COMMITTED TO PERFORMANCE 2014 S U M M A R Y A N N UA L R E P O R T We Are Bar Harbor Bankshares COMMUNICATION COMMUNICATION BUILD COMMUNITY POSITIVE ATTITUDE TEAMWORK APPRECIATION A UNIQUE HIGH PERFORMANCE CULTURE In 2014, a team of Brand Champions, employees from across the bank, was formed to motivate employees to live the brand every day as they deliver service to customers. They also generate ideas about how to consistently keep the brand alive and in focus. The Brand Champions extracted from the Brand Promise and Story ‘five key behaviors’ which employees can actively demonstrate in their daily work. COMMUNICATION—PRACTICE communication (Positive, Respect, Active, Clear, Timely, Intentional, Considerate, Empathetic) BUILD COMMUNITY—treat every person in the Company as your best customer POSITIVE ATTITUDE—energize your environment—lead with a positive attitude! TEAMWORK—support and respect others, working collaboratively for success APPRECIATION—express genuine appreciation From this, an employee recognition and reward program was created, called “Stars on the Horizon,” to encourage all employees to adopt these behaviors. When any employee witnesses another performing one of the five key behaviors, they are encouraged to give that person a star. On a quarterly basis, all star nominations are reviewed and winners chosen. Quarterly winners receive an engraved paperweight, along with a half day off with pay or a $50 BHBT logo clothing credit. These winners, along with a few other nominations, are then considered for the Bank’s highest employee honor, the annual Agnes Salisbury Award. The following pages highlight recent star nominations. 2014 ANNUAL REPORT Page 1 COMMUNICATION —Faye Allen, AVP/Cash Management Services (135 High Street, Ellsworth) Mia Dupuy, Electronic Banking Specialist, nominated Faye for going out of her way to quickly communicate some important information to a customer. Mia was processing ACH files when she saw a customer had submitted a payroll file on Christmas Eve, after the earlier holiday cut off time. Because the file was not processed on December 24, the employees at the company would not be paid on time. Mia tried to contact the company with no luck, so she called Faye for guidance. Faye responded quickly, jumped in her car and drove to the company to see if anyone was around. Unfortunately, the company was closed, but the owner happened to be in the parking lot! Faye explained what happened and he said he would call the two employees who were affected and write them checks. “ This level of customer service is what sets us apart. I had difficulty picking which star to give Faye since her actions fit all five of them,” said Mia. Page 2 BAR HARBOR BANKSHARES RECOGNIZING AND ENCOURAGING 2014 ANNUAL REPORT Page 3 DELIVERING OUR BRAND EVERY DAY “ Standing behind the independent businessmen “ Standing behind the independent businessmen and women building futures for their families and women building futures for their families and their communities.” and their communities.” Page 4 BAR HARBOR BANKSHARES BUILD COMMUNITY —Pam Farnsworth, Compliance Risk Analyst (Bar Harbor) Marsha Sawyer, SVP/Human Resources, nominated Pam for her many years of working with the Maine Sea Coast Mission to make Christmas happier for 100 children in Hancock & Washington Counties. For more than 10 years, Pam has been personally responsible for obtaining from the Mission a list of disadvan- taged children and their Christmas wish. Pam then shares this list with all BHBT employees and coordinates which employee is helping which child. She gathers and inventories all the gifts, makes sure no child is forgotten, and delivers the packages to the Mission for wrapping and distribution. We never know the identity of these children and the children do not know the gifts come from BHBT employees. “We have Pam to thank for the smiling faces of 100 children on the morning of December 25. This is a direct result of her commitment to our surrounding com- munity members who struggle during the holiday season,” said Marsha. 2014 ANNUAL REPORT Page 5 POSITIVE ATTITUDE —Bob Lavoie, VP/Information Systems (Operations Center, Ellsworth) Mia Dupuy, Electronic Banking Specialist, nominated Bob for his positive attitude toward our properties becoming tobacco free. After the corporate announcement was made, Bob (a smoker) sent an e-mail to all employees. After empathizing with the plight of being a smoker in today’s society, Bob extended an “invitation for all of us who are at the point where we are tired of being ostracized, spending money for a habit that only hooks you more, and being winded on what most consider a wee bit of exercise, to join together and kick this habit for good.” He encouraged other smokers to connect with him and share “any tips or suggestions you might have to help improve our odds. I am also looking at tobacco cessation programs. I will compile a list of all suggestions I receive and make them available. We can do this.” “ Bob turned a situation that could be seen as negative into an opportunity to help his co-workers kick their smoking habit for good,” said Mia. Page 6 BAR HARBOR BANKSHARES EVERY PERSON IMPACTS PERFORMANCE 2014 ANNUAL REPORT Page 7 A TRUE COMMUNITY BANK Page 8 BAR HARBOR BANKSHARES TEAMWORK —Kimberly Nason, AVP/Staff Development & Training (Rockland) Pam Farnsworth, Compliance Risk Analyst, and David Cohen, SVP/Controller & Assistant Treasurer, nominated Kim for assisting the Accounting department with preparing an 8-K and assisting with the 10-Q document in Pam’s absence. While Pam was out of state attending the ABA National Compliance School, she recommended Kim (an Excel wiz) to assist importing all the 10-Q tables from an Excel spreadsheet into a Word document. “Although Kim had never before performed this work, she did not hesitate when asked to help,” said Pam. By assuming this responsibility, Kim helped vital work get completed in a timely and efficient manner. “ Kim’s can-do attitude helped keep the time sensitive 10-Q process on track. We appreciate her willingness to drop everything to help us,” said David. APPRECIATION —Jerry McElyea, Project Specialist (Operations Center, Ellsworth) Cathy Planchart, VP/Corporate Communications & Community Relations, nomi- nated Jerry for writing a thank you note to Marsha Sawyer, SVP/Human Resources, after attending the Maine Bankers Association’s Emerging Leaders Conference. “Thank you for giving me the opportunity to attend the Emerging Leaders Conference. It was great to get out and meet people from other institutions, as well as listen in on the various sessions, which were very helpful and informative. The networking was a great experience,” wrote Jerry. “I feel illuminated about banking, inspired to be efficient and collaborative, connected to other institu- tions, and very honored to have been chosen to attend,” concluded Jerry. 