Page

Report of Independent Registered Public Accounting Firm

1

Financial Statements:

Statements of Net Assets Available for Benefits at December 31, 2014, and 2013

2

Statements of Changes in Net Assets Available for Benefits for the years ended

     December 31, 2014, and 2013

3

Notes to Financial Statements

4

Supplemental Schedules*

1     Schedule H, Line 4i – Schedule of Assets Held at End of Year

12

2     Schedule H, Line 4a – Schedule of Delinquent Participant Contributions

13

2014

2013

Additions to net assets attributed to:

Investment income:

Net appreciation in fair value of investments

$

1,297,905

  2,622,918

Interest and dividends from investments

583,806

        410,369

Interest on notes receivable from participants

17,015

          17,900

Other income

38,030

33,970

Total investment income

1,936,756  

3,085,157     

          Contributions:

                   Participants

906,112

     817,324

                   Employer

402,084

366,162   

                   Rollovers

129,804

      19,069      

Total contributions

1,438,000

   1,202,555

Total increase

3,374,756  

4,287,712

Deductions from net assets attributed to:

Benefits paid directly to participants

(1,283,249)

   (1,372,627)

Administrative expenses

(41,844)

      (37,256)

                            Total deductions

(1,325,093)

         (1,409,883)

                            Net increase in assets available for benefits

2,049,663   

2,877,829    

Net assets available for benefits:

Beginning of year

17,771,424

14,893,595

End of year

$

19,821,087

17,771,424

(1)

Description of Plan

The following description of the Bar Harbor Bankshares (the Company or the Plan Sponsor) 401(k) Plan (the Plan) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions.

(a)

General

The Plan is a defined contribution plan covering all employees of the Company who have achieved the age of 20-1/2. There is no service requirement for eligibility. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Company utilizes a Recapture account for 12b-1 fees.   Expenses over and above the balance in the Recapture Account are paid by the Company.  

(b)

Contributions

Each year, participants may contribute up 92% (limited to tax withholding and statutory ceilings) of pretax annual compensation, as defined in the Plan. Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions (limited to statutory ceilings). Participants may also contribute amounts representing distributions from other qualified defined benefit, IRA’s, or defined contribution plans. Participants direct the investment of their contributions into investment options offered by the Plan.

The Plan currently offers investment options for participants. The Plan is a safe harbor plan providing matching contributions under a basic matching contribution formula. During 2014 and 2013, the Company matched 100% up to the first 3% of each participant’s salary deferred and 50% on deferrals from 3% to 5% of each participant’s salary. The Company match is 100% vested immediately and invested in the same manner as the participant has directed for their contributions. Additional profit sharing amounts may be contributed at the option of the Company’s board of directors and, if provided, are vested immediately and invested as directed by the participant. No additional contributions were made in 2014 or 2013.

(c)

Participants’ Accounts

Each participant’s account is credited with the participant’s contribution, allocations of the Company’s match, and profit sharing contributions along with an allocation, based upon a participant’s account balance, of any earnings or losses. The benefit to which a participant is entitled is the benefit that can be provided from the Participant’s vested account.

(d)

Vesting

Participants are vested immediately in their personal contributions and the Company’s contributions.

(e)

Plan Termination

Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants would remain 100% vested in all funds represented by their account balance.

(f)

Payment of Benefits

On termination of employment including disability or retirement, a participant with a balance greater than $5,000 may request payment in a lump sum amount equal to the value of the vested interest in his or her account. Terminated participants with vested balances in their accounts of $1 or more but less than $5,000 have their vested balance rolled over to an IRA, unless they make a voluntary election for another form of distribution or rollover.  Upon the death of an employee, the named beneficiary may elect to receive a lump sum amount equal to the vested balance in the deceased employee’s account.  

(g)

Notes Receivable from Participants

Participants may borrow from their accounts up to the lesser of $50,000 or 50% of the account balance. Participants may carry up to two loans secured by the balance in their account. Loans are generally fixed rate and are written with an interest rate of 1% over Prime. Existing loans presently range from 4.25% to 5.75%. Principal and interest is paid according to amortization schedules through biweekly payroll deductions.

(h)

Risks and Uncertainties

The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rates and market risks. Due to the level of risk associated with investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.

