~~0000707179 onb:ResidentialLoansHeldForSaleMember 2018-12-31~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑
☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~

March 31, 2020

☐
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 1-15817

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

~~INDIANA~~

~~35-1539838~~

INDIANA

35-1539838

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

One Main Street

~~Evansville, Indiana~~

47708

Evansville,

Indiana

(Zip Code)

(Address of principal executive offices)

~~(Zip Code)~~

(800) 731-2265

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

~~Trading~~

~~Symbol(s)~~

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, No Par Value

~~ONB~~

ONB

The

NASDAQ

Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (s232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock. The registrant has one class of common stock (no par value) with ~~170,031,000~~165,109,000 shares outstanding at ~~September 30, 2019.~~

March 31, 2020.

OLD NATIONAL BANCORP

FORM 10-Q

TABLE OF CONTENTS

~~Page~~

~~PART I.~~

~~FINANCIAL INFORMATION~~

Page

~~Item 1.~~

PART I.

FINANCIAL INFORMATION

~~Financial Statements~~

Item 1.

Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Income (unaudited)

Consolidated Statements of Comprehensive Income (unaudited)

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

Consolidated Statements of Cash Flows (unaudited)

Notes to Consolidated Financial Statements (unaudited)

Note 1.

Basis of Presentation

Note 2.

Recent Accounting Pronouncements

Note 3.

~~Acquisition and Divestiture Activity~~

~~Note 4.~~

Net Income Per Share

Note 4.

~~Note 5.~~

Investment Securities

Note 5.

~~Note 6.~~

Loans Held for Sale

Note 6.

~~Note 7.~~

Loans and Allowance for ~~Loan~~Credit Losses

Note 7.

~~Note 8.~~

Other Real Estate Owned

Note 8.

~~Note 9.~~

Premises and Equipment

Note 9.

Leases

~~Note 10.~~

~~Leases~~33

Note 10.

~~Note 11.~~

Goodwill and Other Intangible Assets

Note 11.

~~Note 12.~~

Loan Servicing Rights

Note 12.

~~Note 13.~~

Qualified Affordable Housing Projects and Other Tax Credit Investments

Note 13.

~~Note 14.~~

Securities Sold Under Agreements to Repurchase

Note 14.

~~Note 15.~~

Federal Home Loan Bank Advances

Note 15.

~~Note 16.~~

Other Borrowings

Note 16.

~~Note 17.~~

Accumulated Other Comprehensive Income (Loss)

Note 17.

~~Note 18.~~

Share-Based Compensation

Note 18.

~~Note 19.~~

Income Taxes

Note 19.

~~Note 20.~~

Derivative Financial Instruments

Note 20.

~~Note 21.~~

Commitments and Contingencies

Note 21.

~~Note 22.~~

Financial Guarantees

Note 22.

~~Note 23.~~

Segment Information

Note 23.

~~Note 24.~~

Fair Value

Note 24.

~~Note 25.~~

Revenue from Contracts with Customers

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Highlights

Non-GAAP Financial Measures

Executive Summary

Results of Operations

Financial Condition

Risk Management

Off-Balance Sheet Arrangements

Contractual Obligations

Critical Accounting Policies and Estimates

Forward-Looking Statements

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II.

OTHER INFORMATION

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 5.

Item 6.

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

As used in this report, references to “Old National,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Old National Bancorp and its wholly-owned affiliates. Old National Bancorp refers solely to the parent holding company, and Old National Bank refers to Old National’s bank subsidiary.

The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer to this page as you read this report.

Anchor (MN): Anchor Bancorp, Inc.

Anchor (WI): Anchor BanCorp Wisconsin Inc.

AOCI: accumulated other comprehensive income (loss)

AQR: asset quality rating

ASC: Accounting Standards Codification

ASU: Accounting Standards Update

ATM: automated teller machine

BBCC:business banking credit center (small business)

CECL:current expected credit loss

Common Stock: Old National Bancorp common stock, without par value

~~CReED: Indiana Community Revitalization Enhancement District Tax Credit~~

COVID-19: Novel coronavirus originating in Wuhan, China in December 2019

DTI: debt-to-income

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

FHLB: Federal Home Loan Bank

FHTC: Federal Historic Tax Credit

FICO: Fair Isaac Corporation

GAAP: U.S. generally accepted accounting principles

Klein: Klein Financial, Inc.

LGD: loss given default

LIBOR: London Interbank Offered Rate

LIHTC: Low Income Housing Tax Credit

LTV: loan-to-value

N/A: not applicable

N/M: not meaningful

NASDAQ: The NASDAQ Stock Market LLC

NOW: negotiable order of withdrawal

OCC: Office of the Comptroller of the Currency

OTTI: other-than-temporary impairment

PCD:purchased with credit deterioration

PCI: purchased credit impaired

PD: probability of default

PSA: prepayment speed assumptions

Renewable Energy: investment tax credits for solar projects

SBA: Small Business Administration

SEC: Securities and Exchange Commission

SOFR:Secured Overnight Financing Rate

TBA: to be announced

TDR: troubled debt restructuring

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,			September 30,
(dollars and shares in thousands, except per share data)		2019			2018			2018		(dollars and shares in thousands, except per share data)	March 31, 2020		December 31, 2019
	(unaudited)						(unaudited)				(unaudited)
Assets										Assets
Cash and due from banks	$	320,822		$	284,003		$	215,024		Cash and due from banks	$	203,533	$	234,766
Money market and other interest-earning investments		99,428			33,162			71,737		Money market and other interest-earning investments	139,644		41,571
Total cash and cash equivalents		420,250			317,165			286,761		Total cash and cash equivalents	343,177		276,337
Equity securities		6,562			5,582			5,828		Equity securities	6,870		6,842
Investment securities - available-for-sale, at fair value:										Investment securities - available-for-sale, at fair value:
U.S. Treasury		5,494			5,301			5,237		U.S. Treasury	11,733		17,682
U.S. government-sponsored entities and agencies		486,104			628,151			611,696		U.S. government-sponsored entities and agencies	519,171		592,984
Mortgage-backed securities		3,136,180			2,209,295			1,508,692		Mortgage-backed securities	3,210,000		3,183,861
States and political subdivisions		969,475			940,429			792,666		States and political subdivisions	1,302,395		1,275,643
Other securities		319,726			340,240			354,165		Other securities	316,726		314,921
Total investment securities - available-for-sale		4,916,979			4,123,416			3,272,456		Total investment securities - available-for-sale	5,360,025		5,385,091
Investment securities - held-to-maturity, at amortized cost (fair value $425,588; $506,103; and $505,566, respectively)		407,281			506,334			512,207
Federal Home Loan Bank/Federal Reserve Bank stock, at cost		164,101			142,980			136,206		Federal Home Loan Bank/Federal Reserve Bank stock, at cost	174,113		164,099
Loans held for sale, at fair value		58,285			14,911			21,384		Loans held for sale, at fair value	54,209		46,898
Loans:										Loans:
Commercial		2,950,559			3,232,970			2,949,277		Commercial	3,046,579		2,890,296
Commercial real estate		5,112,123			4,958,851			4,481,554		Commercial real estate	5,283,464		5,166,792
Residential real estate		2,236,623			2,248,404			2,166,203		Residential real estate	2,327,851		2,334,289
Consumer credit, net of unearned income		1,718,343			1,803,667			1,695,625		Consumer credit, net of unearned income	1,726,718		1,726,147
Total loans		12,017,648			12,243,892			11,292,659		Total loans	12,384,612		12,117,524
Allowance for loan losses		(56,910	)		(55,461	)		(52,713	)
Allowance for loan losses (1)										Allowance for loan losses (1)	(106,380)		(54,619)
Net loans		11,960,738			12,188,431			11,239,946		Net loans	12,278,232		12,062,905
Premises and equipment, net		492,065			485,912			450,253		Premises and equipment, net	462,364		490,925
Operating lease right-of-use assets		102,976			—			—		Operating lease right-of-use assets	86,819		95,477
Accrued interest receivable		80,747			89,464			78,493		Accrued interest receivable	77,810		85,123
Goodwill		1,036,994			1,036,258			828,804		Goodwill	1,036,994		1,036,994
Other intangible assets		64,051			77,016			42,134		Other intangible assets	56,329		60,105
Company-owned life insurance		447,110			444,224			405,245		Company-owned life insurance	450,148		448,967
Net deferred tax assets		26,523			87,048			94,667		Net deferred tax assets	17,576		29,705
Loan servicing rights		24,623			24,497			24,336		Loan servicing rights	24,132		25,368
Other assets		229,503			185,197			169,039		Other assets	312,343		196,831
Total assets	$	20,438,788		$	19,728,435		$	17,567,759		Total assets	$	20,741,141	$	20,411,667

Liabilities										Liabilities
Deposits:										Deposits:
Noninterest-bearing demand	$	3,996,264		$	3,965,380		$	3,588,370		Noninterest-bearing demand	$	4,058,559	$	4,042,286
Interest-bearing:										Interest-bearing:
Checking and NOW		3,936,318			3,788,339			3,011,544		Checking and NOW	4,105,006		4,149,639
Savings		2,863,718			2,944,092			2,920,712		Savings	2,853,305		2,845,423
Money market		1,821,989			1,627,882			1,185,439		Money market	1,746,798		1,833,819
Time		1,830,063			2,024,256			1,892,135		Time	1,541,694		1,682,230
Total deposits		14,448,352			14,349,949			12,598,200		Total deposits	14,305,362		14,553,397
Federal funds purchased and interbank borrowings		240,589			270,135			450,031		Federal funds purchased and interbank borrowings	560,770		350,414
Securities sold under agreements to repurchase		337,551			362,294			319,831		Securities sold under agreements to repurchase	318,067		327,782
Federal Home Loan Bank advances		2,001,960			1,613,481			1,554,515		Federal Home Loan Bank advances	2,130,263		1,822,847
Other borrowings		251,763			247,883			251,662		Other borrowings	236,114		243,685
Operating lease liabilities		107,272			—			—		Operating lease liabilities	95,830		99,500
Accrued expenses and other liabilities		218,771			195,123			172,840		Accrued expenses and other liabilities	271,300		161,589
Total liabilities		17,606,258			17,038,865			15,347,079		Total liabilities	17,917,706		17,559,214
Shareholders' Equity										Shareholders' Equity
Preferred stock, 2,000 shares authorized, 0 shares issued or outstanding		—			—			—		Preferred stock, 2,000 shares authorized, 0 shares issued or outstanding	—		—
Common stock, $1.00 per share stated value, 300,000 shares authorized, 170,031; 175,141; and 152,352 shares issued and outstanding, respectively		170,031			175,141			152,352
Common stock, $1.00 per share stated value, 300,000 shares authorized, 165,109 and 169,616 shares issued and outstanding, respectively										Common stock, $1.00 per share stated value, 300,000 shares authorized, 165,109 and 169,616 shares issued and outstanding, respectively	165,109		169,616
Capital surplus		1,948,808			2,031,695			1,645,111		Capital surplus	1,870,260		1,944,445
Retained earnings		655,177			527,684			503,147		Retained earnings	649,909		682,185
Accumulated other comprehensive income (loss), net of tax		58,514			(44,950	)		(79,930	)	Accumulated other comprehensive income (loss), net of tax	138,157		56,207
Total shareholders' equity		2,832,530			2,689,570			2,220,680		Total shareholders' equity	2,823,435		2,852,453
Total liabilities and shareholders' equity	$	20,438,788		$	19,728,435		$	17,567,759		Total liabilities and shareholders' equity	$	20,741,141	$	20,411,667

(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Three Months Ended March 31,
(dollars and shares in thousands, except per share data)		2019		2018		2019		2018	(dollars and shares in thousands, except per share data)	2020			2019
Interest Income									Interest Income
Loans including fees:									Loans including fees:
Taxable	$	145,417	$	125,468	$	432,642	$	368,467	Taxable	$	128,727		$	138,972
Nontaxable		3,905		4,075		12,114		11,933	Nontaxable	3,625			4,223
Investment securities:									Investment securities:
Taxable		28,884		19,391		86,162		56,562	Taxable	27,356			28,037
Nontaxable		7,119		6,295		21,776		19,502	Nontaxable	7,942			7,408
Money market and other interest-earning investments		528		140		1,140		347	Money market and other interest-earning investments	349			278
Total interest income		185,853		155,369		553,834		456,811	Total interest income	167,999			178,918
Interest Expense									Interest Expense
Deposits		18,707		11,189		53,670		27,583	Deposits	12,298			16,444
Federal funds purchased and interbank borrowings		1,484		1,191		5,219		2,855	Federal funds purchased and interbank borrowings	1,240			1,918
Securities sold under agreements to repurchase		715		535		2,048		1,328	Securities sold under agreements to repurchase	384			662
Federal Home Loan Bank advances		9,123		8,880		29,093		25,484	Federal Home Loan Bank advances	7,768			9,931
Other borrowings		2,728		2,732		8,430		8,184	Other borrowings	2,538			2,915
Total interest expense		32,757		24,527		98,460		65,434	Total interest expense	24,228			31,870
Net interest income		153,096		130,842		455,374		391,377	Net interest income	143,771			147,048
Provision for loan losses(1)		1,437		750		3,483		3,576	16,950			1,043
Net interest income after provision for loan losses		151,659		130,092		451,891		387,801	Net interest income after provision for loan losses	126,821			146,005
Noninterest Income									Noninterest Income
Wealth management fees		9,160		9,022		27,604		27,794	Wealth management fees	8,884			8,535
Service charges on deposit accounts		11,860		11,028		34,201		32,552	Service charges on deposit accounts	10,077			10,826
Debit card and ATM fees		5,370		4,706		16,292		14,651	Debit card and ATM fees	4,998			5,503
Mortgage banking revenue		8,850		4,348		20,996		13,729	Mortgage banking revenue	11,119			5,011
Investment product fees		5,244		5,073		16,106		15,170	Investment product fees	5,874			5,271
Capital markets income		4,560		2,700		10,227		4,094	Capital markets income	4,328			2,517
Company-owned life insurance		2,703		2,958		8,602		7,993	Company-owned life insurance	3,080			3,188
Net debt securities gains (losses)		424		135		1,486		2,417
Debt securities gains (losses), net									Debt securities gains (losses), net	5,174			(103)
Other income		5,790		5,987		16,077		18,751	Other income	3,968			5,668
Total noninterest income		53,961		45,957		151,591		137,151	Total noninterest income	57,502			46,416
Noninterest Expense									Noninterest Expense
Salaries and employee benefits		71,729		63,158		214,478		193,929	Salaries and employee benefits	79,173			71,183
Occupancy		11,934		12,578		41,071		38,731	Occupancy	15,133			14,578
Equipment		3,954		3,652		12,945		10,945	Equipment	5,305			4,474
Marketing		4,105		3,406		12,267		11,065	Marketing	3,097			3,723
Data processing		8,961		8,628		28,509		26,752	Data processing	9,467			9,341
Communication		2,349		2,473		8,252		8,309	Communication	2,798			3,054
Professional fees		5,037		3,235		12,868		8,888	Professional fees	4,293			2,910
Loan expenses		1,811		1,564		5,380		5,151	Loan expenses	1,771			1,912
FDIC assessment		960		2,722		4,501		8,528	FDIC assessment	1,609			2,087
Amortization of intangibles		4,168		3,283		12,965		10,308	Amortization of intangibles	3,776			4,472
Amortization of tax credit investments		1,211		9,233		2,039		21,807	Amortization of tax credit investments	5,515			260
Other expense		6,366		5,444		18,469		22,580	Other expense	26,807			5,047
Total noninterest expense		122,585		119,376		373,744		366,993	Total noninterest expense	158,744			123,041
Income before income taxes		83,035		56,673		229,738		157,959	Income before income taxes	25,579			69,380
Income tax expense		13,254		5,325		40,717		14,627	Income tax expense	2,939			13,104
Net income	$	69,781	$	51,348	$	189,021	$	143,332	Net income	$	22,640		$	56,276
Net income per common share - basic	$	0.41	$	0.34	$	1.10	$	0.95	Net income per common share - basic	$	0.13		$	0.32
Net income per common share - diluted		0.41		0.34		1.09		0.94	Net income per common share - diluted	0.13			0.32
Weighted average number of common shares outstanding - basic		170,746		151,930		172,807		151,844	Weighted average number of common shares outstanding - basic	167,748			174,734
Weighted average number of common shares outstanding - diluted		171,551		152,784		173,527		152,616	Weighted average number of common shares outstanding - diluted	168,404			175,368
Dividends per common share	$	0.13	$	0.13	$	0.39	$	0.39	Dividends per common share	$	0.14		$	0.13

(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,							Three Months Ended March 31,
(dollars in thousands)		2019			2018			2019			2018		(dollars in thousands)	2020		2019
Net income	$	69,781		$	51,348		$	189,021		$	143,332		Net income	$	22,640	$	56,276

Other comprehensive income (loss):													Other comprehensive income (loss):

Change in debt securities available-for-sale:													Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period		19,567			(18,159	)		133,081			(51,280	)	Unrealized holding gains (losses) for the period	103,954		62,265
Reclassification for securities transferred to held-to-maturity		—			—			—			14,007

Reclassification adjustment for securities (gains) losses realized in income		(424	)		(135	)		(1,486	)		(2,417	)	Reclassification adjustment for securities (gains) losses realized in income	(5,174)		103
Income tax effect		(3,602	)		4,188			(30,005	)		9,368		Income tax effect	(22,411)		(14,578)
Unrealized gains (losses) on available-for-sale debt securities		15,541			(14,106	)		101,590			(30,322	)	Unrealized gains (losses) on available-for-sale debt securities	76,369		47,790

Change in securities held-to-maturity:													Change in securities held-to-maturity:
Adjustment for securities transferred to available-for-sale		—			—			—			19,412
Adjustment for securities transferred from available-for-sale		—			—			—			(14,007	)

Amortization of unrealized losses on securities transferred from available-for-sale		1,384			628			2,405			1,740		Amortization of unrealized losses on securities transferred from available-for-sale	—		457
Income tax effect		(392	)		(146	)		(627	)		(1,291	)	Income tax effect	—		(106)
Changes from securities held-to-maturity		992			482			1,778			5,854		Changes from securities held-to-maturity	—		351

Cash flow hedges:													Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges		(73	)		725			479			6,804		Net unrealized derivative gains (losses) on cash flow hedges	7,803		(392)
Reclassification adjustment for (gains) losses realized in net income		(21	)		(226	)		(412	)		553		Reclassification adjustment for (gains) losses realized in net income	(431)		(385)
Income tax effect		23			(122	)		(17	)		(1,805	)	Income tax effect	(1,811)		191
Changes from cash flow hedges		(71	)		377			50			5,552		Changes from cash flow hedges	5,561		(586)

Defined benefit pension plans:													Defined benefit pension plans:
Amortization of net loss recognized in income		20			27			61			81		Amortization of net loss recognized in income	27		20
Income tax effect		(5	)		(7	)		(15	)		(20	)	Income tax effect	(7)		(5)
Changes from defined benefit pension plans		15			20			46			61		Changes from defined benefit pension plans	20		15
Other comprehensive income (loss), net of tax		16,477			(13,227	)		103,464			(18,855	)	Other comprehensive income (loss), net of tax	81,950		47,570
Comprehensive income	$	86,258		$	38,121		$	292,485		$	124,477		Comprehensive income	$	104,590	$	103,846

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

										Accumulated
										Other			Total
	Common			Capital			Retained			Comprehensive			Shareholders'
(dollars in thousands, except per share data)	Stock			Surplus			Earnings			Income (Loss)			Equity			(dollars in thousands, except per share data)	Common Stock		Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders' Equity
Balance, December 31, 2017	$	152,040		$	1,639,499		$	413,130		$	(50,272	)	$	2,154,397
Balance, December 31, 2018																Balance, December 31, 2018	$	175,141	$	2,031,695	$	527,684	$	(44,950)	$	2,689,570
Cumulative effect of change in accounting principles		—			—			(4,127	)		(52	)		(4,179	)	Cumulative effect of change in accounting principles	—		—		6,322		—		6,322
Balance, January 1, 2018		152,040			1,639,499			409,003			(50,324	)		2,150,218
Reclassification of certain tax effects related to the Tax Cuts and Jobs Act of 2017		—			—			10,751			(10,751	)		—
Net income		—			—			47,983			—			47,983
Other comprehensive income (loss)		—			—			—			(451	)		(451	)
Dividends - common stock ($0.13 per share)		—			—			(19,782	)		—			(19,782	)
Common stock issued		6			99			—			—			105
Common stock repurchased		(64	)		(1,051	)		—			—			(1,115	)
Share-based compensation expense		—			1,931			—			—			1,931
Stock activity under incentive compensation plans		190			298			(259	)		—			229
Balance, March 31, 2018		152,172			1,640,776			447,696			(61,526	)		2,179,118
Net income		—			—			44,001			—			44,001
Other comprehensive income (loss)		—			—			—			(5,177	)		(5,177	)
Dividends - common stock ($0.13 per share)		—			—			(19,806	)		—			(19,806	)
Common stock issued		8			109			—			—			117
Common stock repurchased		(36	)		(598	)		—			—			(634	)
Share-based compensation expense		—			1,675			—			—			1,675
Stock activity under incentive compensation plans		207			828			(114	)		—			921
Balance, June 30, 2018		152,351			1,642,790			471,777			(66,703	)		2,200,215
Net income		—			—			51,348			—			51,348
Other comprehensive income (loss)		—			—			—			(13,227	)		(13,227	)
Dividends - common stock ($0.13 per share)		—			—			(19,806	)		—			(19,806	)
Common stock issued		8			141			—			—			149
Common stock repurchased		(2	)		(25	)		—			—			(27	)
Share-based compensation expense		—			2,023			—			—			2,023
Stock activity under incentive compensation plans		(5	)		182			(172	)		—			5
Balance, September 30, 2018	$	152,352		$	1,645,111		$	503,147		$	(79,930	)	$	2,220,680

Balance, December 31, 2018	$	175,141		$	2,031,695		$	527,684		$	(44,950	)	$	2,689,570
Cumulative effect of change in accounting principles (Note 2)		—			—			6,322			—			6,322
Balance, January 1, 2019		175,141			2,031,695			534,006			(44,950	)		2,695,892		Balance, January 1, 2019	175,141		2,031,695		534,006		(44,950)		2,695,892
Net income		—			—			56,276			—			56,276		Net income	—		—		56,276		—		56,276
Other comprehensive income (loss)		—			—			—			47,570			47,570		Other comprehensive income (loss)	—		—		—		47,570		47,570
Dividends - common stock ($0.13 per share)		—			—			(22,812	)		—			(22,812	)	Dividends - common stock ($0.13 per share)	—		—		(22,812)		—		(22,812)
Common stock issued		9			121			—			—			130		Common stock issued	9		121		—		—		130
Common stock repurchased		(1,655	)		(25,642	)		—			—			(27,297	)	Common stock repurchased	(1,655)		(25,642)		—		—		(27,297)
Share-based compensation expense		—			1,800			—			—			1,800		Share-based compensation expense	—		1,800		—		—		1,800
Stock activity under incentive compensation plans		484			(12	)		(159	)		—			313		Stock activity under incentive compensation plans	484		(12)		(159)		—		313
Balance, March 31, 2019		173,979			2,007,962			567,311			2,620			2,751,872		Balance, March 31, 2019	$	173,979	$	2,007,962	$	567,311	$	2,620	$	2,751,872

Balance, December 31, 2019																Balance, December 31, 2019	$	169,616	$	1,944,445	$	682,185	$	56,207	$	2,852,453
Cumulative effect of change in accounting principles (Note 2)																Cumulative effect of change in accounting principles (Note 2)	—		—		(31,150)		—		(31,150)
Balance, January 1, 2020																Balance, January 1, 2020	169,616		1,944,445		651,035		56,207		2,821,303
Net income		—			—			62,964			—			62,964		Net income	—		—		22,640		—		22,640
Other comprehensive income (loss)		—			—			—			39,417			39,417		Other comprehensive income (loss)	—		—		—		81,950		81,950
Dividends - common stock ($0.13 per share)		—			—			(22,476	)		—			(22,476	)
Dividends - common stock ($0.14 per share)																Dividends - common stock ($0.14 per share)	—		—		(23,535)		—		(23,535)
Common stock issued		10			138			—			—			148		Common stock issued	9		142		—		—		151
Common stock repurchased		(1,884	)		(28,961	)		—			—			(30,845	)	Common stock repurchased	(5,076)		(76,746)		—		—		(81,822)
Share-based compensation expense		—			1,946			—			—			1,946		Share-based compensation expense	—		2,748		—		—		2,748
Stock activity under incentive compensation plans		126			120			(133	)		—			113		Stock activity under incentive compensation plans	560		(329)		(231)		—		—
Balance, June 30, 2019		172,231			1,981,205			607,666			42,037			2,803,139
Net income		—			—			69,781			—			69,781
Other comprehensive income (loss)		—			—			—			16,477			16,477
Dividends - common stock ($0.13 per share)		—			—			(22,136	)		—			(22,136	)
Common stock issued		8			133			—			—			141
Common stock repurchased		(2,206	)		(34,866	)		—			—			(37,072	)
Share-based compensation expense		—			2,200			—			—			2,200
Stock activity under incentive compensation plans		(2	)		136			(134	)		—			—
Balance, September 30, 2019	$	170,031		$	1,948,808		$	655,177		$	58,514		$	2,832,530
Balance, March 31, 2020																Balance, March 31, 2020	$	165,109	$	1,870,260	$	649,909	$	138,157	$	2,823,435

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months Ended
	September 30,							Three Months Ended March 31,
(dollars in thousands)		2019			2018		(dollars in thousands)	2020		2019
Cash Flows From Operating Activities							Cash Flows From Operating Activities
Net income	$	189,021		$	143,332		Net income	$	22,640	$	56,276
Adjustments to reconcile net income to cash provided by operating activities:							Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		19,980			17,666		Depreciation	8,594		6,443
Amortization of other intangible assets		12,965			10,308		Amortization of other intangible assets	3,776		4,472
Amortization of tax credit investments		2,039			21,807		Amortization of tax credit investments	5,515		260
Net premium amortization on investment securities		13,199			11,290		Net premium amortization on investment securities	5,146		3,154
Accretion income related to acquired loans		(33,465	)		(29,525	)	Accretion income related to acquired loans	(6,649)		(8,668)
Share-based compensation expense		5,946			5,629		Share-based compensation expense	2,748		1,800
Excess tax (benefit) expense on share-based compensation		(1,057	)		416		Excess tax (benefit) expense on share-based compensation	(818)		(1,013)
Provision for loan losses		3,483			3,576		Provision for loan losses	16,950		1,043
Net debt securities (gains) losses		(1,486	)		(2,417	)
Debt securities (gains) losses, net							Debt securities (gains) losses, net	(5,174)		103
Net (gains) losses on sales of loans and other assets		(3,815	)		(215	)	Net (gains) losses on sales of loans and other assets	11,826		(1,564)
Increase in cash surrender value of company-owned life insurance		(8,602	)		(7,993	)	Increase in cash surrender value of company-owned life insurance	(3,080)		(3,188)
Residential real estate loans originated for sale		(564,457	)		(377,702	)	Residential real estate loans originated for sale	(223,961)		(94,632)
Proceeds from sales of residential real estate loans		528,739			378,849		Proceeds from sales of residential real estate loans	219,626		97,010
(Increase) decrease in interest receivable		8,717			5,112		(Increase) decrease in interest receivable	7,313		3,184
(Increase) decrease in other assets		(1,695	)		5,947		(Increase) decrease in other assets	(87,826)		13,618
Increase (decrease) in accrued expenses and other liabilities		(32,816	)		(7,866	)	Increase (decrease) in accrued expenses and other liabilities	2,242		(45,288)
Net cash flows provided by (used in) operating activities		136,696			178,214		Net cash flows provided by (used in) operating activities	(21,132)		33,010
Cash Flows From Investing Activities							Cash Flows From Investing Activities
Purchases of investment securities available-for-sale		(1,713,799	)		(446,276	)	Purchases of investment securities available-for-sale	(446,819)		(530,677)
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock		(21,142	)		(16,520	)	Purchases of Federal Home Loan Bank/Federal Reserve Bank stock	(10,025)		(14,439)
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale		810,397			316,239		Proceeds from maturities, prepayments, and calls of investment securities available-for-sale	436,742		145,356
Proceeds from sales of investment securities available-for-sale		295,615			136,648		Proceeds from sales of investment securities available-for-sale	236,410		8,681
Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity		99,913			49,520		Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity	—		21,689
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock		21			—		Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock	11		19
Proceeds from sales of equity securities		130			128		Proceeds from sales of equity securities	133		130
Proceeds from sale of student loan portfolio		—			70,674
Loan originations and payments, net		257,675			(211,199	)	Loan originations and payments, net	(262,497)		182,638
Proceeds from company-owned life insurance death benefits		5,716			6,501		Proceeds from company-owned life insurance death benefits	1,899		2,861
Proceeds from sales of premises and equipment and other assets		3,038			6,013		Proceeds from sales of premises and equipment and other assets	—		84
Purchases of premises and equipment and other assets		(31,095	)		(24,704	)	Purchases of premises and equipment and other assets	(7,938)		(11,684)
Net cash flows provided by (used in) investing activities		(293,531	)		(112,976	)	Net cash flows provided by (used in) investing activities	(52,084)		(195,342)
Cash Flows From Financing Activities							Cash Flows From Financing Activities
Net increase (decrease) in:							Net increase (decrease) in:
Deposits		98,403			(7,703	)	Deposits	(248,035)		79,321
Federal funds purchased and interbank borrowings		(29,546	)		114,998		Federal funds purchased and interbank borrowings	210,356		54,895
Securities sold under agreements to repurchase		(24,743	)		(64,979	)	Securities sold under agreements to repurchase	(9,715)		(19,814)
Other borrowings		3,744			2,427		Other borrowings	(7,339)		3,650
Payments for maturities of Federal Home Loan Bank advances		(375,999	)		(998,801	)	Payments for maturities of Federal Home Loan Bank advances	(200,005)		(325,070)
Proceeds from Federal Home Loan Bank advances		750,000			945,000		Proceeds from Federal Home Loan Bank advances	500,000		425,000
Cash dividends paid on common stock		(67,424	)		(59,394	)	Cash dividends paid on common stock	(23,535)		(22,812)
Common stock repurchased		(95,214	)		(1,776	)	Common stock repurchased	(81,822)		(27,297)
Proceeds from exercise of stock options		280			948		Proceeds from exercise of stock options	—		280
Common stock issued		419			371		Common stock issued	151		130
Net cash flows provided by (used in) financing activities		259,920			(68,909	)	Net cash flows provided by (used in) financing activities	140,056		168,283
Net increase (decrease) in cash and cash equivalents		103,085			(3,671	)	Net increase (decrease) in cash and cash equivalents	66,840		5,951
Cash and cash equivalents at beginning of period		317,165			290,432		Cash and cash equivalents at beginning of period	276,337		317,165
Cash and cash equivalents at end of period	$	420,250		$	286,761		Cash and cash equivalents at end of period	$	343,177	$	323,116
Supplemental cash flow information:							Supplemental cash flow information:
Total interest paid	$	101,224		$	65,880		Total interest paid	$	26,387	$	33,779
Total taxes paid (net of refunds)	$	2,954		$	1,681		Total taxes paid (net of refunds)	$	1,212	$	150
Investment securities purchased but not settled	$	64,924		$	2,291		Investment securities purchased but not settled	$	102,459	$	10,912
Securities transferred from held-to-maturity to available-for-sale	$	—		$	447,026
Securities transferred from available-for-sale to held-to-maturity	$	—		$	323,990

Operating lease right-of-use assets obtained in exchange for lease obligations	$	117,853		$	—		Operating lease right-of-use assets obtained in exchange for lease obligations	$	(310)	$	117,739
Finance lease right-of-use assets obtained in exchange for lease obligations	$	7,871		$	—		Finance lease right-of-use assets obtained in exchange for lease obligations	$	—	$	7,542

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of ~~September 30, 2019 and 2018,~~March 31, 2020 and December 31, ~~2018,~~2019, and the results of its operations for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Interim results do not necessarily represent annual results. These financial statements should be read in conjunction with Old National’s Annual Report for the year ended December 31, ~~2018.~~

2019.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current presentation. Such reclassifications had no effect on prior period net income or shareholders’ equity and were insignificant amounts.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in ~~2019~~

~~FASB ASC 842~~ ~~– In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02,~~ ~~Leases (Topic 842)~~. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged.

