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 June 30, 2013, the Company did not have any loss contingencies that were both probable and 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-balance sheet 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.

A summary of the contractual and notional amounts of the Company’s financial instruments follows:



	June 30, 2013		December 31, 2012
Lending-Related Instruments:
Loan origination commitments and unadvanced lines of credit:
Home equity	$	306,168	$	277,373
Commercial and commercial real estate	13,795		20,016
Residential	12,102		9,497
Letters of credit	2,076		1,836
Other commitments	17,880		16,845
Derivative Financial Instruments:
Forward mortgage loan sale commitments	7,301		—
Derivative mortgage loan commitments	4,501		—
Customer loan swaps	15,933		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.

The Company’s derivative contracts contain provisions that require the Company to post cash collateral with the counterparties 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 $6.7 million in cash held as collateral. The Company swapped the variable cost for a fixed cost and the terms of the interest rate swap agreements are as follows:



Notional Amount		Fixed Cost	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 junior subordinated debentures at June 30, 2013 was a liability of $6.2 million and, as this instrument qualifies as a highly effective cash flow hedge, the $3.1 million increase in fair value during the first six months of 2013, net of tax, was recorded in other comprehensive income and other liabilities. Net payments under the swap transactions were $829,000 in the first six months of 2013, and have been classified as cash flows from operating activities in the statement of cash flows.

Customer Derivatives

The Company has a notional amount of $8.0 million in an 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 swap agreements have substantially equivalent and offsetting terms, they do not materially change the Company’s interest rate risk.

Forward Commitments to Sell Residential Mortgage Loans

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 June 30, 2013 the Company had $7.3 million of forward commitments to sell residential mortgages with positive fair value of $66,000. At December 31, 2012, the Company had no outstanding commitments to sell mortgages.

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 June 30, 2013 the Company had $4.5 million of mortgage loans with rate lock commitments with a positive fair value of $40,000 in a pipeline.