Commission File Number: 841105-D

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

Inapplicable
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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_____

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND DECEMBER 31, 2006
(in thousands, except share data)
(unaudited)

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(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, 2007 AND 2006
(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, 2007 AND 2006
(in thousands)
(unaudited)

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

The consolidated balance sheet at December 31, 2006 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 218). 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, 2006, 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.

Income Taxes: On January 1, 2007, the Company adopted Financial Accounting Interpretation Number 48 ("FIN 48") to account for uncertain tax positions. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.

The Company estimates its income taxes for each period for which a statement of income is presented. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information indicates that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of March 31, 2007 and December 31, 2006, there was no valuation allowance for deferred tax assets. Deferred tax assets are included in other assets on the consolidated balance sheet.

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.

The following is a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2007 and 2006:

Prior to the first quarter of 2007, the Company sponsored a limited post-retirement 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. It was the Company's policy to record the cost of post-retirement health care and life insurance plans based on actuarial estimates, which were dependent on claims and premiums paid. The cost of providing these benefits was accrued during the active service period of the employee.

In the first quarter of 2007, the Company settled its limited post-retirement benefit program. The Company voluntarily paid out $700 to plan participants, representing 64% of the accrued post retirement 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 $291 actuarial gain related to the program, which was included in accumulated other comprehensive income, net of tax effect of $151.

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

The Company also has supplemental executive retirement plans for certain executive officers. These plans provide a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, death, or in the event that the 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, 2007 and 2006:

The Company is expected to recognize $359 of expense for the foregoing plans for the year ended December 31, 2007. The Company is expected to contribute $222 to the foregoing plans in 2007. As of March 31, 2007, 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, 2007 and December 31, 2006:

As of March 31, 2007 and December 31, 2006, the fair value of the standby letters of credit were not significant to the Company’s consolidated financial statements.

As part of its overall asset 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.

At March 31, 2007 the Bank had four outstanding derivative instruments with notional principal amounts totaling $50,000. These derivative instruments were interest rate swap agreements and interest rate floor agreements, with notional principal amounts totaling $20,000 and $30,000, respectively. The details are summarized as follows:

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 interest rates of 6.04% and 6.25%, respectively, over the term of each 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."

At March 31, 2007, the fair market value of the interest rate swap agreements was an unrealized loss of $364 compared with unrealized losses of $473 and $745 at December 31, and March 31, 2006, respectively. The fair market values of the interest rate swap agreements were included in other liabilities on the consolidated balance sheets.

During the three months ended March 31, 2007, the total net cash flows (paid to) received from counter-parties amounted to ($106), compared with ($53) during the same period in 2006. The net cash flows (paid to) received from counter-parties were recorded in interest income.

At March 31, 2007, the net unrealized loss on the interest rate swap agreements included in accumulated other comprehensive loss, net of tax, amounted to $240 compared with $313 and $492 at December 31 and March 31, 2006, respectively. Also included in accumulated other comprehensive loss at March 31, 2007, was a net deferred loss, net of tax, of $4 related to the de-designation and re-designation of these interest rate swap agreements as cash flow hedges in 2004.

At March 31, 2007, and December 31, 2006, the unamortized premium net of the unrealized gain on the interest rate floor agreement amounted to $126 and $129, net of tax, respectively, and was recorded in accumulated other comprehensive income on the consolidated balance sheet.

The Company recently adopted the following accounting standards:

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109" ("FIN 48"). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

On January 1, 2007 the Company adopted the provisions of FIN 48 and there was no impact on the consolidated financial statements. Upon the adoption of this standard, the Company performed an analysis of its tax positions to determine whether there may be uncertainties that require further analysis under FIN 48 based upon their specific facts and circumstances. The Company did not identify any uncertain tax positions for which tax benefits should not be recognized under FIN 48 upon adoption or as of March 31, 2007. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.

Accounting for Servicing of Financial Assets: In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 ("SFAS 156"), "Accounting for Servicing of Financial Assets." This statement amends Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 requires companies to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. The statement permits a company to choose either the amortized cost method or fair value measurement method for each class of separately recognized servicing assets. This statement is effective as of the beginning of a company's first fiscal year after September 15, 2006 (January 1, 2007 for the Company). The Company’s adoption of SFAS 156 did not have an impact on its financial condition or results of operations.

