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Fair Value
 12 Months Ended
Dec. 31, 2020
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: The fair values for investment 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 December 31, 2020 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Financial Assets
Equity securities$2,547 $2,547 $— $— 
Investment securities available-for-sale:
U.S. Treasury10,208 10,208 — — 
U.S. government-sponsored entities and agencies841,988 — 841,988 — 
Mortgage-backed securities - Agency3,339,098 — 3,339,098 — 
States and political subdivisions1,492,162 — 1,492,162 — 
Pooled trust preferred securities7,913 — — 7,913 
Other securities278,746 — 278,746 — 
Residential loans held for sale63,250 — 63,250 — 
Derivative assets140,201 — 140,201 — 
Financial Liabilities
Derivative liabilities18,187 — 18,187 — 
Fair Value Measurements at December 31, 2019 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$6,842 $6,842 $— $— 
Investment securities available-for-sale:
U.S. Treasury17,682 17,682 — — 
U.S. government-sponsored entities and agencies592,984 — 592,984 — 
Mortgage-backed securities - Agency3,183,861 — 3,183,861 — 
States and political subdivisions1,275,643 — 1,275,603 40 
Pooled trust preferred securities8,222 — — 8,222 
Other securities306,699 31,169 275,530 — 
Residential loans held for sale46,898 — 46,898 — 
Derivative assets51,301 — 51,301 — 
Financial Liabilities
Derivative liabilities12,393 — 12,393 — 
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		State and
Political
Subdivisions
Year Ended December 31, 2020
Balance at beginning of period$8,222 $40 
Accretion (amortization) of discount15 — 
Sales/payments received(64)(40)
Increase (decrease) in fair value of securities(260)— 
Balance at end of period$7,913 $— 
Year Ended December 31, 2019
Balance at beginning of period$8,495 $4,108 
Accretion (amortization) of discount12 — 
Sales/payments received(62)(35)
Increase (decrease) in fair value of securities(223)— 
Transfers out of Level 3—(4,033)
Balance at end of period$8,222 $40 
Year Ended December 31, 2018
Balance at beginning of period$8,448 $— 
Accretion (amortization) of discount17 (56)
Sales/payments received(338)— 
Increase (decrease) in fair value of securities368 28 
Transfers into Level 3—4,136 
Balance at end of period$8,495 $4,108 
The accretion or amortization of discounts on securities in the table above is included in interest income.  The increase 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.  The 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. 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.  During 2019, Old National received third party pricing on a $4.0 million state and political subdivisions security and transferred it out of Level 3.  Old National transferred $4.1 million of state and political subdivisions securities to Level 3 during 2018 because Old National could no longer obtain evidence of observable inputs.
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 ValueValuation
Techniques		Unobservable InputRange (Weighted
Average) (4)
December 31, 2020
Pooled trust preferred securities$7,913 Discounted cash flowConstant prepayment rate (1)0.0%
Additional asset defaults (2)
6.0% - 8.7% (6.8%)
Expected asset recoveries (3)
0.0% - 23.2% (7.3%)
December 31, 2019
Pooled trust preferred securities$8,222 Discounted cash flowConstant prepayment rate (1)0.0%
Additional asset defaults (2)
6.2% - 8.0% (6.8%)
Expected asset recoveries (3)
0.0% - 19.1% (6.0%)
State and political subdivisions40 Discounted cash flowNo observable inputsN/A
Local municipality issuances
Old National owns 100%
Carried at par
(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 on a non-recurring basis are summarized below:
Fair Value Measurements at December 31, 2020 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$10,747 $— $— $10,747 
Commercial real estate loans40,653 — — 40,653 
Loan servicing rights26,717 — 26,717 — 
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 $57.2 million, with a valuation allowance of $5.8 million at December 31, 2020.  Old National recorded provision expense associated with these loans totaling $2.1 million in 2020.
Other real estate owned and other repossessed property is measured at fair value less costs to sell. 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, 2020.  There were write-downs of other real estate owned of $161 thousand in 2020.
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 December 31, 2020 totaled $1.4 million.  Old National recorded impairments associated with these loan servicing rights totaling $1.4 million in 2020.
Assets measured at fair value on a non-recurring basis at December 31, 2019 are summarized below:
Fair Value Measurements at December 31, 2019 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$10,361 $— $— $10,361 
Commercial real estate loans11,610 — — 11,610 
Foreclosed Assets:
Commercial real estate21 — — 21 
Residential22 — — 22 
Loan servicing rights4,662 — 4,662 — 
At December 31, 2019, commercial and commercial real estate loans that are deemed collateral dependent had a principal amount of $30.9 million, with a valuation allowance of $8.9 million.  Old National recorded provision expense associated with these loans totaling $4.1 million in 2019.
