Investment Securities

6 Months Ended

Jun. 30, 2022

Investments, Debt and Equity Securities [Abstract]

INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolios and the corresponding amounts of gross unrealized gains, unrealized losses, and basis adjustments in accumulated other comprehensive income (loss) and gross unrecognized gains and losses. The Company held no securities classified as held-to-maturity as of December 31, 2021.


(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Basis Adjustments (1)		Fair Value
June 30, 2022
Available-for-Sale
U.S. Treasury	$	441,846	$	9	$	(7,739)	$	(31,333)	$	402,783
U.S. government-sponsored entities and agencies	1,442,261		1		(123,234)		(76,471)		1,242,557
Mortgage-backed securities - Agency	5,227,908		794		(400,994)		—		4,827,708
States and political subdivisions	740,026		4,132		(24,117)		—		720,041
Pooled trust preferred securities	13,768		—		(2,667)		—		11,101
Other securities	384,417		176		(21,082)		—		363,511
Total available-for-sale securities	$	8,250,226	$	5,112	$	(579,833)	$	(107,804)	$	7,567,701

Held-to-Maturity
U.S. government-sponsored entities and agencies	$	815,833	$	—	$	(95,398)	$	—	$	720,435
Mortgage-backed securities - Agency	1,149,212		170		(59,940)		—		1,089,442
States and political subdivisions	1,119,292		69		(149,797)		—		969,564

Allowance for securities held-to-maturity	(151)		—		—		—		(151)
Total held-to-maturity securities	$	3,084,186	$	239	$	(305,135)	$	—	$	2,779,290

December 31, 2021
Available-for-Sale
U.S. Treasury	$	234,555	$	1,233	$	(7,751)	$	7,547	$	235,584
U.S. government-sponsored entities and agencies	1,575,994		7,354		(37,014)		(3,561)		1,542,773
Mortgage-backed securities - Agency	3,737,484		27,421		(66,074)		—		3,698,831
States and political subdivisions	1,587,172		69,696		(1,882)		—		1,654,986
Pooled trust preferred securities	13,756		—		(4,260)		—		9,496
Other securities	235,072		6,578		(1,254)		—		240,396
Total available-for-sale securities	$	7,384,033	$	112,282	$	(118,235)	$	3,986	$	7,382,066

(1) Basis adjustments represent the cumulative fair value adjustments included in the carrying amounts of fixed-rate investment securities assets in fair value hedging arrangements.

During the six months ended June 30, 2022, U.S government-sponsored entities and agencies, agency mortgage-backed securities, and state and political subdivision securities with a fair value of $3.0 billion were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. The $125.2 million unrealized holding loss, net of tax, at the date of transfer will continue to be reported as a separate component of shareholders’ equity and is being amortized over the remaining term of the securities as an adjustment to yield. The corresponding discount on these securities will offset this adjustment to yield as it is amortized.

Proceeds from sales or calls of available-for-sale investment securities and the resulting realized gains and realized losses were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2022		2021		2022		2021
Proceeds from sales of available-for-sale securities	$	1,903	$	15,247	$	12,742	$	67,715
Proceeds from calls of available-for-sale securities	21,331		46,750		60,605		56,995
Total	$	23,234	$	61,997	$	73,347	$	124,710

Realized gains on sales of available-for-sale securities	$	5	$	736	$	344	$	2,736
Realized gains on calls of available-for-sale securities	43		48		167		61
Realized losses on sales of available-for-sale securities	(52)		(85)		(147)		(85)
Realized losses on calls of available-for-sale securities	(81)		(7)		(107)		(27)
Debt securities gains (losses), net	$	(85)	$	692	$	257	$	2,685

Substantially all of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities. The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yield is based on amortized cost.


	June 30, 2022
(dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield
Maturity
Available-for-Sale
Within one year	$	315,154	$	314,532	1.11	%
One to five years	1,731,888		1,662,131		2.56
Five to ten years	4,076,303		3,738,698		2.30
Beyond ten years	2,126,881		1,852,340		2.43
Total	$	8,250,226	$	7,567,701	2.34	%
Held-to-Maturity
Within one year	$	100	$	100	2.47	%
One to five years	70,765		68,860		3.72
Five to ten years	987,729		934,946		2.75
Beyond ten years	2,025,592		1,775,384		2.76
Total	$	3,084,186	$	2,779,290	2.78	%

The following table summarizes the available-for-sale investment securities with unrealized losses for which an allowance for credit losses has not been recorded by aggregated major security type and length of time in a continuous unrealized loss position:


	Less than 12 months				12 months or longer				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2022
Available-for-Sale
U.S. Treasury	$	400,802	$	(7,739)	$	—	$	—	$	400,802	$	(7,739)
U.S. government-sponsored entities and agencies	803,249		(27,407)		437,307		(95,827)		1,240,556		(123,234)
Mortgage-backed securities - Agency	4,149,631		(311,841)		509,634		(89,153)		4,659,265		(400,994)
States and political subdivisions	372,074		(24,117)		—		—		372,074		(24,117)
Pooled trust preferred securities	—		—		11,102		(2,667)		11,102		(2,667)
Other securities	301,443		(18,960)		32,799		(2,122)		334,242		(21,082)
Total available-for-sale	$	6,027,199	$	(390,064)	$	990,842	$	(189,769)	$	7,018,041	$	(579,833)

December 31, 2021
Available-for-Sale
U.S. Treasury	$	91,063	$	(7,751)	$	—	$	—	$	91,063	$	(7,751)
U.S. government-sponsored entities and agencies	1,032,566		(21,167)		312,949		(15,847)		1,345,515		(37,014)
Mortgage-backed securities - Agency	2,415,923		(59,277)		163,685		(6,797)		2,579,608		(66,074)
States and political subdivisions	178,570		(1,849)		2,729		(33)		181,299		(1,882)
Pooled trust preferred securities	—		—		9,496		(4,260)		9,496		(4,260)
Other securities	56,976		(943)		21,133		(311)		78,109		(1,254)
Total available-for-sale	$	3,775,098	$	(90,987)	$	509,992	$	(27,248)	$	4,285,090	$	(118,235)

The following table summarizes the held-to-maturity investment securities with unrecognized losses aggregated by major security type and length of time in a continuous loss position:


	Less than 12 months				12 months or longer				Total
(dollars in thousands)	Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses
June 30, 2022
Held-to-Maturity
U.S. government-sponsored entities and agencies	$	529,507	$	(69,932)	$	190,927	$	(25,466)	$	720,434	$	(95,398)
Mortgage-backed securities - Agency	649,804		(47,157)		419,930		(12,783)		1,069,734		(59,940)
States and political subdivisions	929,474		(143,443)		31,684		(6,354)		961,158		(149,797)
Total held-to-maturity	$	2,108,785	$	(260,532)	$	642,541	$	(44,603)	$	2,751,326	$	(305,135)

The unrecognized losses on held-to-maturity investment securities presented in the table above include unrecognized losses on securities that were transferred from available-for-sale to held-for-maturity totaling $161.5 million at June 30, 2022.

Available-for-sale securities in unrealized loss positions are evaluated at least quarterly to determine if a decline in fair value should be recorded through income or other comprehensive income. For available-for sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security, before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for sale securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair

value of the security is less than its amortized cost basis. Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was needed at June 30, 2022 or December 31, 2021.

An allowance on held-to-maturity debt securities is maintained for certain municipal bonds to account for expected lifetime credit losses. Substantially all of the U.S. government-sponsored entities and agencies and agency mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. The allowance for credit losses on held-to-maturity debt securities was $0.2 million at June 30, 2022.

Accrued interest receivable on the securities portfolio is excluded from the estimate of credit losses and totaled $50.9 million at June 30, 2022 and $35.5 million at December 31, 2021.

At June 30, 2022, Old National’s securities portfolio consisted of 3,232 securities, 2,679 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. Treasury, U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates and temporary market movements. Old National’s pooled trust preferred securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. At June 30, 2022, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.

Old National’s pooled trust preferred securities have experienced credit defaults. However, we believe that the value of the instruments lies in the full and timely interest payments that will be received through maturity, the steady amortization that will be experienced until maturity, and the full return of principal by the final maturity of the collateralized debt obligations. Old National did not recognize any losses on these securities for the six months ended June 30, 2022 or 2021.

Equity Securities

Old National’s equity securities with readily determinable fair values totaled $55.9 million at June 30, 2022 and $13.2 million at December 31, 2021. There were losses on equity securities of $2.4 million during the three months ended June 30, 2022 and losses of $4.2 million during the six months ended June 30, 2022, compared to gains of $0.2 million during the three months ended June 30, 2021 and gains of $0.7 million during the six months ended June 30, 2021.

Alternative Investments

Old National has alternative investments without readily determinable fair values that are included in other assets totaling $265.7 million at June 30, 2022, consisting of $143.0 million of illiquid investments of partnerships, limited liability companies, and other ownership interests that support affordable housing and $122.7 million of economic development and community revitalization initiatives in low-to-moderate income neighborhoods. These alternative investments totaled $186.0 million at December 31, 2021. There have been no impairments or adjustments on equity securities without readily determinable fair values, except for amortization of tax credit investments in the six months ended June 30, 2022 and 2021. See Note 11 to the consolidated financial statements for detail regarding these investments.