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. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. Old National’s exposure is limited to the termination 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.

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.

The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item.

Interest rate swaps of certain borrowings were designated as cash flow hedges totaling $150.0 million notional amount at both March 31, 2023 and December 31, 2022. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $1.9 billion notional amount at both March 31, 2023 and December 31, 2022. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.

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.

Old National has designated its interest rate floor 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 floor strike rate. No payments are required if the index remains above the floor strike rate.

Interest rate swaps of certain borrowings were designated as fair value hedges totaling $200.0 million notional amount at March 31, 2023 and $300.0 million notional amount at December 31, 2022. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $910.0 million notional amount at both March 31, 2023 and December 31, 2022. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.


	March 31, 2023						December 31, 2022
			Fair Value						Fair Value
(dollars in thousands)	Notional		Assets (1)		Liabilities (2)		Notional		Assets (1)		Liabilities (2)
Cash flow hedges
Interest rate collars and floors on loan pools	$	1,900,000	$	17,328	$	38,276	$	1,900,000	$	11,764	$	47,859
Interest rate swaps on borrowings (3)	150,000		—		—		150,000		—		—
Fair value hedges
Interest rate swaps on investment securities (3)	909,957		—		4,833		909,957		—		—
Interest rate swaps on borrowings (3)	200,000		—		—		300,000		—		—
Total			$	17,328	$	43,109			$	11,764	$	47,859


(dollars in thousands)						Gain (Loss) Recognized in Income on Related Hedged Items
Derivatives in Fair Value Hedging Relationships	Location of Gain or (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative		Hedged Items in Fair Value Hedging Relationships	Location of Gain or (Loss) Recognized in in Income on Related Hedged Item
Three Months Ended March 31, 2023
Interest rate contracts	Interest income/(expense)	$	2,153	Fixed-rate debt	Interest income/(expense)	$	(2,218)
Interest rate contracts	Interest income/(expense)	(63,115)		Fixed-rate investment securities	Interest income/(expense)	63,251
Total		$	(60,962)			$	61,033


Three Months Ended March 31, 2022
Interest rate contracts	Interest income/(expense)	$	(4,833)	Fixed-rate debt	Interest income/(expense)	$	4,956
Interest rate contracts	Interest income/(expense)	57,654		Fixed-rate investment securities	Interest income/(expense)	(58,029)
Total		$	52,821			$	(53,073)


		Three Months Ended March 31,				Three Months Ended March 31,
(dollars in thousands)		2023		2022		2023		2022
Derivatives in Cash Flow Hedging Relationships	Location of Gain or (Loss) Reclassified from AOCI into Income	Gain (Loss) Recognized in Other Comprehensive Income on Derivative				Gain (Loss) Reclassified from AOCI into Income
Interest rate contracts	Interest income/(expense)	$	6,603	$	(9,506)	$	(7,637)	$	669

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 $4.4 million will be reclassified to interest income and $23.1 million will be reclassified to interest expense.

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 March 31, 2023, the notional amounts of the interest rate lock commitments were $38.9 million and forward commitments were $45.0 million. At December 31, 2022, the notional amounts of the interest rate lock commitments were $21.4 million and forward commitments were $30.3 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 clients. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $5.6 billion at March 31, 2023 and $5.2 billion at December 31, 2022. 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 clients 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 clients. Old National does not designate these foreign currency forward contracts for hedge accounting treatment.


	March 31, 2023						December 31, 2022
			Fair Value						Fair Value
(dollars in thousands)	Notional		Assets (1)		Liabilities (2)		Notional		Assets (1)		Liabilities (2)
Interest rate lock commitments	$	38,945	$	380	$	—	$	21,401	$	93	$	—
Forward mortgage loan contracts	45,047		—		148		30,330		32		—
Customer interest rate swaps	5,575,403		19,470		257,902		5,220,363		5,676		326,924
Counterparty interest rate swaps (3)	5,575,403		128,487		19,610		5,220,363		151,111		5,711
Customer foreign currency forward contracts	14,165		382		21		8,341		253		42
Counterparty foreign currency forward contracts	14,143		22		205		8,297		72		168
Total			$	148,741	$	277,886			$	157,237	$	332,845


		Three Months Ended March 31,
(dollars in thousands)		2023		2022
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative
Interest rate contracts (1)	Other income/(expense)	$	(138)	$	501
Mortgage contracts	Mortgage banking revenue	107		130
Foreign currency contracts	Other income/(expense)	(1)		(28)
Total		$	(32)	$	603