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The amortized cost and fair values of debt securities by contractual maturity at December 31, 2002 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 

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For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated to the due-after-ten-years category. 

Proceeds from the sale of investments classified as available for sale during 2002 were $8.2 million, which resulted in gross realized gains of $156,250. Proceeds from the sale of investments classified as available for sale during 2001 were $7.4 million, which resulted in gross realized gains of $336,423. There were no sales in the held to maturity portfolio during 2002 or 2001. There were no sales in either the available-for-sale or held-to-maturity portfolios during 2000. 

At December 31, 2002 and 2001, securities with an amortized cost of $211.0 million and $78.1 million and a fair value of $219.2 million and $80.9 million, respectively, were pledged to secure Federal Home Loan Bank of Boston (GLYPH<210>FHLBBGLYPH<211>) advances, public deposits, securities sold under agreements to repurchase and other purposes required or permitted by law. 

## 6. DERIVATIVE FINANCIAL INSTRUMENTS 

The Company has interest rate swap agreements with notional amounts of $30.0 million at December 31, 2002. Under these agreements the Company exchanges a variable rate asset for a fixed rate asset, thus protecting certain asset yields from falling interest rates. In accordance with SFAS No. 133, management designated these swaps as cash flow hedges and determined the hedging transaction to be 100% effective. Therefore, the changes in fair value of the swap agreements are recorded in other comprehensive income. As of December 31, 2002, the swaps had a fair value of approximately $1.4 million, less tax of $492,000, which has been recorded as other comprehensive income in the Consolidated Statement of Changes in ShareholdersGLYPH<213> Equity. 

In 2000, the Company purchased interest rate protection agreements (caps) with notional amounts of $90.0 million. These caps were used to limit the CompanyGLYPH<213>s exposure to a raising rate environment. Under these agreements, the Company paid up front premiums of $239,000 for the right to receive cash flow payments in excess of the predetermined cap rate, thus effectively capping its interest rate cost for the duration of the agreement. In accordance with SFAS No. 133, management designated these caps as cash flow hedges. For a qualifying cash flow hedge, an interest rate cap is carried on the Consolidated Statement of Condition at fair value with the time and option volatility value changes reflected in the current Consolidated Statement of Income. Any intrinsic value will be recorded in other comprehensive income and recognized in future Consolidated Statements of Income as an offset to related future interest costs. At December 31, 2001, the caps had no fair value and therefore there was no effect on the Consolidated Statement of Income or other comprehensive income. The caps matured during the second and third quarters of 2002. 

As part of its interest rate risk management, the Company used interest rate swap agreements to hedge a portfolio of brokered certificates of deposit. These swaps were designated as a fair value hedge since they were used to convert the cost of the certificates of deposit from a fixed to a variable rate. These swaps were called during the third quarter of 2001 and subsequently the Company exercised the call option on the brokered certificates of deposit offsetting the swaps. Since the hedge relationship was estimated to be 100% effective (gain or loss on the swap agreements will completely offset the gain or loss on the brokered certificates of deposit) there was no impact on the Consolidated Statement of Income or other comprehensive income. 

On April 11, 2001, the Company sold an interest rate floor agreement and an interest rate swap agreement. The purpose of the interest rate floor was to protect net interest income from falling interest rates by GLYPH<210>flooringGLYPH<211> certain asset yields for a contracted period of time, and thus provide a minimum earnings level from these assets. The purpose of the interest rate swap agreement was to exchange a variable rate asset for a fixed rate asset, thus protecting certain asset yields from falling interest rates. With a substantial decline in the interest rate environment, it was determined that it would be economically advantageous to sell both the interest rate floor agreement and the interest rate swap agreement rather than wait for the potential cash flows over the life of these instruments. In addition, subsequent to the Company having purchased these instruments, other strategies were implemented to protect the balance sheet in a declining interest rate environment including the use of short-term funding and the extension of fixed rate assets. The impact of the sale of the interest rate floor and interest rate swap agreements was an increase to net income of $615,000, net of applicable taxes. 

## 7. LOANS 

The composition of the CompanyGLYPH<213>s loan portfolio at December 31 was as follows: 

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