(2)

Summary of Significant Accounting Policies

(a)

Basis of Presentation

The Plan’s financial statements have been prepared on an accrual basis of accounting. Benefits are recorded when paid. Cash equivalents are generally funds held in money market funds at December 31, 2014 and 2013. Amounts in prior year’s financial statements are reclassified when necessary to conform to current year’s presentation.

(b)

Investments and Notes Receivable from Participants

The Plan’s investments are valued on a daily basis, using quoted market prices. Participant loans are valued at their outstanding unpaid principal amounts. Dividends are recorded on the ex-dividend date. Common collective trust funds are valued based on audited information reported by the issuer of the common collective trust at year-end.

The Plan’s valuations may result in a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although Plan management believes the valuations are appropriate and consistent with those participating in the market, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.  

The Plan also invests in investment contracts through a common collective trust (Union Bond & Trust Company Stable Value Fund, often referred to as Morley Stable Value Fund).  Investment contracts held by a defined contribution plan are required to be reported at fair value, with an adjustment to contract value in the statement of net assets available for benefits because contract value of these contracts is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan.  The contract value of the Union Bond & Trust Company Stable Value Fund represents contributions plus earnings, less participant withdrawals and administrative expenses.

The investment objective of the Morley Stable Value Fund is to provide preservation of capital, relatively stable returns consistent with its comparatively low risk profile, and liquidity for benefit-responsive payments.   Withdrawals from the Morley Stable Value Fund for benefit payments and participant transfers to noncompeting options are made to plan participants promptly upon request but in all cases within 30 days after written notification has been received.   All plan sponsor-directed full or partial withdrawals are subject to a twelve month advance written notice requirement, though the Morley Stable Value Fund may waive this request at its discretion.

(c)

Use of Estimates

The preparation of financial statements, in conformity with U.S. generally accepted accounting principles; require management to make estimates and assumptions affecting the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

(d)

Subsequent Events

In connection with the preparation of financial statements, the Plan evaluated subsequent events after the balance sheet date of December 31, 2014 through June 26, 2015, which was the date the financial statements were available to be issued

(3)

Investments

Investments, including those that represent 5% or more of the net assets available for benefits, at December 31, 2014 or 2013 are as follows:

2014

2013

Money market funds

$

1,045

5,113

Morley Stable Value Fund

832,234

997,970

American Target Funds  2015-2050

7,847,101

7,388,398

Mutual funds:

      Domestic equity mutual funds:

Vanguard 500 Index Fund-Admiral Signal Shares

$

2,173,341

1,888,929

Vanguard Mid Cap Index Investor

210,451

96,858

             Vanguard Small Cap Index Signal Shares

265,570

174,868

             Blackrock Strategic Income

9,482

---

      Foreign equity mutual funds:

American Europacific Growth Fund.

$

977,704

1,002,233

American New Perspective

979,475

955,782    

      Bond mutual funds:

              Prudential Short Term Corp Bond

475,112

476,284

             Total mutual funds

$

5,091,135

4,594,954   

     Common stock:

Bar Harbor Bankshares

$

5,584,286  

4,411,377

During 2014 and 2013, the Plan’s investments appreciated in value (including realized gains and losses on investments bought, sold, and held during the year) as follows:

Year ended December 31

2014

2013

Stable value funds  

$

1,990

30,036

American Target funds

195,084

1,150,545

Mutual Funds

179,553

759,303

Common stock of Bar Harbor Bankshares  

921,278

        683,034

$

     1,297,905

2,622,918

(4)

Fair Values of Financial Instruments

The Plan uses a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

·

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

·

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

·

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

Level 1

Level 2

Level 3

Total

December 31, 2014

      Money Market funds

$

1,045

---

---

1,045

      Stable Value Funds

832,234

---

832,234

      Target funds

7,847,101

---

---

7,847,101

      Mutual funds

5,091,135

---

---

5,091,135

      Common stock of Bar

          Harbor Bankshares

5,584,286

---

---

5,584,286

December 31, 2013

     Money Market funds

$

5,113

---

---

5,113

     Stable Value Funds

---

997,970

---

997,970

     Target funds

7,388,398

---

---

7,388,398

     Mutual funds

4,594,954

---

---

4,594,954

     Common stock of Bar

          Harbor Bankshares

4,411,377

---

---

4,411,377

There were no transfers between levels during 2014.

