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Table of Contents
 
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarter ended June 30, 2002
 
Commission File No. 0-28190
 
 
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Maine
  
01-04132282
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
2 Elm Street, Camden, ME
  
04843
(Address of principal executive offices)
  
(Zip Code)
 
Registrant’s telephone number, including area code: (207) 236-8821
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:
 
Outstanding at July 31, 2002: Common stock (no par value) 8,057,781 shares.
 

Table of Contents
 
CAMDEN NATIONAL CORPORATION
 
Form 10-Q for the quarter ended June 30, 2002
 
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
        
Page
PART I.
     
ITEM 1.
  
FINANCIAL INFORMATION
     
      
3
      
4-5
      
6
      
7
      
7
      
8
      
9
      
10-12
ITEM 2.
     
12-19
ITEM 3.
     
19-21
PART II.
     
ITEM 1.
     
21
ITEM 2.
     
21
ITEM 3.
     
21
ITEM 4.
     
21
ITEM 5.
     
21-22
ITEM 6.
     
23
  
24
EXHIBITS
   
25

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Table of Contents
INDEPENDENT ACCOUNTANTS’ REPORT
 
The Shareholders and Board of Directors
Camden National Corporation
 
We have reviewed the accompanying interim consolidated financial information of Camden National Corporation and Subsidiaries as of June 30, 2002, and for the six-month and three-month periods then ended. These financial statements are the responsibility of the Company’s management.
 
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with United States generally accepted auditing standards, the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with United States generally accepted accounting principles.
 
BERRY, DUNN, MCNEIL & PARKER
 
Portland, Maine
July 31, 2002

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Table of Contents
 
PART I.
 
ITEM 1.    FINANCIAL STATEMENTS
 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
    
Six Months Ended
June 30,
    
2002
     
2001
    
(In thousands, except number of shares and per share data)
Interest Income
                
Interest and fees on loans
   
$
27,349
 
   
$
32,290
Interest on securities
   
 
8,667
 
   
 
7,268
Interest on interest rate swap agreements, net
   
 
269
 
   
 
311
Interest on federal funds sold and other investments
   
 
364
 
   
 
607
    
  
Total interest income
   
 
36,649
 
   
 
40,476
Interest Expense
                
Interest on deposits
   
 
8,509
 
   
 
14,003
Interest on other borrowings
   
 
4,703
 
   
 
5,076
    
  
Total interest expense
   
 
13,212
 
   
 
19,079
    
  
Net interest income
   
 
23,437
 
   
 
21,397
Provision for Loan Losses
   
 
1,950
 
   
 
1,428
    
  
Net interest income after provision for loan losses
   
 
21,487
 
   
 
19,969
Other Income
                
Service charges on deposit accounts
   
 
1,860
 
   
 
1,768
Income from fiduciary activities
   
 
1,225
 
   
 
502
Merchant program
   
 
869
 
   
 
767
Mortgage servicing
   
 
445
 
   
 
246
Net gains on derivative instruments
   
 
—  
 
   
 
932
Life insurance earnings
   
 
433
 
   
 
378
Other income
   
 
1,839
 
   
 
1,063
    
  
Total other income
   
 
6,671
 
   
 
5,656
Operating Expenses
                
Salaries and employee benefits
   
 
8,014
 
   
 
6,712
Premises and fixed assets
   
 
2,329
 
   
 
2,128
Merchant program
   
 
836
 
   
 
835
Amortization of core deposit intangible
   
 
487
 
   
 
493
Other expenses
   
 
4,217
 
   
 
4,083
    
  
Total operating expenses
   
 
15,883
 
   
 
14,251
    
  
Income before income taxes and cumulative effect of accounting change
   
 
12,275
 
   
 
11,374
Income Taxes
   
 
4,007
 
   
 
3,751
    
  
Income before cumulative effect of accounting change
   
 
8,268
 
   
 
7,623
Cumulative effect of change in accounting for goodwill, net of tax benefit of $241
   
 
(449
)
   
 
—  
    
  
Net Income
   
$
7,819
 
   
$
7,623
    
  
 
See Independent Accountants’ Report.
The accompanying notes are an integral part of these Consolidated Financial Statements.

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Per Share Data
                
Basic earnings per share before cumulative effect of accounting change
   
$
1.03
 
   
$
0.94
Cumulative effect of change in accounting for goodwill, net of income tax benefit
   
 
(0.06
)
   
 
—  
    
  
Basic earnings per share
   
 
0.97
 
   
 
0.94
Diluted earnings per share before cumulative effect of accounting change
   
 
1.02
 
   
 
0.93
Cumulative effect of change in accounting for goodwill, net of income tax benefit
   
 
(0.06
)
   
 
—  
    
  
Diluted earnings per share
   
 
0.96
 
   
 
0.93
Cash dividends per share
   
$
0.34
 
   
$
0.32
Weighted average number of shares outstanding
   
 
8,057,781
 
   
 
8,145,341
 
 
 
See Independent Accountants’ Report.
The accompanying notes are an integral part of these Consolidated Financial Statements.

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Table of Contents
 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
    
Three Months Ended June 30,
    
2002
   
2001
    
(In thousands, except number
of shares and per share data)
Interest Income
              
Interest and fees on loans
   
$
13,761
   
$
16,460
Interest on securities
   
 
4,216
   
 
3,292
Interest on interest rate swap agreements, net
   
 
157
   
 
190
Interest on federal funds sold and other investments
   
 
167
   
 
304
    
  
Total interest income
   
 
18,301
   
 
20,246
Interest Expense
              
Interest on deposits
   
 
4,252
   
 
6,580
Interest on other borrowings
   
 
2,415
   
 
2,537
    
  
Total interest expense
   
 
6,667
   
 
9,117
    
  
Net interest income
   
 
11,634
   
 
11,129
Provision for Loan Losses
   
 
1,303
   
 
714
    
  
Net interest income after provision for loan losses
   
 
10,331
   
 
10,415
Other Income
              
Service charges on deposit accounts
   
 
1,018
   
 
925
Income from fiduciary activities
   
 
615
   
 
246
Mortgage servicing
   
 
240
   
 
93
Merchant program
   
 
518
   
 
452
Net gains on derivative instruments
   
 
—  
   
 
589
Life insurance earnings
   
 
216
   
 
189
Other income
   
 
1,132
   
 
413
    
  
Total other income
   
 
3,739
   
 
2,907
Operating Expenses
              
Salaries and employee benefits
   
 
4,013
   
 
3,460
Premises and fixed assets
   
 
1,168
   
 
1,078
Merchant program
   
 
489
   
 
528
Amortization of core deposit intangible
   
 
235
   
 
247
Other expenses
   
 
1,954
   
 
2,017
    
  
Total operating expenses
   
 
7,859
   
 
7,330
    
  
Income before income taxes
   
 
6,211
   
 
5,992
Income Taxes
   
 
2,003
   
 
1,989
    
  
Net Income
   
$
4,208
   
$
4,003
    
  
Per Share Data
              
Basic earnings per share
   
$
0.53
   
$
0.50
Diluted earnings per share
   
 
0.52
   
 
0.49
Cash dividends per share
   
 
0.17
   
 
0.16
Weighted average number of shares outstanding
   
 
8,057,781
   
 
8,145,341
 
 
See Independent Accountants’ Report.
The accompanying notes are an integral part of these Consolidated Financial Statements
 

