Analysis of Change in Net Interest Margin on Earning Assets (Dollars in thousands) DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: SecuritiesGLYPH<209>taxable $ 292,279 $17,459 5.97% $ 234,835 $15,666 6.67% $224,698 $16,079  7.16% SecuritiesGLYPH<209>nontaxable (1) 8,936 562 6.29% 9,161 589 6.43% 8,993 595 6.62% Federal funds sold 15,729 250 1.59% 3,399 83 2.44% 2,215 109 4.92% Loans (1)(2)(3) 757,733 55,370 7.31%  732,460 63,065 8.61%  675,316  62,007 9.17% Total interest-earning assets 1,074,677  73,641 6.86% 979,855 79,403 8.10%  911,222  78,790 8.63% Cash and due from banks 28,189 24,742 27,544 Other assets 63,565 57,874 58,817 Less allowance for loan losses 14,232 12,200 10,541 Total assets $1,152,199 $1,050,271 $987,042 Liabilities & ShareholdersGLYPH<213> Equity Interest-bearing liabilities: NOW accounts $ 96,707 $ 401 0.41% $ 92,111 $ 733 0.80% $ 86,783 $ 889 1.02% Savings accounts 92,839 815 0.88% 84,201 1,646 1.95% 85,427 2,168 2.54% Money market accounts 155,742 2,397 1.54% 128,106 4,333 3.38% 98,559 4,467 4.53% Certificates of deposit 309,413 10,880 3.52% 321,503 16,047 4.98% 329,664 18,595 5.64% Broker certificates of deposit 55,642 2,597 4.67% 34,659 2,136 6.16% 12,876 947 7.35% Borrowings 224,659 9,325 4.15% 199,615 9,846  4.95%  198,597  11,650 5.87% Total interest-bearing liabilities 935,002  26,415 2.83% 860,195 34,741 4.04%  811,906  38,716 4.77% Demand deposits 95,824 82,572 84,357 Other liabilities 10,496 8,327 6,409 ShareholdersGLYPH<213> equity 110,877 99,177 84,370 Total liabilities and shareholdersGLYPH<213> equity $1,152,199 $1,050,271 $987,042 Net interest income 47,226 44,662 40,074 (fully-taxable equivalent) Less: fully-taxable  equivalent adjustment (369) (481) (561) Net interest income $46,857 $44,181 $39,513 Net interest rate spread (fully-taxable equivalent) 4.03% 4.06% 3.87% Net interest margin (fully-taxable equivalent) 4.39% 4.56% 4.39% 24 Camden National Corporation and Subsidiaries Analysis of Volume and Rate Changes on Net Interest Income DECEMBER 31, 2002 VS 2001 DECEMBER 31, 2001 VS 2000 (Dollars in thousands) INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO Volume Rate Total Volume Rate Total Interest-earning assets: SecuritiesGLYPH<209>taxable $3,832 $ (2,039) $ 1,793 $ 725 $(1,138) $ (413) SecuritiesGLYPH<209>nontaxable (14) (13) (27) 11 (17) (6) Federal funds sold 301 (134) 167 58 (84) (26) Loans 2,176  (9,871)  (7,695) 5,238 (4,073) 1,165 Total interest income 6,295  (12,057)  (5,762) 6,032 (5,312) 720 Interest-bearing liabilities: NOW accounts 37 (369) (332) 55 (211) (156) Savings accounts 169 (1,000) (831) (31) (491) (522) Money market accounts 935 (2,871) (1,936) 1,339 (1,473) (134) Certificates of deposit (603) (4,564) (5,167) (460) (2,124) (2,584) Broker certificates of deposit 1,293 (832) 461 1,602 (413) 1,189 Borrowings 1,235 (1,756) (521) 60 (1,828)  (1,768) Total interest expense 3,066  (11,392)  (8,326) 2,565 (6,540)  (3,975) Net interest income (fully-taxable equivalent) $3,229 $ (665) $ 2,564 $3,467 $ 1,228 $ 4,695 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. During 2002, overall interest rates in the United States were at 40-year lows, as highlighted by a federal funds discount rate of 1.25% at December 31, 2002. This affected the CompanyGLYPH<213>s net interest income in several ways. First and foremost, the CompanyGLYPH<213>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 (GLYPH<210>LIBORGLYPH<211>) resulted in a reduction in gross revenues (these products are also referred to as GLYPH<210>variableGLYPH<211> or GLYPH<210>floatingGLYPH<211> rate instruments) as these benchmarks declined in 2002. 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. Finally, numerous customers refinanced to a lower interest rate various debt obligations they had to the 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 2002, interest income on the CompanyGLYPH<213>s taxable investment portfolio increased $1.8 million primarily due to  the increase in volume in the portfolio, while the CompanyGLYPH<213>s non-taxable investment portfolio interest income declined $27,000, due to both volume and rate declines in the portfolio. During 2002 and 2001, the Company was a party to several 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, GLYPH<210>Financial Instruments,GLYPH<211> of the Notes to Consolidated Financial Statements, on page 59, and the GLYPH<210>Market RiskGLYPH<211> section, on page 33, should be reviewed for further discussion of the CompanyGLYPH<213>s derivative and market risk strategies. Offsetting the effects of the interest rate environment  was the fact that the Company generated additional loan volume of $28.2 million through its previously announced expansion into new markets and increased volume of activity  in its other existing marketplaces. During 2002, residential mortgages increased $39.9 million, or 19.5%, and consumer loans (including home equities) increased $9.9 million, or 11.5%, during 2002. The Company also benefited from revenues from an interest rate swap agreement which was entered into  in early 2002 as a hedge against falling interest rates. As rates fell, revenues from the interest rate swap increased. Camden National Corporation and Subsidiaries 25 (1) Reported on tax-equivalent basis calculated using a rate of 35%. (2) Non-accrual loans are included in total average loans. (3) Includes net interest income on interest swap agreements.