borrowings ended the first quarter at $281 million, representing increases of $3 million and $29 million, or 0.9% and 11.5%, compared with December 31, and March 31 2007, respectively. The additional borrowings were utilized to help support the Bank’s earning asset growth.
  
• Capital: The Company continued to exceed regulatory requirements for well-capitalized institutions, ending the first quarter of 2008 with a Tier I Capital Ratio of 6.90%.
  
• Tangible Book Value: At March 31, 2008, the Company’s tangible book value per share of common stock outstanding amounted to $21.08, representing an increase of $1.63 or 8.4%, compared with the same date last year.

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 three months ended March 31, 2008, net interest income on a fully tax equivalent basis amounted to $6,522, compared with $5,460 in the first quarter of 2007, representing an increase of $1,062, or 19.5%. As more fully discussed below, the increase in the Bank’s first quarter 2008 net interest income compared with the same quarter in 2007 was principally attributed to a 24 basis point improvement in the tax equivalent net interest margin, combined with average earning asset growth of $70,891, or 8.9%.

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

Net Interest Income Analysis: The following tables summarize 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, 2008 and 2007, respectively:

Net Interest Margin: The net interest margin, expressed on a Tax equivalent basis, represents the difference between interest and dividends earned on interest-earning 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.

For the three months ended March 31, 2008 the fully tax equivalent net interest margin amounted to 3.03%, compared with 2.79% during the same quarter in 2007, representing an improvement of 24 basis points.

Since September 2007, the Board of Governors of the Federal Reserve System (the "Federal Reserve") decreased short term interest rates six times for a total of 300 basis points. These actions have favorably impacted the Bank’s net interest income, given its liability sensitive balance sheet. Specifically, the Bank’s total weighted average cost of funds declined at a faster pace than the weighted average yield on its earning asset portfolios.

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

For the three months ended March 31, 2008, the weighted average yield on the Bank’s securities portfolio amounted to 6.02% compared with 5.56% during the same period in 2007, representing an improvement of 46 basis points. The improved yield on the securities portfolio reflects, in part, the restructuring of a portion of the portfolio in 2007. In addition, because the majority of the securities portfolio consists of fixed rate securities, the decline in short-term interest rates has had minimal impact on its weighted average yield.

Comparing the first quarter of 2008 with the same quarter in 2007, interest income from the loan portfolio increased $350 or 3.8%, and interest income from the securities portfolio increased $755, or 24.3%.

As depicted on the rate /volume tables below, the increased volume of total average earning assets on the balance sheet during the first quarter of 2008 contributed $1,265 to the increase in first quarter 2008 interest income compared with the first quarter of 2007, offset in part by a decrease of $143 attributed to the decline in the weighted average earning asset yield.

The increase in interest expense was attributed to an increase in average interest bearing liabilities amounting to $62,214 or 8.7%, almost all of which was offset by a 33 basis point decline in the weighted average cost of interest bearing liabilities, when comparing the first quarter of 2008 with the same quarter in 2007. The decline in the weighted average cost of interest bearing liabilities was principally attributed to declines in short term interest rates, which favorably impacted the weighted average cost of the Bank’s variable rate funding sources as well as its short term borrowings. Should short term interest rates continue at current levels, Bank management anticipates further declines in the weighted average cost of funds, as maturing time deposits and borrowings continue to re-price at lower costs.

As depicted on the rate/volume analysis table below, the increased volume of average interest bearing liabilities on the balance sheet during the first quarter of 2008 contributed $607 to the increase in first quarter 2008 interest expense compared with the first quarter of 2007, but was largely offset by a decrease of $547 attributed to the decline in the cost of interest bearing liabilities.

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.

The provision for loan losses reflects the amount necessary to maintain the allowance for loan losses (the "allowance") at a level that, in management’s judgment, is appropriate for the amount of inherent risk of probable loss in the Bank’s current loan portfolio.

The Bank’s non-performing loans remained at relatively low levels at quarter end, representing $2,296 or 0.38% of total loans, compared with $2,062 or 0.36% at December 31, 2007. At March 31, 2008, one problem loan accounted for $864, or 38% of total non-performing loans.