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Table of Contents
 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
    
Six Months Ended
June 30,
  
    
2002
   
2001
  
    
(In thousands)
  
Net income
   
$
7,819
   
$
7,623
 
Other comprehensive income, net of tax:
                
Cumulative effect to record unrealized appreciation on securities held to maturity transferred to securities available for sale (net of taxes of $1,021 for 2001)
   
 
—  
   
 
1,982
 
Change in unrealized appreciation on securities available for sale (net of taxes of $556 and $800 for 2002 and 2001, respectively)
   
 
1,032
   
 
1,552
 
Cumulative effect of implementation of SFAS No. 133 (net of taxes of $158 for 2001)
   
 
—  
   
 
308
 
Change in effective cash flow hedge component of unrealized appreciation (depreciation) on derivative instruments marked to market (net of taxes of $42 and $(158) for 2002 and 2001, respectively)
   
 
78
   
 
(308
)
    
  
Comprehensive income
   
$
8,929
   
$
11,157
 
    
  
 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
    
Three Months Ended June 30,
  
    
2002
   
2001
  
    
(In thousands)
  
Net income
   
$
4,208
   
$
4,003
 
Other comprehensive income, net of tax:
                
Change in unrealized appreciation (depreciation) on securities available for sale (net of taxes of $1,223 and $(103) for 2002 and 2001, respectively)
   
 
2,271
   
 
(200
)
Change in effective cash flow hedge component of unrealized appreciation (depreciation) on derivative instruments marked to market (net of taxes of $159 and $(189) for 2002 and 2001, respectively)
   
 
296
   
 
(369
)
    
  
Comprehensive income
   
$
6,775
   
$
3,434
 
    
  
 
See Independent Accountants’ Report.
The accompanying notes are an integral part of these Consolidated Financial Statements.

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Table of Contents
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CONDITION
 
    
June 30,
2002
   
December 31,
2001
    
(unaudited)
   
(audited)
    
(In thousands, except number of shares and per share data)
ASSETS
              
Cash and due from banks
   
$
30,561
   
$
38,861
Federal funds sold
   
 
45,835
   
 
—  
Securities available for sale, at market
   
 
259,674
   
 
262,866
Securities held to maturity
   
 
1,042
   
 
944
Residential mortgages held for sale
   
 
207
   
 
—  
Loans, less allowance for loan losses of $14,235 and $13,514 at June 30, 2002 and December 31, 2001, respectively
   
 
740,032
   
 
710,528
Premises and equipment, net
   
 
17,523
   
 
17,437
Other real estate owned
   
 
190
   
 
195
Interest receivable
   
 
6,148
   
 
5,054
Core deposit intangible, net
   
 
5,237
   
 
5,708
Goodwill
   
 
3,518
   
 
4,208
Other assets
   
 
44,321
   
 
43,554
    
  
Total assets
   
$
1,154,288
   
$
1,089,355
    
  
LIABILITIES
              
Deposits:
              
Demand
   
$
89,560
   
$
96,162
NOW
   
 
91,902
   
 
95,664
Money market
   
 
161,059
   
 
134,333
Savings
   
 
91,178
   
 
88,226
Certificates of deposit
   
 
318,066
   
 
302,987
Brokered certificates of deposit
   
 
56,754
   
 
46,196
    
  
Total deposits
   
 
808,519
   
 
763,568
Borrowings from Federal Home Loan Bank
   
 
172,547
   
 
168,832
Other borrowed funds
   
 
50,551
   
 
42,011
Accrued interest and other liabilities
   
 
11,563
   
 
9,876
    
  
Total liabilities
   
 
1,043,180
   
 
984,287
    
  
Shareholders’ Equity
              
Common stock, no par value; authorized 10,000,000 shares, issued 8,609,898 shares
   
 
2,450
   
 
2,450
Surplus
   
 
5,775
   
 
5,795
Retained earnings
   
 
107,666
   
 
102,621
Accumulated other comprehensive income:
              
Net unrealized appreciation on securities available for sale, net of income tax
   
 
5,546
   
 
4,514
Net unrealized appreciation on derivative instruments marked to market, net of income tax
   
 
78
   
 
—  
    
  
Total accumulated other comprehensive income
   
 
5,624
   
 
4,514
Less cost of 552,117 shares of treasury stock
   
 
10,407
   
 
10,312
    
  
Total shareholders’ equity
   
 
111,108
   
 
105,068
    
  
Total liabilities and shareholders’ equity
   
$
1,154,288
   
$
1,089,355
    
  
 
See Independent Accountants’ Report.
The accompanying notes are an integral part of these Consolidated Financial Statements.
 