Prior Year Financial Statement Misstatements: In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. There are two widely recognized methods for quantifying the effects of financial statement misstatements: the "roll-over" and "iron curtain" methods. The roll-over method, the method the Company historically used, focuses primarily on the impact of a misstatement on the income statement, including the reversing effect of prior year misstatements. Because the focus is on the income statement, the roll-over method can lead to the accumulation of misstatements in the balance sheet that may become material to the balance sheet. The iron curtain method focuses primarily on the effect of correcting the accumulated misstatement as of the balance sheet date, with less emphasis on the reversing effects of prior year errors on the income statements. In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements under both the roll-over and iron curtain methods. This framework is referred to as the "dual approach." SAB 108 permits companies to initially apply its provisions either by restating prior financial statements as if the dual approach had always been used or recording the cumulative effect of initially applying the dual approach as adjustments to the balance sheet as of the first day of the fiscal year with an offsetting adjustment recorded to retained earnings.

Fair Value Measurements: In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements." This statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The statement is effective for fair value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within that fiscal year (January 1, 2008 for the Company). The Company is currently evaluating the impact of adopting SFAS 157, but does not anticipate that the adoption of this standard will have a material impact on its financial condition or results of operations.

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

Use of Non-GAAP Financial Measures: Certain information discussed below is presented on a fully taxable equivalent basis. Specifically, included in first quarter 2007 and 2006 net interest income was $407 and $477, respectively, of tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax-exempt income has been added back to the interest income and net interest income totals discussed in this Management’s Discussion and Analysis, resulting in tax-equivalent adjustments of $149 and $187 in the first quarter of 2007 and 2006, respectively. The analysis of net interest income tables included in this Form 10-Q provide a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

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

FORWARD LOOKING STATEMENTS DISCLAIMER

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

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

The forward-looking statements contained herein represent the Company's judgment as of the date of this report on Form 10-Q, and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the succeeding discussion, or elsewhere in this report on Form 10-Q, except to the extent required by federal securities laws.

Management’s discussion and analysis of the Company’s financial condition are based on the Consolidated Financial Statements, which are prepared in accordance with U.S. generally accepted accounting principles. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management evaluates its estimates, including those related to the allowance for loan losses, on an ongoing basis. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management’s estimates and assumptions under different assumptions or conditions.

The Company’s significant accounting policies are more fully enumerated in Note 1 to the Consolidated Financial Statements included in Item 8 of its December 31, 2006 report on Form 10-K. The reader of the financial statements should review these policies to gain a greater understanding of how the Company’s financial performance is reported. Management believes the following critical accounting policies represent the more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements:

Allowance for Loan Losses: Management believes the allowance for loan losses ("allowance") is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The allowance, which is established through a provision for loan loss expense, is based on management’s evaluation of the level of allowance required in relation to the estimated inherent risk of loss in the loan portfolio. Management regularly evaluates the allowance for loan losses for adequacy by taking into consideration factors such as previous loss experience, the size and composition of the portfolio, current economic and real estate market conditions and the performance of individual loans in relation to contract terms and estimated fair values of collateral. The use of different estimates or assumptions could produce different provisions for loan losses. A smaller provision for loan losses results in higher net income, and when a greater amount of provision for loan losses is necessary the result is lower net income. Refer to Item 2 below of this Part I, Allowance for Loan Losses and Provision for Loan Losses in this report on Form 10-Q, for further discussion and analysis concerning the allowance.

Income Taxes: On January 1, 2007, the Company adopted Financial Accounting Interpretation Number 48 ("FIN 48") to account for uncertain tax positions. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.

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, 2007 and December 31, 2006, 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 affect on the Company's results of operations.

