BAR HARBOR BANKSHARES   

82 Main Street          

Bar Harbor, ME 04609

 

April 9, 2013   

Dear Shareholder:

The 2013 Annual Meeting of the shareholders of Bar Harbor Bankshares will be held at 11:00 a.m. EDT on Tuesday, May 21, 2013, at the Bar Harbor Club located at 111 West Street in Bar Harbor, Maine.  Our directors and officers join me in inviting you to attend this meeting and the reception following. The Notice of Annual Meeting, Proxy Statement and Proxy Card are enclosed, along with the Company’s 2012 Summary Annual Report and Annual Report on Form 10-K.

The accompanying Notice of Annual Meeting of Shareholders describes matters to be acted upon at the Annual Meeting. Please give these materials your prompt attention. Then we ask that you complete, sign, date and mail promptly the enclosed Proxy Card in the return envelope, or use telephone or internet voting to ensure that your shares are represented and voted at the meeting.  Shareholders who attend the Annual Meeting may withdraw their proxy and vote in person if they wish to do so. Your vote is extremely important, so please act at your earliest convenience.

We look forward to seeing you on May 21st.  Please join us for the reception even if you are unable to attend the business meeting.

Very truly yours,

/s/ Joseph M. Murphy

Joseph M. Murphy

President and

Chief Executive Officer

Enclosures

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BAR HARBOR BANKSHARES

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD MAY 21, 2013

     Notice is hereby given that the Annual Meeting of the Shareholders of Bar Harbor Bankshares (the “Annual Meeting”) will be held at the Bar Harbor Club at 111 West Street in Bar Harbor, Maine, on Tuesday, May 21, 2013, at 11:00 a.m. EDT to consider and act upon the following proposals:

1.

To elect thirteen (13) persons to serve as directors for a term of one year   [Proposal I];

2.

To approve a non-binding, advisory resolution on the compensation of the Named Executive Officers of the Company (“Say on Pay”) [Proposal II];

3.

To ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2013 [Proposal III]; and

4.

To transact such other business as may properly come before the Annual Meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on March 20, 2013 as the record date for determining the shareholders of the Company entitled to receive notice of, and to vote at, the Annual Meeting (the “Record Date”).   Only shareholders of record of the Company’s common stock at the close of business on the Record Date are entitled to receive notice of, and to vote at, the Annual Meeting.  

YOUR VOTE IS IMPORTANT.  YOU ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY IN THE POSTAGE PREPAID ENVELOPE AS PROMPTLY AS POSSIBLE WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. YOU MAY ALSO DELIVER YOUR VOTE BY TELEPHONE OR INTERNET BY FOLLOWING THE INSTRUCTIONS ON YOUR PROXY CARD OR VOTING INSTRUCTIONS FORM.  IF YOU ATTEND THE ANNUAL MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON IF YOU WISH TO DO SO.

By Order of the Board of Directors

/s/ Marsha C. Sawyer

Marsha C. Sawyer, Clerk

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BAR HARBOR BANKSHARES

82 Main Street

Bar Harbor, ME

ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD TUESDAY, MAY 21, 2013

PROXY STATEMENT

This Proxy Statement is furnished to the Shareholders of Bar Harbor Bankshares (the “Company”) in connection with the solicitation of proxies on behalf of the Board of Directors for use at the Annual Meeting of Shareholders (the “Annual Meeting”). The Annual Meeting will be held on Tuesday, May 21, 2013, at 11:00 a.m. EDT at the Bar Harbor Club located at 111 West Street in Bar Harbor, Maine. The official Notice of the Annual Meeting of Shareholders accompanies this Statement. A Form of Proxy for use at the meeting and a return envelope for the Proxy are enclosed.

The Notice of Annual Meeting, Proxy Statement, and Proxy Card were first mailed to the Company’s shareholders on or about April 9, 2013 to solicit proxies for the Annual Meeting. Any shareholder submitting a proxy has the right to revoke it at any time before it is exercised; therefore, the delivery of an executed Proxy Card will not in any way affect a shareholder’s right to attend the Annual Meeting and vote in person.  Revocation may be made prior to the Annual Meeting by a written revocation, or by submitting a duly executed Proxy Card bearing a later date sent to the Company attention: Marsha C. Sawyer, Clerk, 82 Main Street, Bar Harbor, Maine 04609; or a proxy may be revoked personally at the Annual Meeting prior to the voting of the Proxy.  

In absence of specific instructions to the contrary, shares represented by properly executed proxies received by the Company, including unmarked proxies, will be voted.

Proposal - I “FOR” the election of the thirteen (13) persons nominated as directors by the Board of Directors;

Proposal - II “FOR” approval of the non-binding, advisory resolution on the compensation of the named executive officers; and

Proposal - III “FOR” ratification of the appointment of KPMG LLP as the independent registered public accounting firm of the Company for the ensuing year.  

Except for procedural matters incidental to the conduct of the Annual Meeting, the Board of Directors does not know of any matters other than those described in the Notice of Annual Meeting that are to come before the Annual Meeting. If any other matters are properly brought before the Annual Meeting, the persons named in the Proxy will vote the shares represented by such proxy on such matters as determined by a majority of the Board of Directors.  

Quorum and Vote Required

Only shareholders of record as of March 20, 2013 (the “Record Date”) will be entitled to notice of, to attend, and to vote at, the Annual Meeting. Each share is entitled to cast one vote for each of the thirteen (13) director nominees to the Company’s Board of Directors and to cast one vote on each of the other matters to be voted on at the Annual Meeting. Cumulative voting is not permitted. As of the Record Date, 3,928,149 shares of the Company’s common stock, $2.00 par value (“Common Stock”), were outstanding and entitled to vote at the Annual Meeting. The presence at the Annual Meeting, either in person or by proxy, of the holders of not less than a majority of the shares entitled to vote at any meeting will constitute a quorum. If a quorum is present at the Annual Meeting, action may be taken on any matter considered, excepting only the election of directors, by the holders of a majority of the shares present and voting.  Directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. The inspector of election will treat abstentions and broker non-votes as shares that are present and entitled to vote for purposes of determining the presence of a quorum, but not for purposes of voting with respect to determining the approval of any matter submitted to the shareholders for a vote. Shareholders who are present will have an opportunity to vote on each matter properly brought before the Annual Meeting. A broker non-vote occurs when a broker or other nominee holder, such as a bank, submits a proxy

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representing shares that another person actually owns, and that person has not given voting instructions to the broker or other nominee holder.

The following is the Board’s recommendation with respect to each of the items to be considered and voted upon at the Annual Meeting:

Proposal I - The Board of Directors recommends that you vote “FOR” the election of the thirteen (13) persons nominated as directors;

Proposal II - The Board of Directors recommends that you vote “FOR” the approval of the non-binding advisory resolution on the compensation of the named executive officers; and

Proposal III – The Board of Directors recommends that you vote “FOR” ratification of the appointment of KPMG LLP as the independent registered public accounting firm of the Company for the ensuing year.

It is not anticipated that any matters will be presented at the Annual Meeting other than as set forth in the accompanying Notice of the Annual Meeting.  If any other matters are presented properly at the Annual Meeting, however, the proxy will be voted by the proxy holders in accordance with the recommendations of the Board.

Voting

Voting by Mail.   Shareholders can ensure that their shares are voted at the Annual Meeting by completing, signing, dating, and mailing the enclosed Proxy Card in the enclosed, postage prepaid envelope.  

Voting by Telephone or the Internet.   If you choose to vote by telephone or the Internet, instructions to do so are set forth on the enclosed Proxy Card.  If you vote by telephone or the Internet, you do not have to mail in your proxy card, but your vote must be received by the voting deadline set forth on the Proxy Card.

If your shares are held by a bank, broker, or other nominee, please follow the instructions provided with your proxy materials supplied by your bank or broker.  

Revocability of Proxies

Any shareholder who executes and delivers a proxy has the right to revoke it at any time before it is exercised, by filing, with the Company Clerk, an instrument revoking it, or by submitting a duly executed proxy bearing a later date. A proxy may also be revoked by attending the Annual Meeting and voting in person at the Annual Meeting. If your shares are held in street name, you should follow the instructions of your broker, bank or nominee regarding the revocations of proxies.  

Solicitation of Proxies

Proxies are being solicited by the Board of Directors of the Company, (the “Board”), principally through the mail. The Board of Directors and Management of the Company may also solicit proxies personally, or by telephone, e-mail, or facsimile transmission. The entire expense of solicitation, including costs of preparing assembling and mailing the proxy material will be borne by the Company.

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Annual Meeting to be Held on May 21, 2013:

This Proxy Statement, along with the Company’s Annual Report on Form 10K for the fiscal year ended December 31, 2012 and our 2012 Summary Annual Report are available free of charge on the Investor Relations section of our website www.BHBT.com.

In addition, the Company will provide without charge upon the written request of any shareholder a copy of the Company’s Annual Report on Form 10-K, including the financial statements and the financial statement schedules, required to be filed with the United States Securities and Exchange Commission for the fiscal year ended December 31, 2012. Requests should be directed to Bar Harbor Bankshares, Attn:  Investor Relations, 82 Main Street, Bar Harbor, Maine  04609.

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PROPOSAL I

ELECTION OF DIRECTORS

At the Annual Meeting of Shareholders, thirteen (13) director-nominees will stand for re-election to serve until the 2014 Annual Meeting of Shareholders and until each director’s successor is elected and qualified. Each director-nominee has consented to serve, and to the use of his or her name in this Proxy. All thirteen (13) of the director-nominees currently serve on the Board of the Company.

The Board has determined the majority of director-nominees are “independent directors” as required in accordance with applicable laws, regulations, and NYSE MKT, LLC (formerly the American Stock Exchange or “AMEX” and hereinafter “NYSE MKT”) listing requirements. The exception is director-nominee Joseph M. Murphy, who serves as President and Chief Executive Officer of the Company.  Mr. Murphy does not serve as a voting member of the Audit, Compensation and Human Resources, or Governance Committees.

Board of Director Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE ELECTION OF THE THIRTEEN (13) PERSONS NOMINATED AS DIRECTORS IN THE PROXY.  

PROPOSAL II

NON-BINDING, ADVISORY RESOLUTION ON THE COMPENSATION

OF THE NAMED EXECUTIVE OFFICERS

The Securities Exchange Act of 1934, as amended, requires the Company to provide shareholders an opportunity to vote to approve, on a non-binding, advisory basis, the compensation of named executive officers as disclosed in this Proxy Statement.  This vote does not address any specific item of compensation, but rather the overall compensation of the Company’s named executive officers and its compensation philosophy, policies and practices, as disclosed in this proxy statement.  Shareholders requested through their 2011 vote to have the opportunity to express their opinion on the overall compensation program through this non-binding voting mechanism on an annual basis.  

The Company’s named executive officers in this Proxy Statement include, Joseph M. Murphy, Gerald Shencavitz, Michael W. Bonsey, Gregory W. Dalton, and Stephen M. Leackfeldt.  The compensation of the Company’s named executive officers is disclosed in the Compensation Discussion and Analysis, the summary compensation table and the other related tables and narrative disclosure contained elsewhere in this proxy statement. As discussed in those disclosures, the Board of Directors believes that our executive compensation philosophy, policies, and procedures provide a strong link between each named executive officer’s compensation and our short and long-term performance. The objective of our executive compensation program is to provide compensation which is competitive based on our performance and aligned with the long-term interests of our shareholders.

The Company asks shareholders to indicate their support of our named executive officer’s compensation as described in this Proxy Statement. This proposal will be presented at the Annual Meeting as a resolution in substantially the following form:  

RESOLVED, on an advisory basis, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.

Board of Director  Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THIS PROPOSAL.   

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PROPOSAL III

RATIFICATION OF THE APPOINTMENT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Company’s Audit Committee has appointed KPMG LLP as the Company’s principal independent registered public accounting firm for the fiscal year ending December 31, 2013. The Company is asking its shareholders to ratify the appointment of KPMG LLP as its independent registered public accounting firm because it believes it is a matter of good corporate practice to do so. If the Company’s shareholders do not ratify the appointment, the Audit Committee will reconsider whether to retain KPMG LLP, but may still retain them. Even if the appointment is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines such a change would be in the best interest of the Company and its shareholders.