2014 ANNUAL REPORT Page 9 Curtis C. Simard President and Chief Executive Officer Peter Dodge Chairman DEAR FELLOW SHAREHOLDERS, We recognize, appreciate and support the unique people and culture in the places we call home. True to Our Culture—Committed to Performance This describes our approach to evolving and improving our Bank over the past year. The reasoning is rather simple. Our longstanding culture has created a very strong brand that has provided consistent performance over a sustained period of time. Our further commitment to this formula in 2014 provided our ninth consec- utive year of record earnings of $14.6 million and led to our ability to raise our shareholder dividend in each quarter. In April 2014, we announced a stock dividend, which had the same effect as a three-for-two split of our common shares. Our five-year cumulative Total Shareholder Return, or TSR, has exceeded the S&P 500 and the ABA Nasdaq Community Bank Index demonstrating we provide excellent shareholder value. Please see the graph on the following page. Other notable performance metrics from the year we are proud to highlight include: • Average earning asset growth of $75.7 million, led by average loan growth of $42.4 million or 5.1% • An 18 basis point increase in our net interest margin despite a challenging rate environment • A $4.9 million or 11.9% increase in net interest income • Organic growth in core franchise deposits (Demand, NOW and Money Market accounts) totaling $39.9 million or 9.1% • Effective containment of expenses with an efficiency ratio of 54.7% • Comfortable maintenance of the regulatory standards of a “well capitalized” institution on all levels Page 10 BAR HARBOR BANKSHARES 250 200 150 100 50 0 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Bar Harbor Bankshares, the NYSE MKT Composite Index, the S&P 500 Index, and ABA Nasdaq Community Band Index $250 200 150 100 50 0 12/09 12/10 12/11 12/12 12/13 12/14 Bar Harbor Bankshares NYSE MKT Composite S&P 500 ABA Nasdaq Community Bank Index *$100 invested on12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright © 2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. 12/09 12/10 12/11 12/12 12/13 12/14 Bar Harbor Bankshares NYSE MKT Composite S&P 500 ABA Nasdaq Community Bank Index 100.00 100.00 100.00 100.00 109.84 129.56 115.06 113.77 117.78 133.75 117.49 107.15 136.89 140.87 136.30 124.86 168.36 150.79 180.44 175.61 209.07 153.24 205.14 184.04 The stock price performance included in this graph is not necessarily indicative of future stock price performance. Role of the Brand in Our Culture Bar Harbor Bank & Trust is a true community bank. We recognize, appreciate, and support the unique people and culture in the places we call home. We have been committed to this very axiom for decades. Whether openly communicated through our business practices or the mutual respect shown for one another, or demonstrated in the financial and volunteer support of our communities, the Bar Harbor Bank & Trust brand is understood and very much alive. Combining this with the tireless pursuit of increasing performance and shareholder value defines our culture. The result has been strong performance rooted in limited employee turnover by industry standards. A critical benchmark for us is being elected as one of the Best Places to Work in Maine—again the only Maine-based publicly traded company to receive this honor. Our Stars on the Horizon program, discussed throughout, embodies colleagues’ desire to recognize one another’s efforts and encourage the continuation of a very unique culture that is increasingly rare in the very competitive financial services landscape. 2014 ANNUAL REPORT Page 11 Evolution Not Outright Change Entering another year marked by a rather stagnant economy and protracted low interest rate environment, our objective was to remain true to who we are while identifying the necessary enhancements that raise the very high bar by which we measure ourselves. We have been focused on building our franchise around our customers’ needs, honestly assessing where improvement is necessary. Equally important to our identity is the pursuit of a way to better manage risk, turning that ability into a competitive advantage. We must keep reinvesting in our business lines in order to achieve the task of brand and performance preservation. Committed to this approach, we have been able to meet the growing expectations of our many constituents including our shareholders, our customers, and the regulatory community. Given our financial, cultural, and reputation stability over many years, the mission is clear: Evolution not outright change. Aligning Around Our Strategy At the core of our evolution is the dedication to our model of balancing growth with earnings. In order to do so, we repeat what works while being unafraid to address blind spots, or areas that benefit from our atten- tion, as we look to convert them into strengths. To take this to the next level, we have engaged the entire company in realizing that positive employee and customer experiences need to continue to be at the heart of all we do. The outcome is performance for shareholders. Any barriers to this commitment must be removed. We have therefore undertaken strategic initiatives that have added to the depth and strength of our team, creating renewed urgency around deepening existing customer relationships while also attracting new ones through an increasingly aggressive sales culture. This includes leveraging the longstanding Bar Harbor Bank & Trust name in more recently entered markets. Our demonstrated growth in loans and core deposits in 2014 reflects our effectiveness. Alongside the personal delivery that embodies our brand, our commitment to technology has never been stronger. We are keeping decisions local and investing in technology to improve our responsiveness. We are adding products such as mobile platforms to meet the growing demands of our customers. We are exploring new product suites to remain current with changing needs. With compliance and risk management always being non-negotiable items in our strategy, technology must also keep pace to ensure the reliability, safety, and peace of mind our customers deserve. Every person in our company has a role in delivering our strategy and impacts our performance. This unifies our team. True to Our Culture—Committed to Performance. It’s a powerful approach that has served us well, as demon- strated by our consistent performance in the past, and will continue to be our foundation as we continue to grow and evolve in the coming years. On behalf of the Board of Directors and the entire Bar Harbor Bankshares team, it is our privilege to thank you, our shareholders, for your continued confidence and loyalty. Curtis C. Simard President and Chief Executive Officer Peter Dodge Chairman Page 12 BAR HARBOR BANKSHARES Bar Harbor Bankshares SENIOR EXECUTIVE TEAM Standing left to right: Gregory W. Dalton Executive Vice President, Business Banking Marsha C. Sawyer Senior Vice President, Human Resources Daniel A. Hurley, III Senior Vice President, President, Bar Harbor Trust Services (retired 1/15/2015) Gerald Shencavitz Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer Richard Maltz Executive Vice President, Chief Risk Officer Seated left to right: Stephen M. Leackfeldt Executive Vice President, Retail Banking and Operations Cheryl L. Mullen Senior Vice President, Sales and Marketing Marcia T. Bender Senior Vice President, Senior Operations and BSA Officer Curtis C. Simard President and Chief Executive Officer Bar Harbor Bankshares BOARD OF DIRECTORS Standing left to right: Thomas A. Colwell Deer Isle, ME—Vice Chairman of the Board Retired President, Colwell Bros., Inc. Kenneth E. Smith Bar Harbor, ME Owner and Innkeeper of Manor House Inn Peter Dodge Blue Hill, ME—Chairman of the Board President and Insurance Agent, Peter Dodge Agency d/b/a Merle B. Grindle Agency, John R. Crooker Agency, and The Endicott Agency Gregg S. Hannah Surry, ME Chartered Financial Analyst, Past Associate Professor of Business Management at Nichols College Lauri E. Fernald Mt. Desert, ME Certified Funeral Service Practitioner and an Owner in Jordan-Fernald Funeral Home Clyde H. Lewis Sullivan, ME Retired Vice President and General Manager, Morrison Chevrolet, Inc. Scott