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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

Commission File No. 0-28190

CAMDEN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (207) 236-8821

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, without par value

(Title of class)

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant as of June 30, 2003 is: Common stock; $217,643,690. Shares of the Registrant’s common stock held by each executive officer and director and by each person who beneficially owns 5% or more of the Registrant’s outstanding common stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of each of the registrant’s classes of common stock, as of March 12, 2004 is: Common stock; 7,737,023.

Listed hereunder are documents incorporated by reference and the relevant Part of the Form 10-K into which the document is incorporated by reference:

(1) Certain information required in response to Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference from Camden National Corporation’s Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed with the Commission prior to April 29, 2004 pursuant to Regulation 14A of the General Rules and Regulations of the Commission.

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CAMDEN NATIONAL CORPORATION

2003 FORM 10-K ANNUAL REPORT

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FORWARD-LOOKING STATEMENTS

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, but are not limited to, the following:

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the factors listed in “Certain Factors Affecting Future Operating Results,” with Item 7, beginning on page 29. 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.

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PART I

Item 1. Business

Overview. Camden National Corporation (the “Company”) is a publicly held, multi-bank and financial services holding company incorporated under the laws of the State of Maine and headquartered in Camden, Maine. The Company makes its products and services available directly and indirectly through its subsidiaries, Camden National Bank (“CNB”), UnitedKingfield Bank (“UnitedKingfield”), and Acadia Trust, N.A. As of January 1, 2003, Acadia Trust, N.A. merged with Trust Company of Maine, Inc. (“TCOM”), a wholly owned subsidiary of the Company, and Acadia Trust, N.A. remained as the surviving entity. The Consolidated Financial Statements of the Company accompanying this Form 10-K include the accounts of the Company, CNB, UnitedKingfield, and Acadia Trust, N.A. All inter-company accounts and transactions have been eliminated in consolidation.

Descriptions of the Company and the Company’s Subsidiaries. A brief description of each of the Company, CNB, UnitedKingfield and Acadia Trust, N.A. follows.

The Company. The Company was founded in January 1984 following a corporate reorganization in which the shareholders of CNB exchanged their shares of CNB stock for shares of stock of the Company. As a result of this share exchange, the Company became CNB’s sole parent. In December 1995, the Company merged with UnitedCorp, a bank holding company headquartered in Bangor, Maine, and, as a result thereof, acquired (a) 100% of the outstanding stock of United Bank, a Maine-chartered stock banking institution with its principal office in Bangor, Maine, and (b) 51% of the outstanding stock of TCOM.

On December 20, 1999, the Company completed its acquisition of KSB Bancorp, Inc. (“KSB”), a publicly-held, bank holding company organized under the laws of the State of Delaware and having its principal office in the State of Maine, with one principal subsidiary, Kingfield Savings Bank (“Kingfield Bank”), a Maine-chartered stock savings bank with its principal office in Kingfield, Maine.

On July 19, 2001, the Company completed its acquisition of Acadia Trust, N.A. and Gouws Capital Management, Inc. (“Gouws Capital”). Acadia Trust, N.A. is a federally regulated, non-depository trust company headquartered in Portland, Maine. Gouws Capital, an investment advisory firm was merged into Acadia Trust, N.A. on December 31, 2001. The Company’s acquisition of Acadia Trust, N.A. and Gouws Capital were accounted for under the purchase method of accounting as prescribed by SFAS No. 141, “Business Combinations.”

On October 24, 2001, the Company acquired the remaining minority interest in TCOM. The Company’s acquisition of the remaining minority interest in TCOM was accounted for under the purchase method of accounting as prescribed by SFAS No. 141, “Business Combinations.” As of January 1, 2003, TCOM merged with Acadia Trust, N.A., with Acadia Trust, N.A. remaining as the surviving entity.

As of December 31, 2003, the Company’s securities consisted of one class of common stock, no par value, of which there was 7,758,653 shares outstanding held of record by approximately 989 shareholders.

The Company is a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Company is also considered a Maine financial institution holding company for purposes of the laws of the State of Maine, and as such, is also subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions (the “Superintendent”).

The Company makes available, free of charge and as soon as reasonably practicable after electronically filing with the SEC, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, through the Investor Relations page of its subsidiary banks’ websites, as identified below.

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Camden National Bank. CNB, a direct, wholly owned subsidiary of the Company, is a national banking association chartered under the laws of the United States and having its principal office in Camden, Maine. Originally founded in 1875, CNB became a direct, wholly owned subsidiary of the Company as a result of a January 1984 corporate reorganization in which the shareholders of CNB exchanged their shares of stock in CNB for shares of stock in the Company.

CNB offers its products and services primarily in the communities of Belfast, Bucksport, Camden, Damariscotta, Kennebunk, Portland, Rockland, Thomaston, Union, Vinalhaven and Waldoboro, and focuses primarily on attracting deposits from the general public through its branches and using such deposits to originate residential mortgage loans, commercial business loans, commercial real estate loans, and a variety of consumer loans. During 2001, CNB introduced Acadia Financial Consultants, a new full-service brokerage and insurance division of the Bank. CNB customers may also access these products and services using other media, including CNB’s Internet web site located at www.camdennational.com.

CNB is a member bank of the Federal Reserve System and is subject to supervision, regulation and examination by the Comptroller of the Currency (the “OCC”). Its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum amount permitted by law.

UnitedKingfield Bank. UnitedKingfield, a direct, wholly owned subsidiary of the Company, is a financial institution chartered under the laws of the State of Maine and having its principal office in Bangor, Maine. UnitedKingfield is the successor by merger, effective February 4, 2000, of United Bank and Kingfield Bank, and is subject to regulation, supervision and examination by the FDIC and the Maine Superintendent of the Bureau of Financial Institutions. Its deposits are insured by the FDIC up to the maximum amount permitted by law.

UnitedKingfield offers its products and services primarily in the communities of Bangor, Bingham, Corinth, Dover-Foxcroft, Farmington, Greenville, Hampden, Hermon, Jackman, Kingfield, Lewiston, Madison, Milo, Phillips, Rangeley, and Stratton, Maine, and focuses primarily on attracting deposits from the general public through its branches and using such deposits to originate residential mortgage loans, commercial business loans, commercial real estate loans, and a variety of consumer loans. During 2002, UnitedKingfield introduced Acadia Financial Consultants, a new full-service brokerage and insurance division of UnitedKingfield. UnitedKingfield customers may also access these products and services using other media, including UnitedKingfield’s Internet web site located at www.unitedkingfield.com.

Acadia Trust, N.A. Acadia Trust, N.A., a direct, wholly owned subsidiary of the Company, is a national banking association chartered under the laws of the United States with trust powers chartered under the laws of the State of Maine and having its principal office in Portland, Maine.

Acadia Trust, N.A. provides a broad range of trust, trust-related, investment and wealth management services, in addition to retirement and pension plan management services, to both individual and institutional clients. The financial services provided by Acadia Trust, N.A. complement the services provided by the Company’s subsidiary banks by offering customers investment management services.

Acadia Trust, N.A is a member bank of the Federal Reserve System and is subject to supervision, regulation and examination by the OCC as well as to supervision, examination and reporting requirements under the BHC Act and the regulations of the FRB.

Competition. The Company competes principally in mid-coast and southern Maine through CNB, its largest subsidiary bank. CNB considers its primary market areas to be in Knox County and Waldo County, with a growing presence in Cumberland, Hancock, Lincoln, and York counties, all in the State of Maine. The combined population of the two primary counties of Knox and Waldo is approximately 76,000 people, and their economies are based primarily on tourism but also are supported by a substantial population of retirees. Major competitors in the Company’s market areas include local branches of large regional bank affiliates, as well as local independent banks,

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thrift institutions and credit unions. Other competitors for deposits and loans within CNB’s primary market areas include insurance companies, money market funds, consumer finance companies and financing affiliates of consumer durable goods manufacturers.

The Company, through UnitedKingfield, also competes in both the central and western Maine areas. Most of UnitedKingfield’s offices are located in communities that can generally be characterized as rural areas, with the exception of Bangor and Lewiston. The Bangor and Lewiston areas have populations of approximately 90,000 and 39,000 people, respectively. All UnitedKingfield offices are located in the State of Maine. Major competitors in these market areas include local branches of large regional bank affiliates, as well as local independent banks, thrift institutions and credit unions. Other competitors for deposits and loans within UnitedKingfield’s market area include insurance companies, money market funds, consumer finance companies and financing affiliates of consumer durable goods manufacturers.

The Company and its banking subsidiaries generally have been able to compete effectively with other financial institutions by emphasizing customer service, including local decision-making, by establishing long-term customer relationships and building customer loyalty and by providing products and services designed to address the specific needs of customers. No assurance can be given, however, that the Company and its banking subsidiaries will continue to be able to compete effectively with other financial institutions in the future.

The Company, through its non-bank subsidiary, Acadia Trust, N.A., competes for trust, trust-related, investment management, retirement and pension plan management services with local banks and non-banks, which may now, or in the future, offer a similar range of services, as well as with a number of brokerage firms and investment advisors with offices in the Company’s market area. In addition, most of these services are widely available to the Company’s customers by telephone and over the Internet through firms located outside the Company’s market area.