Net charge-offs amounted to $300 in the first quarter of 2008, or annualized net charge-offs to average loans outstanding of 0.20%. The problem loan mentioned above was accountable for $280 of first quarter 2008 charge-offs. The real estate securing this loan was sold during the second quarter of 2008 and no further charge-offs were sustained. In the first quarter of 2007, net loan charge-offs amounted to $26, or annualized net charge-offs to average loans outstanding of 0.20%.

The allowance expressed as a percentage of non-performing loans stood at 216% at March 31, 2008, compared with 230% at December 31, 2007.

For the three months ended March 31, 2008, the provision for loan losses (the "provision") amounted to $512 compared with no provision during the same period in 2007. The increase in the provision principally reflects continued growth in the loan portfolio, declining real estate values in much of the Bank’s market area, and other qualitative and environmental considerations.

Refer below to Item 2 of this Part I, Financial Condition, Loans, Allowance for Loan Losses, in this report on Form 10-Q for further discussion and analysis regarding the allowance.

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, 2008, total non-interest income amounted to $2,049, compared with $378 during the same quarter in 2006, representing an increase of $1,671, or 442.1%.

Factors contributing to the changes in non-interest income are enumerated in the following discussion and analysis:

Trust and Other Financial Services: Income from trust and other 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 brokerage services conducted through Bar Harbor Financial Services, an independent third party broker.

At March 31, 2008, total assets under management at Bar Harbor Trust Services ("Trust Services"), a Maine chartered non-depository trust company and second tier subsidiary of the Company, stood at $265,482 compared with $278,227 and $257,799 at December 31 and March 31, 2007, representing a decline of $12,745 or 4.6% and an increase of $7,683, or 3.0%, respectively.

For the quarter ended March 31, 2008, income from trust and other financial services amounted to $539, compared with $541 during the same quarter in 2007, representing a decline of $2 or 0.4%. Revenue generated from third party brokerage activities posted moderate declines, reflecting lower trading volumes, including sales of mutual funds and annuity products.

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 $362 for the quarter ended March 31, 2008, compared with $370 during the same quarter in 2007, representing a decline of $8, or 2.2%. The decline in service charges on deposit accounts was principally attributed to a small decline in deposit account overdraft activity in the first quarter of 2008 compared with the same quarter in 2007.

For quarter ended March 31, 2008, credit and debit card service charges and fees amounted to $333, compared with $267 during the same quarter in 2007, representing an increase of $66, or 24.7%.

The first quarter increase in credit and debit card fees was largely attributed to an increase in debit card fees, principally reflecting the ongoing growth in the Bank’s demand deposits accounts base, combined with the 2007 introduction of a new deposit account product that offers rewards for debit card transactions. Merchant credit card processing fees also posed an increase, reflecting higher merchant credit card processing volumes, compared with the first quarter of 2007. The increase in credit and debit card processing revenue was largely offset by an increase in credit and debit card processing expense, which is included in non-interest expense in the Company’s consolidated statements of income.

Net Securities Gains (Losses): For the quarter ended March 31, 2008, net securities gains amounted to $377, compared with net securities losses of $920 in the first quarter of 2007, representing an increase of $1,297. The amount recorded in the first quarter of 2008 represented realized gains on the sale of securities, while the amount recorded in the first quarter of 2007 represented a securities impairment loss partially offset by realized gains.

In April 2007, Company’s Board of Directors approved the restructuring of a portion of the Company’s consolidated balance sheet through the sale of $43,337 of its aggregate $227,473 available for sale securities portfolio, the proceeds from which were initially used to pay down short term borrowings. Since the Company no longer had the intent to hold these securities until a recovery of their amortized cost, the Company recorded an adjustment to write down these securities to fair value at March 31, 2007, resulting in an impairment loss of $1,162. In the first quarter of 2007 the Company also recorded $241 in realized gains on sales of securities.

Other Operating Income: For the quarter ended March 31, 2008, total other operating income amounted to $388, compared with $68 during the same quarter in 2007, representing an increase of $320 or 470.6%.

As previously reported, in Part II, Item 7 of the Company’s Annual Report on Form 10-K, and in connection with the Bank’s merchant services and Visa credit card business, prior to September 2007 the Bank was a member of Visa U.S.A. Inc. Card Association. As a part of the Visa Inc. reorganization in 2007, (the "Visa Reorganization"), the Bank received its proportionate number of Class U.S.A. shares of Visa Inc common stock, or 20,187 shares.