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Table of Contents
 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
    
Six Months Ended June 30,
  
    
2002
     
2001
  
    
(In thousands)
  
Operating Activities
                  
Net Income
   
$
7,819
 
   
$
7,623
 
Adjustment to reconcile net income to net cash provided by operating activities:
                  
Provision for loan losses
   
 
1,950
 
   
 
1,428
 
Depreciation and amortization
   
 
837
 
   
 
809
 
Increase in interest receivable
   
 
(1,004
)
   
 
(772
)
Decrease in core deposit intangible
   
 
471
 
   
 
493
 
Goodwill impairment loss
   
 
690
 
   
 
0
 
Increase in other assets
   
 
(1,330
)
   
 
(201
)
Increase in other liabilities
   
 
1,598
 
   
 
1,193
 
(Increase) decrease in residential mortgage loans held for sale
   
 
(207
)
   
 
10,325
 
Decrease in minority position
   
 
—  
 
   
 
(12
)
    
  
Net cash provided by operating activities
   
 
10,824
 
   
 
20,886
 
Investing Activities
                  
Proceeds from maturities of securities held to maturity
   
 
500
 
   
 
—  
 
Purchase of securities held to maturity
   
 
(595
)
   
 
—  
 
Proceeds from sale and maturities of securities available for sale
   
 
36,673
 
   
 
11,038
 
Purchase of securities available for sale
   
 
(31,991
)
   
 
(3,201
)
Net increase in loans
   
 
(31,454
)
   
 
(58,299
)
Net decrease in other real estate owned
   
 
5
 
   
 
71
 
Purchase of premises and equipment
   
 
(745
)
   
 
(1,543
)
Net sale of federal funds
   
 
(45,835
)
   
 
—  
 
    
  
Net cash used in investing activities
   
 
(73,442
)
   
 
(51,934
)
Financing Activities
                  
Net increase (decrease) in deposits
   
 
44,952
 
   
 
(20,923
)
Proceeds from Federal Home Loan Bank borrowings
   
 
2,402,253
 
   
 
2,622,875
 
Repayments on Federal Home Loan Bank borrowings
   
 
(2,398,539
)
   
 
(2,574,863
)
Net increase in other borrowed funds
   
 
8,540
 
   
 
2,829
 
Exercise and repurchase of stock options
   
 
(113
)
   
 
(54
)
Cash dividends
   
 
(2,775
)
   
 
(2,613
)
    
  
Net cash provided by financing activities
   
 
54,318
 
   
 
27,251
 
Net decrease in cash and cash equivalents
   
 
(8,300
)
   
 
(3,797
)
Cash and cash equivalents at beginning of year
   
 
38,861
 
   
 
29,337
 
    
  
Cash and cash equivalents at end of period
   
$
30,561
 
   
$
25,540
 
    
  
Supplemental disclosures of cash flow information:
                  
Non-Cash transactions:
                  
Transfer of securities from held to maturity to available for sale
   
 
—  
 
   
 
57,695
 
Transfer from loans to real estate owned
   
 
—  
 
   
 
54
 
 
See Independent Accountants’ Report.
The accompanying notes are an integral part of these Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1—BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation, as of June 30, 2002, and December 31, 2001, the consolidated statements of income for the six and three months ended June 30, 2002 and June 30, 2001, the consolidated statements of comprehensive income for the six and three months ended June 30, 2002 and June 30, 2001 and the consolidated statements of cash flows for the six months ended June 30, 2002 and June 30, 2001. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the six-month period ended June 30, 2002 is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the December 31, 2001 Annual Report to Shareholders.
 
NOTE 2—EARNINGS PER SHARE
 
Basic earnings per share data is computed based on the weighted average number of common shares outstanding during each year. Potential common stock is considered in the calculation of weighted average shares outstanding for diluted earnings per share.
 
The following tables set forth the computation of basic and diluted earnings per share:
 
    
Six Months Ended June 30,
    
2002
   
2001
    
(Dollars in thousands, except number of shares and per share data)
Net income, as reported
   
$
7,819
   
$
7,623
Weighted average shares
   
 
8,057,781
   
 
8,145,341
Effect of dilutive employee stock options
   
 
61,990
   
 
19,333
    
  
Adjusted weighted average shares and assumed conversion
   
 
8,119,771
   
 
8,164,674
    
  
Basic earnings per share
   
$
0.97
   
$
0.94
Diluted earnings per share
   
 
0.96
   
 
0.93
 
    
Three Months Ended June 30,
    
2002
   
2001
Net income, as reported
   
$
4,208
   
$
4,003
Weighted average shares
   
 
8,057,781
   
 
8,145,341
Effect of dilutive employee stock options
   
 
61,990
   
 
19,333
    
  
Adjusted weighted average shares and assumed conversion
   
 
8,119,771
   
 
8,164,674
    
  
Basic earnings per share
   
$
0.53
   
$
0.50
Diluted earnings per share
   
 
0.52
   
 
0.49
 

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NOTE 3—DERIVATIVE FINANCIAL INSTRUMENTS
 
The Company has interest rate protection agreements (caps) with notional amounts of $90.0 million at June 30, 2002. These caps are used to limit the Company’s exposure to a rising rate environment. Under these agreements the Company paid up front premiums for the right to receive cash flow payments in excess of the predetermined cap rate, thus, effectively capping its interest rate cost for the duration of the agreement. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, management designates these caps as cash-flow hedges. For a qualifying cash flow hedge, an interest rate cap will be carried on the statement of condition at fair value with the time and option volatility value changes reflected in the current statement of income. Any intrinsic value will be recorded in other comprehensive income and recognized in future statements of income as an offset to related future interest costs. As of June 30, 2002 and December 31, 2001, the caps have no fair value and therefore there was no effect on the statements of income or other comprehensive income.
 
The Company also has swap agreements with notional amounts of $30 million at June 30, 2002 to hedge floating rate loans. These swap agreements are designated as a cash flow hedge since they convert a portion of the loan portfolio from a variable rate based upon the Prime rate to a fixed rate. The hedge relationship is estimated to be 100% effective, therefore, there is no impact on the statements of income. The fair values of the swap agreements are recorded in the statement of condition with the offset recorded in the statement of other comprehensive income.
 
Upon implementation of SFAS No. 133, net gains and losses related to the effective cash flow hedge component of derivative instruments were reported as a cumulative effect adjustment to other comprehensive income.
 
NOTE 4—CORE DEPOSIT INTANGIBLES
 
The Company has a core deposit intangible asset related to the acquisition of bank branches in 1998. The core deposit intangible is amortized on a straight-line basis over 10 years, and reviewed for possible impairment when it is determined that events or changed circumstances may affect the underlying basis of the asset. The carrying amount is as follows:
 
    
June 30,
2002
   
December 31,
2001
    
(Dollars in thousands)
Core deposit intangible, cost
   
$
9,424
   
$
9,424
Accumulated amortization
   
 
4,187
   
 
3,716
    
  
Core deposit intangible, net
   
$
5,237
   
$
5,708
 
Amortization expense related to the core deposit intangible for the six and three month periods ended June 30, 2002 amounted to $471.0 thousand and $235.0 thousand, respectively. The expected amortization expense for each year in the five-year period ending December 31, 2007 is estimated to be $941.1 thousand.
 
