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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

Outstanding at May 7, 2004: Common stock (no par value) 7,730,847 shares.

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CAMDEN NATIONAL CORPORATION

Form 10-Q for the quarter ended March 31, 2004

TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

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INDEPENDENT ACCOUNTANTS’ REPORT

The Shareholders and Board of Directors

Camden National Corporation

We have reviewed the accompanying interim consolidated financial information of Camden National Corporation and Subsidiaries as of March 31, 2004, and for the three-month periods ended March 31, 2004 and 2003. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board, the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with United States generally accepted accounting principles.

Berry, Dunn, McNeil & Parker

Portland, Maine

April 30, 2004

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PART I.

ITEM 1. FINANCIAL STATEMENTS

Camden National Corporation and Subsidiaries

Consolidated Statements of Income

(unaudited)

See Independent Accountants’ Report.

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Camden National Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited)

See Independent Accountants’ Report.

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Camden National Corporation and Subsidiaries

Consolidated Statements of Condition

See Independent Accountants’ Report.

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Camden National Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

See Independent Accountants’ Report.

The accompanying notes are an integral part of these Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation, as of March 31, 2004 and December 31, 2003, the consolidated statements of income for the three months ended March 31, 2004 and 2003, the consolidated statements of comprehensive income for the three months ended March 31, 2004 and 2003 and the consolidated statements of cash flows for the three months ended March 31, 2004 and 2003. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the three-month period ended March 31, 2004 is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the December 31, 2003 Annual Report on Form 10-K.

NOTE 2 – EARNINGS PER SHARE

Basic earnings per share data is computed based on the weighted average number of common shares outstanding during each period. Potential common stock is considered in the calculation of weighted average shares outstanding for diluted earnings per share, and is determined using the treasury stock method.

The following tables set forth the computation of basic and diluted earnings per share:

NOTE 3 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company has interest rate protection agreements with notional amounts of $30.0 million at March 31, 2004. Under these agreements, the Company exchanges a variable rate asset for a fixed rate asset, thus protecting certain asset yields from falling interest rates. In accordance with SFAS No. 133, management designated these swap agreements as cash-flow hedges since they convert a portion of the loan portfolio from a variable rate based upon the Prime Rate to a fixed rate. The hedge relationship is estimated to be 100% effective, therefore, there is no impact on the statement of income resulting from changes in fair value. The fair values of the swap agreements are recorded in the Statement of Condition with the offset recorded in the Statement of Other Comprehensive Income.

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NOTE 4 – CORE DEPOSIT INTANGIBLE

The Company has a core deposit intangible asset related to the acquisition of bank branches in 1998. The core deposit intangible is amortized on a straight-line basis over 10 years, and reviewed for possible impairment when it is determined that events or changed circumstances may affect the underlying basis of the asset. The carrying amount is as follows:

Amortization expense related to the core deposit intangible for the three-month periods ended March 31, 2004 and 2003 amounted to $231,000 and $235,000, respectively. The expected amortization expense for the remaining amortization period ending December 31, 2008 is estimated to be $941,100 per year through December 31, 2007 and $470,000 for the year ending December 31, 2008.

NOTE 5 – GOODWILL

The value of the Company’s goodwill balances, including the related impairment loss, is as follows:

As of June 30, 2003, in accordance with SFAS No. 142, the Company completed its annual review of the goodwill and determined that there has been no additional impairment.

NOTE 6 – STOCK REPURCHASE

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 repurchases 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 March 31, 2004, the Company has repurchased 231,958 shares of common stock at an average price of $29.39 under the current plan, of which 22,630 shares at an average price of $33.80 have been purchased during the first quarter of 2004. On June 25, 2002, the Board of Directors of the Company voted to authorize the Company to repurchase 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 $24.64.

NOTE 7 – SHAREHOLDERS’ EQUITY

On April 29, 2003, the shareholders of the Company approved the 2003 Stock Option and Incentive Plan (the “current Plan”). Prior to the approval, the Company had three stock option plans, which the Company accounted for under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. On August 27, 2002, the Company announced that it adopted the fair value recognition provisions of SFAS No. 123, “Accounting for

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Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled. During the first quarter of 2004, the Company issued, under the current plan, 7,500 stock options to employees, which, in general, vest over a five-year period, therefore, no expense has been recorded as none of the options vested during the first quarter of 2004. During the first quarter of 2003, the Company issued 6,000 stock options to employees, which vested immediately and were expensed as options on the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding awards in each period.

