Derivative Financial Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

NOTE 17—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 $441.0 million and $41.0 million at September 30, 2013 and December 31, 2012, respectively. The September 30, 2013 balances consist of $41.0 million notional amount of receive-fixed interest rate swaps and $400.0 million notional amount of pay-fixed, receive variable interest rate swaps on certain of its FHLB advances. The December 31, 2012 balances consist of $41.0 million notional amount of receive-fixed interest rate swaps on certain of its FHLB advances. These hedges were entered into to manage interest rate risk. 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 September 30, 2013, the notional amount of the interest rate lock commitments and forward commitments were $17.9 million and $23.5 million, respectively. At December 31, 2012, the notional amount of the interest rate lock commitments and forward commitments were $23.4 million and $32.0 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 $450.0 million and $450.0 million, respectively, at September 30, 2013. At December 31, 2012, the notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $456.1 million and $456.1 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
	September 30, 2013				December 31, 2012
	Balance				Balance
	Sheet		Fair		Sheet		Fair
(dollars in thousands)	Location		Value		Location		Value
Derivatives designated as hedging instruments
Interest rate contracts		Other assets	$	3,974		Other assets	$	6,458
Total derivatives designated as hedging instruments			$	3,974			$	6,458
Derivatives not designated as hedging instruments
Interest rate contracts		Other assets	$	19,713		Other assets	$	29,475
Mortgage contracts		Other assets		543		Other assets		579
Total derivatives not designated as hedging instruments			$	20,256			$	30,054
Total derivative assets			$	24,230			$	36,512

	Liability Derivatives
	September 30, 2013			December 31, 2012
	Balance			Balance
	Sheet	Fair		Sheet	Fair
(dollars in thousands)	Location	Value		Location	Value
Derivatives designated as hedging instruments
Interest rate contracts	Other liabilities	$	2,188	Other liabilities	$	—
Total derivatives designated as hedging instruments		$	2,188		$	—
Derivatives not designated as hedging instruments
Interest rate contracts	Other liabilities	$	19,970	Other liabilities	$	29,909
Mortgage contracts	Other liabilities		215	Other liabilities		101
Total derivatives not designated as hedging instruments		$	20,185		$	30,010
Total derivative liabilities		$	22,373		$	30,010

The effect of derivative instruments on the Consolidated Statement of Income for the three and nine months ended September 30, 2013 and 2012 are as follows:

		Three months			Three months
		ended			ended
(dollars in thousands)		September 30, 2013			September 30, 2012
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)	$	410		$	508
Interest rate contracts (2)	Other income / (expense)		26			203
Total		$	436		$	711
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)	$	—		$	—
Total		$	—		$	—
	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)	$	(1	)	$	23
Mortgage contracts	Mortgage banking revenue		(895	)		(19	)
Total		$	(896	)	$	4

		Nine months			Nine months
		ended			ended
(dollars in thousands)		September 30, 2013			September 30, 2012
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)	$	1,354		$	1,681
Interest rate contracts (2)	Other income / (expense)		(22	)		596
Total		$	1,332		$	2,277
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)	$	—		$	241
Total		$	—		$	241
	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)	$	178		$	61
Mortgage contracts	Mortgage banking revenue		(150	)		75
Total		$	28		$	136

(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.

See Note 21 to the consolidated financial statements.