Information regarding the audit fees and reports of KPMG LLP is set forth in this Proxy under the caption INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.

Board of Director  Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2013.  

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

 

As of the Record Date, the Company had outstanding 3,928,149 shares of its voting common stock (the “Common Stock”), par value $2.00 per share.

The following table sets forth information with respect to the beneficial ownership of the Company’s voting Common Stock as of December 31, 2012, by: (i) each person or entity known by the Company to own beneficially more than five percent (5%) of the outstanding Common Stock calculated on the outstanding shares on December 31, 2012, (ii) each current director-nominee for director on the Company’s Board of Directors, (iii) the Company’s named executive officers (as defined on page 28) of this Proxy under the heading (“2012 Summary Compensation Table”) and (iv) all executive officers and directors as a group.  The Company had 3,920,044 shares outstanding as of December 31, 2012.

(This space intentionally left blank)

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¹The number of shares beneficially owned by the persons set forth above is determined under the rules of Section 13 of the Securities Exchange Act of 1934, as amended, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, an individual is considered to beneficially own any shares of Common Stock if he or she directly or indirectly has or shares, (i) voting power, which includes the power to vote or to direct the voting of the shares, or (ii) investment power, which includes the power to dispose or direct the disposition of shares. Unless otherwise indicated, an individual has sole voting power and sole investment power with respect to the indicated shares. All individual holdings amounting to less than 1% of issued and outstanding Common Stock are marked with an (*).

²Includes 1,500 shares over which voting and dispositive powers are shared jointly with Mr. Carter’s spouse.

³Includes 4,500 shares over which voting and dispositive powers are shared jointly with Mr. Colwell’s spouse.

⁴Includes 3,400 shares over which voting and dispositive powers are shared jointly with Mr. Lewis’ spouse.

⁵Includes 500 shares over which voting and dispositive powers are shared jointly with Mr. Phillips’ spouse.

⁶Includes 2,200 shares held jointly with Mrs. Shea’s spouse to include voting and dispositive powers.

⁷Includes 1,298 shares over which voting and dispositive powers are shared jointly with Mr. Smith’s spouse.

⁸Includes 450 shares owned by Mr. Toothaker’s children and 2,000 shares over which voting and dispositive powers are shared with Mr. Toothaker’s spouse.

⁹Includes 325 shares over which voting and dispositive powers are shared jointly with Mr. Woodside’s spouse.

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¹⁰Ownership figures for directors include 500 director-qualifying shares owned by each person indicated.  The number also includes 255 restricted shares granted to each director (except Mr. Murphy) as part of their director compensation to be held in the custody of the Company until three months following the date the director ceases to serve as a member of the Company’s Boards.

¹¹Includes shares over which present executives have voting power under the Company’s 401(k) Plan and options to purchase shares of common stock granted pursuant to the Company stock option plan which are exercisable within 60 days of the Record Date.    This number also includes restricted shares granted by the Board of Directors as part of the 2012 compensation adjustment required to be held until three months following the date of the executive ceases to be employed by or associated with the Company.

Name	401(k) Plan	Exercisable Options	Restricted Shares
Joseph M. Murphy	31,169	0	279
Gerald Shencavitz	4,039	9,400	111
Michael W. Bonsey	2,270	2,400	55
Gregory W. Dalton	2,927	2,400	55
Stephen M. Leackfeldt	0	2,400	55

¹²Total beneficial ownership includes, 30,200 shares (0.77%) of the Common Stock held by two trusts, which, for purposes of voting, are allocated equally among the directors present at the Annual Meeting under the terms of the respective trust instruments. No director has any other beneficial interest in these shares. These trusts are denominated for purposes of this Proxy Statement as the "Parker Trust" and the "The Fred & Hattie Lynam Private Foundation" formerly known as the Lynam Trust.

The Parker Trust was established in 1955 in perpetuity. Bar Harbor Trust Services, the Company’s second tier non-depository trust services Company located in Ellsworth, Maine, is the sole Trustee, with full powers, of this trust benefiting the Mt. Heights Cemetery in Southwest Harbor, Maine.

The Fred & Hattie Lynam Private Foundation, formerly known as the Lynam Trust, was established in 1942 in perpetuity to benefit Mount Desert Island charities and later expanded to provide scholarships to graduates of Mount Desert Island High School. Bar Harbor Trust Services is the sole Trustee, with full powers, and administers the trust with the assistance of an established Grant and Scholarship Committee made up of members of the Bar Harbor Bankshares Board of Directors and community representatives.

The information provided is based on the records of the Company and on information furnished by the persons listed.

The Company is not aware of any arrangement that could at a subsequent date result in a change in control of the Company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers, directors, and persons who own more than ten percent (10%) of a registered class of the Company’s equity securities (collectively “Section 16 Persons”) to file initial reports of ownership and reports of changes of ownership with the United States Securities and Exchange Commission (the “Commission”) and the NYSE MKT.   Section 16 Persons are required by the Commission regulations to furnish the Company with copies of all Section 16(a) forms they file.    

To the Company’s knowledge, based solely on review of such reports provided to the Company and written representations, all reports were filed timely and as required except for:

On September 5 and September 7, 2012, Mr. Gerald Shencavitz disposed of 30 shares and 138 shares, respectively, following  a stock option exercise.  Timely reporting did not occur.  On September 12, 2012, a Form 4 was filed reflecting his updated ownership.

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DIRECTORS AND EXECUTIVE OFFICERS

Directors and Nominees:

The Company’s Board of Directors currently consists of thirteen (13) members. The Board has determined that the majority of the director-nominees are “independent directors” as required in accordance with applicable laws, regulations, and NYSE MKT listing requirements.  The exception is director–nominee Murphy, who serves as President and Chief Executive Officer of the Company.  Mr. Murphy does not serve as a voting member of the Audit, Compensation and Human Resources, or Governance Committees.  Mr. Murphy has announced his retirement as President and Chief Executive Officer as of June 30, 2013.   The Board has nominated Mr. Murphy for re-election as a continuing director and, if re-elected, he will continue to serve as a director after his anticipated retirement in June 2013.  The Board believes Mr. Murphy’s continuing service as a director following his retirement is important for continuity and leadership transition purposes.  Mr. Murphy does not meet the definition as an independent director under the NYSE MKT listing requirements and, therefore, will be limited as to his voting committee assignments.  

The following table sets forth for each director-nominee for election at the Annual Meeting, their name, age as the Record Date and positions with the Company or its subsidiaries, Bar Harbor Bank & Trust (“BHBT”) and Bar Harbor Trust Services (“BHTS”).

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¹Peter Dodge served as a director of the Company from 1987 through 2000 and then again from 2003 to present.

²Robert Carter served as a director of the Company from 1996 through 2000 and then again from 2003 to present.

³Robert Phillips served as a director of the Company from 1993 through 2000 and then again from 2003 to present.

Executive Officers:

Set forth below is a list of the Company’s named executive officers, including their ages as of the Record Date, and positions with the Company and its subsidiaries, Bar Harbor Bank & Trust (“BHBT”) and Bar Harbor Trust Services (“BHTS”) as of the Record Date:

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The Bylaws of the Company provide that the executive officers be elected annually by the Board of Directors and that the President and Chief Executive Officer (“CEO”), Chairperson and Vice Chairperson, if any, shall serve at the pleasure of the Board and until their successors have been chosen and qualified. All other officers serve at the pleasure of the Board of Directors and the CEO. There are no arrangements or understanding between any of the directors, executive officers, or any other persons pursuant to which the above directors have been selected as directors or any of the above officers have been selected as officers. There are no “family relationships” as defined by the Commission, between any director, executive officer, or person nominated or chosen by the Company to become a director or executive officer.

Business Experience    

The principal occupation and business experience for at least the last five (5) years for each director, nominee, and executive officer is set forth below. None of the organizations discussed below, except for Bar Harbor Bank & Trust and Bar Harbor Trust Services, are affiliated with the Company.

Directors and Nominees:          

Robert C. Carter.  Mr. Carter resides in Machias, Maine. He presently operates Carter Enterprises, a rental management business also located in Machias, Maine. He is a former game warden for the Maine Department of Inland Fisheries.  Mr. Carter previously owned and operated Helen’s Restaurant and Machias Motor Inn for 12 and 20 years, respectively. Mr. Carter’s business experience and first-hand knowledge of the Washington County business community and local issues provides essential guidance to the Company in this unique market.

Thomas A. Colwell.  Mr. Colwell resides in Deer Isle, Maine. Mr. Colwell is the former President of Colwell Bros. Inc. (lobster pounding) and retired from that position as of December 31, 2006. He is a director of the Lobster Institute and a past director of the Maine Lobster Pound Association and the Penobscot East Resource Center (non-profit).  His knowledge of this specialized industry and the working waterfront provides a unique understanding to the Board of this important segment of business lending for a community bank operating on the coast of Maine. He also served as Chairman of the Board of Bar Harbor Bankshares for five years before becoming its Vice Chairman in 2009

Peter Dodge.  Mr. Dodge resides in Blue Hill, Maine, and is President, Insurance Agent, and majority owner of Peter Dodge Agency d/b/a Merle B. Grindle Agency, John R. Crooker Agency, and The Endicott Agency, providing insurance services from locations in Blue Hill, Bucksport, and Castine, Maine. Mr. Dodge has been part of our Board since 1987 and is the longest serving director who brings a historical, long-term perspective and leadership to the Board. He has served as Chairperson of the Company’s Loan, Audit, and Compensation and Human Resources Committees various times during his tenure, before accepting the position of Chairperson of the Board in May, 2009. He is Past President of the Independent Insurance Agents of Maine. He has also served as Past President of George Stevens Academy and is a former board member of Blue Hill Memorial Hospital, both located in Blue Hill, Maine.                                                                                                                       

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Martha T. Dudman.  Ms. Dudman resides in Northeast Harbor, Maine, and is a fundraising consultant and published author. She is past President and General Manager of Dudman Communications Corporation, operating a group of radio stations in Ellsworth and Bangor, Maine. She currently serves as Senior Counsel with Gary Friedmann & Associates, providing fundraising consulting services to nonprofits throughout the State of Maine. She has extensive experience in business management, public relations, marketing and sales. Ms. Dudman has been awarded membership in the Deborah Morton Society, recognizing women of high distinction in their careers and public service and whose leadership in civic, cultural, and social causes has been exceptional.  She serves on several non-profit boards and is President of the Northeast Harbor Library and serves on the Board of Selectmen for the Town of Mount Desert, Maine.    

Lauri E. Fernald.  Ms. Fernald resides in Mount Desert, Maine, and is a Certified Funeral Service Provider, President and an owner in Jordan-Fernald headquartered in Mount Desert, Maine. She is also Managing Partner of Jordan Family Properties LLC and L.E. Fernald LLC, operating as real estate holding companies.  Ms. Fernald serves on the finance committee of Hospice Volunteers of Hancock County.  She is Treasurer of St. Mary and St. Jude Episcopal Church of Northeast Harbor and Vice Chair of Maine Coast Healthcare Foundation.   She is also a member of the Ellsworth Noontime Rotary Club, the Woodbine Cemetery Association of Ellsworth, and the Brookside Cemetery Corp. of Mount Desert, Maine.   

Gregg S. Hannah.  Mr. Hannah resides in Surry, Maine and is a past Associate Professor of Business Management at Nichols College in Dudley, Massachusetts.   He taught courses in marketing, investment management, and corporate strategy.   He also served as a Trustee of the Connecticut State University System and was Chairman of their Finance Committee for several years.   Mr. Hannah was employed in a professional investment capacity from 1973 to 1987 and is a Chartered Financial Analyst.   His investment experience is valuable to his role as a member of the Trust Committee.   Mr. Hannah is also a Trustee, Treasurer, and member of the Executive Committee of the Hancock County Trustees of Public Reservations, the governing board of the Woodlawn Museum, Gardens, and Park in Ellsworth, Maine.   He also served as a Trustee of George Stevens Academy in Blue Hill, Maine for six years.