The Company’s Philosophy. The Company is committed to the philosophy of serving the financial needs of customers in local communities. The Company, through CNB and UnitedKingfield, has branches that are located in towns within the Company’s geographic market areas. The Company believes that its comprehensive retail, small business and commercial real estate products, enable its subsidiary banks to compete effectively. No single person or group of persons provides a material portion of the Company’s deposits, the loss of any one or more of which would have a materially adverse effect on the business of the Company, and no material portion of the Company’s loans are concentrated within a single industry or group of related industries.

The Company’s Growth. The Company had consolidated asset growth of 12.5%, or $151.9 million, during 2003. The primary factor contributing to the growth was the increase in lending activity at the Company’s subsidiary banks. As the business continued to grow during this past year, each of the Company’s subsidiary banks focused on customer service. The Company’s performance-based compensation program also supported this growth by creating an environment where employees have a personal interest in the performance of the Company and are rewarded for balancing profit with growth and quality with productivity.

The Company’s Employees. The Company employs approximately 320 people on a full-time equivalent basis. The Company’s management believes that employee relations are good, and there are no known disputes between management and employees.

The Company’s Employee Incentives. All Company employees are eligible for participation in the Company’s Retirement Savings 401(k) Plan and Profit Sharing Plan, and certain Executive Officers of the Company may also participate in the Company’s 2003 Stock Option Plan, Supplemental Executive Retirement Plan, Executive Incentive Compensation Program, and Deferred Compensation Plan.

In addition, the Company, as successor to KSB, maintains a Bank Recognition and Retention Plan (“BRRP”) as a method of providing certain officers and other employees of the Company with a proprietary interest in the Company. During 1994, the Company contributed funds to the BRRP to enable certain officers and employees to acquire, in the

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aggregate, 56,045 shares of common stock of the Company. Participants are vested at a rate of 20% per year commencing one year from the date of the award. All previous awards made under the BRRP were vested in 2003. The Company does not intend to make any additional awards under the BRRP.

Supervision and Regulation. The business in which the Company and its subsidiaries is engaged is subject to extensive supervision, regulation and examination by various federal and state bank regulatory agencies, including the FRB, the OCC, the FDIC and the Superintendent, as well as other governmental agencies in the State of Maine. The supervision, regulation and examination to which the Company and its subsidiaries are subject are intended primarily to protect depositors or are aimed at carrying out broad public policy goals, and not necessarily for the protection of shareholders.

Some of the more significant statutory and regulatory provisions applicable to banks and BHCs to which the Company and its subsidiaries are subject are described more fully below, together with certain statutory and regulatory matters concerning the Company and its subsidiaries. The description of these statutory and regulatory provisions does not purport to be complete and is qualified in its entirety by reference to the particular statutory or regulatory provision. Any change in applicable law or regulation may have a material effect on the Company’s business and operations, as well as those of its subsidiaries.

BHCs – Activities and Other Limitations. As a registered BHC and a Maine financial institution holding company, the Company is subject to regulation under the BHC Act and Maine law and to examination and supervision by the FRB and the Superintendent, and is required to file reports with, and provide additional information requested by, the FRB and the Superintendent. The FRB has the authority to issue orders to BHCs to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals that violate the BHC Act or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of BHCs, and to order termination of ownership and control of a non-banking subsidiary by a BHC.

Various other laws and regulations, including Sections 23A and 23B of the Federal Reserve Act, as amended (the “FRA”) and Federal Reserve Board Regulation W thereunder, generally limit borrowings, extensions of credit and certain other transactions between the Company and its non-bank subsidiaries and its affiliate insured depository institutions. Section 23A of the FRA also generally requires that an insured depository institution’s loans to non-bank affiliates be secured in appropriate amounts, and Section 23B of the FRA generally requires that transactions between an insured depository institution and its non-bank affiliates be on arm’s length terms. These laws and regulations also limit BHCs and their subsidiaries from engaging in certain tying arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services.

The BHC Act prohibits a BHC from acquiring substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, or merging or consolidating with any BHC without prior FRB approval. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes BHCs to acquire banks located in any state, possibly subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate mergers and to a lesser extent, interstate branching.

Unless a BHC becomes a financial holding company (“FHC”) under the Gramm-Leach-Bliley Act (“GLBA”), as discussed below, the BHC Act also prohibits a BHC from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or BHC and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the FRB determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In addition, Maine law imposes certain approval and notice requirements with respect to acquisitions of banks and other entities by a Maine financial institution holding company.

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The GLBA established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit BHCs that qualify and elect to be treated as FHCs to engage in a range of financial activities broader than would be permissible for traditional BHCs that have not elected to be treated as FHCs, such as the Company. “Financial activities” is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

In order to elect to become an FHC, a BHC must meet certain tests and file an election form with the FRB. To qualify, all of a BHC’s subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the BHC’s banks must have been rated ‘satisfactory’ or better in its most recent federal Community Reinvestment Act evaluation.

A BHC that elects to be treated as an FHC may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the FRB, which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. The Company has not elected to become an FHC.

Further, the GLBA permits national banks and state banks, to the extent permitted under state law to engage in certain new activities, which are permissible for subsidiaries of an FHC. Further, the GLBA expressly preserves the ability of national banks and state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a national bank or state bank must be well-capitalized, and such banks would be subject to certain capital deduction, risk management and affiliate transaction rules. Also, the FDIC’s final rules governing the establishment of financial subsidiaries adopt the position that activities that a national bank could only engage in through a financial subsidiary only may be conducted in a financial subsidiary by a state nonmember bank. However, activities that a national bank could not engage in through a financial subsidiary, such as real estate development or investment, continue to be governed by the FDIC’s standard activities rules. Moreover, to mirror the FRB’s actions with respect to state member banks, the final rules provide that a state bank subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed to be a financial subsidiary.

Declaration of Dividends. According to its Policy Statement on Cash Dividends Not Fully Covered by Earnings (the “FRB Dividend Policy”), the FRB considers adequate capital to be critical to the health of individual banking organizations and to the safety and stability of the banking system. Of course, one of the major components of the capital adequacy of a bank or a BHC is the strength of its earnings and the extent to which its earnings are retained and added to capital or paid to shareholders in the form of cash dividends. Accordingly, the FRB Dividend Policy suggests that banks and BHCs generally should not maintain their existing rate of cash dividends on common stock unless the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FRB Dividend Policy reiterates the FRB’s belief that a BHC should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the BHC’s ability to serve as a source of strength.

Under Maine law, a corporation’s board of directors may declare, and the corporation may pay, dividends on its outstanding shares in cash or other property, generally only out of the corporation’s unreserved and unrestricted earned surplus, or out of the unreserved and unrestricted net earnings of the current fiscal year and the next preceding fiscal year taken as a single period, except under certain circumstances, including when the corporation is insolvent or when the payment of the dividend would render the corporation insolvent or when the declaration would be contrary to the corporation’s charter. These same limitations generally apply to investor-owned, Maine financial institutions, such as UnitedKingfield.

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Dividend payments by national banks, such as CNB, also are subject to certain restrictions. For instance, national banks generally may not declare a dividend in excess of the bank’s undivided profits and, absent OCC approval, if the total amount of dividends declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date combined with its retained net income for the preceding two years. National banks also are prohibited from declaring or paying any dividend it, after making the dividend, the national bank would be considered “undercapitalized” (defined by reference to other OCC regulations).

Federal bank regulatory agencies also have authority to prohibit banking institutions from paying dividends if those agencies determine that, based on the financial condition of the bank, such payment would constitute an unsafe or unsound practice.

Capital Requirements.

FRB Guidelines. The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a BHC and in analyzing applications to it under the BHC Act. The FRB’s capital adequacy guidelines apply on a consolidated basis to BHCs with consolidated assets of $150 million or more; thus, these guidelines apply to the Company on a consolidated basis.

The FRB’s capital adequacy guidelines generally require BHCs to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items, with at least one-half of that amount consisting of Tier 1 or core capital and the remaining amount consisting of Tier 2 or supplementary capital. Tier 1 capital for BHCs generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other non-qualifying intangible assets. Tier 2 capital generally consists of hybrid capital instruments; perpetual preferred stock, which is not eligible to be included as Tier 1 capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics.

In addition to the risk-based capital requirements, the FRB requires BHCs to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to total assets of 3.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted from Tier 1 capital. The FRB has determined that the 3.0% leverage ratio requirement is the minimum for the strong BHCs without any supervisory, financial or operational weaknesses or deficiencies or those, which are not experiencing or anticipating significant growth. All other BHCs are required to maintain a minimum leverage ratio of at least 4.0%. BHCs with supervisory, financial, operational, or managerial weaknesses, as well as BHCs that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels.

The Company’s risk-based capital ratio and leverage ratio currently are, and its management expects these ratios to remain, in excess of regulatory requirements.

OCC and FDIC Guidelines. The OCC and the FDIC each have promulgated regulations and adopted a statement of policy regarding the capital adequacy of, respectively, national banks and state-chartered banks that are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the FRB.

Moreover, the federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the Federal Deposit Insurance Act, as amended (the “FDIA”). Under the prompt correction action regulations, a bank generally shall be deemed to be:

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An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. An institution, which is required to submit a capital restoration plan, must concurrently submit a performance guaranty by each company that controls the institution. A critically undercapitalized institution generally is to be placed in conservatorship or receivership within 90 days unless the federal banking agency determines to take such other action (with the concurrence of the FDIC) that would better protect the deposit insurance fund.