In connection with the Visa Inc. initial public offering that occurred in March of 2008, the Bank received 18,949 shares of Visa Inc. Class B Common Stock, of which 7,326 shares were immediately redeemed. The proceeds from this redemption amounted to $313 and were recorded in other operating income in the Company’s consolidated statement of income. The 11,623 post redemption non-marketable shares owned by the Bank are convertible to Class A Visa Inc. shares three years after the initial public offering, or upon settlement of certain litigation between Visa Inc. and other third parties, whichever is later. As of March 29, 2008, the conversion rate of Class B shares into Class A shares was 0.71429.

The increase in salaries and employee benefits was attributed to a variety of factors including strategic additions to staff, normal increases in base salaries, and higher levels of accrued incentive compensation. The increase in salaries and benefits followed a two-year period where salary and employee benefits declined.

Occupancy Expenses: For the quarter ended March 31, 2008, total occupancy expenses amounted to $385, compared with $373 during the same quarter in 2007, representing an increase of $12 or, or 3.2%.

The increase in occupancy expenses principally reflected higher fuel and utilities prices in the first quarter of 2008 compared with the same quarter last year.

The first quarter increase in furniture and equipment expenses was principally attributed to higher maintenance fees on certain equipment and a higher level of equipment repairs, compared with the first quarter of 2007.

For the quarter ended March 31, 2008, credit and debit card expenses amounted to $255, compared with $188 during the same quarter in 2007, representing an increase of $67, or 35.6%. The increase in credit and debit card expenses was principally attributed to an increase in debit card fees, reflecting the growth of the Bank’s retail checking account base and the 2007 introduction of a new deposit product that provides customer rewards for debit card activity. Merchant credit card processing expenses were moderately higher in the first quarter of 2008, principally reflecting higher merchant credit card processing volumes compared with the same quarter in 2007.

First quarter 2008 credit and debit card expenses also included the costs associated with the voluntary reissuance of a large number of credit and debit cards that were compromised in the widely publicized Hannaford Supermarket data breach.

Other Operating Expenses: For the quarter ended March 31, 2008, other operating expenses amounted to $1,201, compared with $1,274 during the same quarter in 2007, representing a decline of $73, or 5.7%.

The decline in other operating expenses was principally attributed to a $128 reduction in the Company’s liability related to the Visa Reorganization and the Visa Inc. initial public offering.

As previously reported in Part II, Item 7 of the Company’s Annual Report on Form 10-K, as a former member of Visa, the Bank has an obligation to indemnify Visa U.S.A. under its bylaws and Visa Inc. under a retrospective responsibility plan, approved as part of the Visa Reorganization, for contingent losses in connection with covered litigation (the "Visa Indemnification") disclosed in Visa Inc.’s public filings with the SEC, based on its membership proportion. The Bank is not a party to the lawsuits brought against Visa U.S.A. In 2007 the Bank recorded a $243 liability in connection with the Visa Indemnification. In connection with the March 2008 Visa Inc. public offering the Bank reduced this liability by $128. The Company recognizes its portion of the Visa Indemnification at the estimated fair value of such obligation in accordance with FASB Interpretation No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others".

The Company's effective tax rate for the quarter ended March 31, 2008 amounted to 31.3%, compared with 26.2% for the same quarter in 2007. The income tax provisions for these periods were 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.

Fluctuations in the Company’s effective tax rate are generally attributed to changes in the relationship between non-taxable income and non-deductible expense, and income before income taxes, during any given reporting period.

The Company’s assets principally consist of loans and securities, which at March 31, 2008 represented 66.7% and 28.2% of total assets, compared with 65.2% and 29.7% at December 31, 2007, respectively.

At March 31, 2008, total assets amounted to $910,894, compared with $889,472 and $827,266 at December 31 and March 31, 2007, representing increases of $21,422 and $83,628, or 2.4% and 10.1%, respectively.

The 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.

In the first quarter of 2008, the securities portfolio represented 29.8% of the Company’s average earning assets and generated 28.3% of total tax equivalent interest and dividend income, compared with 28.5% and 24.6% in the first quarter of 2007, respectively.