Clyde H. Lewis.  Mr. Lewis resides in Sullivan, Maine, retired in February, 2012 as Vice President, General Manager, and an owner in Morrison Chevrolet Inc., of Ellsworth, Maine. He is presently a member of the Executive Board of the Downeast Family YMCA. He has served as President of the Ellsworth Chamber of Commerce, is a Past Master of the Lygonia Masonic Lodge, and a member of the Anah Temple and Hancock County Shrine Clubs. His knowledge of and contacts with residents and customers from the large geographic area surrounding Ellsworth brings unique market intelligence to the Board.  

Joseph M. Murphy.  Mr. Murphy resides in Mount Desert, Maine, and is CEO of Bar Harbor Bankshares and Bar Harbor Bank & Trust. Mr. Murphy has over 35 years of banking experience at the executive level with community banks in Connecticut (Centerbank), Delaware (WSFS Bank) and Maine (BHB).   He served as Chairman of the Maine Banker’s Association.  He is a former board member of the Abbe Museum and the Friends of Acadia.  He is currently a board member of the Maine Seacoast Mission in Bar Harbor, Maine and a Corporator of Maine Coast Memorial Hospital in Ellsworth, Maine.

Robert M. Phillips.  Mr. Phillips resides in Sullivan, Maine, and is a former consultant for Cherryfield Foods, Maine Wild Blueberry, and Oxford Foods, food processors with locations in Washington County, Maine. Mr. Phillips serves as a consultant for the Wild Blueberry Association of North America and the Maine Wild Blueberry Commission, is a Maine Trustee of the Eastern States Exposition (“the BIG E”), is on the Technology Board of the Maine Technology Institute, and is an advisor to the Food Science Department of the University of Maine. Mr. Phillip’s expert knowledge gained by his employment in the wild blueberry industry has been an important resource to the Board for this important agricultural business segment of Downeast Maine.  

Constance C. Shea.  Mrs. Shea resides in Mount Desert, Maine, and is a Real Estate Broker and a former owner in Sylvia Shea Inc. d/b/a Lynam Real Estate Agency, Bar Harbor, Maine. Mrs. Shea is also the owner of a commercial real estate property located in Bar Harbor, Maine. She serves as a member of the Board of Directors of the Somesville Library Association.  Mrs. Shea has been involved with the real estate brokerage business since 1989.  Her perspective of year-round and seasonal real estate markets provides valuable insights into real estate trends in our major markets, especially Mount Desert Island, which is important to the activities of the Loan Committee.   

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Kenneth E. Smith.  Mr. Smith resides in Bar Harbor, Maine, and has been owner and Innkeeper of Manor House Inn since 2003 and former owner of Wonder View Inn, both lodging facilities located in Bar Harbor, Maine. The hospitality industry is a critical segment of the local economy and the Bank’s commercial loan portfolio. Mr. Smith’s 36 years of experience and expertise in the field are highly valued by the Board. Mr. Smith has served as Chairperson of the Bar Harbor Town Council and is a member of the Anah Temple Shrine.   

Scott G. Toothaker.  Mr. Toothaker resides in Ellsworth, Maine, and is a Principal and Vice President of Melanson Heath & Co., PC, a CPA firm with an office located in Ellsworth, Maine, which specializes in professional services to small businesses and entrepreneurs throughout New England.   He holds an MBA from the University of Maine and an MST from Bentley College. A practicing CPA, Mr. Toothaker serves as Chairperson of the Audit Committee.

David B. Woodside.  Mr. Woodside resides in Bar Harbor, Maine, and is Chief Executive Officer and General Manager of The Acadia Corporation, a locally owned company operating restaurants and retail shops located in Acadia National Park and Bar Harbor, Maine. Since receiving his BS degree in Business Administration from the University of Maine in 1976, Mr. Woodside has been employed by The Acadia Corporation. In addition to serving numerous local non-profit organizations, Mr. Woodside serves as Vice Chairperson of the National Park Hospitality Association, representing the diverse companies providing visitor hospitality services in National Parks across the country.    His in-depth knowledge of the retail industry and its impact on the tourist segment of the local economy, as well as his involvement with tourism on the national level provides significant expertise to the Board.  

Executive Officers:

Joseph M. Murphy. For a summary of Mr. Murphy’s business experience, refer to the “Directors and Nominees” section immediately above.

Gerald Shencavitz.  Mr. Shencavitz resides in Mount Desert, Maine, and has served as Executive Vice President, Chief Financial Officer (“CFO”), and Treasurer of the Company since December, 2007. Prior to his promotion in December 2007 to Executive Vice President, he served as Chief Financial Officer and Treasurer of the Company since June 2001. Mr. Shencavitz has served as Executive Vice President, Chief Financial Officer, and Chief Operating Officer of Bar Harbor Bank & Trust since his promotion in December, 2007. He was Chief Financial Officer, Senior Vice President and Chief Operating Officer of Bar Harbor Bank & Trust between June 2001 and December, 2007. Mr. Shencavitz serves as Treasurer of Bar Harbor Trust Services, an office he has held since 2001.  Mr. Shencavitz has also served as a member of the Federal Home Loan Bank of Boston’s Advisory Panel since 2007.

Michael W. Bonsey.  Mr. Bonsey resides in Bar Harbor, Maine, and has served as Executive Vice President (“EVP”) and Chief Risk Officer of Bar Harbor Bank & Trust since October, 2011.   He was Senior Vice President of Credit Administration of Bar Harbor Bank & Trust from December, 2001 through October, 2011. Additionally, Mr. Bonsey served as Vice President of Credit Administration from 2000 through December, 2001. Mr. Bonsey is the Chairperson of the Mount Desert Island Hospital’s Trustees and is a past President of Bar Harbor Rotary.

Gregory W. Dalton. Mr. Dalton resides in Mount Desert, Maine, and has served as Executive Vice President (“EVP”) of Business Banking of Bar Harbor Bank & Trust since October 2011.  He was Senior Vice President of Bar Harbor Bank & Trust’s Business Banking function from 2000 through October 2011. He is also a minority owner in both the Bar Harbor Jam Co. and its real estate holding companies, Blueberry Partners LLC and Triangle Development LLC located in Bar Harbor, Maine.  Mr. Dalton served as Vice Chair of the MDI YMCA and serves in several local youth focused, non-profit organizations including The Katahdin Area Council of the Boy Scouts of America and the Neighborhood House in Northeast Harbor, Maine.  

Stephen M. Leackfeldt. Mr. Leackfeldt resides in Harrington, Maine, and has served as Executive Vice President (“EVP”) of Retail Banking and Operations since 2011.  From 2001 through October 2011 he served as Senior Vice President of Retail Banking and Consumer Lending of Bar Harbor Bank & Trust. He is also the owner of State Cinemas located in Calais, Maine.

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CORPORATE GOVERNANCE

Board of Directors:

A Board of Directors comprised of thirteen (13) members managed the Company during 2012. A majority of the Board of Directors meets the independence standards established by NYSE MKT. The Board has determined that all the named director-nominees listed in this Proxy, with the exception of Mr. Murphy, meet applicable independence standards established by NYSE MKT. The Board of Directors of the Company held a total of eleven (11) regular meetings, three (3) special meetings, and one (1) annual meeting during 2012. Each director attended at least 75% of the total number of board and committee meetings that he or she was eligible to attend. The Board encourages, but does not require, each director to attend its Annual Meeting. All of the Board’s members attended the 2012 Annual Meeting.

Mr. Murphy’s Servce as Director following his Planned Retirement as President and CEO:

Mr. Murphy has announced his planned retirement as President and Chief Executive Officer of the Company and the Bank effective June 30, 2013.    The Governance Committee has recommended Mr. Murphy as a nominee for re-election as a Director to continue his service following his planned retirement in 2013.  Mr. Murphy has agreed to stand for re-election understanding that his service, if elected, will continue following his June 2013 retirement date.   The Governance Committee believes Mr. Murphy’s continuing service as a Director following his retirement will provide continuity and assist the Company in its CEO leadership transition process.  

Board Leadership Structure and Risk Oversight:

The leadership structure of the Company is guided by its Governance Committee. The Company’s Governance Committee nominates individuals to serve as members of the Company’s Board of Directors, including any management Directors. All Directors of the Company are considered “independent directors”, except for the CEO of the Company. The Chairperson of the Board of Directors, as well as the Vice Chairperson of the Board, are both “independent directors”. Management Directors do not serve as Chairs of any Board Committees. The Governance Committee nominates the Chairperson and Vice Chairperson roles for election by the entire Board of Directors. The “independent directors” meet in executive session directly after Board meetings periodically to ensure that there is adequate oversight of Company management and to ensure that there is ample time to assess the Company’s activities separate from management. The Governance Committee believes this leadership structure is prudent and provides sufficient segregation and independence.

The Board of Directors provides oversight to the management of the Company's risk profile, including but not limited to internal controls over financial reporting, credit risk, interest rate risk, liquidity risk, operational risk, reputational risk and compliance risk. The Board of Directors monitors and manages these risks through the activities of specialized Board Committees in conjunction with management, internal audit, the independent registered public accounting firm, and other independent advisors. Some of the more significant risks and the Board’s oversight of those risks are described below.  

The Board manages credit risk through a Director’s Loan Committee, which operates at the BHBT level and meets at least monthly. This committee sets loan policy, establishes credit authorities, and approves or ratifies all extensions of credit over $1,000,000. This Committee regularly reviews credit trends, delinquencies, non-performing loans and recommends loans to be charged-off to the Board of Directors.  

The Asset and Liability Management Committee (“ALCO”), which comprises the entire senior management team and is chaired by the CFO, assists in the management of interest rate and liquidity risk.  This committee meets on a regular basis to review market interest rate trends and product pricing strategies. On a quarterly basis, ALCO meets with its asset and liability management consultant, Darling Consulting Group, to review current trends, possible interest rate or liquidity risks in the balance sheet and to review prospective strategies over typically a two-year horizon using their proprietary modeling services.  The Chairperson of the Board attends these quarterly meetings and the findings and recommendations are reported to the full Board by the consultants at least twice a year. The Company's balance sheet position and risk mitigation strategies are reviewed by internal audit and the data verified by an outsourced specialist from M & M Consulting.

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The Company’s Audit Committee meets quarterly and receives reports from its independent registered public accounting firm, the independent loan review consultants, and the Company's internal audit function. The senior auditor conducts an annual risk-based audit program and provides audit findings quarterly.  

The Company has an Enterprise Risk Management Program that is administered on behalf of the Board of Directors by Executive Vice President and Chief Risk Officer Bonsey.  In addition to this Program, the Bank’s credit review, consumer loan underwriting, compliance and information security departments report to Mr. Bonsey.   The Enterprise Risk Management Program coordinates with all of the Bank’s lines of business to identify, monitor, track and report various risks within the organization.  The Program also established an Enterprise Risk Management committee that reviews and discusses on a quarterly basis the Program’s Bank wide risk assessments.   The final risk assessments are shared and discussed with the Board of Directors each quarter.  

The Board manages incentive compensation risk through its Compensation and Human Resources Committee. This Committee has engaged Pearl Meyer & Partners as independent compensation consultants to provide the Committee with both competitive market data and research into compensation best practices to guide the decisions of the Committee. To mitigate the inherent risks of incenting behaviors potentially adverse to the Company and its stakeholders, the Committee has reviewed the plans with the assistance of the Company’s Chief Risk Officer and their results are reviewed by the Board to ensure that incentive plans for senior officers and others do not encourage excessive risk-taking.

The Company believes that its risk management activities and procedures provide sufficient information to management and the Board of Directors to assist them in properly and adequately evaluating the Company’s compliance with its risk management programs and policies.  There can be no assurance that the Board’s risk oversight structure has identified and addressed every potential material risk and there may be additional risks that could arise in the Company’s business.   Both known and unknown risks could result in potentially material financial and/or business losses despite the Board’s efforts to oversee risk.