Immediately upon becoming undercapitalized, the institution becomes subject to the provisions of Section 38 of the FDIA, including for example, (i) restricting payment of capital distributions and management fees, (ii) requiring that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital, (iii) requiring submission of a capital restoration plan, (iv) restricting the growth of the institution’s assets and (v) requiring prior approval of certain expansion proposals.

At December 31, 2003, each of the Company’s subsidiary banks was deemed to be a well-capitalized institution for the above purposes. The federal bank regulatory agencies may raise capital requirements applicable to banking organizations beyond current levels. The Company is unable to predict whether higher capital requirements will be imposed and, if so, at what levels and on what schedules. Therefore, the Company cannot predict what effect such higher requirements may have on it. As is discussed above, each of the Company’s subsidiary banks would be required to remain a well-capitalized institution at all times if the Company elected to be treated as an FHC.

Information concerning the Company and its subsidiaries with respect to capital requirements is incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the section entitled “Capital Resources” and Item 8. Financial Statements and Supplementary Data, Note 23, “Regulatory Matters.

FDICIA identifies five capital categories for insured depository institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and requires the respective U.S. federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank’s assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness related generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.

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The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, the Company is considered “well capitalized.”

Activities and Investments of Insured State-Chartered Banks. FDIC insured, state-chartered banks, such as UnitedKingfield, are also subject to similar restrictions on their business and activities. Section 24 of the Federal Deposit Insurance Act (“FDIA”) generally limits the activities as principal and equity investments of FDIC-insured, state-chartered banks to those that are permissible to national banks. In 1999, the FDIC substantially revised its regulations implementing Section 24 of the FDIA to ease the ability of state-chartered banks to engage in certain activities not permissible for national banks, and to expedite FDIC review of bank applications and notices to engage in such activities.

Activities and Investments of National Banking Associations. National banking associations must comply with the National Bank Act and the regulations promulgated thereunder by the OCC which limit the activities of national banking associations to those that are deemed to be part of or incidental to the “business of banking.” Activities that are part of or incidental to the business of banking include taking deposits, borrowing and lending money and discounting or negotiating paper. Subsidiaries of national banking associations generally may only engage in activities permissible for the parent national bank.

Other Regulatory Requirements

Community Reinvestment Act. Both CNB and United Kingfield are subject to the provisions of the Community Reinvestment Act (“CRA”). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a depository institution, to assess such institution’s record of meeting the credit needs of the communities served by the institution, including those of low and moderate income neighborhoods. The regulatory agency’s assessment of the institution’s record is made available to the public.

Customer Information Security. The OCC, the FDIC and other bank regulatory agencies have adopted final guidelines establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the “Guidelines”). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

Privacy. The OCC, the FDIC and other regulatory agencies have adopted final privacy rules pursuant to provisions of the GLBA (“Privacy Rules”). The Privacy Rules, which govern the treatment of nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to customers (and other consumers in some circumstances) about its privacy policies and practices, describe the conditions under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties, and provide a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by “opting-out” of that disclosure, subject to certain exceptions.

USA PATRIOT Act. The USA PATRIOT Act of 2001 (the “PATRIOT Act”), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The PATRIOT Act

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requires financial institutions to implement additional policies and procedures with respect to money laundering, suspicious activities, currency transaction reporting, customer identity notification and customer risk analysis. The PATRIOT Act also permits information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and requires the Federal Reserve Board (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHC Act or the Bank Merger Act. Management believes that we are currently in compliance with all currently effective requirements prescribed by the PATRIOT Act and all applicable final implementing regulations.

Deposit Insurance. The banks pay deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund member institutions. The FDIC has established a risk based premium system under which the FDIC classifies institutions based upon their capital ratios and other relevant factors and generally assesses higher rates on those institutions that tend to pose greater risks to the federal deposit insurance funds. The FDIA does not require the FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. However, as a result of general economic conditions and recent bank failures, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. A resumption of assessments of deposit insurance premiums charged to well capitalized institutions, such the Company’s subsidiary banks, could have an effect on the Company’s net earnings. The Company cannot predict whether the FDIC will be required to increase deposit insurance assessments above their current levels.

Item 2. Properties

The Company operates in 29 facilities. The headquarters of the Company and the headquarters and main office of CNB is located at Two Elm Street, Camden, Maine, and CNB owns this property. The building has 15,500 square feet of space on three levels. CNB also owns seven of its branch facilities, none of which is subject to a mortgage. CNB also leases five branches under long-term leases, which expire in, respectively, September 2005, August 2006, December 2006, May 2010 and December 2077.

The main office of UnitedKingfield is located at 145 Exchange Street, Bangor, Maine, and is owned by UnitedKingfield. The building has 25,600 square feet of space on two levels. UnitedKingfield occupies 16,975 square feet of space on both floors. Acadia Trust, N.A. leases 2,645 square feet on the second floor of this building. The law firm of Russell, Lingley & Silver, P.A., and Professional Information Networks also leases 2,896 square feet and 1,920 square feet on the second floor, respectively. The Company also utilizes 2,042 square feet for off-site computer processing, with the remaining square footage as common space. UnitedKingfield also owns 13 of its other facilities, none of which is subject to a mortgage. UnitedKingfield also leases 3 branches and a parcel of land, which expire in, respectively, September 2004, May 2006, February 2013, and August 2009.

Acadia Trust, N.A. leases its facility at 511 Congress Street, Portland, Maine under a long-term lease, which expires in October 2005. Acadia Trust, N.A. leases 18,966 square feet on the 8^th and 9^th floors, occupying 11,767 square feet of this office space. Acadia Trust, N.A. leases to the Law Office of David Hunt, Strategic Media, and Hopkinson & Abbondanza, 3,660 square feet, 2392 square feet, and 1,147 square feet, respectively, of office space on the 8^th floor.

The Company’s service center is located at 245 Commercial Street, Rockport, Maine, and is owned by the Company. The building has 32,360 square feet of space on two levels.

Item 3. 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.

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Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company stock is traded on the American Stock Exchange (AMEX) under the ticker symbol ‘CAC.’

The Company has paid quarterly dividends since its inception in 1985. The high and low sales prices (as quoted by AMEX) and cash dividends paid per share of the company’s common stock, by calendar quarter for the past 2 years were as follows:

As of December 31, 2003, there were 7,758,653 shares of the Company’s common stock outstanding. As of March 8, 2004, there were 7,737,023 shares of the Company’s common stock outstanding held of record by approximately 989 shareholders. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees, which is estimated to be 2,500 shareholders.

Although, the Company has historically paid quarterly dividends on its common stock, the Company’s ability to pay such dividends depends on a number of factors, including restrictions on the ability of the Company to pay dividends under federal laws and regulations, and as a result, there can be no assurance that dividends will be paid in the future. Refer to the ‘Capital Resources’ section within Item 7. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of dividend restrictions. Refer to Item 6. Selected Financial Data for dividend related ratios.

Securities authorized for issuance under equity compensation plans are as follows:

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Refer to Notes 1 and 17 within the Notes to Consolidated Financial Statements within Item 8. Financial Statements and Supplementary Data for further information related to the Company’s equity compensation plans.

Item 6. Selected Financial Data

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis reviews the consolidated financial condition of Camden National Corporation (the “Company”) at December 31, 2003 and 2002, the consolidated results of operations for the past 3 years and, where appropriate, factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data.

Executive Summary

The Company, as a diversified financial services provider, pursues a strategy of achieving long-term sustainable growth without sacrificing profitability. The primary business of the Company and its subsidiaries is to attract deposits from consumer, institutional, non-profit and commercial customers and to extend loans to consumer, institutional, non-profit and commercial customers. The Company’s earnings are supplemented by investment income while the Company’s source of funds are supplemented by external borrowings from the brokered CD market and the Federal Home Loan Bank system. The Company also offers investment management services to its customers through Acadia Trust, N.A., a wholly owned non-depository trust company, and Acadia Financial Consultants, which provide brokerage services as a division of the two banking subsidiaries.

The primary businesses of the Company have many inherent risks which are outlined within this Form 10-K, and include risks due to losses on loans not being repaid (or “credit risks”), interest rate risks arising from the possibility of the Company’s interest bearing assets and liabilities being misaligned, as well as other exposure to national and local economic conditions. Management has created numerous processes to monitor and mitigate these risks based on various assumptions and actions, which if were changed or altered, could result in different earnings for the Company.

The Company reported earnings of $18.9 million for 2003, compared to $17.0 million in 2002 as a result of several events, of which the most significant include the historic low interest rate environment, improved asset quality of the Company in general, but more specifically within its UnitedKingfield Bank subsidiary, and, as part of the Company’s effort to continually assess the profitability of its products and services, the exiting of two major product offerings. During 2004, the Company continued to look for ways to enhance its customer value proposition and at the same time improve efficiencies. Providing customers with more cost-effective products and services is essential in growing the Company’s assets and increasing non-interest income. As a result, the Company’s bank subsidiaries sold their consumer credit card portfolios, and Acadia Trust, N.A. outsourced the administration processing of its employee benefit services. The Company also continued to pursue methods of enhancing products and services in an effort to grow deposits and expand non-interest income using new technologies.