~~In July 2018, the FASB issued ASU No. 2018-10,~~ ~~Codification Improvements to Topic 842, Leases~~ ~~and ASU No. 2018-11,~~ ~~Leases (Topic 842): Targeted Improvements~~. ASU No. 2018-10 provides improvements related to ASU No. 2016-02 to increase stakeholders’ awareness of the amendments and to expedite the improvements. The amendments affect narrow aspects of the guidance issued in ASU No. 2016-02. ASU No. 2018-11 allows entities adopting ASU No. 2016-02 to choose an additional (and optional) transition method, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU No. 2018-11 also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The amendments in these updates became effective for annual periods and interim periods within those annual periods beginning after December 15, 2018.

Old National elected the optional transition method permitted by ASU No. 2018-11. Under this method, an entity shall recognize and measure leases that exist at the application date and prior comparative periods are not adjusted. In addition, Old National elected the package of practical expedients to leases that commenced before the effective date:

~~An entity need not reassess whether any expired or existing contracts contain leases.~~

2020

~~An entity need not reassess the lease classification for any expired or existing leases.~~

~~An entity need not reassess initial direct costs for any existing leases.~~

Old National also elected the practical expedient, which must be applied consistently to all leases, to use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. We also elected a practical expedient to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 contain a lease under this Topic. Both of these practical expedients may be elected separately or in conjunction with each other or the package noted above.

Based on both operating and finance leases outstanding at December 31, 2018, the impact of adoption on January 1, 2019 was recording a lease liability of $122.9 million, a right-of-use asset of $118.7 million, and a cumulative-effect adjustment of $6.3 million to increase retained earnings.

~~FASB ASC 310 –~~ ~~In March 2017, the FASB issued ASU No. 2017-08,~~ ~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities~~. This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. Concerns were raised that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. There is diversity in practice (1) in the amortization period for premiums of callable debt securities and (2) in how the potential for exercise of a call is factored into current impairment assessments. The amendments in this update became effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods and did not have a material impact on the consolidated financial statements.

~~FASB ASC 718~~ ~~– In June 2018, the FASB issued ASU No. 2018-07,~~ ~~Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.~~ The amendments in this update expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. The amendments in this update became effective for annual periods beginning after December 15, 2018, including interim periods within that fiscal year and did not have a material impact on the consolidated financial statements.

~~FASB ASC 958 –~~ ~~In June 2018, the FASB issued ASU No. 2018-08,~~ ~~Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.~~ The amendments in this update clarify and improve the scope and accounting guidance around contributions of cash and other assets received and made by not-for-profit organizations and business enterprises. The ASU clarifies and improves current guidance about whether a transfer of assets, or the reduction, settlement, or cancellation of liabilities, is a contribution or an exchange transaction. It provides criteria for determining whether the resource provider is receiving commensurate value in return for the resources transferred which, depending on the outcome, determines whether the organization follows contribution guidance or exchange transaction guidance in the revenue recognition and other applicable standards. It also provides a more robust framework for determining whether a contribution is conditional or unconditional, and for distinguishing a donor-imposed condition from a donor-imposed restriction. This is important because such classification affects the timing of contribution revenue and expense recognition. The new ASU does not apply to transfers of assets from governments to businesses. The amendments in this update became effective for a public business entity for transactions in which the entity serves as a resource recipient to annual periods beginning after June 15, 2018, including interim periods within those annual periods. The amendments in this update became effective for a public business entity for transactions in which the entity serves as a resource provider to annual periods beginning after December 15, 2018, including interim periods within those annual periods and there was no impact.

~~FASB ASC 815 –~~ ~~In October 2018, the FASB issued ASU No. 2018-16,~~ ~~Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting.~~ In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government (“UST”), the London Interbank Offered Rate (“LIBOR”) swap rate, and the Overnight Index Swap (“OIS”) Rate based on the Fed Funds Effective Rate. When the FASB issued ASU No. 2017-12, ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Rate as the fourth permissible U.S. benchmark rate.~~

The new ASU adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments in this update became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on

any new contracts entered into using new benchmark rates, as well as any existing contracts that get migrated from LIBOR to new benchmark interest rates. The Company has formed a working group who is developing a transition plan for all exposed contracts migrating from LIBOR to SOFR. The Company has identified contracts that reflect exposure associated with LIBOR-indexed financial instruments that mature beyond 2021 in an aggregate notional amount of $4.8 billion. Additionally, the working group is monitoring industry specific transition guidance around a LIBOR contract’s “fallback” language with the industry goal to minimize or eliminate value transfers resulting from the transition. The associated risks identified include dependence on third parties for critical decisions regarding SOFR index calculations, spread adjustments, term rate development, and product development, which may impact the bank’s ability to establish more detailed timelines for action.

~~Codification Updates to SEC Sections –~~ ~~In July 2019, the FASB issued ASU No. 2019-07,~~ ~~Codification Updates to SEC Sections~~, which amends certain SEC sections or paragraphs within the Accounting Standards Codification to reflect changes in SEC Final Rule Releases No. 33-10532, “Disclosure Update and Simplification,” and 33-10231 and 33-10442, “Investment Company Reporting Modernization.” Other revisions in ASU No. 2019-07 update language in the codification to match the electronic Code of Federal Regulations. The amendments became effective upon addition to the FASB Codification and there is no impact on the consolidated financial statements.

~~Accounting Guidance Issued But Not Yet Adopted~~

FASB ASC 326 – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all related subsequent amendments thereto (“CECL”). The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments within its scope, including loans held for investment purposes and other commitments to extend credit held by a reporting entity at each reporting date.The amendment requires the measurement of all expected credit losses for the in-scope financial assets ~~held~~at the date of origination or acquisition, and at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates.The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio.In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.The current expected credit loss measurement will be used to estimate the allowance for credit losses (“ACL”) over the life of the financial assets.The amendments in this update ~~become~~became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. ~~Early adoption will be permitted beginning after December 15, 2018.~~

As previously disclosed, Old National formed a ~~cross functional~~cross-functional committee to oversee the adoption of the ASU at the effective date. A working group was also formed ~~and has developed~~to develop a project plan focused on understanding the ASU, researching issues, identifying data needs for modeling inputs, technology requirements, modeling considerations, and ensuring overarching governance ~~has been~~was achieved for each objective and milestone. ~~Currently, the~~The working group ~~has~~ identified ~~seven~~7 distinct loan portfolios for which a model to estimate credit losses has been developed. For all ~~seven~~7 loan portfolios, the data sets have been identified, populated, and internally validated.Old National has completed data and model validation testing.During the ~~remainder~~last half of 2019, the project plan ~~is targeting multiple~~targeted parallel processing of our existing allowance for loan losses model compared to the CECL model, as well as model sensitivity analysis, determination of qualitative adjustments, supporting analytics, and execution of the governance and approval process.

~~Currently, our~~ Internal controls related to the CECL process were finalized prior to adoption on January 1, 2020.

The CECL modeling measurements for estimating the current expected life-time credit losses for loans and debt securities ~~(as well as certain beneficial interests classified as held-to-maturity)~~ includes the following major items:

•

~~Initial forecast – using a period of one year for all portfolio segments and off-balance-sheet credit exposures, using forward-looking economic scenarios of expected losses.~~

•Initial loss forecast – using a forecast period of one year for all allowance portfolio segments and off-balance-sheet credit exposures, using forward-looking economic scenarios of expected losses.

Historical loss forecast – for a period incorporating the remaining contractual life, adjusted for prepayments, and the changes in various economic variables during representative historical and recessionary periods.

•Historical loss forecast – for a period incorporating the remaining contractual life, adjusted for prepayments, and the changes in various economic variables during representative historical and recessionary periods.

~~Reversion period – using two years, which links the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date.~~

•Reversion period – using two years, which links the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date.

~~Discounted cash flow (“DCF”) aggregator – using the items above to estimate the life-time credit losses for all portfolios and losses for loans modified as a TDR.~~

~~During~~•Discounted cash flow aggregator – using the ~~remainder of 2019,~~ items above to estimate the life-time credit losses for all portfolios and losses for loans modified as a TDR.

Old National ~~will~~adopted CECL on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for the reporting periods after January 1, 2020 are presented under Topic 326 while prior period amounts continue ~~researching and resolving interpretive accounting issues~~to be reported in ~~the ASU, evaluating and refining processes and related controls, finalizing various related accounting policies, and reporting disclosures.~~

accordance with previously applicable GAAP. As of ~~the beginning of the first reporting period in which the new standard is effective,~~that date, Old National ~~expects to recognize a one-time cumulative effect adjustment increasing~~increased the allowance for credit losses for loans by $41.3 million and increased the allowance for credit losses for unfunded loan ~~losses,~~commitments by $4.5 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. ~~Old National currently estimates an~~The increase to the allowance for credit losses of approximately $35 million to $45 million upon adoption, which includes a range of $3 million to $8 million for off-balance sheet exposures. At this point in time, the vast majority of this increase is related to the acquired loan ~~portfolio.~~portfolio totaled $27.1 million. Under the ~~current~~previously applicable accounting guidance, any remaining unamortized loan discount on an individual loan ~~can~~could be used to offset a charge-off for that loan, so the allowance for loan losses needed for the acquired loans iswas reduced by the remaining loan discounts. The new ~~accounting under the~~ ASU removes the ability to offset a charge-off against the remaining loan discount and requires an allowance for credit losses to be recognized in addition to the loan discount. The ~~ultimate~~ impact of adopting the ASU, ~~will be~~and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and available-for-sale securities ~~portfolios, and~~portfolio, along with other management ~~judgements at the time~~judgements. As of ~~adoption. The transition~~January 1, 2020, Old National recorded a cumulative-effect adjustment of $31.2 million to decrease retained earnings.

Old National did not record ~~the~~an allowance for credit losses may fall outside of management’s estimated increase based on material changes in these dependencies, specifically the macroeconomic forecast and conditions, used in calculating the allowance for credit losses upon the adoption of CECL.

Old National does not expect a material allowance for credit losses to be recorded on held-to-maturity securities under the CECL credit impairment model, as the composition of these securities are government agency-backed securities for which the risk the risk of loss is minimal. Additionally, Old National does not expect a material allowance for credit losses to be recorded on its available-for-sale debt securities under the newly codified available-for-sale debt security impairment model, as the majority of these securities are government agency-backed securities for which the risk of loss is ~~minimal~~minimal.

We adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, we did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $4.5 million to the allowance for credit losses for loans. The remaining noncredit discount in the amount of $11.8 million (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020.

The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans.The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures.The 4 loan portfolios are classified into 7 segments of loans - commercial, commercial real estate, business banking credit center ("BBCC"), residential real estate, indirect, direct, and home equity.The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments.The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments.The composition of loans by portfolio segment as of December 31, 2019 follows:


(dollars in thousands)	December 31, 2019 Statement Balance		Segment Portfolio Reclassifications		December 31, 2019 After Reclassifications
Loans:
Commercial	$	2,890,296	$	(75,142)	$	2,815,154
Commercial real estate	5,166,792		(277,539)		4,889,253
BBCC	N/A		352,681		352,681
Residential real estate	2,334,289		—		2,334,289
Consumer	1,726,147		(1,726,147)		N/A
Indirect	N/A		935,584		935,584
Direct	N/A		228,524		228,524
Home equity	N/A		562,039		562,039
Total	$	12,117,524	$	—	$	12,117,524
Allowance:
Commercial	$	(22,585)	$	1,226	$	(21,359)
Commercial real estate	(21,588)		1,053		(20,535)
BBCC	N/A		(2,279)		(2,279)
Residential real estate	(2,299)		—		(2,299)
Consumer	(8,147)		8,147		N/A
Indirect	N/A		(5,319)		(5,319)
Direct	N/A		(1,863)		(1,863)
Home equity	N/A		(965)		(965)
Total	$	(54,619)	$	—	$	(54,619)

The following table illustrates the impact of adoption of the ASU:


(dollars in thousands)	December 31, 2019 After Reclassifications		Impact of ASC 326 Adoption		January 1, 2020 Post-ASC 326 Adoption
Assets:
Loans, net of unearned income:
Commercial	$	2,815,154	$	2,679	$	2,817,833
Commercial real estate	4,889,253		1,637		4,890,890
BBCC	352,681		33		352,714
Residential real estate	2,334,289		105		2,334,394
Indirect	935,584		10		935,594
Direct	228,524		2		228,526
Home equity	562,039		12		562,051
Total	12,117,524		4,478		12,122,002
Allowance:
Commercial	(21,359)		(7,150)		(28,509)
Commercial real estate	(20,535)		(25,548)		(46,083)
BBCC	(2,279)		(3,702)		(5,981)
Residential real estate	(2,299)		(6,986)		(9,285)
Indirect	(5,319)		1,669		(3,650)
Direct	(1,863)		1,059		(804)
Home equity	(965)		(689)		(1,654)
Total allowance for credit losses on loans	(54,619)		(41,347)		(95,966)
Net loans	$	12,062,905	$	(36,869)	$	12,026,036
Net deferred tax assets	$	29,705	$	10,268	$	39,973

Liabilities:
Allowance for credit losses on unfunded loan commitments	$	2,656	$	4,549	$	7,205

Shareholders' equity:
Retained earnings	$	682,185	$	(31,150)	$	651,035

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL.The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). Old National is ~~planning on~~ adopting the capital transition relief over the permissible ~~three-year~~five-year period.

FASB ASC 350 – In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the ~~qualitative~~quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update ~~should be adopted~~became effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is2019 and did not ~~expected to~~ have a material ~~impact.~~impact on the financial statements.

FASB ASC 820 – In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The updated guidance improves the disclosure requirements on fair value measurements. The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements; and for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy and purchases and

issues of Level 3 assets and liabilities for nonpublic entities; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update ~~become~~became effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

~~FASB ASC 715 –~~ ~~In August 2018, the FASB issued ASU No. 2018-14,~~ ~~Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans~~. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update become effective for fiscal years ending after December 15, 20202019 and ~~will~~did not have a material impact on the ~~consolidated~~ financial statements.

FASB ASC 350 – In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update ~~become~~became effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal ~~years. Early adoption is permitted. Old National is currently evaluating the~~years and did not have a material impact ~~of adopting the new guidance~~ on the ~~consolidated~~ financial statements.

FASB ASC 842 – In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. The amendments in ASU No. 2019-01 align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value in Topic 820, Fair Value Measurement should be applied. ASU No. 2019-01 also requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities. The amendments in this update ~~become~~became effective for annual periods and interim periods within those annual periods beginning after December 15, ~~2019. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is~~2019 and did not ~~expected to~~ have a material ~~impact.~~impact on the financial statements.

FASB ASC 326, 815, and 825 – In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments related to Topic 326 address accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, vintage disclosures, and contractual extensions and renewal options and ~~will become~~became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The improvements and clarifications related to Topic 815 address partial-term fair value hedges of interest-rate risk, amortization, and disclosure of fair value hedge basis adjustments and consideration of hedged contractually specified interest rate under the hypothetical method and ~~will become~~became effective for the annual reporting period beginning January 1, 2020. The amendments related to Topic 825 contain various improvements to ASU 2016-01, including scope; held-to-maturity debt securities fair value disclosures; and remeasurement of equity securities at historical exchange rates and ~~will become~~became effective for fiscal years and interim periods beginning after December 15, 2019. ~~Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is~~The amendments in this update did not ~~expected to~~ have a material ~~impact.~~impact on the financial statements.

FASB ASC 326 – In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. These amendments provide targeted transition relief allowing entities to irrevocably elect the fair value option, on an instrument-by-instrument basis, for certain financial assets (excluding held-to-maturity debt securities) previously measured at amortized cost.

In November 2019, the FASB issued 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, to make improvements to the credit losses standard. Most significantly, the standard clarifies

guidance around how to report expected recoveries for PCD assets. “Expected recoveries” describes a situation in which an organization recognizes a full or partial writeoff of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. This ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recognizing negative allowances for available-for-sale debt securities.

The amendments in these updates became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019 and did not have a material impact on the consolidated financial statements.

FASB ASC 718 – In November 2019, the FASB issued ASU No. 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer. This ASU requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718, Compensation—Stock Compensation. As a result, the amount recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, ~~2019.~~2019 and did not have a material impact on the consolidated financial statements.

FASB ASC 326 and 842 – In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). This ASU inserts a paragraph to address the November 2019 issuance of SEC Staff Accounting Bulletin ("SAB") 119, Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326. The SAB updates existing staff guidance on developing a systematic methodology for estimating credit losses, and it explains the documentation the staff typically would expect from registrants in support of estimates of current expected credit losses ("CECL") for lending activities, when material. The amendments in this update became effective upon issuance and did not have a material impact on the consolidated financial statements.

Guidance on Non-TDR Loan Modifications due to COVID-19

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") that passed on March 27, 2020 further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The modifications completed in the three months ended March 31, 2020 were immaterial.

Accounting Guidance Issued But Not Yet Adopted

FASB ASC 715 – In August 2018, the FASB issued ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update become effective for fiscal years ending after December 15, 2020 and will not have a material impact on the consolidated financial statements.

FASB ASC 740 – In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax

accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial ~~statements, but~~statements.

FASB ASC 321, 323, and 815 – In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The ASU clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the amendments are to be applied prospectively. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

Codification Improvements to Financial Instruments – In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to clarify and improve various financial instruments Topics. The amendments include the following improvements:

•Issue 1 – Clarifies that all entities are required to provide fair value option disclosures.

•Issue 2 – Clarifies the applicability of the portfolio exception in measuring fair value for nonfinancial items accounted for as derivatives.

•Issue 3 – Clarifies that disclosure requirements in Topic 320 apply to disclosure requirements in Topic 942 for depository and lending institutions.

•Issue 4 – Added cross-reference of line-of-credit or revolving-debt arrangements guidance to guidance in accounting for fees between debtor and creditor and third-party costs directly related to exchanges or modifications of debt instruments.

•Issue 5 – Clarifies that fair value measurement disclosure requirements do not apply to entities using the net asset value per share practical expedient.

•Issue 6 – Aligns the contractual term to measure expected tocredit losses for a net investment in a lease under the Credit Loss Standard (Topic 326) with the lease term determined under the Leases Standard (Topic 842).

•Issue 7 – Clarifies that when an entity regains control of financial assets sold, an allowance for credit losses should be recorded in accordance with Topic 326.

For Issue 1, Issue 2, Issue 4, and Issue 5, the amendments are effective upon issuance and did not have a material ~~impact.~~

~~NOTE~~impact on the consolidated financial statements. For Issue 3, the amendments to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and did not have a material impact on the consolidated financial statements. For Issues 6 and 7, the amendments to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and did not have a material impact on the consolidated financial statements.

FASB ASC 848 – ~~ACQUISITION AND DIVESTITURE ACTIVITY~~

~~Acquisition~~

~~Klein~~In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial ~~Inc.~~

~~Effective November 1, 2018, Old National completed~~Reporting, which provides temporary, optional guidance to ease the ~~acquisition~~potential burden in accounting for, or recognizing the effects of, ~~Minnesota-based Klein~~the transition away from the LIBOR or other interbank offered rate on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include:

•A change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria.

•When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.

The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through a 100% stock merger. Klein was a bank holding company with KleinBank as its wholly-owned subsidiary. Founded in 1907 and headquartered in Chaska, Minnesota with 18 full-service branches, KleinBank was the ~~largest family-owned community bank serving the Twin Cities and its western communities. Old National believes that~~transition period, it will be ~~able~~in effect for a limited time and will not apply to ~~achieve cost savings by integrating~~contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the ~~two companies and combining accounting, data processing, retail and lending support, and other administrative functions, which will enable~~end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. Old National ~~to achieve economies~~is evaluating the impact of ~~scale in these areas.~~

~~Pursuant to~~adopting the merger agreement, each holder of Klein common stock received 7.92 shares of Old National Common Stock per share of Klein common stock such holder owned. The total fair value of consideration for Klein was $406.5 million, consisting of 22.8 million shares of Old National Common Stock valuednew guidance on the consolidated financial statements on an ongoing basis with no material expected impact at ~~$406.5 million. Through September 30, 2019, transaction and integration costs of $20.1 million associated with~~ this ~~acquisition have been expensed and remaining integration costs will be expensed as incurred.~~

During the three months ended September 30, 2019, immaterial adjustments were made to the provisional valuation of assets acquired and liabilities assumed as Old National finalized the valuation. These adjustments affected goodwill, premises and equipment, and net deferred tax assets. A summary of the fair values of the acquired assets, liabilities assumed, and resulting goodwill follows (in thousands):

time.

Cash and cash equivalents

$
60,759

Investment securities

697,951

FHLB/Federal Reserve Bank stock

2,637

Loans held for sale

3,371

Loans

1,049,073

Premises and equipment

32,408

Accrued interest receivable

7,896

Company-owned life insurance

36,380

Net deferred tax assets

6,746

Other real estate owned

954

Other assets

10,299

Deposits

(1,713,086
)
Securities sold under agreements to repurchase

(19,481
)
Accrued expenses and other liabilities

(17,506
)
Net tangible assets acquired

158,401

Definite-lived intangible assets acquired

39,017

Loan servicing rights

285

Goodwill

208,771

Total consideration

$
406,474

~~Goodwill related to this acquisition will not be deductible for tax purposes.~~

~~The estimated fair value of the core deposit intangible was $39.0 million and is being amortized over an estimated useful life of 12 years.~~

~~Acquired loan data for Klein can be found in the table below:~~

Best Estimate at

Acquisition Date of

Fair Value

Gross Contractual

Contractual Cash

of Acquired Loans

Cash Flows at

Flows Not Expected

(in thousands)
at Acquisition Date

Acquisition Date

to be Collected

Acquired receivables subject to
ASC 310-30
$
11,663

$
18,568

$
4,521

Acquired receivables not subject
to ASC 310-30
$
1,037,410

$
1,252,954

$
76,534

NOTE 43 – NET INCOME PER SHARE

Basic and diluted net income per share are calculated using the two-class method. Net income is divided by the weighted-average number of common shares outstanding during the period. Adjustments to the weighted average number of common shares outstanding are made only when such adjustments will dilute net income per common share. Net income is then divided by the weighted-average number of common shares and common share equivalents during the period.

The following table reconciles basic and diluted net income per share:


	Three Months Ended March 31,
(dollars and shares in thousands, except per share data)	2020		2019
Basic Net Income Per Share
Net income	$	22,640	$	56,276
Weighted average common shares outstanding	167,748		174,734
Basic Net Income Per Share	$	0.13	$	0.32
Diluted Net Income Per Share
Net income	$	22,640	$	56,276
Weighted average common shares outstanding	167,748		174,734
Effect of dilutive securities:
Restricted stock	616		582
Stock options (1)	40		52
Weighted average shares outstanding	168,404		175,368
Diluted Net Income Per Share	$	0.13	$	0.32

(1)Options to purchase 14 thousand shares outstanding at March 31, 2020 and 2019 were not included in the computation of net income per diluted share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 because the exercise price of these options was greater than the average market price of the common shares and, ~~2018:~~

therefore, the effect would be antidilutive.

Three Months Ended

Nine Months Ended

(dollars and shares in thousands,

September 30,

September 30,

except per share data)

2019

2018

2019

2018

Basic Net Income Per Share

Net income

$
69,781

$
51,348

$
189,021

$
143,332

Weighted average common shares outstanding

170,746

151,930

172,807

151,844

Basic Net Income Per Share

$
0.41

$
0.34

$
1.10

$
0.95

Diluted Net Income Per Share

Net income

$
69,781

$
51,348

$
189,021

$
143,332

Weighted average common shares outstanding

170,746

151,930

172,807

151,844

Effect of dilutive securities:

Restricted stock

761

790

672

701

Stock options (1)

44

64

48

71

Weighted average shares outstanding

171,551

152,784

173,527

152,616

Diluted Net Income Per Share

$
0.41

$
0.34

$
1.09

$
0.94

~~(1)~~

Options to purchase 14 thousand shares outstanding at September 30, 2019 and 2018 were not included in the computation of net income per diluted share for the three and nine months ended September 30, 2019 and 2018 because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

NOTE 54 – INVESTMENT SECURITIES

The following table summarizes the amortized cost, ~~and~~ fair value, and allowance for credit losses of the available-for-sale ~~and held-to-maturity~~ investment securities portfolio ~~at September 30, 2019 and December 31, 2018~~ and the corresponding amounts of unrealized gains and losses ~~therein:~~

recognized in accumulated other comprehensive income (loss):

	Amortized		Unrealized		Unrealized			Fair
(dollars in thousands)	Cost		Gains		Losses			Value		(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Allowance for Credit Losses for Investments		Fair Value
September 30, 2019
March 31, 2020										March 31, 2020
Available-for-Sale										Available-for-Sale
U.S. Treasury	$	5,363	$	133	$	(2	)	$	5,494	U.S. Treasury	$	11,379	$	354	$	—	$	—	$	11,733
U.S. government-sponsored entities and agencies		484,226		1,913		(35	)		486,104	U.S. government-sponsored entities and agencies	515,217		3,954		—		—		519,171
Mortgage-backed securities - Agency		3,092,991		49,135		(5,946	)		3,136,180	Mortgage-backed securities - Agency	3,089,212		121,282		(494)		—		3,210,000
States and political subdivisions		932,589		37,226		(340	)		969,475	States and political subdivisions	1,251,515		51,841		(961)		—		1,302,395
Pooled trust preferred securities		13,825		—		(6,130	)		7,695	Pooled trust preferred securities	13,798		��		(6,376)		—		7,422
Other securities		305,591		7,560		(1,120	)		312,031	Other securities	308,242		5,929		(4,867)		—		309,304
Total available-for-sale securities	$	4,834,585	$	95,967	$	(13,573	)	$	4,916,979	Total available-for-sale securities	$	5,189,363	$	183,360	$	(12,698)	$	—	$	5,360,025


December 31, 2019										December 31, 2019
Available-for-Sale										Available-for-Sale
U.S. Treasury										U.S. Treasury	$	17,567	$	117	$	(2)	$	—	$	17,682
U.S. government-sponsored entities and agencies										U.S. government-sponsored entities and agencies	596,595		1,027		(4,638)		—		592,984
Mortgage-backed securities - Agency										Mortgage-backed securities - Agency	3,151,550		41,363		(9,052)		—		3,183,861
States and political subdivisions										States and political subdivisions	1,232,497		44,193		(1,047)		—		1,275,643
Pooled trust preferred securities										Pooled trust preferred securities	13,811		—		(5,589)		—		8,222
Other securities										Other securities	301,189		6,842		(1,332)		—		306,699
Total available-for-sale securities										Total available-for-sale securities	$	5,313,209	$	93,542	$	(21,660)	$	—	$	5,385,091

Held-to-Maturity

U.S. government-sponsored entities and agencies

$
33,321

$
1,125

$
—

$
34,446

Mortgage-backed securities - Agency

112,187

3,580

—

115,767

States and political subdivisions

261,773

13,602

—

275,375

Total held-to-maturity securities

$
407,281

$
18,307

$
—

$
425,588

December 31, 2018

Available-for-Sale

U.S. Treasury

$
5,332

$
—

$
(31
)

$
5,301

U.S. government-sponsored entities and agencies

639,458

35

(11,342
)

628,151

Mortgage-backed securities - Agency

2,243,774

9,738

(44,217
)

2,209,295

States and political subdivisions

932,757

11,113

(3,441
)

940,429

Pooled trust preferred securities

13,861

—

(5,366
)

8,495

Other securities

337,435

486

(6,176
)

331,745

Total available-for-sale securities

$
4,172,617

$
21,372

$
(70,573
)

$
4,123,416

Held-to-Maturity

U.S. government-sponsored entities and agencies

$
73,986

$
—

$
(1,627
)

$
72,359

Mortgage-backed securities - Agency

127,120

39

(2,750
)

124,409

States and political subdivisions

305,228

6,208

(2,101
)

309,335

Total held-to-maturity securities

$
506,334

$
6,247

$
(6,478
)

$
506,103

Proceeds from sales or calls of available-for-sale investment securities and the resulting realized gains and realized losses were as ~~follows for the three and nine months ended September 30, 2019 and 2018:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

2019

2018

2019

2018

Proceeds from sales of available-for-sale debt securities

$
27,983

$
5,327

$
295,615

$
136,648

Proceeds from calls of available-for-sale debt securities

316,361

2,938

378,476

31,585

Total

$
344,344

$
8,265

$
674,091

$
168,233

Realized gains on sales of available-for-sale debt securities

$
340

$
—

$
3,443

$
3,259

Realized gains on calls of available-for-sale debt securities

86

—

89

284

Realized losses on sales of available-for-sale debt securities

(2
)

(74
)

(2,017
)

(1,379
)
Realized losses on calls of available-for-sale debt securities

—

(7
)

(29
)

(60
)
Other securities gains (losses) (1)

—

216

—

313

Net debt securities gains (losses)

$
424

$
135

$
1,486

$
2,417

follows:

~~(1)~~

For the three and nine months ended September 30, 2018, other securities gains (losses) included realized gains and losses of equity securities previously classified as trading securities. For the three and nine months ended September 30, 2019, gains (losses) on equity securities are included in other income.