The Company reported consolidated net income of $1.4 million or fully diluted earnings per share of $0.44 for the three months ended March 31, 2007, compared with $1.6 million or fully diluted earnings per share of $0.50 for the same quarter in 2006, representing declines of $188 thousand and $0.06, or 12.0% and 12.4%, respectively. The annualized return on average shareholders’ equity ("ROE") and average assets ("ROA") amounted to 9.02% and 0.67%, respectively, compared with 11.16% and 0.84% for the same quarter in 2006. The decline in first quarter earnings was principally attributed to the Company’s planned restructuring of a portion of its balance sheet, substantially offset by the settlement of its limited postretirement benefit program.

• Balance Sheet Restructuring: In April 2007, the Company’s Board of Directors approved the restructuring of a portion of the Company’s balance sheet through the sale of $43.3 million of its aggregate $227.5 million available for sale investment 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, which may be at maturity, the Company recorded an adjustment to write down these securities to fair value at March 31, 2007, resulting in a pre-tax impairment loss of $1.2 million included in first quarter 2007 earnings as a reduction of non-interest income. The Company’s overall objectives are to improve future period earnings, lower the interest rate risk profile of the Company’s balance sheet, and provide a means to more effectively respond to the current and future yield curve environments.

• Post Retirement Plan Settlement: In the first quarter of 2007, the Company settled its 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. The Company voluntarily paid out $700 thousand to plan participants, representing 64% of the total 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 first quarter reduction in non-interest expense of $832 thousand, representing the remaining accrued benefit obligation and the actuarial gain related to the program.

• Net Interest Income: For the quarter ended March 31, 2007, net interest income on a tax equivalent basis amounted to $5.4 million, representing a decline of $243 thousand, or 4.3%, compared with the same quarter in 2006. The decline in net interest income was principally attributed to a 40 basis point decline in the net interest margin, which in the first quarter of 2007 amounted to 2.77%. As is widely the situation throughout the banking industry, the decline in the net interest margin was largely attributed to the seventeen consecutive increases in short-term interest rates by the Federal Reserve Bank from June 2004 to June 2006 and a flat-to-inverted yield curve over the past fifteen months, the impact of which has caused the Bank’s funding costs to increase at a faster pace than the yield on its earning asset portfolios.

• Non- interest Income: For the quarter ended March 31, 2007, total non-interest income amounted to $378 thousand, representing a decline of $1.2 million, or 76.4%, compared with the same quarter in 2006. The decline in non-interest income was principally attributed to a $1.2 million securities impairment loss in connection with the Company’s restructuring of a portion of its balance sheet. Also included in first quarter net securities losses were realized gains on the sale of securities amounting to $241 thousand, representing a decline of $69 thousand, or 22.3%, compared with the same quarter last year.

For the quarter ended March 31, 2007, fees from financial services, service charges on deposits and credit and debit card fees posted increases of 7.3%, 7.9% and 16.1%, respectively, compared with the same quarter in 2006. First quarter 2007 other operating income amounted to $68 thousand, representing a decline of $96 thousand, or 59%, compared with the same quarter in 2006. The decline in other operating income was attributed to a $150 thousand gain on the sale of a parcel of Bank owned real estate recorded during the first quarter of 2006.

• Non-Interest Expense: For the quarter ended March 31, 2007, total non-interest expense amounted to $3.8 million, representing a decline of $1.1 million, or 22.3%, compared with the same quarter in 2006. The decline in non-interest expense was principally attributed to the settlement of the Company’s limited post retirement program, the financial impact of which reduced first quarter non-interest expense by $832 thousand. The decline in first quarter non-interest expense was also attributed to lower salaries and employee benefits expense and other miscellaneous operating expenses, which posted declines of $99 thousand and $189 thousand, or 4.1% and 12.9%, compared with the first quarter of 2006, respectively.

The Company’s total assets ended the first quarter of 2007 at $827.3 million, representing increases of $2.4 million and $45.7 million, or 0.3% and 5.9%, compared with December 31 and March 31, 2006.

