As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, collars, caps, and floors. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. The notional amount of these derivative instruments was $567.0 million at September 30, 2019 and $1.482 billion at December 31, 2018. These derivative financial instruments at September 30, 2019 consisted of $32.0 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, $25.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances, and $510.0 million notional amount interest rate collars and floors related to variable-rate commercial loan pools. Derivative financial instruments at December 31, 2018 consisted of $757.0 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, $525.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances, and $200.0 million notional amount interest rate collars related to a variable-rate commercial loan pool. These hedges were entered into to manage interest rate risk. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

In accordance with ASC 815-20-35-1, subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship should be accounted for in the following manner:

Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income.

Fair value hedges: changes in fair value are recognized concurrently in earnings.

Consistent with this guidance, as long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings.

While separate measurement and presentation of ineffectiveness is eliminated, paragraph 815-20-45-1A requires the change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness be presented in the same income statement line item that is used to present the earnings effect of the hedged item.

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. These derivative contracts do not qualify for hedge accounting. At September 30, 2019, the notional amount of the interest rate lock commitments was $147.7 million and forward commitments were $192.4 million. At December 31, 2018, the notional amount of the interest rate lock commitments was $27.6 million and forward commitments were $34.5 million. 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.

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 $1.208 billion at September 30, 2019. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $793.4 million at December 31, 2018. 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.

Old National enters into derivative financial instruments as part of its foreign currency risk management strategies. These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its customers. Old National does not designate these foreign currency forward contracts for hedge accounting treatment. The notional amounts of these foreign currency forward contracts and the offsetting counterparty derivative instruments were $3.2 million at September 30, 2019 and $3.6 million at December 31, 2018.

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.

Amounts reported in AOCI related to cash flow hedges will be reclassified to interest income or interest expense as interest payments are received or paid on Old National’s derivative instruments. During the next 12 months, we estimate that $1.0 million will be reclassified to interest income and $0.7 million will be reclassified to interest expense.

The following table summarizes the fair value of derivative financial instruments utilized by Old National:

	Balance			Balance
	Sheet	Fair		Sheet	Fair
(dollars in thousands)	Location	Value		Location	Value
September 30, 2019
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	8,937	Other liabilities	$	1,115
Total derivatives designated as hedging instruments		$	8,937		$	1,115
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other assets	$	57,695	Other liabilities	$	14,214
Mortgage contracts	Other assets		3,510	Other liabilities		—
Foreign currency contracts	Other assets		204	Other liabilities		155
Total derivatives not designated as hedging instruments		$	61,409		$	14,369
Total		$	70,346		$	15,484

December 31, 2018
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	12,741	Other liabilities	$	1,603
Total derivatives designated as hedging instruments		$	12,741		$	1,603
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other assets	$	15,278	Other liabilities	$	10,562
Mortgage contracts	Other assets		874	Other liabilities		316
Foreign currency contracts	Other assets		112	Other liabilities		69
Total derivatives not designated as hedging instruments		$	16,264		$	10,947
Total		$	29,005		$	12,550

Summary information about the interest rate swaps designated as fair value hedges is as follows:

The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 were as follows:

(dollars in thousands)

Gain (Loss)

Recognized

Location of Gain or

Gain (Loss)

Hedged Items

Location of Gain or

in Income on

Derivatives in

(Loss) Recognized in

Recognized

in Fair Value

(Loss) Recognized in

Fair Value Hedging

in Income on

Hedging

in Income on Related

Hedged

Relationships

Derivative

Relationships

Hedged Item

Items

Three Months Ended

September 30, 2019

Interest rate contracts

Interest income/(expense)

Fixed-rate debt

Interest income/(expense)

(14

)

Three Months Ended

September 30, 2018

Interest rate contracts

Interest income/(expense)

(2,786

)

Fixed-rate debt

Interest income/(expense)

2,778

Nine Months Ended

September 30, 2019

Interest rate contracts

Interest income/(expense)

12,925

Fixed-rate debt

Interest income/(expense)

(12,914

)

Nine Months Ended

September 30, 2018

Interest rate contracts

Interest income/(expense)

(4,450

)

Fixed-rate debt

Interest income/(expense)

4,433

Summary information about the interest rate swaps designated as cash flow hedges is as follows:

Old National has designated its interest rate collars as cash flow hedges. The structure of these instruments is such that Old National pays the counterparty an incremental amount if the collar index exceeds the cap rate. Conversely, Old National receives an incremental amount if the index falls below the floor rate. No payments are required if the collar index falls between the cap and floor rates. Summary information about the collars designated as cash flow hedges is as follows:

Old National has designated its interest rate floor spread transactions as cash flow hedges. The structure of these instruments is such that Old National receives an incremental amount if the index falls below the purchased floor strike rate. Old National pays an incremental amount if the index falls below the sold floor rate. Floor corridor protection is limited to the spread between the purchased floor strike rate and the sold floor rate. No payments are required if the index remains above the purchased floor strike rate. Summary information about the floor spread transactions designated as cash flow hedges is as follows:

Old National had no interest rate floor spread transactions designated as cash flow hedges as of December 31, 2018.

The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 were as follows:

Three Months Ended

September 30,

(dollars in thousands)

2019

2018

2019

2018

Gain (Loss)

Derivatives in

Location of Gain or

Recognized in Other

Reclassified from

Cash Flow Hedging

(Loss) Reclassified

Comprehensive

AOCI into

Relationships

from AOCI into Income

Income on Derivative

Income

Interest rate contracts

Interest income/(expense)

(73

)

725

226

Nine Months Ended

September 30,

(dollars in thousands)

2019

2018

2019

2018

Gain (Loss)

Derivatives in

Location of Gain or

Recognized in Other

Reclassified from

Cash Flow Hedging

(Loss) Reclassified

Comprehensive

AOCI into

Relationships

from AOCI into Income

Income on Derivative

Income

Interest rate contracts

Interest income/(expense)

479

6,804

412

(553

)

The effect of derivatives not designated as hedging instruments on the consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 were as follows:

		Three Months Ended
		September 30,
(dollars in thousands)		2019			2018
	Location of Gain or (Loss)	Gain (Loss)
Derivatives Not Designated as	Recognized in Income on	Recognized in Income on
Hedging Instruments	Derivative	Derivative
Interest rate contracts (1)	Other income/(expense)	$	(116	)	$	(23	)
Mortgage contracts	Mortgage banking revenue		1,110			(43	)
Foreign currency contracts	Other income/(expense)		—			20
Total		$	994		$	(46	)


		Nine Months Ended
		September 30,
(dollars in thousands)		2019			2018
	Location of Gain or (Loss)	Gain (Loss)
Derivatives Not Designated as	Recognized in Income on	Recognized in Income on
Hedging Instruments	Derivative	Derivative
Interest rate contracts (1)	Other income/(expense)	$	(247	)	$	4
Mortgage contracts	Mortgage banking revenue		2,951			394
Foreign currency contracts	Other income/(expense)		(11	)		43
Total		$	2,693		$	441

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