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

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
(Dollars in thousands, except per share data)
(unaudited)

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Dollars in thousands, except per share data)
(unaudited)

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Dollars in thousands, except per share data)
(unaudited)

 BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Dollars in thousands)
(unaudited)

BAR HARBOR BANKSHARES AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Dollars in thousands, except share data)
(unaudited)

The consolidated balance sheet at December 31, 2009, 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 ("U.S.") 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, 2009, 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, other-than-temporary impairments on securities, income tax estimates, and the valuation of intangible assets.

Allowance for Loan Losses: 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 is available to absorb losses on loans and 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. The allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off, and is decreased by loans charged-off as uncollectible.

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, non-performing loan trends, the performance of individual loans in relation to contract terms, and estimated fair values of collateral.

The allowance consists of allowances established for specific loans including impaired loans; allowances for pools of loans based on historical charge-offs by loan types; and supplemental allowances that adjust historical loss experience to reflect current economic conditions, industry specific risks, and other observable data.

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 allowance, which also may necessitate future additions or reductions to the allowance, based on information available to them at the time of their examination.

Other-Than-Temporary Impairments on Investment Securities: One of the significant estimates relating to securities is the evaluation of other-than-temporary impairment. If a decline in the fair value of a security is judged to be other-than-temporary, and management does not intend to sell the security and believes it is more-likely-than-not the Company will not be required to sell the security prior to recovery of cost or amortized cost, the portion of the total impairment attributable to the credit loss is recognized in earnings, and the remaining difference between the security’s amortized cost basis and its fair value is included in other comprehensive income.

For impaired available for sale debt securities that management intends to sell, or where management believes it is more-likely-than-not that the Company will be required to sell, an other-than-temporary impairment charge is recognized in earnings equal to the difference between fair value and cost or amortized cost basis of the security. The fair value of the other-than-temporarily impaired security becomes its new cost basis.

The evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of securities should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. The Company has a security monitoring process that identifies securities that, due to certain characteristics, as described below, are subjected to an enhanced analysis on a quarterly basis.

Securities that are in an unrealized loss position, are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the cause of the impairment; (b) the financial condition, credit rating and future prospects of the issuer; (c) whether the debtor is current on contractually obligated interest and principal payments; (d) the volatility of the securities’ fair value; (e) performance indicators of the underlying assets in the security including default rates, delinquency rates, percentage of non-performing assets, loan to collateral value ratios, third party guarantees, current levels of subordination, vintage, and geographic concentration and; (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of the receipt of all principal and interest due.

For securitized financial assets with contractual cash flows, such as private label mortgage-backed securities, the Company periodically updates its best estimate of cash flows over the life of the security. The Company’s best estimate of cash flows is based upon assumptions consistent with the current economic recession, similar to those the Company believes market participants would use. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been an adverse change in timing or amount of anticipated future cash flows since the last revised estimate to the extent that the Company does not expect to receive the entire amount of future contractual principal and interest, an other-than-temporary impairment charge is recognized in earnings representing the estimated credit loss if management does not intend to sell the security and believes it is more-likely-than-not the Company will not be required to sell the security prior to recovery of cost or amortized cost. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain assumptions and judgments regarding the future performance of the underlying collateral. In addition, projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral.

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 using certain fair value techniques. Goodwill impairment testing is performed at the segment (or "reporting unit") level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to the reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

The goodwill impairment analysis is a two-step test. The first step used to identify potential impairment, involves comparing each unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is to measure the amount of impairment. At September 30, 2010, there was no indication of impairment.

At September 30, 2010 and December 31, 2009, the Company did not have any identifiable intangible assets on its consolidated balance sheet.

Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, such as the Company’s dilutive stock options.

The following is a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009:

Securities Maturity Distribution: The following table summarizes the maturity distribution of the amortized cost and estimated fair value of securities available for sale as of September 30, 2010. Actual maturities may differ from the final maturities noted below because borrowers or issuers may have the right to prepay or call obligations with or without prepayment or call penalties. Mortgage-backed securities are allocated among the maturity groupings based on their final maturity dates.

Securities Impairment: As a part of the Company’s ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired ("OTTI").

Effective April 1, 2009, the Company adopted FSP FAS 115-2, Recognition and Presentation of Other-than Temporary Impairments, now included in the FASB Accounting Standards Codification as part of FASB ASC 320-10-65, Investments – Debt and Equity Securities. This new accounting standard amended the OTTI guidance included in GAAP for debt securities, which among other things clarified the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired and changed the presentation and calculation of OTTI on debt securities in the financial statements. Additionally, when adopting this accounting standard, an entity is required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the non-credit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income (loss) if the entity does not intend to sell the security and it is not likely that the entity will be required to sell the security before recovery of its amortized cost. Upon the adoption of this accounting standard the Company recognized the effect of applying it as a change in accounting principle. The Company recognized a $937 cumulative effect of initially applying this standard as an adjustment to retained earnings as of April 1, 2009, with a corresponding adjustment to accumulated other comprehensive income (loss).