NOTE 5—GOODWILL
 
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must be recognized and reported separately from goodwill. SFAS No. 142 requires, in part, that recorded goodwill be tested at least annually for impairment rather than being amortized over the estimated useful life of the underlying business. The Company adopted the provisions of SFAS No. 141 as of July 1, 2001 and SFAS No. 142 as of January 1, 2002. Goodwill acquired in a purchase business combination completed after June 30, 2001, but before SFAS No. 142 was adopted in full, was not amortized. The Company had no business combinations treated as a purchase before July 1, 2001, thus the Company did not have any goodwill prior to that date. Upon adoption of SFAS No. 142, the Company evaluated its existing intangible assets and goodwill that were acquired in purchase business combinations, and considered whether any necessary reclassifications were required in order to conform with the new classification

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criteria in SFAS No. 141 for recognition separate from goodwill. No such reclassifications were required.
 
In connection with the transitional goodwill impairment evaluation, SFAS No. 142 required the Company to perform an assessment of whether there was an indication that goodwill was permanently impaired as of the date of adoption. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill, to those reporting units as of the date of adoption. As a result of this process, the Company has identified Banking and Financial Services as reporting units based on operational characteristics, the existence of discrete financial information, and direct management review of these units. The Company had six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. The Company determined that goodwill was impaired as of January 1, 2002, the date of adoption, and the transitional impairment loss, net of taxes, was recognized as a cumulative effect of a change in accounting principle in the Company’s consolidated statement of income.
 
The Company estimated the value of goodwill as of January 1, 2002 utilizing several standard valuation techniques, including discounted cash flow analyses, as well as an estimation of the impact of business conditions on the long-term value of the goodwill carried on the Company’s balance sheet. Management and the Board of Directors determined that the impact of the overall deterioration of the stock market on investor activities within its target market had negatively impacted the value of the Company’s goodwill balances related to the acquisitions of its financial services subsidiaries. This resulted in an estimation of impairment of $690,000, before taxes, which management determined as of June 30, 2002, effective January 1, 2002.
 
At January 1, 2002, goodwill was as follows:
 
    
Banking
   
Financial
Services
     
Total
  
Goodwill, at cost
   
$
1,800
   
$
2,408
 
   
$
4,208
 
Transitional impairment loss
   
 
—  
   
 
(690
)
   
 
(690
)
    
  
  
Goodwill, net
   
$
1,800
   
$
1,718
 
   
$
3,518
 
    
  
  
 
ITEM 2.    MANAGEMENT’S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
Forward Looking Information
 
The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Company may make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “will,” “should,” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
 
Some of the factors that might cause these differences include the following: changes in general, national or regional economic conditions; changes in loan default and charge-off rates; reductions in deposit levels

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necessitating increased borrowing to fund loans and investments; changes in interest rates; changes in laws and regulations; changes in the size and nature of the Company’s competition; and changes in the assumptions used in making such forward-looking statements. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences, including, among others, the factors listed under “Certain Factors Affecting Future Operating Results,” beginning on page 16 of our Annual Report on Form 10-K for the year ended December 31, 2001. Readers should carefully review the factors described under “Certain Factors Affecting Future Operating Results” and should not place undue reliance on our forward-looking statements.
 
These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
 
Critical Accounting Policies
 
Management’s discussion and analysis of the Company’s financial condition are based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to the allowance for loan losses. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management’s estimates and assumptions under different assumptions or conditions.
 
Management believes the allowance for loan losses is a critical accounting policy that requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on management’s evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management’s estimation of probable losses. The use of different estimates or assumptions could produce different provisions for loan losses.
 
Management utilizes numerous techniques to estimate the value of various assets held by the Company. As previously discussed, management utilized various methods to determine the appropriate carrying value of goodwill as required under SFAS 142. Various other valuation methodologies are utilized to determine the appropriate carrying value of other assets including, but not limited to, property, plant and equipment, mortgage servicing rights, overall collectibility of loans and receivables. The use of different estimates or assumptions could produce different estimates of carrying value.
 
Results Of Operations
 
The Company reported consolidated net income of $7.8 million or $0.96 per diluted share, for the first six months of 2002. This is an increase of $196.0 thousand or 2.6% compared to net income of $7.6 million or $0.93 per diluted share for the comparable period of 2001. Net income before the cumulative effect of a change in accounting for goodwill was $8.3 million, an increase of 8.5% compared to the first six months of 2001. On a fully diluted per share basis, earnings before the cumulative effect of a change in accounting for goodwill were $1.02 per share for the first six months of 2002, compared to $0.93 reported for the first six months of 2001. Return on average equity (“ROE”) and return on average assets (“ROA”) for the first half of the year was 14.66% and 1.42%, respectively. ROE and ROA were 16.16% and 1.50%, respectively, for the same period in 2001.
 
For the second quarter of 2002, the Company reported consolidated net income of $4.2 million or $0.52 per diluted share, an increase of 6.1% over earnings per diluted share of $0.49 reported for the second quarter of

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2001. When excluding income from the sale of securities and derivative instruments, fully diluted earnings per share for the second quarter of 2002 would have been $0.51 compared to $0.44 for the second quarter of 2001, an increase of 15.9%.
 
Net Interest Income
 
The Company’s net interest income, on a fully taxable equivalent basis, for the six months ended June 30, 2002 was $23.6 million, a 9.2% or $2.0 million increase over the net interest income for the first six months of 2001 of $21.6 million. Interest income on loans decreased by $5.0 million, or 15.4% during the six-month period of 2002 compared to the same period of 2001. This decrease was due to decreases in loan yields resulting from a decreasing interest rate environment. The Company experienced an increase in interest income on investments during the first six months of 2002 compared to the same period in 2001 due to increased investment volumes. The Company’s interest expense on deposits and borrowings decreased during the first six months of 2002 compared to the same period in 2001. This decrease was the result of the decreasing interest rate environment that was somewhat offset by increased deposit volumes. Net interest income, expressed as a percentage of average interest-earnings assets for the first half of 2002 and 2001, was 4.62% and 4.55%, respectively.
 
Net interest income, on a fully taxable equivalent basis, for the three months ended June 30, 2002 was $11.7 million, a 4.2% or $0.5 million increase, over $11.2 million in net interest income for the same period in 2001.
 