	Three Months Ended March 31,
(dollars in thousands)	2020		2019
Proceeds from sales of available-for-sale debt securities	$	236,410	$	8,681
Proceeds from calls of available-for-sale debt securities	163,771		23,685
Total	$	400,181	$	32,366

Realized gains on sales of available-for-sale debt securities	$	5,595	$	71
Realized gains on calls of available-for-sale debt securities	13		3
Realized losses on sales of available-for-sale debt securities	(409)		(148)
Realized losses on calls of available-for-sale debt securities	(25)		(29)
Debt securities gains (losses), net	$	5,174	$	(103)

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.


	At September 30, 2019								March 31, 2020
(dollars in thousands)					Weighted			(dollars in thousands)	Amortized Cost			Fair Value				Weighted Average Yield
	Amortized		Fair		Average							Fair Value				Weighted Average Yield
Maturity	Cost		Value		Yield			Maturity	Amortized Cost		Amortized Cost			Fair Value				Weighted Average Yield
Available-for-Sale								Available-for-Sale						Fair Value				Weighted Average Yield
Within one year	$	155,063	$	154,941		2.47	%	Within one year	$	741,828	Amortized Cost			$	762,452			1.82	%
One to five years		2,900,031		2,941,365		2.78		One to five years	2,591,483			2,691,307				2.73
Five to ten years		767,785		787,301		3.17		Five to ten years	592,020			609,108				3.41
Beyond ten years		1,011,706		1,033,372		3.23		Beyond ten years	1,264,032			1,297,158				3.24
Total	$	4,834,585	$	4,916,979		2.93	%	Total	$	5,189,363		$	5,360,025			2.80	%

Held-to-Maturity
Within one year	$	3,621	$	3,644		3.66	%
One to five years		108,113		111,340		3.28
Five to ten years		106,591		111,513		3.96
Beyond ten years		188,956		199,091		4.22
Total	$	407,281	$	425,588		3.90	%

The following table summarizes the available-for-sale investment securities with unrealized losses ~~at September 30, 2019 and December 31, 2018~~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
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized				Less than 12 months						12 months or longer						Total
(dollars in thousands)	Value		Losses			Value		Losses			Value		Losses			(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2019
March 31, 2020																March 31, 2020
Available-for-Sale																Available-for-Sale

Mortgage-backed securities - Agency																Mortgage-backed securities - Agency	$	66,182	$	(295)	$	13,308	$	(199)	$	79,490	$	(494)
States and political subdivisions																States and political subdivisions	75,669		(961)		465		—		76,134		(961)
Pooled trust preferred securities																Pooled trust preferred securities	—		—		7,422		(6,376)		7,422		(6,376)
Other securities																Other securities	101,144		(2,907)		24,690		(1,960)		125,834		(4,867)
Total available-for-sale																Total available-for-sale	$	242,995	$	(4,163)	$	45,885	$	(8,535)	$	288,880	$	(12,698)

December 31, 2019																December 31, 2019
Available-for-Sale																Available-for-Sale
U.S. Treasury	$	—	$	—		$	1,494	$	(2	)	$	1,494	$	(2	)	U.S. Treasury	$	999	$	(2)	$	—	$	—	$	999	$	(2)
U.S. government-sponsored entities and agencies		50,979		(20	)		5,322		(15	)		56,301		(35	)	U.S. government-sponsored entities and agencies	357,647		(4,638)		—		—		357,647		(4,638)
Mortgage-backed securities - Agency		484,912		(2,806	)		295,934		(3,140	)		780,846		(5,946	)	Mortgage-backed securities - Agency	786,245		(6,122)		212,056		(2,930)		998,301		(9,052)
States and political subdivisions		66,516		(278	)		8,192		(62	)		74,708		(340	)	States and political subdivisions	120,166		(1,016)		7,006		(31)		127,172		(1,047)
Pooled trust preferred securities		—		—			7,695		(6,130	)		7,695		(6,130	)	Pooled trust preferred securities	—		—		8,222		(5,589)		8,222		(5,589)
Other securities		21,626		(25	)		95,483		(1,095	)		117,109		(1,120	)	Other securities	30,765		(182)		87,066		(1,150)		117,831		(1,332)
Total available-for-sale	$	624,033	$	(3,129	)	$	414,120	$	(10,444	)	$	1,038,153	$	(13,573	)	Total available-for-sale	$	1,295,822	$	(11,960)	$	314,350	$	(9,700)	$	1,610,172	$	(21,660)

December 31, 2018
Available-for-Sale
U.S. Treasury	$	3,829	$	(12	)	$	1,472	$	(19	)	$	5,301	$	(31	)
U.S. government-sponsored entities and agencies		54,701		(594	)		519,911		(10,748	)		574,612		(11,342	)
Mortgage-backed securities - Agency		82,289		(742	)		1,172,984		(43,475	)		1,255,273		(44,217	)
States and political subdivisions		99,162		(1,340	)		151,097		(2,101	)		250,259		(3,441	)
Pooled trust preferred securities		—		—			8,495		(5,366	)		8,495		(5,366	)
Other securities		94,607		(1,965	)		143,842		(4,211	)		238,449		(6,176	)
Total available-for-sale	$	334,588	$	(4,653	)	$	1,997,801	$	(65,920	)	$	2,332,389	$	(70,573	)

~~The following table summarizes the held-to-maturity investment~~

Available-for-sale debt securities ~~with unrecognized~~in unrealized loss positions are evaluated for impairment related to credit losses at ~~September 30, 2019 and December 31, 2018 by aggregated major security type and length of time in a continuous unrecognized loss position:~~

Less than 12 months

12 months or longer

Total

Fair

Unrecognized

Fair

Unrecognized

Fair

Unrecognized

(dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

September 30, 2019

Held-to-Maturity

U.S. government-sponsored entities
   and agencies

$
—

$
—

$
—

$
—

$
—

$
—

Mortgage-backed securities - Agency

—

—

—

—

—

—

States and political subdivisions

—

—

—

—

—

—

  Total held-to-maturity

$
—

$
—

$
—

$
—

$
—

$
—

December 31, 2018

Held-to-Maturity

U.S. government-sponsored entities
   and agencies

$
—

$
—

$
72,359

$
(4,642
)

$
72,359

$
(4,642
)
Mortgage-backed securities - Agency

4,335

(24
)

119,207

(8,006
)

123,542

(8,030
)
States and political subdivisions

24,533

(983
)

70,022

(3,556
)

94,555

(4,539
)
  Total held-to-maturity

$
28,868

$
(1,007
)

$
261,588

$
(16,204
)

$
290,456

$
(17,211
)

~~The unrecognized losses on held-to-maturity investment~~least quarterly.For available-for sale debt securities ~~presented in the table above include unrecognized losses on securities that were transferred from available-for-sale to held-to-maturity totaling~~ ~~$10.7 million at December 31, 2018. All transferred held-to-maturity investment securities were~~ in an unrealized ~~gain~~loss position, ~~at September 30, 2019. The remaining unamortized loss on securities transferred from available-for-sale to held-to-maturity totaled $9.4 million at September 30, 2019.~~

Management evaluates debt securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3)we first assess whether ~~the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent~~we intend to sell, ~~the debt security~~ or it is more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

~~When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not~~that we will be required to sell the security before recovery of its amortized cost ~~basis less any current-period credit loss.~~ basis.If ~~an entity intends~~either of the criteria regarding intent or requirement to sell ~~or more likely than not will be required to sell~~is met, the ~~security before recovery of its~~security’s amortized cost basis is written down to fair value through income.For available-for sale debt 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 ~~current-period credit loss, the OTTI shall be recognized in earnings equal~~changes to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Otherwise, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amountrating of the ~~total OTTI~~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 ~~is determined based on~~exists, we compare the present value of cash flows expected to be collected ~~and is recognized in earnings. The amount~~from the security with the amortized cost basis of the ~~total OTTI related~~security.If the present value of cash flows expected to ~~other factors shall~~ 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 impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable ~~taxes.~~ taxes. No allowance for credit losses for available-for-

sale debt securities was needed at March 31, 2020.Accrued interest receivable on available-for-sale debt securities totaled $22.6 million at March 31, 2020 and is excluded from the estimate of credit losses.

The ~~previous amortized cost basis less~~U.S. government sponsored entities and agencies and mortgage-backed securities – agency are either explicitly or implicitly guaranteed by the ~~OTTI recognized in earnings shall become~~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.

Prior to the ~~new amortized cost basis~~adoption of ~~the investment.~~

~~There~~ASC 326, there was 0 OTTI recorded during the ~~nine~~three months ended ~~September 30, 2019 or 2018.~~

March 31, 2019.

At ~~September 30, 2019,~~March 31, 2020, Old National’s securities portfolio consisted of ~~1,937~~1,867 securities, ~~256~~186 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. Our pooled trust preferred securities are discussed below. At ~~September 30, 2019,~~March 31, 2020, 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.

Pooled Trust Preferred Securities

At ~~September 30, 2019,~~March 31, 2020, our securities portfolio contained 2 pooled trust preferred securities with a fair value of ~~$7.7~~$7.4 million and unrealized losses of ~~$6.1~~$6.4 million. These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. For the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, our analysis indicated 0 OTTI~~we did 0t recognize any losses on these securities.

The table below summarizes the relevant characteristics of our pooled trust preferred securities as well as our single issuer trust preferred securities that are included in the “other securities” category in this footnote. Each of the pooled trust preferred securities support a more senior tranche of security holders. Both pooled trust preferred securities have experienced credit defaults. However, these securities have excess subordination and are not other-than-temporarily impaired as a result of their class hierarchy, which provides more loss protection.


Trust preferred securities													Actual	Expected	Excess	Trust preferred securities
September 30, 2019													Deferrals	Defaults as	Subordination
March 31, 2020																March 31, 2020
(dollars in thousands)												# of Issuers	and Defaults	a % of	as a % of	(dollars in thousands)	Class	Lowest Credit Rating (1)	Amortized Cost		Fair Value		Unrealized Gain/ (Loss)		# of Issuers Currently Performing/ Remaining	Actual Deferrals and Defaults as a % of Original Collateral	Expected Defaults as a % of Remaining Performing Collateral	Excess Subordination as a % of Current Performing Collateral
		Lowest					Unrealized			Realized		Currently	as a % of	Remaining	Current
		Credit	Amortized		Fair		Gain/			Losses		Performing/	Original	Performing	Performing
	Class	Rating (1)	Cost		Value		(Loss)			2019		Remaining	Collateral	Collateral	Collateral
Pooled trust preferred securities:																Pooled trust preferred securities:
Pretsl XXVII LTD	B	B	$	4,303	$	2,135	$	(2,168	)	$	—	32/41	14.6%	11.3%	26.7%	Pretsl XXVII LTD	B		$	4,270	$	2,192	$	(2,078)	32/41	14.4%	11.2%	33.5%
Trapeza Ser 13A	A2A	BBB		9,522		5,560		(3,962	)		—	42/47	4.5%	6.7%	49.6%	Trapeza Ser 13A	A2A	BBB	9,528		5,230		(4,298)		39/41	4.5%	6.6%	51.6%
				13,825		7,695		(6,130	)		—								13,798		7,422		(6,376)
Single Issuer trust preferred securities:																Single Issuer trust preferred securities:
JP Morgan Chase & Co		BBB-		4,795		4,325		(470	)		—					JP Morgan Chase & Co		BBB-	4,800		3,600		(1,200)

Total			$	18,620	$	12,020	$	(6,600	)	$	—					Total			$	18,598	$	11,022	$	(7,576)

(1)Lowest rating for the security provided by any nationally recognized credit rating agency.

Equity Securities

Equity securities are recorded at fair value and totaled ~~$6.6~~$6.9 million at ~~September 30, 2019~~March 31, 2020 and ~~$5.6~~$6.8 million at December 31, ~~2018.~~2019. There were gains on equity securities of ~~$0.2~~$0.1 million during the three months ended ~~September~~

~~30, 2019 and $0.4 million during the nine months ended September 30, 2019,~~March 31, 2020, compared to gains of $0.2 million during the three months ended ~~September 30, 2018 and $0.3 million during the nine months ended September 30, 2018.~~March 31, 2019. Old National also has equity securities without readily determinable fair values that are included in other assets that totaled ~~$93.3~~$93.1 million at ~~September 30, 2019~~March 31, 2020 and ~~$79.2~~$91.4 million at December 31, ~~2018.~~2019. These are illiquid investments that consist of partnerships, limited liability companies, and other ownership interests that support affordable housing, economic development, and community revitalization initiatives in low-to-moderate income neighborhoods. There have been 0 impairments or ~~downward~~ adjustments on these securities in the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 or ~~2018.~~2019.

NOTE 65 – LOANS HELD FOR SALE

Mortgage loans held for immediate sale in the secondary market were ~~$58.3~~$54.2 million at ~~September 30, 2019,~~March 31, 2020, compared to ~~$14.9~~$46.9 million at December 31, ~~2018.~~2019. Residential loans that Old National has originated with the intent to sell are recorded at fair value. Conventional mortgage production is sold on a servicing retained basis. Certain loans, such as government guaranteed mortgage loans are sold on servicing released basis.

NOTE 76 – LOANS AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

Old National’s loans consist primarily of loans made to consumers and commercial clients in various industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. While loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold.

The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans.The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures.The 4 loan portfolios are classified into 7 segments of loans - commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity.The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments.The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments.The composition of loans by ~~lending classification was~~portfolio segment as of December 31, 2019 and January 1, 2020 follows:

September 30,

December 31,

(dollars in thousands)

2019

2018

Commercial (1)

$
2,950,559

$
3,232,970

Commercial real estate:

Construction

592,348

504,625

Other

4,519,775

4,454,226

Residential real estate

2,236,623

2,248,404

Consumer credit:

Home equity

555,905

589,322

Auto

1,005,535

1,059,633

Other

156,903

154,712

Total loans

12,017,648

12,243,892

Allowance for loan losses

(56,910
)

(55,461
)
Net loans

$
11,960,738

$
12,188,431


	December 31, 2019		Credit		December 31, 2019		Impact of		January 1, 2020
	Statement		Risk		After		ASC 326		Post-ASC 326
(dollars in thousands)	Balance		Reclassifications		Reclassifications		Adoption		Adoption
Loans:
Commercial	$	2,890,296	$	(75,142)	$	2,815,154	$	2,679	$	2,817,833
Commercial real estate	5,166,792		(277,539)		4,889,253		1,637		4,890,890
BBCC	N/A		352,681		352,681		33		352,714
Residential real estate	2,334,289		—		2,334,289		105		2,334,394
Consumer	1,726,147		(1,726,147)		N/A		N/A		N/A
Indirect	N/A		935,584		935,584		10		935,594
Direct	N/A		228,524		228,524		2		228,526
Home equity	N/A		562,039		562,039		12		562,051
Total	$	12,117,524	$	—	$	12,117,524	$	4,478	$	12,122,002
Allowance:
Commercial	$	(22,585)	$	1,226	$	(21,359)	$	(7,150)	$	(28,509)
Commercial real estate	(21,588)		1,053		(20,535)		(25,548)		(46,083)
BBCC	N/A		(2,279)		(2,279)		(3,702)		(5,981)
Residential real estate	(2,299)		—		(2,299)		(6,986)		(9,285)
Consumer	(8,147)		8,147		N/A		N/A		N/A
Indirect	N/A		(5,319)		(5,319)		1,669		(3,650)
Direct	N/A		(1,863)		(1,863)		1,059		(804)
Home equity	N/A		(965)		(965)		(689)		(1,654)
Total	$	(54,619)	$	—	$	(54,619)	$	(41,347)	$	(95,966)

~~(1)~~

~~Includes direct finance leases of $50.0 million at September 30, 2019 and $60.0 million at December 31, 2018.~~

The composition of loans by portfolio segment follows:


(dollars in thousands)	March 31, 2020		January 1, 2020
Commercial (1)	$	2,844,465	$	2,817,833
Commercial real estate	5,118,439		4,890,890
BBCC	367,139		352,714
Residential real estate	2,327,851		2,334,394
Indirect	953,136		935,594
Direct	211,793		228,526
Home equity	561,789		562,051
Total loans	12,384,612		12,122,002
Allowance for credit losses	(106,380)		(95,966)
Net loans	$	12,278,232	$	12,026,036

(1)Includes direct finance leases of $44.4 million at March 31, 2020 and $47.2 million at December 31, 2019.

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are classified primarily ~~based~~ on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

~~These~~

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Included with commercial real estate are construction loans, which are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders (including Old National), sales of developed property, or an interim loan commitment from Old National until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.

At ~~189%~~206%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at ~~September 30, 2019.~~

March 31, 2020.

BBCC

BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owner(s) and guarantor(s), and the ability to show relatively stable earnings as criteria to help mitigate risk.

Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business.These factors can be affected by changes in economic conditions such as unemployment levels.

Residential

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, Old National typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. ~~Risk~~Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

~~Consumer~~

~~Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer~~

Indirect

Indirect loans are secured by ~~consumer assets such as automobiles or recreational vehicles. Some consumer~~automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint.Old National typically mitigates the risk of Indirect loans ~~are unsecured such as small installment loans~~by establishing minimum FICO scores, maximum loan-to-value ratios, and ~~certain lines of credit.~~ maximum debt-to-income ratios.Repayment of these loans ~~is primarily dependent~~depends largely on the personal income of the borrowers which can be ~~impacted~~affected by changes in economic conditions ~~in their market areas~~ such as unemployment levels. ~~Repayment can also be impacted by changes in residential property or other collateral values. Risk~~Portfolio risk is mitigated by the fact that the loans are of smaller ~~individual~~ amounts ~~and~~ spread over ~~a large number~~many borrowers, conservative credit policies, and ongoing reviews of ~~borrowers.~~

dealer relationships.

Direct

Direct loans are typically secured by collateral such as auto or real estate or are unsecured.Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios.Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels.Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies.

Home Equity

Home Equity loans are generally secured by 1-4 family residences that are owner occupied.Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios.Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels.Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies as well as monitoring of updated borrower credit scores.Risk is further mitigated in that Old National retains the right to unconditionally cancel unfunded lines of credit due to deterioration of borrower credit history.

Allowance for ~~Loan~~Credit Losses

for Loans

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans.The allowance for ~~loan~~credit losses is ~~maintained~~an estimate of expected losses inherent within the Company’s loans held for investment portfolio.Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses.Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet.The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. We have made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans totaled $54.0 million at March 31, 2020 and is excluded from the estimate of credit losses.

and risk characteristics, including current conditions and reasonable and supportable forecasts about the ~~consolidated loan portfolio. Management’s evaluation of~~future.Determining the ~~adequacy~~appropriateness of the allowance is ~~an estimate based on reviews~~complex and requires judgment by management about the effect of ~~individual loans, pools of homogeneous loans, assessments~~matters that are inherently uncertain.In future periods evaluations of the ~~impact~~overall loan portfolio, in light of ~~current~~the factors and ~~anticipated economic conditions on~~forecasts then prevailing, may result in significant changes in the ~~portfolio,~~allowance and credit loss expense in those future periods.

The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss ~~experience.~~ experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.The ~~allowance is increased through a provision charged to operating expense. Loans deemed to be uncollectible are charged to~~methodology for estimating the ~~allowance. Recoveries~~amount of ~~loans previously charged-off are added to the allowance.~~

~~We utilize a PD and LGD model as a tool to determine the adequacy of~~expected credit losses reported in the allowance for ~~loan~~credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for ~~performing commercial~~such individual loans; and ~~commercial real estate loans.~~second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. See Note 2 for more information about CECL for loans and unfunded loan commitments.

For the three months ended March 31, 2020 the allowance for credit losses increased primarily due to macroeconomic factors surrounding the COVID-19 pandemic. The ~~PD is~~ forecast ~~using~~scenario includes a ~~transition matrix~~sharp decline in gross domestic product in the second quarter of 2020 with a return to ~~determine~~growth by year end.The immediate increase in unemployment remains elevated through 2023.In addition to these quantitative inputs, several qualitative factors were considered, including the ~~likelihood of a customer’s AQR migrating from its current AQR~~risk that the economic decline, specifically unemployment and gross domestic product, prove to ~~any other status within the time horizon. Transition rates are measured using Old National’s own historical experience.~~ be more severe and/or prolonged than our baseline forecast.The ~~model assumes that recent historical transition rates will continue into the future. The LGD is defined as credit loss incurred when an obligor~~

mitigating impact of the ~~bank defaults. The sum of all net charge-offs for a particular portfolio segment are divided by all loans that have defaulted over a given period of time. The expected loss derived from~~unprecedented fiscal stimulus, including direct payments to individuals, increased unemployment benefits, as well as the ~~model considers the PD, LGD, and exposure at default. Additionally, qualitative factors, such as changes in lending policies or procedures, and economic business conditions are~~various government sponsored loan programs, was also considered.

~~We use historic loss ratios adjusted for economic conditions to determine the appropriate level of allowance for residential real estate and consumer loans.~~

No allowance was brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. An allowance for loan losses will be established for any subsequent credit deterioration or adverse changes in expected cash flows.

Old National’s activity in the allowance for ~~loan~~credit losses for ~~the three and nine months ended September 30, 2019 and 2018 was as follows:~~

Commercial

(dollars in thousands)

Commercial

Real Estate

Residential

Consumer

Total

Three Months Ended September 30, 2019

Balance at beginning of period

$
22,548

$
23,311

$
2,269

$
8,164

$
56,292

Charge-offs

(420
)

(191
)

(384
)

(1,721
)

(2,716
)
Recoveries

374

669

26

828

1,897

Provision

(373
)

465

452

893

1,437

Balance at end of period

$
22,129

$
24,254

$
2,363

$
8,164

$
56,910

Three Months Ended September 30, 2018

Balance at beginning of period

$
21,387

$
22,498

$
1,867

$
7,908

$
53,660

Charge-offs

(1,662
)

(241
)

(284
)

(2,074
)

(4,261
)
Recoveries

467

944

45

1,108

2,564

Provision

(473
)

(309
)

292

1,240

750

Balance at end of period

$
19,719

$
22,892

$
1,920

$
8,182

$
52,713

Nine Months Ended September 30, 2019

Balance at beginning of period

$
21,742

$
23,470

$
2,277

$
7,972

$
55,461

Charge-offs

(1,184
)

(815
)

(702
)

(5,784
)

(8,485
)
Recoveries

1,083

2,444

107

2,817

6,451

Provision

488

(845
)

681

3,159

3,483

Balance at end of period

$
22,129

$
24,254

$
2,363

$
8,164

$
56,910

Nine Months Ended September 30, 2018

Balance at beginning of period

$
19,246

$
21,436

$
1,763

$
7,936

$
50,381

Charge-offs

(2,378
)

(675
)

(941
)

(6,006
)

(10,000
)
Recoveries

1,227

2,011

1,890

3,628

8,756

Provision

1,624

120

(792
)

2,624

3,576

Balance at end of period

$
19,719

$
22,892

$
1,920

$
8,182

$
52,713

~~The following table presents Old National’s recorded investment in~~ loans by portfolio segment for the three months ended March 31, 2020 was as follows:


(dollars in thousands)	Balance at Beginning of Period		Impact of Adopting ASC 326		Sub-Total		Charge-offs		Recoveries		Provision for Credit Losses		Balance at End of Period
Three Months Ended March 31, 2020
Commercial	$	21,359	$	7,150	$	28,509	$	(5,042)	$	357	$	7,301	$	31,125
Commercial real estate	20,535		25,548		46,083		(1,292)		669		8,643		54,103
BBCC	2,279		3,702		5,981		(15)		66		(615)		5,417
Residential real estate	2,299		6,986		9,285		(300)		169		483		9,637
Indirect	5,319		(1,669)		3,650		(1,203)		414		805		3,666
Direct	1,863		(1,059)		804		(475)		152		341		822
Home equity	965		689		1,654		(118)		82		(8)		1,610
Total allowance for credit losses	$	54,619	$	41,347	$	95,966	$	(8,445)	$	1,909	$	16,950	$	106,380

The provision recapture for the BBCC portfolio was the result of several offsetting items.The economic forecast resulted in an increase to the provision for credit losses for the quarter, which was more than offset by a decrease related to the payoffs of several nonaccrual loans during the quarter.In addition, the BBCC portfolio has a lower weighted average life quarter over quarter, which resulted in a decrease to the allowance for credit losses that was needed at ~~September 30, 2019~~March 31, 2020.

Allowance for Credit Losses on Unfunded Loan Commitments

Old National maintains an allowance for credit losses on unfunded commercial lending commitments and ~~December~~letters of credit to provide for the risk of loss inherent in these arrangements.The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment.The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet.Old National’s activity in the allowance for credit losses on unfunded loan commitments for the three months ended March 31, ~~2018 and other information regarding the allowance:~~

2020 was as follows:

Commercial

(dollars in thousands)

Commercial

Real Estate

Residential

Consumer

Total

September 30, 2019

Allowance for loan losses:

Individually evaluated for impairment

$
7,855

$
4,485

$
—

$
—

$
12,340

Collectively evaluated for impairment

14,273

19,621

2,363

7,968

44,225

Loans acquired with deteriorated
   credit quality

1

148

—

196

345

Total allowance for loan losses

$
22,129

$
24,254

$
2,363

$
8,164

$
56,910

Loans and leases outstanding:

Individually evaluated for impairment

$
40,270

$
73,627

$
—

$
—

$
113,897

Collectively evaluated for impairment

2,904,851

5,016,357

2,228,965

1,715,701

11,865,874

Loans acquired with deteriorated
   credit quality

5,438

22,139

7,658

2,642

37,877

Total loans and leases outstanding

$
2,950,559

$
5,112,123

$
2,236,623

$
1,718,343

$
12,017,648

December 31, 2018

Allowance for loan losses:

Individually evaluated for impairment

$
6,035

$
8,306

$
—

$
—

$
14,341

Collectively evaluated for impairment

15,700

14,845

2,276

7,821

40,642

Loans acquired with deteriorated
   credit quality

7

319

1

151

478

Total allowance for loan losses

$
21,742

$
23,470

$
2,277

$
7,972

$
55,461

Loans and leases outstanding:

Individually evaluated for impairment

$
35,410

$
83,104

$
—

$
—

$
118,514

Collectively evaluated for impairment

3,191,367

4,850,356

2,239,147

1,800,115

12,080,985

Loans acquired with deteriorated
   credit quality

6,193

25,391

9,257

3,552

44,393

Total loans and leases outstanding

$
3,232,970

$
4,958,851

$
2,248,404

$
1,803,667

$
12,243,892


(dollars in thousands)	Total
Three months ended March 31, 2020
Allowance for credit losses on unfunded loan commitments:
Balance at beginning of period	$	2,656
Impact of adopting ASC 326	4,549
Sub-Total	7,205
Expense (reversal of expense) for credit losses	1,745
Balance at end of period	$	8,950

Credit Quality

Old National’s management monitors the credit quality of its loans inon an ~~on-going manner.~~ongoing basis with the AQR for commercial loans reviewed annually or at renewal and the performance of its residential and consumer loans based upon the accrual status refreshed at least quarterly. Internally, management assigns an AQR to each non-homogeneous commercial, ~~and~~ commercial real estate, and BBCC loan in the ~~portfolio, with the exception of certain FICO-scored small business loans.~~portfolio. The primary determinants of the AQR are ~~based upon~~ the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The AQR will also consider current industry conditions. Major factors used in determining the AQR can vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden. Old National uses the following definitions for risk ratings:

Criticized. Special mention loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Classified – Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Classified – Nonaccrual. Loans classified as nonaccrual have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, in doubt.

Classified – Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual, with the added characteristic that the weaknesses make collectionor liquidationin full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Pass rated loans are those loans that are other than criticized, classified – substandard, classified – nonaccrual, or classified – doubtful.

The following table summarizes the risk category of commercial, ~~and~~ commercial real estate, and BBCC loans by loan portfolio segment and class of ~~loans at September 30, 2019 and December 31, 2018 was as follows:~~

loan:

(dollars in thousands)

Commercial

Commercial

Real Estate -

Real Estate -

Corporate Credit Exposure

Commercial

Construction

Other

Credit Risk Profile by

September 30,

December 31,

September 30,

December 31,

September 30,

December 31,

Internally Assigned Grade

2019

2018

2019

2018

2019

2018

Grade:

Pass

$
2,773,941

$
3,029,130

$
553,854

$
460,158

$
4,251,014

$
4,167,902

Criticized

89,079

98,798

24,839

29,368

119,601

110,586

Classified - substandard

49,659

66,394

—

1,275

92,372

102,961

Classified - nonaccrual

30,067

29,003

13,655

13,824

37,972

37,441

Classified - doubtful

7,813

9,645

—

—

18,816

35,336

Total

$
2,950,559

$
3,232,970

$
592,348

$
504,625

$
4,519,775

$
4,454,226


	Risk Rating
(dollars in thousands)	Pass		Criticized		Classified - substandard		Classified - nonaccrual		Classified - doubtful		Total
March 31, 2020
Commercial:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	339,465	$	9,386	$	9,935	$	816	$	3,051	$	362,653
2016	177,397		6,799		4,268		784		803		190,051
2017	342,542		12,704		13,345		2,324		9,838		380,753
2018	312,229		12,995		7,893		5,905		157		339,179
2019	546,484		4,707		5,421		3,274		2,254		562,140
2020	213,893		1,708		751		—		—		216,352
Revolving Loans	581,830		39,157		18,326		3,905		—		643,218
Revolving to Term Loans	138,584		1,356		3,397		6,782		—		150,119
Total	$	2,652,424	$	88,812	$	63,336	$	23,790	$	16,103	$	2,844,465

Commercial real estate:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	793,743	$	22,910	$	12,944	$	15,352	$	3,881	$	848,830
2016	596,312		12,915		17,519		14,368		212		641,326
2017	838,575		69,842		27,025		1,830		4,356		941,628
2018	864,477		7,933		23,741		3,525		3,300		902,976
2019	1,149,445		20,007		2,878		2,177		1,965		1,176,472
2020	280,341		—		39		—		—		280,380
Revolving Loans	25,474		500		212		—		—		26,186
Revolving to Term Loans	282,936		6,522		10,792		391		—		300,641
Total	$	4,831,303	$	140,629	$	95,150	$	37,643	$	13,714	$	5,118,439

BBCC:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	17,943	$	—	$	—	$	—	$	187	$	18,130
2016	30,762		1,024		551		538		53		32,928
2017	45,700		522		1,028		575		—		47,825
2018	61,865		512		—		1,070		61		63,508
2019	90,970		877		1,443		438		—		93,728
2020	26,069		172		—		46		—		26,287
Revolving Loans	58,040		4,044		644		76		—		62,804
Revolving to Term Loans	18,679		1,419		1,008		823		—		21,929
Total	$	350,028	$	8,570	$	4,674	$	3,566	$	301	$	367,139

~~Old National considers the performance of the loan portfolio and its impact on the allowance for loan losses.~~

For residential real estate and consumer loan classes, Old National ~~also~~ evaluates credit quality based on the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the ~~recorded investment~~amortized cost in residential real estate and consumer loans based on payment ~~activity at September 30, 2019~~activity:


	Payment Performance
(dollars in thousands)	Performing		Nonperforming		Total
March 31, 2020
Residential real estate:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	826,831	$	20,629	$	847,460
2016	292,199		1,755		293,954
2017	303,763		661		304,424
2018	219,650		425		220,075
2019	561,322		97		561,419
2020	100,385		—		100,385
Revolving Loans	—		—		—
Revolving to Term Loans	134		—		134
Total	$	2,304,284	$	23,567	$	2,327,851
Indirect:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	53,056	$	277	$	53,333
2016	99,915		685		100,600
2017	152,882		1,113		153,995
2018	199,211		568		199,779
2019	348,865		242		349,107
2020	96,230		—		96,230
Revolving Loans	—		—		—
Revolving to Term Loans	92		—		92
Total	$	950,251	$	2,885	$	953,136
Direct:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	29,807	$	535	$	30,342
2016	15,445		249		15,694
2017	28,370		145		28,515
2018	48,587		214		48,801
2019	46,602		51		46,653
2020	12,485		—		12,485
Revolving Loans	27,834		—		27,834
Revolving to Term Loans	1,468		1		1,469
Total	$	210,598	$	1,195	$	211,793
Home equity:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	—	$	—	$	—
2016	240		326		566
2017	1,002		37		1,039
2018	719		—		719
2019	1,085		31		1,116
2020	—		—		—
Revolving Loans	535,095		189		535,284
Revolving to Term Loans	19,425		3,640		23,065
Total	$	557,566	$	4,223	$	561,789

Nonaccrual and ~~December 31, 2018:~~

Past Due Loans

Consumer

Home

(dollars in thousands)

Residential

Equity

Auto

Other

September 30, 2019

Performing

$
2,215,864

$
551,129

$
1,002,091

$
155,707

Nonperforming

20,759

4,776

3,444

1,196

Total

$
2,236,623

$
555,905

$
1,005,535

$
156,903

December 31, 2018

Performing

$
2,223,450

$
586,235

$
1,057,038

$
153,113

Nonperforming

24,954

3,087

2,595

1,599

Total

$
2,248,404

$
589,322

$
1,059,633

$
154,712

~~Impaired Loans~~

Large commercial credits are subject to individual evaluation for impairment. Retail credits and other small balance credits that are part of a homogeneous group are not tested for individual impairment unless they are modified as a TDR. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Old National’s policy, for all but PCI loans, is to recognize interest income on impaired loans unless the loan is placed on nonaccrual status.

