Derivative Financial Instruments

12 Months Ended

Dec. 31, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

NOTE 19 – DERIVATIVE FINANCIAL INSTRUMENTS

As part of our 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 $464.5 million and $41.0 million at December 31, 2013 and December 31, 2012, respectively. The December 31, 2013 balances consist of $39.5 million notional amount of receive-fixed interest rate swaps and $425.0 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 and are not reported on a net basis.

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, 2013, the notional amount of the interest rate lock commitments and forward commitments were $10.5 million and $17.2 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 our 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 $436.8 million and $436.8 million, respectively, at December 31, 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 and collars. 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, we minimize 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, 2013			December 31, 2012
(dollars in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	3,545	Other assets	$	6,458
Total derivatives designated as hedging instruments		$	3,545		$	6,458
Derivatives not designated as hedging instruments
Interest rate contracts	Other assets	$	18,279	Other assets	$	29,475
Mortgage contracts	Other assets		263	Other assets		579
Total derivatives not designated as hedging instruments		$	18,542		$	30,054
Total derivatives		$	22,087		$	36,512

	Liability Derivatives
	December 31, 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	$	1,218	Other liabilities	$	—
Total derivatives designated as hedging instruments		$	1,218		$	—
Derivatives not designated as hedging instruments
Interest rate contracts	Other liabilities	$	18,505	Other liabilities	$	29,909
Mortgage contracts	Other liabilities		—	Other liabilities		101
Total derivatives not designated as hedging instruments		$	18,505		$	30,010
Total derivatives		$	19,723		$	30,010

The effect of derivative instruments on the Consolidated Statement of Income for the twelve months ended December 31, 2013 and 2012 are as follows:

		Year ended			Year ended
(dollars in thousands)		December 31, 2013			December 31, 2012
Derivatives in Fair Value Hedging Relationships	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Interest rate contracts (1)	Interest income / (expense)	$	1,748		$	2,114
Interest rate contracts (2)	Other income / (expense)		(33	)		677
Total		$	1,715		$	2,791
Derivatives in Cash Flow Hedging Relationships	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Interest rate contracts (1)	Interest income / (expense)	$	—		$	241
Total		$	—		$	241
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Interest rate contracts (3)	Other income / (expense)	$	209		$	143
Mortgage contracts	Mortgage banking revenue		(215	)		261
Total		$	(6	)	$	404

(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.