The following tables, which present changes in interest income and interest expense by major asset and liability category for six months ended June 30, 2002 and 2001, illustrate the impact of average volume growth and rate changes. The income from tax-exempt assets, municipal investments and loans, has been adjusted to a tax-equivalent basis, thereby allowing a uniform comparison to be made between asset yields. Changes in net interest income are the result of interest rate movements, changes in the amounts and mix of interest-earning assets and interest-bearing liabilities, and changes in the level of non-interest-earning assets and non-interest-bearing liabilities. The Company utilizes derivative financial instruments such as interest rate swap agreements that have an effect on net interest income. There was an increase in net interest income due to the derivative financial instruments of $269.0 thousand during the first six months of 2002 compared to an increase of $311.0 thousand in the first six months of 2001. The average amount of non-accrual loans can also affect the average yield on all outstanding loans. Non-accrual loans for June 30, 2002 and 2001 were $7.7 million and $6.3 million, respectively.
 

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ANALYSIS OF CHANGES IN NET INTEREST MARGIN
 
    
Six Months Ended
June 30, 2002
     
Six Months Ended
June 30, 2001
  
    
Amount of Interest
     
Average
Yield/Cost
     
Amount of Interest
     
Average
Yield/Cost
  
    
Dollars in thousands
  
Interest-earning assets:
                                
Investments (including federal funds sold)
   
$
9,129
 
   
6.41
%
   
$
7,977
 
   
6.86
%
Loans
   
 
27,712
*
   
7.52
%
   
 
32,744
*
   
9.12
%
    
  
  
  
Total earning assets
   
 
36,841
 
   
7.20
%
   
 
40,721
 
   
8.56
%
Interest-bearing liabilities:
                                
Demand deposits
   
 
0
 
   
0.00
%
   
 
0
 
   
0.00
%
NOW accounts
   
 
205
 
   
0.45
%
   
 
409
 
   
0.92
%
Savings accounts
   
 
424
 
   
0.95
%
   
 
946
 
   
2.33
%
Money market accounts
   
 
1,214
 
   
1.77
%
   
 
2,523
 
   
4.11
%
Certificates of deposit
   
 
5,403
 
   
3.61
%
   
 
9,114
 
   
5.57
%
Borrowings
   
 
4,703
 
   
4.22
%
   
 
5,076
 
   
5.21
%
Brokered certificates of deposit
   
 
1,263
 
   
4.68
%
   
 
1,011
 
   
7.68
%
    
  
  
  
Total interest-bearing liabilities
   
 
13,212
 
   
2.69
%
   
 
19,079
 
   
4.16
%
Net interest income (fully-taxable equivalent)
   
 
23,629
 
          
 
21,642
 
       
Less: fully-taxable equivalent adjustment
   
 
(192
)
          
 
(245
)
       
    
         
      
    
$
23,437
 
          
$
21,397
 
       
    
         
      
Net Interest Rate Spread (fully-taxable equivalent)
            
4.51
%
            
4.40
%
Net Interest Margin (fully-taxable equivalent)
            
4.62
%
            
4.55
%
*
 
  Includes net swap income figures—2002: $269,000 and 2001: $311,000.
 
Notes:
 
Nonaccrual loans are included in total loans. Tax exempt interest was calculated using a rate of 34% for fully-taxable equivalent.

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AVERAGE BALANCE SHEETS
 
    
Six Months Ended June 30,
    
2002
   
2001
    
Dollars in thousands
Interest-earning assets:
              
Investments (including federal funds sold)
   
$
287,202
   
$
234,326
Loans
   
 
743,463
   
 
723,965
    
  
Total interest-earning assets
   
 
1,030,665
   
 
958,291
Cash and due from banks
   
 
26,594
   
 
23,879
Other assets
   
 
63,224
   
 
56,790
Less allowance for loan losses
   
 
13,665
   
 
11,510
    
  
Total assets
   
$
1,106,818
   
$
1,027,450
    
  
Sources of funds:
              
Demand deposits
   
$
86,677
   
$
76,370
NOW accounts
   
 
92,893
   
 
89,394
Savings accounts
   
 
89,743
   
 
81,993
Money market accounts
   
 
138,378
   
 
123,649
Certificates of deposits
   
 
302,182
   
 
330,123
Short-term borrowings
   
 
224,743
   
 
196,328
Brokered certificates of deposit
   
 
54,471
   
 
26,562
    
  
Total sources of funds
   
 
989,087
   
 
924,419
Other liabilities
   
 
10,208
   
 
7,904
Shareholders’ equity
   
 
107,523
   
 
95,127
    
  
Total liabilities and shareholders’ equity
   
$
1,106,818
   
$
1,027,450
    
  
 
ANALYSIS OF VOLUME AND RATE CHANGES ON
NET INTEREST INCOME AND EXPENSES
 
    
June 30, 2002 Over June 30, 2001
  
    
Change
Due to
Volume
     
Change
Due to
Rate
     
Total
Change
  
    
Dollar in thousands
  
Interest-earning assets:
                           
Investments (including federal funds sold)
   
$
1,800
 
   
$
(648
)
   
$
1,152
 
Loans
   
 
882
 
   
 
(5,914
)
   
 
(5,032
)
    
  
  
Total interest income
   
 
2,682
 
   
 
(6,562
)
   
 
(3,880
)
Interest-bearing liabilities:
                           
NOW accounts
   
 
16
 
   
 
(220
)
   
 
(204
)
Savings accounts
   
 
89
 
   
 
(611
)
   
 
(522
)
Money market accounts
   
 
301
 
   
 
(1,610
)
   
 
(1,309
)
Certificates of deposit
   
 
(771
)
   
 
(2,940
)
   
 
(3,711
)
Short-term borrowings
   
 
735
 
   
 
(1,108
)
   
 
(373
)
Brokered certificates of deposit
   
 
1,063
 
   
 
(812
)
   
 
251
 
    
  
  
Total interest expense
   
 
1,433
 
   
 
(7,301
)
   
 
(5,868
)
Net interest income (fully taxable equivalent)
   
$
1,249
 
   
$
739
 
   
$
1,988
 
    
  
  
 

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Noninterest Income
 
Total non-interest income increased by $1.0 million or 17.9% in the six months ended June 30, 2002 compared to the six months ended June 30, 2001. Excluding the gain of $932.0 thousand realized from the sale of derivative instruments during 2001, non-interest income increased $1.9 million or 41.2%. Service charges on deposit accounts increased $92.0 thousand or 5.2% for the first half of 2002 compared to 2001. Income from trust fees increased $723.0 thousand or 144.0% primarily due to the acquisition of Acadia Trust, N.A. on July 19, 2001. Merchant card program fees increased $102.0 thousand or 13.3 % during the first half of the year compared to a comparable period in 2001 due to increased volumes. Residential mortgage servicing rights associated with sales of residential real estate loans increased $199.5 thousand due to increased sale of loans during the first half of 2002 compared to 2001. Other non-interest income increased $776.0 or 73.0%, primarily due to $505.6 thousand in management fees from Acadia Trust, N.A., gains on the sale of investments of $143.0 thousand, and an increase in brokerage fees of $135.4 thousand from Acadia Financial Consultants, our banks’ full-service brokerage and insurance divisions added during the fourth quarter of 2001.
 