Net interest income represents the Company’s major revenue source, therefore, to protect the Company’s major income stream, the growth of earning assets is extremely important. Low interest rates fueled record residential mortgage refinance activity and significant increases in home equity lending, which combined with the expansion of the Company’s commercial line of business, resulted in loan growth of 19.5% from December 31, 2002 to December 31, 2003. While the historic low interest rate environment resulted in higher loan volumes, the rates on those loans were significantly lower than existing loans. Furthermore, many of the Company’s investments that matured, paid down, or were called during 2003, and were replaced with investments at much lower rates. Conversely, the low interest rate environment allowed the Company to reduce the rates of interest paid on its deposits as well as its borrowings. However, the reduction in interest expense was less than as the reduction in the Company’s interest income, which resulted in a compression of its net interest margin. The increase in the Company’s total earning asset base helped to offset the decrease in the Company’s net interest margin.

The Company continues to evaluate the possibilities of expansion into new markets through both de novo expansion and acquisitions. In the interim, the Company is focused on maximizing the potential for growth in existing markets, especially in markets where the Company has less of a presence. The financial services industry continues to experience consolidations through mergers that could create opportunities for the Company to promote its value.

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The Company will continue to be faced with uncertainties in the future, and Management believes that the discussion and financial information that follows more fully describes Management’s initiatives taken during 2003 and supports its objective of creating sustainable long-term growth for the Company.

General

Camden National Corporation (the “Company”), with $1.4 billion in assets, is a multi-bank and financial services holding company located in Camden, Maine. The Company provides commercial and consumer banking services in its 28 branch locations, through its two bank subsidiaries, Camden National Bank and UnitedKingfield Bank. It also provides brokerage and insurance services through Acadia Financial Consultants, which operates as a division of the two banking subsidiaries. The Company also provides wealth management, trust and employee benefit administration through its other subsidiary, Acadia Trust, N.A., which is located in Portland and Bangor, Maine. In addition to serving as a holding company, the Company provides managerial, operational and technology services to its subsidiaries. These services include general management, financial management, risk management and bank operations.

The Company’s two banking subsidiaries conduct operations throughout eastern, central, western, southern and mid-coast Maine. As a result, the Company has a presence in the State’s three largest markets (Portland, Lewiston and Bangor), as well as in the State’s fastest growing area, York County.

Acadia Trust, N.A. has locations in Portland and Bangor and provides wealth management, trust and employee benefit services to clients in those areas, as well as in other states. As of January 1, 2003, Acadia Trust, N.A. merged with Trust Company of Maine, Inc., a wholly owned subsidiary of the Company, and Acadia Trust, N.A. remained as the surviving entity. In addition to acquiring customers through its separate marketing efforts, Acadia Trust, N.A. provides services to clients of the Company’s banking subsidiaries.

Review of Financial Statements

The discussion and analysis which follows focuses on the factors affecting the Company’s consolidated results of operations for the years ended December 31, 2003, 2002 and 2001 and financial condition at December 31, 2003 and 2002. The Consolidated Financial Statements and Notes to Consolidated Financial Statements in Item 8 should be read in conjunction with this review.

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 of America. 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 and lease losses (“ALLL”) and accounting for acquisitions and the related review of goodwill and intangible assets for impairment. 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 under different assumptions or conditions.

Allowance for Loan and Lease Losses. In preparing the Consolidated Financial Statements, the ALLL requires the most significant amount of management estimates and assumptions. Management regularly evaluates the ALLL for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of

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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 and lease losses which would effect the earnings of the Company. A smaller provision for loan and lease losses results in higher net income and when a greater amount of provisions for loan and lease losses is necessary the result is lower net income. Monthly, the Corporate Risk Management Group reviews the ALLL with the board of directors for each bank subsidiary. On a quarterly basis, a more in depth review of the ALLL, including the methodology for calculating and allocating the ALLL, is reviewed with the Company’s Board of Directors, as well as the board of directors for each subsidiary bank. Please see “Allowance for Loan and Lease Losses/Provisions for Loan Losses” and “Certain Factors Affecting Future Operating Results—Our Allowance for Loan and Lease Losses may not be adequate to cover actual loan losses” for more information.

Periodically the Company acquires property in connection with foreclosures or in satisfaction of debt previously contracted. The valuation of this property is accounted for individually at the lower of the “book value of the loan satisfied” or its net realizable value on the date of acquisition. At the time of acquisition, if the net realizable value of the property is less than the book value of the loan, a change, or reduction in the ALLL, is recorded. If the value of the property becomes permanently impaired, as determined by an appraisal or an evaluation in accordance with the Company’s appraisal policy, the Company will record the decline by showing a charge against current earnings. Upon acquisition of a property valued at $25,000 or more, a current appraisal or a broker’s opinion must substantiate “market value” for the property.

Mortgage Servicing Rights. Servicing assets are recognized as separate assets when servicing rights are acquired through sale of residential mortgage assets. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial residential mortgage assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized costs. Fair value is determined based upon discounted cash flows using market-based assumptions. In periods of falling market interest rates, accelerated loan prepayment speeds can adversely impact the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets were to increase in the future, the Company can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. When the book value exceeds the fair value, an impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact the Company’s financial condition and results of operations either positively or adversely. Management has engaged, on a quarterly basis, a recognized third party to evaluate the valuation of the Company’s mortgage servicing rights asset.

Valuation of Acquired Assets and Liabilities. 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 Statement of Financial Accounting Standards (“SFAS”) No. 142. In addition, goodwill from a purchase acquisition is subject to ongoing periodic impairment tests. Goodwill is evaluated for impairment using several standard valuation techniques including discounted cash flow analyses, as well as an estimation of the impact of business conditions. Different estimates or assumptions are also utilized to determine the appropriate carrying value of other assets including, but not limited to, property, plant and equipment, overall collectibility of loans and receivables. The use of different estimates or assumptions could produce different estimates of carrying value. Management prepares the valuation analyses, which are then reviewed by the Board of Directors of the Company.

Interest Income Recognition. Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on loans 90 days or more past due unless they are adequately secured and in the process of collection or on other loans when management believes collection is doubtful. All loans considered impaired are non-accruing. Interest on non-accruing loans is recognized as income when the ultimate collectibility of interest is no longer considered doubtful. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current-period interest income, therefore, an increase in loans on non-accrual status reduces interest income. If a loan is removed from non-accrual status, all previously unrecognized interest is collected and recorded as interest income.

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Results of Operations

Comparison of 2003 to 2002

Overview

The Company reported net income of $18.9 million, or $2.38 per diluted share, for 2003 compared to $17.0 million and $2.11 per diluted share in 2002. Return on average assets was 1.48% in 2003 compared to 1.48% in 2002 and return on average shareholders’ equity was 15.85% in 2003 compared to 15.38% in 2002. The improved results were primarily a function of improved asset quality at UnitedKingfield, which resulted in a provision benefit of $150,000 in 2003 compared to provision expense of $3.1 million in 2002. The Company also recorded a gain of $575,000 as a result of the sale of its consumer credit card business to Elan Financial Services in 2003, compared to a $1.3 million gain the Company recorded in 2002 as a result of the sales of its merchant credit card business.

Net Interest Income

Net interest income accounted for 81.5% of total revenues for the Company, and is the Company’s largest source of revenue. Net interest income reflects revenues generated through income from earning assets plus loan fees, less interest paid on interest bearing deposits and borrowings. Net interest income was $48.0 million on a fully-taxable equivalent basis in 2003 compared to $47.2 million in 2002, an increase of 1.7%. The Company’s level of net interest income fluctuates over time for three primary reasons. First, interest earned from earning assets and expenses from interest bearing deposits and borrowings fluctuate due to changes in interest rates. This is referred to as the “yield” or “rate” component of net interest income. Second, net interest income changes due to the amount of earning assets the Company maintains as well as the amount of non-interest bearing deposits, interest bearing deposits, and borrowings the Company holds. This is referred to as the “volume” component of net interest income. Finally, net interest income fluctuates as a result of the change over time in the components of earning assets, non-interest bearing deposits, interest bearing deposits and borrowings. This is referred to as the “mix” component of net interest income. It is the Company’s goal to maximize net interest income by providing competitive products to its customers that, within various risk parameters, maximize interest income while minimizing interest expense. Management uses several analytical models, including those illustrated by Tables 1 & 2 below, to assess and monitor those factors that affect net interest income and to assess the Company’s performance in meeting its goals and to determine future strategies.

During 2003, overall interest rates in the United States were at 40-year lows, as highlighted by a federal funds discount rate of 1.00% at December 31, 2003. This affected the Company’s net interest income in several ways. First and foremost, the Company’s interest-bearing assets, which are contractually allowed to reprice based on various benchmarks such as Prime Rate and the London Inter-Bank Offer Rate (“LIBOR”), resulted in a reduction in gross revenues (these products are also referred to as “variable” or “floating” rate instruments) as these benchmarks declined in 2003. Second, as a result of the historically low interest rate environment and, the Company operating in a highly competitive marketplace, interest rates on new loans were also lower than previously experienced. The Company was able to partially compensate for the reduction in revenues due to these factors by lowering the interest rate it paid on various deposit products. Third, while amortization and pay-off of existing loans and investments were experienced during the year, those funds were either used to fund additional loans or reinvested in securities, each of which earned lower rates of interest than in previous years due to the historic low interest rate environment. Fourth, the Company also experienced historically high levels of residential mortgage activity during 2003 as a result of the level of interest rates. This activity resulted in higher than normal levels of interest income, loan fees, gains and losses from the sales of those mortgages. Management does not expect residential mortgage activity in 2004 to reach 2003 levels. Finally, numerous customers refinanced to a lower interest rate various debt obligations they had with Company, which in turn lowered the interest income the Company earned. Many fixed-rate products the Company offers contain pre-payment penalties, but other products, such as residential mortgages, do not.