     

Committees

The Board of Directors has a standing Executive Committee, Audit Committee, Governance Committee, and Compensation and Human Resources Committee.

Executive Committee

The Bylaws of the Company provide that after each Annual Meeting of Shareholders, the Board shall                                                                                                                                                designate from among its members an Executive Committee with the authority to exercise all the powers of the Board of Directors in regard to ordinary operations of the business of the Company when the Board is not in session, subject to any specific vote of the Board. The Executive Committee for 2012 included directors Dodge, Colwell, Dudman, Murphy, Phillips, Shea, Toothaker, and Woodside.  Mr. Dodge served as Chairperson. The Executive Committee held two (2) meetings in 2012.

Audit Committee

The members of the Audit Committee included directors Toothaker, Dudman, Fernald, Hannah, and Woodside.  Mr. Toothaker served as Chairperson of the Committee. The Audit Committee met five (5) times during 2012. See “Appendix A” for a Report of the Audit Committee. The Audit Committee has a written charter, a copy of which is attached to this Proxy Statement and labeled “Appendix B”.  The Audit Committee Charter may be viewed on the Company’s general website under the Investor Relations section at www.BHBT.com.     

The Company’s Board has determined that the Audit Committee is composed of independent directors, in accordance with applicable NYSE MKT listing requirements and Rule 10A-3(b)(1) under the Exchange Act. The Audit Committee operates under a written charter, which has been adopted by the Audit Committee and the Company’s Board.  Audit Committee members do not accept any consulting, advisory, or other compensatory fees (except directors fees) and are not affiliated with the Company (except as a director) or any of its subsidiaries. The Board of Directors has determined that the Company has at least one “audit committee financial expert” serving on its Audit Committee. Mr. Scott G. Toothaker, CPA, meets the criteria for an “audit committee financial expert” and is “independent” within the meaning of the rules adopted by the NYSE MKT pursuant to the Sarbanes-Oxley Act of 2002.

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The Audit Committee has the sole authority to appoint and replace the independent registered public accounting firm. The Audit Committee is responsible for the compensation and oversight of the independent registered public accounting firm and this firm reports directly to the Audit Committee. The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities with respect to (i) the financial information to be provided to shareholders and the Commission; (ii) the review of quarterly financial statements; (iii) the system of financial reporting controls management has established; and (iv) the internal audit, external audit, and loan review processes.

 

Governance Committee

                                           

The Governance Committee for 2012 was comprised of directors Shea, Dodge, Colwell, Carter, and Lewis. The Governance Committee met four (4) times during 2012. Mrs. Shea served as Chairperson of the Committee. The Company Board of Directors has determined that each member of the Governance Committee is independent for purposes of NYSE MKT listing standards.

The Governance Committee’s responsibilities include screening director candidates, recommending nominees to the full Board of Directors (including the slate of returning directors) to be elected each year, making recommendations concerning the size and composition of the Board of Directors, recommending Committee structure and membership, and sponsoring new director orientation and education. The Governance Committee has a written charter, which may be viewed on the Company’s general website under the Investor Relations section at www.BHBT.com.

The Governance Committee expects to identify nominees to serve as directors of the Company primarily by accepting and considering the suggestions and nominee recommendations made by directors, management, and shareholders. To date the Governance Committee has not engaged any third parties to assist it in identifying candidates for the Board of Directors. The Governance Committee considers among other things the background, business and professional experience (including any requisite financial expertise or other special qualifications), current employment, community service, and other board service of its director-nominees, as well as racial, ethnic, and gender diversity of the Board as a whole. The Governance Committee generally considers a candidate’s qualifications in light of these broad criteria as well as an assessment as to whether the candidate can make decisions on behalf of or while representing the Company in a manner consistent with its stated business goals and objectives. The Governance Committee will also consider the candidate’s “independent” status in accordance with applicable regulations and listing standards. The Governance Committee will consider nominees recommended by shareholders. Any shareholder wishing to nominate a candidate for director must follow the procedures for submission of proposals set forth in the section of this Proxy Statement entitled “Nominations by Shareholders.”

Compensation and Human Resources Committee

The Compensation and Human Resources Committee reviews and considers recommendations from management, consultants, and directors concerning executive compensation policies, employee benefit plans, and salary administration programs, including reviewing annually the performance, total compensation, and recommended adjustments for all executive officers of the Company and its subsidiaries. The deliberations of the Compensation and Human Resources Committee are reported to the Board of Directors for review and approval by the independent board members. The Compensation and Human Resources Committee has a written charter, which may be viewed on the Company’s general website under the Investor Relations section at www.BHBT.com.

The Compensation and Human Resources Committee is comprised of Company directors Phillips, Colwell, Dodge, Fernald and Smith.  Mr. Phillips served as Chairperson of the Committee. The Company’s and Bank’s CEO, Mr. Murphy, served on the Committee in a non-voting, ex-officio capacity, as does the Bank’s Senior Vice President of Human Resources, Mrs. Marsha C. Sawyer. All voting members of the Compensation and Human Resource Committee are independent for purposes of NYSE MKT listing standards. The Compensation and Human Resources Committee met eight (8) times in 2012.

Further information regarding the Compensation and Human Resources Committee can be found below in this Proxy Statement beginning under the caption “Role of the Compensation Committee.” The Compensation Committee report appears at page 27 of this Proxy Statement.

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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

COMPENSATION OF EXECUTIVE OFFICERS

Compensation Discussion and Analysis

In the paragraphs that follow, is an overview and analysis of the Company’s compensation program and policies, the material compensation decisions made under those programs and policies with respect to its named executive officers, and the material factors considered in making those decisions.  Later in this Proxy Statement under the heading, “Executive Compensation” is a series of tables containing specific information about the compensation earned or paid to the named executive officers, referred to as “NEOs.”

The discussion below is intended to aid understanding the detailed information provided in those tables and put that information into context within the overall compensation program.  

Named Executive Officers

As used in this Proxy Statement, the term “named executive officers” or “NEOs” includes:  (i) the Company’s President and Chief Executive Officer, Joseph M. Murphy and Chief Financial Officer, Gerald Shencavitz, and (ii) the Company’s three (3) other most highly compensated policy making, executive officers who earned more than $100,000 in total compensation during the Company’s last fiscal year. In 2012, the other three NEOs were Executive Vice Presidents:  Michael W. Bonsey, Gregory W. Dalton and Stephen M. Leackfeldt.  

Objectives of the Company’s Compensation Program

The objective of the Company’s compensation program is to attract, retain, motivate, and reward NEOs and other executives who contribute to its financial and operational success, which ultimately builds value for its shareholders.  The Company Board of Directors believes that, in order to do this effectively, the program must:

·

Provide Company NEOs with total compensation opportunities at levels that are competitive for comparable positions at companies and banks with whom it competes for talent;

·

Directly link a significant portion of total compensation to the Company’s achievement of performance goals in a way that proportionally rewards higher performance levels;

·

Provide upside opportunities for exceptional individual performance, which can result in differentiated compensation among NEOs based on performance; and

·

Closely align the NEOs’ interest with those of Company shareholders by making stock-based incentives an element of the executive’s compensation over time.

Role of the Compensation Committee

The Compensation and Human Resources Committee (the “Committee”) oversees regulatory compliance for all Company compensation and benefit plans and administers the Company’s executive compensation programs. The Committee recommends these programs to the Company’s Board of Directors for approval by its independent board members at least annually and more frequently, if circumstances warrant. These programs are intended to provide a variety of competitive compensation components including base salaries, traditional benefits, annual cash performance incentives, and retirement programs. In addition, the Company has sought to align the long-term interests of its executives, including the NEOs, with those of the shareholders by providing share-based incentives in the form of stock option grants or equity awards. The composition of the components may vary from year to year based on individual performance, the Company’s business plan, market conditions, or other factors.

The Committee believes that the Company’s compensation policies and procedures are designed to provide a strong link between each NEO’s compensation and the Company’s short and long-term performance. The objective of the Company’s compensation program is to provide compensation which is competitive, variable based on the Company’s performance, and aligned with the long-term interests of shareholders.

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Shareholder Say on Pay Advisory Votes

Shareholders were first entitled to vote on an advisory, non-binding resolution on the Company’s compensation policies and procedures in 2009, again in 2011, and annually thereafter.  Past shareholder votes have been overwhelmingly in favor of the Company’s programs and practices.

The May, 2012 Say on Pay voting results were as follows:

For	Against	Abstain	Broker Non-Vote
2,315,677.99	62,894.35	77,016.82	981,993

The Compensation Committee will continue to consider the outcome of future advisory, non-binding Say on Pay votes when reviewing and planning future executive compensation arrangements.

The Role of Compensation Consultants and the Committee’s Evaluation of Conflicts of Interest

The Committee has occasionally utilized, and expects to utilize in the future, various outside consultants, actuaries, and employment attorneys to assist it in developing and implementing the essential components of the Company’s compensation program, including its stock option program, Supplemental Executive Retirement Plan (“SERP”), and incentive compensation arrangements.

During 2012, as in past years, Committee Chair, Robert Phillips and Senior Vice President Sawyer attended a multi-day conference sponsored by Bank Director Magazine, NASDAQ, and Institutional Shareholder Services specifically targeted at Bank Executive & Board Compensation best practices.

The Committee, under authority granted by its Charter, engages Pearl Meyer & Partners to assist in conducting updated reviews of the Company’s executive officer and director compensation packages.  Their 2012-2013 engagement includes:

·

Providing current market-based total compensation guidelines to assist in establishing appropriate and ongoing base compensation and short-term incentive compensation levels for the Company’s NEOs;

·

Providing on-going guidance on the Company’s short-term, annual cash incentive plan positions in relationship to the established plan framework utilizing, thresholds, targets, and stretch goals tied to the Company’s strategic and long-term financial plans;

·

Providing a comprehensive review of the Company’s compensation program for its directors;

·

Recommending an updated, appropriate Compensation Peer Group comparison for compensation purposes;

·

Providing guidelines for competitive base salary, equity components, and benefit structure as the Company seeks a candidate to fill the vacancy created by Mr. Murphy’s previously announced retirement in June 2013; and

·

Providing guidance for the development of a long term incentive program using equity grants as partial payment for future grants to NEOs under the Bar Harbor Bankshares and Subsidiaries Equity Incentive Plan of 2009.

The Committee has assessed the relationships between Pearl Meyer & Partners, the Company, the Committee and the executive officers of the Company for independence and conflicts of interest.   In this assessment, the Committee reviewed the criteria set forth in the SEC’s Reg. 240.10C-1(b)(4) (i)-(vi) and such other criteria as it deemed appropriate.   Specifically, the Committee considered the following factors in its evaluation of its relationship with Pearl Meyer & Partners:

·

Whether Pearl Meyer & Partners provided any other services to the Company;

·

How much compensation Pearl Meyer & Partners has received from the Company for compensation consulting services, as a percentage to their total revenue;

·

What policies and procedures have been adopted by Pearl Meyer & Partners to prevent a conflict of interest;

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·

Whether Pearl Meyer & Partners has any business or personal relationship with a member of the Committee;

·

   Whether Pearl Meyer & Partners owns any of our Company stock; and

·

Whether Pearl Meyer & Partners has any personal or business relationship with any executive officer of the Company.

The Committee did not identify any conflicts of interest for Pearl Meyer & Partners.

Role of Management in Establishing Compensation

On an annual basis Mrs. Marsha C. Sawyer, the Senior Vice President of Human Resources, with the oversight of the CEO, provides the Committee with general information on executive officer compensation, including the NEOs.   The Committee then reviews, discusses, and considers this information and any recommendations.   The CEO and the Senior Vice President of Human Resources generally attend the Committee meetings but were not present for the executive sessions or for any discussion of their own compensation.   Mrs. Sawyer assists in the administration of all executive compensation programs, prepares Committee and Board meeting materials and performs work as requested by the Committee, including working directly with the Company’s Compensation Consultant in preparation of peer analyses for the Committee’s consideration.   Mr. Murphy, the Company’s CEO attends portions of the Committee’s meetings and makes recommendations on base salary, annual incentives, and equity compensation for executive officers who report to him.   The Committee has the discretion to accept, reject, or modify the CEO’s recommendations.  No changes occurred in 2012 with respect to the participation by management in the compensation process.  

