NOTE 15 - INTEREST RATE CONTRACTS

As a result of loans acquired through the Integra Bank transaction in the fourth quarter of 2010, the Bank initiated an interest rate protection program in which the Bank earns a fee by providing the Bank’s commercial loan customers the ability to swap from variable to fixed, or fixed to variable interest rates. Under these agreements the Bank enters into a variable or fixed rate loan agreement with its customer in addition to a swap agreement. The swap agreement effectively swaps the customer’s variable rate to a fixed rate or vice versa. The Bank then enters into a corresponding swap agreement with a third party in order to swap its exposure on the variable to fixed rate swap with the Bank’s customer. Since the swaps are structured to offset each other, changes in fair values, while recorded, have no material net earnings impact. The notional amount of interest rate swaps at December 31, 2013 was $107,966 and $50,771 on December 31, 2012 with maturities ranging from one to ten years. The current fair value of these swaps was $1,915 and $1,926 at December 31, 2013 and 2012, respectively, and is included in other assets and other liabilities for the value of each of the swaps.

The Bank is exposed to losses if a counterparty fails to make its payments under a contract in which the Bank is in the receiving status. Although collateral or other security is not obtained, as the Bank is not currently in the receiving status, we minimize our credit risk by monitoring the credit standing of the counterparties. We anticipate the counterparties will be able to fully satisfy their obligations under these agreements.