The overall objectives of the Bank’s strategy for the securities portfolio include maintaining appropriate liquidity reserves, diversifying earning assets, managing interest rate risk, leveraging the Bank’s strong capital position, and generating acceptable levels of net interest income.

Securities available for sale represented 100% of total securities at March 31, 2008 and 2007. Securities available for sale are reported at their fair value with unrealized gains or losses, net of taxes, excluded from earnings but shown separately as a component of shareholders’ equity. Gains and losses on the sale of securities available for sale are determined using the specific-identification method and are shown separately in the consolidated statements of income.

Total Securities: At March 31, 2008, total securities amounted to $256,698, compared with $264,617 and $227,473 at December 31 and March 31, 2007, representing a decline of $7,919 or 3.0% and an increase of $29,225, or 12.9%, respectively. The decline in the securities portfolio from December 31, 2007 was principally attributed to called securities, paydowns on mortgage-backed securities and sales of securities, the cash flows from which were not fully reinvested due to prevailing market conditions and strong first quarter loan growth.

In the second quarter of 2007, the Bank completed the restructuring of a portion of its securities portfolio, selling a total of $46,170 in securities with below market yields while paying down short-term borrowings. During the later part of the second quarter of 2007, market yields climbed to a five-year high, with the benchmark 10-year U.S. Treasury advancing from 4.63% in mid May to 5.30% in mid June. The strong increase in market yields presented opportunities for replacing the securities sold; further increasing the Bank’s earning assets with additional securities, and generating higher levels of net interest income. The $29,225 increase in securities at March 31, 2008 compared with the same date in 2007 was principally attributed to the implementation of the foregoing strategy.

Impaired Securities: The securities portfolio contains certain investments where amortized cost exceeds fair value, which at March 31, 2008 amounted to unrealized losses of $3,483, compared with $723 at December 31, 2007. The increase in unrealized losses was principally attributed to changes in prevailing market conditions, interest rates and market yields at quarter end, including historically wide pricing spreads to the U.S. Treasury yield curve (the "yield curve").

Management believes the unrealized losses in the securities portfolio at March 31, 2008 were attributed to prevailing market conditions, interest rates and market yields, combined with historically wide pricing spreads to the yield curve. Because the decline in market value was attributable to changes in prevailing market yields and interest rates, and because the Bank has the ability and intent to hold these investment securities until a recovery of their amortized cost, which may be at maturity, the Company does not consider these investment securities to be other-than-temporarily impaired at March 31, 2008.

Total Loans: At March 31, 2008, total loans amounted to $607,165, compared with $579,711 and $552,643 at December 31, and March 31, 2007, representing increases of $27,454, or 4.7%, and an increase of $54,522, or 9.9%, respectively. Business lending activity led the overall growth of the loan portfolio during the three months ended March 31, 2008.

Commercial Loans: At March 31, 2008, total commercial loans amounted to $294,348, compared with $264,890 and $236,771 at December 31 and March 31, 2007, representing increases of $29,458 and 57,577, or 11.1% and 24.3%, respectively.

Commercial loans represented 105.5% of total loan growth when comparing March 31, 2008 with the same date in 2007. Commercial loan growth was almost principally driven by commercial real estate mortgage loans and commercial and industrial loans, which posted increases of $42,255 and $10,069, or 26.3% and 17.2%, respectively, when comparing March 31, 2008 with the same date in 2007. Bank management attributes the overall growth in commercial loans, in part, to an effective business banking team, a variety of new business development initiatives, focused incentive compensation plans, and a relatively stable local economy.

Consumer Loans: At March 31, 2008, total consumer loans, which principally consisted of consumer real estate (residential mortgage) loans, amounted to $305,821, compared with $307,675 and $308,715 at December 31 and March 31, 2007, representing declines of $1,854 and $2,894, or 0.6% and 0.9%, respectively.

The declines in consumer loans were principally attributed to declines in residential real estate loans, reflecting a continued softening of the real estate markets in the communities served by the Bank. While the Bank originated and closed $6,678 in residential real estate loans during the first quarter of 2008, this amount was more than offset by $9,572 of cash flows (principal paydowns) from the existing residential real estate loan portfolio.