Market Benchmarking and Performance Comparisons

The Committee approves and recommends to the Board’s independent members compensation programs it believes meets the Company’s ongoing need to attract, motivate, and retain talented and qualified executives who have the ability to make a major contribution to the leadership and success of the Company. The Committee regularly reviews market information provided by the Company’s independent compensation consulting firm, Pearl Meyer & Partners. Pearl Meyer & Partners is retained by the Committee and does not provide any other consulting services to the Company or its subsidiaries. Pearl Meyer & Partners draws compensation information from published surveys and public filings detailing comparable benchmark data for similarly sized banks in the Company’s region.  The Committee reviews comparative compensation and benefit information contained in the public filings of a peer group the Company established for compensation comparison (the “Compensation Peer Group”). The Committee again found it necessary due to bank mergers and acquisitions to update and expand its Compensation Peer Group to financial institutions outside of Maine to incorporate an appropriate selection of publicly-traded financial institutions and provide a representation of the geographical area that may be considered for recruitment purposes. With the assistance of Pearl Meyer & Partners, the Company redefined its 2012 Compensation Peer Group to the companies listed below. The Committee believes these Compensation Peer Group filings disclose compensation programs of similarly situated executives in comparable institutions throughout Maine and the Northeast region and they are a useful comparative tool for the Committee in establishing executive compensation programs and individual criteria for its executives including the NEOs. The Compensation Peer Group information is used as a guide in establishing reasonableness in the Company’s compensation program.

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Financial performance statistics for the Company’s Compensation Peer Group is shown for the year ended December 31, 2012. The statistical information reported below was provided to Pearl Meyer & Partners by SNL Financial.  For 2012, the Company’s Compensation Peer Group was comprised of the following institutions.        

¹Calculated on a tax-equivalent basis.

The Committee did not target the elements of its compensation program at any specific level or percentile within the Compensation Peer Group, but used the information as a whole and the 50th percentile as a way to define its compensation program and assess the competitiveness and reasonableness of the Company’s pay practices. Rather than rely on a specific formula-based model, the Committee believes that retaining discretion to assess the overall performance of NEOs gives the Committee the ability to more accurately reflect individual contributions that cannot be absolutely quantified. The Committee also considers the senior incentive program tailored to provide more emphasis on incentive compensation for the NEO group as an important component of the Company’s overall compensation program.  

  

Total Shareholder Returns (“TSR”) statistics for the Company’s Compensation Peer Group is shown below for both one year and the three years ending December 31, 2012 for the purposes of measuring its CEO compensation in relationship to shareholder value. The statistical information was provided to Pearl Meyer & Partners for the Company’s 2012 Compensation Peer Group.

The Committee feels the Company’s TSR compares favorably with the Company’s Compensation Peer Group and places the Company above average for the measurement period indicating a solid pay-performance alignment.   The Committee believes that the compensation established for its CEO and other NEOs provides for appropriate balance between market compensation and shareholder return.     

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PEER BANK	STATE	TICKER  SYMBOL	1 Year TSR 2012 Y (%)	3 Year TSR 2012 Y (%)
Alliance Financial Corp	NY	ALNC	19.75	22.12
Arrow Financial Corp	NY	AROW	13.14	6.88
Bridge Bancorp, Inc.	NY	BDGE	7.83	(1.45)
Camden National Corp	ME	CAC	7.19	4.92
Chicopee Bancorp, Inc	MA	CBNK	12.70	8.39
Elmira Savings Bank	NY	ESBK	52.69	21.97
Enterprise Bancorp Inc.	MA	EBTC	18.64	18.16
Evans Bancorp, Inc	NY	EVBN	35.95	14.85
Financial Institutions Inc.	NY	FISI	19.33	19.91
First Bancorp Inc.	ME	FNLC	12.37	7.69
Hampden Bancorp Inc.	MA	HBNK	28.81	13.39
Hingham Inst.	MA	HIFS	33.99	30.32
Merchants Bancshares Inc.	VT	MBVT	(4.55)	10.41
NH Thrift Bancshares, Inc.	NH	NHTB	17.12	14.25
Northeast Bancorp	ME	NBN	(24.80)	5.85
Salisbury Bancorp, Inc	CT	SAL	4.47	7.14
Union Bankshares, Inc.	VT	UNB	7.98	10.52
United Financial Bancorp, Inc	MA	UBNK	.18	8.68
Westfield Financial Inc.	MA	WFD	4.23	1.93
75thth Percentile			19.54	16.50
50th Percentile			12.70	10.41
Bar Harbor Bankshares	ME	BHB	16.23	11.03
Percentile  Rank  BHB to Peers			58%	58%

The Committee used detailed compensation information on the Compensation Peer Group as disclosed in the most recent proxy filings available for competitive reference along with market salary survey information provided by Pearl Meyer & Partners. The Committee further referenced salary survey information and guidance provided by Pearl Meyer & Partners in its process to confirm and validate the appropriateness of the Company’s executive compensation compared to market and performance in establishing compensation levels for this group.    

  2012 compensation and comparative market salary information is detailed below:    

	BHB 2012 Base Salary1 ($)	Market Ranges of Base Salaries2 ($)	BHB 2012 Total Cash Compen-sation3 ($)	Market of Total Cash Compensation2  ($)
Joseph M. Murphy	351,805	300,000 350,000 400,000	464,961	455,000
Gerald Shencavitz	215,253	180,000 215,000 250,000	272,958	269,000
Michael W. Bonsey4	169,000	150,000 180,000 210,000	206,450	225,000
Gregory W. Dalton	177,000	150,000 180,000 210,000	214,109	225,000
Stephen M. Leackfeldt5	177,000	140,000 165,000 190,000	216,987	206,000

¹Approved base salary figures at the end of 2012 are used for comparison purposes in this table.  

²Market sources are comprised of Peer Group Average Proxy filing data from the financial institutions

disclosed on page 20 of base salary and cash (incentive) compensation and multiple industry survey

results utilized by Pearl Meyer & Partners.

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³ Approved base salary figures at the end of 2012 plus the amount paid to each NEO under the 2012 Annual Incentive

Plans are used in this table for comparison purposes.    

⁴Mr. Bonsey’s salary comparison is measured against market salaries for a Chief Risk Officer. Salaries ranges reported include banks on a larger scale than Bar Harbor Bankshares.   Mr. Bonsey’s base salary is set reflective of the Company’s size in relationship to the reported group size.  

⁵Mr. Leackfeldt’s salary comparison is measured against market salaries for an Executive Officer in charge of Retail Banking.   Mr. Leackfeldt also carries the responsibilities for oversight of all the Company’s facilities and the Bank’s Operations areas that are not reflected in the market comparison detailed above

The Committee also considers the relative scarcity of senior banking executive candidates in its immediate market area and the difficulties of recruiting out-of-market candidates to work in rural Maine. The Committee does not use any formal, fixed, or indexed criteria for establishing compensation levels for any of its NEOs within market identified ranges. The Committee believes over time, the growth in total compensation provided to its executive officers should be balanced towards incentive and equity compensation opportunities directly tied to corporate performance with less emphasis upon growth in base salaries.  

Compensation Plan Components

               The Company’s executive compensation program applicable to the NEOs is comprised of the following primary components: (a) base salaries and benefits, (b) annual incentive cash compensation programs, (c) long-term incentives in the form of stock option grants, and (d) retirement benefits:

(a)

Base Salary and Benefits. The executive compensation program provides base salaries and benefits, which include health and life insurance programs, a 401(k) retirement program, and vacation awards to compensate executive officers for the performance of core duties and responsibilities associated with their positions. The Committee reviews base salaries annually in the context of the comparative industry information, as described above. The Committee also considers the specific contributions of the individual executive officer and the officer’s opportunity for professional growth, as well as market factors, when it sets and adjusts base salaries. In addition, the Committee considers the prevailing economic climate, the overall performance of the Company, and its most current business plan.    Upon performance evaluations and the advice and market salary data supplied by Pearl Meyer & Partners, the Committee made performance and market adjustments resulting in the 2012 approved base salaries for NEOs as follows:

Named Executive	2011 Base Salary ($)	2012 Base Salary Adjustment ($)	2012 Equity Grants2 ($)	2012 Ending Base Salary ($)	Percentage of Base Increase Over 2011 (%)	Percentage of Base with Equity Value Increase Over 2011 (%)
Joseph M. Murphy President and CEO of Bar Harbor Bankshares and Bar Harbor Bank & Trust	341,805	10,000	$9,999	351,805	2.93	5.85
Gerald Shencavitz EVP, CFO,  and Treasurer of Bar Harbor  Bank-hares and EVP, CFO, and Chief Operations Officer of Bar Harbor Bank & Trust	211,253	4,000	$3,978	215,253	1.89	3.78
Michael W. Bonsey1 EVP, Chief Risk Officer  of Bar Harbor Bank & Trust	167,000	2,000	$1,971	169,000	1.20	2.38
Gregory W. Dalton1 EVP Vice President, Business Banking of Bar Harbor Bank & Trust	175,000	2,000	$1,971	177,000	1.14	2.27
Stephen M. Leackfeldt1 EVP, Retail  Banking and Operations for Bar Harbor Bank & Trust	167,000	10,000	$1,971	177,000	5.99	7.17

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¹Mr. Bonsey’s, Mr. Dalton’s, and Mr. Leackfeldt’s base salaries were increased through the Company’s normal process at the beginning of 2011.   They were further increased in October of 2011 in recognition of their promotions to Executive Vice President and expansion of their respective roles within the Company.   The 2011 Base Salary figure noted in the table represents their annualized, ending base salary for 2011.

²The Board of Directors voted NEOs equity shares as part of their 2012 compensation adjustment to further align the NEOs compensation with the financial success of the Company.  The shares are wholly owned by the executive, but carry the restriction to be held for a minimum of three months after leaving the employment of the Company

(b)

Short-term, Annual Incentive Cash Compensation Program. During 2012, eight (8) senior managers including NEOs, Messrs. Murphy, Shencavitz, Bonsey, Dalton, and Leackfeldt participated in an annual cash incentive compensation plan developed under the guidance of Pearl Meyer & Partners. The philosophy of the Compensation Committee was to set competitive, reasonable base salaries and allow for the potential of meaningful incentives tied to the Company’s short-term initiatives to optimize profitability, growth, excellence in individual performance, and to promote teamwork among its participants. This plan was approved by the Company’s Board of Directors for 2012 and is detailed below:    Incentive Payout Opportunity Each participant had a target incentive opportunity based on their role. The target incentive reflected a percentage of base salary determined to be consistent with competitive market practices. Actual awards varied based on achievement of specific goals. The opportunity reflects a range of potential awards.  Actual awards ranged from 0% (for not achieving minimal performance) to 150% of target (for exceptional performance). The table below summarizes the incentive ranges for the 2012 plan year.

2012 Short-Term Incentive Targets
Role	Below Threshold	Threshold (50% of Target Percentage)	Target (100%)	Stretch (150% of Target Percentage)
President /CEO	0%	12.50%	25.00%	37.50%
EVP & CFO	0%	10.00%	20.00%	30.00%
EVP	0%	8.75%	17.50%	26.25%

Plan Trigger  

In order for the Annual Incentive Plan to ‘activate’ or turn on, the Company needed to achieve at least $10,336 in Net Income for 2012. If BHB did not meet this level, the plan would not pay out any awards for the year, regardless of performance on other goals.

For the year ended December 31, 2012, the Company reported record net income of $12,466 compared with $11,043 for the year ended December 31, 2011, representing an increase of $1,423 or 12.89%.

