X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007

Commission File Number: 841105-D

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in exchange act rule 12b-2): YES: _____ NO:     X    

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Dollars in thousands)
(unaudited)

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 June 30, 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.

Any changes in the estimates used by the Company to determine the carrying value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, would adversely affect the Company’s consolidated results of operations.

The following is a reconciliation of basic and diluted earnings per share for the three and six months ended June 30, 2007 and 2006:

Note 4: Retirement Benefit Plans

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 $442 actuarial gain ($291, net of tax) related to the program. The actuarial gain was previously included in accumulated other comprehensive income, net of tax 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 current 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 and six months ended June 30, 2007 and 2006:

The Company expects to recognize $359 of expense for the supplemental plans for the year ended December 31, 2007. The Company expects to contribute $222 to the supplemental plans in 2007. As of June 30, 2007, the Company had contributed $106.

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 June 30, 2007 and December 31, 2006:

As of June 30, 2007, and December 31, 2006, the fair values 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 June 30, 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 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 June 30, 2007, the fair market value of the interest rate swap agreements was an unrealized loss of $324 compared with unrealized losses of $473 and $777 at December 31, and June 30, 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 and six months ended June 30, 2007, the total net cash flows paid to counter-parties amounted to $103 and $209, compared with $73 and $126 during the same periods in 2006. The net cash flows paid to counter-parties were recorded as reductions in interest income on the hedged loans.

At June 30, 2007, the net unrealized loss on the interest rate swap agreements included in accumulated other comprehensive loss, net of tax, amounted to $214, compared with $313 and $513 at December 31 and June 30, 2006, respectively. Also included in accumulated other comprehensive loss at June 30, 2007, was a net deferred loss, net of tax, of $3 related to the de-designation and re-designation of these interest rate swap agreements as cash flow hedges in 2004.

Interest Rate Floor Agreements:

At June 30, 2007, and December 31, 2006, the unamortized premium net of the unrealized gain on the interest rate floor agreements amounted to $138 and $129, net of tax, respectively, and was recorded in accumulated other comprehensive loss 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 June 30, 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.

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

Use of Non-GAAP Financial Measures: Certain information discussed below is presented on a fully taxable equivalent basis. Specifically, included in second quarter 2007 and 2006 net interest income was $384 and $475, respectively, of tax-exempt interest income from certain investment securities and loans. For the six months ended June 30, 2007 and 2006, the amount of tax-exempt income included in net interest income was $790 and $952, respectively. 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 $139 and $184 in the second quarter of 2007 and 2006, respectively, and $288 and $371 in tax-equivalent adjustments for the six months ended June 30, 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 Part I, Item 2 below, Allowance for Loan Losses and Provision in this report on Form 10-Q, for further discussion and analysis concerning the allowance.

Income Taxes – The Company estimates its income taxes for each period for which a statement of income is presented. This involves estimating the Company’s actual current tax liability, as well as assessing temporary differences resulting from differing timing of recognition of expenses, income and tax credits, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from historical taxes paid and future taxable income and, to the extent that the recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of June 30, 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. Refer to Note 2 of the consolidated financial statements in Part I, Item 1 of this report on Form 10-Q for further details of the Company’s accounting policies and estimates covering goodwill and other intangible assets.

As more fully enumerated below, the increase in second quarter 2007 net income compared with the same quarter in 2006 was principally attributed to a $328 or 6.2% increase in net interest income and a $133 or 8.7% increase in non-interest income, offset in part by a $103 or 2.3% increase in non-interest expense.

As more fully discussed below, in connection with the previously reported restructuring of a portion of the Company’s balance sheet, during the six months ended June 30, 2007 the Company recorded net securities losses amounting to $902, compared with securities gains of $310 for the same period in 2006, representing a decline of $1,212. Partially offsetting the decline in net securities gains was an $832 reduction in non-interest expense recorded in the first quarter of 2007, related to the Company’s previously reported settlement of its limited postretirement benefit program. Excluding the impact of net securities gains and losses and the settlement of the postretirement program, non-interest income was up $119 or 4.2% and non-interest expense was down $153 or 1.6%, compared with the first six months of 2006.

• Net Interest Income: For the quarter ended June 30, 2007, net interest income amounted to $5,596, representing an increase of $328 or 6.2%, compared with the same quarter in 2006. The increase in net interest income was largely attributed to average earning asset growth of $22,875, or 3.0%. Additionally, in the second quarter of 2006 the Federal Home Loan Bank of Boston, of which the Bank is a member and shareholder, did not declare a dividend, negatively impacting that quarter’s net interest income by $168.