G. Toothaker Ellsworth, ME Certified Public Accountant Principal and Vice President of Melanson Heath & Co. Martha T. Dudman Northeast Harbor, ME Published Author, Former President of Dudman Communications Joseph M. Murphy Mt. Desert, ME Retired President and Chief Executive Officer of the Company and the Bank Robert C. Carter Machias, ME Owner of Carter Enterprises (Rental Management) and Retired Owner of Machias Motor Inn David B. Woodside Bar Harbor, ME Chief Executive Officer of The Acadia Corporation Seated left to right: Constance C. Shea Mt. Desert, ME Real Estate Broker and Former Owner of Lynam Real Estate Matthew L. Caras Arrowsic, ME Owner in Leaders LLC Curtis C. Simard Mt. Desert, ME President and Chief Executive Officer of the Company and the Bank 2014 ANNUAL REPORT Page 13 FIVE-YEAR SUMMARY OF FINANCIAL DATA The following table sets forth selected data for the last five years. As of and for the Years Ended December 31, (in thousands, except per share data) Balance Sheet Data Total assets Total securities Total loans Allowance for loan losses Total deposits Total borrowings Total shareholders’ equity Average assets Average shareholders’ equity Results of Operations Interest and dividend income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before income taxes Income taxes 2014 2013 2012 2011 2010 $ 1,459,320 470,525 919,024 (8,969) 858,049 447,020 146,287 1,424,209 136,672 $ 1,373,893 450,170 852,857 (8,475) 835,651 409,445 121,379 1,345,353 125,340 $ 1,302,935 418,040 815,004 (8,097) 795,012 371,567 128,046 1,252,390 125,600 $ 1,167,466 381,880 729,003 (8,221) 722,890 320,283 118,250 1,151,163 111,135 $ 1,117,933 357,882 700,670 (8,500) 708,328 300,014 103,608 1,087,327 105,911 $ 53,718 9,905 43,813 1,833 41,980 7,758 29,211 20,527 5,914 $ 50,749 11,663 39,086 1,418 37,668 7,566 26,860 18,374 5,191 $ 50,838 13,867 36,971 1,652 35,319 7,709 25,618 17,410 4,944 $ 50,907 16,518 34,389 2,395 31,994 6,792 23,281 15,505 4,462 $ 51,141 19,432 31,709 2,327 29,382 7,458 22,046 14,794 4,132 Net income $ 14,613 $ 13,183 $ 12,466 $ 11,043 $ 10,662 Preferred stock dividends and accretion of discount — — — — 653 Net income available to common shareholders $ 14,613 $ 13,183 $ 12,466 $ 11,043 $ 10,009 Per Common Share Data: Basic earnings per share Diluted earnings per share Cash dividends per share Dividend payout ratio Selected Financial Ratios: Return on total average assets Return on total average equity Tax-equivalent net interest margin Capital Ratios: Tier 1 leverage capital ratio Tier 1 risk-based capital ratio Total risk-based capital ratio Asset Quality Ratios: Net charge-offs to average loans Allowance for loan losses to total loans Allowance for loan losses to non-performing loans Non-performing loans to total loans $ $ $ $ $ $ 2.47 2.45 0.905 36.69% 1.03% 10.69% 3.33% 9.30% 15.60% 17.24% 0.15% 0.98% 73.0% 1.34% 2.24 2.22 0.833 37.28% 0.98% 10.52% 3.15% 9.01% 14.97% 16.62% 0.12% 0.99% 95.9% 1.04% $ $ $ $ $ $ 2.13 2.12 0.780 36.62% $ $ $ 1.91 1.90 0.730 38.29% 1.00% 9.93% 3.23% 8.87% 14.15% 15.78% 0.23% 0.99% 82.1% 1.21% 0.96% 9.94% 3.23% 9.32% 14.29% 16.06% 0.37% 1.13% 63.7% 1.77% 1.76 1.74 0.697 39.43% 0.98% 10.07% 3.18% 9.01% 13.57% 15.41% 0.24% 1.21% 62.1% 1.95% All share and per share amounts have been adjusted to reflect the effect of the 3-for-2 stock split (dividend) during May 2014. Refer to the Bar Harbor Bankshares 2014 Annual Report on Form 10-K for a complete set of audited financial statements and accompanying notes. Page 14 BAR HARBOR BANKSHARES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Bar Harbor Bankshares: We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Bar Harbor Bankshares and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014 (not presented herein); and in our report dated March 16, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial state- ments is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. Boston, Massachusetts March 16, 2015 2014 ANNUAL REPORT Page 15 CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) Assets Cash and cash equivalents Securities available for sale, at fair value (amortized cost of $458,370 and $461,635, respectively) Federal Home Loan Bank stock Loans Allowance for loan losses Loans, net of allowance for loan losses Premises and equipment, net Goodwill Bank owned life insurance Other assets TOTAL ASSETS Liabilities Deposits: Demand and other non-interest bearing deposits NOW accounts Savings and money market deposits Time deposits Total deposits Short-term borrowings Long-term advances from Federal Home Loan Bank Junior subordinated debentures Other liabilities TOTAL LIABILITIES Shareholders’ equity Capital stock, par value $2.00; authorized 10,000,000 shares; issued 6,788,407 shares at December 31, 2014 and December 31, 2013 Surplus Retained earnings Accumulated other comprehensive (loss) income: Prior service cost and unamortized net actuarial losses on employee benefit plans, net of tax of ($251) and ($192), at December 31, 2014 and December 31, 2013, respectively Net unrealized appreciation (depreciation) on securities available for sale, net of tax of $3,997 and ($4,150), at December 31, 2014 and December 31, 2013, respectively Portion of OTTI attributable to non-credit gains, net of tax of $257 and $252, at December 31, 2014 and December 31, 2013, respectively Net unrealized depreciation on derivative instruments, net of tax of $389 and $0, at December 31, 2014 and December 31, 2013, respectively Total accumulated other comprehensive income (loss) Less: cost of 842,082 and 879,840 shares of treasury stock at December 31, 2014 and December 31, 2013, respectively TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY December 31, 2014 December 31, 2013 $ 9,800 470,525 21,354 919,024 (8,969) 910,055 20,518 4,935 8,141 13,992 $ 9,200 450,170 18,370 852,857 (8,475) 844,382 20,145 4,935 7,879 18,812 $ 1,459,320 $ 1,373,893 $ 78,802 153,499 247,685 378,063 858,049 313,520 128,500 5,000 7,964 $ 72,259 135,246 232,558 395,588 835,651 312,945 91,500 5,000 7,418 1,313,033 1,252,514 13,577 20,905 113,149 13,577 20,559 103,907 (488) 7,423 478 (722) 6,691 (373) (8,055) 488 — (7,940) (8,035) 146,287 (8,724) 121,379 $ 1,459,320 $ 1,373,893 All share and per share amounts have been adjusted to reflect the effect of the 3-for-2 stock split (dividend) during May 2014. Refer to the Bar Harbor Bankshares 2014 Annual Report on Form 10-K for a complete set of audited financial statements and accompanying notes. Page 16 BAR HARBOR BANKSHARES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data) Interest and dividend income: Interest and fees on loans Interest on securities Dividend on FHLB stock Total interest and dividend income Interest expense: Deposits Short-term borrowings Long-term debt Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income: Trust and other financial services Service charges on deposit accounts Debit card service charges and fees Net securities gains Total other-than-temporary impairment (“OTTI”) losses Non-credit portion of OTTI losses (before taxes)(1) Net OTTI losses recognized in earnings Other operating income Total non-interest income Non-interest expense: Salaries and employee benefits Occupancy expense Furniture and equipment expense Credit and debit card expenses FDIC insurance assessments Other operating expense Total non-interest expense Income before income taxes Income taxes Net income Computation of Earnings Per Share: Weighted average number of capital stock shares outstanding Basic Effect of dilutive employee stock options Diluted Per Common Share Data: Basic earnings per share Diluted earnings per share Years Ended December 31, 2014 2013 2012 $37,739 15,689 290 $37,223 13,457 69 $36,579 14,173 86 53,718 50,749 50,838 5,894 667 3,344 9,905 43,813 1,833 41,980 3,976 1,151 1,584 403 — — — 644 7,758 16,836 2,143 2,166 429 699 6,938 29,211 20,527 5,914 6,616 487 4,560 11,663 39,086 1,418 37,668 3,634 1,248 1,572 676 (359) 110 (249) 685 7,566 15,227 1,968 2,005 384 696 6,580 26,860 18,374 5,191 7,707 436 5,724 13,867 36,971 1,652 35,319 3,278 1,196 1,462 1,938 (1,170) 317 (853) 688 7,709 14,027 1,682 1,778 367 853 6,911 25,618 17,410 4,944 $14,613 $13,183 $12,466 5,926,387 49,877 5,898,077 30,363 5,851,677 27,977 5,976,264 5,928,440 5,879,654 $ 2.47 $ 2.24 $ 2.13 $ 2.45 $ 2.22 $ 2.12 (1) Included in other comprehensive income, net of taxes All share and per share amounts have been adjusted to reflect the effect of the 3-for-2 stock split (dividend) during May 2014. Refer to the Bar Harbor Bankshares 2014 Annual Report on Form 10-K for a complete set of audited financial statements and accompanying notes. 