The following table shows Old National’s impaired loans at September 30, 2019 and December 31, 2018, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired (excluding loans acquired with deteriorated credit quality) are included in the table below.

Unpaid

Recorded

Principal

Related

(dollars in thousands)

Investment

Balance

Allowance

September 30, 2019

With no related allowance recorded:

Commercial

$
19,154

$
19,462

$
—

Commercial Real Estate - Construction

10,890

10,890

—

Commercial Real Estate - Other

38,517

39,942

—

Residential

1,783

1,803

—

Consumer

1,137

1,303

—

With an allowance recorded:

Commercial

21,116

21,169

7,855

Commercial Real Estate - Construction

2,764

2,764

1,183

Commercial Real Estate - Other

21,456

21,456

3,302

Residential

990

990

39

Consumer

1,065

1,065

53

Total

$
118,872

$
120,844

$
12,432

December 31, 2018

With no related allowance recorded:

Commercial

$
22,031

$
22,292

$
—

Commercial Real Estate - Other

41,126

41,914

—

Residential

2,276

2,296

—

Consumer

362

535

—

With an allowance recorded:

Commercial

13,379

13,432

6,035

Commercial Real Estate - Construction

13,824

13,824

1,830

Commercial Real Estate - Other

28,154

28,154

6,476

Residential

889

889

44

Consumer

2,013

2,013

101

Total

$
124,054

$
125,349

$
14,486

~~The average balance of impaired loans during the three and nine months ended September 30, 2019 and 2018 are included in the table below.~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

2019

2018

2019

2018

Average Recorded Investment

With no related allowance recorded:

Commercial

$
20,147

$
19,960

$
20,593

$
20,445

Commercial Real Estate - Construction

10,964

—

5,445

—

Commercial Real Estate - Other

34,073

45,302

39,821

42,209

Residential

2,066

2,303

2,145

2,289

Consumer

1,166

1,392

1,096

1,617

With an allowance recorded:

Commercial

19,866

14,771

17,248

10,393

Commercial Real Estate - Construction

2,764

11,307

8,294

7,537

Commercial Real Estate - Other

21,019

24,305

24,806

26,537

Residential

924

863

907

887

Consumer

1,204

1,909

1,260

2,013

Total

$
114,193

$
122,112

$
121,615

$
113,927

Old National does not record interest on nonaccrual loans until principal is recovered. ~~Interest income recognized on impaired loans during the three and nine months ended September 30, 2019 and 2018 was immaterial.~~

For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest.Interest accrued ~~during the current year on such loans~~but not received is reversed against ~~interest income. Interest accrued in the prior year, if any, is charged to the allowance for loan losses.~~ earnings.Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status.Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured.

~~Loans accounted for under FASB ASC Topic 310-30 accrue interest, even though they may be contractually past due, as any nonpayment~~

The following table presents the aging of ~~contractual principal or interest is considered~~the amortized cost basis in ~~the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or prospective yield adjustments.~~

~~Old National’s~~ past due loans as of March 31, 2020 by class of loans:


(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More		Total Past Due		Current		Total Loans
March 31, 2020
Commercial	$	3,578	$	1,707	$	9,156	$	14,441	$	2,830,024	$	2,844,465
Commercial Real Estate	6,114		2,200		13,412		21,726		5,096,713		5,118,439
BBCC	419		156		234		809		366,330		367,139
Residential	13,895		4,603		9,255		27,753		2,300,098		2,327,851
Indirect	6,358		963		339		7,660		945,476		953,136
Direct	1,513		183		325		2,021		209,772		211,793
Home equity	1,755		474		1,761		3,990		557,799		561,789
Total	$	33,632	$	10,286	$	34,482	$	78,400	$	12,306,212	$	12,384,612

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan:


(dollars in thousands)	Beginning of Period Nonaccrual Amortized Cost		End of Period Nonaccrual Amortized Cost		Nonaccrual With No Related Allowance		Past Due 90 Days or More and Accruing		Interest Income Recognized on Nonaccrual
At or for the Three Months Ended March 31, 2020
Commercial	$	40,103	$	39,893	$	7,040	$	3	$	—
Commercial Real Estate	58,350		51,355		13,281		165		—
BBCC	4,530		3,869		—		—		—
Residential	20,970		23,567		—		112		—
Indirect	3,318		2,885		—		81		—
Direct	1,303		1,195		—		102		—
Home equity	3,857		4,223		34		195		—
Total	$	132,431	$	126,987	$	20,355	$	658	$	—

When management determines that foreclosure is probable, expected credit losses for collateral-dependent loans are based on the fair value of the collateral at ~~September 30, 2019~~the reporting date, adjusted for selling costs as appropriate. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and ~~December 31, 2018 were as follows:~~

not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of collateral-dependent loans by class of loan:

Past Due

90 Days or

30-59 Days

60-89 Days

More and

Total

(dollars in thousands)

Past Due

Past Due

Accruing

Nonaccrual (1)

Past Due

Current

September 30, 2019

Commercial

$
2,218

$
1,181

$
100

$
37,880

$
41,379

$
2,909,180

Commercial Real Estate:

Construction

—

300

—

13,655

13,955

578,393

Other

549

90

—

56,788

57,427

4,462,348

Residential

8,620

3,546

64

20,759

32,989

2,203,634

Consumer:

Home equity

1,008

118

233

4,776

6,135

549,770

Auto

6,069

769

190

3,444

10,472

995,063

Other

695

105

116

1,196

2,112

154,791

Total loans

$
19,159

$
6,109

$
703

$
138,498

$
164,469

$
11,853,179

December 31, 2018

Commercial

$
3,627

$
279

$
52

$
38,648

$
42,606

$
3,190,364

Commercial Real Estate:

Construction

—

—

—

13,824

13,824

490,801

Other

1,633

500

40

72,777

74,950

4,379,276

Residential

25,947

3,437

258

24,954

54,596

2,193,808

Consumer:

Home equity

1,434

960

456

3,087

5,937

583,385

Auto

7,091

1,903

377

2,595

11,966

1,047,667

Other

711

210

170

1,599

2,690

152,022

Total loans

$
40,443

$
7,289

$
1,353

$
157,484

$
206,569

$
12,037,323


	Type of Collateral
(dollars in thousands)	Real Estate		Blanket Lien		Investment Securities/Cash		Auto		Other
March 31, 2020
Commercial	$	6,802	$	23,175	$	8,209	$	396	$	1,522
Commercial Real Estate	40,361		150		3,199		—		179
BBCC	1,930		1,614		59		246		—
Residential	23,567		—		—		—		—
Indirect	—		—		—		2,885		—
Direct	863		—		8		265		—
Home equity	4,223		—		—		—		—
Total loans	$	77,746	$	24,939	$	11,475	$	3,792	$	1,701

~~(1)~~

Includes purchased credit impaired loans of $11.0 million at September 30, 2019 and $20.5 million at December 31, 2018 that are categorized as nonaccrual for credit analysis purposes because the collection of principal or interest is doubtful. However, these loans are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At ~~September 30, 2019,~~March 31, 2020, these loans totaled ~~$891.9~~$849.4 million, of which ~~$416.0~~$401.6 million had been sold to other financial institutions and ~~$475.9~~$447.8 million was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.

Troubled Debt Restructurings

Old National may choose to restructure the contractual terms of certain loans. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection.

Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for ~~six~~6 months.

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under ~~$250,000~~$250,000 that are 90 days or more delinquent and do not have adequate collateral support. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

For commercial TDRs, an allocated reserve is established within the allowance for ~~loan~~credit losses for the difference between the carrying value of the loan and its computed value. To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral value, if the loan is collateral dependent. The allocated reserve is established as the difference between the carrying value of the loan

and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.

When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs.

The following table presents activity in TDRs for the three ~~and nine~~ months ended ~~September 30, 2019 and 2018:~~

March 31, 2020:

Commercial

(dollars in thousands)

Commercial

Real Estate

Residential

Consumer

Total

Three Months Ended September 30, 2019

Balance at beginning of period

$
18,872

$
19,363

$
3,080

$
2,516

$
43,831

(Charge-offs)/recoveries

12

13

—

7

32

(Payments)/disbursements

(2,303
)

(1,057
)

(865
)

(322
)

(4,547
)
Additions

530

—

557

—

1,087

Balance at end of period

$
17,111

$
18,319

$
2,772

$
2,201

$
40,403

Three Months Ended September 30, 2018

Balance at beginning of period

$
9,043

$
34,927

$
3,771

$
3,398

$
51,139

(Charge-offs)/recoveries

(7
)

753

—

3

749

(Payments)/disbursements

453

(6,601
)

(75
)

(200
)

(6,423
)
Additions

1,954

—

—

—

1,954

Balance at end of period

$
11,443

$
29,079

$
3,696

$
3,201

$
47,419

Nine Months Ended September 30, 2019

Balance at beginning of period

$
10,275

$
27,671

$
3,390

$
2,374

$
43,710

(Charge-offs)/recoveries

(89
)

(58
)

—

8

(139
)
(Payments)/disbursements

(3,307
)

(19,321
)

(1,175
)

(497
)

(24,300
)
Additions

10,232

10,027

557

316

21,132

Balance at end of period

$
17,111

$
18,319

$
2,772

$
2,201

$
40,403

Nine Months Ended September 30, 2018

Balance at beginning of period

$
12,088

$
34,705

$
3,315

$
3,895

$
54,003

(Charge-offs)/recoveries

(158
)

731

23

(19
)

577

(Payments)/disbursements

(3,525
)

(7,570
)

(144
)

(1,107
)

(12,346
)
Additions

3,038

1,213

502

432

5,185

Balance at end of period

$
11,443

$
29,079

$
3,696

$
3,201

$
47,419


(dollars in thousands)	Beginning Balance		(Charge-offs)/ Recoveries		(Payments)/ Disbursements		Additions		Ending Balance
Three months ended March 31, 2020
Commercial	$	12,412	$	(695)	$	(789)	$	—	$	10,928
Commercial Real Estate	14,277		(1,272)		(157)		—		12,848
BBCC	578		—		(16)		—		562
Residential	3,107		—		(67)		—		3,040
Indirect	—		3		(3)		—		—
Direct	983		2		(63)		—		922
Home equity	381		1		(8)		—		374
Total	$	31,738	$	(1,961)	$	(1,103)	$	—	$	28,674

TDRs included ~~with~~within nonaccrual loans totaled ~~$21.8~~$11.8 million at ~~September 30, 2019~~March 31, 2020 and ~~$26.3~~$13.8 million at December 31, ~~2018.~~2019. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling ~~$6.3~~$1.4 million at ~~September 30, 2019~~March 31, 2020 and ~~$3.0~~$0.9 million at December 31, ~~2018.~~2019. At ~~September 30, 2019,~~March 31, 2020, Old National had committed to lend an additional ~~$1.8~~$0.9 million to customers with outstanding loans that are classified as ~~TDRs.~~

TDRs, compared to $2.3 million at December 31, 2019.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ are the same except for when the loan modifications involve the forgiveness of principal. The following table presents loans ~~by class~~ modified as TDRs that occurred during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~

2019:

Pre-modification

Post-modification

Outstanding

Outstanding

Number

Recorded

Recorded

(dollars in thousands)

of Loans

Investment

Investment

Nine Months Ended September 30, 2019

TDR:

Commercial

8

$
10,232

$
10,232

Commercial Real Estate - Other

4

10,027

10,027

Residential

1

557

557

Consumer

1

316

316

Total

14

$
21,132

$
21,132

Nine Months Ended September 30, 2018

TDR:

Commercial

5

$
3,038

$
3,038

Commercial Real Estate - Other

2

1,213

1,213

Residential

1

502

502

Consumer

1

432

432

Total

9

$
5,185

$
5,185


(dollars in thousands)			Total
Three Months Ended March 31, 2020
TDR:
Number of loans			—
Pre-modification outstanding recorded investment			—
Post-modification outstanding recorded investment			—

Three Months Ended March 31, 2019
TDR:
Number of loans			4
Pre-modification outstanding recorded investment			5,510
Post-modification outstanding recorded investment			5,510

The TDRs that occurred during the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 decreased the allowance for loan losses by $0.7 million and resulted in no charge-offs during the nine months ended September 30, 2019. The TDRs that occurred during the nine months ended September 30, 2018 did 0tnot have a material impact on the allowance for loan losses and resulted in 0no charge-offs during the ~~nine~~three months ended ~~September 30, 2018.~~

March 31, 2020, or 2019.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

TDRs for which there was a payment default within twelve months following the modification were insignificant during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~

2019.

The terms of certain other loans were modified during ~~2019~~2020 and ~~2018~~2019 that did not meet the definition of a TDR. It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional

collateral or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

PCI loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. If a PCI loan is subsequently modified, and meets the definition of a TDR, it will be removed from PCI accounting and accounted for as a TDR only if the PCI loan was being accounted for individually. If the PCI loan is being accounted for as part of a pool, it will not be removed from the pool. As of September 30, 2019, it has not been necessary to remove any loans from PCI accounting.

subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall. However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

~~Purchased Credit Impaired Loans~~

~~Purchased loans acquired in~~

Non-TDR Loan Modifications due to COVID-19

On March 22, 2020, a ~~business combination~~statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are ~~recorded at estimated fair value on~~or may be unable to meet their ~~purchase date with no carryover~~contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the ~~related~~CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The modifications completed in the three months ended March 31, 2020 were immaterial.

Allowance for Loan Losses

Prior to the adoption of ASC 326 on January 1, 2020, Old National calculated allowance for loan and lease losses. In determining the estimated fair value of purchased loans, management considers a number of factors including, among others, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received. Purchased loanslosses using incurred losses methodology. The following tables are accounted for in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreasesdisclosures related to the ~~expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in expected cash flows will result in a reversal of the provision~~allowance for loan losses toin prior periods.

Old National's activity in the ~~extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income prospectively.~~

~~Old National has purchased loans~~allowance for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loansloan losses for the three months ended March 31, 2019 was as follows:

September 30,

December 31,

(dollars in thousands)

2019

2018

Commercial

$
5,438

$
6,193

Commercial real estate

22,139

25,391

Residential

7,658

9,257

Consumer

2,642

3,552

Carrying amount

37,877

44,393

Allowance for loan losses

(345
)

(478
)
Carrying amount, net of allowance

$
37,532

$
43,915


(dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer		Total






Three Months Ended March 31, 2019
Balance at beginning of period	$	21,742	$	23,470	$	2,277	$	7,972	$	55,461
Charge-offs	(160)		(235)		(178)		(2,319)		(2,892)
Recoveries	375		570		72		930		1,947
Provision	(1,551)		1,364		131		1,099		1,043
Balance at end of period	$	20,406	$	25,169	$	2,302	$	7,682	$	55,559

The ~~outstanding balance of~~following table disaggregates Old National's allowance for credit losses and amortized cost basis in loans ~~accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $229.8 million at September 30, 2019 and $246.9 million~~by measurement methodology at December 31, ~~2018.~~

2019:


(dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer		Total
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	7,891	$	1,006	$	—	$	—	$	8,897
Collectively evaluated for impairment	14,692		20,582		2,299		7,954		45,527
Loans acquired with deteriorated credit quality	2		—		—		193		195
Total allowance for loan losses	$	22,585	$	21,588	$	2,299	$	8,147	$	54,619
Loans and leases outstanding:
Individually evaluated for impairment	$	41,479	$	63,288	$	—	$	—	$	104,767
Collectively evaluated for impairment	2,843,536		5,084,737		2,326,907		1,723,715		11,978,895
Loans acquired with deteriorated credit quality	5,281		18,767		7,382		2,432		33,862
Total loans and leases outstanding	$	2,890,296	$	5,166,792	$	2,334,289	$	1,726,147	$	12,117,524

The ~~accretable difference~~risk category or commercial and commercial real estate loans by class of loans at December 31, 2019 was as follows:


(dollars in thousands)	Commercial		Commercial Real Estate - Construction		Commercial Real Estate - Other
Corporate Credit Exposure Credit Risk Profile by Internally Assigned Grade	December 31, 2019		December 31, 2019		December 31, 2019
Grade:
Pass	$	2,702,605	$	665,512	$	4,191,455
Criticized	84,676		34,651		115,514
Classified - substandard	63,979		—		101,693
Classified - nonaccrual	22,240		12,929		38,822
Classified - doubtful	16,796		—		6,216
Total	$	2,890,296	$	713,092	$	4,453,700

The following table presents the recorded investment in residential and consumer loans based on ~~PCI~~payment activity at December 31, 2019:


			Consumer
(dollars in thousands)	Residential		Home Equity		Auto		Other
December 31, 2019
Performing	$	2,311,670	$	555,025	$	1,013,760	$	147,383
Nonperforming	22,619		3,996		3,527		2,456
Total	$	2,334,289	$	559,021	$	1,017,287	$	149,839

The following table shows Old National's impaired loans isat December 31, 2019. Only purchased loans that have experienced subsequent impairment since the ~~difference between~~date acquired (excluding loans acquired with deteriorated credit quality) are included in the ~~expected cash flows and the net present value~~table below.


(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2019
With no related allowance recorded:
Commercial	$	23,227	$	23,665	$	—
Commercial Real Estate - Construction	12,929		12,929		—
Commercial Real Estate - Other	37,674		38,112		—
Residential	1,774		1,794		—
Consumer	403		568		—
With an allowance recorded:
Commercial	18,252		18,305		7,891

Commercial Real Estate - Other	12,685		12,685		1,006
Residential	1,201		1,201		39
Consumer	1,094		1,094		55
Total	$	109,239	$	110,353	$	8,991

The average balance of ~~expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion recorded as loan interest income totaled $4.8 million~~impaired loans during the three months ended ~~September 30,~~March 31, 2019 ~~and $9.0 million during~~are included in the ~~nine months ended September 30, 2019, compared to $1.9 million during~~table below.


(dollars in thousands)	Three Months Ended March 31, 2019
Average Recorded Investment
With no related allowance recorded:
Commercial	$	23,688
Commercial Real Estate - Construction	5,477
Commercial Real Estate - Other	40,135
Residential	2,289
Consumer	660
With an allowance recorded:
Commercial	11,347
Commercial Real Estate - Construction	8,690
Commercial Real Estate - Other	26,279
Residential	881
Consumer	1,693
Total	$	121,139

The following table presents activity in TDRs for the three months ended September 30, 2018 and $8.9 million during the nine months ended September 30, 2018. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield as shown in the table below.

~~Accretable yield of PCI loans, or income expected to be collected, was as follows:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

2019

2018

2019

2018

Balance at beginning of period

$
22,414

$
24,249

$
25,051

$
27,835

Accretion of income

(4,848
)

(1,854
)

(8,988
)

(8,927
)
Reclassifications from (to) nonaccretable difference

620

1,599

2,202

5,065

Disposals/other adjustments

118

1

39

22

Balance at end of period

$
18,304

$
23,995

$
18,304

$
23,995

~~Included in Old National’s allowance for loan losses is $0.3 million related to the purchased loans disclosed above at September 30, 2019 and $0.5 million at December~~March 31, ~~2018.~~

~~PCI loans purchased during 2018 for which it was probable at acquisition that all contractually required payments would not be collected were as follows:~~

2019:

(dollars in thousands)

Klein (1)

Contractually required payments

$
18,568

Nonaccretable difference

(4,521
)
Cash flows expected to be collected at acquisition

14,047

Accretable yield

(2,384
)
Fair value of acquired loans at acquisition

$
11,663


(dollars in thousands)	Beginning Balance		(Charge-offs)/ Recoveries		(Payments)/ Disbursements		Additions		Ending Balance
Commercial	$	10,275	$	(7)	$	(1,029)	$	2,407	$	11,646
Commercial Real Estate	27,671		(75)		(1,562)		3,103		29,137
Residential	3,390		—		(143)		—		3,247
Consumer	2,374		(3)		(58)		—		2,313
Total	$	43,710	$	(85)	$	(2,792)	$	5,510	$	46,343

~~(1)~~

~~Old National acquired Klein effective November 1, 2018.~~

Income is not recognized on PCI loans if Old National cannot reasonably estimate cash flows expected to be collected. Old National had no PCI loans for which it cannot reasonably estimate cash flows expected to be collected.

NOTE 87 – OTHER REAL ESTATE OWNED

Other real estate owned is included in other assets. The following table presents activity in other real estate ~~owned for the three~~owned:


	Three Months Ended March 31,
(dollars in thousands)	2020		2019
Balance at beginning of period	$	2,169	$	3,232
Additions	146		394
Sales	(113)		(272)
Impairments	(39)		(75)
Balance at end of period (1)	$	2,163	$	3,279

(1)Includes repossessed personal property of $0.4 million at March 31, 2020 and ~~nine months ended September 30, 2019 and 2018:~~

$0.4 million at March 31, 2019.

Three Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

2019

2018

2019

2018

Balance at beginning of period

$
2,819

$
3,729

$
3,232

$
8,810

Additions

411

474

1,084

1,649

Sales

(271
)

(511
)

(1,248
)

(6,136
)
Impairments

(18
)

(129
)

(127
)

(760
)
Balance at end of period (1)

$
2,941

$
3,563

$
2,941

$
3,563

~~(1)~~

~~Includes repossessed personal property of $0.5million at September 30, 2019 and $0.3 million at September 30, 2018.~~

Foreclosed residential real estate property recorded as a result of obtaining physical possession of the property included in the table above totaled ~~$1.0~~$0.5 million at ~~September 30, 2019~~March 31, 2020 and ~~$1.3~~$0.5 million at December 31, ~~2018.~~2019. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled ~~$3.8~~$5.1 million at ~~September 30, 2019~~March 31, 2020 and ~~$4.9~~$3.7 million at December 31, ~~2018.~~

2019.

NOTE 98 – PREMISES AND EQUIPMENT

The composition of premises and equipment ~~at September 30, 2019 and December 31, 2018~~ was as follows:

	September 30,			December 31,
(dollars in thousands)	2019			2018			(dollars in thousands)	March 31, 2020		December 31, 2019
Land	$	79,967		$	79,231		Land	$	71,451	$	79,569
Buildings		381,028			365,102		Buildings	360,462		380,925
Furniture, fixtures, and equipment		107,526			107,862		Furniture, fixtures, and equipment	117,566		112,654
Leasehold improvements		44,448			42,288		Leasehold improvements	44,371		44,136
Total		612,969			594,483		Total	593,850		617,284
Accumulated depreciation		(120,904	)		(108,571	)	Accumulated depreciation	(131,486)		(126,359)
Premises and equipment, net	$	492,065		$	485,912		Premises and equipment, net	$	462,364	$	490,925

Depreciation expense was ~~$6.8~~$8.6 million for the three months ended ~~September 30, 2019 and $20.0 million for the nine months ended September 30, 2019,~~March 31, 2020, compared to ~~$5.9~~$6.4 million for the three months ended ~~September 30, 2018 and $17.7 million for the nine months ended September 30, 2018.~~

March 31,

2019.

Finance Leases

Old National leases certain branch buildings under finance leases that are included in premises and equipment. See Notes 109 and 1615 to the consolidated financial statements for detail regarding these leases.

NOTE 109 – LEASES

~~Old National adopted FASB Topic 842 as of January 1, 2019. See Note 2 to the consolidated financial statements regarding transition guidance related to the new standard.~~

Old National determines if an arrangement is or contains a lease at contract inception. Operating leases are included in operating lease right-of-use assets and operating lease liabilities in our consolidated balance sheet at September 30, 2019. Finance leases are included in premises and equipment and other borrowings in our consolidated balance sheets at September 30, 2019 and 2018, and December 31, 2018.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use the implicit lease rate when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.

Old National has operating and finance leases for land, office space, banking centers, and equipment. These leases are generally for periods of 10 to 20 years with various renewal options. We include certain renewal options in the measurement of our right-of-use assets and lease liabilities if they are reasonably certain to be exercised. Variable lease payments that are dependent on an index or a rate are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Variable lease payments that are not dependent on an index or a rate are excluded from the measurement of the lease liability and are recognized in profit and ~~loss.~~loss when incurred. Variable lease payments are defined as payments made for the right to use an asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.

We have made a policy election to exclude the recognition requirements of Topic 842 to all classes of leases with original terms of 12 months or less. Instead, the short-term lease payments are recognized in profit or loss on a straight-line basis over the lease term.

Old National has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since they are generally able to be segregated. For certain equipment leases, Old National accounts for the lease and non-lease components as a single lease component using the practical expedient available for that class of assets.

Old National does not have any material sub-lease agreements.

The components of lease expense were as follows:

	Affected Line	Three Months			Nine Months
	Item in the	Ended			Ended				Affected Line Item in the	Three Months Ended March 31,
(dollars in thousands)	Statement of Income	September 30, 2019			September 30, 2019			(dollars in thousands)	Statement of Income	2020		2019
Operating lease cost	occupancy/equipment expense	$	4,280		$	12,973		Operating lease cost	occupancy/equipment expense	$	9,181	$	4,402
Finance lease cost:								Finance lease cost:
Amortization of right-of-use assets	occupancy expense		166			485		Amortization of right-of-use assets	occupancy expense	166		158
Interest on lease liabilities	interest expense		80			241		Interest on lease liabilities	interest expense	78		81
Short-term lease cost	occupancy expense		1			2		Short-term lease cost	occupancy expense	1		1
Sub-lease income	occupancy expense		(193	)		(553	)	Sub-lease income	occupancy expense	(128)		(179)
Total		$	4,334		$	13,148		Total		$	9,298	$	4,463

~~Lease expense for operating leases was $4.4 million for the three months ended September 30, 2018 and $13.4 million for the nine months ended September 30, 2018.~~

Supplemental balance sheet information related to leases was as follows:


(dollars in thousands)	September 30, 2019			(dollars in thousands)	March 31, 2020			December 31, 2019
Operating Leases				Operating Leases
Operating lease right-of-use assets	$	102,976		Operating lease right-of-use assets	$	86,819		$	95,477
Operating lease liabilities		107,272		Operating lease liabilities	95,830			99,500

Finance Leases				Finance Leases
Premises and equipment, net		7,337		Premises and equipment, net	7,004			7,170
Other borrowings		7,527		Other borrowings	7,284			7,406

Weighted-Average Remaining Lease Term (in Years)				Weighted-Average Remaining Lease Term (in Years)
Operating leases		10.8		Operating leases	10.5			10.6
Finance leases		11.5		Finance leases	11.0			11.3

Weighted-Average Discount Rate				Weighted-Average Discount Rate
Operating leases		3.45	%	Operating leases	3.43		%	3.45		%
Finance leases		4.43	%	Finance leases	4.44		%	4.43		%

Supplemental cash flow information related to leases was as follows:


	Nine Months Ended			Three Months Ended March 31,
(dollars in thousands)	September 30, 2019		(dollars in thousands)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:			Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	13,201	Operating cash flows from operating leases	$	4,193	$	4,436
Operating cash flows from finance leases		241	Operating cash flows from finance leases	78		$	81
Financing cash flows from finance leases		344	Financing cash flows from finance leases	122		$	111

The following table presents a maturity analysis of the Company’s lease liability by lease classification at ~~September 30, 2019:~~

March 31, 2020:

	Operating			Finance
(dollars in thousands)	Leases			Leases			(dollars in thousands)	Operating Leases		Finance Leases
2019	$	4,314		$	200
2020		16,772			803		2020	$	12,306	$	603
2021		15,698			809		2021	15,492		809
2022		14,138			815		2022	13,695		815
2023		9,682			830		2023	9,078		830
2024							2024	7,840		858
Thereafter		69,091			6,232		Thereafter	56,858		5,374
Total undiscounted lease payments		129,695			9,689		Total undiscounted lease payments	115,269		9,289
Amounts representing interest		(22,423	)		(2,162	)	Amounts representing interest	(19,439)		(2,005)
Lease liability	$	107,272		$	7,527		Lease liability	$	95,830	$	7,284

Old National leases certain office space and buildings to unrelated parties in exchange for consideration. All of these tenant leases are classified as operating leases. The following table presents a maturity analysis of the Company’s tenant leases at ~~September 30, 2019:~~March 31, 2020:


(dollars in thousands)	Tenant Leases
2020	$	1,832
2021	2,295
2022	1,941
2023	1,536
2024	1,409
Thereafter	2,520
Total undiscounted lease payments	$	11,533

Tenant

(dollars in thousands)

Leases

2019

$
588

2020

2,034

2021

1,740

2022

1,431

2023

1,298

Thereafter

3,650

Total undiscounted lease payments

$
10,741

NOTE 1110 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of ~~goodwill for the three and nine months ended September 30, 2019 and 2018:~~

goodwill:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Three Months Ended March 31,
(dollars in thousands)	2019		2018		2019		2018		(dollars in thousands)	2020		2019
Balance at beginning of period	$	1,036,258	$	828,804	$	1,036,258	$	828,051	Balance at beginning of period	$	1,036,994	$	1,036,258
Acquisition adjustments		736		—		736		753
Acquisitions and adjustments									Acquisitions and adjustments	—		—
Balance at end of period	$	1,036,994	$	828,804	$	1,036,994	$	828,804	Balance at end of period	$	1,036,994	$	1,036,258

Old National performed the required annual goodwill impairment test as of August 31, 2019 and there was 0 impairment. No events or circumstances since the August 31, 2019 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists. ~~See~~Refer to Note 320, Commitments and Contingencies, for additional information on COVID-19 and its potential impact to ~~the consolidated financial statements for detail regarding changes in goodwill associated with acquisitions.~~

Old National.