Total non-interest income increased by $832.0 thousand or 28.6% during the second quarter of 2002 compared to the second quarter of 2001. Excluding the gain of $589.0 thousand recognized from the sale of derivative instruments during the second quarter of 2001, non-interest income increased $1.4 million or 61.3%. Service charges on deposit accounts increased $93.0 thousand or 10.1% for the second quarter of 2002 compared to 2001. Merchant card program fees increased $66.0 thousand or 14.6% during the second quarter due to increased volumes. Income from trust fees increased by $369.0 thousand or 150.0% in the second quarter of 2002 compared to 2001 due to the acquisition of Acadia Trust, N.A. Other non-interest income increased $719.0 or 174.1%, primarily due to $342.9 thousand in investment management fees from Acadia Trust, N.A., gains on the sale of investments of $156.2 thousand, a gain on the sale of an OREO property of $93.0 thousand, and an increase in brokerage fees of $59.9 thousand from Acadia Financial Consultants.
 
During the second quarter of 2002, the overall impact of the general stock market environment negatively impacted business activities in the Company’s financial services business lines. General stock market activity could affect the Company’s financial results in several ways. For example, decreased market values of clients’ assets under management (“AUM”) would result in decreased AUM levels to which management fees can be charged to the Company’s clients. Additionally, an overall negative investor sentiment toward the stock market would affect the Company’s ability to attract and retain clients who use the Company’s investment management services. The impact of the existing stock market performance, however, may also benefit the Company’s banking subsidiaries as disenchanted stock market investors search for safer investment opportunities such as certificates of deposits, money market funds and other traditional products offered through the banking subsidiaries.
 
Noninterest Expense
 
Total non-interest expense increased by $1.6 million or 11.5% in the six month period ended June 30, 2002 compared to the six months ended June 30, 2001. Salaries and employee benefit costs increased by $1.3 million or 19.4% during the first six months of 2002 compared to 2001. The largest portion of this increase, approximately $1.1 million, was related to costs associated with Acadia Trust N.A. and Acadia Financial Consultants. Excluding this amount, the increase for the six month period would have been $231.0 thousand or 3.4%, which is due to normal annual salary increases and higher benefit costs. Expenses related to premises and fixed assets increased $201.0 thousand or 9.4% during the first half of 2002 compared to 2001 due to the addition of Acadia Trust, N.A. and the renovation and expansion of several of the Company’s facilities. Other operating expenses increased by $134.0 thousand or 3.3%, in the first six months of 2002 compared to the first six months of 2002. The largest contributing factor was the expenses related to the acquisition of Acadia Trust, N.A.
 
Total non-interest expense increased by $529.0 thousand or 7.2% in the quarter ended June 30, 2002 compared to the same quarter ended June 30, 2001. Salaries and employee benefit costs increased by $553.0 thousand or 16.0% during the second quarter of 2002 compared to 2001. The largest portion of this increase, approximately $545.9 thousand, is related to the costs associated with Acadia Trust N.A. and Acadia Financial

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Consultants. Expenses related to premises and fixed assets increased $90.0 thousand or 8.3% during the second quarter of 2002 compared to 2001 due to the addition of Acadia Trust, N.A. and the renovation and expansion of several of the Company’s facilities. Other operating expenses decreased by $63.0 thousand or 3.1%, in the second quarter of 2002 compared to the second quarter of 2001. The largest contributing factors were the amortization of $213.0 thousand related to cap contracts and expenses related to the acquisitions of Acadia Trust, N.A. of $188.0 thousand recognized in the second quarter of 2001.
 
Financial Condition
 
During the first six months of 2002, average assets increased by $79.4 million, or 7.7%, to $1.1 billion. This increase was the result of an increase in the loan portfolio (including residential mortgages held for sale) of $19.5 million or 2.7% to $743.5 million of average loans outstanding during the first half of 2002 compared to $724.0 million of average loans outstanding during the first half of 2001. There were increases in several loan categories. The largest increase was in commercial real estate loans, which increased by $48.4 million, or 20.1%, during the first half of 2002 compared to 2001. Average residential real estate loans decreased by $33.8 million, or 14.4%, during the first half of 2002 compared to the first half of 2001. During the second half of 2001 the Company securitized $57.0 million of residential mortgages which resulted in higher investment balances and lower loan balances. The Company’s securities portfolio averaged $287.2 million during the first half of 2002, an increase of $52.9 million or 22.6%, as compared to $234.3 million during the first half of 2001 reflecting the $57.0 million of securitized residential mortgage loans.
 
The liquidity needs of the Company requires the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. Due to the potential for unexpected fluctuations in both deposits and loans, active management of the Company’s liquidity is necessary. The Company maintains various sources of funding and levels of liquid assets in excess of regulatory guidelines in order to satisfy its varied liquidity demands. The Company monitors its liquidity in accordance with its internal guidelines and all applicable regulatory requirements. As of June 30, 2002 and 2001, the Company’s level of liquidity exceeded its target levels. Management believes that the Company currently has appropriate liquidity available to respond to liquidity demands. Sources of funds utilized by the Company consist of deposits, borrowings from the Federal Home Loan Bank of Boston (“FHLBB”) and other sources, cash flows from operations, prepayments and maturities of outstanding loans, investments and mortgage-backed securities, and the sales of mortgage loans.
 
Reflecting the Company’s primary source of funds, average deposits of $764.3 million during the first half of 2002 increased $36.3 million or 5.0% from $728.1 million the first half of 2001. Borrowings supplement deposits as a source of liquidity. In addition to borrowings from the FHLBB, the Company purchases federal funds, sells securities under agreements to repurchase and utilizes treasury tax and loan accounts. Average borrowings for the first half of 2002 were $224.7 million, an increase of $28.4 million or 14.5% from $196.3 million during the first half of 2001 due to the need for funds resulting from increases in commercial and commercial real estate loans. The majority of the borrowings were from the FHLBB, whose advances remained the largest non-deposit-related, interest-bearing funding source for the Company. Qualified residential real estate loans, certain investment securities and certain other assets available to be pledged secure these borrowings.
 