Prior to the adoption of the new accounting standard, in the first quarter of 2009 the Company recorded other-than-temporary impairment losses of $1,007 related to five available for sale, non-agency residential mortgage-backed securities because the Company could no longer conclude it was probable that it would recover all of the principal and interest on these securities. This charge represented the total amount of unrealized losses on these securities at March 31, 2009 and was recorded within net securities gains in the Company’s consolidated statement of income.

For the three months ended September 30, 2010, the Company recognized total OTTI losses of $211 in the statement of income (before taxes) related to two, available for sale, private label mortgage-backed securities, both of which the Company had previously determined were other-than-temporarily impaired. In both cases the OTTI losses represented management’s best estimate of credit losses or additional credit losses on the collateral underlying these securities.

For the nine months ended September 30, 2010, the Company recognized total OTTI losses of $751 in the statement of income (before taxes) related to nine, available for sale, private label mortgage-backed securities, all but one of which the Company had previously determined were other-than-temporarily impaired. In all cases the OTTI losses represented management’s best estimate of credit losses or additional credit losses on the collateral underlying these securities.

The $751 of year-to-date OTTI losses recognized in earnings represented management’s best estimate of credit losses inherent in the securities based on discounted, bond-specific future cash flow projections using assumptions about cash flows associated with the pools of loans underlying each security. In estimating those cash flows the Company considered loan level credit characteristics, current delinquency and non-performing loan rates, current levels of subordination and credit support, recent default rates and future constant default rate estimates, loan to collateral value ratios, recent collateral loss severities and future collateral loss severity estimates, recent prepayment rates and future prepayment rate assumptions, and other estimates of future collateral performance.

As of September 30, 2010, the total OTTI losses included in accumulated other comprehensive income amounted to $611 net of tax, compared with $1,808 at December 31, 2009. These OTTI losses related to thirteen private label mortgage-backed securities, with a total unamortized cost of $6,848 at September 30, 2010.

The following table summarizes the fair value of securities with continuous unrealized losses for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2010 and December 31, 2009. All securities referenced are debt securities. At September 30, 2010, and December 31, 2009, the Company did not hold any common stock or other equity securities in its securities portfolio.

For securities with unrealized losses, the following information was considered in determining that the impairments were not other-than-temporary:

• Mortgage-backed securities issued by U.S. Government-sponsored enterprises: As of September 30, 2010, the total unrealized losses on these securities amounted to $258, compared with $3 at December 31, 2009. All of these securities were credit rated "AAA" by the major credit rating agencies. Company management believes these securities have minimal credit risk, as these Government-sponsored enterprises play a vital role in the nation’s financial markets. Management’s analysis indicates that the unrealized losses at September 30, 2010 were attributed to changes in current market yields and pricing spreads for similar securities since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at September 30, 2010.

• Mortgage-backed securities issued by U.S. Government agencies: As of September 30, 2010, the total unrealized losses on these securities amounted to $47, compared with $21 at December 31, 2009. All of these securities were credit rated "AAA" by the major credit rating agencies. Management’s analysis indicates that these securities bear no credit risk because they are backed by the full faith and credit of the United States. The Company attributes the unrealized losses at September 30, 2010 to changes in current market yields and pricing spreads for similar securities since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at September 30, 2010.

• Private label mortgage-backed securities: As of September 30, 2010, the total unrealized losses on the Bank’s private label mortgage-backed securities amounted to $2,601, compared with $5,428 at December 31, 2009. The Company attributes the unrealized losses at September 30, 2010 to the current market environment for non-agency mortgage-backed securities, a seriously depressed housing market, significantly elevated levels of home foreclosures, risk related market pricing discounts for non-agency mortgage-backed securities and credit rating downgrades on certain private label mortgage-backed securities owned by the Company. Based upon the foregoing considerations and the expectation that the Company will receive all of the future cash flows related to amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities at September 30, 2010.

• Obligations of states of the U.S. and political subdivisions thereof: As of September 30, 2010, the total unrealized losses on the Bank’s municipal securities amounted to $1,941, compared with $3,835 at December 31, 2009. The Bank’s municipal securities are supported by the general taxing authority of the municipality and in the cases of school districts, are supported by state aid. At September 30, 2010, all municipal bond issuers were current on contractually obligated interest and principal payments. At September 30, 2010, the Bank’s municipal bond portfolio did not contain any below investment grade securities as reported by major credit rating agencies.

The Company attributes the unrealized losses at September 30, 2010, to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, driven in part by current market concerns about the prolonged economic recession and the impact it might have on the future financial stability of municipalities throughout the country. Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at September 30, 2010.

