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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments DERIVATIVE FINANCIAL INSTRUMENTS
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.
In accordance with ASC 815-20-35-1, subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship should be accounted for in the following manner:
Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income.
Fair value hedges: changes in fair value are recognized concurrently in earnings.
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.
Cash Flow Hedges
Interest rate swaps of certain borrowings were designated as cash flow hedges totaling $150.0 million notional amount at September 30, 2021 and $325.0 million notional amount at December 31, 2020. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $450.0 million notional amount at September 30, 2021 and $400.0 million notional amount at December 31, 2020. 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.
Fair Value Hedges
Interest rate swaps of certain borrowings were designated as fair value hedges totaling $377.5 million notional amount at September 30, 2021 and $379.0 million notional amount at December 31, 2020. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $910.0 million notional amount at September 30, 2021 and $347.5 million notional amount at December 31, 2020. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.
Derivatives Designated as Hedges
The following table summarizes Old National’s derivatives designated as hedges:
September 30, 2021December 31, 2020
Fair ValueFair Value
(dollars in thousands)NotionalAssets (1)Liabilities (2)NotionalAssets (1)Liabilities (2)
Cash flow hedges
Interest rate collars and floors on loan pools$450,000 $1,559 $459 $400,000 $6,636 $— 
Interest rate swaps on borrowings150,000 3,422 — 325,000 628 1,816 
Fair value hedges
Interest rate swaps on investment securities909,957 16,516 9,883 347,516 1,145 172 
Interest rate swaps on borrowings377,500 4,976 — 379,000 8,793 — 
Total$26,473 $10,342 $17,202 $1,988 
(1)Derivative assets are included in other assets on the balance sheet.
(2)Derivative liabilities are included in other liabilities on the balance sheet.
The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income were as follows:
(dollars in thousands)Gain (Loss)
Recognized
in Income on
Related
Hedged
Items
Derivatives in
Fair Value Hedging
Relationships		Location of Gain or
(Loss) Recognized in
Income on Derivative		Gain (Loss)
Recognized
in Income on
Derivative		Hedged Items
in Fair Value
Hedging
Relationships		Location of Gain or
(Loss) Recognized in
in Income on Related
Hedged Item
Three Months Ended
September 30, 2021
Interest rate contractsInterest income/(expense)$(991)Fixed-rate debtInterest income/(expense)$943 
Interest rate contractsInterest income/(expense)5,650 Fixed-rate
investment
securities		Interest income/(expense)(5,096)
Total$4,659 $(4,153)
Three Months Ended
September 30, 2020
Interest rate contractsInterest income/(expense)$(1,294)Fixed-rate debtInterest income/(expense)$1,290 
Nine Months Ended
September 30, 2021
Interest rate contractsInterest income/(expense)$(3,817)Fixed-rate debtInterest income/(expense)$3,772 
Interest rate contractsInterest income/(expense)5,659 Fixed-rate
investment
securities		Interest income/(expense)(5,158)
Total$1,842 $(1,386)
Nine Months Ended
September 30, 2020
Interest rate contractsInterest income/(expense)$8,678 Fixed-rate debtInterest income/(expense)$(8,726)
The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income were as follows:
Three Months Ended
September 30,		Three Months Ended
September 30,
(dollars in thousands) 2021202020212020
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 contractsInterest income/(expense)$(164)$(11)$1,578 $1,550 
  Nine Months Ended
September 30,		Nine Months Ended
September 30,
 2021202020212020
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 contractsInterest income/(expense)$2,612 $7,546 $3,483 $3,651 
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 $1.5 million will be reclassified to interest income and $0.1 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 September 30, 2021, the notional amounts of the interest rate lock commitments were $189.0 million and forward commitments were $215.2 million.  At December 31, 2020, the notional amounts of the interest rate lock commitments were $224.7 million and forward commitments were $261.0 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 customers.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $2.384 billion at September 30, 2021.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $2.008 billion at December 31, 2020.  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 customers 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 customers.  Old National does not designate these foreign currency forward contracts for hedge accounting treatment.
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts.  Old National’s exposure is limited to the replacement 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.
Derivatives Not Designated as Hedges
The following table summarizes Old National’s derivatives not designated as hedges:
September 30, 2021December 31, 2020
Fair ValueFair Value
(dollars in thousands)NotionalAssets (1)Liabilities (2)NotionalAssets (1)Liabilities (2)
Interest rate lock commitments$188,963 $4,472 $— $224,719 $9,375 $— 
Forward mortgage loan contracts215,238 1,305 — 261,027 — 2,335 
Customer interest rate swaps2,384,213 65,882 7,202 2,008,149 113,300 133 
Counterparty interest rate swaps (3)2,384,213 453 9,438 2,008,149 — 13,543 
Customer foreign currency forward contracts15,861 402 — 9,990 324 — 
Counterparty foreign currency forward contracts15,724 — 301 9,854 — 188 
Total$72,514 $16,941 $122,999 $16,199 
(1)Derivative assets are included in other assets on the balance sheet.
(2)Derivative liabilities are included in other liabilities on the balance sheet.
(3)The fair values of certain counterparty interest rate swaps are zero due to the settlement of centrally-cleared variation margin rules.  The net adjustment was $50.1 million as of September 30, 2021 and $100.4 million as of December 31, 2020.
The effect of derivatives not designated as hedging instruments on the consolidated statements of income were as follows:
Three Months Ended
September 30,
(dollars in thousands) 20212020
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)$46 $5 
Mortgage contractsMortgage banking revenue1,054 (2,811)
Foreign currency contractsOther income/(expense)3 49 
Total $1,103 $(2,757)
  Nine Months Ended
September 30,
 20212020
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)$356 $(582)
Mortgage contractsMortgage banking revenue(1,262)9,244 
Foreign currency contractsOther income/(expense)(46)25 
Total $(952)$8,687 
(1)Includes the valuation differences between the customer and offsetting swaps.