Incentive Plan Measures Each participant had predefined performance goals used to determine their short-term incentive award.  There were two performance categories: BHB Team and Individual. BHB Team performance was reflected by common goals for all participants. Individual goals reflected each participant’s individual contributions based on their role.  The specific allocations of goals were weighted to reflect the focus and contribution for each position in the Company.   The table below provided the guidelines for the allocation of participant’s incentives for each performance component.

Position	BHB/Team  Performance	Individual Performance
President/CEO   (Murphy)	75%	25%
EVP/CFO   (Shencavitz)	75%	25%
EVP – Line   (Dalton)	30%	70%
EVP – Staff  (Bonsey and Leackfeldt)	50%	50%

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BHB Performance

BHB Team performance goals for 2012 were increased Net Income and an improved Efficiency Ratio. The table below shows the specific performance goals at Threshold, Target (budget or improvement over prior year measurements) and Stretch for each of the NEO’s during 2012.  

Joseph M.  Murphy
President and CEO
Base Salary	$351,805	Base Salary		$351,805	Base Salary		$351,805
Incentive Threshold (%)	12.50%	Incentive Target (%)		25.00%	Incentive Stretch (%)		37.50%
Incentive Threshold ($)	$43,976	Incentive Target ($)		$87,951	Incentive Stretch ($)		$131,927
Performance Goals					Payment Range1
Incentive Measures	Threshold	Target	Stretch	Weight	Threshold	Target	Stretch
Net  Income ($thousands)	$10,33 6	$11,114	$12,225	50.00%	6.25%	12.50%	18.75%
Efficiency Ratio	56.10%	55.00%	49.50%	25.00%	3.13%	6.25%	9.38%
Past Dues2	225bps	200bps	150bps	8.33%	1.04%	2.08%	3.12%
Charge offs2	30bps	25bps	20bps	8.33%	1.04%	2.08%	3.12%
NPL+OREO2	225bps	175bps	125bps	8.34%	1.04%	2.09%	3.13%
TOTALS				100.00%	12.50%	25.00%	37.50%
Gerald Shencavitz
EVP and CFO
Base Salary	$215,253	Base Salary		$215,253	Base Salary		$215,253
Incentive Threshold (%)	10.00%	Incentive Target (%)		20.00%	Incentive Stretch (%)		30.00%
Incentive Threshold ($)	$21,525	Incentive Target ($)		$43,051	Incentive Stretch ($)		$64,576
Performance Goals					Payment Range1
Incentive Measures	Threshold	Target	Stretch	Weight	Threshold	Target	Stretch
Net Income ($thousands)	$10,336	$11,114	$12,225	50.00%	5.00%	10.00%	15.00%
Efficiency Ratio	56.10%	55.00%	49.50%	25.00%	2.50%	5.00%	7.50%
Net Invest. Income	$15,675	$15,995	$17,595	15.00%	1.50%	3.00%	4.50%
Inv Yield Percentile Against Peer	48th	50th	75th	10.00%	1.00%	2.00%	3.00%
TOTALS				100.00%	10.00%	20.00%	30.00%
Michael W. Bonsey
Executive  Vice President
Base Salary	$169,000	Base Salary		$169,000	Base Salary		$169,000
Incentive Threshold (%)	8.75%	Incentive Target (%)		17.50%	Incentive Stretch (%)		26.25%
Incentive Threshold ($)	$14,788	Incentive Target ($)		$29,575	Incentive Stretch ($)		$44,363
Performance Goals					Payment Range1
Incentive Measures	Threshold	Target	Stretch	Weight	Threshold	Target	Stretch
Net Income ($thousands)	$10,336	$11,114	$12,225	30.00%	2.63%	5.25%	7.88%
Efficiency Ratio	56.10%	55.00%	49.50%	20.00%	1.75%	3.50%	5.25%
Avg. Commercial Loans	$406,539	$414,836	$456,320	15.00%	1.31%	2.63%	3.94%
Avg. Consumer Loans	$302,404	$308,575	$339,443	10.00%	0.88%	1.75%	2.63%
Past Dues2	225bps	200bps	150bps	8.33%	0.73%	1.46%	2.19%
Charge offs2	30bps	25bps	20bps	8.33%	0.73%	1.46%	2.18%
NPL+OREO2	225bps	175bps	125bps	8.34%	0.72%	1.45%	2.18%
TOTALS				100.00%	8.75%	17.50%	26.25%
Gregory  W. Dalton
Executive Vice President
Base Salary	$177,000	Base Salary		$177,000	Base Salary		$177,000
Incentive Threshold (%)	8.75%	Incentive Target (%)		17.50%	Incentive Stretch (%)		26.25%
Incentive Threshold ($)	$15,488	Incentive Target ($)		$30,975	Incentive Stretch ($)		$46,463
Performance Goals					Payment Range1
Incentive Measures	Threshold	Target	Stretch	Weight	Threshold	Target	Stretch
Net Income ($thousands)	$10,336	$11,114	$12,225	20.00%	1.75%	3.50%	5.25%
Efficiency Ratio	56.10%	55.00%	49.50%	10.00%	0.88%	1.75%	2.63%
Avg. Commercial Loans	$406,539	$414.836	$456,320	35.00%	3.06%	6.13%	9.19%
Avg. Non Personal Deposits Past Dues2	$176,224 225bp	$179,820 200bp	$197,802 150bp	15.00% 6.66%	1.31% 0.58%	2.63% 1.17%	3.94% 1.75%
Charge offs2	30bps	25bps	20bps	6.67%	0.58%	1.16%	1.75%
NPL+OREO2	225bps	175bps	125bps	6.67%	0.59%	1.16%	1.74%
TOTALS				100.00%	8.75%	17.50%	26.25%
Stephen M. Leackfeldt
Executive Vice President
Base Salary	$177,000	Base Salary		$177,000	Base Salary		$177,000
Incentive Threshold (%)	8.75%	Incentive Target (%)		17.50%	Incentive Stretch (%)		26.25%
Incentive Threshold ($)	$15,488	Incentive Target ($)		$30,975	Incentive Stretch ($)		$46,463
Performance Goals					Payment Range1
Incentive Measures	Threshold	Target	Stretch	Weight	Threshold	Target	Stretch
Net Income  thousands)	$10,336	$11,114	$12,225	30.00%	2.63%	5.25%	7.88%
Efficiency Ratio	56.10%	55.00%	49.50%	20.00%	1.75%	3.50%	5.25%
Retail Deposits	$498,626	$508,802	$559,682	10.00%	0.88%	1.75%	2.63%
Deposit Rate	0.81	0.79	0.77	10.00%	0.88%	1.75%	2.63%
Avg. Cons. Loans	$302,404	$308,575	$339,433	10.00%	0.88%	1.75%	263%
Past Dues2	225bps	200bps	150bps	6.67%	0.58%	1.17 %	1.75%
Charge offs2	30bps	25bps	20bps	6.67%	0.58%	1.17 %	1.74%
NPL+OREO2	225bps	175bps	125bps	6.66%	0.57%	1.16 %	1.74%
TOTALS				100.00%	8.75%	17.50%	26.25%

1 All Payment Range percentages rounded to two trailing decimals. 2 The asset quality measures for Past Dues and Non-Performing Loans + Other Real Estate Owned are calculated using a twelve month average of the month-end actual data for the calendar year.  Charge off percentage is measured using the actual annual net charge offs as a percentage of the average outstanding.  The average outstanding for this calculation is measured by averaging the actual outstanding loans at each month end.

Below is a summary of the 2012 awards paid as described above

2012 Incentive Payment Summary

Named Executive	Percentage Of Base (%)	Total Payout ($)	Net Income ($)	Efficiency Ratio ($)	Credit Asset Quality1 ($)	Loan and Deposit Growth ($)	Individual Goals ($)
Joseph M. Murphy	32.16	113,156	65,963	22,801	24,392
Gerald Shencavitz	26.81	57,705	32,288	11,150			14,2672
Michael W. Bonsey	22.16	37,450	13,317	6,135	8,221	9,777
Gregory W. Dalton	20.97	37,109	9,293	3,204	6,899	17,713
Stephen M. Leackfeldt	22.59	39,987	13,948	6,425	6,895	8,064	4,6553
Totals		285,407	134,809	49,715	46,407	35,554	18,922

	1The asset quality measures for Past Dues and Non-Performing Loans + Other Real Estate Owned are calculated using a twelve month average of the month-end actual data for the calendar year.  Charge off percentage is measured using the actual annual net charge offs as a percentage of the average outstanding.  The average outstanding for this calculation are measured by averaging the actual outstanding loans at each month end 2Mr. Shencavitz earned $7,811 for exceeding investment income targets, and $6,456 for investment yield measured against peers for a total incentive payment of $14,267 in this category. 3Mr. Leackfeldt received $4,655 for deposit rate management. Details of the above payments maximums are disclosed into Threshold, Target, and Stretch categories on be found on page 32.
(c)	Equity Plans. Since adopting its Stock Option Plan in 2000, the Company has provided its officers and managers, including its NEOs, with an equity-based compensation component in the form of stock options. This compensation component is used to align the interest of the Company’s participating officers and managers, particularly its executive officers, with those of its shareholders over a long-term horizon and to serve as a retention tool. The Company granted options upon date of hire or promotion for qualified individuals, and from time to time for special recognition. The Company awards all grants at the closing market price of the business day of the enabling vote by the Company’s Board of Directors. The Board of Directors also sets the vesting schedule, which is typically over a period of three to seven years. The Stock Option Plan adopted in 2000 may no longer issue stock options grants and the grants made under the Stock Option Plan of 2000 to NEOs and other management members are nearing expiration.  A schedule of these maturing options can be found on page 33.  Stock trading activity in the Company stock is being experienced as members of the management team exercise these maturing options.  The Company adopted the Bar Harbor Bankshares and Subsidiaries Equity Incentive Plan of 2009 which was approved by shareholders at the May 2009 Annual Meeting under which equity grants currently may be issued. NEOs were granted an increment of restricted stock as part of their 2012 compensation adjustment.  These restricted equity shares are fully vested, but held in the possession of the Company and may not be sold, transferred, or gifted by the NEOs until at least three months after they are no longer employed nor have director oversight for the Company. The purpose of the 2012 equity grants was to tie a portion of the NEOs compensation to the future success of the Company. While no formal plan to continue this compensation philosophy was established in 2012, the Committee may consider employing some form of this practice in the future.  Details of these grants made under the Bar Harbor Bankshares and Subsidiaries Equity Incentive Plan of 2009 are set forth on page 33 in the 2012 Option Exercises and Stock Vested Table in columns (d) and (e).   The Compensation Committee has engaged Pearl Meyer & Partners to assist it in developing a new equity-based program for future use. This portion of the Company’s compensation program was designed to encourage the long-term financial growth of the Company and reward the NEOs for the appreciation in shareholder value.
(d)	Benefits, Retirement and Post-Termination Compensation Elements. The Company provides a 401(k) plan for all employees meeting minimum age and service requirements. In addition, the Company provides a nonqualified, noncontributory, defined-benefit plan (“SERP”) for certain highly compensated officers. Currently, the CEO and Executive Vice President and Chief Financial Officer (“EVP/CFO”) are the only two NEOs that participate in the SERP. The Company’s 401(k) plan has embedded regulatory ceilings that limit the two most senior executives from deferring amounts which the Committee considers sufficient to provide for a reasonable, final average salary retirement benefit. The Company utilizes its SERP plan as a vehicle to assist in funding the CEO’s and EVP/CFO’s total retirement program.   The Company also maintains Change in Control Agreements for NEOs Murphy, Shencavitz, Bonsey, Leackfeldt, and Dalton. These agreements provide for the payment of their salary and other specified benefits for a period of twelve to twenty-four months in the event of both a change of control of the Company and subsequent termination (or constructive termination) within set timeframes after a change in control, unless such termination was for cause.  These specific payments and timeframes were established under the advice of a compensation consultant and employment attorney as representative of similar type agreements in the industry. The Committee believes that the Company’s SERP plan and Change in Control Agreements are necessary to provide a competitive total compensation plan to attract and retain the employment of NEOs that are a party to the agreements.