NOTE 8 – MORTGAGE SERVICING RIGHTS

Residential real estate mortgages are originated by the Company with the intent to hold in portfolio or to sell in the secondary market to institutional investors such as Freddie Mac. Under loan sale and servicing agreements with the investor, the Company generally continues to service the residential real estate mortgages. A Mortgage Servicing Right is created when the Company pays the investor an agreed-upon rate on the loan, which, including a guarantee fee paid to Freddie Mac, is less than the interest rate the Company receives from the borrower. The Company retains the difference as a fee for servicing the residential real estate mortgages. As required by SFAS No. 140, the Company capitalizes mortgage servicing rights at their fair value upon sale of the related loans and periodically assesses the asset for impairment. The balance of capitalized mortgage servicing rights, net of a valuation allowance, included in other assets at March 31, 2004 and 2003 was $839,000 and $875,000, respectively, which equaled the fair value of these rights. At December 31, 2003, the balance of capitalized mortgage servicing rights was $897,000. Amortization of the mortgage serving rights, as well as prepayment of mortgage serving rights, is recorded as a charge against mortgage servicing fee income. The Company’s assumptions with respect to prepayments, which are affected by the estimated average life of the loans, are adjusted periodically to reflect current circumstances. In evaluating the reasonableness of the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans.

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The following summarizes mortgage servicing rights capitalized and amortized, along with the activity in the related valuation allowance:

NOTE 9 – POST-RETIREMENT PLAN

The Company’s post-retirement plan provides medical and life insurance to certain eligible retired employees. The components of the net periodic benefit cost are:

The Company’s expected contribution for the second quarter of 2004 is $43,875 and the expected contribution for all of 2004 is $175,500.

NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 133 Implementation Issue C13, “When a Loan Commitment Is Included in the Scope of Statement 133,” requires commitments to originate mortgage loans that will be held for sale upon origination to be accounted for as derivatives, but does not provide guidance on how the fair value of those commitments should be measured.

In March 2004, the SEC issued Staff Accounting Bulletin (SAB) No. 105, “Application of Accounting Principles to Loan Commitments,” in which the staff indicated it believes loan commitments are written options and therefore should never result in the recognition of an asset under SFAS No. 133. Rather, the staff indicated lenders should initially recognize a liability for loan commitments, with the offsetting debit recognized as a derivative loss to the extent a premium is not received from the potential borrower.

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The staff indicated it would not object to a registrant’s recognizing loan commitments as assets provided it discontinues that practice for commitments entered into in the first reporting period beginning after March 15, 2004 and provided assets recorded on loan commitments entered into prior to that date are reversed when the related loan closes or the commitment expires.

SAB No. 105 is not expected to have a material effect on the Company’s consolidated financial statements or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD LOOKING INFORMATION

The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Company may make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “will,” “should,” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause these differences include, but are not limited to, the following:

You should carefully review all of these factors, and you should be aware that there might be other factors that could cause these differences, including, among others, the factors listed under “Certain Factors Affecting

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Future Operating Results,” beginning on page 29 of our Annual Report on Form 10-K for the year ended December 31, 2003. Readers should carefully review the factors described under “Certain Factors Affecting Future Operating Results” and should not place undue reliance on our forward-looking statements.

These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of the Company’s financial condition are based on the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States 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”), mortgage servicing rights 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 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 affect 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.

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. When the book value exceeds the fair value, a valuation allowance is recorded against these servicing assets. 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 valuation allowance, but cannot recognize an asset in excess of its amortized book value. Future changes in fair value, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could positively or adversely impact the Company’s financial condition and results of operations. Management has engaged, on a quarterly basis, a recognized third party to evaluate the valuation of the Company’s mortgage servicing rights asset.

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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.

RESULTS OF OPERATIONS

Overview

The Company reported consolidated net income of $4.5 million, or $0.58 per diluted share, for the first three months of 2004. This is an increase of $195,000, or 4.5%, compared to net income of $4.3 million, or $0.54 per diluted share, for the comparable period of 2003. Annualized return on average equity (“ROE”) and return on average assets (“ROA”) for the first three months of the year were 14.98% and 1.33%, respectively. Annualized ROE and ROA were 14.67% and 1.42%, respectively, for the same period in 2003.

