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, 2014 and 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,
	2014		2013
Lending-Related Instruments:
Loan origination commitments and unadvanced lines of credit:
Home equity	$	303,815	$	276,671
Commercial and commercial real estate	47,066		26,688
Residential	10,975		6,408
Letters of credit	3,103		1,789
Other commitments	1,305		437
Derivative Financial Instruments:
Customer loan swaps	58,234		15,702
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, from time to time, will enter into an interest rate swap agreement with a counterparty to manage interest rate risk associated with its borrowings. At December 31, 2014 and 2013, the Company held five interest rate swap agreements with $43.0 million of notional with a single counterparty that was designated as hedging instruments. The Company swapped its variable interest for a fixed interest on its junior subordinated debentures to manage its interest rate risk. These interest rate swap arrangements contain provisions that require the Company to post cash collateral with the counterparty for its contracts that are in a net loss position based on their fair value and the Company's credit rating. At December 31, 2014 and 2013, the Company had posted $9.9 million and $5.3 million, respectively, of cash as collateral. The details of its interest rate swap agreements are outlined in the table below:



						December 31,
						2014			2013
Notional Amount		Trade Date	Maturity Date	Variable Index Received	Fixed Rate Paid	Fair Value⁽¹⁾			Fair Value⁽¹⁾
$	10,000	3/18/2009	6/30/2021	3-Month USD LIBOR	5.09%	$	(1,092	)	(807		)
10,000		7/8/2009	6/30/2029	3-Month USD LIBOR	5.84%	(2,511		)	(1,121		)
10,000		5/6/2010	6/30/2030	3-Month USD LIBOR	5.71%	(2,434		)	(944		)
5,000		3/14/2011	3/30/2031	3-Month USD LIBOR	4.35%	(1,279		)	(493		)
8,000		5/4/2011	7/7/2031	3-Month USD LIBOR	4.14%	(1,827		)	(547		)
$	43,000					$	(9,143	)	$	(3,912	)

(1) Presented within accrued interest and other liabilities on the consolidated statements of condition.

Each instrument qualifies as a highly effective cash flow hedge and, thus, the change in fair value for the years ended December 31 2014, 2013, and 2012 of ($3.4 million), $4.7 million, and $59,000, was recorded in OCI, net of tax. Net payments to the counterparty for the years ended December 31, 2014 and 2013 were $1.7 million and $1.6 million, respectively, 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.

Customer Loan Swaps

The Company will enter into interest rate swaps with its commercial customers, from time to time, to provide them with a means to lock into a long-term fixed rate, while simultaneously the Company enters into an arrangement with a counterparty to swap the fixed rate to a variable rate to allow it to effectively manage its interest rate exposure. At December 31, 2014 and 2013, the Company had interest rate swap agreements with a total notional amount of $29.1 million and $7.9 million, respectively, with its commercial customers, and interest rate swap agreements of equal notional amounts with a dealer bank. The Company's customer loan level derivative program is not designated as a hedge for accounting purposes. As the interest rate 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. The Company records its customer loan swaps at fair value and presents such on a gross basis within other assets and accrued interest and other liabilities on the consolidated statements of condition. The fair value of customer loan swaps at December 31, 2014 and 2013 were $1.1 million and $114,000, respectively.

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, 2014 and 2013, 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, 2014 and 2013, 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.