2014 ANNUAL REPORT Page 17 2014 FINANCIAL OVERVIEW (unaudited) Non-Interest Income ($ in thousands) 50000 40000 6,000 $8,000 $7,758 BUSINESS STRATEGY NON-INTEREST INCOME As a diversified financial services provider, Bar Harbor ($ in thousands) Bankshares pursues a strategy of achieving long-term sustainable growth, profitability, and shareholder value, without sacrificing its soundness. The Company works toward achieving these goals by focusing on increasing its loan and deposit market share in downeast, midcoast and central Maine. The Company believes one of its more unique strengths is an understanding of the financial needs of coastal communities and the businesses vital to Maine’s coastal economy, namely: tourism, hospitality, retail establishments, restaurants, seasonal lodging and campgrounds, fishing, lobstering, boat building, and marine services. 2,000 4,000 10000 20000 30000 0 0 ’10 ’13 ’12 ’11 ’14 Tax-Equivalent Net Interest Income ($ in thousands) 1.5 12% 10.69% Operating under a community banking philosophy, the Company’s key strategic focus is vigorous financial stew- ardship, deploying investor capital safely, yet efficiently, RETURN ON AVERAGE EQUITY for the best possible returns. The Company strives to provide unmatched service to its customers, while main- taining strong asset quality and a focus toward improv- ing operating efficiencies. In managing its earning asset portfolios, the Company seeks to utilize funding and capital resources within well-defined credit, investment, interest-rate and liquidity guidelines. In managing its bal- ance sheet, the Company seeks to preserve the sensitivity of net interest income to changes in interest rates, and to enhance profitability through strategies that promise sufficient reward for understood and controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity under prevailing and expected conditions, and ’11 strives to maintain a balanced and appropriate mix of loans, securities, core deposits, and borrowed funds. Return on Average Assets ’12 ’10 ’13 ’14 0 6 0.0 0.5 1.0 Return on Average Equity 8000 6000 4000 2000 0 12 6 0 NON-INTEREST INCOME ($ in thousands) RESULTS OF OPERATIONS TAX-EQUIVALENT For the year ended December 31, 2014, the Company NET INTEREST INCOME ($ in thousands) reported record net income of $14.6 million, represent- ing an increase of $1.4 million, or 10.8%, compared with $50,000 2013. The Company also reported record diluted earnings per share of $2.45 for 2014, representing an increase of $0.23, or 10.4%, compared with 2013. The Company’s 2014 earnings performance featured a significant increase in net interest income, higher levels of fee income, and an improved efficiency ratio. $45,698 $7,758 30,000 $8,000 20,000 40,000 6,000 4,000 2,000 10,000 The Company’s return on average shareholders’ equity amounted to 10.69% in 2014, up from 10.52% in 2013. The Company’s 2014 return on average assets amounted 0 ’12 to 1.03%, up from 0.98% in 2013. ’10 ’11 ’12 ’13 ’14 ’13 ’10 ’11 ’14 0 TAX-EQUIVALENT NET INTEREST INCOME ($ in thousands) $45,698 $50,000 40,000 30,000 20,000 10,000 0 RETURN ON AVERAGE ASSETS RETURN ON AVERAGE EQUITY RETURN ON AVERAGE ASSETS 1.5% 12% 10.69% 1.0 0.5 0 1.03% 6 0 1.5% 1.0 0.5 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 1.03% NET INCOME ($ in thousands) NET INCOME ($ in thousands) DILUTED EARNINGS PER SHARE DILUTED EARNINGS PER SHARE 15000 15000 1000 1000 $15,000 $15,000 $14,613 $14,613 $2.50 $2.45 $2.50 800 600 400 200 0 800 600 400 200 0 10,000 10,000 5,000 5,000 0 ’10 ’11 ’12 ’13 0 ’14 ’10 ’11 ’12 ’13 ’14 2.00 1.50 1.00 0.50 0 2.00 1.50 1.00 0.50 0 ’13 ’10 ’11 ’12 ’14 ’10 ’11 ’12 DEPOSITS ($ millions) Net Interest Income: Net interest income is the principal component of the Company’s income stream and rep- resents the difference or spread between interest gener- ated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in market interest rates, as well as volume and mix changes in earn- ing assets and interest bearing liabilities, can materially 800 impact net interest income. DEPOSITS ($ millions) $2.45 $858 $858 $1,000 $1,000 800 400 600 400 For the year ended December 31, 2014, net interest 600 income on a tax-equivalent basis amounted to $45.7 million, compared with $40.8 million in 2013, represent- ing an increase of $4.9 million, or 11.9%. The increase in net interest income was principally attributed to average earning asset growth of $75.7 million or 5.8%, combined with an eighteen basis point improvement in the net 0 ’14 ’13 interest margin to 3.33%. The increase in the net interest margin was principally attributed to a twenty basis point decline in the weighted average cost of interest bearing 200 200 ’14 ’13 ’12 ’11 ’10 ’14 ’10 ’11 ’12 ’13 0 SECURITIES ($ in millions) SECURITIES ($ in millions) Page 18 BAR HARBOR BANKSHARES ALLOWANCE FOR LOAN LOSSES ($ in thousands) ALLOWANCE FOR LOAN LOSSES ($ in thousands) PROVISION FOR LOAN LOSSES ($ in thousands) PROVISION FOR LOAN LOSSES ($ in thousands) $500 400 300 200 100 0 $500 $471 $471 $10,000 $10,000 $2,500 $2,500 400 300 200 100 0 8,000 6,000 4,000 2,000 0 8,000 6,000 4,000 2,000 0 2,000 1,500 1,000 500 0 2,000 $1,833 $1,833 1,500 1,000 500 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 50000 40000 30000 20000 10000 0 1.5 1.0 0.5 0.0 Non-Interest Income ($ in thousands) Tax-Equivalent Net Interest Income ($ in thousands) Return on Average Equity Return on Average Assets 8000 6000 4000 2000 0 12 6 0 2.5 2.0 1.5 1.0 0.5 0.0 8000 6000 4000 2000 0 Net Income Available Net Income Available to Common Shareholders to Common Shareholders Diluted Earnings Diluted Earnings per Share per Share ($ in thousands) ($ in thousands) Deposits ($ in millions) Deposits ($ in millions) 10000 10000 5000 5000 0 0 500 400 300 200 100 0 500 400 300 200 100 0 2.5 2.0 1.5 1.0 0.5 0.0 8000 6000 4000 2000 0 10000 10000 2500 2000 1500 1000 500 0 2500 2000 1500 1000 500 0 Securities ($ in millions) Securities ($ in millions) Allowance for Loan Losses ($ in thousands) Allowance for Provision for Loan Losses Loan Losses ($ in thousands) ($ in thousands) Provision for Loan Losses ($ in thousands) NET CHARGE-OFFS TO AVERAGE LOANS NON-PERFORMING LOANS TO TOTAL LOANS NET CHARGE-OFFS LOANS TO AVERAGE LOANS ($ millions) NON-PERFORMING LOANS TO TOTAL LOANS LOANS ($ millions) 2.0% 0.40% $1,000 $919 2.0% $1,000 $919 1.34% 1.34% 1000 800 600 0.15% 400 200 ’10 ’11 ’12 0 ’13 ’14 Loans ($ in millions) 1.5 1.0 0.5 0 ’10 ’11 ’12 ’13 ’14 0.35 0.30 0.25 0.20 0.15 0.10 0.5 0 800 600 400 0.15% 200 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 