During the first three months of 2004, the Company continued to experience a narrowing of the net interest margin as yields on earning assets continued to re-price downward faster than the cost of funding, resulting in a net interest margin of 3.89% compared to 4.27% for the same period in 2003. Although the Company has experienced a narrowing margin during a sustained low interest rate environment, the increase in average earning assets of $128.6 million resulted in net interest income increasing $282,000 during the first three months of 2004 compared to the same period in 2003. In addition, during the first quarter of 2004, compared to the same period one year ago, the Company experienced an increase of $250,000 in income from trust and investment management income. Another contributing factor to the improved results was a reduction of $255,000 in the provision for loan and lease losses in 2004 compared to 2003. Conversely, other non-interest income decreased $213,000 primarily due to the sale of the credit card portfolio at the two banks in the fourth quarter of 2003 and the reduction in employee benefits administration income at Acadia Trust, N.A. Salaries and employee benefits increased $384,000 in the first quarter of 2004 compared to the same quarter of 2003.

NET INTEREST INCOME

The Company’s net interest income, on a fully taxable equivalent basis (adjusted as described in the following paragraph), for the three months ended March 31, 2004, was $12.5 million, a 2.4% or $294,000 increase over the net interest income for the first three months of 2003, of $12.2 million. Interest income on loans increased $569,000, or 4.1%, during the three-month period ended March 31, 2004 compared to the same period of 2003, as average loan balances increased $139.1 million from March 31, 2003 to March 31, 2004. The Company experienced a decrease in interest income on investments of $836,000 during the first three months of 2004 compared to the same period in 2003. This decrease was due to declines in the investment yield resulting from

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maturities of higher rate investments being replaced with the lower rate securities currently available in the market, and the fact that average investment balances during the first 3 months of 2004 were $10.5 million lower than the same period in 2003. The Company’s total interest expense decreased $561,000 during the first three months of 2004 compared to the same period in 2003. This decrease was the result of increases in the average balances of lower-costing deposits. The Company experienced an increase of $24.0 million in the average balances of transaction account deposits (demand deposit and NOW accounts) and an increase of $38.9 million in average savings and money market accounts during the first three months of 2004 compared to 2003. Certificates of deposit accounts decreased slightly during the first three months of 2004 compared to the same period in 2003, as customers continue to refrain from locking into long-term deposit products in the current low interest rate environment. During the first quarter 2004, the Company increased brokered certificates by $39.9 million and borrowings from the FHLBB by $38.5 million compared to the first three months of 2003. The Company uses brokered certificates, instead of other funding sources, when the all-in costs (including broker fees) make them a viable funding option. Net interest income, expressed as a percentage of average interest-earning assets for the first three months of 2004 and 2003, was 3.89% and 4.27%, respectively.

The following tables, which present changes in interest income and interest expense by major asset and liability category for three months ended March 31, 2004 and 2003, illustrate the impact of average volume growth and rate changes. The income from tax-exempt assets, municipal investments and loans, has been adjusted to a tax-equivalent basis, thereby allowing a uniform comparison to be made between asset yields. Changes in net interest income are the result of interest rate movements, changes in the amounts and mix of interest-earning assets and interest-bearing liabilities, and changes in the level of non-interest-earning assets and non-interest-bearing liabilities. The Company utilizes derivative financial instruments, such as interest rate swap agreements, that have an effect on net interest income. There was an increase in net interest income due to the derivative financial instruments of $210,000 during the first three months of 2004 compared to an increase of $199,000 in the first three months of 2003. The average amount of non-accrual loans can also affect the average yield on all outstanding loans. Average non-accrual loans for the periods ended March 31, 2004 and 2003 were $5.1 million and $7.7 million, respectively.

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ANALYSIS OF CHANGES IN NET INTEREST MARGIN

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AVERAGE BALANCE SHEETS

ANALYSIS OF VOLUME AND RATE CHANGES ON

NET INTEREST INCOME AND EXPENSES

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NON-INTEREST INCOME

Total non-interest income of $2.5 million increased by $153,000, or 6.4%, in the three months ended March 31, 2004 compared to the three months ended March 31, 2003. Income from trust and investment management activities increased $250,000, or 48.5%, principally due to an increase in assets under management at Acadia Trust, N.A. resulting, in part, from increases in the market value of these assets during the later part of 2003 and early 2004. Residential mortgage servicing rights associated with the sale of residential real estate loans increased $27,000 during the first three months of 2004 compared to 2003, due to decreased amortization of the mortgage servicing asset associated with a decline of loan prepayments during the first quarter of 2004 compared to the same period in 2003. Earnings on bank-owned life insurance increased $76,000 in the first three months of 2004 compared to the first three months of 2003 due to an increase in yields. Other non-interest income decreased $213,000, or 26.0%, primarily due to the reduction in credit card income due to the sale of the credit card portfolio in October of 2003, and a reduction of retirement plan administration income as Acadia Trust, N.A. began to outsource this function on January 1, 2004.