In determining the adequacy of the allowance for loan losses (“ALL”), management relies primarily on its review of the loan portfolio both to ascertain whether there are specific loan losses to be reserved against, and to assess the collectibility of the loan portfolio in the aggregate. Non-performing loans are examined on an individual basis to determine the estimated probable loss on these loans. In addition, each quarter management conducts a formal analysis of the ALL, which considers the current loan mix and loan volumes, historical net loan loss experience for each loan category, and current economic conditions affecting each loan category. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. The Company continues to monitor and modify its ALL as conditions dictate.
 
During the first six months of 2002, the Company provided $2.0 million to the allowance for loan losses compared to $1.4 million in the first half of 2001. A softening of the economy in the central and western Maine markets had an adverse impact on UnitedKingfield Bank’s asset quality during the quarter. In response to this developing trend, the Company conducted a thorough review of UnitedKingfield Bank’s loan portfolio which resulted in an increase in the Company’s non-performing assets, as a percent of total loans. Total non-performing assets were 1.02% of total loans outstanding at June 30, 2002, compared to 0.84% of loans

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outstanding June 30, 2001. Determining an appropriate level of ALL involves a high degree of judgment. Management believes that the ALL at June 30, 2002 of $14.2 million, or 1.89%, of total loans outstanding was appropriate given the current economic conditions in the Company’s service area and the overall condition of the loan portfolio. As a percentage of total loans outstanding, the ALL was 1.63% at June 30, 2001.
 
Under Federal Reserve Board (“FRB”) guidelines, bank holding companies such as the Company are required to maintain capital based on risk-adjusted assets. These guidelines apply to the Company on a consolidated basis. Under the current guidelines, banking organizations must maintain a risk-based capital ratio of 8%, of which at least 4% must be in the form of core capital. The Company’s Tier 1 and total risk based capital ratios at June 30, 2002, of 12.5% and 13.7%, respectively, exceed regulatory guidelines. The Company’s Tier 1 and total risk based capital ratios at December 31, 2001 were 12.9% and 14.2%, respectively.
 
The principal cash requirement of the Company is the payment of dividends on the Company’s common stock as and when declared by the Board of Directors. The Company is primarily dependent upon the payment of cash dividends by its subsidiaries to service its commitments. The Company, as the sole shareholder of its subsidiaries, is entitled to dividends when and as declared by each subsidiary’s Board of Directors from legally available funds. The Company declared dividends in the aggregate amount of $2.8 million and $2.6 million in the first six months of 2002 and 2001, respectively
 
Impact of Inflation and Changing Prices
 
The Consolidated Interim Financial Statements and the Notes to Consolidated Interim Financial Statements thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
 
Unlike many industrial companies, substantially all of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation.
 
ITEM 3.    QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
 
Market Risk
 
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure at the bank subsidiaries is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process, which is governed by policies established by the subsidiaries’ Boards of Directors that are reviewed and approved annually. Each subsidiary’s Board of Directors’ Asset/Liability Committee delegates responsibility for carrying out the asset/liability management policies to the Company’s management Asset/Liability Committee (“Management ALCO”). In this capacity, Management ALCO develops guidelines and strategies impacting the Company’s asset/liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends.
 
Interest Rate Risk
 
Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, thereby impacting net interest income (“NII”), the primary component of the Company’s earnings. ALCO

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utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling 2-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk.
 
The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and liabilities reflected on the Company’s balance sheet as well as for derivative financial instruments. None of the assets used in the simulation were held for trading purposes. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given both a 200 basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed. The following reflects the Company’s NII sensitivity analysis as measured during the second quarter of 2002.
 
Rate Change
     
Estimated
Changes in NII
  
+200bp
     
1.89
%
-200bp
     
(1.87
%)
 
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.
 
The most significant factors affecting the changes in market risk exposures during the first half of 2002 were the continued low interest rate environment, the increase in the aggregate principal amount in fixed-rate loans extended by the subsidiary banks, and the increase of fixed-rate FHLBB borrowings. With increases on the balance sheet in fixed-rate loans and borrowings, the Company reduced its opportunity to lower funding costs in a declining rate environment. The Company decreased its exposure in a rising rate environment, while increasing its market risk in both a flat or declining interest rate environment. The increased risk in the flat or declining interest rate environment is well within the Company’s policy limits.
 
When appropriate, the Company may utilize derivative financial instruments, such as interest rate floors, caps and swaps to hedge its interest rate risk position. The Board of Directors’ approved hedging policy statements govern the use of these instruments by the bank subsidiaries. As of June 30, 2002, the Company had a notional principal of $30 million in interest rate swap agreements and $90 million in cap contracts. The $30 million of interest rate swap agreements mature in 2005. The two cap contracts ($20 million and $70 million) have strike rates of 7.5% and 7.0%, respectively, and both mature in 2002. ALCO monitors derivative activities relative to its expectation and the Company’s hedging policy. These instruments are more fully described in Note 3—Derivative Financial Instruments within the “Notes to Consolidated Financial Statements” section.
 
In a purchased interest rate swap agreement, cash interest payments are exchanged between the Company and counterparty. These agreements were entered into to convert a portion of the loan portfolio from a variable rate based upon the Prime rate to a fixed rate. The estimated effects of these derivative financial instruments on the Company’s earnings are included in the sensitivity analysis presented above. The risks associated with entering into in this transaction are the risk of default from the counterparty from whom the Company has entered into agreement and poor correlation between the rate being swapped and the liability cost of the Company.
 
In a purchased interest rate cap agreement, cash interest payments are received only if current interest rates rise above predetermined interest rates. These agreements were purchased to protect the Company’s exposure to fixed rate instruments in a rising rate environment. The estimated effects of these derivative financial instruments on the Company’s earnings are included in the sensitivity analysis presented above. The risks entered into in this transaction are: 1) the risk of default from the counterparty from whom the Company purchased the cap; 2) poor correlation between the rate being capped and the liability cost of the Company; and, 3) the fee being paid for the protection (i.e. if rates do not rise the protection will never have any value). Over the

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term of the cap, the Company will always write-off the total premium paid for protection.
 