During 2003, residential mortgages increased $44.4 million, or 18.2%, commercial loans increased $73.9 million,

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or 16.0%, and consumer loans (including home equities) increased $31.8 million, or 33.0%, during 2003. The Company also benefited from revenues from interest rate swap agreements, which were entered into in early 2002 as a hedge against falling interest rates. As rates fell, revenues from the interest rate swap increased to $817,000 in 2003 from $597,000 in 2002.

Investments in U.S. government securities, U.S. government agency securities and highly rated corporate bonds are used by the Company to diversify its revenues as well as provide interest rate risk and credit risk diversification. The Company periodically uses interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge interest rate risk associated with its loan and investment portfolios as well as its deposit and borrowing strategies. Note 22, “Financial Instruments,” of the Notes to Consolidated Financial Statements, included in Item 8, and the “Market Risk” section, included in Item 7, should be reviewed for further discussion of the Company’s derivative and market risk strategies.

During 2003, interest income on the Company’s investment portfolio decreased $3.0 million primarily due to the decrease in yields and a decrease in the size of the portfolio. During 2003 and 2002, the Company was a party to interest rate swap agreements that were a component of the Company’s strategy to protect a portion of its interest income revenue stream against a decreasing interest rate environment. These instruments contributed $817,000 to interest income in 2003 and $597,000 in 2002. The increase in 2003 can be attributed to the decline in the prime rate, which resulted in an increase in the Company’s net interest income from the interest rate swap agreements. Interest rate swap agreements involve risks associated with counterparties to the agreements and their abilities to meet the contractual terms of the agreements, as well as risks associated with a changing interest rate environment. Notional principal amounts are used to reflect the volume of these transactions, but credit risks associated with these agreements are limited to the forecasted payment stream expected from counterparties. The Company’s counterparties to these agreements had an investment grade rating by Moody’s and Standard and Poor’s rating agencies. These instruments involve only the exchange of fixed- and variable-rate interest payments based upon a notional principal amount and maturity date. The Company’s notional value of derivative financial instruments was $30.0 million on December 31, 2003 and 2002. Note 22, “Financial Instruments,” of the Notes to Consolidated Financial Statements, included in Item 8, should be reviewed for further discussion of derivative instruments.

Information on average balances, yields and rates for the past three years can be found in Table 1 below. Table 2 below shows the changes from 2002 to 2003 in tax equivalent net interest income by category due to changes in rate and volume. Information on interest rate sensitivity can be found in the Asset-Liability Management section below.

Non-interest Income

Non-interest income decreased to $10.8 million for the year ended December 31, 2003 from $14.5 million in 2002, approximately a $3.7 million, or 25.5%, decrease. This includes the $575,000 gain from the sale of the Company’s credit card business to Elan Financial Services (“Elan”) during October 2003 and a $1.3 million gain from the sale of the Company’s merchant business credit card product to NOVA Information Systems during November 2002 (both recorded in “Other income”). The reduction of merchant assessments due to the sale of merchant business credit card product resulted in a decrease of fee income of $2.1 million in 2003 compared to 2002. Income from deposit services experienced a slight decrease of $58,000 in 2003 due to higher levels of compensating balances maintained. Other service charges and fees declined $313,000 due to the acceleration of the amortization of the capitalized mortgage servicing rights asset, which offset against servicing rights income, associated with increased prepayments on previously sold residential real estate loans that the Company services due to the current low interest rate environment. Trust fees decreased $119,000, or 3.3%, during 2003 primarily due to a decline in assets under management (“AUM”) at Acadia Trust, N.A. Brokerage and insurance commissions increased $72,000, or 28.6%, as a result of Acadia Financial Consultants, the banks’ full-service brokerage and insurance sales division activity. During 2003 the Company recorded a $575,000 gain from the sale of the credit card business to Elan, which was somewhat offset by losses recorded on the sale of loans of $317,000 compared to a gain recorded on the sale of loans of $143,000 in 2002. Therefore, other non-interest income decreased $1.2 million primarily due to the gain of $1.3 million from the sale of the Company’s merchant business credit card in 2002.

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During 2003 the overall impact of the general stock market environment continued to negatively impact business activities in the Company’s financial services business lines even though the stock market experienced some momentum during the second half of the year. General stock market activity affected the Company’s financial results in several ways. For example, decreased market values of clients’ AUM resulted in lower management fees. Additionally, adverse conditions in the stock market prior to 2003 appear to have had an adverse effect on the Company’s ability to attract and retain clients who use the Company’s investment management services. This circumstance, however, appears to have benefited the Company’s banking subsidiaries as disenchanted stock market investors searched for safer investment opportunities such as certificates of deposits, money market funds and other traditional products offered through the banking subsidiaries.

Non-interest Expenses

Non-interest expenses decreased to $30.4 million for the year ended December 31, 2003 from $32.3 million in 2002, a change of approximately $1.9 million, or 5.8%. Expenses associated with the processing of merchant business credit card transactions decreased $1.8 million during 2003 compared to 2002 reflecting the sale of the Company’s merchant program to NOVA Information Systems effective in November 2002. Salaries and employee benefits increased by $395,000, or 2.4%, due to annual salary increases and higher employee benefit costs. Occupancy expenses decreased $38,000, or 1.7%, due to lower depreciation cost in 2003 compared 2002. Other expenses decreased by $94,000, or 1.1%, in 2003 compared to 2002 primarily due to normal increase in other categories offset by lower hiring, training and marketing costs.

Comparison 2002 to 2001

The Company reported net income after the cumulative effect of a change in accounting for goodwill (“SFAS No. 142”) of $17.0 million, or $2.11 per diluted share, for 2002 compared to $15.4 million and $1.89 per diluted share in 2001. The improved results were attributable to increases of 6.1% and 10.4% in net interest income and non-interest income respectively, over 2001, including a gain on the sale of the Company’s merchant business credit card product during 2002, which were partially offset by an increase of 4.2% in non-interest expenses and a SFAS No. 142 adjustment of $449,000. Return on average assets was 1.48% in 2002 compared to 1.47% in 2001 and return on average shareholders’ equity was 15.38% in 2002 compared to 15.55% in 2001. The slight increase in return on average assets was primarily due to growth in both the loan and investment portfolios resulting in increased net interest income and non-interest income. The decline in return on average equity was primarily due to increased retained earnings and the increase in the fair value of securities available for sale and derivative instruments, which resulted in higher levels of equity.

The Company’s consolidated provision for loan and lease losses was $3.1 million during 2002 compared to $3.7 million in 2001. Non performing assets, increased from $8.3 million in 2001 to $8.8 million in 2002, however, as a percentage of total loans outstanding non-performing assets actually decreased during 2002 due to the growth in the loan portfolio. Non-performing assets to total loans was 1.09% at December 31, 2002 compared to 1.14% at December 31, 2001.

The Company reported increased net interest income on a fully-taxable equivalent basis of $47.2 million during 2002 compared to $44.7 million in 2001 due to changes in the yields, volumes and mix of its interest-earning assets and interest-bearing liabilities. As a result of the historically low interest rate environment, interest rates on new loans were lower than previously experienced. The Company was able to partially compensate for the reduction in revenues by lowering the interest rate it paid on various deposit products. Amortization and pay-off of existing loans and investments were either used to fund additional loans or reinvested in securities, each of which earned lower rates of interest than in previous years.

Non-interest income increased $1.4 million from $13.1 million in 2001 to $14.5 million in 2002. This increase included the $1.3 million gain from the sale of the Company’s merchant business credit card product to NOVA Information Systems during November 2002 (recorded in “Other income”). Income from deposit services increased

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$228,000 primarily due to volume and fee increases related to transaction accounts. Other service charges and fees declined $425,000 due to the acceleration of the amortization of the capitalized mortgage servicing rights asset, which is offset against servicing rights income that is associated with increased prepayments on previously sold residential real estate loans that the Company services. Trust fees increased $1.1 million, or 44.8%, during 2002 primarily due to the acquisition of Acadia Trust, N.A. on July 19, 2001. Brokerage and insurance commissions increased $222,000 as a result of the addition of Acadia Financial Consultants, the banks’ full-service brokerage and insurance sales division, during the fourth quarter of 2001.

