Fair Value

3 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value

FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Old National used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment securities and equity securities: The fair values for investment securities and equity securities are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  Discounted cash flows are calculated using swap and LIBOR curves plus spreads that adjust for loss severities, volatility, credit risk, and optionality.  During times when trading is more liquid, broker quotes are used (if available) to validate the model.  Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Derivative financial instruments: The fair values of derivative financial instruments are based on derivative valuation models using market data inputs as of the valuation date (Level 2).

Recurring Basis

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which we have elected the fair value option, are summarized below: 

			Fair Value Measurements at March 31, 2022 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Equity securities	$	67,555	$	67,555	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury	419,024		419,024		—		—
U.S. government-sponsored entities and agencies	1,580,020		—		1,580,020		—
Mortgage-backed securities - Agency	5,623,742		—		5,623,742		—
States and political subdivisions	750,056		—		750,056		—
Pooled trust preferred securities	9,665		—		—		9,665
Other securities	368,097		—		368,097		—
Residential loans held for sale	39,376		—		39,376		—
Derivative assets	56,324		—		56,324		—
Financial Liabilities
Derivative liabilities	141,198		—		141,198		—

			Fair Value Measurements at December 31, 2021 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Equity securities	$	13,211	$	13,211	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury	235,584		235,584		—		—
U.S. government-sponsored entities and agencies	1,542,773		—		1,542,773		—
Mortgage-backed securities - Agency	3,698,831		—		3,698,831		—
States and political subdivisions	1,654,986		—		1,654,986		—
Pooled trust preferred securities	9,496		—		—		9,496
Other securities	240,396		—		240,396		—
Residential loans held for sale	35,458		—		35,458		—
Derivative assets	74,226		—		74,226		—
Financial Liabilities
Derivative liabilities	41,872		—		41,872		—

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

(dollars in thousands)	Pooled Trust Preferred Securities
Three Months Ended March 31, 2022
Balance at beginning of period	$	9,496
Accretion of discount	5
Increase in fair value of securities	164
Balance at end of period	$	9,665
Three Months Ended March 31, 2021
Balance at beginning of period	$	7,913
Accretion of discount	5
Sales/payments received	(15)
Increase in fair value of securities	307
Balance at end of period	$	8,210

The accretion of discounts on securities in the table above is included in interest income.  The increase or decrease in the fair value of securities in the table above is included in the unrealized holding gains (losses) for the period in the statement of other comprehensive income. An increase in fair value is reflected in the balance sheet as an increase in the fair value of investment securities available-for-sale, an increase in accumulated other comprehensive income, which is included in shareholders’ equity, and a decrease in other assets related to the tax impact. A decrease in fair value is reflected in the balance sheet as a decrease in the fair value of investment securities available-for-sale, a decrease in accumulated other comprehensive income, which is included in shareholders’ equity, and an increase in other assets related to the tax impact. 

The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:

(dollars in thousands)	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average) (4)
March 31, 2022
Pooled trust preferred securities	$	9,665	Discounted cash flow	Constant prepayment rate (1)	0.00%
				Additional asset defaults (2)	5.5% - 8.4% (6.4%)
				Expected asset recoveries (3)	0.0% - 46.2% (14.1%)
December 31, 2021
Pooled trust preferred securities	$	9,496	Discounted cash flow	Constant prepayment rate (1)	0.00%
				Additional asset defaults (2)	5.7% - 8.5% (6.5%)
				Expected asset recoveries (3)	0.0% - 46.0% (14.1%)

(1)Assuming no prepayments.

(2)Each currently performing pool asset is assigned a default probability based on the banking environment, which is adjusted for specific issuer evaluation, of 0%, 50%, or 100%.

(3)Each currently defaulted pool asset is assigned a recovery probability based on specific issuer evaluation of 0%, 25%, or 100%.

(4)Unobservable inputs are weighted by the estimated number of defaults and current performing collateral of the instruments.

Significant changes in any of the unobservable inputs used in the fair value measurement in isolation would have resulted in a significant change to the fair value measurement.  The pooled trust preferred securities Old National owns are subordinate note classes that rely on an ongoing cash flow stream to support their values.  The senior note classes receive the benefit of prepayments to the detriment of subordinate note classes since the ongoing interest cash flow stream is reduced by the early redemption.  Generally, a change in prepayment rates or additional pool asset defaults would have an impact that is directionally opposite from a change in the expected recovery of a defaulted pool asset.

Non-Recurring Basis

Assets measured at fair value at March 31, 2022 on a non-recurring basis are summarized below:

			Fair Value Measurements at March 31, 2022 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral Dependent Loans:
Commercial loans	$	4,329	$	—	$	—	$	4,329
Commercial real estate loans	56,279		—		—		56,279
Foreclosed Assets:
Commercial	1,678		—		—		1,678
Residential	100		—		—		100
Loan servicing rights	21		—		21		—

Commercial and commercial real estate loans that are deemed collateral dependent are valued using the discounted cash flows.  The liquidation amounts are based on the fair value of the underlying collateral using the most recently available appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral.  These commercial and commercial real estate loans had a principal amount of $78.5 million, with a valuation allowance of $17.8 million at March 31, 2022.  Old National recorded provision expense associated with these loans totaling $15.8 million for the three months ended March 31, 2022.  Old National recorded provision recoveries associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $0.2 million for the three months ended March 31, 2021.

Other real estate owned and other repossessed property is measured at fair value less costs to sell on a non-recurring basis and had a net carrying amount of $1.8 million at March 31, 2022. There were $243 thousand write-downs of other real estate owned for the three months ended March 31, 2022 and of $23 thousand for the three months ended March 31, 2021.

Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount.  If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value.  Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).  The valuation allowance for loan servicing rights with impairments at March 31, 2022 totaled $0.3 thousand.  Old National recorded recoveries associated with these loan servicing rights totaling $45 thousand during the three months ended March 31, 2022. There were recoveries of $1.3 million for the three months ended March 31, 2021.

Assets measured at fair value at December 31, 2021 on a non-recurring basis are summarized below:

			Fair Value Measurements at December 31, 2021 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral Dependent Loans:
Commercial loans	$	2,634	$	—	$	—	$	2,634
Commercial real estate loans	16,308		—		—		16,308
Loan servicing rights	140		—		140		—

At December 31, 2021, commercial and commercial real estate loans that are deemed collateral dependent had a principal amount of $21.0 million, with a valuation allowance of $2.1 million.

The valuation allowance for loan servicing rights with impairments at December 31, 2021 totaled $46 thousand.

The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:

(dollars in thousands)	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average) (1)
March 31, 2022
Collateral Dependent Loans
Commercial loans	$	4,329	Discounted	Discount for type of property,	14% - 15% (14%)
			cash flow	age of appraisal, and current status
Commercial real estate loans	56,279		Discounted	Discount for type of property,	6% - 10% (8%)
			cash flow	age of appraisal, and current status
Foreclosed Assets
Commercial real estate (1)	1,678		Fair value of	Discount for type of property,	14%
			collateral	age of appraisal, and current status
Residential (1)	100		Fair value of	Discount for type of property,	—%
			collateral	age of appraisal, and current status
December 31, 2021
Collateral Dependent Loans
Commercial loans	$	2,634	Discounted	Discount for type of property,	14% - 15% (14%)
			cash flow	age of appraisal, and current status
Commercial real estate loans	16,308		Discounted	Discount for type of property,	6% - 10% (8%)
			cash flow	age of appraisal, and current status

(1)Unobservable inputs were weighted by the relative fair value of the instruments.

Fair Value Option

Old National may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income.  After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur.  The fair value election may not be revoked once an election is made.

Residential Loans Held For Sale

Old National has elected the fair value option for residential loans held for sale.  For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the financial assets (except any that are on nonaccrual status).  None of these loans are 90 days or more past due, nor are any on nonaccrual status.  Included in the income statement is interest income for loans held for sale totaling $0.5 million for the three months ended March 31, 2022, compared to $0.4 million for the three months ended March 31, 2021.

Old National has elected the fair value option for newly originated conforming fixed-rate and adjustable-rate first mortgage loans held for sale.  These loans are intended for sale and are hedged with derivative instruments.  Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.  The fair value option was not elected for loans held for investment.

The difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was as follows: 

(dollars in thousands)	Aggregate Fair Value		Difference		Contractual Principal
March 31, 2022
Residential loans held for sale	$	39,376	$	(4)	$	39,380
December 31, 2021
Residential loans held for sale	$	35,458	$	1,342	$	34,116

Accrued interest at period end is included in the fair value of the instruments.

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value:

(dollars in thousands)	Other Gains and (Losses)		Interest Income		Interest (Expense)		Total Changes in Fair Values Included in Current Period Earnings
Three Months Ended March 31, 2022
Residential loans held for sale	$	(1,343)	$	—	$	(3)	$	(1,346)
Three Months Ended March 31, 2021
Residential loans held for sale	$	(2,380)	$	2	$	—	$	(2,378)

Financial Instruments Not Carried at Fair Value

The carrying amounts and estimated fair values of financial instruments not carried at fair value were as follows: 

			Fair Value Measurements at March 31, 2022 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,    and other interest-earning investments	$	1,976,552	$	1,976,552	$	—	$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies	528,524		—		480,409		—
Mortgage-backed securities - Agency	463,111		—		441,054		—
State and political subdivisions	1,090,507		—		1,034,033		—
Other securities	100		—		100		—
Loans, net:
Commercial	8,523,614		—		—		8,458,138
Commercial real estate	11,196,343		—		—		11,078,838
Residential real estate	5,688,903		—		—		5,603,201
Consumer credit	2,646,877		—		—		2,634,122
Accrued interest receivable	136,975		948		39,859		96,168
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	12,463,136	$	12,463,136	$	—	$	—
Checking, NOW, savings, and money market    interest-bearing deposits	20,600,243		20,600,243		—		—
Time deposits	2,544,011		—		2,531,360		—
Federal funds purchased and interbank borrowings	1,721		1,721		—		—
Securities sold under agreements to repurchase	509,275		509,275		—		—
FHLB advances	3,239,357		—		3,234,585		—
Other borrowings	597,207		—		582,231		—
Accrued interest payable	6,311		—		6,311		—
Standby letters of credit	415		—		—		415
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	1,882

			Fair Value Measurements at December 31, 2021 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,    and other interest-earning investments	$	822,019	$	822,019	$	—	$	—
Loans, net:
Commercial	3,363,175		—		—		3,335,009
Commercial real estate	6,315,574		—		—		6,211,854
Residential real estate	2,245,942		—		—		2,216,900
Consumer credit	1,569,814		—		—		1,582,600
Accrued interest receivable	84,109		688		35,790		47,631
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	6,303,106	$	6,303,106	$	—	$	—
Checking, NOW, savings, and money market    interest-bearing deposits	11,305,676		11,305,676		—		—
Time deposits	960,413		—		968,658		—
Federal funds purchased and interbank borrowings	276		276		—		—
Securities sold under agreements to repurchase	392,275		392,275		—		—
FHLB advances	1,886,019		—		1,935,140		—
Other borrowings	296,670		—		311,532		—
Accrued interest payable	5,496		—		5,496		—
Standby letters of credit	454		—		—		454
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	4,678

The methods utilized to measure the fair value of financial instruments at March 31, 2022 and December 31, 2021 represent an approximation of exit price, however, an actual exit price may differ.