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, 2015 and 2014, the Company did not have any material loss contingencies that were provided for and/or disclosure was necessary.

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,
	2015		2014
Lending-Related Instruments:
Loan origination commitments and unadvanced lines of credit:
Home equity	$	464,701	$	303,815
Commercial and commercial real estate	94,791		47,066
Residential	16,256		10,975
Letters of credit	4,468		3,103
Other commitments	433		1,305
Derivative Financial Instruments:
Customer interest rate swaps	285,888		58,234
Forward-starting interest rate swaps	50,000		—
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.

Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.

The Company has designated its interest rate swaps on its junior subordinated debentures and its forward-starting interest rate swaps on forecasted 30-day FHLBB borrowings as cash flow hedges. The change in the fair value of the Company's cash flow hedges is accounted within OCI, net of tax. Quarterly, in conjunction with financial reporting, the Company assesses each cash flow hedge for ineffectiveness. To the extent any significant ineffectiveness is identified, this amount is recorded within the consolidated statements of income. Furthermore, the Company will reclassify the gain or loss on the effective portion of the cash flow hedge from OCI into the consolidated statements of income in the period the hedged transaction affects earnings.

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 variable rate borrowings. The Company’s interest rate swap agreements 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. If the interest rate swaps are in a net asset position based on their fair value, the counterparty is required to post cash collateral to the Company. At December 31, 2015 and 2014, the Company had a notional amount of $43.0 million in variable-for-fixed interest rate swap agreements on its junior subordinated debentures and posted $10.7 million of cash as collateral at December 31, 2015. The details of its interest rate swap agreements are outlined in the table below:



						December 31,
						2015			2014
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%	$	(1,038	)	$	(1,092	)
10,000		7/8/2009	6/30/2029	3-Month USD LIBOR	5.84%	(2,537		)	(2,511		)
10,000		5/6/2010	6/30/2030	3-Month USD LIBOR	5.71%	(2,477		)	(2,434		)
5,000		3/14/2011	3/30/2031	3-Month USD LIBOR	4.35%	(1,301		)	(1,279		)
8,000		5/4/2011	7/7/2031	3-Month USD LIBOR	4.14%	(1,876		)	(1,827		)
$	43,000					$	(9,229	)	$	(9,143	)

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

For the years ended December 31, 2015, 2014 or 2013, the Company did not record any ineffectiveness on these cash flow hedges within the consolidated statements of income.

Net payments to the counterparty for the years ended December 31, 2015 and 2014 were $1.7 million and have been classified as cash flows from operating activities in the consolidated statements of cash flows.

Forward-Starting Interest Rate Swaps.

In the first quarter of 2015, the Bank entered into two forward-starting interest rate swap arrangements with a counterparty on two tranches of 30-day FHLBB advances with a total notional amount of $50.0 million. Each derivative arrangement commenced on February 25, 2016, with one contract set to expire on February 25, 2018 and the other on February 25, 2019. The Bank entered into these forward-starting interest rate swaps to mitigate its interest rate exposure on borrowings in a rising interest rate environment. The Bank has designated each arrangement as a cash flow hedge in accordance with GAAP, and, therefore, the change in unrealized gains or losses on the derivative instruments is recorded within AOCI, net of tax. Also, quarterly, in conjunction with financial reporting, the Company assesses each derivative instrument for ineffectiveness. To the extent any significant ineffectiveness is identified this amount would be recorded within the consolidated statements of income. For the year ended December 31, 2015 the Company did not record any ineffectiveness on these cash flow hedges within the consolidated statements of income.

The Bank's arrangement with the counterparty requires it to post cash collateral for contracts in a net liability position based on their fair values and the Bank's credit rating. If the interest rate swaps are in a net asset position based on their fair value, the counterparty is required to post cash collateral to the Company. At December 31, 2015, the Bank posted cash collateral with the counterparty of $1.3 million.

The terms of the forward-starting interest rate swap agreements are as follows:



						December 31, 2015
Notional Amount		Trade Date	Maturity Date	Variable Index Received	Fixed Rate Paid	Fair Value⁽¹⁾
$	25,000	2/25/2015	2/25/2018	1-Month USD LIBOR	1.54%	$	(230	)
25,000		2/25/2015	2/25/2019	1-Month USD LIBOR	1.74%	(346		)
$	50,000					$	(576	)
(1) Presented within accrued interest and other liabilities on the consolidated statements of condition.

For the year ended December 31, 2015, the Company did not record any ineffectiveness on these cash flow hedges within the consolidated statements of income.

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.

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 following table presents the total positions, notional and fair value of the Company's customer loans swaps with its commercial customers and the corresponding interest rate swap agreements with counterparty for the periods indicated:



	December 31,
	2015						2014
	Number of Positions	Notional		Fair Value			Number of Positions	Notional		Fair Value
Receive fixed, pay variable⁽¹⁾	28	$	142,944	$	3,166		10	$	29,117	$	1,140
Pay fixed, received variable⁽²⁾	28	142,944		(3,166		)	10	29,117		(1,140		)
(1) Presented within other assets on the consolidated statements of condition.
(2) Presented within accrued interest and other liabilities on the consolidated statements of condition.

The Company seeks to mitigate its customer counterparty credit risk exposure through its loan policy and underwriting process, which includes credit approval limits, monitoring procedures, and obtaining collateral, where appropriate. The Company seeks to mitigate its institutional counterparty credit risk exposure by limiting the institutions for which it will enter into interest swap arrangements through an approved listing by the Company's board of directors. The Company's arrangement with an institutional counterparty requires it to post cash collateral for contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position. At December 31, 2015, the Company posted cash collateral with the counterparty of $3.7 million.

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, 2015 and 2014, 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.

The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:



	For The Years Ended December 31,
	2015			2014			2013
Derivatives designated as cash flow hedges
(Loss) gain in OCI on derivatives (effective portion), net of tax	$	(431	)	$	(3,401	)	$	4,663
Loss reclassified from OCI into interest expense (effective portion), gross	$	1,695		$	1,714		$	1,611

The Company expects approximately $1.9 million (pre-tax) to be reclassified to interest expense from OCI, related to the Company’s cash flow hedges, in the next twelve months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of December 31, 2015.