The gross carrying amount and accumulated amortization of other intangible assets ~~at September 30, 2019 and December 31, 2018~~ were as follows:

	Gross		Accumulated			Net
	Carrying		Amortization			Carrying
(dollars in thousands)	Amount		and Impairment			Amount		(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization and Impairment		Net Carrying Amount
September 30, 2019
March 31, 2020								March 31, 2020
Core deposit	$	119,051	$	(59,398	)	$	59,653	Core deposit	$	119,051	$	(66,488)	$	52,563
Customer trust relationships		16,547		(12,149	)		4,398	Customer trust relationships	16,547		(12,781)		3,766
Total intangible assets	$	135,598	$	(71,547	)	$	64,051	Total intangible assets	$	135,598	$	(79,269)	$	56,329

December 31, 2018
December 31, 2019								December 31, 2019
Core deposit	$	129,100	$	(57,524	)	$	71,576	Core deposit	$	119,051	$	(63,020)	$	56,031
Customer trust relationships		16,547		(11,107	)		5,440	Customer trust relationships	16,547		(12,473)		4,074
Total intangible assets	$	145,647	$	(68,631	)	$	77,016	Total intangible assets	$	135,598	$	(75,493)	$	60,105

Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years.

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. NaN impairment charges were recorded during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 or ~~2018.~~2019. Total amortization expense associated with intangible assets was ~~$4.2~~$3.8 million for the three months ended ~~September 30, 2019 and $13.0 million for the nine months ended September 30, 2019,~~March 31, 2020, compared to ~~$3.3~~$4.5 million for the three months ended ~~September 30, 2018 and $10.3 million for the nine months ended September 30, 2018.~~

March 31, 2019.

Estimated amortization expense for future years is as follows:


(dollars in thousands)			(dollars in thousands)
2019 remaining	$	3,945
2020		14,091
2020 remaining			2020 remaining	$	10,315
2021		11,336	2021	11,336
2022		9,014	2022	9,014
2023		7,053	2023	7,053
2024			2024	5,645
Thereafter		18,612	Thereafter	12,966
Total	$	64,051	Total	$	56,329

NOTE 1211 – LOAN SERVICING RIGHTS

At ~~September 30, 2019,~~March 31, 2020, loan servicing rights derived from loans sold with servicing retained totaled ~~$24.6~~$24.1 million, compared to ~~$24.5~~$25.4 million at December 31, ~~2018.~~2019. Loans serviced for others are not reported as assets. The principal balance of loans serviced for others was ~~$3.379~~$3.467 billion at ~~September 30, 2019,~~March 31, 2020, compared to ~~$3.306~~$3.445 billion at December 31, ~~2018.~~2019. Approximately ~~99.7%~~99.8% of the loans serviced for others at ~~September 30, 2019~~March 31, 2020 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were ~~$43.6~~$28.4 million at ~~September 30, 2019~~March 31, 2020 and ~~$10.7~~$12.7 million at December 31, ~~2018.~~

2019.

The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation ~~allowance for~~allowance:


	Three Months Ended March 31,
(dollars in thousands)	2020		2019
Balance at beginning of period	$	25,399	$	24,512
Additions	1,731		659
Amortization	(1,555)		(900)
Balance before valuation allowance at end of period	25,575		24,271
Valuation allowance:
Balance at beginning of period	(31)		(15)
(Additions)/recoveries	(1,412)		(2)
Balance at end of period	(1,443)		(17)
Loan servicing rights, net	$	24,132	$	24,254

At March 31, 2020, the ~~three~~fair value of servicing rights was $24.1 million, which was determined using a discount rate of 9% and ~~nine months ended September 30, 2019 and 2018:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

2019

2018

2019

2018

Balance at beginning of period

$
24,364

$
24,318

$
24,512

$
24,690

Additions

2,097

1,147

4,026

3,098

Amortization

(1,717
)

(1,117
)

(3,794
)

(3,440
)
Balance before valuation allowance at end of period

24,744

24,348

24,744

24,348

Valuation allowance:

Balance at beginning of period

(32
)

(15
)

(15
)

(29
)
(Additions)/recoveries

(89
)

3

(106
)

17

Balance at end of period

(121
)

(12
)

(121
)

(12
)
Loan servicing rights, net

$
24,623

$
24,336

$
24,623

$
24,336

a conditional prepayment rate of 16%. At ~~September 30,~~December 31, 2019, the fair value of servicing rights was ~~$25.5~~$26.5 million, which was determined using a discount rate of 12% and a ~~weighted average~~conditional prepayment ~~speed of 170% PSA. At December 31, 2018, the fair value of servicing rights was $27.4 million, which was determined using a discount~~ rate of ~~12% and a weighted average prepayment speed of 119% PSA.~~

10%.

NOTE 1312 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS

Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities.As of ~~September 30, 2019,~~March 31, 2020, Old National expects to recover its remaining investments through the use of the tax credits that are generated by the investments.

The following table summarizes Old National’s investments in qualified affordable housing projects and other tax credit ~~investments at September 30, 2019 and December 31, 2018:~~

investments:


(dollars in thousands)		September 30, 2019				December 31, 2018				(dollars in thousands)		March 31, 2020						December 31, 2019
				Unfunded				Unfunded
Investment	Accounting Method	Investment		Commitment (1)		Investment		Commitment		Investment	Accounting Method	Investment		Unfunded Commitment (1)		Investment		Unfunded Commitment
LIHTC	Proportional amortization	$	30,577	$	3,973	$	28,396	$	2,238	LIHTC	Proportional amortization	$	28,909	$	3,907	$	29,735	$	3,911
FHTC	Equity		22,403		20,272		16,815		17,945	FHTC	Equity	25,760		22,896		22,403		17,886
CReED	Equity		—		—		17		538
Renewable Energy	Equity		8,255		4,951		9,176		17,827	Renewable Energy	Equity	7,151		3,669		7,523		4,129
Total		$	61,235	$	29,196	$	54,404	$	38,548	Total		$	61,820	$	30,472	$	59,661	$	25,926

(1)All commitments will be paid by Old National by 2027.

~~All commitments will be paid by Old National by 2027.~~

The following table summarizes the amortization expense and tax benefit recognized for Old National’s qualified affordable housing projects and other tax credit ~~investments~~investments:


(dollars in thousands)	Amortization Expense (1)		Tax Expense (Benefit) Recognized (2)
Three Months Ended March 31, 2020
LIHTC	$	776	$	(1,019)
FHTC	5,143		(1,356)
Renewable Energy	372		(400)
Total	$	6,291	$	(2,775)
Three Months Ended March 31, 2019
LIHTC	$	792	$	(1,042)

Renewable Energy	260		(244)
Total	$	1,052	$	(1,286)

(1)The amortization expense for the ~~three~~LIHTC investments is included in our income tax expense. The amortization expense for the FHTC and ~~nine months ended September 30, 2019~~Renewable Energy tax credits is included in noninterest expense.

(2)All of the tax benefits recognized are included in our income tax expense. The tax benefit recognized for the FHTC and ~~2018:~~Renewable Energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) of the investments’ income (loss).

Tax Expense

Amortization

(Benefit)

(dollars in thousands)

Expense (1)

Recognized (2)

Three Months Ended September 30, 2019

LIHTC

$
793

$
(992
)
FHTC

1,113

(1,244
)
CReED

13

—

Renewable Energy

85

(70
)
Total

$
2,004

$
(2,306
)

Three Months Ended September 30, 2018

LIHTC

$
640

$
(832
)
FHTC

3,282

(1,258
)
CReED

687

—

Renewable Energy

5,264

(3,109
)
Total

$
9,873

$
(5,199
)

Nine Months Ended September 30, 2019

LIHTC

$
2,376

$
(3,076
)
FHTC

1,113

$
(1,244
)
CReED

13

—

Renewable Energy

913

(847
)
Total

$
4,415

$
(5,167
)

Nine Months Ended September 30, 2018

LIHTC

$
1,923

$
(2,494
)
FHTC

8,727

(5,154
)
CReED

687

—

Renewable Energy

12,393

(9,406
)
Total

$
23,730

$
(17,054
)

~~(1)~~

The amortization expense for the LIHTC investments is included in our income tax expense. The amortization expense for the FHTC, CReED, and Renewable Energy tax credits is included in noninterest expense.

~~(2)~~

All of the tax benefits recognized are included in our income tax expense. The tax benefit recognized for the FHTC and Renewable Energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) of the investments’ income (loss).

NOTE 1413 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are secured borrowings. Old National pledges investment securities to secure these borrowings. The following table presents securities sold under agreements to repurchase and related weighted-average interest ~~rates at or for the nine months ended September 30:~~

rates:

(dollars in thousands)

2019

2018

Outstanding at September 30,

$
337,551

$
319,831

Average amount outstanding

344,294

342,797

Maximum amount outstanding at any month-end

367,884

364,001

Weighted-average interest rate:

During the nine months ended September 30,

0.80

%

0.52

%
At September 30,

0.74

0.74


	At or for the Three Months Ended
(dollars in thousands)	March 31, 2020			December 31, 2019			March 31, 2019
Outstanding at period end	$	318,067		$	327,782		$	342,480
Average amount outstanding during the period	329,091			337,786			361,261
Maximum amount outstanding at any month-end during the period	318,067			337,185			367,884
Weighted-average interest rate:
During the period	0.47		%	0.55		%	0.74		%
At period end	0.22		%	0.53		%	0.79		%

The following table presents the contractual maturity of our secured borrowings and class of collateral pledged:

	At September 30, 2019
	Remaining Contractual Maturity of the Agreements											At March 31, 2020
	Overnight and		Up to				Greater Than					Remaining Contractual Maturity of the Agreements
(dollars in thousands)	Continuous		30 Days		30-90 Days		90 days		Total		(dollars in thousands)	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater Than 90 days		Total
Repurchase Agreements:											Repurchase Agreements:
U.S. Treasury and agency securities	$	337,551	$	—	$	—	$	—	$	337,551	U.S. Treasury and agency securities	$	318,067	$	—	$	—	$	—	$	318,067
Total	$	337,551	$	—	$	—	$	—	$	337,551	Total	$	318,067	$	—	$	—	$	—	$	318,067

The fair value of securities pledged to secure repurchase agreements may decline. Old National has pledged securities valued at ~~107%~~121% of the gross outstanding balance of repurchase agreements at ~~September 30, 2019~~March 31, 2020 to manage this risk.

NOTE 1514 – FEDERAL HOME LOAN BANK ADVANCES

The following table summarizes Old National Bank’s FHLB ~~advances at September 30, 2019 and December 31, 2018:~~

advances:

	September 30,		December 31,
(dollars in thousands)	2019		2018		(dollars in thousands)	March 31, 2020		December 31, 2019
FHLB advances (fixed rates 0.68% to 4.96% and variable rates 2.29% to 2.45%) maturing October 2019 to August 2029	$	1,977,644	$	1,603,643
FHLB advances (fixed rates 0.31% to 4.96% and variable rates 0.09% to 1.82%) maturing April 2020 to January 2030					FHLB advances (fixed rates 0.31% to 4.96% and variable rates 0.09% to 1.82%) maturing April 2020 to January 2030	$	2,100,660	$	1,800,664
ASC 815 fair value hedge and other basis adjustments		24,316		9,838	ASC 815 fair value hedge and other basis adjustments	29,603		22,183
Total other borrowings	$	2,001,960	$	1,613,481	Total other borrowings	$	2,130,263	$	1,822,847

FHLB advances had weighted-average rates of ~~2.19%~~1.79% at ~~September 30, 2019~~March 31, 2020 and ~~2.56%~~2.19% at December 31, ~~2018.~~2019. Investment securities and residential real estate loans collateralize these borrowings up to 140% of outstanding debt.

Contractual maturities of FHLB advances at ~~September 30, 2019~~March 31, 2020 were as follows:

(dollars in thousands)

Due in 2019

$
200,480

Due in 2020

50,000

Due in 2021

20,000

Due in 2022

157,000

Due in 2023

164

Thereafter

1,550,000

ASC 815 fair value hedge and other basis adjustments

24,316

Total

$
2,001,960


(dollars in thousands)
Due in 2020	$	125,000
Due in 2021	20,000
Due in 2022	130,500
Due in 2023	160
Due in 2024	375,000
Thereafter	1,450,000
ASC 815 fair value hedge and other basis adjustments	29,603
Total	$	2,130,263

NOTE 1615 – OTHER BORROWINGS

The following table summarizes Old National’s other ~~borrowings at September 30, 2019 and December 31, 2018:~~

borrowings:

	September 30,			December 31,
(dollars in thousands)	2019			2018			(dollars in thousands)	March 31, 2020		December 31, 2019
Old National Bancorp:							Old National Bancorp:
Senior unsecured notes (fixed rate 4.125%) maturing August 2024	$	175,000		$	175,000
Senior unsecured notes (fixed rate 4.125% maturing August 2024)							Senior unsecured notes (fixed rate 4.125% maturing August 2024)	$	175,000	$	175,000
Unamortized debt issuance costs related to senior unsecured notes		(754	)		(870	)	Unamortized debt issuance costs related to senior unsecured notes	(676)		(715)
Junior subordinated debentures (variable rates of 3.44% to 6.31%) maturing April 2032 to June 2037		60,310			60,310
Junior subordinated debentures (variable rates of 2.34% to 5.62%) maturing April 2032 to June 2037							Junior subordinated debentures (variable rates of 2.34% to 5.62%) maturing April 2032 to June 2037	45,093		52,310
Other basis adjustments		(2,859	)		(3,046	)	Other basis adjustments	(3,082)		(2,833)
Old National Bank:							Old National Bank:
Finance lease liabilities		7,527			5,262		Finance lease liabilities	7,284		7,406
Subordinated debentures (fixed rate 5.75%)		12,000			12,000		Subordinated debentures (fixed rate 5.75%)	12,000		12,000
Other		539			(773	)	Other	495		517
Total other borrowings	$	251,763		$	247,883		Total other borrowings	$	236,114	$	243,685

Contractual maturities of other borrowings at ~~September 30, 2019~~March 31, 2020 were as follows:

(dollars in thousands)

Due in 2019

$
120

Due in 2020

499

Due in 2021

524

Due in 2022

553

Due in 2023

591

Thereafter

252,550

Unamortized debt issuance costs and other
basis adjustments

(3,074
)
Total

$
251,763


(dollars in thousands)
Due in 2020	$	376
Due in 2021	524
Due in 2022	553
Due in 2023	591
Due in 2024	175,643
Thereafter	61,690
Unamortized debt issuance costs and other basis adjustments	(3,263)
Total	$	236,114

Senior Notes

In August 2014, Old National issued $175.0 million of senior unsecured notes with a 4.125% interest rate. These notes pay interest on February 15 and August 15. The notes mature on August 15, 2024.

Junior Subordinated Debentures

Junior subordinated debentures related to trust preferred securities are classified in “other borrowings.” On November 1, 2017, Old National acquired Anchor (MN) and exceeded $15 billion in assets. As a result, these securities can only be treated as Tier 2 capital for regulatory purposes, subject to certain limitations. Prior to the fourth quarter of 2017, these securities qualified as Tier 1 capital for regulatory purposes.

Through various acquisitions, Old National assumed junior subordinated debenture obligations related to various trusts that issued trust preferred securities. Old National guarantees the payment of distributions on the trust preferred securities issued by the trusts. Proceeds from the issuance of each of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by the trusts.

Old National, at any time, may redeem the junior subordinated debentures at par and, thereby cause a redemption of the trust preferred securities in whole or in part.

In February 2020, Old National redeemed at par $4.1 million of junior subordinated debentures issued in October 2002 by Anchor Bancorp, Inc. (as successor to VFSC, Inc.), which was acquired by Old National in 2017.This subsequently caused the redemption of all of the common and capital (preferred) securities issued by VFSC Capital Trust II by the same amount in aggregate.At the time of redemption, the rate on this floating rate instrument was 5.36%. In March 2020, Old National redeemed at par $3.1 million of junior subordinated debentures issued in April 2004 by Anchor Bancorp, Inc. (as successor to VFSC, Inc.), which was acquired by Old National in 2017.This subsequently caused the redemption of all of the common and capital (preferred) securities issued by VFSC Capital Trust III by the same amount in aggregate.At the time of redemption, the rate on this floating rate instrument was 4.71%.

The following table summarizes the terms of our outstanding junior subordinated ~~debentures at September 30, 2019:~~

debentures:

(dollars in thousands)

Rate at

(dollars in thousands)

Rate at

Issuance

September 30,

Name of Trust

Issuance Date

Amount

Rate

2019

Maturity Date

Name of Trust

Issuance Date

Issuance Amount

Rate

March 31, 2020

Maturity Date

VFSC Capital Trust I

April 2002

3,093

6-month LIBOR plus 3.70%

6.31%

April 22, 2032

VFSC Capital Trust I

April 2002

3,093

6-month LIBOR plus 3.70%

5.62%

April 22, 2032

VFSC Capital Trust II

October 2002

4,124

3-month LIBOR plus 3.45%

5.61%

November 7, 2032

VFSC Capital Trust III

April 2004

3,093

3-month LIBOR plus 2.80%

4.94%

September 8, 2034

St. Joseph Capital Trust II

March 2005

5,000

3-month LIBOR plus 1.75%

3.89%

March 17, 2035

St. Joseph Capital Trust II

March 2005

5,000

3-month LIBOR plus 1.75%

2.59%

March 17, 2035

Anchor Capital Trust III

August 2005

5,000

3-month LIBOR plus 1.55%

3.65%

September 30, 2035

Anchor Capital Trust III

August 2005

5,000

3-month LIBOR plus 1.55%

3.00%

September 30, 2035

Tower Capital Trust 2

December 2005

8,000

3-month LIBOR plus 1.34%

3.44%

December 30, 2035

Home Federal Statutory

Trust I

September 2006

15,000

3-month LIBOR plus 1.65%

3.77%

September 15, 2036

Home Federal Statutory
Trust I

September 2006

15,000

3-month LIBOR plus 1.65%

2.39%

September 15, 2036

Monroe Bancorp Capital

Trust I

July 2006

3,000

3-month LIBOR plus 1.60%

3.90%

October 7, 2036

Monroe Bancorp Capital
Trust I

July 2006

3,000

3-month LIBOR plus 1.60%

3.47%

October 7, 2036

Tower Capital Trust 3

December 2006

9,000

3-month LIBOR plus 1.69%

3.82%

March 1, 2037

Tower Capital Trust 3

December 2006

9,000

3-month LIBOR plus 1.69%

3.27%

March 1, 2037

Monroe Bancorp Statutory

Trust II

March 2007

5,000

3-month LIBOR plus 1.60%

3.72%

June 15, 2037

Monroe Bancorp Statutory
Trust II

March 2007

5,000

3-month LIBOR plus 1.60%

2.34%

June 15, 2037

Total

60,310

Total

45,093

Subordinated Debentures

On November 1, 2017, Old National assumed $12.0 million of subordinated fixed-to-floating notes related to the acquisition of Anchor (MN). The subordinated debentures have a 5.75% fixed rate of interest through October 29, 2020. From October 30, 2020 to the October 30, 2025 maturity date, the debentures have a floating rate of interest equal to the three-month LIBOR rate plus 4.356%.

Finance Lease Liabilities

Old National has long-term finance lease liabilities for certain banking centers totaling ~~$7.5~~$7.3 million. The economic substance of these leases is that Old National is financing the acquisition of the building through the lease and accordingly, the building is recorded as a right-of-use asset in premises and equipment and the lease is recorded as a liability in other borrowings. The right-of-use assets and lease liabilities are initially measured at the present value of the lease payments over the lease term using Old National’s incremental borrowing rate based on the information available at the commencement date of the lease. See Note 109 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities.

NOTE 1716 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of AOCI, net of ~~tax,~~tax:


(dollars in thousands)	Unrealized Gains and Losses on Available- for-Sale Debt Securities		Unrealized Gains and Losses on Held-to- Maturity Securities		Gains and Losses on Cash Flow Hedges		Defined Benefit Pension Plans		Total
Three Months Ended March 31, 2020
Balance at beginning of period	$	56,131	$	—	$	240	$	(164)	$	56,207
Other comprehensive income (loss) before reclassifications	80,369		—		5,886		—		86,255
Amounts reclassified from AOCI to income (1)	(4,000)		—		(325)		20		(4,305)
Balance at end of period	$	132,500	$	—	$	5,801	$	(144)	$	138,157

Three Months Ended March 31, 2019
Balance at beginning of period	$	(37,348)	$	(8,515)	$	1,099	$	(186)	$	(44,950)
Other comprehensive income (loss) before reclassifications	47,711		—		(296)		—		47,415
Amounts reclassified from AOCI to income (1)	79		351		(290)		15		155
Balance at end of period	$	10,442	$	(8,164)	$	513	$	(171)	$	2,620

(1)See tables below for ~~the three and nine months ended September 30, 2019 and 2018:~~

details about reclassifications to income.

(dollars in thousands)

Unrealized
Gains and
Losses on
Available-
for-Sale
Debt
Securities

Unrealized
Gains and
Losses on
Held-to-
Maturity
Securities

Gains and
Losses on
Cash Flow
Hedges

Defined
Benefit
Pension
Plans

Total

Three Months Ended September 30, 2019

Balance at beginning of period

$
48,701

$
(7,729
)

$
1,220

$
(155
)

$
42,037

Other comprehensive income (loss) before
   reclassifications

15,876

—

(58
)

—

15,818

Amounts reclassified from AOCI to income (1)

(335
)

992

(13
)

15

659

Balance at end of period

$
64,242

$
(6,737
)

$
1,149

$
(140
)

$
58,514

Three Months Ended September 30, 2018

Balance at beginning of period

$
(59,356
)

$
(9,335
)

$
2,277

$
(289
)

$
(66,703
)
Other comprehensive income (loss) before
   reclassifications

(13,989
)

—

548

—

(13,441
)
Amounts reclassified from AOCI to income (1)

(117
)

482

(171
)

20

214

Balance at end of period

$
(73,462
)

$
(8,853
)

$
2,654

$
(269
)

$
(79,930
)

Nine Months Ended September 30, 2019

Balance at beginning of period

$
(37,348
)

$
(8,515
)

$
1,099

$
(186
)

$
(44,950
)
Other comprehensive income (loss) before
   reclassifications

102,737

—

357

—

103,094

Amounts reclassified from AOCI to income (1)

(1,147
)

1,778

(307
)

46

370

Balance at end of period

$
64,242

$
(6,737
)

$
1,149

$
(140
)

$
58,514

Nine Months Ended September 30, 2018

Balance at beginning of period

$
(35,557
)

$
(12,107
)

$
(2,337
)

$
(271
)

$
(50,272
)
Amount reclassified from AOCI to retained
      earnings for cumulative effect of
      change in accounting principle

—

—

(52
)

—

(52
)
Amounts reclassified from AOCI to retained
      earnings related to the Tax Cuts and Jobs
      Act of 2017

(7,583
)

(2,600
)

(509
)

(59
)

(10,751
)
Other comprehensive income (loss) before
   reclassifications

(28,475
)

4,514

5,135

—

(18,826
)
Amounts reclassified from AOCI to income (1)

(1,847
)

1,340

417

61

(29
)
Balance at end of period

$
(73,462
)

$
(8,853
)

$
2,654

$
(269
)

$
(79,930
)

~~(1)~~

~~See tables below for details about reclassifications to income.~~

The following table summarizes the significant amounts reclassified out of each component of ~~AOCI for the three months ended September 30, 2019 and 2018:~~

AOCI:

	Amount Reclassified						Affected Line Item in the
Details about AOCI Components	from AOCI						Statement of Income	Details about AOCI Components	Amount Reclassified from AOCI					Affected Line Item in the Statement of Income
	Three Months Ended
	September 30,								Three Months Ended March 31,
(dollars in thousands)	2019			2018				(dollars in thousands)	2020		2019
Unrealized gains and losses on available-for-sale debt securities	$	424		$	135		Net debt securities gains (losses)	Unrealized gains and losses on available-for-sale debt securities	$	5,174	$	(103)	Debt securities gains (losses), net
		(89	)		(18	)	Income tax (expense) benefit		(1,174)		24		Income tax (expense) benefit
	$	335		$	117		Net income		$	4,000	$	(79)	Net income
Unrealized gains and losses on held-to-maturity securities	$	(1,384	)	$	(628	)	Interest income (expense)	Unrealized gains and losses on held-to-maturity securities	$	—	$	(457)	Interest income (expense)
		392			146		Income tax (expense) benefit		—		106		Income tax (expense) benefit
	$	(992	)	$	(482	)	Net income		$	—	$	(351)	Net income
Gains and losses on cash flow hedges Interest rate contracts	$	21		$	226		Interest income (expense)	Gains and losses on cash flow hedges Interest rate contracts	$	431	$	385	Interest income (expense)
		(8	)		(55	)	Income tax (expense) benefit		(106)		(95)		Income tax (expense) benefit
	$	13		$	171		Net income		$	325	$	290	Net income
Amortization of defined benefit pension items								Amortization of defined benefit pension items
Actuarial gains (losses)	$	(20	)	$	(27	)	Salaries and employee benefits	Actuarial gains (losses)	$	(27)	$	(20)	Salaries and employee benefits
		5			7		Income tax (expense) benefit		7		5		Income tax (expense) benefit
	$	(15	)	$	(20	)	Net income		$	(20)	$	(15)	Net income

Total reclassifications for the period	$	(659	)	$	(214	)	Net income	Total reclassifications for the period	$	4,305	$	(155)	Net income

~~The following table summarizes the significant amounts reclassified out of each component of AOCI for the nine months ended September 30, 2019 and 2018:~~

Amount Reclassified

Affected Line Item in the
Details about AOCI Components

from AOCI

Statement of Income

Nine Months Ended

September 30,

(dollars in thousands)

2019

2018

Unrealized gains and losses on
   available-for-sale debt securities

$
1,486

$
2,417

Net debt securities gains (losses)

(339
)

(570
)

Income tax (expense) benefit

$
1,147

$
1,847

Net income
Unrealized gains and losses on
   held-to-maturity securities

$
(2,405
)

$
(1,740
)

Interest income/(expense)

627

400

Income tax (expense) benefit

$
(1,778
)

$
(1,340
)

Net income
Gains and losses on cash flow hedges
   Interest rate contracts

$
412

$
(553
)

Interest income/(expense)

(105
)

136

Income tax (expense) benefit

$
307

$
(417
)

Net income
Amortization of defined benefit
   pension items

  Actuarial gains (losses)

$
(61
)

$
(81
)

Salaries and employee benefits

15

20

Income tax (expense) benefit

$
(46
)

$
(61
)

Net income

Total reclassifications for the period

$
(370
)

$
29

Net income

NOTE 1817 – SHARE-BASED COMPENSATION

At ~~September 30, 2019,~~March 31, 2020, Old National had ~~3.7~~3.2 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan. The granting of awards to key employees is typically in the form of restricted stock awards or units.

Restricted Stock Awards

Old National granted ~~211~~121 thousand time-based restricted stock awards to certain key officers during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, with shares vesting generally over a ~~thirty-six~~36 month period. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. At ~~September 30, 2019,~~March 31, 2020, unrecognized compensation expense was estimated to be ~~$5.1~~$5.4 million for unvested restricted stock awards. The cost is expected to be recognized over a weighted-average period of ~~2.0~~2.2 years.

Old National recorded share-based compensation expense, net of tax, related to restricted stock awards of $0.7 million during the three months ended ~~September 30, 2019 and $1.9 million during the nine months ended September 30, 2019,~~March 31, 2020, compared to $0.6 million during the three months ended ~~September 30, 2018 and $1.7 million during the nine months ended September 30, 2018.~~

March 31, 2019.

Restricted Stock Units

Old National granted ~~375~~210 thousand shares of performance based restricted stock units to certain key officers during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, with shares vesting at the end of a ~~thirty-six~~36 month period based on the achievement of certain targets. For certain awards, the level of performance could increase or decrease the number of shares earned. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. At ~~September 30, 2019,~~March 31, 2020, unrecognized compensation expense was estimated to be ~~$5.4~~$5.9 million. The cost is expected to be recognized over a weighted-average period of ~~1.8~~2.2 years.

Old National recorded share-based compensation expense, net of tax, related to restricted stock units of ~~$1.0~~$1.4 million during the three months ended ~~September 30, 2019 and $2.6 million during the nine months ended September 30, 2019,~~March 31, 2020, compared to ~~$0.9~~$0.8 million during the three months ended ~~September 30, 2018 and $2.5 million during the nine months ended September 30, 2018.~~

March 31, 2019.

Stock Options

Old National has not granted stock options since 2009. However, Old National did acquire stock options and stock appreciation rights through prior year acquisitions. Old National ~~did 0t record any share-based compensation expense related to these stock options during the nine months ended September 30, 2019 or 2018.~~

~~Stock Appreciation Rights~~

~~Old National has never granted stock appreciation rights. However, Old National did acquire stock appreciation rights through a prior year acquisition. Old National did 0t record any~~recorded 0 incremental expense associated with the conversion of these options and stock appreciation ~~rights during the nine months ended September 30, 2019 or 2018.~~ rights.At ~~September 30, 2019, 57~~March 31, 2020, 50 thousand stock appreciation rights remained outstanding.