Other Compensation and Benefits

In addition to the foregoing, all executive officers of the Company are entitled to participate in certain group health, dental, and term life insurance benefits. In accordance with Company policy, all such benefits are generally available to employees of the Company and its subsidiaries.  

Stock Ownership Guidelines

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While all of the Company’s executive officers hold Company stock, the Company does not have specific guidelines regarding stock ownership for its NEOs at this time.  However, the Company encourages stock ownership and reviews overall ownership levels on a periodic basis.

Compliance with Internal Revenue Code Section 409A

Section 409A of the Internal Revenue Code was enacted in 2005 and provides that if a service provider is entitled to nonqualified deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, the service provider would be subject to adverse tax treatment, including accelerated income recognition and a potential 20% tax penalty. The Company has modified its affected compensation plans to comply with the Section 409A tax provisions because the Company’s NEOs meet the definition of a service provider under Section 409A.  

Policy on Internal Revenue Code Section 162(m)

Section 162(m) of the Code disallows publicly-traded companies from receiving a tax deduction on compensation paid to executive officers in excess of $ 1 million unless, among other things, the compensation meets the requirements for performance-based compensation. In structuring the compensation programs and in determining executive compensation, the Committee takes into consideration the deductibility limit for compensation and the performance-based requirements of Section 162(m).

No Company employee exceeded the $1 million dollar threshold during 2012.  

Compensation Committee Report

The Compensation Committee has reviewed the Compensation Discussion and Analysis included in this proxy statement and has discussed it with members of management. Based on such review and discussion, the Compensation Committee recommended to the Board of Director members that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K and this Proxy Statement.

Respectfully submitted by the members of the Compensation and Human Resources Committee of the Board:

Robert M. Phillips, Chair                        

Thomas A. Colwell                                 

Peter Dodge

Lauri E. Fernald

Kenneth E. Smith

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EXECUTIVE COMPENSATION

2012 Summary Compensation Table

The following table discloses compensation for the years ended December 31, 2012, 2011 and 2010 received by the Company’s principal executive officer, principal financial officer, and three other most highly compensated executive officers (the “NEOs”). The Company, or the subsidiary by which he was employed, paid compensation for each named executive officer.   

¹Included in received base salary amounts disclosed above for each named executive officer are monies they deferred pursuant to the Company’s 401(k) Plan, which allows employees of the Company and its wholly owned subsidiaries to defer monies from their compensation, subject to applicable limitations in section 401(k) of the Internal Revenue Code of 1986, as amended, and amounts deferred pursuant to the Company’s Section 125 Cafeteria plan providing health, life, and disability insurance benefits.  Employees, including NEOs are paid on a 26 bi-weekly basis most years.   Infrequently, the calendar provides for 27 bi-weekly pay days.  NEO’s received 1/26^th of their 2009 base salary on January 4, 2010 to accommodate this additional pay date.   This adjusting amount has been included in the 2010 base salary amount disclosed above.  This additional pay amount for 2010 was approved by the Board of Directors.

²Amounts in this column represent the cash value of restricted stock granted to executives as part of their 2012 compensation adjustments.    

³The amounts in this column reflect the changes in value of the Company’s nonqualified, noncontributory, defined-benefit supplemental executive retirement program between December 31, 2012, December 31, 2011, and December 31, 2010.  The amounts include applicable Medicare gross up (1.45%) amounts on the SERP calculations.

⁴Other Annual Compensation includes match and contribution amounts into the Company’s 401(k) plan in the same formula and schedule as available to all other employees and imputed life insurance amounts on group term insurance in excess of the allowable $50,000, non-taxable IRS limit.

⁵Mr. Murphy’s 2010 Incentive Compensation was capped as a result of the Company participation in the U.S. Treasury’s Capital Purchase Program.   The amounts disclosed above represent the reduced amounts for Mr. Murphy.

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⁶Mr. Shencavitz’s calculation (memo post only) had been over-reported in prior years.   Thus, to eliminate the cumulative prior overage, there was no need to report any additional amount for 2011 on Mr. Shencavitz’s  income statement to the IRS.  

⁷Mr. Bonsey’s base salary was adjusted from $144,200 to $167,000 effective October, 2011 upon his promotion to Executive Vice President.   The $148,504 represents the actual blended base salary he received for the calendar year 2011.

⁸One time payment of $5,000 in recognition of transitional teamwork effort in the business banking function during 2010 but paid in 2011

⁹Mr. Dalton’s base salary was adjusted from $151,600 to $175,000 effective October, 2011 upon his promotion to Executive Vice President.   The $156,003 represents the actual blended base salary he received for the calendar year 2011.

¹⁰Mr. Leackfeldt’s base salary was adjusted from $145,038 to $167,000 effective October, 2011 upon his promotion to Executive Vice President.   The $149,193 represents the actual blended base salary he received for the calendar year 2011.

The NEOs also participate in certain group life, health, disability insurance, and medical reimbursement plans, not disclosed in the Summary Compensation Table, that are generally available to all employees and do not discriminate in scope, terms, and operation.  The table below provides detail on the amounts comprising the column entitled “All Other Compensation” contained in the 2012 Summary Compensation Table.

		All Other Compensation Detail
Name	Year	Employer 401(k) Contribution Match and Contribution ($)	Club Dues ($)	Spousal Travel ($)	Imputed Life Insurance ($)	TOTAL ($)
Joseph M. Murphy	2012	9,800	1,250	0	8,289	19,339
Gerald Shencavitz	2012	7,989	0	198	2,092	10,279
Michael W. Bonsey	2012	6,928	0	0	773	7,701
Gregory W. Dalton	2012	7,789	0	0	836	8,625
Stephen M. Leackfeldt	2012	7,443	0	0	2,186	9,629

The Company provides non-cash perquisites that do not exceed $10,000 in the aggregate for any individual and are not included in the reported figures. Benefits not disclosed in the table above are of de minimus value such as incidental service fee waivers on deposit accounts or safe deposit rental fees.

NARRATIVE DISCUSSION AND ANALYSIS OF SUMMARY COMPENSATION TABLE

The Committee believes the following information and discussion is useful to the reader in understanding the information set forth in the above Summary Compensation Table.

Chief Executive Officer Employment Agreement

The Company has entered into a written employment agreement with Mr. Joseph M. Murphy, its President and CEO which was amended and restated on November 19, 2008 (the “CEO Employment Agreement”).

 

The CEO Employment Agreement provides for the payment of an annual base salary to the President and CEO of not less than $273,946 to be paid in substantially equal installments in accordance with the Company’s compensation policies and procedures on the pay dates established by the Company for its senior executive officers.  The base salary shall be reviewed annually by the Compensation Committee of the Company’s Board of Directors and shall be adjusted at the Company’s sole discretion.  The CEO shall also participate in any performance

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compensation plan agreed upon by the parties during the term of the CEO Employment Agreement in concert with the Company’s evolving goals and objectives. The Employment Agreement is for an initial term of two (2) years with provisions for automatic extensions of one (1) year each in the absence of notice from the Company of its intention not to extend the term of the Employment Agreement.   Mr. Murphy has announced his retirement from the Company as of June 30, 2013.  

Mr. Murphy’s Employment Agreement also provided for a payment in the event of his involuntary termination without cause or voluntary termination for good reason of two times his salary plus health and welfare benefits for twenty four months.  With limited exceptions, it also allows for a severance payment to the CEO in the event his employment is terminated within one (1) year prior to or following certain events defined to constitute a change in control of the Company. This severance payment resulting from a termination of employment (constructive termination) following a change in control is equal to two (2) times the CEO’s base annual salary, incentive compensation payments earned and any accrued but unused vacation time.  In addition, if Mr. Murphy had any unvested stock options and unvested supplemental executive retirement benefits those amounts would vest in accordance with the terms of the plans under which they were granted and vest fully upon a change in control. In the event that Mr. Murphy becomes subject to an excise tax on payments made under his agreements and various benefit plans in connection with a change in control, he will be reimbursed for payment of such amounts upon such time as the assumptions and calculations have been prepared, reviewed, and confirmed by a nationally recognized accounting firm.

Mr. Murphy’s Change in Control Agreement also contains restrictions on competition by the CEO with the Company during the term and for a period of one (1) year following the cessation of the CEO’s employment with the Company regardless of reason.

Compensation of the Chief Executive Officer

On an annual basis, the Committee reviews the existing compensation plan for the Company’s CEO, Joseph M. Murphy. The Committee reviews this compensation plan in the context of the Company’s overall performance, the achievement of certain financial and non-financial goals and the judgment of the entire Board of Directors as to the quality of the CEO’s leadership. In addition, the Committee compares the CEO’s compensation to CEOs of the Company’s Compensation Peer Group and salary survey information for comparable positions. In making these comparisons, the Committee takes into account appropriate differences in the size, business model, and financial performance of the other banking institutions.

In accordance with the CEO’s Employment Agreement with the Company, the Committee reviews the CEO’s base salary no less often than annually and may recommend an increase in his base salary to the Board of Directors at the Committee’s sole discretion. During 2012, CEO Murphy’s cash base salary was adjusted 2.93%   based on his continued strong performance on behalf of the Company and competitive data provided by the Company’s Compensation Consultant, Pearl Meyer & Partners.  

As further discussed below, the CEO participated in the structured annual incentive cash compensation plan provided to all executive officers. During 2012, Mr. Murphy earned an annual incentive of $113,156.  

During 2012, the Committee granted the CEO Murphy 279 shares of restricted stock with a value on the grant date of $9,999 as part of his 2012 compensation adjustment.  The stock is wholly owned by Mr. Murphy, but he is required to hold the shares for a minimum of three months after he has no further employment or director oversight for the Company.   

CEO Murphy is a member of the Board of Directors of the Company and its subsidiaries. He does not receive any director fees for participating in the activities of these Boards.

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Other Change in Control, Confidentiality, and Non-competition Agreements

The Company entered into a Change in Control, Confidentiality, and Non-competition Agreement with the Company’s EVP/CFO, Mr. Gerald Shencavitz. This agreement provides Mr. Shencavitz with severance of both salary and benefits for a period of eighteen (18) months in the event of both a change of control of the Company and subsequent termination (or constructive termination) within twelve (12) months after a change of control, unless such termination was for cause. In addition, Mr. Shencavitz’s stock options and supplemental executive retirement benefits will vest in accordance with the terms of the plans under which they were granted and vest fully upon a change in control. In the event that Mr. Shencavitz becomes subject to an excise tax on payments made under his agreements and various benefit plans in connection with a change in control, he will be reimbursed for payment of such amounts upon such time as the assumptions and calculations have been prepared, reviewed, and confirmed by a nationally recognized accounting firm.  

The Company has also entered into Change in Control, Confidentiality, and Non-Competition Agreements with the Bank’s Executive Vice Presidents, Michael W. Bonsey, and Gregory W. Dalton, and Stephen Leackfeldt along with four other senior employees. Their agreements provide for severance of both salary and benefits for a period of twelve (12) months in the event of both a change of control of the Company and subsequent termination (or constructive termination) within twelve (12) months of a change of control, unless such termination was for cause.  

All of these agreements were entered into as part of a total compensation program to attract and/or retain qualified executives and not entered into in response to any effort known to the Board of Directors by any party or entity to acquire control of the Company.

Incentive Cash Compensation

During 2012 NEOs, Messrs. Murphy, Shencavitz, Bonsey, Dalton, and Leackfeldt participated in an annual cash incentive compensation program with a combination of team and individual goals representing opportunities for incentive payments. This plan was approved by the Company’s Compensation Committee and Board of Directors in 2012. The voted plan document allows for tiered payments based on Threshold, Target, and Stretch measures along with an overall plan trigger requiring the Company to achieve at least a Net Income Available to Common Shareholder’s amount of $10,336 before any payments would be approved or paid under any measure. The Company paid out a total of Two Hundred Eighty Five Thousand, Four Hundred and Seven dollars ($285,407) to its NEOs in 2012.