For the six months ended June 30, 2007, net interest income amounted to $10,878, representing an increase of $123, or 1.1%, compared with the same period in 2006. The increase in net interest income was principally attributed to average earning asset growth of $45,598 or 6.1%, as the net interest margin declined 13 basis points. As has widely been the situation throughout the banking industry, the decline in the net interest margin was largely attributed to the flat-to-inverted U.S. Treasury yield curve over the past 18 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. During the latter part of the second quarter of 2007, the yield curve began to steepen, as long-term interest rates advanced to five-year highs. Company management anticipates that this steepening of the yield curve, should it continue, will have a favorable impact on future levels of net interest income.

• Non-interest income: For the quarter ended June 30, 2007, total non-interest income amounted to $1,658, representing an increase of $133 or 8.7% compared with the same quarter in 2006. Trust and financial service fees, debit and credit card fees and service charges on deposit accounts led the increase in non-interest income, posting increases of 13%, 12% and 3% respectively.

For the six months ended June 30, 2007, total non-interest income amounted to $2,036, representing a decline of $1,093, or 34.9%, compared with the same period in 2006. The decline in non-interest income was attributed to a $1,212 decline in net securities gains. During the first half of 2007, net securities losses of $902 were recorded, principally resulting from the Company’s previously announced restructuring of a portion of its balance sheet, compared with net securities gains of $310 recorded during the same period in 2006. The decline in non-interest income also reflects a $150 gain on the sale of Bank owned real estate recorded during the first quarter of 2006.

For the six months ended June 30, 2007, debit and credit card fees, trust and financial service fees and service charges on deposit accounts were up 14%, 10% and 5% compared with the same period last year, respectively.

• Non-interest expense: For the quarter ended June 30, 2007, total non-interest expense amounted to $4,553, representing an increase of $103 or 2.3%, compared with the same quarter in 2006. A variety of operating expenses were up $222 or 10.2% in the aggregate, largely offset by a $119 or 5.2% decline in salaries and employee benefits.

Summary Financial Condition

The Company’s total assets ended the second quarter at $833,450, representing increases of $8,573 and $31,171, or 1.0% and 3.9%, compared with December 31 and June 30, 2006, respectively.

• Loans: Total loans ended the second quarter at $551,801, representing a decline of $3,298 or 0.6% and an increase of $8,070 or 1.5% compared with December 31 and June 30, 2006, respectively. Loan growth has recently been impacted by anticipated pay offs of certain large commercial loans, combined with softening loan demand and intensifying competition in the markets served by the Bank.

• Credit Quality: The Bank’s non-performing loans remained at low levels at quarter-end, representing $912 or 0.17% of total loans, compared with $628 and $652, or 0.11% and 0.12% of total loans at December 31 and June 30, 2006, respectively. The Bank’s loan loss experience continued at low levels during the first six months of 2007, with net charge-offs amounting to $57, or annualized net charge-offs to average loans outstanding of 0.02%, compared with $179 and 0.07% during the same period in 2006, respectively. For the six months ended June 30, 2007 the Bank recorded a provision for loan losses of $33 compared with $43 during the same period last year.

• Securities: Total securities ended the second quarter at $230,313, representing increases of $17,061 and $25,998, or 8.0% and 12.7%, compared with December 31 and June 30, 2006, respectively.

In the second quarter of 2007, the Bank completed its previously announced restructuring of a portion of its balance sheet, selling a total of $46,170 in securities while paying down short-term borrowings. During the later part of the second quarter, market yields soared to a five-year high, with the benchmark 10-year U.S. Treasury advancing from 4.63% in mid May to 5.30% in mid June. The increase in market yields presented opportunities for replacing the securities sold, increasing the Bank’s earning assets, and generating higher levels of net interest income.

• Deposits: Total deposits ended the second quarter at $517,431, representing increases of $21,112 and $29,867, or 4.3% and 6.1% compared with December 31 and June 30, 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 half of 2007.

At June 30, 2007, retail deposits totaled $382,907, representing declines of $31,051 and $15,547, or 7.5% and 3.9%, compared with December 31 and June 30, 2006, respectively. 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 declines in retail deposits were principally attributed to declines in money market accounts offered to clients of Bar Harbor Trust Services, a Maine chartered non-depository trust company subsidiary of the Company, reflecting a reallocation of cash within certain managed asset portfolios. Comparing June 30, 2007, with December 31 and June 30, 2006, these money market deposits accounted for $24,032 and $23,660 of the overall retail deposit declines, respectively.

