Fair Value

3 Months Ended

Mar. 31, 2024

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 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 March 31, 2024 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	$	84,954	$	84,954	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury	233,051		233,051		—		—
U.S. government-sponsored entities and agencies	1,183,019		—		1,183,019		—
Mortgage-backed securities - Agency	4,550,023		—		4,550,023		—
States and political subdivisions	515,104		—		515,104		—
Pooled trust preferred securities	11,274		—		11,274		—
Other securities	299,181		—		299,181		—
Loans held-for-sale	19,418		—		19,418		—
Derivative assets	167,479		—		167,479		—
Financial Liabilities
Derivative liabilities	297,403		—		297,403		—

			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		—

Non-Recurring Basis

Assets measured at fair value at March 31, 2024 on a non-recurring basis are summarized below:

			Fair Value Measurements at March 31, 2024 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	$	26,057	$	—	$	—	$	26,057
Commercial real estate loans	83,492		—		—		83,492
Foreclosed Assets:
Commercial	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 $142.2 million, with a valuation allowance of $32.7 million at March 31, 2024. Old National recorded provision expense associated with these loans totaling $9.6 million for the three months ended March 31, 2024, compared to $11.9 million for the three months ended March 31, 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 other repossessed property measured at fair value on a non-recurring basis at March 31, 2024. There were no write-downs on other real estate owned for the three months ended March 31, 2024, compared to $27 thousand for the three months ended March 31, 2023.

Assets measured at fair value at December 31, 2023 on a non-recurring basis 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

At December 31, 2023, commercial and commercial real estate loans that are deemed collateral dependent had a principal amount of $134.3 million, with a valuation allowance of $27.9 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, 2024
Collateral Dependent Loans
Commercial loans	$	26,057	Discounted	Discount for type of property,	2% - 38% (29%)
			cash flow	age of appraisal, and current status
Commercial real estate loans	83,492		Discounted	Discount for type of property,	1% - 34% (13%)
			cash flow	age of appraisal, and current status
Foreclosed Assets
Commercial real estate	1,669		Fair value of	Discount for type of property,	4% - 8% (4%)
			collateral	age of appraisal, and current status
December 31, 2023
Collateral Dependent Loans
Commercial loans	$	11,017	Discounted	Discount for type of property,	5% - 37% (27%)
			cash flow	age of appraisal, and current status
Commercial real estate loans	95,457		Discounted	Discount for type of property,	2% - 38% (16%)
			cash flow	age of appraisal, and current status
Foreclosed Assets
Commercial real estate	1,669		Fair value of	Discount for type of property,	4% - 8% (4%)
			collateral	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.

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. Interest income for loans held-for-sale is included in the income statement totaling $0.3 million for the three months ended March 31, 2024, compared to $0.2 million for the three months ended March 31, 2023.

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, 2024
Loans held-for-sale	$	19,418	$	414	$	19,004
December 31, 2023
Loans held-for-sale	$	32,006	$	621	$	31,385

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, 2024
Loans held-for-sale	$	(202)	$	—	$	(5)	$	(207)
Three Months Ended March 31, 2023
Loans held-for-sale	$	(53)	$	—	$	(3)	$	(56)

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, 2024 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	$	939,499	$	939,499	$	—	$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies	827,684		—		662,735		—
Mortgage-backed securities - Agency	1,016,858		—		857,657		—
State and political subdivisions	1,156,807		—		1,027,184		—
Loans, net:
Commercial	9,522,947		—		—		9,357,300
Commercial real estate	14,492,040		—		—		14,005,872
Residential real estate	6,639,480		—		—		5,682,754
Consumer credit	2,649,139		—		—		2,607,831
Accrued interest receivable	219,809		1,133		47,057		171,619
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	9,257,709	$	9,257,709	$	—	$	—
Checking, NOW, savings, and money market    interest-bearing deposits	22,490,875		22,490,875		—		—
Time deposits	5,950,834		—		5,913,854		—
Federal funds purchased and interbank borrowings	50,416		50,416		—		—
Securities sold under agreements to repurchase	274,493		274,493		—		—
FHLB advances	4,193,039		—		3,994,880		—
Other borrowings	813,213		—		798,748		—
Accrued interest payable	54,690		—		54,690		—
Standby letters of credit	1,379		—		—		1,379
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	3,824

			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 credit	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

The methods utilized to measure the fair value of financial instruments at March 31, 2024 and December 31, 2023 represent an approximation of exit price, however, an actual exit price may differ.