NOTE 1918 – INCOME TAXES

Following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statements of income:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,									Three Months Ended March 31,
(dollars in thousands)		2019				2018				2019				2018			(dollars in thousands)	2020			2019
Provision at statutory rate of 21%	$	17,437			$	11,901			$	48,245			$	33,171			Provision at statutory rate of 21%	$	5,372		$	14,570
Tax-exempt income:																	Tax-exempt income:
Tax-exempt interest		(2,511	)			(2,179	)			(7,645	)			(6,607	)		Tax-exempt interest	(2,632)			(2,531)
Section 291/265 interest disallowance		113				84				346				220			Section 291/265 interest disallowance	73			111
Company-owned life insurance income		(568	)			(621	)			(1,806	)			(1,679	)		Company-owned life insurance income	(647)			(669)
Tax-exempt income		(2,966	)			(2,716	)			(9,105	)			(8,066	)		Tax-exempt income	(3,206)			(3,089)
State income taxes		1,496				2,091				5,053				4,307			State income taxes	(8)			1,999
Interim period effective rate adjustment		(1,598	)			(81	)			(557	)			944			Interim period effective rate adjustment	3,267			688
Tax credit investments - federal		(2,443	)			(5,483	)			(3,577	)			(16,224	)		Tax credit investments - federal	(1,902)			(420)
Other, net		1,328				(387	)			658				495			Other, net	(584)			(644)
Income tax expense	$	13,254			$	5,325			$	40,717			$	14,627			Income tax expense	$	2,939		$	13,104
Effective tax rate		16.0		%		9.4		%		17.7		%		9.3		%	Effective tax rate	11.5		%	18.9		%

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ based on the current estimate of the effective annual rate.

The ~~higher~~lower effective tax rate during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 when compared to the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily the result of ~~a decrease~~an increase in federal tax credits ~~available as well as an increase in pre-tax book income.~~

available.

Unrecognized Tax Benefits

Old National has an immaterial amount of unrecognized tax benefits. Old National is currently under audit by the Internal Revenue Service. Old National expects the total amount of unrecognized tax benefits to be reduced to 0 after the audit is finalized.

Net Deferred Tax Assets

Significant components of net deferred tax assets (liabilities) were as ~~follows at September 30, 2019 and December 31, 2018:~~

follows:

	September 30,			December 31,
(dollars in thousands)	2019			2018			(dollars in thousands)	March 31, 2020		December 31, 2019
Deferred Tax Assets							Deferred Tax Assets
Allowance for loan losses, net of recapture	$	14,651		$	14,514		Allowance for loan losses, net of recapture	$	28,603	$	14,179
Benefit plan accruals		17,144			21,754		Benefit plan accruals	13,268		19,673
Alternative minimum tax credit		1,272			2,545		Alternative minimum tax credit	1,272		1,272
Net operating loss carryforwards		25,369			31,765		Net operating loss carryforwards	21,575		25,336
Federal tax credits		—			1,779		Federal tax credits	3,238		—
Deferred gain on securities		1,563			1,976		Deferred gain on securities	3,339		3,754
Acquired loans		18,872			26,956		Acquired loans	15,341		16,784
Operating lease liabilities		28,460			—		Operating lease liabilities	25,591		26,503
Lease exit obligation		—			1,025
Unrealized losses on available-for-sale investment securities		—			11,853
Unrealized losses on held-to-maturity investment securities		1,869			2,497

Tax credit investments and other partnerships		1,501			3,004		Tax credit investments and other partnerships	2,808		1,765
Other real estate owned		156			144		Other real estate owned	143		141
Other, net		738			3,167		Other, net	790		591
Total deferred tax assets		111,595			122,979		Total deferred tax assets	115,968		109,998
Deferred Tax Liabilities							Deferred Tax Liabilities
Accretion on investment securities		(897	)		(595	)

Purchase accounting		(17,575	)		(18,100	)	Purchase accounting	(18,187)		(17,564)
Loan servicing rights		(6,104	)		(6,141	)	Loan servicing rights	(5,989)		(6,289)
Premises and equipment		(11,840	)		(8,507	)	Premises and equipment	(8,139)		(12,167)
Prepaid expenses		(673	)		(681	)	Prepaid expenses	(973)		(973)
Operating lease right-of-use assets		(27,348	)		—		Operating lease right-of-use assets	(23,285)		(25,448)
Unrealized gains on available-for-sale investment securities		(18,152	)		—		Unrealized gains on available-for-sale investment securities	(38,162)		(15,751)
Unrealized gains on hedges		(374	)		(358	)	Unrealized gains on hedges	(1,889)		(78)
Other, net		(2,109	)		(1,549	)	Other, net	(1,768)		(2,023)
Total deferred tax liabilities		(85,072	)		(35,931	)	Total deferred tax liabilities	(98,392)		(80,293)
Net deferred tax assets	$	26,523		$	87,048		Net deferred tax assets	$	17,576	$	29,705

Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at ~~September 30, 2019~~March 31, 2020 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million. Of this total, $50.9 million was acquired from Anchor (WI), and $1.9 million was acquired from Lafayette Savings Bank. Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. Old National Bank has no intention of making such a nondividend distribution. Accordingly, under current accounting principles, a related deferred income tax liability of $13.0 million has not been recognized.

NaN valuation allowance was recorded at ~~September 30, 2019~~March 31, 2020 or December 31, ~~2018~~2019 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards totaling ~~$78.5~~$60.1 million at ~~September 30, 2019~~March 31, 2020 and ~~$104.5~~$78.5 million at December 31, ~~2018.~~2019. This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016. If not used, the federal net operating loss carryforwards will expire from 2029 to 2033. Old National has alternative minimum tax ~~(“AMT”)~~ credit carryforwards subject to section 382 limitations and included in net deferred tax assets totaling $1.3 million at ~~September 30, 2019~~March 31, 2020 and ~~$10.1~~$1.3 million at December 31, ~~2018.~~2019. The enactment of H.R. 1 ~~eliminates~~eliminated the parallel tax system known as the ~~AMT~~alternative minimum tax and ~~allows~~allowed any existing ~~AMT~~alternative minimum tax credits to be used to reduce regular tax or be refunded from 2018 to 2021. ASC 740 allows for the reclassification of the AMT credit from a deferred tax asset to a current tax asset, except for the amount limited by section 382. Old National has $1.3 million of AMT credit carryforward subject to section 382 limitations, which is included in deferred tax assets. Old National has recorded state net operating loss carryforwards totaling ~~$148.4~~$150.3 million at ~~September 30, 2019~~March 31, 2020 and ~~$165.6~~$148.4 million at December 31, ~~2018.~~2019. If not used,

the state net operating loss carryforwards will expire from 2024 to ~~2033.~~2035. Old National had federal tax credit carryforwards of ~~$1.8~~$3.2 million at ~~December~~March 31, ~~2018.~~

2020.

The federal and recorded state net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code section 382. Old National believes that all of the recorded net operating loss carryforwards will be used prior to expiration.

NOTE 2019 – 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. The notional amount of these derivative instruments was ~~$567.0~~$905.5 million at ~~September 30, 2019~~March 31, 2020 and ~~$1.482 billion~~$665.5 million at December 31, ~~2018.~~2019. These derivative financial instruments at ~~September 30~~,March 31, 2020 consisted of $380.5 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, $125.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances, and $400.0 million notional amount interest rate collars and floors related to variable-rate commercial loan pools. Derivative financial instruments at December 31, 2019 consisted of ~~$32.0~~$130.5 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, $25.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances, and $510.0 million notional amount interest rate collars and floors related to variable-rate commercial loan pools. Derivative financial instruments at December 31, 2018 consisted of $757.0 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, $525.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances, and $200.0 million notional amount interest rate collars related to a variable-rate commercial loan pool. These hedges were entered into to manage interest rate risk.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.

Consistent with this guidance, 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.

While separate measurement and presentation of ineffectiveness is eliminated, paragraph 815-20-45-1A requires the change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness be presented in the same income statement line item that is used to present the earnings effect of the hedged item.

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~~,March 31, 2020, the notional amount of the interest rate lock commitments was $371.6 million and forward commitments were $388.8 million. At December 31, 2019, the notional amount of the interest rate lock commitments was ~~$147.7~~$65.7 million and forward commitments were ~~$192.4 million. At December 31, 2018, the notional amount of the interest rate lock commitments was $27.6 million and forward commitments were $34.5~~$101.6 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 $~~1.208~~$1.380 billion at ~~September 30, 2019.~~March 31, 2020. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were ~~$793.4 million~~$1.298 billion at December 31,~~, 2018.~~ 2019. 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. The notional amounts of these foreign currency forward contracts and the offsetting counterparty derivative instruments were ~~$3.2~~$5.3 million at ~~September 30, 2019~~March 31, 2020 and ~~$3.6~~$8.2 million at December 31, ~~2018.~~

2019.

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.

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 ~~$1.0~~$6.7 million will be reclassified to interest income and ~~$0.7~~$0.9 million will be reclassified to interest expense.

The following table summarizes the fair value of derivative financial instruments utilized by Old National:

Balance

Balance

Sheet

Fair

Sheet

Fair

(dollars in thousands)

Location

Value

Location

Value

September 30, 2019

Derivatives designated as hedging instruments

Interest rate contracts

Other assets

$
8,937

Other liabilities

$
1,115

Total derivatives designated as hedging instruments

$
8,937

$
1,115

Derivatives not designated as hedging instruments

Interest rate contracts (1)

Other assets

$
57,695

Other liabilities

$
14,214

Mortgage contracts

Other assets

3,510

Other liabilities

—

Foreign currency contracts

Other assets

204

Other liabilities

155

Total derivatives not designated as hedging instruments

$
61,409

$
14,369

Total

$
70,346

$
15,484

December 31, 2018

Derivatives designated as hedging instruments

Interest rate contracts

Other assets

$
12,741

Other liabilities

$
1,603

Total derivatives designated as hedging instruments

$
12,741

$
1,603

Derivatives not designated as hedging instruments

Interest rate contracts (1)

Other assets

$
15,278

Other liabilities

$
10,562

Mortgage contracts

Other assets

874

Other liabilities

316

Foreign currency contracts

Other assets

112

Other liabilities

69

Total derivatives not designated as hedging instruments

$
16,264

$
10,947

Total

$
29,005

$
12,550

~~(1)~~

The fair values of counterparty interest rate swaps are 0 due to the settlement of centrally-cleared variation margin rules. The net adjustment was $43.8 million as of September 30, 2019 and $4.8 million as of December 31, 2018.


(dollars in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
March 31, 2020
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	21,630	Other liabilities	$	1,443
Total derivatives designated as hedging instruments		$	21,630		$	1,443
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other assets	$	114,839	Other liabilities	$	26,630
Mortgage contracts	Other assets	13,081		Other liabilities	6,913
Foreign currency contracts	Other assets	323		Other liabilities	233
Total derivatives not designated as hedging instruments		$	128,243		$	33,776
Total		$	149,873		$	35,219

December 31, 2019
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	7,157	Other liabilities	$	1,046
Total derivatives designated as hedging instruments		$	7,157		$	1,046
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other assets	$	42,224	Other liabilities	$	10,883
Mortgage contracts	Other assets	1,702		Other liabilities	354
Foreign currency contracts	Other assets	218		Other liabilities	110
Total derivatives not designated as hedging instruments		$	44,144		$	11,347
Total		$	51,301		$	12,393

(1)The fair values of counterparty interest rate swaps are 0 due to the settlement of centrally-cleared variation margin rules. The net adjustment was $88.9 million as of March 31, 2020 and $31.6 million as of December 31, 2019.

Summary information about the interest rate swaps designated as fair value hedges is as follows:

	September 30,			December 31,
(dollars in thousands)	2019			2018			(dollars in thousands)	March 31, 2020			December 31, 2019
Notional amounts	$	32,000		$	757,000		Notional amounts	$	380,500		$	130,500
Weighted average pay rates		3.35	%		2.48	%	Weighted average pay rates	0.33		%	1.82		%
Weighted average receive rates		4.92	%		2.70	%	Weighted average receive rates	1.33		%	2.20		%
Weighted average maturity (in years)		3.1			3.9		Weighted average maturity (in years)	2.9			2.8
Fair value of swaps	$	1,903		$	9,683		Fair value of swaps	$	10,797		$	1,555

The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income ~~for the three and nine months ended September 30, 2019 and 2018~~ were as follows:

(dollars in thousands)

Gain (Loss)

Recognized

Location of Gain or

Gain (Loss)

Hedged Items

Location of Gain or

in Income on

Derivatives in

(Loss) Recognized in

Recognized

in Fair Value

(Loss) Recognized in

Related

Fair Value Hedging

in Income on

in Income on

Hedging

in Income on Related

Hedged

Relationships

Derivative

Derivative

Relationships

Hedged Item

Items

Three Months Ended

September 30, 2019

Interest rate contracts

Interest income/(expense)

$
12

Fixed-rate debt

Interest income/(expense)

$
(14
)
Three Months Ended

September 30, 2018

Interest rate contracts

Interest income/(expense)

$
(2,786
)

Fixed-rate debt

Interest income/(expense)

$
2,778

Nine Months Ended

September 30, 2019

Interest rate contracts

Interest income/(expense)

$
12,925

Fixed-rate debt

Interest income/(expense)

$
(12,914
)
Nine Months Ended

September 30, 2018

Interest rate contracts

Interest income/(expense)

$
(4,450
)

Fixed-rate debt

Interest income/(expense)

$
4,433

(dollars in thousands)

Location of Gain or
(Loss) Recognized in
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

Gain (Loss) Recognized in Income on Related Hedged Items

Derivatives in
Fair Value Hedging Relationships

Three Months Ended March 31, 2020

Interest rate contracts

Interest income/(expense)

9,241

Fixed-rate debt

Interest income/(expense)

(9,228)

Three Months Ended March 31, 2019

Interest rate contracts

Interest income/(expense)

6,552

Fixed-rate debt

Interest income/(expense)

(6,548)

Summary information about the interest rate swaps designated as cash flow hedges is as follows:

	September 30,				December 31,
(dollars in thousands)	2019				2018			(dollars in thousands)	March 31, 2020			December 31, 2019
Notional amounts	$	25,000			$	525,000		Notional amounts	$	125,000		$	25,000
Weighted average pay rates		3.52		%		2.21	%	Weighted average pay rates	1.11		%	3.52		%
Weighted average receive rates		2.26		%		2.63	%	Weighted average receive rates	1.46		%	1.93		%
Weighted average maturity (in years)		2.3				1.4		Weighted average maturity (in years)	1.8			2.1
Unrealized gains (losses)	$	(1,115	)		$	146		Unrealized gains (losses)	$	(1,443)		$	(954)

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. Summary information about the collars designated as cash flow hedges is as follows:

	September 30,			December 31,
(dollars in thousands)	2019			2018			(dollars in thousands)	March 31, 2020			December 31, 2019
Notional amounts	$	300,000		$	200,000		Notional amounts	$	300,000		$	300,000
Weighted average cap rates		3.21	%		3.44	%	Weighted average cap rates	3.21		%	3.21		%
Weighted average floor rates		2.21	%		2.38	%	Weighted average floor rates	2.21		%	2.21		%
Weighted average rates		2.08	%		2.35	%	Weighted average rates	1.25		%	1.70		%
Weighted average maturity (in years)		2.1			2.8		Weighted average maturity (in years)	1.6			1.9
Unrealized gains (losses)	$	4,852		$	1,309		Unrealized gains (losses)	$	9,214		$	3,691

Old National has designated its interest rate floor ~~spread~~ 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. Summary information about the interest rate floor transactions designated as cash flow hedgesis as follows:


(dollars in thousands)	March 31, 2020
Notional amounts	$	100,000
Weighted average floor strike rate	0.75		%
Weighted average rates	0.99		%
Weighted average maturity (in years)	3.0
Unrealized gains (losses)	$	1,619

The structure of Old National's interest rate floor spread transactions at December 31, 2019 was such that Old National received an incremental amount if the index fell below the purchased floor strike rate. Old National ~~pays~~paid an incremental amount if the index ~~falls~~fell below the sold floor rate. Floor corridor protection iswas limited to the spread between the purchased floor strike rate and the sold floor rate. No payments ~~are~~were required if the index ~~remains~~remained above the purchased floor strike rate. Old National terminated these interest rate floor spread transactions during the first quarter of 2020. Summary information about the floor spread transactions designated as cash flow hedges isat December 31, 2019 was as follows:

September 30,
(dollars in thousands)
2019
Notional amounts
$
210,000

Weighted average purchased floor strike rate

2.00

%
Weighted average sold floor rate

1.00

%
Weighted average rate

2.08

%
Weighted average maturity (in years)

2.3

Unrealized gains (losses)
$
2,182


(dollars in thousands)	December 31, 2019
Notional amounts	$	210,000
Weighted average purchased floor strike rate	2.00		%
Weighted average sold floor rate	1.00		%
Weighted average rate	1.70		%
Weighted average maturity (in years)	2.1
Unrealized gains (losses)	$	1,820

~~Old National had 0 interest rate floor spread transactions designated as cash flow hedges as of December 31, 2018.~~

The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income ~~for the three and nine months ended September 30, 2019 and 2018~~ were as follows:

Three Months Ended

Three Months Ended

September 30,

September 30,

(dollars in thousands)

2019

2018

2019

2018

Gain (Loss)

Gain (Loss)

Derivatives in

Location of Gain or

Recognized in Other

Reclassified from

Cash Flow Hedging

(Loss) Reclassified

Comprehensive

AOCI into

Relationships

from AOCI into Income

Income on Derivative

Income

Interest rate contracts

Interest income/(expense)

$
(73
)

$
725

$
21

$
226

Nine Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

2019

2018

2019

2018

Gain (Loss)

Gain (Loss)

Derivatives in

Location of Gain or

Recognized in Other

Reclassified from

Cash Flow Hedging

(Loss) Reclassified

Comprehensive

AOCI into

Relationships

from AOCI into Income

Income on Derivative

Income

Interest rate contracts

Interest income/(expense)

$
479

$
6,804

$
412

$
(553
)


		Three Months Ended March 31,						Three Months Ended March 31,
(dollars in thousands)		2020		2019		2020		2019
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)	$	7,803	$	(392)	$	431	$	385

The effect of derivatives not designated as hedging instruments on the consolidated statements of income ~~for the three and nine months ended September 30, 2019 and 2018~~ were as follows:

		Three Months Ended
		September 30,								Three Months Ended March 31,
(dollars in thousands)		2019			2018			(dollars in thousands)		2020		2019
	Location of Gain or (Loss)	Gain (Loss)
Derivatives Not Designated as	Recognized in Income on	Recognized in Income on
Hedging Instruments	Derivative	Derivative
Derivatives Not Designated as Hedging Instruments								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)	$	(116	)	$	(23	)	Interest rate contracts (1)	Other income/(expense)	$	(466)	$	(37)
Mortgage contracts	Mortgage banking revenue		1,110			(43	)	Mortgage contracts	Mortgage banking revenue	4,820		1,022
Foreign currency contracts	Other income/(expense)		—			20		Foreign currency contracts	Other income/(expense)	(19)		3
Total		$	994		$	(46	)	Total		$	4,335	$	988


		Nine Months Ended
		September 30,
(dollars in thousands)		2019			2018
	Location of Gain or (Loss)	Gain (Loss)
Derivatives Not Designated as	Recognized in Income on	Recognized in Income on
Hedging Instruments	Derivative	Derivative
Interest rate contracts (1)	Other income/(expense)	$	(247	)	$	4
Mortgage contracts	Mortgage banking revenue		2,951			394
Foreign currency contracts	Other income/(expense)		(11	)		43
Total		$	2,693		$	441

(1)Includes the valuation differences between the customer and offsetting swaps.

NOTE 2120 – COMMITMENTS AND CONTINGENCIES

COVID-19

In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. The COVID-19 virus continues to aggressively spread globally and has spread to over 185 countries, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. While the spread of the COVID-19 virus has minimally impacted our operations as of March 31, 2020, it has caused significant economic disruption throughout the United States as state and local governments issued “shelter at home” orders along with the closing of non-essential businesses. The potential financial impact is unknown at this time. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of Old National's customers to fulfill their contractual obligations to the Company. This could cause Old National to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Old National's intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

Litigation

In the normal course of business, Old National Bancorp and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.

Old National contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, Old National cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of Old National, although the outcome of such matters could be material to Old National’s operating results and cash flows for a particular future period, depending on, among other things, the level of Old National’s revenues or income for such period. Old National will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated.

Old National is not currently involved in any material litigation.

Credit-Related Financial Instruments

In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of ~~$2.891~~$2.898 billion and standby letters of credit of ~~$93.3~~$82.4 million at ~~September 30, 2019.~~March 31, 2020. At ~~September 30, 2019,~~March 31, 2020, approximately ~~$2.650~~$2.621 billion of the loan commitments had fixed rates and ~~$241.2~~$277.0 million had floating rates, with the floating interest rates ranging from 1%0% to ~~15%~~13%. At December 31, ~~2018,~~2019, loan commitments totaled ~~$3.566~~$2.779 billion and standby letters of credit totaled ~~$319.0~~$87.8 million. These commitments are not

reflected in the consolidated financial statements. The allowance for unfunded loan commitments totaled $~~2.3~~$9.0 million at ~~September 30, 2019~~March 31, 2020 and ~~$2.5~~$2.7 million at December 31, ~~2018.~~

2019. The increase in allowance for unfunded loan commitments at March 31, 2020 included a cumulative-effect adjustment of $4.5 million due to the adoption of ASC 326. See Note 2 for additional information about CECL for unfunded loan commitments.

Old National had credit extensions with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients totaling ~~$9.8~~$8.7 million at ~~September 30, 2019~~March 31, 2020 and ~~$15.5 million at~~ December 31, ~~2018.~~2019. Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $7.7 million at ~~September 30, 2019~~March 31, 2020 and ~~$7.8 million at~~ December 31, ~~2018.~~2019. Old National did not provide collateral for the remaining credit extensions.

Visa Class B Restricted Shares

In 2008, Old National received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the final settlement of certain litigation for which Visa is indemnified by the holders of Visa’s Class B shares, including Old National. Visa funded an escrow account from its initial public offering to settle these litigation claims. Increases in litigation claims requiring Visa to fund the escrow account due to insufficient funds will result in a reduction of the conversion ratio of each Visa Class B share

to unrestricted Class A shares. As of ~~September 30, 2019,~~March 31, 2020, the conversion ratio was 1.6228. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the 65,466 Class B shares that Old National owns at ~~September 30, 2019~~March 31, 2020 are carried at a 0 cost basis and are included in other assets with our equity securities that have no readily determinable fair value.

NOTE 2221 – FINANCIAL GUARANTEES

Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees in accordance with FASB ASC 460-10 (FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others),which requires Old National to record the instruments at fair value. Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties. Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract. Credit risk associated with standby letters of credit is essentially the same as that associated with extending loans to clients and is subject to normal credit policies. The term of these standby letters of credit is typically one year or less. At ~~September 30,~~March 31, 2020, the notional amount of standby letters of credit was $82.4 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.5 million. At December 31, 2019, the notional amount of standby letters of credit was ~~$93.3~~$87.8 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.6 million. ~~At December 31, 2018, the notional amount of standby letters of credit was $319.0 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.5 million.~~

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of ~~$38.5~~$50.1 million at ~~September 30, 2019.~~

March 31, 2020.

NOTE 2322 – SEGMENT INFORMATION

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Old National Bank, Old National’s bank subsidiary, is the only significant subsidiary upon which management makes decisions regarding how to allocate resources and assess performance. Each of the branches of Old National Bank provide a group of similar community banking services, including such products and services as commercial, real estate and consumer loans, time deposits, checking and savings accounts, cash management, brokerage, trust, and investment advisory services. The individual bank branches located throughout our Midwest footprint have similar operating and economic characteristics. While the chief decision maker monitors the revenue streams of the various products, services, and regional locations, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the community banking services and branch locations are considered by management to be aggregated into 1 reportable operating segment, community banking.

NOTE 2423 – 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 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 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.~~

•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).

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 September 30, 2019 Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs					Fair Value Measurements at March 31, 2020 Using
(dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)		(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									Financial Assets
Equity securities	$	6,562	$	6,562	$	—	$	—	Equity securities	$	6,870	$	6,870	$	—	$	—
Investment securities available-for-sale:									Investment securities available-for-sale:
U.S. Treasury		5,494		5,494		—		—	U.S. Treasury	11,733		11,733		—		—
U.S. government-sponsored entities and agencies		486,104		—		486,104		—	U.S. government-sponsored entities and agencies	519,171		—		519,171		—
Mortgage-backed securities - Agency		3,136,180		—		3,136,180		—	Mortgage-backed securities - Agency	3,210,000		—		3,210,000		—
States and political subdivisions		969,475		—		969,435		40	States and political subdivisions	1,302,395		—		1,302,395		—
Pooled trust preferred securities		7,695		—		—		7,695	Pooled trust preferred securities	7,422		—		—		7,422
Other securities		312,031		31,317		280,714		—	Other securities	309,304		31,670		277,634		—
Residential loans held for sale		58,285		—		58,285		—	Residential loans held for sale	54,209		—		54,209		—
Derivative assets		70,346		—		70,346		—	Derivative assets	149,873		—		149,873		—
Financial Liabilities									Financial Liabilities
Derivative liabilities		15,484		—		15,484		—	Derivative liabilities	35,219		—		35,219		—

Fair Value Measurements at December 31, 2018 Using

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

(dollars in thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Financial Assets

Equity securities

$
5,582

$
5,582

$
—

$
—

Investment securities available-for-sale:

U.S. Treasury

5,301

5,301

—

—

U.S. government-sponsored entities and agencies

628,151

—

628,151

—

Mortgage-backed securities - Agency

2,209,295

—

2,209,295

—

States and political subdivisions

940,429

—

936,321

4,108

Pooled trust preferred securities

8,495

—

—

8,495

Other securities

331,745

30,259

301,486

—

Residential loans held for sale

14,911

—

14,911

—

Derivative assets

29,005

—

29,005

—

Financial Liabilities

Derivative liabilities

12,550

—

12,550

—


			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. Treasury	17,682		17,682		—		—
U.S. government-sponsored entities and agencies	592,984		—		592,984		—
Mortgage-backed securities - Agency	3,183,861		—		3,183,861		—
States and political subdivisions	1,275,643		—		1,275,603		40
Pooled trust preferred securities	8,222		—		—		8,222
Other securities	306,699		31,169		275,530		—
Residential loans held for sale	46,898		—		46,898		—
Derivative assets	51,301		—		51,301		—
Financial Liabilities
Derivative liabilities	12,393		—		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):

	Pooled Trust			States and
	Preferred			Political
(dollars in thousands)	Securities			Subdivisions			(dollars in thousands)	Pooled Trust Preferred Securities		States and Political Subdivisions
Three Months Ended September 30, 2019
Three Months Ended March 31, 2020							Three Months Ended March 31, 2020
Balance at beginning of period	$	7,836		$	40		Balance at beginning of period	$	8,222	$	40
Accretion of discount		3			—		Accretion of discount	4		—
Sales/payments received		(14	)		—		Sales/payments received	(17)		(40)
Increase (decrease) in fair value of securities		(130	)		—
Decrease in fair value of securities							Decrease in fair value of securities	(787)		—
Balance at end of period	$	7,695		$	40		Balance at end of period	$	7,422	$	—

Three Months Ended September 30, 2018
Balance at beginning of period	$	8,205		$	4,028
Accretion (amortization) of discount		3			(19	)
Sales/payments received		(17	)		—
Increase (decrease) in fair value of securities		881			(30	)
Balance at end of period	$	9,072		$	3,979

Nine Months Ended September 30, 2019
Three Months Ended March 31, 2019							Three Months Ended March 31, 2019
Balance at beginning of period	$	8,495		$	4,108		Balance at beginning of period	$	8,495	$	4,108
Accretion of discount		9			—		Accretion of discount	4		—
Sales/payments received		(46	)		(35	)	Sales/payments received	(15)		(35)
Increase (decrease) in fair value of securities		(763	)		—
Decrease in fair value of securities							Decrease in fair value of securities	(361)		—
Transfers out of Level 3		—			(4,033	)	Transfers out of Level 3	—		(4,033)
Balance at end of period	$	7,695		$	40		Balance at end of period	$	8,123	$	40

Nine Months Ended September 30, 2018
Balance at beginning of period	$	8,448		$	—
Accretion (amortization) of discount		13			(37	)
Sales/payments received		(322	)		—
Increase (decrease) in fair value of securities		933			(45	)
Transfers into Level 3		—			4,061
Balance at end of period	$	9,072		$	3,979

The accretion ~~or amortization~~ of discounts on securities in the table above is included in interest income. ~~An increase in fair value is reflected in the balance sheet as an increase~~The decrease in the fair value of ~~investment~~ securities ~~available-for-sale, an increase~~ in ~~accumulated other comprehensive income, which~~the table above is included in ~~shareholders’~~

~~equity, and a decrease~~the unrealized holding gains (losses) for the period in the statement of other ~~assets related to the tax impact.~~ 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 the ~~nine~~three months ended ~~September 30,~~March 31, 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 a $4.1 million state and political subdivisions security to Level 3 during the nine months ended September 30, 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:

Valuation

Unobservable

Range (Weighted

(dollars in thousands)

Fair Value

Techniques

Input

Average)

September 30, 2019

Pooled trust preferred securities

$
7,695

Discounted cash flow

Constant prepayment rate (a)

0.00%

Additional asset defaults (b)

6.3% - 9.2% (7.2%)

Expected asset recoveries (c)

0.00%

State and political subdivisions

40

Discounted cash flow

No observable inputs

N/A

Local municipality issuance

Old National owns 100%

Carried at par

December 31, 2018

Pooled trust preferred securities

$
8,495

Discounted cash flow

Constant prepayment rate (a)

0.00%

Additional asset defaults (b)

6.8% - 8.5% (7.3%)

Expected asset recoveries (c)

0.00%

State and political subdivisions

4,108

Discounted cash flow

No observable inputs

N/A

Local municipality issuance

Old National owns 100%

Carried at par

~~(a)~~

~~Assuming no prepayments.~~

~~(b)~~

~~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%.~~

(dollars in thousands)

Fair Value

Valuation Techniques

Unobservable Input

Range (Weighted Average) (4)

March 31, 2020

Pooled trust preferred securities

7,422

Discounted cash flow

Constant prepayment rate (1)

0.00%

Additional asset defaults (2)

6.1% - 9.1% (7.1%)

Expected asset recoveries (3)

0.0% - 18.6% (5.8%)

December 31, 2019

Pooled trust preferred securities

8,222

Discounted cash flow

Constant prepayment rate (1)

0.00%

Additional asset defaults (2)

6.2% - 8.0% (6.8%)

Expected asset recoveries (3)

0.0% - 19.1% (6.0%)

State and political subdivisions

Discounted cash flow

No observable inputs

N/A

Local municipality issuance

Old National owns 100%

Carried at par

~~(c)~~(1)Assuming no prepayments.