Non-interest expenses were $32.3 million in 2002, compared to $31.0 million in 2001. Salaries and employee benefits increased by $2.2 million, or 15.6%, due to increased salaries and employee benefits of $1.3 million associated with the Acadia Trust, N.A. acquisition in July 2001 and establishment of Acadia Financial Consultants in October 2001. In addition to this amount, there was an increase of $821,000, or 6.5%, due to annual salary increases and higher employee benefit costs. Occupancy expenses increased $224,000, or 10.8%, due in part to the full year of Acadia Trust, N.A. and a new branch facility in Kennebunk, Maine. Expenses associated with the processing of merchant business credit card transactions decreased $183,000, or 9.2%, during 2002 compared to 2001 reflecting the sale of the Company’s merchant program to NOVA Information Systems effective in November 2002. Other expenses decreased by $683,000, or 7.4%, in 2002 compared to 2001 primarily due to a legal settlement of $1.0 million paid in 2001.

Financial Condition

Overview

Total assets at December 31, 2003 were $1.4 billion, an increase of $151.9 million, or 12.5%, from December 31, 2002. The change in assets consisted primarily of a $159.1 million increase in net loans, an increase of $3.6 million cash and due from banks, an increase in other assets of $1.2 million, partially offset by an $11.0 million decrease in investment securities, and a $1.0 million decrease in net premises and equipment. The asset growth was supported by an increase of $99.5 million in total borrowings, a $50.9 million increase in deposits, a $657,000 increase in other liabilities, and an increase of $878,000 in total shareholders’ equity.

Investment Securities

The Company maintains an investment portfolio of various securities to diversify its revenues, as well as provide interest rate risk and credit risk diversification and to provide for its liquidity and funding needs. Total investment securities decreased $11.0 million, or 3.5%, to $303.7 million at December 31, 2003. The Company has investment securities in both the available-for-sale and held-to-maturity categories.

The Company conforms to SFAS No. 115, which requires all investments to be categorized as “trading securities,” “available for sale” or “held to maturity.” All realized gains or losses from investments in any category are recorded as an effect to net income in the period incurred. Unrealized gains or losses from investments are recorded based on its respective classification. Unrealized gains or losses from investments categorized as “trading securities” are immediately recorded in the Company’s income statement. During 2003, the Company did not hold any securities in this category. Unrealized gains or losses from investments categorized as “held to maturity” are only recorded when and if the gain or loss is recognized. In most cases, due to the strict interpretation of this classification, these securities are not sold. Unrealized gains or losses on securities classified as “available for sale” are recorded as adjustments to shareholders’ equity, net of related deferred income taxes, and are a component of the Company’s other comprehensive income contained in the Consolidated Statement of Changes in Shareholders’ Equity. At December 31, 2003, the Company had $2.9 million of unrealized gains on securities available for sale, net of the deferred taxes, compared to $6.8 million of unrealized gains, net of deferred taxes at December 31, 2002. The decrease in unrealized appreciation was attributed to the cash flows on the investment portfolio being invested at the current lower market interest rates.

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Loans

The Company’s bank subsidiaries provide loans to customers primarily located within the banks’ geographic market area. Loans, including loans held for sale, totaled $966.9 million at December 31, 2003, a 19.5% increase from total loans of $808.9 million at December 31, 2002. This reflects the continuation of strong loan growth experienced in the commercial, residential real estate and consumer loan portfolios, less $63.1 million of fixed-rate residential mortgage loans that were sold on the secondary market by the Company during 2003.

Residential real estate mortgage loans increased by $44.4 million, or 18.2%, in 2003. During 2003 the Company originated and sold $63.1 million of fixed-rate residential mortgage loans on the secondary market to Freddie Mac. The Company will receive annual servicing fees as compensation for servicing the outstanding balances. These loans were sold to Freddie Mac without recourse, which results in Freddie Mac assuming the risk of loss from borrower defaults subject to the terms and conditions of the purchase documents. Residential real estate mortgage loans increased by $39.9 million, or 19.5%, in 2002. During 2002, the Company securitized $16.7 million of fixed-rate residential mortgage loans into mortgage-backed securities, which are classified as securities available for sale. These transactions resulted in the Company’s loan balances decreasing, as those assets shifted to investment securities. In addition, the Company originated and sold $35.4 million of fixed-rate residential mortgage loans on the secondary market. Residential real estate loans consist of loans secured by one-to-four family residences. The Company generally retains adjustable-rate mortgages in its portfolio and will, from time to time, retain fixed-rate mortgages. With a relatively low interest rate environment, the Company’s asset/liability strategy during 2003 was to keep a portion of its fixed-rate residential mortgages in its loan portfolio.

Commercial loans consist of loans secured by various corporate assets, as well as loans to provide working capital in the form of lines of credit, which may be secured or unsecured and includes commercial real estate loans secured by income producing commercial real estate. The Company focuses on lending to financially sound small- and medium-sized business customers within its geographic marketplace as well as offering loans for the acquisition, development and construction of commercial real estate. Commercial loans increased by $73.9 million, or 16.0%, during 2003. In 2002, commercial loans increased by $37.9 million, or 9.0%, over the prior year.

Consumer loans are originated by the Company for a wide variety of purposes designed to meet the needs of customers. Consumer loans include overdraft protection, automobile, boat, recreation vehicles, mobile homes, home equity, and secured and unsecured personal loans. Consumer loans increased by $31.8 million, or 33.0%, in 2003 as a result of consumers taking advantage of the continued low interest rate environment and utilizing home equity loans to consolidate debt and for general consumer purposes. In 2002, consumer loans increased by $9.9 million, or 11.5%, from the prior year.

The Company’s policy is to discontinue the accrual of interest on loans when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. When a loan is placed on “non-accrual” status, all payments received from the customer are applied to outstanding loan principal first and then to the accrued interest receivable for the loan once the principal obligation has been satisfied. If, in the opinion of management, a loan on non-accrual is determined to be creditworthy, it may be placed back on accrual status. Payments received on loans that are returned to accrual status are recorded from that time forward to the appropriate interest income and principal reduction categories. Non-performing loans, defined as non-accrual loans plus accruing loans 90 days or more past due, totaled $6.8 million, or 0.7%, of total loans at December 31, 2003 compared to $8.3 million, or 1.0%, of total loans at December 31, 2002.

Allowance for Loan and Lease Losses / Provision for Loan and Lease Losses

In determining the adequacy of the ALLL, management reviews the loan portfolio to ascertain whether there are specific loans, which require additional reserves, 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, the ongoing evaluation process includes a formal analysis of the ALLL each quarter, which considers,

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among other factors, the current loan mix and loan volumes, loan growth, management’s ongoing review of individual loans, trends in the level of criticized or classified assets, an evaluation of results of examinations by regulatory authorities, analyses of historical trends in charge-off and delinquencies, and business and economic conditions affecting each loan category. The use of different estimates or assumptions could produce different provisions for loan and lease losses. Although management uses available information to establish the appropriate level of the ALLL, no assurance can be given, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. The Company continues to monitor and modify its ALLL as conditions dictate (see Item 8, Note 8, “Allowance for Loan Losses,” of the Notes to Consolidated Financial Statements).

The methodology for calculating the ALLL involves significant judgment. First and foremost, it involves the early identification of credits that are deteriorating. Second, it involves management judgment to derive loss factors. The Company uses a risk rating system to determine the credit quality of its loans. Loans are reviewed for information affecting the obligor’s ability to fulfill its obligations. In assessing the risk rating of a particular loan, management makes certain assumptions, including the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources of repayment, the level and nature of contingencies, and with commercial loans consideration has to be given to management strength, and the industry and geography in which the obligor operates. These factors are based on an evaluation of historical information, as well as subjective assessment and interpretation. Emphasizing one factor over another or considering additional factors that may be relevant in determining the risk rating of a particular loan, but which are not currently an explicit part of the Company’s methodology, could impact the risk rating assigned by the Company to that loan. Wherever possible, the Company uses independent, verifiable data or the Company’s own historical loss experience in its models for estimating these loss factors. Many factors can affect management’s estimates of specific loss and expected loss, including volatility of default probabilities, rating migrations and loss severity. There are judgments as to which external data should be used, and when it should be used. Choosing data that is not reflective of the Company’s specific loan portfolio characteristics could affect loss estimates.

During 2003, the Company reversed $150,000 of expense to the allowance for loan and lease losses compared to recognizing expense of $3.1 million and $3.7 million in 2002 and 2001, respectively. Provisions are made to the ALLL in order to maintain the ALLL at a level which management believes is reasonable and reflective of the overall risk of loss inherent in the loan portfolio. During 2003, non-performing assets decreased from $8.8 million or 1.09% of total loans at December 31, 2002 to $7.0 million or 0.72% of total loans at December 21, 2003. In addition, the Company’s ratio of ALLL to non-performing assets improved to 202.91% in 2003 from 173.40% in 2002 even with significant loan growth. The ALLL quarterly analysis is done at the bank subsidiaries and during the fourth quarter of 2003 several large credits that had specific reserves were resolved and resulted a lower required ALLL. The $150,000 recovery of provision is reflective of the changes in specific reserves and various improvements made in the quality of the loan portfolios at both banks during 2003. Most notably, there was substantial improvement made to the overall quality of the loan portfolio during 2003 as the Company’s Corporate Risk Management Group actively addressed asset quality issues at UnitedKingfield that resulted in a higher quality loan portfolio at December 31, 2003. The determination of an appropriate level of ALLL, and subsequent provision for loan and lease losses, which would affect earnings, is based on management’s judgment of the adequacy of the reserve based on analysis of various economic factors and review of the Company’s loan portfolio, which may change due to numerous factors including loan growth, payoffs of lower quality loans, recoveries on previously charge-off loans, improvement in the financial condition of the borrowers, risk rating downgrades/upgrades and charge-offs. Management believes that the ALLL at December 31, 2003 of $14.1 million, or 1.46%, of total loans outstanding was appropriate given the current economic conditions in the Company’s service area and the improved condition of the loan portfolio as a result of efforts made during 2003 to address issues and improve the Company’s collateral position in credits identified as problems. As a percentage of total loans outstanding, the ALLL was 1.88% in 2002.