Other real estate owned and other repossessed property had a net carrying amount of $43 thousand at December 31, 2019.  There were write-downs of other real estate owned of $60 thousand in 2019.
The valuation allowance for loan servicing rights with impairments at December 31, 2019 totaled $31 thousand.  There were impairments associated with these loan servicing rights totaling $16 thousand in 2019.
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)(2)
December 31, 2020
Collateral Dependent Loans
Commercial loans$10,747 Discounted
cash flow		Discount for type of property,
age of appraisal, and current status
0% - 33% (12%)
Commercial real estate loans40,653 Discounted
cash flow		Discount for type of property,
age of appraisal, and current status
0% -18% (7%)
December 31, 2019
Collateral Dependent Loans
Commercial loans$10,361 Fair value of collateralDiscount for type of property,
age of appraisal, and current status
0% - 50% (13%)
Commercial real estate loans (1)11,610 Fair value of collateralDiscount for type of property,
age of appraisal, and current status		45%
Foreclosed Assets
Commercial real estate (1)21 Fair value of collateralDiscount for type of property,
age of appraisal, and current status		43%
Residential (1)22 Fair value of collateralDiscount for type of property,
age of appraisal, and current status		21%
(1)There was only one collateral dependent commercial real estate loan, one foreclosed commercial real estate asset, and one foreclosed residential asset at December 31, 2019, so no range or weighted average is reported.
(2)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 $2.0 million in 2020, $1.4 million in 2019, and $0.5 million in 2018.
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		DifferenceContractual
Principal
December 31, 2020
Residential loans held for sale$63,250 $3,485 $59,765 
December 31, 2019
Residential loans held for sale$46,898 $1,529 $45,369 
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, 2020
Residential loans held for sale$1,962 $18 $(24)$1,956 
Year Ended December 31, 2019
Residential loans held for sale$1,036 $18 $— $1,054 
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, 2020 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		$589,712 $589,712 $— $— 
Loans, net:
Commercial3,922,642 — — 3,912,948 
Commercial real estate5,867,795 — — 5,797,447 
Residential real estate2,235,814 — — 2,264,274 
Consumer credit1,628,840 — — 1,618,365 
Accrued interest receivable85,306 21 27,977 57,308 
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits$5,633,672 $5,633,672 $— $— 
Checking, NOW, savings, and money market
   interest-bearing deposits
10,180,911 10,180,911 — — 
Other time deposits1,103,313 — 1,121,365 — 
Brokered deposits119,557 — 119,514 — 
Federal funds purchased and interbank borrowings1,166 1,166 —— 
Securities sold under agreements to repurchase431,166 431,166 —— 
FHLB advances1,991,435 — 2,092,033 — 
Other borrowings252,787 — 254,612 — 
Accrued interest payable5,443 — 5,443 — 
Standby letters of credit462 — — 462 
Off-Balance Sheet Financial Instruments
Commitments to extend credit$— $— $— $11,822 
Fair Value Measurements at December 31, 2019 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		$276,337 $276,337 $— $— 
Loans, net:
Commercial2,867,711 — — 2,831,298 
Commercial real estate5,145,204 — — 5,130,848 
Residential real estate2,331,990 — — 2,357,341 
Consumer credit1,718,000 — — 1,676,253 
Accrued interest receivable85,123 15 28,185 56,923 
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits$4,042,286 $4,042,286 $— $— 
Checking, NOW, savings, and money market
   interest-bearing deposits
8,828,881 8,828,881 — — 
Other time deposits1,589,988 — 1,600,214 — 
Brokered deposits92,242 — 92,355 — 
Federal funds purchased and interbank borrowings350,414 350,414 —— 
Securities sold under agreements to repurchase327,782 327,782 —— 
FHLB advances1,822,847 — 1,875,089 — 
Other borrowings243,685 — 254,519 — 
Accrued interest payable8,272 — 8,272 — 
Standby letters of credit573 — — 573 
Off-Balance Sheet Financial Instruments
Commitments to extend credit$— $— $— $4,302 
The methods utilized to measure the fair value of financial instruments at December 31, 2020 and 2019 represent an approximation of exit price, however, an actual exit price may differ.