NON-INTEREST EXPENSE

Total non-interest expense of $8.0 million increased by $431,000, or 5.7%, in the three-month period ended March 31, 2004 compared to the three-month period ended March 31, 2003. Salaries and employee benefit costs increased $384,000, or 9.5%, during the first three months of 2004 compared to 2003, primarily due to normal annual salary and benefit cost increases and to an increase in employee incentive expense of $228,000. Expenses related to premises and fixed assets decreased $34,000, or 3.0%, during the first three months of 2004 compared to 2003, due to lower depreciation costs in 2004 compared to 2003. Other operating expenses increased by $85,000, or 3.9%, in the first three months of 2004 compared to the first three months of 2003, primarily due to increased hiring and training costs, increased consulting fees at Acadia Trust, N.A. related to the outsourcing of its retirement plan administrative services, and increased brokered deposits fees as the Company has increased its use of brokered certificates of deposit as a funding source. Offsetting some of these increases in other operating expenses were lower legal costs.

FINANCIAL CONDITION

During the three months of 2004, average assets of $1.4 billion increased by $129.1 million, or 10.5%, compared to the same period in 2003. This increase was the result of an increase in the loan portfolio, which averaged $972.4 million during the first three months of 2004, an increase of $139.1 million, or 16.7%, as compared to $833.3 million during the first three months of 2003. The largest increase in average loan balances was in commercial real estate loans, which increased $58.7 million, or 18.9%, during the first three months of 2004 compared to the first three months of 2003. In addition, average consumer loans increased $32.6 million, or 32.4%, reflecting increased home equity loan activity and residential real estate loans increased $31.2 million, or 12.1%, reflecting high levels of refinance activity during the later part of 2003 due to historical low interest rates. Average investment balances declined $10.5 million, or 3.2%, to $313.0 million for the first quarter of 2004 from $323.5 million for the first quarter of 2003, as the Company did not reinvest all cash flows from the investment portfolio due to the general unfavorable bond market during the first quarter of 2004.

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 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 March 31, 2004 and 2003, 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

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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. For the first three months of 2004 average deposits of $919.0 million increased $88.7 million, or 10.7%, from $830.3 million reported during the first three months of 2003. The Company experienced growth in all deposit categories during this period. Comparing average deposits for the first three months of 2004 to 2003, transaction accounts (demand deposits and NOW accounts) increased $24.0 million, savings accounts increased $8.0 million, money market accounts increased $30.8 million, and certificates of deposit increased $25.8 million. Included in the money market deposit category are deposits from Acadia Trust, N.A., representing client funds. The balance in the Acadia Trust, N.A. client money market account, which was $54.9 million on March 31, 2004, could increase or decrease depending upon changes in the portfolios of the clients of Acadia Trust, N.A. The increase in certificates of deposit was the result of the Company utilizing brokered certificates of deposit as a funding source when the market for these funds was more favorable compared to other alternatives during the first quarter of 2004. Borrowings supplement deposits as a source of liquidity. In addition to borrowings from the FHLBB, the Company purchases federal funds, sells securities under agreements to repurchase and utilizes treasury tax and loan accounts. Average borrowings for the first three months of 2004 were $313.5 million, an increase of $38.5 million, or 14.0%, from $275.0 million during the first three months of 2003. The majority of the borrowings were from the FHLBB, whose advances remained the largest non-deposit-related, interest-bearing funding source for the Company. The Company secures these borrowings with qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. The carrying value of loans pledged as collateral at the FHLBB was $284.0 million and $263.5 million at March 31, 2004 and 2003, 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 March 31, 2004. The Company had no outstanding balance on its line of credit with the FHLBB at March 31, 2004 and 2003.

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.

Another aspect of the Company’s financial condition is its ALLL. 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, 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.

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

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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 the first three months of 2004, the Company provided $165,000 to the ALLL compared to $420,000 in the first three months of 2003. 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. The Company’s Corporate Risk Management Group actively addresses existing and anticipated asset quality issues. The efforts of the Risk Management Group resulted in net recoveries of $202,000 during the first three months of 2004, compared to net charge-offs of $15,000 during the first three months of 2003. At the same time, non-performing assets as a percent of total loans improved to 0.63% at March 31, 2004, compared to 0.89% at March 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 March 31, 2004, of $14.5 million, or 1.49% of total loans outstanding, was appropriate based on the economic conditions in the Company’s service area and management’s estimation of the quality of the Company’s loan portfolio at March 31, 2004. Several factors, as explained above, may materially affect the level of future provision for loan and lease losses, which could impact earnings. As a percentage of total loans outstanding, the ALLL, of $15.6 million, was 1.83% as of March 31, 2003.