At September 30, 2010, the Company had no intent to sell nor believed it is more-likely-than-not that it would be required to sell any of its impaired securities as identified and discussed immediately above, and therefore did not consider these securities to be other-than-temporarily impaired as of that date.

Note 5: Retirement Benefit Plans

The Company 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 upon a change of control.

The following table summarizes the net periodic benefit costs for the three and nine months ended September 30, 2010 and 2009:

Note 6: Commitments and Contingent Liabilities

The Company’s wholly owned subsidiary, Bar Harbor Bank & Trust (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 September 30, 2010 and December 31, 2009:

As of September 30, 2010 and December 31, 2009, the fair value of the standby letters of credit was not significant to the Company’s consolidated financial statements.

Note 7: 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 re-pricing 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.

A summary of the hedging related balances follows:

• Level 1 – Valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

• Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-based techniques for which all significant assumptions are observable in the market.

• Level 3 – Valuation is principally generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques.

The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The most significant instruments that the Company values are securities, all of which fall into Level 2 in the fair value hierarchy. The securities in the available for sale portfolio are priced by independent providers. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether valuations are appropriately placed within the fair value hierarchy and whether the valuations are representative of an exit price in the Company’s principal markets. The Company’s principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Additionally, the Company periodically tests the reasonableness of the prices provided by these third parties by obtaining fair values from other independent providers and by obtaining desk bids from a variety of institutional brokers.

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.

• Securities Available for Sale: All securities and major categories of 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 independent pricing providers. The fair value measurements used by the pricing providers consider observable data that may include dealer quotes, market maker quotes and live trading systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, 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 independent dealer market price estimates to value its Prime interest rate floors. Derivative instruments are priced by independent providers using observable market data and assumptions with adjustments based on widely accepted valuation techniques. A discounted cash flow analysis on the expected cash flows of each derivative reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, transaction size, custom tailored features, counterparty credit quality, and the estimated current replacement cost of the derivative instrument.

The foregoing valuation methodologies may produce fair value calculations that may not be fully indicative of net realizable value or reflective of future fair values. While Company management believes these 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.

The following tables summarize financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

The following table summarizes financial assets and financial liabilities measured at fair value during the quarter, on a non-recurring basis as of September 30, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

The Company had total collateral dependent impaired loans with a carrying value of $3,898 which had specific reserves included in the allowance of $713 at September 30, 2010.

Accrued Interest Receivable and Payable: The carrying amounts of accrued interest receivable and payable approximate their fair values.

A summary of the carrying values and estimated fair values of the Company’s significant financial instruments at September 30, 2010, and December 31, 2009, follows:

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 quarterly 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 quarterly 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 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. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, other than temporary impairment on securities, income tax estimates, and the evaluation of intangible assets. The use of these estimates is more fully described in Part I, Item 1, Note 2 of the consolidated financial statements in this quarterly report on Form 10-Q.

The Company reported consolidated net income available to common shareholders of $2,870 for the quarter ended September 30, 2010, compared with $2,833 for the third quarter of 2009, representing an increase of $37, or 1.3%. The Company’s diluted earnings per share amounted to $0.75 for the third quarter of 2010, compared with $0.95 for the third quarter of 2009, representing a decline of $0.20, or 21.1%.

The Company’s annualized return on average shareholders’ equity ("ROE") amounted to 10.81% for the quarter, compared with 14.02% in the third quarter of 2009. The decline in third quarter ROE compared with the third quarter of 2009 was principally attributed to a $17,508 or 19.9% increase in average shareholders equity, which amounted to $105,362 in the third quarter. The Company’s annualized return on average assets ("ROA") amounted to 1.04% for the quarter, compared with 1.16% in the third quarter of 2009.

For the nine months ended September 30, 2010, the Company’s net income available to common shareholders amounted to $7,980, compared with $7,724 for the same period in 2009, representing an increase of $256, or 3.3%. Diluted earnings per share amounted to $2.09 for the nine months ended September 30, 2010, compared with $2.63 for the same period in 2009, representing a decline of $0.54, or 20.5%.

For the nine months ended September 30, 2010, the Company’s ROE amounted to 10.94%, compared with 13.16% for the same period in 2009. The Company’s ROA amounted to 1.07%, compared with 1.08% for the nine months ended September 30, 2009.

The declines in third quarter and year-to-date 2010 diluted earnings per share largely reflect the Company’s previously reported issuance of 882,021 shares of its common stock in the fourth quarter of 2009 and the first quarter of 2010, the proceeds from which were primarily used to repurchase all of the shares of Preferred Stock sold to the U.S. Department of the Treasury (the "Treasury") in the first quarter of 2009 as part of the Capital Purchase Program established by the Treasury under the Emergency Economic Stabilization Act of 2008.