• Credit Quality: The Bank’s non-performing loans remained at low levels at quarter-end, representing $422 thousand or 0.08% of total loans, compared with $628 thousand and $896 thousand, or 0.11% and 0.17% of total loans at December 31 and March 31, 2006, respectively. The Bank’s loan loss experience continued at low levels during the first quarter, with net charge-offs amounting to $26 thousand, or annualized net charge-offs to average loans outstanding of 0.02%, compared with $202 thousand or annualized net charge-offs to average loans outstanding of 0.16% during the first quarter of 2006. In the first quarter of 2007 the Bank did not record a provision for loan losses, compared with $28 thousand in the first quarter of 2006.

• Securities: Total securities ended the first quarter at $227.5 million, representing increases of $14.2 million and $26.3 million, or 6.7% and 13.1%, compared with December 31 and March 31, 2006, respectively. Market yields showed meaningful improvement early in the first quarter, with the benchmark 10-year U.S. Treasury note climbing to a five-month high, presenting opportunities for increasing the Bank’s earning assets and generating higher levels of net interest income.

• Deposits: Total deposits ended the first quarter at $506.8 million, representing increases of $10.5 million and $32.1 million, or 2.1% and 6.8% compared with December 31 and March 31, 2006, respectively. Deposit growth was largely attributed to certificates of deposit obtained in the national market, which were principally used to fund the Bank’s earning asset growth and replace the seasonal deposit outflows experienced in the first quarter of 2007.

At March 31, 2007, retail deposits totaled $387.4 million, representing declines of $26.6 million and $5.0 million, or 6.4% and 1.3%, compared with December 31 and March 31, 2006, 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. During the first quarter of 2007, the Bank’s net deposit outflows were moderately higher than historical norms.

• Shareholders’ Equity: The Company continued to exceed regulatory requirements for "well-capitalized" institutions. At March 31, 2007, the Company’s Tier 1Leverage, Tier 1 Risk-based, and Total Risk-based Capital ratios amounted to 7.26%, 11.18% and 12.02%, respectively. Total shareholders’ equity ended the quarter at $62.6 million, representing increases of $1.5 million and $6.4 million, or 2.5% and 11.4%, compared with December 31 and March 31, 2006, respectively.

• Tangible Book Value: At March 31, 2007 the Company’s tangible book value per share of common stock outstanding amounted to $19.44, compared with $18.93 and $17.32 at December 31 and March 31, 2006, representing increases of 2.7% and 12.2%, respectively.

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, 2007, net interest income on a fully tax-equivalent basis amounted to $5,431, compared with $5,674 in the first quarter of 2006, representing a decline of $243, or 4.3%. As discussed below, the Bank’s first quarter 2007 net interest income was adversely impacted by a 40 basis point decline in the net interest margin compared with the same quarter in 2006.

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, 2007 and 2006, 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, 2007 the net interest margin amounted to 2.77%, compared with 3.17% during the same period in 2006, representing a decline of 40 basis points.

In June of 2004, following an extended period of historically low interest rates, the Board of Governors of the Federal Reserve System (the "Federal Reserve") began increasing short-term interest rates. Through June of 2006, the Federal Funds targeted rate had increased seventeen times for a total of 425 basis points while the 10-year U.S. Treasury note remained relatively unchanged, causing a dramatic flattening of the U.S. Treasury yield curve. Over the past fifteen months the yield curve has been flat-to-inverted, meaning short-term interest rates have been equal to or greater than long-term interest rates.

In the first quarter of 2005 the Bank’s net interest margin began to decline and this decline has steadily continued through the first quarter of 2007, principally reflecting the inherent net interest margin challenges widely associated with a flat or inverted yield curve. The declining net interest margin was principally attributed to the increases in the Bank’s cost of funds outpacing the increases in yields on its interest earning assets, reflecting the re-pricing of a large portion of the Bank’s funding base during a period of rapidly rising short-term interest rates. In addition, highly competitive pricing pressures with respect to loans and deposits and a higher utilization of wholesale funding have adversely impacted the Bank’s net interest margin.

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 Income: For the quarter ended March 31, 2007, total interest income, on a fully tax-equivalent basis, amounted to $12,509 compared with $10,881 during the same quarter in 2006, representing an increase of $1,628, or 15.0%.