1.5 1.0 0.5 0 60% 50 40 30 20 10 0 800 600 400 200 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 EFFICIENCY RATIO NON-INTEREST EXPENSE ($ in thousands) $29,211 54.7% $35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 NON-INTEREST EXPENSE ($ in thousands) $29,211 $35,000 $1,459 30,000 25,000 20,000 15,000 10,000 5,000 0 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’11 0 0 ’14 ’13 ’12 ’11 ’10 ’14 30 50 20 10 40 750 450 150 900 600 300 60% 1,050 1,350 1,500 1,200 $1,650 54.7% $1,459 EFFICIENCY RATIO ASSETS ($ in millions) Non-Interest Expense ($ in thousands) liabilities to 0.82%, as the weighted average earning asset yield of 4.05% was unchanged compared with 2013. While the weighted average loan yield declined fifteen basis points to 4.31% in 2014, this decline was off- set by a twenty-eight basis point increase in securities yields to 3.69%, as higher long-term interest rates and slowing mortgage refinance activity over this past year caused the amortization of mortgage-backed security purchase premiums to slow. Non-interest Income: 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. Non-interest income is principally derived from financial services including trust, investment man- ’10 agement and brokerage activities, as well as service charges on deposit accounts, credit and debit card proc- essing fees, net securities gains, and a variety of other product and service fees. ASSETS ($ in millions) $1,650 1,500 1,350 1,200 1,050 900 750 600 450 300 150 0 Assets ($ in millions) Efficiency Ratio Assets Non-Interest Expense ($ in millions) ($ in thousands) ’10 ’11 ’12 Efficiency Ratio 35000 30000 25000 20000 15000 10000 5000 0 ’13 0.40% 0.35 0.30 0.25 0.20 0.15 0.10 0.5 0 Net Charge-Offs to Average Loans Non-Performing Loans to Total Loans Loans ($ in millions) Net Charge-Offs to Average Loans Non-Performing Loans to Total Loans 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1650 1500 1350 1200 1050 900 750 600 450 300 150 0 8000 6000 4000 2000 0 12 6 0 2.0 1.5 1.0 0.5 0.0 60 50 40 30 20 10 0 50000 40000 30000 20000 10000 0 1.5 1.0 0.5 0.0 1000 800 600 400 200 0 35000 30000 25000 20000 15000 10000 5000 0 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1650 1500 1350 1200 1050 900 750 600 450 300 150 0 8000 6000 4000 2000 0 12 6 0 2.0 1.5 1.0 0.5 0.0 60 50 40 30 20 10 0 6,000 4,000 2,000 0 12% 6 0 40000 30000 20000 10000 1.5 1.0 0.5 0.0 For the year ended December 31, 2014, total non-interest income amounted to $7.8 million, representing an increase of $192 thousand, or 2.5%. The increase in non-interest income was principally attributed to a $342 thousand, or 9.4% increase in trust and other financial services fees compared with 2013. This increase was principally attributed to higher levels of fee income from retail bro- kerage activities as well as increases in the value of assets under management. Partially offsetting the foregoing increase was a $97 thousand or 7.8% decline in service charges on deposits, reflecting lower levels of customer overdraft activity. Total realized securities gains, net of other-than-temporary impairment losses, amounted to $403 in 2014, representing a decline of $24 thousand, or 5.6%, compared with 2013. TAX-EQUIVALENT NET INTEREST INCOME ($ in thousands) NON-INTEREST INCOME ($ in thousands) $45,698 $8,000 $7,758 6,000 4,000 2,000 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 $50,000 40,000 30,000 20,000 10,000 0 NON-INTEREST INCOME ($ in thousands) $8,000 50000 $7,758 Non-Interest Income ($ in thousands) Tax-Equivalent Net Interest Income ($ in thousands) Non-Interest Income ($ in thousands) ’10 0 ’11 ’12 ’13 ’14 Tax-Equivalent Net Interest Income ($ in thousands) RETURN ON AVERAGE EQUITY RETURN ON AVERAGE ASSETS RETURN ON AVERAGE EQUITY RETURN ON AVERAGE ASSETS 2014 ANNUAL REPORT Page 19 10.69% 1.5% 12% 10.69% 1.5% 1.0 0.5 0 1.03% 1.03% 1.0 0.5 0 6 0 Return on Average Equity Return on Average Assets Return on Average Equity ’10 ’11 ’12 ’13 ’14 Return on Average Assets ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 Non-interest Expense: For the year ended December 31, 2014, total non-interest expense amounted to $29.2 mil- lion, up $2.4 million, or 8.8%, compared with 2013. The increase in non-interest expense was largely attributed to a $1.6 million, or 10.6%, increase in salaries and employee benefits. The increase in salaries and employee benefits was attributed to a variety of factors including normal increases in base salaries, higher levels of employee incen- tive compensation, higher levels of employee health insurance, lower levels of deferred loan origination costs, as well as increases in staffing levels and strategic changes in staffing mix. Total other operating expenses amounted to $6.9 million in 2014, up $358 thousand, or 5.4%, com- pared with 2013. This increase largely reflected higher levels of loan collection and other real estate owned expenses. TAX-EQUIVALENT NET INTEREST INCOME ($ in thousands) Efficiency Ratio: The Company’s efficiency ratio, or non- interest operating expenses divided by the sum of tax- equivalent net interest income and non-interest income other than net securities gains and other-than-temporary impairments, measures the relationship of operating expenses to revenues. Low efficiency ratios are typically a key factor for high performing financial institutions. For the year ended December 31, 2014, the Company’s efficiency ratio amounted to 54.7%, compared with 55.6% in 2013. These ratios compared favorably to peer and industry averages. $45,698 $50,000 40,000 30,000 10,000 20,000 Income Taxes: For the year ended December 31, 2014, total income taxes amounted to $5.9 million, represent- ing an increase of $723 thousand, or 13.9%, compared with 2013. The Company’s effective tax rate amounted to 28.8% in 2014, compared with 28.3% in 2013. Fluctuations ’13 in the Company’s effective tax rate are generally attributed to increases in the level of non-taxable income in relation to taxable income. ’11 ’12 ’14 ’10 0 Net Charge-Offs to Average Loans Non-Performing Loans to Total Loans Loans ($ in millions) NET CHARGE-OFFS TO AVERAGE LOANS 2.0 1.5 1.0 0.5 0.0 60 50 40 30 10 0 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1650 1500 1350 1200 1050 900 750 600 450 150 0 1000 800 600 400 0 300 200 35000 30000 25000 20000 15000 10000 5000 0 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1650 1500 1350 1200 1050 900 750 600 450 300 150 0 1000 800 600 400 200 0 0.40% 35000 0.35 30000 0.30 25000 0.25 20000 0.20 15000 0.10 5000 0.5 0 0 $1,650 1,500 1,350 1,200 1,050 900 750 600 450 300 150 0 2.0 1.5 1.0 0.5 0.0 60 50 40 30 20 10 0 1000 800 600 400 200 0 30000 25000 20000 15000 10000 5000 0 ’10 ’11 ’12 ’13 ’14 Non-Interest Expense 35000 ($ in thousands) ASSETS ($ in millions) $1,459 Net Charge-Offs 20 to Average Loans Non-Performing 0.15 Loans to Total Loans 10000 Loans 0.15% ($ in millions) 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1650 1500 1350 1200 1050 900 750 600 450 300 150 0 2.0 1.5 1.0 0.5 0.0 60 50 40 30 20 10 0 Net Charge-Offs to Average Loans Non-Performing Loans to Total Loans Assets Loans ($ in millions) ($ in millions) Efficiency Ratio 1650 1500 1350 1200 1050 900 750 600 450 300 150 0 Assets ($ in millions) Efficiency Ratio Non-Interest Expense Assets ($ in millions) ($ in thousands) 60% 50 40 30 20 10 0 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 2.0% 1.5 1.0 FINANCIAL CONDITION Assets: At December 31, 2014, the Company’s total assets ended the year at $1.46 billion, representing an increase of $85.4 million, or 6.2%, compared with year end 2013. The increase in total assets was led by loan growth and, to a lesser extent, an increase in the Bank’s investment securities portfolio. NET CHARGE-OFFS TO AVERAGE LOANS 0.25 0.35 0.30 2.0% 0.40% Loans: Consumer loans, which principally consisted of residential real estate mortgage loans and home equity loans, comprised 48.6% of the Bank’s total loan portfolio at December 31, 2014. The Bank also serves the small business market throughout downeast, midcoast and central Maine. It offers business loans to individuals, partnerships, corporations, and other business entities for capital construction, real estate purchases, working capital, real estate development, and a broad range of NET CHARGE-OFFS other business purposes. At December 31, 2014, commer- TO AVERAGE LOANS cial business loans represented 49.6% of the Bank’s total ’11 ’11 loan portfolio. 