• Shareholders’ Equity: The Company continued to exceed regulatory requirements for "well capitalized" institutions. At June 30, 2007, the Company’s Tier I Leverage, Tier I Risk-based, and Total Risk-based capital ratios amounted to 7.44%, 11.09% and 11.92% respectively. Total shareholders’ equity ended the second quarter at $61,361, representing increases of $310 and $5,560, or 0.5% and 10.0%, compared with December 31 and June 30, 2006, respectively.

• Tangible Book Value: At June 30, 2007, the Company’s tangible book value per share of common stock outstanding amounted to $19.07, compared with $18.96 and $17.19 at December 31 and June 30, 2006, representing increases of 0.5% and 10.9%, respectively.

• Shareholder Dividends: On July 17, 2007, the Company declared a cash dividend of 24 cents per share of common stock for the quarter ended June 30, 2007, representing an increase of one-cent per share or 4.3% compared with the dividend paid for the same quarter in 2006.

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 June 30, 2007, net interest income on a fully tax-equivalent basis amounted to $5,735, compared with $5,452 in the second quarter of 2006, representing an increase of $283, or 5.2%.

The increase in second quarter net interest income was attributed, in part, to average earning asset growth of $22,875, or 3.0%, compared with the same quarter in 2006. Additionally, the Federal Home Loan Bank of Boston (the "FHLB"), of which the Bank is a member and shareholder, did not declare a dividend on its stock during the second quarter of 2006. Pursuant to its "Dividend Schedule Transition Plan," in the third quarter of 2006, the FHLB declared a dividend that was "grossed up" to an equivalent accrual period matching the number of days in the second and third quarters of 2006. This action unfavorably impacted the Bank’s second quarter 2006 net interest income by $168.

For the six months ended June 30, 2007, net interest income on a fully tax-equivalent basis amounted to $11,166, compared with $11,126 during the same period in 2006, representing an increase of $40, or 0.4%. The increase in net interest income was principally attributed to average earning asset growth of $45,598 or 6.1%, as the net interest margin declined 16 basis points to 2.86% compared with the six months ended June 30, 2006.

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

Net Interest Income Analysis: The following tables summarize the Company’s average balance sheets and components of net interest income, including a reconciliation of tax equivalent adjustments, for the three and six months ended June 30, 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 June 30, 2007, the net interest margin amounted to 2.95%, compared with 2.89% for the same quarter in 2006, representing an increase of 6 basis points. The increase in the net interest margin was principally attributed to the FHLB not paying a cash dividend on its stock in the second quarter of 2006. Excluding this factor, the second quarter 2007 net interest margin was essentially unchanged compared with the same quarter in 2006. Comparing the quarter ended June 30, 2007 with the same quarter in 2006 the weighted average yield the Bank’s earning assets increased 46 basis points, the same increase experienced in its weighted average cost of funds.

For the six months ended June 30, 2007, the net interest margin amounted to 2.86%, compared with 3.02% for the same period in 2006, representing a decline of 16 basis points. Over the past 18 months the U. S. Treasury yield curve has been flat-to-inverted, meaning short-term interest rates have been equal to or greater than long-term interest rates. The decline in the 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 rising short-term interest rates, combined with highly competitive pricing pressures with respect to loans and deposits, a higher utilization of wholesale funding, and the inherent net interest margin challenges widely associated with a flat or inverted U.S. Treasury yield curve. Comparing the six months ended June 30, 2007 with the same period in 2006, the increase in the cost of the Bank’s interest bearing liabilities exceeded the increase in yields on its earning asset portfolios by 22 basis points.

During the latter part of the second quarter of 2007, the yield curve began to steepen, as long-term interest rates advanced to five-year highs. Company management anticipates that this steepening of the yield curve, should it continue, will have a favorable impact on future levels of net interest income. 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 three and six months ended June 30, 2007, total interest income, on a fully tax-equivalent basis, amounted to $12,745 and $25,254 compared with $11,508 and $22,389 during the same periods in 2006, representing increases of $1,237 and $2,865, or 10.7% and 12.8%, respectively.

