Commitments and Contingencies

Legal Contingencies

In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that based on the information currently available the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position as a whole.

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time.

As of December 31, 2013, the Company did not have any loss contingencies that were both probable and reasonably estimable and, therefore, no accrued liability has been recognized.

Financial Instruments

In the normal course of business, the Company is a party to both on-and off-balance sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated statements of condition.

The following is a summary of the contractual and notional amounts of the Company’s financial instruments:



	December 31,
	2013		2012
Lending-Related Instruments:
Loan origination commitments and unadvanced lines of credit:
Home equity	$	276,671	$	277,373
Commercial and commercial real estate	26,688		20,016
Residential	6,408		9,497
Letters of credit	1,789		1,836
Other commitments	437		16,845
Derivative Financial Instruments:
Customer loan swaps	15,702		16,093
Interest rate swaps	43,000		43,000

Lending-Related Instruments

The contractual amounts of the Company’s lending-related financial instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. These instruments are subject to the Company’s credit approval process, including an evaluation of the customer’s creditworthiness and related collateral requirements. Commitments generally have fixed expiration dates or other termination clauses.

Derivative Financial Instruments

The Company uses derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. The Company controls the credit risk of these instruments through collateral, credit approvals and monitoring procedures.

Interest Rate Swaps:

The Company’s interest rate swap arrangements contain provisions that require the Company to post cash collateral with the counterparty for contracts that are in a net liability position based on their fair values and the Company’s credit rating. The Company had a notional amount of $43.0 million in interest rate swap agreements on its junior subordinated debentures and $5.3 million in cash held as collateral. The Company swapped its variable interest rate for a fixed interest rate and the terms of the interest rate swap agreements are as follows:



Notional Amount		Fixed Rate	Maturity Date
$	10,000	5.09%	June 30, 2021
10,000		5.84%	June 30, 2029
10,000		5.71%	June 30, 2030
5,000		4.35%	March 30, 2031
8,000		4.14%	July 7, 2031

The fair value of the swap agreements on the Company’s junior subordinated debentures at December 31, 2013 was a liability of $3.9 million and is presented within accrued interest and other liabilities on the consolidated statements of condition. As each instrument qualifies as a highly effective cash flow hedge, the change in fair value of the interest rate swaps during 2013 of $4.7 million was recorded in OCI, net of tax. Net payments to the counterparty for 2013 were $1.6 million and have been classified as cash flows from operating activities in the consolidated statements of cash flows. The Company would reclassify unrealized gains or losses accounted for within AOCI into earnings if the interest rate swaps were to become ineffective or the arrangements were to terminate. In the next 12 months, the Company does not believe it will reclassify any related unrealized gains or losses accounted for within AOCI into earnings.

At December 31, 2012, the Company had interest rate swap arrangements with a notional amount of $43.0 million. The fair value of the swap agreements on its junior subordinated debentures at December 31, 2012 was a liability of $11.1 million and is presented within accrued interest and other liabilities on the consolidated statements of condition. As each instrument qualified as a highly effective cash flow hedge, the change in fair value of the interest rate swaps during 2012 of $60,000 was recorded in OCI, net of tax. Net payments to the counterparty for 2012 were $1.6 million and have been classified as cash flows from operating activities in the consolidated statements of cash flows.

Customer Derivatives

At December 31, 2013 and 2012, the Company had a notional amount of $7.9 million in interest rate swap agreements with commercial customers and interest rate swap agreements of equal notional amounts with a dealer bank related to the Company’s commercial loan level derivative program. As the two swap agreements have substantially equivalent and offsetting terms, they do not materially change the Company’s interest rate risk or present any material exposure to the Company's consolidated statements of income for either of 2013 or 2012.

Forward Commitments to Sell Residential Mortgage Loans

From time to time, the Company enters into forward commitments to sell residential mortgages in order to reduce the market risk associated with originating loans for sale in the secondary market. At December 31, 2013 and 2012, there were no commitments to sell residential mortgages.

Interest Rate Locks and Mortgage Loan Commitments

As part of originating residential mortgage and commercial loans, the Company may enter into rate lock agreements with customers, and may issue commitment letters to customers, which are considered interest rate lock or forward commitments. At December 31, 2013 and 2012, based upon the pipeline of mortgage loans with rate lock commitments and commercial loans with commitment letters, and the change in fair value of those commitments due to changes in market interest rates, the Company determined the impact on the consolidated financial statements was not material.