Liquidity

Liquidity is defined as the ability to meet current and future financial obligations. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet the cash flow needs of the

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Company in the most economical and expedient manner. The liquidity needs of the Company require 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 December 31, 2003 and 2002, 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.

Deposits continue to represent the Company’s primary source of funds. In 2003, total deposits increased by $50.9 million, or 6.0%, over 2002, ending the year at $901.0 million. The Company experienced growth in all deposit categories in 2003. Comparing year-end balances 2003 to 2002, transaction accounts (demand deposits and NOW) increased by $18.9 million, money market accounts by $15.3 million, savings accounts by $10.3 million, and certificates of deposit by $6.4 million. In 2002, total deposits increased by $86.6 million, or 11.3%, over 2001, ending the year at $850.1 million. 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. Total borrowings were $338.4 million at December 31, 2003 compared to $238.9 million at December 31, 2002, an increase of $99.5 million, or 41.7%. 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. The carrying value of loans pledged as collateral at the FHLBB was $290.4 million and $236.3 million at December 31, 2003 and 2002, respectively. The Company also pledges securities as collateral at the FHLBB depending on its borrowing needs. The Company, through its bank subsidiaries, has an available line of credit with FHLBB of $13.0 million at December 31, 2003 and 2002. The Company had no outstanding balance on its line of credit with the FHLBB at December 31, 2003 or 2002.

In addition to the liquidity sources discussed above, the Company believes the investment portfolio and residential loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales. The Company also believes that it has significant untapped access to the national brokered deposit market. These sources are considered as liquidity alternatives in the Company’s contingent liquidity plan. The Company believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer saving habits and availability or access to the national brokered deposit market could significantly impact the Company’s liquidity position.

Contractual Obligations and Commitments

In the normal course of business, the Company is a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the Consolidated Statements of Condition. These financial instruments include lending commitments and letters of credit. Those instruments involve varying degrees of credit risk in excess of the amount recognized in the Consolidated Statements of Condition.

The Company follows the same credit policies in making commitments to extend credit and conditional obligations as it does for on-balance sheet instruments, including requiring similar collateral or other security to support financial instruments with credit risk. The Company’s exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. At December 31, 2003, the Company had the following levels of commitments to extend credit.

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The Company is a party to several off-balance sheet contractual obligations through lease agreements on a number of branch facilities. The Company has an obligation and commitment to make future payments under these contracts. Borrowings from the FHLBB consist of short- and long-term fixed rate borrowings and are collateralized by all stock in the FHLBB and a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one-to-four family properties, certain pledged investment securities and other qualified assets. The Company has an obligation and commitment to repay all borrowings from the FHLBB. These commitments, borrowings and the related payments are made during the normal course of business. At December 31, 2003, the Company had the following levels of contractual obligations.

The Company uses derivative instruments as partial hedges against large fluctuations in interest rates. The Company uses interest rate swap and floor instruments to partially hedge against potentially lower yields on the variable prime rate loan category in a declining rate environment. If rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap and floor instruments. The Company also uses cap instruments to partially hedge against increases in short-term borrowing rates. If rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the cap instruments. These financial instruments are factored into the Company’s overall interest rate risk position. The Company regularly reviews the credit quality of the counterparty from which the instruments have been purchased. At December 31, 2003, the Company had swap agreements with a notional amount of $30 million with the following cash flows.

The net cash flow reflected on the table above is based on the current rate environment. The Company receives a fixed 6.9% on the notional amount during the contract period from the counterparty on the swap agreements and pays a variable rate based on the prime rate, which is currently at 4.00%. The cash flow will remain positive for the Company as long as the prime rate remains below 6.9%. This derivative instrument was put into place to partially hedge against potential lower yields on the variable prime rate loan category in a declining rate environment. If the prime rate increases, the Company will experience a reduction of cash flow from this derivative instrument that will be offset by an increase in cash flow for the variable prime rate loans.

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Capital Resources

Under Federal Reserve Board (“FRB”) guidelines, bank holding companies such as the Company are required to maintain capital based on risk-adjusted assets. These capital requirements represent quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

The Company’s capital classification is also subject to qualitative judgments by its regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). These guidelines apply to the Company on a consolidated basis. Under the current guidelines, banking organizations must maintain a risk-based capital ratio of 8.0%, of which at least 4.0% must be in the form of core capital (as defined). The risk-based ratios of the Company and its subsidiaries exceeded regulatory guidelines at December 31, 2003 and December 31, 2002. The Company’s Tier 1 capital to risk weighted assets was 11.5% and 12.6% at December 31, 2003 and 2002, respectively (see Item 8, Note 23, “Regulatory Matters,” of the Notes to Consolidated Financial Statements). In addition to risk-based capital requirements, the FRB requires bank holding companies to maintain a minimum leverage capital ratio of core capital to total assets of 4.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted. The Company’s leverage ratio at December 31, 2003 and 2002 was 8.1% and 8.7%, respectively.

As part of the Company’s goal to operate a safe, sound and profitable financial organization, the Company is committed to maintaining a strong capital base. Shareholders’ equity totaled $119.7 million and $118.8 million, or 8.7% and 9.8%, of total assets at December 31, 2003 and 2002, respectively. The $878,000, or 0.7%, increase in shareholders’ equity in 2003 was primarily attributable to net income of $18.9 million, less the costs associated with open market repurchases of approximately $8.7 million of the Company’s common stock in compliance with the Company’s previously announced stock repurchase policy and $5.6 million in cash dividends to the Company’s shareholders, and $3.9 million in unrealized losses on securities available for sale and derivative instruments, net of deferred tax expense.

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. Dividends paid per share during the year ended December 31, 2003 increased by 5.9% over the corresponding period in 2002. 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. Camden National Bank declared dividends in the aggregate amount of $12.7 million and $6.5 million in 2003 and 2002, respectively. UnitedKingfield Bank declared dividends in the aggregate amount of $2.5 million and $1.5 million in 2003 and 2002, respectively. As of December 31, 2003, and subject to the limitations and restrictions under applicable law, Camden National Bank and UnitedKingfield Bank had a total of $8.0 million available for dividends to the Company, although there is no assurance that dividends will be paid at any time in any amount (refer to Note 17 within the Notes to Consolidated Financial Statements of Item 8. Financial Statements and Supplementary Data, for additional information).

On June 24, 2003, the Board of Directors of the Company voted to authorize the Company to purchase up to 5%, or approximately 400,000 shares, of its outstanding common stock. The authority may be exercised from time to time and in such amounts as market conditions warrant. Any purchases are intended to make appropriate adjustments to the Company’s capital structure, including meeting share requirements related to employee benefit plans and for general corporate purposes. As of December 31, 2003, the Company has repurchased 209,328 shares of common stock at an average price of $28.92 under this plan. On June 25, 2002, the Board of Directors of the Company voted to authorize the Company to purchase up to 409,500 shares or approximately 5% of its outstanding common stock for reasons similar to the current year plan. Under the prior year plan, the Company repurchased 143,580 shares of common stock at an average price of $24.53, of which 105,630 shares were repurchased during 2003 at an average price of $24.68. The stock repurchase plans resulted in the use of $8.7 million of capital during 2003.

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Effective August 27, 2002, the Company elected to adopt a fair value-based method of accounting for employee stock compensation plans prospectively and expense the compensation costs over the vesting period of the options in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” In prior periods the Company disclosed in the Notes to Consolidated Financial Statements, the pro forma effect on net income of compensation costs based on the fair value of the options at the grant dates consistent with SFAS No. 123. SFAS No. 123 allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. The Company issued 16,000 options during 2003 and did not grant any options during 2002.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented elsewhere herein have been prepared in accordance with accounting principles generally accepted in the United States, 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 and yield curve may not necessarily move in the same direction or in the same magnitude as inflation.

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 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 bank subsidiary’s Board of Directors’ Asset/Liability Committee (“Board ALCO”) delegates responsibility for carrying out the asset/liability management policies to 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. The Management ALCO and Board ALCO jointly meet on a quarterly basis to review strategies, policies, economic conditions and various activities as part of the management of these risks.

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. Board and Management ALCO utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While Board and Management ALCO routinely monitor simulated NII sensitivity over a rolling 2-year horizon, they also utilize 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 interest-bearing 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.

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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 a 200 basis point (“bp”) upward and 100 bp downward shift in interest rates for 2003 and 2002. 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 periodically over the past 2 years.

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 exposure during 2003 compared to 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. Increases in fixed-rate loans and borrowings resulted in reducing the Company’s opportunity to lower funding costs in a declining rate environment. The Company decreased its exposure in a rising rate environment by locking in fixed-rate borrowings, 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 has approved hedging policy statements governing the use of these instruments by the bank subsidiaries. As of December 31, 2003, the Company had a notional principal amount of $30.0 million in interest rate swap agreements. Board and Management ALCO monitor derivative activities relative to its expectation and the Company’s hedging policies. These instruments are more fully described in Item 8, Note 6, “Derivative Financial Instruments,” of the Notes to Consolidated Financial Statement.