Comparing the three months ended March 31, 2007 with the same period in 2006, the weighted average yield on the Bank’s loan portfolio increased 29 basis points to 6.74%, while the weighted average yield on the securities portfolio increased 36 basis points to 5.52%.

As depicted on the rate /volume tables below, the increased volume of average earning assets on the balance sheet during the first quarter of 2007 contributed $971 to the increase in first quarter 2007 interest income compared with the first quarter of 2006, while the increase attributed to the impact of a higher weighted average earning asset yield amounted to $657.

The increase in interest expense was principally attributed to an increase in average interest bearing liabilities amounting to $68,553 or 10.7%, combined with a 75 basis point increase in the weighted average cost of funds, when comparing the first quarter of 2007 with the same quarter in 2006. The increase in the average cost of interest bearing funds was principally attributed to the increases in short-term market interest rates between periods and, to a lesser extent, aggressive deposit pricing competition and a proportionately higher utilization of wholesale funding.

For the quarter ended March 31, 2007, the weighted average cost of interest bearing liabilities amounted to 4.04%, compared with 3.29% during the same quarter in 2006. Comparing the first quarter of 2007 with the same quarter in 2006, the weighted average cost of borrowed funds increased 53 basis points to 4.95%, while the weighted average cost of interest bearing deposits increased 89 basis points to 3.51%. Reflecting the longer maturities in the Bank’s borrowing base that were not as susceptible to movements in short-term interest rates, combined with a higher utilization of brokered time deposits, the increase in the weighted average cost of interest bearing deposits outpaced the weighted average cost of borrowed funds. In addition, given highly competitive pricing pressures in the markets served by the Bank and the need to strengthen customer relationships, the Bank more closely followed the market with respect to the upward re-pricing of maturity and non-maturity deposits, a trend Bank management believes may continue in the future given the continuation of competitive market pressures.

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 2007 contributed $595 to the increase in first quarter 2007 interest expense compared with the first quarter of 2006, while the increase attributed to the impact of a higher weighted average rate paid on interest bearing liabilities amounted to $1,276.

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 loss in the Bank’s current loan portfolio.

The Bank’s non-performing loans remained at low levels at quarter end, representing $422 or 0.08% of total loans, compared with $628 and $896, or 0.11% and 0.17% of total loans at December 31 and March 31, 2006, respectively. The allowance expressed as a percentage of non-performing loans stood at 1,066% at March 31, 2007, compared with 721% and 499% at December 31 and March 31, 2006, respectively.

The Bank’s loan loss experience continued at low levels during the first quarter with net charge-offs amounting to $26, or annualized net charge-offs to average loans outstanding of 0.02%, compared with $202 or annualized net charge-offs to average loans outstanding of 0.16% during the first quarter of 2006.

Reflecting the continued stable performance of the loan portfolio, for the quarter ended March 31, 2007, the Bank did not record a provision for loan losses, compared with $28 in the first quarter of 2006.

Refer below to Item 2 of this Part I, 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, 2007, total non-interest income amounted to $378, compared with $1,604 during the same quarter in 2006, representing a decline of $1,226, or 76.4%.

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 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.

For the quarter ended March 31, 2007, income from trust and other financial services amounted to $541, compared with $504 during the same quarter in 2006, representing an increase of $37 or 7.3%.

The increase in fee income was driven by trust and investment management services, principally reflecting growth in assets under management. At March 31, 2007, total managed assets at Bar Harbor Trust Services ("Trust Services"), a Maine chartered non-depository trust company and second tier subsidiary of the Company, stood at $257,799 compared with $252,057 and $226,945 at December 31 and March 31, 2006, representing increases of $5,742 and $30,854, or 2.3% and 13.6%, respectively.

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.