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 2007 and this continued to be the case during the three months ended March 31, 2008. The following table sets forth the details of non-performing loans as of the dates indicated:

During the quarter ended March 31, 2008, non-performing loans increased by $234, but remained at relatively low levels. The Bank attributes this to mature credit administration processes and underwriting standards, aided by a relatively stable local economy. The Bank maintains a centralized loan collection and managed asset department, providing timely and effective collection efforts for problem loans.

At March 31, 2008, total non-performing loans amounted to $2,296, compared with $2,062 and $422 at December 31 and March 31, 2007, representing increases of $234 and $1,874, or 11.3%, and 444.1%, respectively. One problem loan accounted for $864 of non-performing loans at quarter end and $1,144 at December 31, 2007. This problem loan was accountable for $280 of first quarter charge-offs. The real estate securing this loan was sold during the second quarter of 2008 and no further charge-off was sustained.

Future levels of non-performing loans may be influenced by economic conditions, including the impact of those conditions on the Bank's customers, including interest rates and debt service levels, declining collateral values, rising oil and gas prices, tourism activity, 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.

At March 31, 2008 and December 31, 2007 total OREO amounted to $340, compared with none as of March 31, 2007. One commercial property comprised the March 31, 2008 and December 31, 2007 balance of OREO.

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, probable losses. Allowances are established for specific impaired loans, a pool of reserves based on historical net loan charge-offs by loan types, and supplemental reserves that adjust historical net loss experience to reflect current economic conditions, industry specific risks, and other qualitative and environmental considerations impacting the inherent risk of loss in the current loan portfolio.

Specific allowances 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 $1,650 as of March 31, 2008, compared with $1,598 and $294 as of December 31 and March 31, 2007, respectively. The related allowance for loan losses on these impaired loans amounted to $100 as of March 31, 2008, compared with $250 and $100 at December 31 and March 31, 2007, respectively.

Management recognizes that early and accurate recognition of risk is the best means to reduce credit losses. 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 loan 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."

There were no material changes in loan concentrations during the three months ended March 31, 2008.

The following table details changes in the allowance and summarizes loan loss experience by loan type for the three-month periods ended March 31, 2008 and 2007.

ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED
MARCH 31, 2008 AND 2007

Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management believes the allowance for loan losses at March 31, 2008, is appropriate for the risks inherent in the loan portfolio.

At March 31, 2008, total deposits amounted to $558,419, compared with $539,116 and $506,832 at December 31 and March 31, 2007, representing increases of $19,303 and $51,587, or 3.6% and 10.2%, respectively.

Total deposits included certificates of deposit obtained in the national market ("brokered deposits"). At March 31, 2008, total brokered deposits amounted to $98,439, compared with $103,692 and $119,468 at December 31 and March 31, 2007, representing declines of $5,253 and $21,029, or 5.1% and 17.6%, respectively. The decline in brokered deposits was attributed, in part, to strong retail deposit growth. In addition, over the past six months prevailing market conditions have kept the cost of brokered deposits at historically wide spreads to other sources of funding. Accordingly, the Bank has been utilizing more of its borrowing capacity from the Federal Home Loan Bank of Boston as a means to lower its overall cost of funds.

At March 31, 2008, retail deposits totaled $459,980 compared with $435,424 at December 31, 2007, representing an increase of $24,556, or 5.6%. Reflecting the seasonality of the Bank’s deposit base discussed above, Demand deposits and NOW accounts declined $16,905 and $2,539, or 25.9% and 3.8%, respectively, compared with December 31, 2007. However, increases in retail certificates of deposit and savings and money market accounts more than offset the seasonal declines in demand deposits and NOW accounts.

Comparing March 31, 2008 with the same date in 2007, total retail deposits increased $72,617, or 18.8%. All categories of retail deposits were showing increases, led by time deposits and savings and money market accounts. Time deposits increased $50,204 or 38.8%, while savings and money market accounts were up $19,857, or 13.5%. The $72,617 growth in retail deposits included an increase of $20,285 in deposits offered to clients of trust services, principally reflecting a reallocation of cash within certain managed asset portfolios in the course of normal operations. The increase in retail deposits also included a $10,034 deposit from the State of Maine.