• Net Interest Income: For the quarter ended September 30, 2010, net interest income on a tax-equivalent basis amounted to $8,342, down $481 or 5.5% compared with the third quarter of 2009. The decline in net interest income was principally attributed to a 23 basis point decline in the Bank’s tax-equivalent net interest margin to 3.15% for the quarter, offset in part by average earning asset growth of $15,138, or 1.5%, compared with the third quarter of 2009. The decline in the net interest margin was largely attributed to earning asset yields, which declined 23 basis points more than the cost of interest bearing liabilities.

For the nine months ended September 30, 2010, net interest income on a tax-equivalent basis amounted to $25,027, down $1,268 or 4.8%, compared with the same period in 2009. The decline in net interest income was principally attributed to the Bank’s tax-equivalent net interest margin, which declined 23 basis points to 3.22%, offset in part by earning asset growth of $19,822 or 1.9%. The decline in the net interest margin was largely attributed to earning asset yields, which declined 23 basis points more than the cost of interest bearing liabilities.

Factors contributing to the net interest margin declines during the three and nine months ended September 30, 2010 included the ongoing re-pricing of certain commercial loans and the origination and accelerated refinancing of residential mortgage loans during a period of historically low interest rates. The replacement of accelerated cash flows from the Bank’s mortgage-backed securities portfolio also contributed heavily to the margin declines. The Bank’s third quarter net interest margin was also impacted by the maturity of a $20 million derivative instrument in the form of an interest rate floor agreement, which had been guaranteeing a minimum of 6.00% on a Prime based portfolio of loans. In addition, as previously reported, over the past fifteen months the Bank has acted to protect future earnings from interest rate risk by extending a portion of its low cost, short-term wholesale funding maturities. While this strategy has pressured the net interest margin in the near-term, the Bank’s balance sheet has been positioned such that future levels of net interest income are largely insulated from rising interest rates.

As previously reported, the Bank’s year-to-date net interest income and net interest margin were also negatively impacted by the accelerated mortgage-backed securities premium amortization related to the Fannie Mae and Freddie Mac cumulative repurchases of seriously delinquent securitized loans earlier in the year. The accelerated premium amortization related to these cumulative repurchases reduced year-to-date net interest income by approximately $420 and the net interest margin by approximately 5 basis points.

• Non-interest Income: For the quarter ended September 30, 2010, total non-interest income amounted to $2,065, up $149 or 7.8%, compared with the third quarter of 2009.

Total securities gains, net of other-than-temporary impairment losses, amounted to $407 in the third quarter, up $223 compared with the same quarter last year. Third quarter net securities gains were comprised of realized gains on the sale of securities amounting to $618, offset in part by other-than-temporary impairment losses of $211 on certain available-for-sale, private label residential mortgage-backed securities.

Trust and other financial services fees amounted to $800 in the third quarter, up $155 or 24.0% compared with the third quarter of 2009. Assets under management at quarter end stood at $301,029, up $33,254 or 12.4% compared with September 30, 2009, reflecting additional new business and some recovery in the equity markets

The foregoing increases in third quarter non-interest income were largely offset by a $228, or 98.3%, decline in income from mortgage banking activities. During the third quarter all residential mortgage loan originations were held in the Bank’s loan portfolio, whereas in the third quarter of 2009 a large portion of residential mortgage loan originations were sold into the secondary market with customer servicing retained.

For the nine months ended September 30, 2010, total non-interest income amounted to $5,770, up $881, or 18.0%, compared with the same period in 2009.

Total securities gains, net of other-than-temporary impairment losses, amounted to $1,224 for the nine months ended September 30, 2010, up $668 compared with the same period in 2009. Year-to-date net securities gains were comprised of realized gains on the sale of securities amounting to $1,975, largely offset by other-than-temporary impairment losses of $751 on certain available-for-sale, private label, residential mortgage-backed securities.

Trust and other financial services fees amounted to $2,136 for the nine months ended September 30, 2010, up $331, or 18.3%, compared with the same period in 2009.

For the nine months ended September 30, 2010, credit and debit card service charges and fees amounted to $844, up $130 or 18.2% compared with the same period in 2009. This increase was principally attributed to continued growth of the Bank’s demand deposits and NOW accounts, higher levels of merchant credit card processing volumes, and continued success with a program that offers rewards for certain debit card transactions.

The foregoing increases in year-to-date non-interest income were offset in part by a $232, or 76.1%, decline in income from mortgage banking activities. During 2010 substantially all residential mortgage loan originations were held in the Bank’s loan portfolio, whereas during the same period in 2009 a large portion of residential mortgage loan originations were sold into the secondary market with customer servicing retained.

