Other Borrowed Funds. Other borrowed funds consist of commercial and consumer repurchase agreements with a carrying value of $46.0 million and $41.0 million at December 31, 2002 and 2001, respectively, and treasury tax and loan deposits. Securities sold under agreements to repurchase generally mature within 30 days and are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.  Treasury tax and loan deposits generally do not have fixed maturity dates. Income Taxes. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax implications attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as  to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Earnings Per Share. Basic earnings per share data is computed based on the weighted average number of the CompanyGLYPH<213>s common shares outstanding during each year. 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. Financial Instruments with Off-Balance Sheet Risk . In the ordinary course of business, the Company has entered into  credit related financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded. Derivative Financial Instruments Designated as Hedges. In June 1998, the Financial Accounting Standards Board (GLYPH<210>FASBGLYPH<211>) issued SFAS No. 133, GLYPH<210>Accounting for Derivative Instruments and Hedging Activities,GLYPH<211> which sets accounting and reporting standards for derivative instruments and hedging activities. The Statement, as amended by SFAS No. 138, GLYPH<210>Accounting for Certain Derivative Instruments and Certain Hedging ActivitiesGLYPH<209>an Amendment of FASB Statement No. 133,GLYPH<211> requires the Company to recognize all derivatives in the Consolidated Statement of Condition at fair value. The Company adopted the Statement effective January 1, 2001 and transferred all of its investment securities classified as held to maturity to the available-for-sale classification. The impact of this reclassification was an increase to other comprehensive income of $2.0 million, net of applicable taxes, which was reported as a cumulative effect adjustment to other comprehensive income. Under the provisions of SFAS No. 133, the Company recognizes all derivatives in the Consolidated Statement of Condition at fair value. On the date the Company enters into the derivative contract, the Company designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (GLYPH<210>cash flow hedgeGLYPH<211>), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (GLYPH<210>fair value hedgeGLYPH<211>) or a held for trading instrument (GLYPH<210>trading instrumentGLYPH<211>). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedgeGLYPH<213>s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is highly effective and that qualifies as a cash flow hedge are recorded in other comprehensive income and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies  as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is highly effective. Those derivatives that are classified as trading instruments are recorded at fair value with changes in fair value recorded in earnings. The Company discontinues hedge accounting when it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.  Fair Value Disclosures. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions: Cash and due from banks: The carrying amounts of cash and due from banks approximate their fair value. Securities held to maturity and securities available for sale: Fair values of securities held to maturity and securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amounts of other securities approximate their fair value. Residential mortgages held for sale: Fair values are based on quoted market prices from Freddie Mac. Loans receivable: For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Interest receivable and payable: The carrying amounts of interest receivable and payable approximate their fair value. Life insurance policies: The carrying amounts of life insurance policies approximate their fair value. Deposits: The fair value of demand and NOW deposits, savings accounts, and certain money market deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered in the CompanyGLYPH<213>s market for deposits of similar remaining maturities. Borrowings: The carrying amounts of short-term borrowings from the Federal Home Loan Bank of Boston (GLYPH<210>FHLBBGLYPH<211>), securities sold under repurchase agreements and other short-term borrowings approximate fair value. The fair value of long-term borrowings is based on the discounted cash flows using current rates for advances of similar remaining maturities.  Derivative financial instruments: Fair values for interest rate swap, floor and cap contracts are based on quoted market prices.  Credit related financial instruments: In the course of originating loans and extending credit and standby letters of credit, the Company charges fees in exchange for its lending commitment. While these commitment fees have value, the Company does not believe their value is material to its financial statements due to the short-term nature of the underlying commitments. Effect of Recently Issued Financial Standards. Effective in 2002, the FASB issued SFAS No. 146, GLYPH<210>Accounting for Costs Associated with Exit or Disposal Activities,GLYPH<211> SFAS No. 147, GLYPH<210>Acquisitions of Certain Financial Institutions,GLYPH<211> SFAS No. 148, GLYPH<210>Accounting for Stock-Based CompensationGLYPH<209>Transition and Disclosure,GLYPH<211> Statement of Position (GLYPH<210>SOPGLYPH<211>) 01-6, GLYPH<210>Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others.GLYPH<211> SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement had no impact on the companyGLYPH<213>s consolidated financial condition and  results of operations. SFAS No. 147 amended SFAS No. 72, GLYPH<210>Accounting for Certain Acquisitions of Banking or Thrift Institutions,GLYPH<211> to exclude from its scope most acquisitions of financial institutions. Such transactions should be accounted for in accordance with SFAS No. 141, GLYPH<210>Business Combinations.GLYPH<211> This Statement had no impact on the CompanyGLYPH<213>s consolidated financial condition and results of operations. SFAS No. 148 contains enhanced disclosure requirements for stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. Adoption of the Statement in 2002 had no impact on the CompanyGLYPH<213>s consolidated financial condition and results of operations. SOP 01-6 was issued in December 2001. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2001. The SOP reconciles and conforms the accounting and financial reporting provisions established by various Audit and Accounting Industry Guides. Adoption of this Statement had no impact on the CompanyGLYPH<213>s consolidated financial condition and results of operations.  Reclassification. Certain items from the prior year were restated to conform to the current year presentation. On July 19, 2001, the Company acquired 100% of the outstanding common stock of Acadia Trust, N.A. and Gouws Capital Management, Inc. (GLYPH<210>Gouws CapitalGLYPH<211>). Acadia Trust, N.A., headquartered in Portland, Maine and founded in 1991, is a nationally chartered trust company offering traditional trust services and was custodian and trustee, at the date of acquisition, for approximately $300 million in assets. Gouws Capital, founded in 1984 and also headquartered in Portland, Maine, offers investment advisory services to high net worth individuals and institutions. Gouws Capital had approximately $342 million of assets under management at the date of acquisition, of which approximately $300 million was held at Acadia Trust, N.A. Subsequent to the acquisition, Gouws Capital was merged into Acadia Trust, N.A. Camden National Corporation and Subsidiaries 47 46 Camden National Corporation and Subsidiaries 2. ACQUISITIONS