Bank management believes it has exercised restraint with respect to overly aggressive deposit pricing strategies, and has sought to achieve an appropriate balance between retail deposit growth and wholesale funding levels, while considering the associated impacts on the Bank’s net interest margin and liquidity position. In offering retail time deposits, the Bank generally prices on a relationship basis. At March 31, 2008, the weighted average cost of retail time deposits was 3.96%. Given the current interest rate environment and continuing time deposit maturities, management anticipates that the weighted average cost of time deposits will show declines throughout the balance of 2008.

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, 2008, total borrowings amounted to $281,457, compared with $278,853 and $252,352 at December 31 and March 31, 2007, representing increases of $2,604 and $29,105, or 0.9 and 11.5%, respectively. The increase in borrowings was principally utilized to help support earning asset growth, principally investment securities.

At March 31, 2008, total borrowings expressed as a percent of total assets amounted to 30.9%, compared with 31.3% and 30.5% at December 31 and March 31, 2007, respectively.

Capital Resources

Capital Ratios: The Company and the Bank are subject to the risk based capital guidelines administered by the Company’s and 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, 2008, the Company and the Bank were 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%.

The following table sets forth the Company's regulatory capital at March 31, 2008 and December 31, 2007, under the rules applicable at that date.

Stock Repurchase Plan: 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 on March 4, 2004 and were continued through December 2007. In December of 2007 the Company’s Board of Directors authorized the continuance of this program through December 31, 2008. 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 and may be made in the open market or through privately negotiated transactions. As of March 31, 2008, the Company had repurchased 249,697 shares of stock under this plan, at a total cost of $7,303 and an average price of $29.25 per share. The Company recorded 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. Management also believes the stock repurchase plan helps facilitate an orderly market for the disposition of large blocks of stock, and lessens the price volatility associated with the Company’s thinly traded stock.

The Company is a party to certain contractual obligations under which it is obligated to make future payments. These principally include borrowings from the FHLB, consisting of short and long-term fixed rate borrowings, and collateralized by all stock in the FHLB, a blanket lien on qualified collateral consisting primarily of loans with first and second mortgages secured by one-to-four family properties, and certain pledged investment securities. The Company has an obligation to repay all borrowings from the FHLB.

The Company is also obligated to make payments on operating leases for its branch office in Somesville and its office in Bangor, Maine.

The following table summarizes the Company’s contractual obligations at March 31, 2008. Borrowings are stated at their contractual maturity due dates and do not reflect call features, or principal amortization features, on certain borrowings.

All FHLB advances are fixed-rate instruments. Advances are payable at their call dates or final maturity dates. Advances are stated in the above table at their contractual final maturity dates. At March 31, 2008, the Bank had $92,500 in callable advances.

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, check printing, statement rendering 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, that may be considered material to investors.

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, 2008, commitments under existing standby letters of credit totaled $506, compared with $506 and $462 at December 31 and March 31, 2007, 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 certain financial derivative instruments; namely, interest rate swap agreements and interest rate floor agreements.

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 as of the dates shown:

Financial Derivative Instruments: As part of its overall asset and 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 repricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on net interest income. Derivative instruments that management periodically uses as part of its interest rate risk management strategy include interest rate swap agreements and interest rate floor agreements. A policy statement, approved by the Board of Directors of the Bank, governs use of derivative instruments.

At March 31, 2008, the Bank had three outstanding derivative instruments with notional amounts totaling $40,000. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. Management does not anticipate non-performance by the counter-parties to the agreements, and regularly reviews the credit quality of the counter-parties from which the instruments have been purchased.

The details of the Bank’s financial derivative instruments as of March 31, 2008 are summarized below. Also refer to Note 7 of the consolidated financial statements in Part I, Item 1 of this report on Form 10-Q.

INTEREST RATE SWAP AGREEMENT

The interest rate swap agreements were designated as cash flow hedges in accordance with 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."

The Company is required to pay a counter-party monthly variable rate payments indexed to Prime, while receiving monthly fixed rate payments based upon an interest rate of 6.25% over the term of the agreement.

The following table summarizes the contractual cash flows of the interest rate swap agreements outstanding at March 31, 2008, based upon the then current Prime interest rate of 5.25%.