Fair Value

3 Months Ended

Mar. 31, 2023

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, 2023 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	$	72,158	$	72,158	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury	221,872		221,872		—		—
U.S. government-sponsored entities and agencies	1,193,691		—		1,193,691		—
Mortgage-backed securities - Agency	4,308,775		—		4,308,775		—
States and political subdivisions	621,487		—		621,487		—
Pooled trust preferred securities	10,849		—		10,849		—
Other securities	330,392		—		330,392		—
Residential loans held for sale	10,584		—		10,584		—
Derivative assets	166,069		—		166,069		—
Financial Liabilities
Derivative liabilities	320,995		—		320,995		—

			Fair Value Measurements at December 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	$	52,507	$	52,507	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury	200,927		200,927		—		—
U.S. government-sponsored entities and agencies	1,175,080		—		1,175,080		—
Mortgage-backed securities - Agency	4,369,902		—		4,369,902		—
States and political subdivisions	663,852		—		663,852		—
Pooled trust preferred securities	10,811		—		10,811		—
Other securities	353,140		—		353,140		—
Residential loans held for sale	11,926		—		11,926		—
Derivative assets	169,001		—		169,001		—
Financial Liabilities
Derivative liabilities	380,704		—		380,704		—

Non-Recurring Basis

Assets measured at fair value at March 31, 2023 on a non-recurring basis are summarized below:

			Fair Value Measurements at March 31, 2023 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	$	16,686	$	—	$	—	$	16,686
Commercial real estate loans	43,924		—		—		43,924
Foreclosed Assets:
Commercial	240		—		—		240
Residential	511		—		—		511

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 $85.4 million, with a valuation allowance of $24.8 million at March 31, 2023.  Old National recorded provision expense associated with these loans totaling $11.9 million for the three months ended March 31, 2023.  Old National recorded provision expense associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $15.8 million for the three months ended March 31, 2022.

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 $0.8 million at March 31, 2023. There were $27 thousand of write-downs on other real estate owned for the three months ended March 31, 2023 and $0.2 million for the three months ended March 31, 2022.

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).  There was no valuation allowance for loan servicing rights with impairments at March 31, 2023 and no impairments or recoveries recorded during the three months ended March 31, 2023. Old National recorded recoveries associated with these loan servicing rights totaling $45 thousand during the three months ended March 31, 2022.

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

			Fair Value Measurements at December 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	$	22,562	$	—	$	—	$	22,562
Commercial real estate loans	48,026		—		—		48,026

At December 31, 2022, commercial and commercial real estate loans that are deemed collateral dependent had a principal amount of $92.0 million, with a valuation allowance of $21.5 million.

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, 2023
Collateral Dependent Loans
Commercial loans	$	16,686	Discounted	Discount for type of property,	10% - 40% (33%)
			cash flow	age of appraisal, and current status
Commercial real estate loans	43,924		Discounted	Discount for type of property,	0% - 30% (14%)
			cash flow	age of appraisal, and current status
Foreclosed Assets
Commercial real estate (2)	240		Fair value of	Discount for type of property,	—%
			collateral	age of appraisal, and current status
Residential (2)	511		Fair value of	Discount for type of property,	5%
			collateral	age of appraisal, and current status
December 31, 2022
Collateral Dependent Loans
Commercial loans	$	22,562	Discounted	Discount for type of property,	10% - 47% (28%)
			cash flow	age of appraisal, and current status
Commercial real estate loans	48,026		Discounted	Discount for type of property,	1% - 26% (11%)
			cash flow	age of appraisal, and current status

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

(2)There were no writedowns on foreclosed commercial real estate and only one residential real estate property written down during the three months ended March 31, 2023, so no range or weighted average is reported.

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 $0.2 million for the three months ended March 31, 2023, compared to $0.5 million for the three months ended March 31, 2022.

Newly originated conforming fixed-rate and adjustable-rate first mortgage 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, 2023
Residential loans held for sale	$	10,584	$	165	$	10,419
December 31, 2022
Residential loans held for sale	$	11,926	$	221	$	11,705

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, 2023
Residential loans held for sale	$	(53)	$	—	$	(3)	$	(56)
Three Months Ended March 31, 2022
Residential loans held for sale	$	(1,343)	$	—	$	(3)	$	(1,346)

Financial Instruments Not Carried at Fair Value

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

			Fair Value Measurements at March 31, 2023 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	$	1,113,935	$	1,113,935	$	—	$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies	820,849		—		663,623		—
Mortgage-backed securities - Agency	1,086,905		—		973,486		—
State and political subdivisions	1,163,436		—		1,026,265		—
Loans, net:
Commercial	9,624,779		—		—		9,477,212
Commercial real estate	12,772,044		—		—		12,477,217
Residential real estate	6,548,459		—		—		5,760,254
Consumer credit	2,578,381		—		—		2,481,269
Accrued interest receivable	188,988		1,046		43,858		144,084
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	10,995,083	$	10,995,083	$	—	$	—
Checking, NOW, savings, and money market    interest-bearing deposits	19,801,014		19,801,014		—		—
Time deposits	4,121,695		—		4,066,499		—
Federal funds purchased and interbank borrowings	618,955		618,955		—		—
Securities sold under agreements to repurchase	393,018		393,018		—		—
FHLB advances	4,981,612		—		4,764,172		—
Other borrowings	746,869		—		717,801		—
Accrued interest payable	28,792		—		28,792		—
Standby letters of credit	846		—		—		846
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	3,649

			Fair Value Measurements at December 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	$	728,412	$	728,412	$	—	$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies	819,168		—		656,358		—
Mortgage-backed securities - Agency	1,106,817		—		982,963		—
State and political subdivisions	1,163,162		—		1,004,361		—
Loans, net:
Commercial	9,386,862		—		—		9,066,583
Commercial real estate	12,317,825		—		—		11,867,851
Residential real estate	6,438,525		—		—		5,372,491
Consumer credit	2,676,758		—		—		2,557,115
Accrued interest receivable	190,521		758		52,081		137,682
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	11,930,798	$	11,930,798	$	—	$	—
Checking, NOW, savings, and money market    interest-bearing deposits	20,056,252		20,056,252		—		—
Time deposits	3,013,780		—		2,976,389		—
Federal funds purchased and interbank borrowings	581,489		581,489		—		—
Securities sold under agreements to repurchase	432,804		432,804		—		—
FHLB advances	3,829,018		—		3,739,780		—
Other borrowings	743,003		—		703,156		—
Accrued interest payable	19,547		—		19,547		—
Standby letters of credit	755		—		—		755
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	3,666

The methods utilized to measure the fair value of financial instruments at March 31, 2023 and December 31, 2022 represent an approximation of exit price, however, an actual exit price may differ.