Fair Value

12 Months Ended

Dec. 31, 2023

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 SOFR 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.

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 market quotes developed using observable 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 December 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	$	80,372	$	80,372	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury	396,733		396,733		—		—
U.S. government-sponsored entities and agencies	1,231,264		—		1,231,264		—
Mortgage-backed securities - Agency	4,216,560		—		4,216,560		—
States and political subdivisions	535,260		—		535,260		—
Pooled trust preferred securities	11,337		—		11,337		—
Other securities	321,901		—		321,901		—
Loans held-for-sale	32,006		—		32,006		—
Derivative assets	166,302		—		166,302		—
Financial Liabilities
Derivative liabilities	268,916		—		268,916		—

			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		—
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 on a non-recurring basis at December 31, 2023 are summarized below:


			Fair Value Measurements at December 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	$	11,017	$	—	$	—	$	11,017
Commercial real estate loans	95,457		—		—		95,457
Foreclosed Assets:
Commercial real estate	1,669		—		—		1,669

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 $134.3 million, with a valuation allowance of $27.9 million at December 31, 2023. Old National recorded provision expense associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $20.5 million in 2023.

Other real estate owned and other repossessed property is measured at fair value less costs to sell on a non-recurring basis. Old National did not have any other real estate owned or repossessed property measured at fair value on a non-recurring basis at December 31, 2023. There were write-downs of other real estate owned of $0.1 million in 2023.

Assets measured at fair value on a non-recurring basis at December 31, 2022 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 were deemed collateral dependent had a principal amount of $92.0 million, with a valuation allowance of $21.5 million. Old National recorded provision expense associated with these loans totaling $20.3 million in 2022.

Old National did not have any other real estate owned or repossessed property measured at fair value on a non-recurring basis at December 31, 2022. There were write-downs of other real estate owned of $0.6 million in 2022.

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)

December 31, 2023

Collateral Dependent Loans

Commercial loans

11,017

Discounted
cash flow

Discount for type of property,
age of appraisal, and current status

5% - 37% (27%)

Commercial real estate loans

95,457

Discounted
cash flow

Discount for type of property,
age of appraisal, and current status

2% - 38% (16%)

Foreclosed Assets

Commercial real estate (1)

1,669

Fair value of collateral

Discount for type of property,
age of appraisal, and current status

4% - 8% (4%)

December 31, 2022

Collateral Dependent Loans

Commercial loans

22,562

Discounted
cash flow

Discount for type of property,
age of appraisal, and current status

10% - 47% (28%)

Commercial real estate loans

48,026

Discounted
cash flow

Discount for type of property,
age of appraisal, and current status

1% - 26% (11%)

(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.

Loans Held-For-Sale

Old National has elected the fair value option for 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 $1.2 million in 2023, $1.8 million in 2022, and $1.5 million in 2021.

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
December 31, 2023
Loans held-for-sale	$	32,006	$	621	$	31,385

December 31, 2022
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
Year Ended December 31, 2023
Loans held-for-sale	$	402	$	12	$	(14)	$	400

Year Ended December 31, 2022
Loans held-for-sale	$	(1,127)	$	10	$	(4)	$	(1,121)

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 December 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	$	1,175,058	$	1,175,058	$	—	$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies	825,953		—		671,126		—
Mortgage-backed securities - Agency	1,029,131		—		881,994		—
State and political subdivisions	1,158,409		—		1,048,068		—
Loans, net:
Commercial	9,392,267		—		—		9,258,193
Commercial real estate	13,984,273		—		—		13,640,868
Residential real estate	6,678,606		—		—		5,579,999
Consumer	2,629,171		—		—		2,555,121
Accrued interest receivable	225,159		859		54,465		169,835

Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	9,664,247	$	9,664,247	$	—	$	—
Checking, NOW, savings, and money market interest-bearing deposits	21,991,789		21,991,789		—		—
Time deposits	5,579,144		—		5,552,538		—
Federal funds purchased and interbank borrowings	390		390		—		—
Securities sold under agreements to repurchase	285,206		285,206		—		—
FHLB advances	4,280,681		—		4,090,954		—
Other borrowings	764,870		—		755,592		—
Accrued interest payable	57,094		—		57,094		—
Standby letters of credit	1,318		—		—		1,318

Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	3,839


			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	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 December 31, 2023 and 2022 represent an approximation of exit price, however, an actual exit price may differ.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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