Comparing the three and six months ended June 30, 2007, with the same periods in 2006, the weighted average yield on the Bank’s loan portfolio increased 32 and 30 basis points to 6.88% and 6.81%, respectively, while the weighted average yield on the securities portfolio increased 46 and 41 basis points to 5.72% and 5.62%, respectively.

As depicted on the rate/volume analysis tables below, comparing the three and six months ended June 30, 2007 with the same periods in 2006, the increased volume of average earning assets on the balance sheet contributed $328 and $1,304 to the increases in interest income, while the increases attributed to the impact of higher weighted average earning asset yields contributed $909 and $1,561, respectively.

The increases in interest expense were principally attributed to 46 and 60 basis point increases in the weighted average cost of funds, combined with increases in average interest bearing liabilities amounting to $17,195 and $42,015, or 2.5% and 6.4%, when comparing the three and six months ended June 30, 2007 with the same periods in 2006, respectively. The increase in the average cost of interest bearing funds was principally attributed to increases in short-term market interest rates between periods and, to a lesser extent, a proportionately higher utilization of wholesale funding. In addition, given highly competitive pricing pressures and the need to strengthen customer relationships, over the past twelve months the Bank more closely followed the market with respect to the upward pricing and re-pricing of maturity and non-maturity deposits.

For the three and six months ended June 30, 2007, the weighted average cost of funds amounted to 4.04%, compared with 3.58% and 3.44% during the same periods in 2006, respectively. For the three and six months ended June 30, 2007, the weighted average cost of borrowed funds increased 24 and 38 basis points to 4.93% and 4.94%, respectively, while the weighted average cost of interest bearing deposits increased 64 and 76 basis points to 3.56% and 3.53%, respectively. The increase in the weighted average cost of interest bearing deposits outpaced the weighted average cost of borrowed funds, reflecting highly competitive market pricing pressures for deposits, combined with a higher utilization of brokered time deposits.

As depicted on the rate/volume analysis tables below, comparing the three and six months ended June 30, 2007 with the same periods in 2006, the increased volume of average interest bearing liabilities on the balance sheet contributed $108 and $692 to the increases in interest expense, while the increases attributed to the impact of higher weighted average rates paid on interest bearing liabilities amounted to $846 and $2,133, respectively.

Rate/Volume Analysis: The following tables set 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.

(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For the purposes of these computations, interest income is reported on a tax-equivalent basis.

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 $912 or 0.17% of total loans, compared with $628 and $652, or 0.11% and 0.12% of total loans at December 31 and June 30, 2006, respectively. The allowance expressed as a percentage of non-performing loans stood at 494% at June 30, 2007, compared with 721% and 692% at December 31 and June 30, 2006, respectively.

The Bank’s loan loss experience continued at low levels during the six months ended June 30, 2007, with net loan charge-offs amounting to $57, or annualized net charge-offs to average loans outstanding of 0.02%, compared with $179 or 0.07% during the same period in 2006.

Reflecting the continued stable performance of the loan portfolio, for the three and six months ended June 30, 2007, the Bank recorded a provision for loan losses of $33, compared with $15 and $43 during the same periods in 2006, respectively.

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 three and six months ended June 30, 2007, total non-interest income amounted to $1,658 and $2,036, compared with $1,525 and $3,129 during the same periods in 2006, representing an increase of $133 or 8.7% and a decline of $1,093 or 34.9%, respectively.

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 three and six months ended June 30, 2007, income from trust and other financial services amounted to $642 and $1,183 compared with $568 and $1,072 during the same periods in 2006, representing increases of $74 and $111, or 13.0% and 10.4%, respectively.

The increases in fee income were driven by trust and investment management services, principally reflecting growth in assets under management.

At June 30, 2007, total managed assets at Bar Harbor Trust Services, a Maine chartered non-depository trust company and second tier subsidiary of the Company, stood at $270,605 compared with $252,057 and $223,825 at December 31 and June 30, 2006, representing increases of $18,548 and $46,779, or 7.4% and 20.9%, 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.

The increases in debit and credit card service charges and fees were 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 posted a small increase, reflecting higher merchant credit card processing volumes, compared with the three and six months ended June 30, 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 three months ended June 30, 2007, net realized gains on the sale of securities amounted to $18 compared with none during the same quarter in 2006. For the six months ended June 30, 2007, net securities losses amounted to $902, compared with securities gains of $310 during the same period in 2006, representing a decline of $1,212, or 391.0%.