~~Each currently defaulted pool asset is assigned a recovery probability based on specific issuer evaluation of 0%, 25%, or 100%.~~

(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 ~~result~~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 ~~has~~would have an impact that is directionally opposite from a change in the expected recovery of a defaulted pool asset.

Assets measured at fair value on a non-recurring basis ~~at September 30, 2019~~ are summarized below:

			Fair Value Measurements at September 30, 2019 Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs					Fair Value Measurements at March 31, 2020 Using
(dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)		(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 Impaired Loans:									Collateral Dependent Impaired Loans:
Commercial loans	$	13,261	$	—	$	—	$	13,261	Commercial loans	$	11,374	$	—	$	—	$	11,374
Commercial real estate loans		15,241		—		—		15,241	Commercial real estate loans	27,570		—		—		27,570
Foreclosed Assets:									Foreclosed Assets:
Commercial									Commercial	214		—		—		214
Loan servicing rights		4,621		—		4,621		—	Loan servicing rights	23,927		—		23,927		—

Impaired commercial and commercial real estate loans that are deemed collateral dependent are valued based on the fair value of the underlying collateral. These estimates are based on 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 impaired commercial and commercial real estate loans had a principal amount of ~~$39.7~~$49.5 million, with a valuation allowance of ~~$11.2~~$10.6 million at ~~September 30, 2019.~~March 31, 2020. Old National recorded provision expense associated with these loans totaling ~~$0.3~~$6.8 million for the three months

ended ~~September 30, 2019 and $2.6~~ ~~million for the nine months ended September 30, 2019.~~March 31, 2020. Old National recorded provision expense associated with impaired commercial and commercial real estate loans that were deemed collateral dependent totaling $1.2 million for the three months ended ~~September 30, 2018 and $7.7~~ ~~million for the nine months ended September 30, 2018.~~

March 31, 2019.

Other real estate owned and other repossessed property is measured at fair value less costs to sell. The estimates of fair value are based on 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. Old National did 0t have any other real estate owned or other repossessed property measured at fair valuesell on a non-recurring basis and had a net carrying amount of $0.2 million at ~~September 30, 2019.~~March 31, 2020. There were write-downs of other real estate owned of ~~$18~~$11 thousand for the three months ended ~~September 30, 2019 and $39 thousand for the nine months ended September 30, 2019. There were~~March 31, 2020. Old National did not record any write-downs ~~of $0.1 million~~ for the three months ended ~~September 30, 2018 and $0.5 million for the nine months ended September 30, 2018.~~

March 31, 2019.

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 ~~September 30, 2019~~March 31, 2020 totaled ~~$0.1~~$1.4 million. Old National recorded impairments associated with these loan servicing rights totaling ~~$0.1~~$1.4 million during the three months ended ~~September 30, 2019~~March 31, 2020 and ~~the nine months ended September 30, 2019. There were recoveries associated with loan servicing rights totaling $3~~impairments of $2 thousand for the three months ended ~~September 30, 2018 and $17 thousand for the nine months ended September 30, 2018.~~

March 31, 2019.

Assets measured at fair value on a non-recurring basis ~~at December 31, 2018~~ are summarized below:

			Fair Value Measurements at December 31, 2018 Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs					Fair Value Measurements at December 31, 2019 Using
(dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)		(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 Impaired Loans:									Collateral Dependent Impaired Loans:
Commercial loans	$	7,242	$	—	$	—	$	7,242	Commercial loans	$	10,361	$	—	$	—	$	10,361
Commercial real estate loans		29,125		—		—		29,125	Commercial real estate loans	11,610		—		—		11,610
Foreclosed Assets:									Foreclosed Assets:
Commercial real estate									Commercial real estate	21		—		—		21
Residential		68		—		—		68	Residential	22		—		—		22
Loan servicing rights		104		—		104		—	Loan servicing rights	4,662		—		4,662		—

At December 31, ~~2018,~~2019, impaired commercial and commercial real estate loans had a principal amount of ~~$49.3~~$30.9 million, with a valuation allowance of ~~$12.9~~$8.9 million.

Other real estate owned and other repossessed property had a net carrying amount of ~~$68~~$43 thousand at December 31, ~~2018.~~

2019.

The valuation allowance for loan servicing rights with impairments at December 31, ~~2018~~2019 totaled ~~$15~~$31 thousand.

The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:

Valuation

Unobservable

Range (Weighted
(dollars in thousands)

Fair Value

Techniques

Input

Average)
September 30, 2019

Collateral Dependent Impaired
Loans

Commercial loans

$
13,261

Fair value of

Discount for type of property,

0% - 90% (31%)

collateral

age of appraisal, and current

status

Commercial real estate loans

15,241

Fair value of

Discount for type of property,

35% - 45% (40%)

collateral

age of appraisal and current

status

December 31, 2018

Collateral Dependent Impaired
Loans

Commercial loans

$
7,242

Fair value of

Discount for type of property,

0% - 90% (35%)

collateral

age of appraisal, and current

status

Commercial real estate loans

29,125

Fair value of

Discount for type of property,

0% - 50% (35%)

collateral

age of appraisal and current

status

Foreclosed Assets

Residential

68

Fair value of

Discount for type of property,

15% - 16% (15%)

collateral

age of appraisal, and current status

(dollars in thousands)

Fair Value

Valuation Techniques

Unobservable Input

Range (Weighted Average) (3)

March 31, 2020

Collateral Dependent Impaired Loans

Commercial loans

11,374

Fair value of

Discount for type of property,

0% - 80% (42%)

collateral

age of appraisal, and current status

Commercial real estate loans (1)

27,570

Fair value of

Discount for type of property,

collateral

age of appraisal, and current status

Foreclosed Assets

Commercial real estate (1)

214

Fair value of

Discount for type of property,

collateral

age of appraisal, and current status

December 31, 2019

Collateral Dependent Impaired Loans

Commercial loans

10,361

Fair value of

Discount for type of property,

0% - 50% (13%)

collateral

age of appraisal, and current status

Commercial real estate loans (2)

11,610

Fair value of

Discount for type of property,

45%

collateral

age of appraisal, and current status

Foreclosed Assets

Commercial real estate (2)

Fair value of

Discount for type of property,

43%

collateral

age of appraisal, and current status

Residential (2)

Fair value of

Discount for type of property,

21%

collateral

age of appraisal, and current status

(1)There were no commercial real estate loans large enough to require a discount and there was only one foreclosed commercial real estate asset at March 31, 2020, so no range or weighted average is reported.

(2)There was only one collateral dependent impaired 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.

(3)Unobservable inputs were weighted by the relative fair value of the instruments.

Financial instruments recorded using 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 $0.4 million for the three months ended ~~September 30, 2019~~March 31, 2020 and ~~$0.9 million for the nine months ended September 30, 2019, compared to~~ $0.2 million for the three months ended ~~September 30, 2018 and $0.3 million for the nine months ended September 30, 2018.~~

March 31, 2019.

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 ~~at September 30, 2019 and December 31, 2018~~ was as follows:

	Aggregate				Contractual
(dollars in thousands)	Fair Value		Difference		Principal		(dollars in thousands)	Aggregate Fair Value		Difference		Contractual Principal
September 30, 2019
March 31, 2020							March 31, 2020
Residential loans held for sale	$	58,285	$	1,799	$	56,486	Residential loans held for sale	$	54,209	$	2,952	$	51,257

December 31, 2018
December 31, 2019							December 31, 2019
Residential loans held for sale	$	14,911	$	475	$	14,436	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)												(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, 2020												Three Months Ended March 31, 2020
Residential loans held for sale												Residential loans held for sale	$	1,421	$	2	$	—	$	1,423
Three Months Ended March 31, 2019												Three Months Ended March 31, 2019
Residential loans held for sale												Residential loans held for sale	$	90	$	5	$	—	$	95
									Total Changes
									in Fair Values
	Other								Included in
	Gains and			Interest		Interest			Current Period
(dollars in thousands)	(Losses)			Income		(Expense)			Earnings
Three Months Ended September 30, 2019
Residential loans held for sale	$	137		$	2	$	—		$	139

Three Months Ended September 30, 2018
Residential loans held for sale	$	(368	)	$	3	$	—		$	(365	)

Nine Months Ended September 30, 2019
Residential loans held for sale	$	1,312		$	12	$	—		$	1,324

Nine Months Ended September 30, 2018
Residential loans held for sale	$	54		$	6	$	(4	)	$	56

The carrying amounts and estimated fair values of financial instruments not carried at fair value ~~at September 30, 2019 and December 31, 2018~~ were as follows:

			Fair Value Measurements at September 30, 2019 Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs					Fair Value Measurements at March 31, 2020 Using
(dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)		(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									Financial Assets
Cash, due from banks, money market, and other interest-earning investments	$	420,250	$	420,250	$	—	$	—	Cash, due from banks, money market, and other interest-earning investments	$	343,177	$	343,177	$	—	$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies		33,321		—		34,446		—
Mortgage-backed securities - Agency		112,187		—		115,767		—
State and political subdivisions		261,773		—		275,375		—

Loans, net:									Loans, net:
Commercial		2,928,430		—		—		2,882,142	Commercial	3,012,704		—		—		2,984,123
Commercial real estate		5,087,869		—		—		5,046,715	Commercial real estate	5,226,694		—		—		5,184,989
Residential real estate		2,234,260		—		—		2,246,971	Residential real estate	2,318,214		—		—		2,334,673
Consumer credit		1,710,179		—		—		1,671,597	Consumer credit	1,720,620		—		—		1,718,474
Accrued interest receivable		80,747		34		24,183		56,530	Accrued interest receivable	77,810		41		23,744		54,025

Financial Liabilities									Financial Liabilities
Deposits:									Deposits:
Noninterest-bearing demand deposits	$	3,996,264	$	3,996,264	$	—	$	—	Noninterest-bearing demand deposits	$	4,058,559	$	4,058,559	$	—	$	—
Checking, NOW, savings, and money market interest-bearing deposits		8,622,025		8,622,025		—		—	Checking, NOW, savings, and money market interest-bearing deposits	8,705,109		8,705,109		—		—
Time deposits		1,830,063		—		1,842,750		—	Time deposits	1,541,694		—		1,563,286		—
Federal funds purchased and interbank borrowings		240,589		240,589		—		—	Federal funds purchased and interbank borrowings	560,770		560,770		—		—
Securities sold under agreements to repurchase		337,551		337,551		—		—	Securities sold under agreements to repurchase	318,067		318,067		—		—
FHLB advances		2,001,960		—		2,007,228		—	FHLB advances	2,130,263		—		2,279,323		—
Other borrowings		251,763		—		262,921		—	Other borrowings	236,114		—		242,995		—
Accrued interest payable		7,107		—		7,107		—	Accrued interest payable	6,113		—		6,113		—
Standby letters of credit		573		—		—		573	Standby letters of credit	459		—		—		459

Off-Balance Sheet Financial Instruments									Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	5,925	Commitments to extend credit	$	—	$	—	$	—	$	15,647

Fair Value Measurements at December 31, 2018 Using

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Carrying

Assets

Inputs

Inputs

(dollars in thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Financial Assets

Cash, due from banks, money market,
and other interest-earning investments

$
317,165

$
317,165

$
—

$
—

Investment securities held-to-maturity:

U.S. government-sponsored entities and agencies

73,986

—

72,359

—

Mortgage-backed securities - Agency

127,120

—

124,409

—

State and political subdivisions

305,228

—

309,335

—

Loans, net:

Commercial

3,211,228

—

—

3,161,132

Commercial real estate

4,935,381

—

—

4,781,294

Residential real estate

2,246,127

—

—

2,225,853

Consumer credit

1,795,695

—

—

1,773,352

Accrued interest receivable

89,464

13

27,580

61,871

Financial Liabilities

Deposits:

Noninterest-bearing demand deposits

$
3,965,380

$
3,965,380

$
—

$
—

Checking, NOW, savings, and money market
interest-bearing deposits

8,360,313

8,360,313

—

—

Time deposits

2,024,256

—

2,002,187

—

Federal funds purchased and interbank borrowings

270,135

270,135

—

—

Securities sold under agreements to repurchase

362,294

362,294

—

—

FHLB advances

1,613,481

—

1,611,103

—

Other borrowings

247,883

—

248,065

—

Accrued interest payable

9,871

—

9,871

—

Standby letters of credit

525

—

—

525

Off-Balance Sheet Financial Instruments

Commitments to extend credit

$
—

$
—

$
—

$
3,115


			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:
Commercial	2,867,711		—		—		2,831,298
Commercial real estate	5,145,204		—		—		5,130,848
Residential real estate	2,331,990		—		—		2,357,341
Consumer credit	1,718,000		—		—		1,676,253
Accrued interest receivable	85,123		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		—		—
Time deposits	1,682,230		—		1,692,569		—
Federal funds purchased and interbank borrowings	350,414		350,414		—		—
Securities sold under agreements to repurchase	327,782		327,782		—		—
FHLB advances	1,822,847		—		1,875,089		—
Other borrowings	243,685		—		254,519		—
Accrued interest payable	8,272		—		8,272		—
Standby letters of credit	573		—		—		573

Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	4,302

The methods utilized to measure the fair value of financial instruments at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 represent an approximation of exit price, however, an actual exit price may differ.

NOTE 2524 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Old National’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income. The consolidated statements of income include all categories of noninterest income. The following table reflects only the categories of noninterest income that are within the scope of Topic 606:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Three Months Ended March 31,
(dollars in thousands)	2019		2018		2019		2018		(dollars in thousands)	2020		2019
Wealth management fees	$	9,160	$	9,022	$	27,604	$	27,794	Wealth management fees	$	8,884	$	8,535
Service charges on deposit accounts		11,860		11,028		34,201		32,552	Service charges on deposit accounts	10,077		10,826
Debit card and ATM fees		5,370		4,706		16,292		14,651	Debit card and ATM fees	4,998		5,503
Investment product fees		5,244		5,073		16,106		15,170	Investment product fees	5,874		5,271
Other income:									Other income:
Merchant processing fees		775		779		2,303		2,198	Merchant processing fees	804		707
Gain (loss) on other real estate owned		29		260		194		981	Gain (loss) on other real estate owned	(56)		40
Safe deposit box fees		267		221		936		849	Safe deposit box fees	310		411
Insurance premiums and commissions		194		83		569		265	Insurance premiums and commissions	116		200
Total	$	32,899	$	31,172	$	98,205	$	94,460	Total	$	31,007	$	31,493

Wealth management fees: Old National earns wealth management fees based upon asset custody and investment management services provided to individual and institutional customers. Most of these customers receive monthly

or quarterly billings for services rendered based upon the market value of assets in custody. Fees that are transaction based are recognized at the point in time that the transaction is executed.

Service charges on deposit accounts: Old National earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which Old National satisfies its performance obligation.

Debit card and ATM fees: Debit card and ATM fees include ATM usage fees and debit card interchange income. As with the transaction-based fees on deposit accounts, the ATM fees are recognized at the point in time that Old National fulfills the customer’s request. Old National earns interchange fees from cardholder transactions processed through card association networks. Interchange rates are generally set by the card associations based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Investment product fees: Investment product fees are the commissions and fees received from a registered broker/dealer and investment adviser that provide those services to Old National customers. Old National acts as an agent in arranging the relationship between the customer and the third-party service provider. These fees are recognized monthly from the third-party broker based upon services already performed, net of the processing fees charged to Old National by the broker.

~~ITEM 2.~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is an analysis of our results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ and financial condition as of ~~September 30, 2019,~~March 31, 2020, compared to ~~September 30, 2018 and~~ December 31, ~~2018.~~2019. This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes. This discussion contains forward-looking statements concerning our business that are based on estimates and involves certain risks and uncertainties. Therefore, future results could differ significantly from our current expectations and the related forward-looking statements.

FINANCIAL HIGHLIGHTS

The following table sets forth certain financial highlights of Old National:

Three Months Ended
Nine Months Ended
(dollars and shares in thousands,
September 30,
June 30,
September 30,
September 30,
except per share data)
2019
2019
2018
2019
2018
Income Statement:

Net interest income
$
153,096

$
155,230

$
130,842

$
455,374

$
391,377

Taxable equivalent adjustment (1)

3,171

3,289

2,753

9,659

8,345

Net interest income - tax equivalent basis

156,267

158,519

133,595

465,033

399,722

Provision for loan losses

1,437

1,003

750

3,483

3,576

Noninterest income

53,961

51,214

45,957

151,591

137,151

Noninterest expense

122,585

128,118

119,376

373,744

366,993

Net income

69,781

62,964

51,348

189,021

143,332

Common Share Data:

Weighted average diluted shares

171,551

173,675

152,784

173,527

152,616

Net income (diluted)
$
0.41

$
0.36

$
0.34

$
1.09

$
0.94

Cash dividends

0.13

0.13

0.13

0.39

0.39

Common dividend payout ratio (2)

32

%

35

%

38

%

35

%

41

%
Book value
$
16.66

$
16.28

$
14.58

$
16.66

$
14.58

Stock price

17.20

16.59

19.30

17.20

19.30

Tangible common book value (3)

10.18

9.86

8.86

10.18

8.86

Performance Ratios:

Return on average assets

1.39

%

1.26

%

1.18

%

1.26

%

1.10

%
Return on average common equity

9.91

9.13

9.28

9.12

8.74

Return on tangible common equity (3)

16.85

15.59

15.99

15.31

14.96

Return on average tangible common
equity (3)

17.01

16.04

16.10

16.00

15.40

Net interest margin (3)

3.57

3.66

3.51

3.58

3.51

Efficiency ratio (3)

56.44

59.35

64.71

58.65

66.74

Net charge-offs (recoveries) to
average loans

0.03

0.01

0.06

0.02

0.01

Allowance for loan losses to ending loans

0.47

0.47

0.47

0.47

0.47

Non-performing loans to ending loans

1.31

1.34

1.47

1.31

1.47

Balance Sheet:

Total loans
$
12,017,648

$
12,046,578

$
11,292,659

$
12,017,648

$
11,292,659

Total assets

20,438,788

20,145,285

17,567,759

20,438,788

17,567,759

Total deposits

14,448,352

14,363,101

12,598,200

14,448,352

12,598,200

Total borrowed funds

2,831,863

2,726,481

2,576,039

2,831,863

2,576,039

Total shareholders' equity

2,832,530

2,803,139

2,220,680

2,832,530

2,220,680

Nonfinancial Data:

Full-time equivalent employees

2,778

2,829

2,554

2,778

2,554

Banking centers

192

192

182

192

182

~~(1)~~

~~Calculated using the federal statutory tax rate in effect of 21% for all periods.~~


	Three Months Ended
(dollars and shares in thousands, except per share data)	March 31, 2020			December 31, 2019			March 31, 2019
Income Statement:
Net interest income	$	143,771		$	148,899		$	147,048
Taxable equivalent adjustment (1)	3,323			3,282			3,198
Net interest income - tax equivalent basis	147,094			152,181			150,246
Provision for loan losses (4)	16,950			1,264			1,043
Noninterest income	57,502			47,726			46,416
Noninterest expense	158,744			134,743			123,041
Net income	22,640			49,185			56,276
Common Share Data:
Weighted average diluted shares	168,404			170,186			175,368
Net income (diluted)	$	0.13		$	0.29		$	0.32
Cash dividends	0.14			0.13			0.13
Common dividend payout ratio (2)	108		%	45		%	41		%
Book value	$	17.10		$	16.82		$	15.82
Stock price	13.19			18.29			16.40
Tangible common book value (3)	10.48			10.35			9.44
Performance Ratios:
Return on average assets	0.44		%	0.97		%	1.14		%
Return on average common equity	3.20			6.94			8.29
Return on tangible common equity (3)	5.89			11.89			14.52
Return on average tangible common equity (3)	5.86			12.03			14.88
Net interest margin (3)	3.31			3.46			3.51
Efficiency ratio (3)	77.71			65.57			60.26
Net charge-offs (recoveries) to average loans	0.21			0.12			0.03
Allowance for loan losses to ending loans (4)	0.86			0.45			0.46
Non-performing loans to ending loans	1.16			1.19			1.41
Balance Sheet:
Total loans	$	12,384,612		$	12,117,524		$	12,068,977
Total assets	20,741,141			20,411,667			20,084,420
Total deposits	14,305,362			14,553,397			14,429,270
Total borrowed funds	3,245,214			2,744,728			2,639,038
Total shareholders' equity	2,823,435			2,852,453			2,751,872
Nonfinancial Data:
Full-time equivalent employees	2,736			2,709			2,908
Banking centers	192			192			193

~~(2)~~(1)Calculated using the federal statutory tax rate in effect of 21% for all periods.

~~Cash dividends per share divided by net income per share (basic).~~

~~(3)~~(2)Cash dividends per share divided by net income per share (basic).

~~Represents a non-GAAP financial measure. Refer to the "Non-GAAP Financial Measures" section for reconciliations to GAAP financial measures.~~

(3)Represents a non-GAAP financial measure. Refer to the "Non-GAAP Financial Measures" section for reconciliations to GAAP financial measures.

(4)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation is based on incurred loss methodology.

NON-GAAP FINANCIAL MEASURES

Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP. Management believes these non-GAAP financial measures enhance an investor’s understanding of the financial results of Old National by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance.

The following table presents GAAP to non-GAAP reconciliations.

		Three Months Ended						Nine Months Ended
(dollars and shares in thousands,	(dollars and shares in thousands,	September 30,												(dollars and shares in thousands,			Three Months Ended March 31,
except per share data)	except per share data)	2019			2018			2019			2018			except per share data)			2020			2019
Tangible common book value:	Tangible common book value:													Tangible common book value:
Shareholders' equity (GAAP)	Shareholders' equity (GAAP)	$	2,832,530		$	2,220,680		$	2,832,530		$	2,220,680		Shareholders' equity (GAAP)			$	2,823,435		$	2,751,872
Deduct:	Goodwill		1,036,994			828,804			1,036,994			828,804		Deduct:	Goodwill	1,036,994	1,036,258
	Intangible assets		64,051			42,134			64,051			42,134			Intangible assets	56,329	72,544
Tangible shareholders' equity (non-GAAP)	Tangible shareholders' equity (non-GAAP)	$	1,731,485		$	1,349,742		$	1,731,485		$	1,349,742		Tangible shareholders' equity (non-GAAP)			$	1,730,112		$	1,643,070
Period end common shares	Period end common shares		170,031			152,352			170,031			152,352		Period end common shares			165,109			173,979
Tangible common book value	Tangible common book value		10.18			8.86			10.18			8.86		Tangible common book value			10.48			9.44

Return on tangible common equity:	Return on tangible common equity:													Return on tangible common equity:
Net income (GAAP)	Net income (GAAP)	$	69,781		$	51,348		$	189,021		$	143,332		Net income (GAAP)			$	22,640		$	56,276
Add: Intangible amortization (net of tax)	Add: Intangible amortization (net of tax)		3,145			2,593			9,780			8,143		Add: Intangible amortization (net of tax)			2,849			3,373
Tangible net income (non-GAAP)	Tangible net income (non-GAAP)	$	72,926		$	53,941		$	198,801		$	151,475		Tangible net income (non-GAAP)			$	25,489		$	59,649

Tangible shareholders' equity (non-GAAP) (see above)	Tangible shareholders' equity (non-GAAP) (see above)	$	1,731,485		$	1,349,742		$	1,731,485		$	1,349,742		Tangible shareholders' equity (non-GAAP) (see above)			$	1,730,112		$	1,643,070
Return on tangible common equity	Return on tangible common equity		16.85	%		15.99	%		15.31	%		14.96	%	Return on tangible common equity			5.89		%	14.52		%

Return on average tangible common equity:	Return on average tangible common equity:													Return on average tangible common equity:
Tangible net income (non-GAAP) (see above)	Tangible net income (non-GAAP) (see above)	$	72,926		$	53,941		$	198,801		$	151,475		Tangible net income (non-GAAP) (see above)			$	25,489		$	59,649
Average shareholders' equity (GAAP)	Average shareholders' equity (GAAP)	$	2,817,452		$	2,212,700		$	2,763,673		$	2,187,624		Average shareholders' equity (GAAP)			$	2,833,523		$	2,714,186
Deduct:	Average goodwill		1,036,306			828,804			1,036,274			828,585		Deduct:	Average goodwill	1,036,994	1,036,258
	Average intangible assets		66,047			43,685			70,361			47,249			Average intangible assets	58,127	74,849
Average tangible shareholders' equity (non-GAAP)	Average tangible shareholders' equity (non-GAAP)	$	1,715,099		$	1,340,211		$	1,657,038		$	1,311,790		Average tangible shareholders' equity (non-GAAP)			$	1,738,402		$	1,603,079
Return on average tangible common equity	Return on average tangible common equity		17.01	%		16.10	%		16.00	%		15.40	%	Return on average tangible common equity			5.86		%	14.88		%

Net interest margin:	Net interest margin:													Net interest margin:
Net interest income (GAAP)	Net interest income (GAAP)	$	153,096		$	130,842		$	455,374		$	391,377		Net interest income (GAAP)			$	143,771		$	147,048
Taxable equivalent adjustment	Taxable equivalent adjustment		3,171			2,753			9,659			8,345		Taxable equivalent adjustment			3,323			3,198
Net interest income - taxable equivalent basis (non-GAAP)	Net interest income - taxable equivalent basis (non-GAAP)	$	156,267		$	133,595		$	465,033		$	399,722		Net interest income - taxable equivalent basis (non-GAAP)			$	147,094		$	150,246
Average earning assets	Average earning assets	$	17,510,487		$	15,213,384		$	17,320,260		$	15,198,690		Average earning assets			$	17,774,030		$	17,143,574
Net interest margin	Net interest margin		3.57	%		3.51	%		3.58	%		3.51	%	Net interest margin			3.31		%	3.51		%

Efficiency ratio:	Efficiency ratio:													Efficiency ratio:
Noninterest expense (GAAP)	Noninterest expense (GAAP)	$	122,585		$	119,376		$	373,744		$	366,993		Noninterest expense (GAAP)			$	158,744		$	123,041
Deduct: Intangible amortization expense	Deduct: Intangible amortization expense		4,168			3,283			12,965			10,308		Deduct: Intangible amortization expense			3,776			4,472
Adjusted noninterest expense (non-GAAP)	Adjusted noninterest expense (non-GAAP)	$	118,417		$	116,093		$	360,779		$	356,685		Adjusted noninterest expense (non-GAAP)			$	154,968		$	118,569
Net interest income - taxable equivalent basis (non-GAAP) (see above)	Net interest income - taxable equivalent basis (non-GAAP) (see above)	$	156,267		$	133,595		$	465,033		$	399,722		Net interest income - taxable equivalent basis (non-GAAP) (see above)			$	147,094		$	150,246
Noninterest income	Noninterest income		53,961			45,957			151,591			137,151		Noninterest income			57,502			46,416
Deduct:	Net debt securities gains (losses)		424			135			1,486			2,417
Deduct: Debt securities gains (losses), net														Deduct: Debt securities gains (losses), net			5,174			(103)
Adjusted total revenue (non-GAAP)	Adjusted total revenue (non-GAAP)	$	209,804		$	179,417		$	615,138		$	534,456		Adjusted total revenue (non-GAAP)			$	199,422		$	196,765
Efficiency ratio	Efficiency ratio		56.44	%		64.71	%		58.65	%		66.74	%	Efficiency ratio			77.71		%	60.26		%

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

EXECUTIVE SUMMARY

In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. The COVID-19 virus continues to aggressively spread globally and has spread to over 185 countries, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. While the spread of the COVID-19 virus has minimally impacted our operations as of March 31, 2020, we may experience temporary closures of our offices and/or suspension of certain services until it is safe to open and return to work. The ultimate effect of COVID-19 on the Company's business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence. At this time, it is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses will be lifted and businesses and their employees will be able to resume normal activities. Further, additional information may emerge regarding the severity of COVID-19 and additional actions may be taken by federal, state, and local governments to contain COVID-19 or treat its impact. Changes in the behavior of customers, businesses, and their employees as a result of the COVID-19 pandemic, including social distancing practices, even after formal restrictions have been lifted, are also unknown. As a result of the COVID-19 pandemic and the actions taken to contain it or reduce its impact, the Company may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers, and the inability of borrowers to repay loans in accordance with their terms. These and similar factors and events may have substantial negative effects on the business, financial condition, and results of operations of the Company and its customers.

Our response to COVID-19 is focused on consumers, small business and commercial clients, team members, and communities. Among the many items we are doing, Old National has committed $1.2 million to COVID-19 relief efforts, as well as approving loan payment extensions, waiving or refunding certain banking fees, and assisting clients with the Paycheck Protection Program. We have adjusted our branch hours, decreased lobby usage, and enabled team members to work remotely. Despite this challenging environment, Old National is still open for business. We continue to lend to qualified businesses for working capital and general business purposes.

We adopted CECL on January 1, 2020 which increased our existing allowance by $41.3 million. Our acquired loan portfolio represents approximately $27.1 million, or 66%, of this increase, with the remaining $14.2 million, or 34%, related to our legacy loan portfolio. This increase was booked as a cumulative effect adjustment to equity and did not flow through the income statement. During the ~~third~~quarter, we recorded a provision expense for loan losses of $17.0 million. This provision expense factored in an estimated future impact for the COVID-19 pandemic.

As previously disclosed, in January of 2020 Old National commenced implementation of a strategic plan (“The ONB Way”), which includes realigning the geographic organization structure to streamline our operating model through integrated commercial, community banking, and wealth teams. We have also identified revenue and efficiency opportunities as well as optimizing our branch network as our clients migrate toward digital banking solutions. We consolidated 31 smaller market banking centers on or before April 24, 2020.By state, these consolidations include ten banking centers in both Wisconsin and Indiana, five in Michigan, four in Minnesota, and two in Kentucky. We incurred $22.8 million in costs associated with the branch optimization, $7.0 million in severance costs, and $1.4 million in other related costs. Several non-branch facilities will be closed at a later date and we will incur related charges of approximately $6 million.

As Old National moves from a generalist relationship management approach, based on geography, to a specialist relationship management approach, based on business segmentations, the fundamentals of our basic banking model do not change. Those fundamentals are loan growth, non-interest income growth, prudent capital deployment, and expense management.

During the first quarter of ~~2019,~~2020, net income was ~~$69.8~~$22.6 million, or ~~$0.41~~$0.13 per diluted share. Net income was ~~$51.3~~$56.3 million, or ~~$0.34~~$0.32 per diluted share, for the ~~third~~first quarter of ~~2018.~~

Our basic banking strategy remains unchanged. This strategy encompasses how we invest our capital, grow loans, manage credit, and contain expenses. Operationally, this translates primarily into using our low-cost core deposits to fund our commercial loans. Coupled with this is our refined credit process, which enables us to identify weaknesses in credits and work through credit issues timely. Additionally, we maintain a disciplined expense culture across all facets of the bank and remain committed to generating positive operating leverage.