(5)

Income Tax Status

The Plan is based on a prototype plan.   The Internal Revenue Service (IRS) informed the prototype plan sponsor, in an opinion letter dated March 31, 2014, that the form of the Plan is acceptable under the requirements of the Internal Revenue Code.  An employer may rely on a favorable opinion letter issued to a prototype sponsor as evidenced that the plan is qualified under Code Section 401 (a) as provided in Revenue Procedure 20011-49.   Although the plan has been amended since receiving the determination letter, the plan administrator believes that the current plan is designed and being operated in compliance with applicable requirements of the IRC so that the plan is qualified and the related trust is tax exempt.  

U.S. GAAP requires Plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by Internal Revenue Service.  The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2014, there were no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements.  The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to income tax examinations for years prior to 2011.  Plan document issues relating to participation in the Plan by certain employees of related employers (or by certain employees of subsidiaries of the Company) have been identified, and the Plan sponsor is undertaking corrective action in accordance with the IRS Employee Plans Compliance Resolution System (EPCRS), to include a Voluntary Correction Program (VCP) submission, as required, in conjunction with the advice of tax counsel (or tax advisors). The Plan administrator believes that the current plan is designed and being operated in compliance with the applicable requirements of the Code so that the plan is qualified and the related trust is tax exempt.  

(6)

Party-in-Interest Transactions

Shares of common stock issued by the Company represent certain Plan investments (See Note 3).  The decision to invest in Company stock is voluntary on the part of the participants.   These transactions are party-in-interest transactions.   Senior officers are prohibited from purchasing, selling, or reallocating their positions in the Company’s common stock during times of established blackouts or while in possession of insider information.  Effective December 1, 2010, Reliance Trust Company became Trustee and investments (including Bar Harbor Bankshares) were held by Fidelity Investments.  Participant loan distributions and repayments are also considered party-in-interest transactions.

(7)

Untimely Remittances

During 2014 it was discovered that there were delays by the Plan Sponsor in submitting certain employee deferrals totaling $2,167.  The Plan Sponsor has reimbursed the Plan for lost interest. The Plan Sponsor assessed lost earnings and excise taxes due for the resulting costs and deposit the funds to the Plan.  The Company corrected these transactions in 2014.

(8)

Difference Between Financial Statements and Form 5500

The following is a reconciliation of assets available for benefits per the financial statements to the Form 5500:

(a)

(b) Identity of Issuer,

borrower, lessor, or

similar party

(c) Description of investment, number of shares, and

rate of interest

(d) Cost

(e) Current

Value

Cash—Pass through account

**

$

9,917

Fidelity Retirement Money Market

Money market fund

**

1,045 

Morley Stable Value Fund

Stable Value Fund,35,535.185 shares

**

832,234

American Target Fund 2015-2050

Target Funds, 642,286.21 shares

**

7,847,101

Prudential Short Term Corp Bond

Bond mutual fund, 42,345.13 shares

**

475,112

Blackrock Strategic Income

Equity Mutual Fund, 937.841 shares

**

9,482

Vanguard Small Cap Index Signal Shares

Equity mutual fund, 4,753.351 shares

**

265,570

Vanguard 500 Index Fund –

     Admiral Signal Shares

Equity mutual fund, 11,445.264 shares

**

2,173,341

Vanguard Mid Cap Index Fund

Equity mutual fund, 6,241.12 shares

**

210,451

American Europacific Growth Fund                          

Foreign equity mutual fund, 20,744.829 shares

**

977,704

American  New Perspective Fund

Foreign equity mutual fund, 26,997.658 shares

**

979,475

*

Bar Harbor Bankshares

Common stock,174,508.932 shares

**

5,584,286

*

Participant Loans Receivable

Interest rates – 4.25 – 5.75%

**

444,709

$

19,810,427

Participant

contributions transferred late to the Plan

___________

Check here if late Participant loan prepayments

are included

☐

Total that Constitute Nonexempt Prohibited Transactions

Totally

fully

corrected

under

VFCP

and PTE

2002-51

Contributions

Not corrected

Contributions corrected outside VFCP

Contributions pending correction in VFCP

$

---

$

---

$

2,167

$

---

$

---

Exhibit No.

Exhibit

23

Consent of KPMG LLP