Derivative Financial Instruments

6 Months Ended

Jun. 30, 2014

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

NOTE 17 – 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 $539.5 million and $464.5 million at June 30, 2014 and December 31, 2013, respectively. The June 30, 2014 balances consist of $39.5 million notional amount of receive-fixed pay variable interest rate swaps and $500.0 million notional amount of pay-fixed, receive variable interest rate swaps on certain of its FHLB advances. The December 31, 2013 balances consist of $39.5 million notional amount of receive-fixed pay variable interest rate swaps and $425.0 million notional amount of pay-fixed, receive variable 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 June 30, 2014, the notional amount of the interest rate lock commitments and forward commitments were $22.2 million and $32.8 million, respectively. 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. 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 our 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 $457.5 million and $457.5 million, respectively, at June 30, 2014. At December 31, 2013, the notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $436.8 million and $436.8 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
	June 30, 2014				December 31, 2013
(dollars in thousands)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest rate contracts		Other assets	$	3,690		Other assets	$	3,545
Total derivatives designated as hedging instruments			$	3,690			$	3,545
Derivatives not designated as hedging instruments
Interest rate contracts		Other assets	$	16,308		Other assets	$	18,279
Mortgage contracts		Other assets		459		Other assets		263
Total derivatives not designated as hedging instruments			$	16,767			$	18,542
Total derivative assets			$	20,457			$	22,087

	Liability Derivatives
	June 30, 2014			December 31, 2013
	Balance			Balance
	Sheet	Fair		Sheet	Fair
(dollars in thousands)	Location	Value		Location	Value
Derivatives designated as hedging instruments
Interest rate contracts	Other liabilities	$	5,446	Other liabilities	$	1,218
Total derivatives designated as hedging instruments		$	5,446		$	1,218
Derivatives not designated as hedging instruments
Interest rate contracts	Other liabilities	$	16,464	Other liabilities	$	18,505
Mortgage contracts	Other liabilities		75	Other liabilities		—
Total derivatives not designated as hedging instruments		$	16,539		$	18,505
Total derivative liabilities		$	21,985		$	19,723

The effect of derivative instruments on the Consolidated Statement of Income for the three and six months ended June 30, 2014 and 2013 are as follows:

		Three months			Three months
		ended			ended
(dollars in thousands)		June 30, 2014			June 30, 2013
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)	$	339		$	467
Interest rate contracts (2)	Other income / (expense)		75			(75	)
Total		$	414		$	392
	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)	$	(4	)	$	218
Mortgage contracts	Mortgage banking revenue		42			598
Total		$	38		$	816
		Six months			Six months
		ended			ended
(dollars in thousands)		June 30, 2014			June 30, 2013
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)	$	698		$	944
Interest rate contracts (2)	Other income / (expense)		181			(48	)
Total		$	879		$	896
	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)	$	69		$	179
Mortgage contracts	Mortgage banking revenue		122			745
Total		$	191		$	924

(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.