December 31, 2002, 2001 and 2000 NATURE OF OPERATIONS. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Amounts in tables expressed in thousands, except number of shares and per share data) Camden National Corporation (or the GLYPH<210>CompanyGLYPH<211>), as a multi-bank and financial services holding company, provides financial services to its customers through three major subsidiaries. Camden National Bank and UnitedKingfield Bank provide traditional commercial and consumer financial services through 28 branch locations in central, southern, mid-coast and western Maine and by online access. Acadia Trust, N.A. (and prior to its merger into Acadia Trust, N.A. on January 1, 2003, Trust Company of Maine, Inc.) provide trust and investment management services to their clients, who are primarily located in the State of Maine, and to the clients of the CompanyGLYPH<213>s two banking subsidiaries. The accounting and reporting policies conform to accounting principles generally accepted in the United States and to general practice within the banking industry. The following is a summary of the significant accounting and reporting policies. Principles of Consolidation. The accompanying Consolidated Financial Statements include the accounts of the Company,  its wholly owned bank subsidiaries, Camden National Bank and UnitedKingfield Bank, and its wholly owned non-bank subsidiary, Acadia Trust, N.A. (and prior to its merger into Acadia Trust, N.A. on January 1, 2003, Trust Company of Maine, Inc.). All intercompany accounts and transactions have been eliminated in consolidation. Assets held by the non-bank subsidiary in a  fiduciary capacity are not assets of the Company and, therefore, are not included in the Consolidated Statement of Condition. Use of Estimates in the Preparation of Financial Statements. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties. Cash. The Company is required to comply with various laws and regulations of the Federal Reserve Bank (GLYPH<210>FRBGLYPH<211>), which require the Company to maintain certain amounts of cash on deposit and restrict the Company from investing those amounts. The Company maintains those balances at the FRB of Boston. In the normal course of business, the Company has funds on deposit at other financial institutions in amounts in excess of the $100,000 insured by the Federal Deposit Insurance Corporation (GLYPH<210>FDICGLYPH<211>).  For the statement of cash flows, cash equivalents consist of cash and due from banks. Investment Securities. The Company has classified its investment securities into investments available for sale and investments to be held to maturity.  Securities Available for Sale. Debt and other securities that are to be held for indefinite periods of time are stated at market value. Changes in net unrealized gains or losses are recorded as an adjustment to shareholdersGLYPH<213> equity until realized. Market values of securities are determined by prices obtained from independent market sources. Realized gains and losses on securities sold are computed on the identified cost basis on the trade date. Securities Held to Maturity. Bonds and notes for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Residential Mortgages Held for Sale. Residential mortgages held for sale are primarily one-to-four family real estate loans  that are valued at the lower of cost or market on an individual basis, as determined by quoted market prices from the Federal Home Loan Mortgage Corporation (GLYPH<210>Freddie MacGLYPH<211>). Gains and losses from sales of residential mortgages held for sale are recognized upon settlement with investors and recorded in other income. These activities, together with underwriting residential mortgage loans, comprise the CompanyGLYPH<213>s mortgage banking business. Loan Servicing.  The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights 44 Camden National Corporation and Subsidiaries Goodwill.  The Company adopted Statement of Financial Accounting Standards (GLYPH<210>SFASGLYPH<211>) No. 142, GLYPH<210>Goodwill and Other Intangible Assets,GLYPH<211> as of January 1, 2002. SFAS No. 142 requires, in part, that recorded goodwill be tested at least annually for impairment rather than being amortized over the estimated useful life of the underlying business. Goodwill acquired in a purchase business combination completed after June 30, 2001, but before SFAS No. 142 was adopted in full, was not amortized. The Company had no business combinations treated as a purchase before June 30, 2001; therefore, the Company did not have goodwill prior to that date. Amortization of software is recognized using the straight-line method over the estimated useful lives of the various software items, which primarily is three years. On an ongoing basis, management reviews the valuation and amortization of intangible assets to determine possible impairment. Intangible Assets. The value of core deposits premium with respect to $104.0 million in deposits acquired by the Company in connection with the acquisition, in 1998, of 8 branch locations is being amortized over periods ranging from 10 to 15 years using the straight-line method. Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the related assets. Other Real Estate Owned. Other real estate owned represents real estate acquired through foreclosure or upon receipt of  a deed in lieu of foreclosure and is recorded at the lower of the recorded amount of the loan or market value of the underlying collateral, less estimated selling costs, determined by an independent appraisal, with any difference at the time of acquisition treated as a loan loss. Subsequent reductions in market value below the carrying cost are charged directly to other operating expenses. The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as provision for loan losses.  Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as provision for loan losses. The allowance for loan losses is maintained at a level believed adequate to absorb expected future charge-offs of loans  deemed uncollectible. Management determines the adequacy of the allowance based upon reviews of individual credits, recent  loss experience, current economic conditions, known and inherent risk characteristics of the various categories of loans, adverse situations that may affect the borrowerGLYPH<213>s ability to repay, estimated value of underlying collateral, and other pertinent factors. The allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off. Credits deemed uncollectible are charged against the allowance. Fees received and direct costs incurred for the origination of loans are deferred and recognized as an adjustment of loan yield.  Loans past due 30 days or more are considered delinquent. In general, consumer loans will be charged off if the loan is delinquent for 120 consecutive days. Commercial and real estate loans may be charged off in part or in full if they appear uncollectible.  Loans. Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal balance, adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs. Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, interest income is reduced for all accrued but unpaid interest. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. are stratified based on the following predominant risk characteristics of the underlying loans: interest rate, fixed versus variable rate, and period of origination. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value.  Camden National Corporation and Subsidiaries 45 Notes to Consolidated Financial Statements Dover-Foxcroft Milo