0.15% 0.10 0.20 0.15 0.5 0.5 1.5 1.0 ’10 ’13 ’14 ’10 ’12 0 0 2.0 0.40% 1000 NON-PERFORMING LOANS TO TOTAL LOANS LOANS ($ millions) were largely offset with certain, sizable loan payoffs as well as scheduled principal amortization from the portfolio. Commercial loan growth has been generally challenged by economic and political uncertainty, a still-struggling economy and strong competition for quality loans. Credit Quality: Total non-performing loans ended the year at $12.3 million, representing an increase of $3.4 mil- lion compared with December 31, 2013. One residential $1,000 real estate mortgage loan, which was placed in non- accrual status in the fourth quarter, represented 73.5% 800 of this increase. Despite the increase in non-performing loans, the Bank does not believe it is reflective of credit 600 deterioration in the loan portfolio as a whole. 1.34% $919 NON-PERFORMING LOANS TO TOTAL LOANS ’12 ’13 ’14 2.0% 400 200 0 LOANS NET CHARGE-OFFS TO AVERAGE LOANS ($ millions) ’10 ’11 ’12 ’13 ’14 0.40% 0.35 0.30 1.34% NON-INTEREST EXPENSE ($ in thousands) 0.25 600 ASSETS NON-PERFORMING LOANS TO TOTAL LOANS ($ in millions) 1.5 0.35 0.30 0.25 0.20 800 LOANS ($ millions) 600 EFFICIENCY RATIO 0.15 $1,459 $1,000 0.15% 400 60% $919 1.5 1.0 54.7% $1,650 1,500 1,350 1,200 1,050 900 750 600 450 300 150 0 ’12 1.0 0.5 1.34% 0.0 0.10 0.5 0 800 600 200 0 ’10 ’11 ’12 ’13 ’14 400 200 0 Non-Performing Loans to Total Loans ASSETS ($ in millions) ’13 ’10 ’14 ’11 ’12 60 50 ’14 ’13 $1,650 1,500 1,350 50 40 30 Loans ($ in millions) 20 10 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 35000 $1,459 30000 Net Charge-Offs to Average Loans 0.5 0 ’10 ’11 EFFICIENCY RATIO 40 30 25000 20000 750 900 1,050 1,200 54.7% Total loans ended the year at $919.0 million, up $66.2 NON-INTEREST EXPENSE million, or 7.8%, compared with December 31, 2013. Con- ($ in thousands) sumer loans, which principally consist of residential real estate mortgages, ended the year at $446.6 million, up $65.4 million or 17.2% compared with December 31, 2013. $29,211 This increase was principally attributed to purchased res- idential mortgage loans, as loans originated and closed by the Bank were largely offset by principal pay-downs ’11 from the existing residential real estate portfolio. 20,000 ’12 $35,000 25,000 30,000 300 600 150 450 ’13 ’10 ’14 10000 15000 5000 0 10 20 0 0 Efficiency Ratio 15,000 At year end, the Bank’s commercial loan portfolio stood at $455.7 million, unchanged, compared with December 31, 2013. During 2014, new commercial loan originations 10,000 5,000 Non-Interest Expense ($ in thousands) 0 0.5 0 ’10 ’11 ’12 ’13 ’14 400 0.15% $29,211 200 0 ’12 ’10 ’11 ’13 ’10 ’14 ’11 ’12 ’13 ’14 0.20 0.15 0.10 0.5 0 $35,000 30,000 25,000 20,000 15,000 10,000 NON-INTEREST EXPENSE ($ in thousands) ’14 ’13 60% EFFICIENCY RATIO ASSETS ($ in millions) Total net loan charge-offs amounted to $1.3 million in 5,000 2014, or net charge-offs to average loans outstanding 0 of 0.15%, up from $1.0 million and 0.12%, respectively, compared with 2013. The Bank recorded a provision $1,459 for loan losses of $1.8 million in 2014, representing an increase of $415 thousand compared with 2013. The increase in the provision largely reflected elevated levels of loan loss experience and, to a lesser extent, increases in non-performing and other potential problem loans. ’10 $1,650 54.7% $35,000 25,000 30,000 20,000 1,200 1,500 1,350 1,050 900 40 50 30 ’11 ’12 ’13 ’14 $29,211 750 600 15,000 20 10 450 10,000 At December 31, 2014, the Bank’s allowance for loan losses stood at $9.0 million, representing an increase of $494 thousand or 5.8% compared with year end 2013. The allowance for loan losses expressed as a percentage ’12 of total loans ended the year at 0.98%, compared with 0.99% at year end 2013. 5,000 0 ’12 300 150 ’11 ’10 ’11 ’12 ’13 ’14 ’10 ’10 ’11 ’13 ’14 0 0 $1,000 800 $919 2.0% $1,000 $919 NON-PERFORMING LOANS TO TOTAL LOANS LOANS ($ millions) 1.34% ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 EFFICIENCY RATIO NON-INTEREST EXPENSE ($ in thousands) 54.7% $29,211 800 600 400 200 0 $35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1.5 1.0 0.5 0 60% 50 40 30 20 10 0 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 Assets ($ in millions) Efficiency Ratio Non-Interest Expense ($ in thousands) ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 Page 20 BAR HARBOR BANKSHARES NET INCOME ($ in thousands) DILUTED EARNINGS PER SHARE NET INCOME ($ in thousands) DEPOSITS ($ millions) DILUTED EARNINGS PER SHARE NET INCOME DEPOSITS ($ in thousands) ($ millions) DILUTED EARNINGS PER SHARE DEPOSITS ($ millions) $14,613 1000 15000 $2.45 2.5 $15,000 $14,613 $1,000 1000 $2.45 $15,000 $1,000 $2.45 $1,000 800 600 400 200 0 ’12 ’13 $858 800 600 400 200 0 ’14 ’10 ’11 ’12 ’13 ’14 Deposits ($ in millions) $2.50 2.00 1.50 1.00 0.50 0 $14,613 $858 10,000 5,000 800 600 400 200 ’10 ’11 ’12 ’13 ’14 0 0 ’10 ’11 ’12 ’10 ’13 ’11 ’14 ’12 ’13 ’14 $2.50 2.00 1.50 1.00 0.50 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 Diluted Earnings per Share 15000 10000 $500 2.5 2500 $471 $10,000 1000 10000 $500 $2,500 $471 2500 $15,000 ALLOWANCE FOR LOAN LOSSES ($ in thousands) SECURITIES ($ in millions) PROVISION FOR LOAN LOSSES ($ in thousands) NET INCOME ($ in thousands) ALLOWANCE FOR LOAN LOSSES ($ in thousands) DILUTED EARNINGS PER SHARE SECURITIES ($ in millions) PROVISION FOR LOAN LOSSES ($ in thousands) DEPOSITS ($ millions) ALLOWANCE FOR LOAN LOSSES ($ in thousands) PROVISION FOR LOAN LOSSES ($ in thousands) $500 $2.45 $2,500 $471 $1,000 $10,000 $14,613 $10,000 8,000 6,000 4,000 2,000 0 $1,833 2,000 2000 10,000 1,500 1500 1,000 1000 5,000 500 500 0 0 0 ’11 ’10 ’12 ’14 ’10 Provision for Loan Losses ($ in thousands) $2.50 2.00 1.50 1.00 0.50 0 400 2,000 300 1,500 200 1,000 100 500 $1,833 800 $858 8,000 6,000 4,000 2,000 0 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 600 400 200 0 ’10 ’11 ’12 ’13 ’13 ’11 ’14 ’12 ’13 ’14 ’10 ’11 ’12 ’13 ’14 ’10 ’11 0 ’12 0 ’14 ’11 ’13 ’10 ’12 ’10 ’13 ’11 ’14 ’12 ’13 ’14 $858 $1,833 800 600 400 200 0 $2,500 2,000 1,500 1,000 500 0 0 10,000 5,000 Net Income Available to Common Shareholders ($ in thousands) Diluted Earnings per Share Net Income Available Deposits to Common Shareholders ($ in millions) ($ in thousands) Diluted Earnings per Share 0 ’10 ’11 ’12 ’13 0 ’14 Deposits ($ in millions) Net Income Available to Common Shareholders ($ in thousands) ’10 ’11 ’12 ’13 2.0 1.5 1.0 0.5 0.0 ’14 15000 10000 5000 0 500 400 300 200 100 0 2.5 2.0 1.5 1.0 0.5 0.0 10000 8000 6000 4000 2000 0 1000 15000 800 10000 600 400 5000 200 0 0 500 400 300 200 100 0 2500 2000 1500 1000 500 0 2.5 2.0 1.5 1.0 0.5 0.0 8000 6000 4000 2000 10000 5000 500 400 300 200 100 0 $2.50 2.00 1.50 1.00 0.50 0 8,000 