• Non-interest Expense: For the quarter ended September 30, 2010, total non-interest expense amounted to $5,518, up $551, or 11.1%, compared with the third quarter of 2009. The increase in non-interest expense was attributed to a wide variety of factors including increases in salaries and employee benefits, loan collection expenses, professional services fees, marketing expenses, insurance, and expenses associated with the disposal of certain fixed assets. Third quarter non-interest expense also included $69 of expenses related to the preparation of fiduciary tax returns for the Bank’s trust clients, whereas in 2009 these expenses were almost entirely recorded in the second quarter.

For the nine months ended September 30, 2010, total non-interest expense amounted to $16,115, up $432, or 2.8%, compared with the same period in 2009. The increase in non-interest expense was principally attributed to salaries and employee benefits, which were up $531 or 6.4% compared with the same period in 2009. The increase in salaries and employee benefits was principally attributed to increases in employee health insurance premiums, normal increases in base salaries, as well as changes in staffing levels and mix. The foregoing increases were partially offset by $402 of employee health insurance credits attained during the nine months ended September 30, 2010, based on favorable claims experience.

FDIC deposit insurance assessments amounted to $797 for the nine months ended September 30, 2010, down $97 or 10.9% compared with the same period in 2009. This decline was principally attributed to a $495 special FDIC assessment recorded in the second quarter of 2009, offset by increased deposit insurance premiums for all FDIC insured banks as a result of the FDIC’s plan to reestablish the Deposit Insurance Fund to levels required by the Federal Deposit Reform Act of 2005.

• Efficiency Ratio: The Company’s efficiency ratio, or non-interest operating expenses divided by the sum of tax-equivalent net interest income and non-interest income other than net securities gains and other-than-temporary impairments, measures the relationship of operating expenses to revenues. For the three and nine months ended September 30, 2010, the Company’s efficiency ratios amounted to 54.9% and 54.3%, compared with 46.9% and 51.0% for the same periods in 2009, respectively.

At September 30, 2010 the Company’s total assets stood at $1,103,329, up $30,948, or 2.9%, compared with December 31, 2009.

• Loans: Total loans ended the third quarter at $680,875, up $11,383, or 1.7%, compared with December 31, 2009. Loan growth was led by commercial loans, which ended the quarter at $379,637, up $10,385 or 2.8% compared with December 31, 2009.

Consumer loans, which principally consist of residential real estate mortgage loans and home equity loans, increased $1,437 or 0.5% compared with December 31, 2009. This increase was principally attributed to home equity loans, which were up $2,081 or 3.8% compared with year-end 2009.

Residential mortgage loan origination activity slowed during the first nine months of 2010, largely reflecting current economic conditions and uncertainties with respect to further real estate market declines in the communities served by the Bank, and to a lesser extent the expiration of the first time home buyers tax credit. The Bank’s residential real estate mortgage portfolio posted a decline of $569, or 0.3%, compared with December 31, 2009, as loans originated and closed were more than offset by cash flows and principal pay-downs from the Bank’s $225,181 residential mortgage loan portfolio.

• Credit Quality: Total non-performing loans ended the third quarter at $8,931, down $245 or 2.7%, compared with December 31, 2009. At September 30, 2010, total non-performing loans represented 1.31% of total loans, down from 1.37% at year-end 2009.

During the nine months ended September 30, 2010, the Bank enjoyed a relatively low level of loan loss experience. Total net loan charge-offs amounted to $774, or annualized net charge-offs to average loans outstanding of 0.15%, compared with $699, or annualized net charge-offs to average loans outstanding of 0.14%, during the same period in 2009.

For the three and nine months ended September 30, 2010, the Bank recorded provisions for loan losses of $450 and $1,500, representing declines of $607 and $1,057, compared with the same periods in 2009, respectively. Despite the year-over-year declines in the provision, the amounts recorded during the first nine months of 2010 were higher than historical norms, largely reflecting a continuance in the overall level of credit deterioration, but aided by relatively low levels of net loan charge-offs and non-performing loans, stabilizing economic conditions, and slowing loan portfolio growth.

The Bank maintains an allowance for loan losses (the "allowance") which is available to absorb probable 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 current loan portfolio and adequate to provide for estimated probable losses. At September 30, 2010, the allowance stood at $8,540, representing an increase of $726 or 9.3% compared with December 31, 2009. The allowance expressed as a percentage of total loans stood at 1.25% at quarter end, up from 1.17% at December 31, 2009. The increase in the allowance was principally attributed to continued credit deterioration in the Bank’s loan portfolio, including an increase in potential problem loans. Company management believes this is reflective of depressed economic conditions, including elevated unemployment levels and declining real estate values in the markets served by the Bank.

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 non-performing loans, potential problem loans and the allowance.

