Derivative Financial Instruments

12 Months Ended

Dec. 31, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 18 - DERIVATIVE FINANCIAL INSTRUMENTS

As part of the Company's overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, caps and floors. The notional amount of these derivative instruments was $192.5 million and $195.0 million at December 31, 2011 and December 31, 2010, respectively. The December 31, 2011 balances consist of $92.5 million notional amount of receive-fixed interest rate swaps on certain of its FHLB advances and $100.0 million notional amount of receive-fixed interest rate swaps on certain commercial loans. The December 31, 2010 balances consist of $95.0 million notional amount of receive-fixed interest rate swaps on certain of its FHLB advances and $100.0 million notional amount of receive-fixed interest rate swaps on certain commercial loans. These hedges were entered into to manage both interest rate risk and asset sensitivity on the balance sheet. These derivative instruments are recognized on the balance sheet at their fair value.

In addition, commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. At December 31, 2011, the notional amount of the interest rate lock commitments and forward commitments were $8.7 million and $10.2 million, respectively. At December 31, 2010, the notional amount of the interest rate lock commitments and forward commitments were $7.7 million and $9.3 million, respectively. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitment to fund the loans. All derivative instruments are recognized on the balance sheet at their fair value.

Old National also enters into derivative instruments for the benefit of its customers. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $448.5 million and $448.5 million, respectively, at December 31, 2011. Included in the notional amounts at December 31, 2011 is $66.7 million of customer derivative instruments assumed in the Integra acquisition. At December 31, 2010, the notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $419.2 million and $419.2 million, respectively. These derivative contracts do not qualify for hedge accounting. These instruments include interest rate swaps, caps, foreign exchange forward contracts and commodity swaps and options. Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. Old National's exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in our agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures.

The following tables summarize the fair value of derivative financial instruments utilized by Old National:

	Asset Derivatives
	December 31, 2011			December 31, 2010
	Balance			Balance
	Sheet		Fair	Sheet		Fair
(dollars in thousands)	Location		Value	Location		Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	7,444	Other assets	$	4,766
Total derivatives designated as hedging instruments		$	7,444		$	4,766
Derivatives not designated as hedging instruments
Interest rate contracts	Other assets	$	36,755	Other assets	$	28,269
Commodity contracts	Other assets		0	Other assets		132
Mortgage contracts	Other assets		216	Other assets		254
Total derivatives not designated as hedging instruments		$	36,971		$	28,655
Total derivatives		$	44,415		$	33,421

	Liability Derivatives
	December 31, 2011			December 31, 2010
	Balance			Balance
	Sheet		Fair	Sheet		Fair
(dollars in thousands)	Location		Value	Location		Value
Derivatives not designated as hedging instruments
Interest rate contracts	Other liabilities	$	37,332	Other liabilities	$	28,928
Commodity contracts	Other liabilities		0	Other liabilities		132
Total derivatives not designated as hedging instruments		$	37,332		$	29,060
Total derivatives		$	37,332		$	29,060

The effect of derivative instruments on the Consolidated Statement of Income for the twelve months ended December 31, 2011 and 2010 are as follows:

			Year ended			Year ended
(dollars in thousands)			December 31, 2011			December 31, 2010
Derivatives in	Location of Gain or (Loss)		Amount of Gain or (Loss)
Fair Value Hedging	Recognized in Income on		Recognized in Income on
Relationships	Derivative		Derivative
Interest rate contracts (1)	Interest income / (expense)	$	2,938		$	3,656
Interest rate contracts (2)	Other income / (expense)		892			1,621
Total		$	3,830		$	5,277
Derivatives in	Location of Gain or (Loss)		Amount of Gain or (Loss)
Cash Flow Hedging	Recognized in Income on		Recognized in Income on
Relationships	Derivative		Derivative
Interest rate contracts (1)	Interest income / (expense)	$	1,593		$	1,553
Total		$	1,593		$	1,553
	Location of Gain or (Loss)		Amount of Gain or (Loss)
Derivatives Not Designated as	Recognized in Income on		Recognized in Income on
Hedging Instruments	Derivative		Derivative
Interest rate contracts (3)	Other income / (expense)	$	82		$	(129	)
Mortgage contracts	Mortgage banking revenue		(38	)		(117	)
Total		$	44		$	(246	)

(1) Amounts represent the net interest payments as stated in the contractual agreements. (2) Amounts represent ineffectiveness on derivatives designated as fair value hedges.

(3) Includes the valuation differences between the customer and offsetting counterparty swaps.