800 6,000 600 4,000 400 2,000 200 0 0 $15,000 10,000 5,000 800 600 400 200 SECURITIES ($ in millions) 2.0 2000 1.5 1500 1.0 1000 0.5 500 400 300 200 100 0 10000 8000 6000 4000 2000 0 10000 5000 0 500 400 300 200 100 0 2500 2000 1500 1000 500 0 Securities ($ in millions) Allowance for Loan Losses ($ in thousands) Provision for Loan Losses ($ in thousands) Securities ($ in millions) Allowance for Loan Losses ($ in thousands) Provision for Loan Losses ($ in thousands) Securities ($ in millions) 0 0 Net Income Available Allowance for to Common Shareholders Loan Losses ($ in thousands) ($ in thousands) 0.0 0 ’11 ’10 ’12 ’13 ’14 Diluted Earnings Provision for per Share Loan Losses ($ in thousands) ’10 ’11 ’12 ’13 Securities ($ in millions) Deposits ($ in millions) 0 0 ’14 Allowance for Loan Losses ($ in thousands) 8000 6000 4000 2000 400 300 200 100 400 $500 $471 SECURITIES ($ in millions) Investment Securities: During 2014, the securities port- folio continued to serve as a key source of earning assets and liquidity for the Bank. Bank management considers securities as a relatively attractive means to effectively $10,000 leverage the Bank’s strong capital position, as securities are typically assigned a significantly lower risk weight- 8,000 ing for the purpose of calculating the Bank’s and the Company’s risk-based capital ratios. The overall objectives 6,000 of the Bank’s strategy for the securities portfolio include maintaining appropriate liquidity reserves, diversifying 4,000 earning assets, managing interest rate risk, leveraging 2,000 the Bank’s strong capital position, generating acceptable levels of net interest income and, when appropriate, generating realized gains on the sale of securities. ’13 100 200 300 ’10 ’11 ’12 ’14 0 0 At December 31, 2014, total investment securities amounted to $470.5 million, representing an increase of $20.4 million, or 4.5%, compared with year end 2013. The securities portfolio is comprised of mortgage- backed securities issued by U.S. Government agencies, U.S. Government-sponsored enterprises, and other non- agency, private-label issuers. The securities portfolio also includes tax-exempt obligations of states and political subdivisions thereof. ALLOWANCE FOR LOAN LOSSES ($ in thousands) Deposits: During 2014, the most significant funding source for the Bank’s earning assets continued to be retail deposits, gathered through its network of fifteen banking offices throughout downeast, midcoast and central Maine. PROVISION FOR LOAN LOSSES ($ in thousands) $2,500 2,000 $1,833 Total deposits ended the year at $858.0 million, up $22.4 million, or 2.7%, compared with December 31, 2013. Demand, NOW and money market accounts combined were up $39.9 million or 9.1%, while time deposits declined $17.5 million, or 4.4%. The decline in time deposits was attributed to lower levels of brokered deposits compared with year end 2013. 1,500 1,000 500 ’10 0 ’13 ’12 ’11 ’10 ’14 ’13 ’12 ’11 Borrowings: Borrowed funds principally consist of ’14 advances from the Federal Home Loan Bank of Boston. The Bank utilizes borrowed funds in leveraging its strong capital position and supporting its earning asset port- folios. 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. Total borrowings ended the year at $447.0 million, representing an increase of $37.6 million, or 9.2%, compared with December 31, 2013. The increase in bor- rowings was utilized to help support the Bank’s 2014 earning asset growth. 2014 ANNUAL REPORT Page 21 Shareholder Dividends: During 2014 the Company paid regular cash dividends on its common stock in the aggre- gate amount of $5.36 million, compared with $4.92 mil- lion in 2013. The Company’s 2014 dividend payout ratio amounted to 36.7%, compared with 37.3% in 2013. The total regular cash dividends paid in 2014 amounted to $0.905 per share of common stock, compared with $0.833 per share in 2013, representing an increase of 0.072 cents per share, or 8.6%. The Company’s Board of Directors declared a first quar- ter 2015 regular cash dividend of 24.5 cents per share of common stock, representing an increase of 2.83 cents or 13.1% compared with the first quarter of 2014. This represented the thirteenth consecutive quarter where the Company increased its quarterly cash dividend to shareholders. Based on the year-end 2014 price of BHB’s common stock of $32.00 per share, the dividend yield amounted to 3.06%. Capital: Consistent with its long-term strategy of operat- ing a sound and profitable organization, at December 31, 2014, the Company and the Bank continued to exceed regulatory requirements for “well-capitalized” financial institutions. Company management considers this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth. Under the capital adequacy guidelines administered by the Bank’s principal regulators, “well-capitalized” institutions are those with Tier I leverage, Tier I Risk-based, and Total Risk-based ratios of at least 5%, 6% and 10%, respectively. At December 31, 2014, the Company’s Tier I Leverage, Tier I Risk-based, and Total Risk-based capital ratios were 9.30%, 15.60% and 17.24%, respectively. Three-for-Two Stock Split: As previously announced, the Company’s Board of Directors declared a three-for-two split of its common stock, payable as a large stock divi- dend, which was paid on May 19, 2014 to all stockholders of record at the close of business on May 5, 2014. Prior to the three-for-two stock split as a large stock dividend, the Company had approximately 3,944,290 shares of common stock outstanding. After the stock split, the number of shares of Company common stock outstand- ing increased to approximately 5,916,435. All previously reported share and per share data included in public fil- ings subsequent to the payment date have been restated to reflect the retroactive effect of this three-for-two stock split. Page 22 BAR HARBOR BANKSHARES Bar Harbor Bankshares MANAGEMENT AND STAFF SENIOR EXECUTIVE TEAM Curtis C. Simard,** President & Chief Executive Officer Gerald Shencavitz,** Executive Vice President, Chief Financial Officer and Treasurer Marcia T. Bender Senior Vice President, Senior Operations and BSA Officer Gregory W. Dalton,* Executive Vice President, Business Banking Robert P. Gerseny, JD (effective 2/2/2015) Senior Vice President, President, Bar Harbor Trust Services Stephen M. Leackfeldt,* Executive Vice President, Retail Banking and Operations Richard Maltz* Executive Vice President and Chief Risk Officer Cheryl L. Mullen Senior Vice President Sales and Marketing Marsha C. Sawyer Senior Vice President Human Resources EMPLOYEES AS OF 3/7/2015 Abbott, Gwen M. Abbott, Jennifer C. Albee, Susan L. Allen, Andrea L. Allen, Deena M. Allen, Faye M. Allen, Maryann G. Alley, Stacie J. Anderson, Judi L. Andrews, Holly M. Archer, Holly J. Austin, Vicki J. Bailey, Karri A. Bannister, Michelle R. Barton, Hannah R. Bates-Mitchell, Kristi L. Baudanza, Erin F. Beal, Charleen L. Beal, Jenna M. Beal, Karen C. Benn, Lorraine M. Beyer, Leslie M. Blackburn, Sarah E. Blake, Heidi L. Boudreau, Alain R. Bowden, Melanie J. Bowker, Rose A. Boynton, Lori C. Brackett, Heather R. Brady, Penny S. Brown, Heather L. Bryer, Katy A. Caouette, Marian R. Carter, Hillary A. Cohen, David S. Colson, Theresa L. Colwell, Brenda B. Condon, Brenda J. Conner, Erin S. Coombs, April E. Cormier, Sarah A. Crandall, Kevin J. Crippen, Melinda A. Cummings, Debbie B. Curativo, Pamela L. Curtis, Jacqueline M. Curtis, Michelle E. Damon, Deidra M. Davis, Sharon J. Denis, Darcie L. Doak, Lori L. Dow, Candice M. Dumont, Riva Y. Dupuy, Mia B. Eaton, Audrey H. Eldridge, Patricia L. Emerson, Rebecca