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Derivative Financial Instruments | 6 Months Ended
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Jun. 30, 2023
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. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. Old National’s exposure is limited to the termination 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 Designated as Hedges Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner: Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income (loss). 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 $250.0 million notional amount at June 30, 2023 and $150.0 million notional amount at December 31, 2022. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $1.4 billion notional amount at June 30, 2023 and $1.9 billion notional amount at December 31, 2022. 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 $700.0 million notional amount at June 30, 2023 and $300.0 million notional amount at December 31, 2022. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $910.0 million notional amount at both June 30, 2023 and December 31, 2022. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms. The following table summarizes Old National’s derivatives designated as hedges:
| June 30, 2023 |  | December 31, 2022
|  |  | Fair Value |  |  |  | Fair Value
(dollars in thousands) | Notional |  | Assets (1) |  | Liabilities (2) |  | Notional |  | Assets (1) |  | Liabilities (2)
Cash flow hedges |  |  |  |  |  |  |  |  |  |  |
Interest rate collars and floors on loan pools | $ | 1,400,000 |  |  | $ | 2,169 |  |  | $ | 15,563 |  |  | $ | 1,900,000 |  |  | $ | 11,764 |  |  | $ | 47,859 |
Interest rate swaps on borrowings (3)(4) | 250,000 |  |  | — |  |  | — |  |  | 150,000 |  |  | — |  |  | — |
Fair value hedges |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps on investment securities (3) | 909,957 |  |  | — |  |  | — |  |  | 909,957 |  |  | — |  |  | — |
Interest rate swaps on borrowings (3) | 700,000 |  |  | — |  |  | — |  |  | 300,000 |  |  | — |  |  | — |
Total |  |  | $ | 2,169 |  |  | $ | 15,563 |  |  |  |  | $ | 11,764 |  |  | $ | 47,859 |
(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. (4)Gross totals include maturing LIBOR and replacement SOFR interest rate swaps executed as part of reference rate reform. 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 June 30, 2023 |  |  |  |  |  |
Interest rate contracts | Interest income/(expense) | $ | (11,101) |  | Fixed-rate debt |  | Interest income/(expense) | $ | 10,956 |
Interest rate contracts | Interest income/(expense) | 24,846 |  | Fixed-rate investment securities |  | Interest income/(expense) | (24,867) |
Total |  | $ | 13,745 |  |  |  |  | $ | (13,911) |
Three Months Ended June 30, 2022 |  |  |  |  |  |
Interest rate contracts | Interest income/(expense) | $ | (2,524) |  | Fixed-rate debt |  | Interest income/(expense) | $ | 2,600 |
Interest rate contracts | Interest income/(expense) | 53,779 |  | Fixed-rate investment securities |  | Interest income/(expense) | (53,762) |
Total |  | $ | 51,255 |  |  |  |  | $ | (51,162) |
Six Months Ended June 30, 2023 |  |  |  |  |  |
Interest rate contracts | Interest income/(expense) | $ | (8,948) |  | Fixed-rate debt |  | Interest income/(expense) | $ | 8,738 |
Interest rate contracts | Interest income/(expense) | (38,269) |  | Fixed-rate investment securities |  | Interest income/(expense) | 38,384 |
Total |  | $ | (47,217) |  |  |  |  | $ | 47,122 |
Six Months Ended June 30, 2022 |  |  |  |  |  |
Interest rate contracts | Interest income/(expense) | $ | (7,357) |  | Fixed-rate debt |  | Interest income/(expense) | $ | 7,555 |
Interest rate contracts | Interest income/(expense) | 111,433 |  | Fixed-rate investment securities |  | Interest income/(expense) | (111,791) |
Total |  | $ | 104,076 |  |  |  |  | $ | (104,236) |
The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income were as follows:
|  | Three Months Ended June 30, | Three Months Ended June 30,
(dollars in thousands) |  | 2023 |  | 2022 | 2023 |  | 2022