For quarter ended March 31, 2007, credit and debit card service charges and fees amounted to $267, compared with $230 during the same quarter in 2006, representing an increase of $37, or 16.1%. The first quarter increase was principally attributed to an increase in debit card fees, principally reflecting the ongoing growth in the Bank’s demand deposits accounts base. Merchant credit card processing fees also posed a small increase, reflecting higher merchant credit card processing volumes, compared with the first quarter of 2006. The increase in credit and debit card processing revenue was offset in part 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 (Losses) Gains: For the quarter ended March 31, 2007, net securities losses amounted to $920, compared with net securities gains of $310 in the first quarter of 2006, representing a decline of $1,230, or 396.8%. The amount recorded in the first quarter of 2007 represented a securities impairment loss partially offset by realized gains, while the amount recorded in the first quarter of 2006 represented realized gains.

In April 2007, Company’s Board of Directors approved the restructuring of a portion of the Company’s balance sheet through the sale of $43,337 of its aggregate $227,473 available for sale securities portfolio, the proceeds from which were initially be 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, which may be at maturity, 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. As of March 31, 2007, the amortized cost of these securities amounted to $44,499, whereas the then current fair market value amounted to $43,337. The weighted average yield on the securities sold approximated 4.22%, whereas the weighted average cost of the borrowings paid down approximated 5.31%.

The decision to restructure a portion of the Company’s balance sheet was based, in part, on an assessment of the overall current state of the economy and management’s belief that the Federal Reserve will be keeping short term interest rates on hold much longer than previously anticipated. Considering the potential adverse impact this would likely have on net interest income, management determined that the restructuring of a portion of the Company’s balance sheet was appropriate at this time. The Company’s overall objectives are to improve future period earnings, lower the interest rate risk profile of the Company’s balance sheet, and provide a means to more effectively respond to the current and future yield curve environments.

In the first quarter of 2007 the Company also recorded $241 in realized gains on the sale of securities, compared with $310 in the first quarter of 2006, representing a decline of $69, or 22.2%.

Occupancy Expenses: For the quarter ended March 31, 2007, total occupancy expenses amounted to $373, compared with $312 during the same quarter in 2006, representing an increase of $61 or, or 19.6%.

The increase in occupancy expenses principally reflect the opening of a new branch office late in the first quarter of 2006 (a leased facility), and higher fuel and utilities prices combined with relatively harsh weather conditions in downeast and midcoast Maine during the first quarter of 2007 compared with the same quarter last year.

The decline in furniture and equipment expenses was principally attributed to certain expenses associated with the Bank’s major renovation and opening of a new branch office in the community of Somesville, Maine during the first quarter of 2006.

For the quarter ended March 31, 2007, credit and debit card expenses amounted to $188, compared with $166 during the same quarter in 2006, representing an increase of $22, or 13.3%. 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. Merchant credit card processing expenses moderately higher in the first quarter of 2007, principally reflecting higher merchant credit card processing volumes compared with the same quarter in 2006. The increase in credit and debit card expenses was more than offset by increases in credit and debit card income, which is included in non-interest income in the Company’s consolidated statements of income.

The Company's effective tax rate for the quarter ended March 31, 2007 amounted to 26.2%, compared with 28.2% for the same quarter in 2006. 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 can occur due to non-taxable income and non-deductible expense bearing different percentages of income before income taxes, during any given reporting period.

The Company’s assets principally consist of loans and investment securities, which at March 31, 2007 represented 66.3% and 27.5% of total assets, compared with 67.3% and 25.9% at December 31, 2006, respectively.

At March 31, 2007, total assets amounted to $827,266, compared with $824,877 and $781,538 at December 31 and March 31, 2006, representing increases of $2,389 and $45,728, or 0.3% and 5.9%, respectively.

The investment securities portfolio is primarily comprised of mortgage-backed securities issued by U.S. government agencies, U.S. government sponsored enterprises, and other corporate issuers. The portfolio also includes tax-exempt obligations of state and political subdivisions, and obligations of other U.S. government sponsored enterprises.

In the first quarter of 2007, the securities portfolio represented 28.5% of the Company’s average earning assets and generated 24.6% of total tax-equivalent interest and dividend income, compared with 26.4% and 22.4% in the first quarter of 2006, respectively.

The overall objectives of the Bank’s strategy for the investment 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 investment securities at March 31, 2007 and 2006. 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.

