All outstanding options at December 31, 2002 are in-the-money options as the exercise price is less than the average market price of the common stock. Options to purchase 10,500 and 93,908 shares of common stock at an average exercise price of $18.75 and $16.54 per share were outstanding at December 31, 2001 and 2000, respectively, but were not included in the computation of diluted earnings per share because the optionsGLYPH<213> exercise price was greater than the average market price of the common stock. The current and deferred components of income tax expense were as follows: The actual expense differs from the expected tax expense computed by applying the applicable U.S. federal corporate income tax rate to income before income taxes and cumulative effect of accounting change, as follows: Items which give rise to deferred income tax assets and liabilities and the tax effect of each are as follows: The related income taxes have been calculated using a rate of 35%. No valuation allowance is deemed necessary for the deferred tax asset, which is included in other assets. 58 Camden National Corporation and Subsidiaries 2002 2001 2000 Current: Federal $7,618 $5,759 $4,836 State  268 241 219 7,886 6,000 5,055 Deferred: Federal 539 1,162  1,188 $8,425 $7,162 $6,243 2002 2001 2000 Computed tax expense $9,074 $7,903 $7,036 Increase (reduction) in income taxes resulting from: Tax exempt income (250) (342) (471) State taxes, net of federal benefit 174 157 142 Income from life insurance (302) (305) (264) Acquisition costs — 89 27 Low income housing credits (303) (303) (303) Other 32 (37) 76 $8,425 $7,162 $6,243 2002 2001 Asset Liability Asset Liability Allowance for possible losses on loans $5,358 $ — $4,643 $ — Allowance for investment losses 86 — 86 — Capitalized costs 120 — 175 — Pension and other benefits 860 — 760 — Depreciation — 217 153 — Deferred loan origination fees  — 422 — 354 Deferred compensation and benefits 423 — 336 — Unrealized gains on investments available for sale — 3,503 — 2,325 Unrealized gains on derivative instruments — 469 — — Unrealized appreciation on loans held for sale 41 — 40 — Interest receivable 231 — 229 — Deposit premium 503 — 326 — Mortgage servicing rights — 338 — 296 Other 20 — 113 — $7,642 $4,949 $6,861 $2,975 19. INCOME TAXES 20. RELATED PARTIES The Company, in the normal course of business, has made loans to its subsidiaries, and certain officers, directors, and their associated companies, under terms that are consistent with the CompanyGLYPH<213>s lending policies and regulatory requirements. Changes  in the composition of the board of directors or the group comprising executive officers result in additions to or deductions from loans outstanding to directors, executive officers, or principal shareholders. Loans to related parties that in aggregate exceed $60,000 were as follows: In addition to the loans noted above, the Company had deposits at December 31, 2002 and 2001 from the same individuals of $5,865,000 and $4,936,000, respectively. Various legal claims arise from time to time in the normal course of business, which in the opinion of management, are not expected to have a material effect on the CompanyGLYPH<213>s Consolidated Financial Statements. 21. LEGAL CONTINGENCIES 22. FINANCIAL INSTRUMENTS Credit Related Financial Instruments 2002 2001 Balance, January 1, $14,537 $14,298 Loans made/advanced and additions 2,461 5,328 Repayments and reductions 11,954 5,089 Balance, December 31 $ 5,044 $14,537 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 accompanying Consolidated Statements of Condition. These financial instruments include lending commitments and letters of credit. These 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 CompanyGLYPH<213>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. The Company has not incurred any losses on its commitments in 2002, 2001  or 2000.  The Company uses derivative instruments as partial hedges against large fluctuations in interest rates. The Company uses interest rate swap and floor instruments to 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. At least quarterly, all financial instruments are reviewed as part of the asset/liability management process. The financial instruments are factored into the CompanyGLYPH<213>s overall interest rate risk position. The Company regularly reviews the credit quality of the counterparty from which the instruments have been purchased.  As of December 31, 2002, the Company had $30 million (notional principal amount) in swap contracts ($20 million and $10 million) in which the Company is hedging prime-based variable rate commercial loans to a fixed rate of 6.90%. The interest rate swap agreements mature in 2005. Derivative Financial Instruments Camden National Corporation and Subsidiaries 59