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 $43,337 of its aggregate $227,473 available for sale securities portfolio, the proceeds from which were initially used to pay down short-term borrowings. Since the Company no longer had the intent to hold these securities until a recovery of their amortized cost, 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 $1,162 included in first quarter 2007 earnings as a reduction of non-interest income. The Company’s primary objectives were to improve future period earnings and provide a means to more effectively respond to the current and future yield curve environments.

The $902 in net securities losses recorded during the six months ended June 30, 2007 were comprised of securities impairment losses of $1,162 and realized losses of $150 on the sale of securities, offset in part by realized gains of $410 on the sale of securities.

The declines in salaries and employee benefit expenses were attributed to a variety of factors including: changes to certain employee benefit programs; changes in overall staffing levels and mix; and lower levels of incentive compensation.

Occupancy Expenses: For the three and six months ended June 30, 2007, total occupancy expenses amounted to $320 and $693, compared with $337 and $649 for the same periods in 2006, representing a decline of $17 or 5.0% and an increase of $44 or 6.8%, respectively.

The increase in occupancy expenses for the six months ended June 30, 2007 compared with the same period last year was principally attributed to the opening of a new branch office late in the first quarter of 2006 (a leased facility), and higher fuel and utility prices combined with relatively harsh weather conditions in downeast and mid coast Maine during the first quarter of 2007 compared with the same quarter last year.

The decline in furniture and equipment expenses for the six months ended June 30, 2007 compared with the same period in 2006 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.

Credit and Debit Card Expenses: For the three and six months ended June 30, 2007, credit and debit card expenses amounted to $270 and $458, compared with $250 and $416 for the same periods in 2006, representing increases of $20 and $42, or 8.0% and 10.1%, respectively.

Credit and debit card expenses principally relate to the Bank’s merchant credit and debit card processing activities, Visa debit card processing expenses and, to a lesser extent, its Visa credit card portfolio. Historically, the Bank’s merchant credit card processing activities have been seasonal in nature with transaction volumes peaking in the summer and autumn, while declining in the winter and spring.

Other Operating Expenses: For the three and six months ended June 30, 2007, other operating expenses amounted to $1,370 and $2,644, compared with $1,168 and $2,631 for the same periods in 2006, representing increases of $202 and $13, or 17.3% and 0.5%, respectively.

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 June 30, 2007, represented 66.2% and 27.6% of total assets, compared with 67.3% and 25.9% at December 31, 2006, respectively.

At June 30, 2007, total assets amounted to $833,450 compared with $824,877 and $802,279 at December 31 and June 30, 2006, representing increases of $8,573 and $31,171, or 1.0% and 3.9%, 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.

The overall objectives of the Bank’s strategy for the investment securities portfolio include maintaining an 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 June 30, 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.

For the six months ended June 30, 2007, the securities portfolio represented 28.1% of the Company’s average earning assets and generated 24.4% of total tax-equivalent interest and dividend income, compared with 26.9% and 23.0% for the same period in 2006.

At June 30, 2007, total securities amounted to $230,313, compared with $213,252 and $204,315 at December 31 and June 30, 2006, representing increases of $17,061 and $25,998, or 8.0% and 12.7%, respectively.

In the second quarter of 2007, the Bank completed its previously reported restructuring of a portion of its balance sheet, selling a total of $46,170 in securities while paying down short-term borrowings. During the later part of the second quarter, market yields soared to a five-year high, with the benchmark 10-year U.S. Treasury advancing from 4.63% in mid May to 5.30% in mid June. The increase in market yields presented opportunities for replacing the securities sold, increasing the Bank’s earning assets, and generating higher levels of net interest income.

Impaired Securities: The securities portfolio contains certain investments where amortized cost exceeds fair market value, which at June 30, 2007 amounted to an unrealized loss of $3,220 compared with $2,635 at December 31, 2006. The increase in unrealized losses principally reflected higher interest rates and market yields at June 30, 2007 compared with December 31, 2006.

At June 30, 2007, unrealized losses on securities in a continuous unrealized loss position more than twelve-months amounted to $1,366 or 2.4% of their amortized cost, compared with $2,418 or 2.4% at December 31, 2006, respectively. The decline in unrealized losses from December 31, 2006 levels was principally attributed to the previously announced restructuring of the securities portfolio, offset in part by higher interest rates and market yields at June 30, 2007 compared with December 31, 2006.

Management believes the unrealized losses in the securities portfolio at June 30, 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 June 30, 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 securities until a recovery of their amortized cost, which may be at maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2007.