The altering, inflating, and/or inappropriate manipulation of performance/financial results or any other infraction of recognized ethical business standards, will subject any participant to disciplinary action up to and including termination of employment. In addition, any incentive compensation as provided by the plan to which the participant would otherwise be entitled will be revoked or subject to “claw back.”   

The plan is based on a balance of multiple measures, layered oversight, and reasonable ceilings for exceptional performance. These two basic plan features structure the plan to discourage excessive risk and rewards.   The Compensation Committee reviewed the plan design to insure it is in line with best practices for risk.

                         

 Other Compensation and Benefits

In addition to the foregoing, all executive officers of the Company are entitled to participate in certain group health, dental, and term life insurance benefits. In accordance with Company policy, all such benefits are generally available to employees of the Company and its subsidiaries.

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2012 Grants of Plan-Based Awards  

The following table sets forth information regarding plan-based awards granted to the NEOs during the last fiscal year under the 2012 Annual Incentive Plan voted by the Board of Directors.

¹ The 2012 Plan measurement detailed in columns (c), (d), and (e) runs the calendar year of January 1, 2012 through December 31, 2012  The equity grants disclosed in columns (i) and (j) were voted on May 15, 2012.

²Amounts in this column represent cash awards available to individual named executives for achieving Threshold limits under the previously described 2012 annual incentive plan for their various assigned measures.

³ Amounts in this column represent cash awards available to individual named executives for achieving Target limits under the previously described 2012 annual incentive plan for their various assigned measures.

⁴Amounts in this column represent cash awards available to individual named executives for achieving Stretch or Maximum limits under the previously described 2012 annual incentive plan for their various assigned measures.

⁵Amounts in this column represent the number of restricted shares awarded to NEOs on May 15, 2012 as part of their 2012 compensation increase.    These shares are full vested but must remain in the ownership of the executives for at least three months following their employment or director association with the Company..

⁶Amounts in this column represent the value of the restricted shares granted to NEOs disclosed in column (i).   This amount is calculated using the closing price of BHB stock on May 15, 2012 which was the date of the grants.  

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2012 Outstanding Equity Awards at Fiscal Year-End

2012 Option Exercises and Stock Vested Table

¹This represents the number and dollar value of vested, but  restricted shares granted by the Board of Directors as part of the 2012 compensation adjustment required to be held until three months following the date the executive ceases to be employed by or associated with the Company.

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Retirement Benefits

The table below shows at December 31, 2012, the present value of accumulated benefits payable to each of the NEOs, including the number of years of service credited to each such named executive officer, under the Supplemental Executive Retirement Plan and using interest rate assumptions consistent with those used in Company financial statements. Additional information regarding the Supplemental Executive Retirement Plan benefits follows the table.

¹Years of credited service are determined by the vesting schedule contained within the Plan and not years of employment with the Company.

²Mr. Murphy became 100% vested in his Supplemental Executive Retirement Plan benefit as of September 30, 2010.

RETIREMENT TABLE NARRATIVE

Supplemental Executive Retirement Plan

The Company maintains a nonqualified, noncontributory, defined-benefit, supplemental executive retirement program (the “SERP”) for certain highly compensated executive employees. Messrs. Murphy and Shencavitz were the only authorized participants (the “Participants”) in the SERP as of December 31, 2012. Under the SERP the Participants are eligible to receive upon most termination events, disability, or death, an individually defined benefit payment based upon a predetermined vesting schedule. No plan benefits are payable to these individuals if they are terminated for cause as defined in the document.

Upon full vesting (defined as age 68 for Mr. Murphy and age 65 for Mr. Shencavitz) and the named executive’s retirement, then monthly payments of $11,200 and $8,583, respectively will be paid under the SERP to the named executives (or their beneficiary) for a period of 240 months. There are also provisions under the SERP for reduced monthly payments in the event of an earlier retirement by these individuals. As of December 31, 2012, Messrs. Murphy and Shencavitz have vested monthly benefits of $11,200 and $4,219, respectively.

The SERP benefit for Mr. Shencavitz will fully vest upon a change of control of the Company (as such term is defined in the SERP).   

Potential Payments upon Termination or Change in Control

The Company has entered into change in control agreements and maintains certain benefit plans that require it to provide compensation to executive officers in the event of a termination of employment or a change in control. The tables below set forth the amount and types of compensation payable to each executive officer upon voluntary termination without good reason, involuntary termination without cause, voluntary termination for good reason, termination for cause, death, disability, retirement, or termination after a change in control. The amounts

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assume a hypothetical termination of employment effective as of December 31, 2012 and include estimates of the amounts which would be paid to the executives in each specified circumstance. The actual amounts to be paid can only be determined at the time of an executive’s actual separation.

Payments Made Upon Voluntary Termination Without Good Reason.  Upon termination of employment with the Company; Messrs. Murphy, Shencavitz, Bonsey, Dalton, and Leackfeldt would be entitled to receive amounts earned during their term of employment pursuant to Company policies, programs, and benefit plans as follows:

·

Salary earned through the date of termination;

·

Reimbursement of reasonable and necessary expenses incurred in connection with employment through the date of termination;

·

Any incentive earned but not yet paid for the fiscal year ending prior to the year of termination;

·

Earned but unused vacation pay if terminated prior to December 31 of any year;

·

All vested stock options unless they will be working for a competitor; and

·

Amounts contributed and vested under the Company 401(k) Plan.

Messrs. Murphy and Shencavitz would be entitled to the payments and benefits above plus:

·

Vested benefits through their date of termination payable under the Company’s SERP Plan; however, Mr. Murphy was fully vested in the ordinary course in his SERP benefit on September 30, 2010.

Payments Made Upon Involuntary Termination by Bar Harbor Bankshares Without Cause or by the Executive for Good Reason.  Messrs. Murphy, Shencavitz, Bonsey, Dalton, and Leackfeldt would be entitled to the payments and benefits as follows:

·

Salary earned through the date of termination;

·

Reimbursement of reasonable and necessary expenses incurred in connection with employment through the date of termination;

·

Any incentive earned but not yet paid for the fiscal year ending prior to the year of termination;

·

Earned but unused vacation pay if terminated prior to December 31 of any year;

·

All vested stock options; and

·

Amounts contributed and vested under the Company 401(k) Plan.

Messrs. Murphy and Shencavitz would be entitled to the payments and benefits above plus:

·

Vested benefit amounts payable under the Company’s SERP Plan; however, Mr. Murphy was fully vested in the ordinary course in his SERP benefit on September 30, 2010.

Mr. Murphy would also be entitled to the payments and benefits above plus:

·

Lump sum payment of two times base salary; and

·

Health and welfare benefits for 24 months.

Mr. Murphy would also be entitled to the following payments and benefits in addition to those listed above if his termination occurs within the twelve months prior or twelve months following a change of control event:

·

Any unvested stock options would become vested; however, Mr. Murphy did not have any outstanding, as of December 31, 2012.

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Payments Made Upon a Termination for Cause.  Messrs. Murphy, Shencavitz, Bonsey, Dalton and Leackfeldt would be entitled to the payments and benefits below:

·

Salary earned through the date of termination;

·

Reimbursement of reasonable and necessary expenses incurred in connection with employment through the date of termination;

·

Earned but unused vacation pay if terminated prior to December 31 of any year;

·

Amounts contributed and vested under the Company’s 401(k) Plan;

·

All vested and unexercised stock options would be forfeited; and

·

Any incentive earned but not yet paid for the fiscal year ending prior to the year of termination will be forfeited.

Messrs. Murphy and Shencavitz would be entitled to the payments and benefits above plus:

·

All vested and unvested benefits under the Company’s SERP Plan would be forfeited.

Payments Made Upon Death or Disability.  In the event of the death or disability of Messrs. Murphy, Shencavitz, Bonsey, Dalton and Leackfeldt each would be eligible to receive the following payments and benefits:

·

Salary earned through the date of death or disability;

·

Reimbursement of reasonable and necessary expenses incurred in connection with employment through the date of death or disability;

·

Any incentive earned but not yet paid for the fiscal year ending prior to the year of death or disability;

·

Earned but unused vacation pay in the event of death or disability through date of event;

·

All vested stock options would become exercisable by the executive, or in the case of death, by their estate;

·

Amounts contributed and vested under the Company 401(k) Plan; and

·

Life insurance proceeds and/or disability payments under the Company’s general benefit plans are paid to the executive or their beneficiary by a third party insurance provider pursuant to policy provisions.

Messrs. Murphy and Shencavitz would be entitled to the payments and benefits above plus:

·

Vested benefit amounts, as of the date of disability, would be payable under the Company’s SERP Plan; and

·

Fully vested benefit amounts payable under the Company’s SERP Plan to their beneficiaries or estate in the event of death.

Payments Made Upon Retirement.  Messrs. Murphy, Shencavitz, Bonsey, Dalton and Leackfeldt would be eligible for the following payments and benefits:

·

Salary earned through the date of retirement;

·

Reimbursement of reasonable and necessary expenses incurred in connection with employment through the date of retirement;

·

Any incentive earned but not yet paid for the fiscal year ending prior to the year retirement;

·

Pro-rata share of any incentive earned for the fiscal year of retirement;

·

Earned but unused vacation pay as of retirement date;

·

All vested stock options would be available for exercise; and

·

Amounts contributed and vested under the Company 401(k) Plan.

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In addition, Messrs. Murphy and Shencavitz would be eligible for:

·

Vested benefit amounts payable under the Company’s SERP Plan.

Payments and Benefits Due Upon a Change in Control.  Messrs. Murphy, Shencavitz, Bonsey, Dalton and Leackfeldt would be eligible for the following payments and benefits:

·

Salary earned through the date of termination;

·

Reimbursement of reasonable and necessary expenses incurred in connection with employment through the date of termination;

·

Any incentive earned but not yet paid for the fiscal year ending prior to the year in which the change of control occurs;  

·

Earned but unused vacation pay as of termination date;

·

All vested stock options along with unvested options would be available for exercise; Amounts contributed and vested under the Company’s 401(k) Plan; and

·

Twelve months of base salary and specified benefits if terminated as a result of the change of control and specified health and welfare benefits.

Messrs. Murphy and Shencavitz would be eligible for:

·

Fully vested benefit amounts payable under the Company’s SERP Plan; and

·

Severance of base salary and specified benefits of twenty-four months for Mr. Murphy and eighteen months for Mr. Shencavitz upon a termination (or constructive termination) within defined time limits detailed within their agreements and tax gross up payments, if applicable.

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The following table describes the potential payments to Joseph M. Murphy, President and CEO, upon an assumed termination of employment or change in control as of December 31, 2012.

¹Under certain termination circumstances leading up to or following a Change of Control, Mr. Murphy may eligible for two times salary and COBRA eligible benefits.   

²Mr. Murphy is fully vested in his SERP Plan and will receive payment in all cases except for gross misconduct or employment with a competitor.

³Mr. Murphy does have provision for Tax Gross Ups within his agreements with the Company, but he had no amounts due as of December 31, 2012 that would provide for this provision to calculate additional amounts due him.

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The following table describes the potential payments to Gerald Shencavitz, Executive Vice President, Chief Financial Officer and Treasurer of Bar Harbor Bankshares and Executive Vice President, Chief Financial Officer, and Chief Operating Officer of Bar Harbor Bank & Trust, upon an assumed termination of employment or change in control as of December 31, 2012.

¹Under certain termination circumstances leading up to or following a Change of Control, Mr. Shencavitz may eligible for one and a half time salary and COBRA eligible benefits.   

² If Mr. Shencavitz terminates his employment on or after his Early Retirement Date and prior to his Normal Retirement Date and within three years after a Change in Control, and if he terminates employment for Good Reason or is terminated without Cause, then the amount of his SERP benefit shall accelerate to his full vested benefit and this figure would be $2,059,920.

³Gross-up plus excise tax.   This amount becomes $620,231, if the Company pays the excise taxes in permitted installment payments (rather than a lump sum).

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The following table describes the potential payments to Michael W. Bonsey, Executive Vice President, Chief Risk Officer of Bar Harbor Bank & Trust, upon an assumed termination of employment or change in control as of December 31, 2012.