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 March 31, 2004 and March 31, 2003. The Company’s Tier 1 to risk-weighted assets was 11.93% and 12.40% at March 31, 2004 and 2003, respectively. 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 March 31, 2004 and 2003 was 7.86% and 8.39%, respectively.

The principal cash requirement of the Company is the payment of dividends on the Company’s common stock as and when declared by the Board of Directors. The Company is primarily dependent upon the payment of cash dividends by its subsidiaries to service its commitments. The Company, as the sole shareholder of its subsidiaries, is entitled to dividends when and as declared by each subsidiary’s Board of Directors from legally available funds. The Company declared dividends in the aggregate amount of $1.6 million and $1.4 million in the first three months of 2004 and 2003, respectively.

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IMPACT OF INFLATION AND CHANGING PRICES

The interim Consolidated Financial Statements and the Notes to the interim Consolidated Financial Statements thereto 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.

OFF-BALANCE SHEET ITEMS

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 March 31, 2004, the Company had the following levels of commitments to extend credit:

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 were made during the normal course of business. At March 31, 2004, the Company had the following levels of contractual obligations.

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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 March 31, 2004, the Company had swap agreements with a notional amount of $30.0 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.

OTHER MATTERS

UnitedKingfield Bank Branch Transaction

On April 15, 2004, the Company’s subsidiary, UnitedKingfield Bank, announced the receipt of regulatory approval to complete a transaction in which UnitedKingfield Bank would purchase and assume certain deposit liabilities and assets associated with the Greenville Junction, Maine branch of Border Trust Company, and Border Trust Company would simultaneously purchase and assume certain deposits liabilities and assets associated with the Jackman, Maine branch of UnitedKingfield Bank. The completion of the transaction is expected to be on the close of business on May 28, 2004.

Camden National Bank Land and Property Purchase

On April 5, 2004, the Company’s subsidiary, Camden National Bank, announced the purchase of the Philbrick Block property located at the intersection of Main and Park Streets in downtown Rockland, Maine. The property, which is located directly behind the Bank’s Park Street Office, is expected accommodate future growth of its busiest branch.

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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE

ABOUT MARKET RISK

MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure 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, and 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 the Company’s Management Asset/Liability Committee (“Management ALCO”). In this capacity, Management ALCO develops guidelines and strategies impacting the Company’s asset/liability management-related activities based upon estimated market risk sensitivity, policy limits, and overall market interest rate levels and 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 liabilities reflected on the Company’s balance sheet as well as for derivative financial instruments. None of the assets used in the simulation were held for trading purposes. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given both a 200 basis point (bp) upward and 100 bp downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed. The following reflects the Company’s NII sensitivity analysis as measured during the first quarter of 2004.

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

The most significant factors affecting the changes in market risk exposures during the first three months of 2004 were the continued low interest rate environment, the slow down of loan activity at both subsidiary banks, and the level of short-term overnight FHLBB borrowings. Short-term borrowings, result in the Company’s being able to keep funding costs lower in a declining rate environment. However, the Company increases its exposure in a rising rate environment by keeping its borrowings short. The risk in a rising rate interest rate environment is well within the Company’s policy limits.

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When appropriate, the Company may utilize derivative financial instruments, such as interest rate floors, caps and swaps to hedge its interest rate risk position. The Board of Directors’ approved hedging policy statements govern the use of these instruments by the bank subsidiaries. As of March 31, 2004, the Company had a notional principal of $30 million in interest rate swap agreements. Board and Management ALCO monitor derivative activities relative to its expectation and the Company’s hedging policy. These instruments are more fully described in Note 3 – Derivative Financial Instruments within the “Notes to Consolidated Financial Statements” section.

The Company acquired interest 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 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 in this transaction are the risk of default from the counterparty from whom the Company has entered into agreement and poor correlation between the rate being swapped and the liability cost of the Company. The Company’s risk from default of a counterparty is limited to the expected cash flow anticipated from the counterparty, not the notional value.

ITEM 4. CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Banking Officer (Principal Financial & Accounting Officer), regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Banking Officer (Principal Financial & Accounting Officer) concluded that they believe the Company’s disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a party to litigation and claims arising in the normal course of business. In addition to routine litigation incidental to its business, the Company’s subsidiary, Camden National Bank, recently commenced mediation with respect to a claim for damages allegedly suffered by a borrower based upon the Bank’s failure to extend credit. The Bank believes the claim is without merit and plans to vigorously defend this matter.

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ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

(e) Furnish the information required by Item 703 of Regulation S-K for any repurchase made in the quarter covered by the report. Provide disclosures covering repurchases made on a monthly basis.