• Securities: Total securities ended the third quarter at $369,422, up $22,396, or 6.5%, compared with December 31, 2009. The 2010 increase in the portfolio occurred early in the third quarter and was largely attributed to purchases of mortgage-backed securities issued by the Government National Mortgage Association, which bear no credit risk because they are backed by the full faith of the U.S. Government. At September 30, 2010, securities backed by the full faith of the U.S. Government were up $28,632, or 129.5%, compared with year-end 2009. Based on prevailing market conditions, fourth quarter cash flows from the Bank’s securities portfolio may or may not be fully re-invested.

For the nine months ended September 30, 2010, total average securities amounted to $343,857, representing a decline of $5,281 or 1.5%, compared with the same period in 2009. Company management has been cautious about leveraging the portfolio in consideration of historically low market yields and the corresponding interest rate risk should interest rates begin to rise. While this action inhibited the growth of the Bank’s net interest income in the near-term, Company management believes the long-term risks outweigh the short-term rewards.

Securities purchased during the first nine months of 2010 principally consisted of mortgage-backed securities issued and guaranteed by U.S. Government agencies and sponsored-enterprises.

• Deposits: Historically, the banking business in the Bank’s market area has been seasonal, with lower deposits in the winter and spring and higher deposits in summer and autumn. The timing and extent of seasonal swings have varied from year to year, particularly with respect to demand deposits.

Total deposits ended the third quarter at $698,873, up $57,700, or 9.0%, compared with December 31, 2009. Total retail deposits ended the third quarter at $606,282, up $57,099 or 10.4% compared with year-end 2009. Retail deposit growth was principally attributed to savings and money market accounts, and time deposits, which increased $22,363 and $20,063, or 13.0% and 8.2%, respectively. Demand deposits were up $8,345 or 14.5%, while NOW accounts were up $6,328, or 8.5%.

Brokered deposits obtained from the national market ended the third quarter at $92,591, up $601, or 0.7%, compared with December 31, 2009. Brokered deposits are generally utilized to help support the Bank’s earning asset growth, while maintaining its strong, on-balance-sheet liquidity position via secured borrowing lines of credit with the Federal Home Loan Bank and the Federal Reserve Bank.

• Borrowings: Total borrowings ended the third quarter at $291,987, down $19,642, or 6.3%, compared with December 31, 2009. The decline in borrowings was principally attributed to strong retail deposit growth.

• Capital: At quarter end the Company and the Bank continued to exceed regulatory requirements for "well-capitalized" institutions. Under the capital adequacy guidelines administered by the Bank’s principal regulators, "well-capitalized" institutions are those with Tier I leverage, Tier I Risk-based, and Total Risk-based ratios of at least 5%, 6% and 10%, respectively. At September 30, 2010, the Company’s Tier I Leverage, Tier I Risk-based, and Total Risk-based capital ratios were 9.06%, 13.61% and 15.48%.

At September 30, 2010, the Company’s tangible common equity ratio stood at 9.38%, up from 8.60% at December 31, 2009.

At September 30, 2010 the Company’s tangible book value per share amounted to $27.14, compared with $24.92 at December 31, 2009.

• Shareholder Dividends: The Company paid regular cash dividends of $0.26 per share of common stock in the third quarter of 2010, unchanged compared with the same quarter in 2009. The Company’s Board of Directors recently declared a fourth quarter 2010 regular cash dividend of $0.265 per share of common stock, which based on the quarter-end price of BHB common stock represented a dividend yield of 3.83%.

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.

Total Net Interest Income: For the three months ended September 30, 2010, net interest income on a tax equivalent basis amounted to $8,342, compared with $8,823 in the third quarter of 2009, representing a decline of $481, or 5.5%. As more fully discussed below, the decline in third quarter 2010 tax-equivalent net interest income compared with the third quarter of 2009 was principally attributed to a 23 basis point decline in the Bank’s net interest margin, offset in part by a $15,138 or 1.5% increase in average earning assets.

For the nine months ended September 30, 2010, net interest income on a tax-equivalent basis amounted to $25,027, compared with $26,295 for the same period in 2009, representing a decline of $1,268, or 4.8%. As more fully discussed below, the decline tax-equivalent net interest income was principally attributed to a 23 basis point decline in the Bank’s net interest margin, partially offset by a $19,822 or 1.9% increase in average earning assets compared with the nine months ended September 30, 2009.

Factors contributing to the changes in net interest income and the net interest margin are more fully 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 and nine months ended September 30, 2010 and 2009, 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 September 30, 2010, the tax equivalent net interest margin amounted to 3.15%, compared with 3.38% in the third quarter of 2009, representing a decline of 23 basis points. The decline in the net interest margin from the third quarter of 2009 was largely attributed earning asset yields, which declined 23 basis points more than the cost of interest bearing liabilities.