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 contracts | Interest income/(expense) | $ | 13,272 |  |  | $ | (3,418) |  | $ | 31,078 |  |  | $ | 219 |
|  | Six Months Ended June 30, | Six Months Ended June 30,
|  | 2023 |  | 2022 | 2023 |  | 2022
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 contracts | Interest income/(expense) | $ | 19,875 |  |  | $ | (12,924) |  | $ | 23,441 |  |  | $ | 888 |
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 $5.6 million will be reclassified to interest income and $8.9 million will be reclassified to interest expense. Derivatives Not Designated as Hedges 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 June 30, 2023, the notional amounts of the interest rate lock commitments were $45.2 million and forward commitments were $61.1 million. At December 31, 2022, the notional amounts of the interest rate lock commitments were $21.4 million and forward commitments were $30.3 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 clients. At June 30, 2023, the notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $5.6 billion and $8.2 billion, respectively. Derivative instruments as of June 30, 2023 include maturing LIBOR derivative instruments as well as replacement derivative instruments tied to SOFR executed as part of the reference rate reform. The total notional amounts of these replacement derivative instruments were $2.6 billion as of June 30, 2023. Remaining derivative instruments referencing LIBOR will mature after June 30, 2023. At December 31, 2022, customer derivative instruments and offsetting counterparty derivative instruments were $5.2 billion. 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 clients 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 clients. Old National does not designate these foreign currency forward contracts for hedge accounting treatment. The following table summarizes Old National’s derivatives not designated as hedges:
| June 30, 2023 |  | December 31, 2022
|  |  | Fair Value |  |  |  | Fair Value
(dollars in thousands) | Notional |  | Assets (1) |  | Liabilities (2) |  | Notional |  | Assets (1) |  | Liabilities (2)
Interest rate lock commitments | $ | 45,216 |  |  | $ | 330 |  |  | $ | — |  |  | $ | 21,401 |  |  | $ | 93 |  |  | $ | — |
Forward mortgage loan contracts | 61,084 |  |  | 164 |  |  | — |  |  | 30,330 |  |  | 32 |  |  | — |
Customer interest rate swaps (4) | 5,589,059 |  |  | 5,621 |  |  | 318,890 |  |  | 5,220,363 |  |  | 5,676 |  |  | 326,924 |
Counterparty interest rate swaps (3)(4) | 8,206,655 |  |  | 175,581 |  |  | 5,662 |  |  | 5,220,363 |  |  | 151,111 |  |  | 5,711 |
Customer foreign currency forward contracts | 12,851 |  |  | 441 |  |  | 22 |  |  | 8,341 |  |  | 253 |  |  | 42 |
Counterparty foreign currency forward contracts | 12,894 |  |  | 18 |  |  | 262 |  |  | 8,297 |  |  | 72 |  |  | 168 |
Total |  |  | $ | 182,155 |  |  | $ | 324,836 |  |  |  |  | $ | 157,237 |  |  | $ | 332,845 |
(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. (4)Gross totals include maturing LIBOR and replacement SOFR interest rate swaps executed as part of reference rate reform. The effect of derivatives not designated as hedging instruments on the consolidated statements of income were as follows:
|  | Three Months Ended June 30,
(dollars in thousands) |  | 2023 |  | 2022
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) | $ | 837 |  |  | $ | 449 |
Mortgage contracts | Mortgage banking revenue | 262 |  |  | (1,503) |
Foreign currency contracts | Other income/(expense) | (12) |  |  | 65 |
Total |  | $ | 1,087 |  |  | $ | (989) |
|  | Six Months Ended June 30,
|  | 2023 |  | 2022
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) | $ | 699 |  |  | $ | 950 |
Mortgage contracts | Mortgage banking revenue | 369 |  |  | (1,374) |
Foreign currency contracts | Other income/(expense) | (13) |  |  | 38 |
Total |  | $ | 1,055 |  |  | $ | (386) |
(1)Includes the valuation differences between the customer and offsetting swaps.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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