The Company acquired rate swap agreements to convert a portion of the loan portfolio from a variable rate based upon the Prime rate to a fixed rate. The $30.0 million of interest rate swap agreements mature in 2005. In a purchased interest rate swap agreement, cash interest payments are exchanged between the Company and counterparty. 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 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. The Company’s risk from default of a counterparty is limited to the expected cash flow anticipated from the counterparty, not the notional value.

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Recent Accounting Pronouncements

In 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133.

SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance will be applied prospectively. The provisions of this Statement that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, will continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, will be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS No. 149 is not expected to have a material impact on the Company’s consolidated financial statements.

May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).

FAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. This Statement does not impact the Company’s consolidated financial statements as the Company does not have any financial instruments with characteristics of both liabilities and equity.

FASB’s Emerging Issues Task Force, in its Issue No. 03-1, has issued new disclosure requirements with respect to investment securities with unrealized losses that have not been classified as other-than-temporary. Companies are required to disclose separately investments that have had continual unrealized losses for twelve months or more, and those that have had continual unrealized losses for less than twelve months. For investments in the former category, a narrative disclosure is required that would allow financial statement users to understand the positive and negative information management considered in reaching the conclusion that the impairments are not other-than-temporary. The new disclosure requirements, which are effective for years ending after December 15, 2003, did not have a material impact on the Company’s consolidated financial statements.

In December 2003, FASB issued a revised version of SFAS 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The Statement retains all of the previous requirements and introduces additional disclosure requirements and interim reporting requirements. SFAS 132 (revised 2003) is effective for years ending after December 15, 2003.

FASB Staff Position (FSP) No. 106-1 was issued to address the accounting impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) signed into law in December 2003. The Act includes a prescription drug benefit under Medicare Part D and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.

The FSP provides temporary guidance whereby a plan’s sponsoring company may elect to defer recognizing the effects of the Act on postretirement benefit expense and on the accumulated projected benefit obligation (APBO) pursuant to SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and defer providing the information related to the plan called for in SFAS 132. The Company has elected the deferral option. Accordingly, the effects of the Act on the APBO or net periodic postretirement benefit cost are not reflected in the financial statements or accompanying notes. Pending specific authoritative guidance on the accounting for the federal subsidy could require the Company to change previously reported information when the guidance is issued.

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Related Party Transactions

As a bank holding company, the Company’s banking subsidiaries are permitted, in their normal course of business, to make loans to certain officers and directors of the Company and its subsidiaries under terms that are consistent with the Company’s lending policies and regulatory requirements. In addition to extending loans to certain officers and directors of the Company and its subsidiaries on terms consistent with the Company’s lending policies, federal banking regulations also requires training, audit and examination of the Company’s adherence to this policy by representatives of the Company’s federal, national and state regulators (also known as “Reg. O” requirements). As described more fully in Item 8, Note 20, “Related Parties,” of the Notes to Consolidated Financial Statements, the Company has not entered into significant non-lending related party transactions.

Certain Factors Affecting Future Operating Results

Interest rate volatility may reduce our profitability.

The profitability of the Company depends to a large extent upon net interest income, which is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowed funds.

Net interest income can be affected significantly by changes in market interest rates. In particular, changes in relative interest rates may reduce the Company’s net interest income as the difference between interest income and interest expense decreases. As a result, the Company has adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources.

However, there can be no assurance that a decrease in interest rates will not negatively impact the Company’s results from operations or financial position. Since market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. An increase in interest rates could also have a negative impact on the Company’s results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to the Company’s allowance for loan losses.

Our allowance for loan and lease losses may not be adequate to cover actual loan losses.

The Company makes various assumptions and judgments about the collectibility of the loan portfolio and provides an allowance for potential losses based on a number of factors. If the assumptions are wrong, the allowance for loan and lease losses may not be sufficient to cover the losses the Company could experience, which would have an adverse effect on operating results, and may also cause the Company to increase the allowance in the future. Further, the Company’s net income would decrease if additional amounts needed to be provided to the allowance for loan and lease losses.

Our loans are concentrated in certain areas of Maine and adverse conditions in those markets could adversely affect our operations.

The Company is exposed to real estate and economic factors in the central, southern, western and midcoast areas of Maine, as virtually the entire loan portfolio is concentrated among borrowers in these markets. Further, because a substantial portion of the loan portfolio is secured by real estate in this area, the value of the associated collateral is also subject to regional real estate market conditions. Adverse economic, political or business developments or natural hazards may affect these areas and the ability of property owners in these areas to make payments of principal

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and interest on the underlying mortgages. If these regions experience adverse economic, political or business conditions, the Company would likely experience higher rates of loss and delinquency on these mortgage loans than if the loans were more geographically diverse.

If we do not maintain our historical growth rate, the market price of our common stock could be adversely affected.

The Company’s return on shareholders’ equity and other measures of profitability, which affect the market price of our common stock, depend in part on the Company’s continued growth and expansion. The Company’s growth strategy has two principal components—internal and external growth. The Company’s ability to generate internal growth is affected by the competitive factors described below as well as by the primarily rural characteristics and related demographic features of the markets the Company serves. The Company’s ability to continue to identify and invest in suitable acquisition candidates on acceptable terms is crucial to our external growth. In pursuing acquisition opportunities, the Company may be in competition with other companies having similar growth strategies. As a result, the Company may not be able to identify or acquire promising acquisition candidates on acceptable terms. Competition for these acquisitions could result in increased acquisition prices and a diminished pool of acquisition opportunities. An inability to find suitable acquisition candidates at reasonable prices could slow our growth rate and have a negative affect on the market price of our common stock.

We experience strong competition within our markets, which may impact our profitability.

Competition in the banking and financial services industry is strong. In the Company’s market areas, the Company competes for loans and deposits with local independent banks, thrift institutions, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally as well as nationally. Many of these competitors have substantially greater resources and lending limits than those of the Company’s subsidiaries and may offer services that the Company’s subsidiaries do not or cannot provide. Our long-term success depends on the ability of the Company’s subsidiaries to compete successfully with other financial institutions in their service areas. Because the Company maintains a smaller staff and has fewer financial and other resources than larger institutions with which the Company competes, it may be limited in its ability to attract customers. If the Company is unable to attract and retain customers, the Company may be unable to continue the loan growth and the Company’s results of operations and financial condition may otherwise be negatively impacted.

Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures.

The Company’s banking subsidiaries have traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at the Company’s banking subsidiaries decreases relative to the Company’s overall banking operations, the Company may have to rely more heavily on borrowings as a source of funds in the future.

Our banking business is highly regulated.

Bank holding companies, national banking associations and state-chartered banks operate in a highly regulated environment and are subject to supervision, regulation and examination by various federal and state bank regulatory agencies, as well as other governmental agencies in the states in which they operate. Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and BHCs, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The OCC, the FDIC and the Superintendent possess cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to BHCs. These and other restrictions limit the manner in which the Company and its subsidiaries may conduct business and obtain financing.

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Furthermore, the Company’s business is affected not only by general economic conditions, but also by the economic, fiscal and monetary policies of the United States and its agencies and regulatory authorities, particularly the FRB. The economic and fiscal policies of various governmental entities and the monetary policies of the FRB may affect the interest rates the Company’s bank subsidiaries must offer to attract deposits and the interest rates they must charge on loans, as well as the manner in which they offer deposits and make loans. These economic, fiscal and monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally including the Company’s bank subsidiaries.

We could be held responsible for environmental liabilities of properties we acquire through foreclosure.

If the Company is forced to foreclose on a defaulted mortgage loan to recover the Company’s investment the Company may be subject to environmental liabilities related to the underlying real property. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on properties during the Company’s ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that the Company would not be fully liable for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property or that the Company could recoup any of the costs from any third party.

To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions.

Although the Company does not have an aggressive acquisition strategy, the Company has acquired, and in the future will continue to consider the acquisition of, other banking companies. To the extent that the Company acquires other companies in the future, the Company’s business may be negatively impacted by certain risks inherent with such acquisitions.

These risks include the following:

Due to the nature of our business, we may be subject to litigation from time to time, some of which may not be covered by insurance.

The Company, through its bank subsidiaries, operates in a highly regulated industry, and as a result, is subject to various regulations related to disclosures to our customers, our lending practices, and other fiduciary responsibilities. From time to time, the Company has been, and may become, subject to legal actions relating to our operations that have had, or could, involve claims for substantial monetary damages. Although the Company maintains insurance, the scope of this coverage may not provide the Company with full, or even partial, coverage in any particular case. As a result, a judgment against the Company in any such litigation could have a material adverse effect on the Company’s financial condition and results of operation.

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Financial Tables

Table 1—Three-Year Average Balance Sheet

The following table sets forth, for the periods indicated, information regarding amount of interest income on interest-earning assets and the average yields, the amount of interest expense on interest-bearing liabilities and average costs, net interest income, net interest spread and net interest margin.

Analysis of Change in Net Interest Margin on Earning Assets