At March 31, 2007, total securities amounted to $227,473, compared with $213,252 and $201,129 at December 31 and March 31, 2006, representing increases of $14,221 and $26,344, or 6.7% and 13.1%, respectively. Market yields showed meaningful improvement early in the first quarter of 2007, with the benchmark 10-year U.S. Treasury note climbing to a five-month high, presenting opportunities for increasing the Bank’s earning assets and generating higher levels of net interest income.

Management believes the unrealized losses in the securities portfolio at March 31, 2007 were attributed to interest rate increases, and reflected the volatile movements in the U.S. Treasury curve over the past few years. Specifically, certain debt securities were purchased in an interest rate environment lower than where the U.S. Treasury yield curve stood on March 31, 2007. Because the decline in market value was attributable to changes in interest rates and not credit quality, 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, 2007.

Total Loans: At March 31, 2007, total loans amounted to $552,643, compared with $555,099 and $529,119 at December 31, and March 31, 2006, representing a decline of $2,456, or 0.4%, and an increase of $23,524, or 4.4%, respectively.

At March 31, 2007, total commercial loans amounted to $237,353, compared with $239,245 and $220,993 at December 31 and March 31, 2006, representing a decline of $1,892, or 0.8%, and increase of $16,360, or 7.4%, respectively.

Commercial loans represented 69.5% of total loan growth when comparing March 31, 2007 with the same date in 2006. Commercial loan growth was almost entirely driven by commercial real estate loans, which posted an increase of $16,379, or 11.3%, when comparing March 31, 2007 with the same date in 2006. 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.

The small decline in commercial loans at March 31, 2007 compared with December 31, 2006 was principally attributed to anticipated paydowns on certain seasonal borrowings, combined with softening loan demand and intensifying competition in the markets served by the Bank.

Reflecting a softening real estate market, consumer real estate loan originations started slowing in 2006 and this trend continued during the three months ended March 31, 2007.

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 2006 and this continued to be the case during the three months ended March 31, 2007. The following table sets forth the details of non-performing loans as of the dates indicated:

During the quarter ended March 31, 2007, non-performing loans remained at low levels. The Bank attributes this success, in part, 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, 2007, total non-performing loans amounted to $422, compared with $628 and $896 at December 31 and March 31, 2006, representing declines of $206 and $474, or 32.8% and 52.9%, respectively. At March 31, 2007, total non-performing loans represented 0.08% of total loans, compared with 0.11% and 0.17% at December 31 and March 31, 2006, respectively.

While the level of non-performing loan ratios continued to reflect the favorable quality of the loan portfolio at March 31, 2007, Bank management is cognizant of relatively softening economic conditions overall, and believes it is managing credit risk accordingly. Future levels of non-performing loans may be influenced by economic conditions, including the impact of those conditions on the Bank's customers, including higher interest rates and debt service levels, 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.

Other Real Estate Owned: When the Bank takes ownership of collateral property upon foreclosure of a real estate secured loan, the property is transferred from the loan portfolio to Other Real Estate Owned ("OREO") at its fair value. If the loan balance is higher than the fair value of the property, the difference is charged to the allowance for loan losses at the time of the transfer. OREO is classified on the consolidated balance sheet with other assets. At March 31, 2007, there was no OREO, unchanged from December 31 and March 31, 2006.

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

Specific reserves for impaired loans are determined in accordance with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors For Impairment of a Loan-Income Recognition and Disclosures." The amount of loans considered to be impaired totaled $294 as of March 31, 2007, compared with $456 and $463 as of December 31 and March 31, 2006, respectively. The related allowance for loan losses on these impaired loans amounted to $106 as of March 31, 2007, compared with $130 and $54 at December 31 and March 31, 2006, respectively.

Management recognizes that early and accurate recognition of risk is the best means to reduce credit losses and maximize earnings. The Bank employs a comprehensive risk management structure to identify and manage the risk of loss. For consumer loans, the Bank identifies loan delinquency beginning at 10-day delinquency and provides appropriate follow-up by written correspondence or personal contact. Non-residential mortgage consumer 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."

The following table details changes in the allowance and summarizes loan loss experience by loan type for the three-month periods ended March 31, 2007 and 2006.

ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED
MARCH 31, 2007 AND 2006

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, 2007, to be appropriate for the risks inherent in the loan portfolio and resident in the local and national economy as of that date.

At March 31, 2007, total deposits amounted to $506,832, compared with $496,319 and $474,752 at December 31 and March 31, 2006, representing increases of $10,513 and $32,080, or 2.1% and 6.7%, respectively.

Deposit growth was largely attributed to certificates of deposit obtained from the national market ("brokered deposits"), which at March 31, 2007, totaled $119,468, compared with $82,361 and $82,372 at December 31 and March 31, 2006, representing increases of $37,107 and $37,096, or 45.1% and 45.0%, respectively. The increase in brokered deposits at March 31, 2007, compared with March 31, 2006, was utilized to help fund the Bank’s earning asset growth, as retail deposits posted small declines. Comparing March 31, 2007 with December 31, 2006, the increase in brokered deposits was principally utilized to replace the seasonal outflows of retail deposits, while also reducing the level of short term borrowings and strengthening the Bank’s overall liquidity position.

At March 31, 2007, retail deposits totaled $387,364 compared with $413,958 at December 31, 2006, representing a decline of $26,594, or 6.4%. The decline in retail deposits was principally attributed to an $18,338 decline in money market deposit accounts offered to clients of Trust Services, principally reflecting a partial reallocation of cash within certain managed asset portfolios. The decline in retail deposits was also attributed to the anticipated outflows of seasonal deposits.

Comparing March 31, 2007 with the same date in 2006, total retail deposits were showing a decline of $5,016, or 1.3%. This decline was also attributed to the money market deposit accounts offered to clients of Trust Services, which posted a decline of $9,819.

In general, without considering the declines in money market accounts offered to clients of Trust Services, the Bank’s retail deposit growth has moderately lagged historical norms. Management believes that competition from banks and non-banks has intensified, as savers and investors seek higher returns in an atmosphere of rising short-term interest rates, and that financial institutions in particular have been aggressively pricing their deposits in order to fund earning asset growth. Management also believes that investors have been reallocating a portion of their cash positions, believing the equity markets have recently become more attractive from a total return perspective.

Since short-term interest rates began rising, Bank management 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.

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, 2007, total borrowings amounted to $252,352, compared with $260,712 and $243,703 at December 31 and March 31, 2006, representing a decline of $8,360 or 3.2% and an increase of $8,649 or 3.6%, respectively.

During 2006 the Bank modified its funding and liquidity strategies, providing more balance between brokered deposits and borrowed funds. The decline in borrowings from December 31, 2006 levels reflects the Bank’s utilization of a greater proportion of brokered deposits to replace seasonal deposit outflows, support earning asset growth, and strengthen the Bank’s liquidity position.

At March 31, 2007, total borrowings expressed as a percent of total assets amounted to 30.5%, compared with 31.6% and 31.2% at December 31 and March 31, 2006, respectively.

Capital Resources

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, 2007, 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, 2007 and December 31, 2006, under the rules applicable at that date.

In March 2004, the Company announced a second stock repurchase plan. The Board of Directors of the Company authorized open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 310,000 shares. Purchases began on March 4, 2004 and were continued through December 31, 2006. The Company’s board of directors subsequently authorized the continuance of this stock repurchase plan through December 31, 2007. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time-to-time, without prior notice. As of March 31, 2007, the Company had repurchased 148,613 shares of stock under this plan, or 47.9% of the total authorized, at a total cost of $4,003 and an average price of $26.94 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, 2007. 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, 2007, the Bank had $52 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, student loan servicing, 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, 2007, commitments under existing standby letters of credit totaled $462, compared with $442 and $115 at December 31 and March 31, 2006, 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 re-pricing 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, 2007, the Bank had four outstanding derivative instruments with notional amounts totaling $50,000. 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, 2007 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 AGREEMENTS

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

The 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 following table summarizes the contractual cash flows of the interest rate swap agreements outstanding at March 31, 2007, based upon the then current Prime interest rate of 8.25%.