For the nine months ended September 30, 2010, the tax equivalent net interest margin amounted to 3.22%, compared with 3.45% for the same period in 2009, representing a decline of 23 basis points. The decline in the net interest margin from the first three quarters of 2009 was largely attributed to earning asset yields, which declined 23 basis points more than the cost of interest bearing liabilities.

A variety of factors contributed to the earning asset yield and net interest margin declines during the three and nine months ended September 30, 2010, including the replacement of accelerated cash flows from the Bank’s mortgage-backed ("MBS") securities portfolio during a period of historically low interest rates. The year-to-date yield on the securities portfolio was also negatively impacted by the accelerated mortgage-backed securities premium amortization related to the Fannie Mae and Freddie Mac cumulative repurchases of seriously delinquent securitized loans earlier in the year. As previously reported, in early 2010 these Government-sponsored enterprises announced they would buy back an approximate $200 billion backlog of seriously delinquent mortgages contained in certain residential MBS previously sold to investors, including the Company. These cumulative repurchases were completed during the second quarter. The Bank’s year-to-date net interest margin and net interest income were negatively impacted by the accelerated MBS premium amortization related to the aforementioned repurchases, which reduced the net interest margin by approximately 5 basis points and net interest income by approximately $420.

The Bank’s year-to-date and third quarter earning asset yield and net interest margin declines were also attributed to the ongoing origination and competitive re-pricing of certain commercial loans during a period of historically low interest rates. Likewise, the replacement of accelerated cash flows from the Bank’s residential mortgage loan portfolio, which was principally driven by heavy re-financing activity, also contributed to the earning asset and net interest margin declines. In addition, third quarter 2010 earning asset yields were negatively impacted by the maturity of a $20,000 interest rate floor agreement (an off balance sheet derivative instrument), which had been guaranteeing a minimum of 6.00% on a Prime based portfolio of loans.

The Bank’s year-to-date and third quarter net interest margin declines compared with the same periods in 2009 were also impacted by a moderate shift from short-term funding to higher cost, long-term funding on the Bank’s balance sheet. Considering the current near zero percent short-term funding rates and the shape of the U.S. Treasury yield curve, the Bank’s interest rate risk management strategy has been focused on protecting net interest income over a long-term horizon, particularly in a rising interest rate environment. While this strategy pressures earnings in the near-term, Company management believes the long term-risks associated with funding the balance sheet short outweigh the short-term rewards. At September 30, 2010, Company management believes the Bank’s balance sheet has been positioned such that future levels of net interest income are largely insulated from rising interest rates.

The weighted average cost of interest bearing liabilities amounted to 2.13% in the third quarter of 2010, compared with 2.29% in the third quarter of 2009, representing a decline of 16 basis points and largely reflecting the re-pricing of deposits and borrowings in a historically low interest rate environment. The weighted average yield on average earning assets amounted to 5.01% in the third quarter of 2010, compared with 5.40% in the third quarter of 2009, representing a decline of 39 basis points and attributed to reasons discussed immediately above. In summary, since the third quarter of 2009 the decline in the Bank’s weighted average yield on its earning asset portfolios exceeded the decline in the weighted average cost of interest bearing liabilities by 23 basis points.

For the nine months ended September 30, 2010, the weighted average cost of interest bearing liabilities amounted to 2.14%, compared with 2.35% for the same period in 2009, representing a decline of 21 basis points and largely reflecting the re-pricing of deposits and borrowings in a historically low interest rate environment. The weighted average yield on average earning assets amounted to 5.10% compared with 5.54% during the nine months ended September 30, 2009, representing a decline of 44 basis points and attributed to reasons discussed immediately above. To summarize, comparing the first nine months of 2010 with the same period in 2009, the decline in the Bank’s weighted average yield on its earning asset portfolios exceeded the decline in the weighted average cost of interest bearing liabilities by 23 basis points.

Should interest rates continue at current levels, Company management anticipates the net interest margin will continue to experience some further pressure over the next twelve months but not to the extent experienced over the past twelve months, as assets and liabilities are generally expected to re-price or be replaced proportionally into the current low interest rate environment.

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.

Interest and Dividend Income: For the three months ended September 30, 2010, total interest and dividend income on a tax-equivalent basis amounted to $13,275, compared with $14,096 in the third quarter of 2009, representing a decline of $821, or 5.8%. The decline in interest and dividend income was principally attributed to a 39 basis point decline in the weighted average earning asset yield, offset in part by earning asset growth of $15,138 or 1.5%. The decline in interest and dividend income was entirely attributed to securities income, which declined $847 or 16.0%. The decline in securities income from the third quarter of 2009 was largely attributed to the ongoing replacement of accelerated portfolio cash flows in a historically low interest rate environment. Accelerated cash flows were principally attributed to increased securitized loan refinancing activity and defaults, the cash flow impact of the previously discussed Fannie Mae and Freddie Mac securitized loan buyouts, and a $6,149 or 1.7% decline in average securities.

