CAPITAL RESOURCES Impact of Inflation and Changing Prices Interest Rate Risk  MARKET RISK Under Federal Reserve Board (GLYPH<210>FRBGLYPH<211>) 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 CompanyGLYPH<213>s assets, liabilities and certain off-balance sheet  items as calculated under regulatory accounting practices.  The CompanyGLYPH<213>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, 2002 and December 31, 2001. The CompanyGLYPH<213>s Tier 1 capital to risk-weighted assets was 12.6% and 12.9% at December 31, 2002 and 2001, respectively (see Note 23, GLYPH<210>Regulatory Matters,GLYPH<211> of the Notes to Consolidated Financial Statements, on page 61, for other capital ratios). 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 CompanyGLYPH<213>s leverage ratio at December 31, 2002 and 2001 was 8.7%. As part of the CompanyGLYPH<213>s goal to operate a safe, sound and profitable financial organization, the Company is committed to maintaining a strong capital base. ShareholdersGLYPH<213> equity totaled $118.8 million and $105.0 million, or 9.8% and 9.6%, of total assets at December 31, 2002 and 2001, respectively. The $13.8 million, or 13.1%, increase in shareholdersGLYPH<213> equity in 2002 was primarily attributable to net income of $17.0 million, less the costs associated with open market repurchases of approximately $0.9 million of the CompanyGLYPH<213>s common stock  in compliance with the CompanyGLYPH<213>s previously announced stock repurchase policy and $5.5 million in cash dividends to the CompanyGLYPH<213>s shareholders, plus $3.2 million in unrealized gains 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 CompanyGLYPH<213>s common stock as and when declared by the Board of Directors. Dividends paid per share during the year ended December 31, 2002 increased by 6.2% over the corresponding period in 2001. The Company is primarily dependent upon the payment of cash dividends by its subsidiaries to service its commitments. The Company, as the 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. 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, GLYPH<210>Accounting for Stock-Based Compensation.GLYPH<211> 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 (GLYPH<210>APBGLYPH<211>) No. 25, GLYPH<210>Accounting for  Stock Issued to Employees,GLYPH<211> 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 did not grant any options during 2002. 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. 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 CompanyGLYPH<213>s capital structure, including meeting share requirements related to employee benefit plans and for general corporate purposes. As of December 31, 2002, the Company has repurchased 37,950 shares of common stock at an average price of $24.21 under this plan. sole shareholder of its subsidiaries, is entitled to dividends when and as declared by each subsidiaryGLYPH<213>s Board of Directors from legally available funds. Camden National Bank declared dividends in the aggregate amount of $6.5 million and $11.5 million in 2002 and 2001, respectively. UnitedKingfield Bank declared dividends in the aggregate amount of $1.5 million and $3.3 million in 2002 and 2001, respectively. As of December 31, 2002, and subject to the limitations and restrictions under applicable law, Camden National Bank and UnitedKingfield Bank had a total of $13.9 million available for dividends to the Company, although there is no assurance that dividends will  be paid at any time in any amount (see Note 17, GLYPH<210>ShareholdersGLYPH<213> Equity,GLYPH<211> of the Notes to Consolidated Financial Statements, on page 56, for additional information). 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 CompanyGLYPH<213>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 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 CompanyGLYPH<213>s primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the CompanyGLYPH<213>s asset/liability management process, which is governed by policies established by the subsidiariesGLYPH<213> Boards of Directors that are reviewed and approved annually. Each bank subsidiaryGLYPH<213>s Board of DirectorsGLYPH<213> Asset/Liability Committee (GLYPH<210>Board ALCOGLYPH<211>) delegates responsibility for carrying out the asset/liability management policies to CompanyGLYPH<213>s Management Asset/Liability Committee (GLYPH<210>Management ALCOGLYPH<211>). In this capacity, Management ALCO develops guidelines and strategies impacting the CompanyGLYPH<213>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 represents the sensitivity of earnings  to changes in market interest rates. As interest rates change, the interest income and expense streams associated with  the CompanyGLYPH<213>s financial instruments also change, thereby impacting net interest income (GLYPH<210>NIIGLYPH<211>), the primary component of the CompanyGLYPH<213>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 CompanyGLYPH<213>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 a 200 basis 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 DirectorsGLYPH<213> approved hedging policy statements governing the The most significant factors affecting the changes in market risk exposure during 2002 compared to 2001 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 CompanyGLYPH<213>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 CompanyGLYPH<213>s policy limits. 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. point (GLYPH<210>bpGLYPH<211>) upward and 100 bp downward shift in interest rates for 2002 and both a 200 bp upward and downward shift in interest rates for 2001. A parallel and pro rata shift in rates over a 12-month period is assumed. The following reflects the CompanyGLYPH<213>s NII sensitivity analysis as measured periodically over the past 2 years. 2002 Estimated Rate Change Changes in NII High Low Average +200 bp 4.76% 0.92% 2.79% -100 bp (3.57%) (3.22%) (3.40%) 2001 Estimated Rate Change Changes in NII High Low Average +200 bp (4.31%) 0.95% (1.80%) -200 bp 2.14% (0.24%) 0.79% Camden National Corporation and Subsidiaries 33 32 Camden National Corporation and Subsidiaries