PART II.    OTHER INFORMATION
 
ITEM 1.    LEGAL PROCEEDINGS
 
There are no material legal matters to which the Company is a party or to which any of its property is subject; however, the Company is a party to ordinary routine litigation incidental to its business.
 
ITEM 2.    CHANGES IN SECURITIES
 
None
 
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4.    SUBMISSION MATTERS TO A VOTE OF SECURITY HOLDERS
 
(a)  The annual meeting of shareholders was held on April 30, 2002.
 
(b)  Robert J. Campbell, Ward I. Graffam, John W. Holmes, and Winfield F. Robinson were elected as directors at the annual meeting. Rendle A. Jones, Ann W. Bresnahan, Robert W. Daigle, Johann H. Gouws, Robert J. Gagnon, Theodore C. Johanson, Richard N. Simoneau, and Arthur E. Strout continued in office as directors after the meeting.
 
(c)  Matters voted upon at the meeting. 1) To elect as director nominees—Robert J. Campbell, Ward I. Graffam, John W. Homes, and Winfield F. Robinson to serve a three year term to expire at the annual meeting in 2005. Total votes cast: 6,146,381, with 6,090,854 for, and 55,527 withheld. 2) To ratify the selection of Berry, Dunn, McNeil & Parker as the Company’s independent public accountants for 2002. Total votes cast: 6,146,381, with 6,041,230 for, 98,309 against, and 6,842 abstain.
 
ITEM 5.    OTHER INFORMATION
 
Statement regarding extension of credit and loans to individuals of the Company
 
The Company’s banking subsidiaries, operating under the supervision of The Federal Reserve Board (the “Fed”) and the Office of the Comptroller of the Currency (the “OCC”) are allowed to extend credit, or make loans, to officers and employees of the Company and its subsidiaries. Loans to executive officers and members of the boards of directors (“Reg. O officers”) of the Company and its banking subsidiaries are regulated by the Fed and the OCC through Regulation O, which ensures all extensions of credit to Reg. O officers are structured and made at interest rates that are offered to all customers of the banking subsidiaries. Additional disclosures of Reg. O extensions of credit are publicly available through each bank’s submission of its Call Report with the Federal Depository Insurance Company (“FDIC”).
 
Explanation of regulation and oversight of the Company and its subsidiaries
 
The Company and its subsidiaries operate in a highly regulated environment, which is primarily designed to protect depositors and loan customers of its banking subsidiaries as well as investment customers of its financial services subsidiaries and business lines. As a bank holding company, Camden National Corporation undergoes

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periodic reviews by the Federal Reserve Bank of Boston (the “Boston Fed”). The Company’s Camden National Bank subsidiary, a nationally chartered bank, is regulated by the Office of the Comptroller of the Currency (the “OCC”) while its UnitedKingfield Bank subsidiary, a state chartered bank, undergoes periodic reviews by the State of Maine—Bureau of Financial Institutions and the FDIC. Acadia Trust, N.A., a nationally chartered non-depository trust company undergoes periodic exams by the OCC. Both Camden National Bank and UnitedKingfield Bank have previously entered into an agreement with Linsco Private Ledger, a provider of third party brokerage services. Representatives of Acadia Financial Consultants, a division of Camden National Bank and UnitedKingfield Bank, and Linsco Private Ledger are required to meet numerous banking and securities regulatory requirements as determined by the State of Maine, OCC, Fed and other applicable securities regulatory bodies.
 
The Company’s Audit Committee Membership
 
The Audit Committee of Camden National Corporation consists of four independent directors including:
 
Richard N. Simoneau, CPA, Chairman, Camden National Corporation Audit Committee
 
Mr. Simoneau has been a director of the Company and Camden National Bank since 1984 and 1979, respectively. Mr. Simoneau has been a principal in Simoneau & Norton, Masters & Alex, CPA, PA of Rockland, Maine since 1999 and was previously a partner in Simoneau & Norton, CPAs, P.A. from 1983 to 1998. Mr. Simoneau’s experience also includes various positions held with the Internal Revenue Service.
 
Mr. Robert J. Campbell
 
Mr. Campbell joined the Company’s Board of Directors in November 1999. He has been a partner in the investment management firm of Beck, Mack & Oliver in New York, New York since 1991. Mr. Campbell resides in Rockport, Maine and New York City.
 
Mr. John W. Holmes
 
Mr. Holmes has been a director of the Company and Camden National Bank since 1989. Mr. Holmes is also President and majority owner of Consumers Fuel Company in Belfast, Maine, a position he has held for 22 years.
 
Ms. Ann W. Bresnahan
 
Ms. Bresnahan has served as a director of the Company and Camden National Bank since 1990 and is a full-time volunteer and civic leader.
 
The Company’s Audit Committee also includes representation from its two principal banking subsidiaries through membership of the following individuals:
 
Mr. Roger Spear
 
Mr. Spear was a director of KSB Bancorp, Inc. (“KSB”) and Kingfield Savings Bank from March 1993 until the Company acquired KSB in December 1999 and Kingfield Savings Bank’s merger with United Bank in February 2000, at which time Mr. Spear became a director of UnitedKingfield Bank. Mr. Spear has been the Chief Financial Officer of the University of Maine at Farmington since 1967.
 
Ms. Rosemary Weymouth
 
Ms. Weymouth has served as a Director of Camden National Bank since 1998. Ms. Weymouth has been President of Megunticook Management Company, a property management concern based in Camden, Maine, since 1983.

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ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.
 
(a)  Exhibits
 
  (3.1)
   
The Articles of Incorporation of Camden National Corporation, as amended to date (incorporated by reference to Exhibit 3.i to the Company’s Form 10-Q filed with the Commission on August 10, 2001).
  (3.2)
   
The Bylaws of Camden National Corporation, as amended to date (incorporated by reference to Exhibit 3.ii to the Company’s Form 10-Q filed with the Commission on November 14, 2001).
(23.1)
   
Consent of Berry, Dunn, McNeil & Parker relating to the financial statements of Camden National Corporation.
 
(b)  Reports on Form 8-K.
 
None.

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SIGNATURES
 
Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CAMDEN NATIONAL CORPORATION
(Registrant)
 
/s/    Robert W. Daigle    August 13, 2002
Robert W. Daigle                                    Date
President and Chief Executive Officer
 
 
/s/    Gregory A. Dufour    August 13, 2002
Gregory A. Dufour                                    Date
Senior Vice President—Finance
and Principal Financial Officer

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