For the quarter ended September 30, 2010, interest income from the loan portfolio amounted to $8,824, representing a slight increase of $25, compared with the third quarter of 2009. While the weighted average yield on the loan portfolio declined 13 basis points to 5.14%, the impact of this decline was essentially offset by average loan portfolio growth of $18,607, or 2.8%.

As depicted on the rate/volume analysis table below, comparing the three months ended September 30, 2010 with the same quarter in 2009, the impact of the lower weighted average earning asset yield contributed $984 to the decline in total tax-equivalent interest income, offset in part by $163 attributed to the increased volume of total average earning assets.

For the nine months ended September 30, 2010, total interest and dividend income on a tax-equivalent basis amounted to $39,666, compared with $42,214 for the same period in 2009, representing a decline of $2,548, or 6.0%. The decline in interest and dividend income was principally attributed to a 44 basis point decline in the weighted average earning asset yield, partially offset by average earning asset growth of $19,822 or 1.9%, compared with the first nine months of 2009. The decline in interest and dividend income was almost entirely attributed to securities income, which declined $2,474 or 15.6%. Factors contributing to the decline in securities income principally included the aforementioned $420 impact of the cumulative buyback of loans contained in certain mortgage-backed securities, the replacement of accelerated cash flows from the portfolio during a period of historically low interest rates, and a $5,281 or 1.5% decline in total average securities.

For the nine months ended September 30, 2010, interest income from the loan portfolio amounted to $26,288, representing a slight decline of $73, compared with the same period in 2009. While the weighted average yield on the loan portfolio declined 20 basis points to 5.19%, the impact of this decline was essentially offset by average loan portfolio growth of $24,089, or 3.7%.

For the nine months ended September 30, 2010, the Bank did not record any Federal Home Loan Bank ("FHLB") stock dividends, unchanged compared with the same period in 2009. In the first quarter of 2009, the FHLB of Boston advised its members that it is focusing on preserving capital in response to other-than-temporary impairment losses it had sustained, declining capital ratios and ongoing market volatility. Accordingly, dividend payments were suspended for all of 2009, and it is unlikely that dividends will be paid in 2010. For the nine months ended September 30, 2010, the average balance of FHLB stock on the Bank’s balance sheet amounted to $16,068.

As depicted on the rate/volume analysis table below, comparing the nine months ended September 30, 2010, with the same period in 2009, the impact of the lower weighted average earning asset yield contributed $3,370 to the decline in total tax-equivalent interest income, offset in part by a positive $822 attributed to the increased volume of total average earning assets on the Bank’s balance sheet.

For the three months ended September 30, 2010, the total weighted average cost of interest bearing liabilities amounted to 2.13%, compared with 2.29% for the same quarter in 2009, representing a decline of 16 basis points. The weighted average cost of interest bearing deposits declined 23 basis points to 1.56%, compared with the third quarter of 2009. The weighted average cost of borrowed funds increased 20 basis points to 3.39%, principally reflecting the addition of long-term borrowings to the Bank’s balance sheet, which significantly improved the Bank’s interest rate risk profile in a rising rate environment. The increase in the cost of borrowings due to increase in interest rate was offset by a $39,113 decline in total borrowings, primarily caused by a decrease in low cost short-term borrowings. This decline was attributed to strong retail deposit growth.

As depicted on the rate/volume analysis table below, comparing the three months ended September 30, 2010 with the same quarter in 2009, the impact of the lower weighted average rate paid on interest bearing liabilities contributed $236 to the decline in interest expense, while the impact of the volume of average interest bearing liabilities contributed $104.

For the nine months ended September 30, 2010, total interest expense amounted to $14,639, compared with $15,919 for the same period in 2009, representing a decline of $1,280, or 8.0%. The decline in interest expense was attributed to a 21 basis point decline in the weighted average cost of interest bearing liabilities, partially offset by a $7,472 or 0.8% increase in total average interest bearing liabilities.

The decline in the average cost of interest bearing liabilities was principally attributed to prevailing, historically low short-term and long-term market interest rates. The total weighted average cost of interest bearing liabilities amounted to 2.14%, compared with 2.35% for the same period in 2009, representing a decline of 21 basis points. The weighted average cost of interest bearing deposits declined 33 basis points to 1.59%, while the weighted average cost of borrowed funds increased 30 basis points to 3.35%, principally reflecting the addition of long-term borrowings to the Bank’s balance sheet and the average balance pay-down of $55,777 in low cost borrowings based on strong retail deposit growth.

As depicted on the rate/volume analysis table below, comparing the nine months ended September 30, 2010, with the same period in 2009, the impact of the lower weighted average rate paid on interest bearing liabilities contributed $918 to the decline in interest expense, while the impact of the volume of average interest bearing liabilities contributed $362.

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.