H. Farnsworth, Pamela J. Fernald, Melony A. Foskett, Amy N. Foster, Wendy M. Fournier-Decoste, Katheryn R. Fuller, Judith W. Gatcomb, Dena M. Geel, Faye A. Gray, Marjorie E. Gray, Roger V. Gray, Shelley E. Griffin, Susanne M. Gurin Jr., R. Stephen Haley, Andrew J. Hall, Kelli M. Hall, Vicki L. Hamilton, Kirsten M. Hamilton, Ronald L. Hanscom, Betsy B. Harper, Amy L. Hash, Amber R. Haskell, Lisa L. Hawes, Bethany A. Hays, Mary D. Heal, Ivy M. Hepburn, Barbara F. Hiestand, Laura M. Higgins, Cathy A. Hinckley, Melissa S. Hinkel, Nicole S. Holmes, Lisa A. Horner, Lara K. Howie, Jeanette L. Huffman, Lynn L. Hunt, Marianne Hutcheson, Joyce R. Hutchinson, Margaret L. Jacobs, Page E. Jameson, Melissa A. Jipson, Bruce W. Jones, Gregory S. Jordan, Krystal E. Kane, Maureen E. Kinghorn, Dennis M. Lacasse, James W. Lambert, Jane E. Lamoureux, Paula M. Lavoie, Robert J. Lawson, Jessica K. Leblanc, Bonnie S. Lee, Nichole J. Lewis, Stephanie M. Lord, Maureen T. Lovely, Norma K. Luce, Wendy J. Lynch, Carolyn R. Mackenzie, Bailey E. MacLeod, Virginia L. Maffucci, Deborah A. Mahoney, Sharon I. Mansfield, Marcia L. Marchetti, Brandy M. Martin, Elena M. Matthews, Ashley S. Maynard, Colleen E. McConomy, Amy G. McElyea, Jeremiah S. McGee, Samuel S. Megathlin, Shawn R. Michaud, J. Paul Miller Jr., Timothy J. Millett, Marcia L. Mitchell, Sonya L. Mitchell-Dow, Debra S. Mockler, Julie E. Mooney, Dylan A. Mora, Angela R. Nason, Dawn B. Nason, Kimberly J. Newenham, Judith L. Nicholas, Derek G. Nicholson, Peter C. Norton, Jennifer I. Norwood, Nichole D. O’Connell, Sara H. O’Neal, Shelley R. Ohmeis, Amanda R. Ohmeis, Claire C. Orcutt, Alexandra Pagan, Joseph F. Parker, Andrea L. Parker, Jane M. Parlee, Deborah I. Parsons, Lisa L. Patton, Ebony A. Pellett, Christine A. Pendleton, Candy A. Perry, Chris P. Planchart, Catherine M. Poland, Bonnie A. Porter, Lester L. Pratt, Joseph M. Prescott, Nikki E. Pye, Carol J. Radel, Joshua A. Redman, Julie A. Richards, Judy A. Richardson, Cindy L. Rickard, Jessica N. Riitano, Zachary J. Robbins, Amanda L. Robertson, Adam L. Robinson, Jane M. Robinson, Sarah C. Rolfe, Seth A. Saunders, Jennifer D. Saunders, Jennifer M. Sawyer, Chelsea M. Schaefer, Frank J. Scott-Henderson, Debra L. Scully, Joseph P. Seavey, Courtney E. Shields, Scott K. Short, Zachary M. Shults, Brittaney D. Sinclair, Jacklyn M. Smith, Samantha A. Somes, Andrew L. Springer, Douglas W. Stanley, Kristy L. Starbird, R. Todd Stevens, Lottie B. Stover, Teri A. Swanberg, Peter M. Swett, Andrea D. Terry, Mindy K. Thompson, Dianne B. Tracy, Terry E. Tunney, Timothy F. Upham, Ann G. Urquhart, Kirstie A. Vanskike, Corey M. Veazie, Lisa F. Wallace, Allyson M. Warren, Jody C. Webster, Paula R. Weeks, Jeanne L. Wesseling, Xin L. White, Roger S. Williams II, John M. Wood, Crystal N. Wooster, Timothy J. Wright, Kim W. Wyatt Jr., Bruce E. Zeugner, Leita K. Zimmerman, Julie B. *Named Executive Officers **Bar Harbor Bankshares Management and Named Executive Officers 2014 ANNUAL REPORT Page 23 Bar Harbor Bankshares LOCATIONS 15 branches 2 service offices 222 employees Northeast Harbor 111 Main Street Northeast Harbor, ME 04662 BUSINESS BANKING, TRUST & FINANCIAL SERVICES OFFICES Bangor One Cumberland Place Suite 100 Bangor, ME 04401 Ellsworth 135 High Street Ellsworth, ME 04605 Rockland 245 Camden Street Rockland, ME 04841 Somesville 1055 Main Street Mt. Desert, ME 04660 South China 368 Route 3 China, ME 04358 Southwest Harbor 314 Main Street Southwest Harbor, ME 04679 Topsham 2 Main Street Topsham, ME 04086 Winter Harbor 385 Main Street Winter Harbor, ME 04693 CORPORATE OFFICE Bar Harbor 82 Main Street Bar Harbor, ME 04609 Augusta 227 Water Street Augusta, ME 04330 Blue Hill 21 Main Street Blue Hill, ME 04614 Deer Isle 25 Church Street Deer Isle, ME 04627 Ellsworth 125 High Street Ellsworth, ME 04605 Lubec 68 Washington Street Lubec, ME 04652 Machias 41 Main Street Machias, ME 04654 Milbridge 2 Bridge Street Milbridge, ME 04658 Page 24 BAR HARBOR BANKSHARES Bar Harbor Bankshares CORPORATE INFORMATION ANNUAL MEETING The Annual Meeting of shareholders of Bar Harbor Bankshares will be held at 11:00 a.m. on Tuesday, May 19, 2015 at the Bar Harbor Club located on West Street in Bar Harbor, Maine. FINANCIAL INFORMATION Shareholders, analysts and other investors seeking financial information about Bar Harbor Bankshares should contact Gerald Shencavitz, Executive Vice President, Chief Financial Officer and Treasurer, at 207-288-3314. INTERNET Bar Harbor Bank & Trust information, as well as Bar Harbor Bankshares Form 10-K, is available at www.bhbt.com. SHAREHOLDER ASSISTANCE Questions concerning your shareholder account, including change of address forms, records or information about lost certificates or dividend checks, should be directed to our transfer agent: American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, New York 11219 800-937-5449 / www.amstock.com STOCK EXCHANGE LISTING Bar Harbor Bankshares common stock is traded on the NYSE MKT, LLC (www.nyse.com), under the symbol BHB. FORM 10-K ANNUAL REPORT The Company refers you to its Annual Report on Form 10-K for fiscal year ended December 31, 2014 for detailed financial data, manage- ment’s discussion and analysis of financial condition and results of oper ations, disclo- sures about market risk, market information including stock graphs, descriptions of the business of the Company and its products and services, and a listing of its executive officers. MAILING ADDRESS If you need to contact our corporate head quarters office, write: Bar Harbor Bankshares Post Office Box 400 82 Main Street Bar Harbor, Maine 04609-0400 207-288-3314 • 888-853-7100 PRINTED FINANCIAL INFORMATION We will provide, without charge, and upon written request, a copy of the Bar Harbor Bankshares Annual Report to the Securities and Exchange Commission on Form 10-K. The Bank will also provide, upon request, Annual Disclosure Statements for Bar Harbor Bank & Trust as of December 31, 2014. Please contact Marsha C. Sawyer, Bar Harbor Bankshares Clerk, at 207-288-3314 or the above address. Founded in 1887, Bar Harbor Bank & Trust (the “Bank”) is a community bank with 15 locations from Lubec to Topsham, Maine that offers a full range of financial products and services for families, businesses, municipalities, and non-profit organizations. Bar Harbor Trust Services, a subsidiary of the Bank, and Bar Harbor Financial Services, a branch of Infinex Investments, Inc., an independent third party broker, provide retirement planning, investment management, brokerage, and insurance services to a wide variety of individual, non-profit, and municipal clients. Bar Harbor Bankshares (“BHB” or the “Company”) is the parent company of Bar Harbor Bank & Trust (“BHBT”). Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com Photography by Chris Pinchbeck/www.pinchbeckphoto.com pages 4–5, 10 and 13. Brand Promise: Bar Harbor Bank & Trust is a true community bank. We recognize, appreciate, and support the unique people and culture in the places we call home. Brand Story: Bar Harbor Bank & Trust understands the unique opportunities and challenges that our customers face and we’re here to face them, too. We’re known for our exceptional support of the people, businesses and communities in the places we call home. The staff is widely known as trustworthy, resourceful and friendly—people who customers can count on to help them find solutions they need. Commitment to honest service and belief in our customers are why Bar Harbor Bank & Trust stands out as a true community bank. 1-888-853-7100 • www.BHBT.com 2014 S U M M A R Y A N N UA L R E P O R T