2019.

We have continued to re-mix our earning assets towards more productive commercial and commercial real estate loans and out of indirect and other loans.

Loans: Our loan balances, excluding loans held for sale, ~~declined $28.9~~increased $267.1 million to ~~$12.018~~$12.385 billion at ~~September 30, 2019~~March 31, 2020 compared to ~~$12.047~~$12.118 billion at ~~June 30,~~December 31, 2019. This was primarily driven by ~~a decline~~growth in commercial ~~loans~~ and ~~consumer indirect loans, substantially offset by higher~~ commercial ~~real estate and residential~~ real estate loans. We reported commercial loan production of ~~$680~~$647.3 million in the ~~third~~first quarter of ~~2019~~2020 and the pipeline totaled ~~$2.0~~$2.8 billion at ~~September 30, 2019.~~March 31, 2020.

Net Interest Income: For the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, our net interest income ~~increased~~decreased primarily due to ~~the acquisition of Klein in November 2018 and increased~~decreased loan yields, partially offset by~~higher~~lower costs of interest-bearing ~~liabilities~~.liabilities. Net interest income decreased in the ~~third~~first quarter of 2020 compared to the fourth quarter of 2019 ~~compared~~primarily due to ~~the second quarter of 2019 with~~decreased loan yields, lower accretion income, and lower interest collected on nonaccrual loans, ~~and a change in~~ ~~the mix of average interest earning assets and interest-bearing liabilities~~, partially offset by ~~higher accretion income associated with acquired loans and an additional day in the third quarter.~~

lower costs of interest-bearing liabilities.

Noninterest Income: Noninterest income increased to ~~$151.6~~$57.5 million ~~for~~in the ~~nine months of 2019 from~~ ~~$137.2 million for~~ ~~the nine~~three months ended ~~September 30, 2018~~March 31, 2020 compared to the three months ended March 31, 2019 ~~substantially~~primarily due to higher ~~noninterest income associated with~~mortgage banking revenue and $5.2 million of debt securities gains in the ~~Klein partnership~~. ~~The third~~first quarter of ~~2019~~2020 compared to $0.1 million of debt securities losses in the first quarter of 2019. The first quarter of 2020 compared to the ~~second~~fourth quarter of 2019 increased ~~$2.7~~$9.8 million reflecting higher mortgage banking revenue and ~~capital markets income.~~higher debt securities gains.

Expenses: Noninterest expenses ~~were well controlled, increasing $6.8~~increased $35.7 million ~~or 2%, for~~in the ~~nine~~three months ended ~~September 30, 2019 when~~March 31, 2020 compared to the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. The increase was primarily attributable to $31.2 million of charges related to The ONB Way strategic initiative and higher ~~expenses associated with~~amortization of tax credit investments. The first quarter of 2020 compared to the ~~Klein partnership.~~ ~~The third~~fourth quarter of 2019 ~~compared~~increased $24.0 million also reflecting the higher charges related to ~~the second quarter of 2019 decreased $5.5 million reflecting lower merger and integration charges associated with Klein.~~The ONB Way strategic initiative.

Old National has spent the year internally focused. This included a comprehensive analysis of every business, every department, and every function within the company. We have partnered with a leading consulting firm with the ultimate goal of improving the overall efficiency of the organization while serving our clients better. ~~Our acquisition strategy has not changed. We~~ ~~remain an active looker and a selective buyer. We are patient and continue to wait for the perfect pitch while we remain focused on execution~~.

RESULTS OF OPERATIONS

The following table sets forth certain income statement information of Old ~~National~~National:


	Three Months Ended March 31,								%
(dollars in thousands)	2020			2019			Change
Income Statement Summary:
Net interest income	$	143,771		$	147,048		(2.2)	%
Provision for loan losses (1)	16,950			1,043			1,525.1
Noninterest income	57,502			46,416			23.9
Noninterest expense	158,744			123,041			29.0
Other Data:
Return on average common equity	3.20		%	8.29		%
Return on tangible common equity (2)	5.89			14.52
Return on average tangible common equity (2)	5.86			14.88
Efficiency ratio (2)	77.71			60.26
Tier 1 leverage ratio	8.46			8.80
Net charge-offs (recoveries) to average loans	0.21			0.03

(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation is based on incurred loss methodology.

(2)Represents a non-GAAP financial measure. Refer to "Non-GAAP Financial Measures" section for ~~the three and nine months ended September 30, 2019 and 2018:~~

Three Months Ended

Nine Months Ended

September 30,

%

September 30,

%

(dollars in thousands)

2019

2018

Change

2019

2018

Change

Income Statement Summary:

Net interest income

$
153,096

$
130,842

17.0

%

$
455,374

$
391,377

16.4

%
Provision for loan losses

1,437

750

91.6

3,483

3,576

(2.6
)

Noninterest income

53,961

45,957

17.4

151,591

137,151

10.5

Noninterest expense

122,585

119,376

2.7

373,744

366,993

1.8

Other Data:

Return on average common equity

9.91

%

9.28

%

9.12

%

8.74

%

Return on tangible common equity (1)

16.85

15.99

15.31

14.96

Return on average tangible common
equity (1)

17.01

16.10

16.00

15.40

Efficiency ratio (1)

56.44

64.71

58.65

66.74

Tier 1 leverage ratio

8.79

8.56

8.79

8.56

Net charge-offs (recoveries) to
average loans

0.03

0.06

0.02

0.01

reconciliations to GAAP financial measures.

~~(1)~~

~~Represents a non-GAAP financial measure. Refer to "Non-GAAP Financial Measures" section for reconciliations to GAAP~~ ~~financial measures.~~

Net Interest Income

Net interest income is the most significant component of our earnings, comprising ~~75%~~71% of revenues for the ~~nine~~three months ended ~~September 30, 2019.~~ March 31, 2020. Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations. Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of earning assets and interest-bearing liabilities.

As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact net interest income. Other financial impacts could occur, though such potential impacts are unknown at this time.

During the first quarter of 2020, interest rates fell dramatically. The Federal Reserve lowered the ~~discount~~Federal Funds target rate ~~by 25 basis points effective August 1, 2019 and lowered another 25 basis points effective September 19, 2019. At September 30, 2019, the~~to effectively 0%. The Treasury yield curve ~~was slightly inverted from the 1-month Treasury bill to the 10-year Treasury note. This could cause our~~steepened modestly as short-term rates fell more than long-term rates. Our interest rate spread tocould decline, which may result in a decrease in our net interest income.However, management has taken balance sheet restructuring, derivative, and ~~derivative~~deposit pricing actions to help mitigate this risk.

Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally costs less than wholesale funding sources. Factors such as general economic activity,

Federal Reserve monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding, net interest income, and margin.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented in the table that follows, adjusted to a taxable equivalent basis to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. We used the federal statutory tax rate in effect of 21% for all periods. This analysis portrays the income tax benefits related to tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets.Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis.Therefore, management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,							Three Months Ended March 31,
(dollars in thousands)	2019			2018			2019			2018			(dollars in thousands)	2020			2019
Net interest income	$	153,096		$	130,842		$	455,374		$	391,377		Net interest income	$	143,771		$	147,048
Conversion to fully taxable equivalent		3,171			2,753			9,659			8,345		Conversion to fully taxable equivalent	3,323			3,198
Net interest income - taxable equivalent basis	$	156,267		$	133,595		$	465,033		$	399,722		Net interest income - taxable equivalent basis	$	147,094		$	150,246

Average earning assets	$	17,510,487		$	15,213,384		$	17,320,260		$	15,198,690		Average earning assets	$	17,774,030		$	17,143,574

Net interest margin		3.50	%		3.44	%		3.51	%		3.43	%	Net interest margin	3.24		%	3.43		%
Net interest margin - taxable equivalent basis		3.57	%		3.51	%		3.58	%		3.51	%	Net interest margin - taxable equivalent basis	3.31		%	3.51		%

The ~~increase~~decrease in net interest income for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 when compared to the three months ended ~~September 30, 2018~~March 31, 2019 was primarily due to lower yields on average earning assets and higher average interest-bearing liabilities.Partially offsetting these decreases were lower costs of average interest-bearing liabilities and higher average earning assets ~~of $2.297 billion~~ in the three months ended ~~September 30, 2019~~March 31, 2020 when compared to the three months ended September 30, 2018 and $2.121 billion in the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018. Partially offsetting the higher average earning assets were higher average interest-bearing liabilities of $1.757 billion in the three months ended September 30, 2019 when compared to the three months ended September 30, 2018 and $1.611 billion in the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018. March 31, 2019.Net interest income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ included accretion income (interest income in excess of contractual interest income) associated with acquired loans.Accretion income totaled ~~$13.4~~$6.7 million in the three months ended ~~September 30, 2019 and $34.1 million in the nine months ended September 30, 2019,~~March 31, 2020, compared to ~~$7.3~~$8.9 million in the three months ended ~~September 30, 2018 and $29.8 million in the nine months ended September 30, 2018.~~ March 31, 2019.We expect accretion income on loans to decrease over time, but this may be offset by future acquisitions.

The following tables present the average balance sheet for each major asset and liability category, its related interest income and yield, or its expense and ~~rate~~rate.


(Tax equivalent basis, dollars in thousands)	Three Months Ended March 31, 2020										Three Months Ended March 31, 2019
Earning Assets	Average Balance		Income (1)/ Expense		Yield/ Rate		Average Balance		Income (1)/ Expense		Yield/ Rate
Money market and other interest-earning investments	$	58,406	$	349	2.41	%	$	58,701	$	278	1.92	%
Investment securities:
Treasury and government sponsored agencies	583,971		3,697		2.53	%	705,417		3,902		2.21	%
Mortgage-backed securities	3,171,650		19,065		2.40	%	2,497,368		17,603		2.82	%
States and political subdivisions	1,273,156		11,409		3.58	%	1,232,355		11,453		3.72	%
Other securities	494,500		3,216		2.60	%	497,604		4,440		3.57	%
Total investment securities	5,523,277		37,387		2.71	%	4,932,744		37,398		3.03	%
Loans: (2)
Commercial	2,907,297		29,053		3.95	%	3,122,402		36,035		4.62	%
Commercial real estate	5,188,597		62,439		4.76	%	4,989,622		65,076		5.22	%
Residential real estate loans	2,370,295		24,244		4.09	%	2,259,243		23,931		4.24	%
Consumer	1,726,158		17,850		4.16	%	1,780,862		19,398		4.42	%
Total loans	12,192,347		133,586		4.35	%	12,152,129		144,440		4.76	%
Total earning assets	17,774,030		$	171,322	3.84	%	17,143,574		$	182,116	4.26	%
Less: Allowance for loan losses (4)	(83,244)						(55,789)
Non-Earning Assets
Cash and due from banks	287,601						229,957
Other assets	2,388,092						2,490,524
Total assets	$	20,366,479					$	19,808,266

Interest-Bearing Liabilities
Checking and NOW accounts	$	4,104,778	$	2,860	0.28	%	$	3,693,886	$	3,142	0.34	%
Savings accounts	2,828,177		1,298		0.18	%	2,935,710		2,283		0.32	%
Money market accounts	1,784,169		2,507		0.57	%	1,702,655		2,826		0.67	%
Time deposits	1,646,173		5,633		1.38	%	2,031,957		8,193		1.64	%
Total interest-bearing deposits	10,363,297		12,298		0.48	%	10,364,208		16,444		0.64	%
Federal funds purchased and interbank borrowings	392,857		1,240		1.27	%	316,998		1,918		2.45	%
Securities sold under agreements to repurchase	329,091		384		0.47	%	361,261		662		0.74	%
FHLB advances	1,965,130		7,768		1.59	%	1,672,376		9,931		2.41	%
Other borrowings	240,276		2,538		4.23	%	249,794		2,915		4.67	%
Total borrowed funds	2,927,354		11,930		1.64	%	2,600,429		15,426		2.41	%
Total interest-bearing liabilities	$	13,290,651	$	24,228	0.73	%	$	12,964,637	$	31,870	1.00	%

Noninterest-Bearing Liabilities and Shareholders' Equity
Demand deposits	$	3,964,493					$	3,846,828
Other liabilities	277,812						282,615
Shareholders' equity	2,833,523						2,714,186
Total liabilities and shareholders' equity	$	20,366,479					$	19,808,266

Net interest rate spread					3.11	%					3.26	%
Net interest margin (3)					3.31	%					3.51	%
Taxable equivalent adjustment			$	3,323					$	3,198

(1)Interest income is reflected on a fully taxable equivalent basis.

(2)Includes loans held for ~~the three and nine months ended September 30, 2019 and 2018.~~sale.

(tax equivalent basis,

Three Months Ended

Three Months Ended

dollars in thousands)

September 30, 2019

September 30, 2018

Average

Income (1)/

Yield/

Average

Income (1)/

Yield/

Earning Assets

Balance

Expense

Rate

Balance

Expense

Rate

Money market and other interest-earning
   investments

$
63,142

$
528

3.32
%

$
35,928

$
140

1.54
%
Investment securities:

Treasury and government sponsored agencies

682,940

4,341

2.54
%

685,919

3,748

2.19
%
Mortgage-backed securities

3,019,322

18,589

2.46
%

1,595,630

9,381

2.35
%
States and political subdivisions

1,172,017

10,896

3.72
%

1,103,347

10,110

3.67
%
Other securities

499,308

4,049

3.24
%

500,837

4,116

3.29
%
Total investment securities

5,373,587

37,875

2.82
%

3,885,733

27,355

2.82
%
Loans: (2)

Commercial

3,018,638

35,428

4.59
%

2,928,744

33,381

4.46
%
Commercial real estate

5,037,909

71,604

5.56
%

4,465,105

57,377

5.03
%
Residential real estate loans

2,283,704

24,261

4.25
%

2,187,130

22,536

4.12
%
Consumer

1,733,507

19,328

4.42
%

1,710,744

17,333

4.02
%
Total loans

12,073,758

150,621

4.91
%

11,291,723

130,627

4.56
%
Total earning assets

17,510,487

$
189,024

4.27
%

15,213,384

$
158,122

4.11
%
Less: Allowance for loan losses

(56,894
)

(53,734
)

Non-Earning Assets

Cash and due from banks

264,145

205,446

Other assets

2,429,466

2,068,469

Total assets

$
20,147,204

$
17,433,565

Interest-Bearing Liabilities

Checking and NOW accounts

$
3,895,654

$
4,448

0.45
%

$
3,026,289

$
1,180

0.15
%
Savings accounts

2,855,401

2,128

0.30
%

2,974,147

2,119

0.28
%
Money market accounts

1,822,698

4,017

0.87
%

1,153,906

1,254

0.43
%
Time deposits

1,914,917

8,114

1.68
%

1,847,322

6,636

1.43
%
Total interest-bearing deposits

10,488,670

18,707

0.71
%

9,001,664

11,189

0.49
%
Federal funds purchased and interbank
   borrowings

254,971

1,484

2.31
%

238,514

1,191

1.98
%
Securities sold under agreements to repurchase

340,158

715

0.83
%

352,998

535

0.60
%
FHLB advances

1,889,407

9,123

1.92
%

1,624,661

8,880

2.17
%
Other borrowings

251,817

2,728

4.33
%

250,255

2,732

4.37
%
Total borrowed funds

2,736,353

14,050

2.04
%

2,466,428

13,338

2.15
%
Total interest-bearing liabilities

$
13,225,023

$
32,757

0.98
%

$
11,468,092

$
24,527

0.85
%

Noninterest-Bearing Liabilities and
   Shareholders' Equity

Demand deposits

$
3,841,867

$
3,596,159

Other liabilities

262,862

156,614

Shareholders' equity

2,817,452

2,212,700

Total liabilities and shareholders' equity

$
20,147,204

$
17,433,565

Net interest rate spread

3.29
%

3.26
%
Net interest margin (3)

3.57
%

3.51
%
Taxable equivalent adjustment

$
3,171

$
2,753

~~(1)~~(3)Net interest margin is defined as net interest income on a tax equivalent basis as a percentage of average earning assets.

~~Interest income is reflected on a fully taxable equivalent basis.~~

~~(2)~~(4)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss model.

~~Includes loans held for sale.~~

~~(3)~~

~~Net interest margin is defined as net interest income on a tax equivalent basis as a percentage of average earning assets.~~

Nine Months Ended

Nine Months Ended

(dollars in thousands)

September 30, 2019

September 30, 2018

Average

Income (1)/

Yield/

Average

Income (1)/

Yield/

Earning Assets

Balance

Expense

Rate

Balance

Expense

Rate

Money market and other interest-earning
   investments

$
60,071

$
1,140

2.54
%

$
51,284

$
347

0.90
%
Investment securities:

Treasury and government sponsored agencies

694,628

12,544

2.41
%

666,015

10,559

2.11
%
Mortgage-backed securities

2,763,406

54,991

2.65
%

1,605,324

27,805

2.31
%
States and political subdivisions

1,198,962

33,584

3.73
%

1,141,827

31,179

3.64
%
Other securities

497,854

12,553

3.36
%

489,465

11,694

3.19
%
Total investment securities

5,154,850

113,672

2.94
%

3,902,631

81,237

2.78
%
Loans: (2)

Commercial

3,067,830

109,290

4.70
%

2,854,691

94,114

4.35
%
Commercial real estate

5,015,973

208,894

5.49
%

4,436,576

170,414

5.07
%
Residential real estate loans

2,263,595

71,972

4.24
%

2,180,416

66,216

4.05
%
Consumer

1,757,941

58,525

4.45
%

1,773,092

52,828

3.98
%
Total loans

12,105,339

448,681

4.91
%

11,244,775

383,572

4.52
%
Total earning assets

17,320,260

$
563,493

4.32
%

15,198,690

$
465,156

4.06
%
Less: Allowance for loan losses

(56,442
)

(52,070
)

Non-Earning Assets

Cash and due from banks

242,938

203,421

Other assets

2,464,192

2,081,615

Total assets

$
19,970,948

$
17,431,656

Interest-Bearing Liabilities

Checking and NOW accounts

$
3,829,213

$
11,786

0.41
%

$
3,063,636

$
2,969

0.13
%
Savings accounts

2,889,977

6,556

0.30
%

3,020,955

5,239

0.23
%
Money market accounts

1,772,150

10,572

0.80
%

1,138,679

2,502

0.29
%
Time deposits

1,979,185

24,756

1.67
%

1,798,616

16,873

1.25
%
Total interest-bearing deposits

10,470,525

53,670

0.69
%

9,021,886

27,583

0.41
%
Federal funds purchased and interbank
   borrowings

290,699

5,219

2.40
%

213,362

2,855

1.79
%
Securities sold under agreements to repurchase

344,294

2,048

0.80
%

342,797

1,328

0.52
%
FHLB advances

1,753,283

29,093

2.22
%

1,671,211

25,484

2.04
%
Other borrowings

251,070

8,430

4.48
%

249,464

8,184

4.37
%
Total borrowed funds

2,639,346

44,790

2.27
%

2,476,834

37,851

2.04
%
Total interest-bearing liabilities

$
13,109,871

$
98,460

1.00
%

$
11,498,720

$
65,434

0.76
%

Noninterest-Bearing Liabilities and
   Shareholders' Equity

Demand deposits

$
3,833,605

$
3,587,453

Other liabilities

263,799

157,859

Shareholders' equity

2,763,673

2,187,624

Total liabilities and shareholders' equity

$
19,970,948

$
17,431,656

Net interest rate spread

3.32
%

3.30
%
Net interest margin (3)

3.58
%

3.51
%
Taxable equivalent adjustment

$
9,659

$
8,345

~~(1)~~

~~Interest income is reflected on a fully taxable equivalent basis.~~

~~(2)~~

~~Includes loans held for sale.~~

~~(3)~~

~~Net interest margin is defined as net interest income on a tax equivalent basis as a percentage of average earning assets.~~

The following table presents the dollar amount of changes in taxable equivalent net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates ~~paid for the three and nine months ended September 30, 2019 and 2018.~~paid.


	From Three Months Ended
	March 31, 2019 to Three
	Months Ended March 31, 2020
	Total Change (1)		Attributed to
(dollars in thousands)					Volume			Rate
Interest Income
Money market and other interest-earning investments	$	71	$	(1)		$	72
Investment securities (2)	(11)		4,237			(4,248)
Loans (2)	(10,854)		1,042			(11,896)
Total interest income	(10,794)		5,278			(16,072)
Interest Expense
Checking and NOW deposits	(282)		335			(617)
Savings deposits	(985)		(55)			(930)
Money market deposits	(319)		139			(458)
Time deposits	(2,560)		(1,411)			(1,149)
Federal funds purchased and interbank borrowings	(678)		363			(1,041)
Securities sold under agreements to repurchase	(278)		(45)			(233)
FHLB advances	(2,163)		1,511			(3,674)
Other borrowings	(377)		(106)			(271)
Total interest expense	(7,642)		731			(8,373)
Net interest income	$	(3,152)	$	4,547		$	(7,699)

(1)

From Three Months Ended

From Nine Months Ended

September 30, 2018 to Three

September 30, 2018 to Nine

Months Ended September 30, 2019

Months Ended September 30, 2019

Total

Attributed to

Total

Attributed to

(dollars in thousands)

Change

Volume

Rate

Change

Volume

Rate

Interest Income

Money market and other interest-earning
   investments

$
388

$
166

$
222

$
793

$
113

$
680

Investment securities (1)

10,520

10,480

40

32,435

26,839

5,596

Loans (1)

19,994

9,425

10,569

65,109

30,690

34,419

Total interest income

30,902

20,071

10,831

98,337

57,642

40,695

Interest Expense

Checking and NOW deposits

3,268

673

2,595

8,817

1,549

7,268

Savings deposits

9

(86
)

95

1,317

(262
)

1,579

Money market deposits

2,763

1,102

1,661

8,070

2,585

5,485

Time deposits

1,478

268

1,210

7,883

1,976

5,907

Federal funds purchased and interbank
   borrowings

293

89

204

2,364

1,211

1,153

Securities sold under agreements to
   repurchase

180

(22
)

202

720

7

713

FHLB advances

243

1,353

(1,110
)

3,609

1,307

2,302

Other borrowings

(4
)

17

(21
)

246

53

193

Total interest expense

8,230

3,394

4,836

33,026

8,426

24,600

Net interest income

$
22,672

$
16,677

$
5,995

$
65,311

$
49,216

$
16,095

The variance not solely due to rate or volume is allocated equally between the rate and volume variances.

~~(1)~~(2)Interest on investment securities and loans includes the effect of taxable equivalent adjustments of $2.1 million and $1.2 million, respectively, during the three months ended March 31, 2020 using the federal statutory rate in effect of 21%.

Interest on investment securities and loans includes the effect of taxable equivalent adjustments of $1.9 million and $1.3 million, respectively, during the three months ended September 30, 2019; and $5.7 million and $3.9 million, respectively, during the nine months ended September 30, 2019 using the federal statutory rate in effect of 21%.

The ~~increase~~decrease in the net interest margin on a fully taxable equivalent basis for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018~~three months ended March 31, 2019 was primarily due to ~~higher average earning assets and higher~~lower yields on interest earning assets and higher average interest-bearing liabilities, partially offset by ~~higher~~lower costs of interest-bearing liabilities, higher average earning assets, and a change in the mix of average interest earning assets and interest-bearing liabilities. The yield on interest earning assets ~~increased 16~~decreased 42 basis points and the cost of interest-bearing liabilities ~~increased 13~~decreased 27 basis points in the quarterly year-over-year comparison. The yield on interest earning assets is calculated by dividing annualized taxable equivalent net interest income by average interest earning assets while the cost of interest-bearing liabilities is calculated by dividing annualized interest expense by average interest-bearing liabilities. The yield on interest earning assets increased 26 basis points and the cost of interest-bearing liabilities increased 24 basis points in the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018. Accretion income represented 3115 basis points of the net interest margin for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to 1921 basis points for the three months ended ~~September 30, 2018. Accretion income represented 26 basis points~~March 31, 2019. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact net interest ~~margin for the nine months ended September 30, 2019 and the nine months ended September 30, 2018.~~

margin. Other financial impacts could occur, though such potential impacts are unknown at this time.

Average earning assets were ~~$17.510~~$17.774 billion for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to ~~$15.213~~$17.144 billion for the three months ended ~~September 30, 2018,~~March 31, 2019, an increase of ~~$2.297 billion,~~$630.5 million, or 15%. Average earning assets were $17.320 billion for the nine months ended September 30, 2019, compared to $15.199 billion for the nine months ended September 30, 2018, an increase of $2.121 billion, or 14%4%. The ~~increases~~increase in average earning assets ~~were~~was primarily due to ~~our acquisition of Klein~~an increase in ~~November 2018.~~average investment securities. The loan portfolio including loans held for sale, which generally has an average yield higher than the investment portfolio, was ~~70%~~69% of average interest earning assets for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared to ~~74%~~71% for the ~~nine~~three months ended ~~September 30, 2018.~~

March 31, 2019.

Average loans including loans held for sale increased ~~$782.0~~$40.2 million for the three months ended ~~September 30, 2019 and $860.6 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018~~three months ended March 31, 2019 primarily due to an increase in average commercial real estate and residential real estate loans, ~~acquired from Klein in November 2018. Loansincluding loans held for sale~~ ~~attributable to the Kleinacquisition totaled $1.052 billion as of the closing date of the acquisition, which was November 1, 2018.~~

partially offset by lower average commercial and consumer loans.

Average investments increased ~~$1.488 billion for the three months ended September 30, 2019 and $1.252 billion for the nine months ended September 30, 2019 when compared to the same periods in 2018 reflecting the Klein acquisition.~~ ~~Excess liquidity generated in 2019 also resulted in higher investment securities.~~

~~Average noninterest-bearing deposits increased $245.7~~$590.5 million for the three months ended ~~September 30, 2019 and $246.2 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018. Average interest-bearing deposits increased $1.487 billion for the~~ three months ended ~~September 30,~~March 31, 2019 reflecting higher fair values and ~~$1.449 billion for the nine months ended September 30, 2019 when compared to the same periods in 2018. The increases in average~~excess liquidity.

Average noninterest-bearing deposits ~~also reflected the Klein acquisition.~~

~~Average borrowed funds~~ increased ~~$269.9~~$117.7 million for the three months ended ~~September 30, 2019 and $162.5 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018.~~

three months ended March 31, 2019. Average interest-bearing deposits were flat for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019.

Average borrowed funds increased $443.7 million for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019.

Provision for Loan Losses

The provision for loan losses was ~~$1.4~~$17.0 million for the three months ended ~~September 30, 2019~~,March 31, 2020, compared to ~~$0.8~~$1.0 million for the three months ended ~~September 30, 2018~~.March 31, 2019. Net charge-offs totaled ~~$0.8~~$6.5 million during the three months ended ~~September 30, 2019~~,March 31, 2020, compared to net charge-offs of ~~$1.7~~$0.9 million during the three months ended ~~September 30, 2018. The provision for loan losses was $3.5 million for the~~ ~~nine months ended September 30, 2019, compared to $3.6 million for the~~ ~~nine months ended September 30, 2018. Net charge-offs totaled $2.0 million during the~~ ~~nine months ended September 30, 2019, compared to net charge-offs of $1.2 million during~~ ~~the nine months ended September 30, 2018~~. March 31, 2019. The higher provision for loan losses in the three months ended ~~September 30, 2019~~March 31, 2020 when compared to the three months ended ~~September 30, 2018 is~~March 31, 2019 was driven by implementation of CECL, which uses an economic forecast that now includes the ~~result~~impact of ~~loan growth, partially offset by a decrease in specific reserves on loans individually evaluated for impairment.~~ the coronavirus pandemic. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense.

Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Noninterest Income

We generate revenues in the form of noninterest income through client fees, sales commissions, and other gains and losses from our core banking franchise and other related businesses, such as wealth management, investment consulting, and investment products. The following table details the components in noninterest ~~income for the three and nine months ended September 30, 2019 and 2018:~~

income:

	Three Months Ended								Nine Months Ended
	September 30,				%				September 30,				%					Three Months Ended March 31,						%
(dollars in thousands)		2019		2018	Change					2019		2018	Change				(dollars in thousands)	2020		2019		Change
Wealth management fees	$	9,160	$	9,022		1.5		%	$	27,604	$	27,794		(0.7	)	%	Wealth management fees	$	8,884	$	8,535	4.1	%
Service charges on deposit accounts		11,860		11,028		7.5				34,201		32,552		5.1			Service charges on deposit accounts	10,077		10,826		(6.9)
Debit card and ATM fees		5,370		4,706		14.1				16,292		14,651		11.2			Debit card and ATM fees	4,998		5,503		(9.2)
Mortgage banking revenue		8,850		4,348		103.5				20,996		13,729		52.9			Mortgage banking revenue	11,119		5,011		121.9
Investment product fees		5,244		5,073		3.4				16,106		15,170		6.2			Investment product fees	5,874		5,271		11.4
Capital markets income		4,560		2,700		68.9				10,227		4,094		149.8			Capital markets income	4,328		2,517		72.0
Company-owned life insurance		2,703		2,958		(8.6	)			8,602		7,993		7.6			Company-owned life insurance	3,080		3,188		(3.4)
Net debt securities gains (losses)		424		135		214.1				1,486		2,417		(38.5	)
Debt securities gains (losses), net																	Debt securities gains (losses), net	5,174		(103)		N/M
Other income		5,790		5,987		(3.3	)			16,077		18,751		(14.3	)		Other income	3,968		5,668		(30.0)
Total noninterest income	$	53,961	$	45,957		17.4		%	$	151,591	$	137,151		10.5		%	Total noninterest income	$	57,502	$	46,416	23.9	%

The increase in noninterest income for the three months ended ~~September 30, 2019~~March 31, 2020 when compared to the three months ended ~~September 30, 2018~~March 31, 2019 was primarily due to higher mortgage banking revenue ~~higher noninterest income attributable to~~and $5.2 million of debt securities gains in the ~~Klein partnership, and higher capital markets income.~~

~~The increase in noninterest income for the nine months ended September 30, 2019 when~~first quarter of 2020 compared to the nine months ended September 30, 2018 was primarily due to higher noninterest income attributable to the Klein partnership, higher mortgage banking revenue, and higher capital markets income. These increases were partially offset by a $2.2$0.1 million ~~gain on the sale~~ of ~~our student loan portfolio~~debt securities losses in the ~~second~~first quarter of ~~2018 and lower net gains on sales of debt securities.~~

2019.

Service charges and overdraft fees increased $0.8 million for the three months ended September 30, 2019 and $1.6 million for the nine months ended September 30, 2019 when compared to the same periods in 2018 primarily due to service charges and overdraft fees attributable to the Klein partnership.

~~Debit card and ATM fees increased~~decreased $0.7 million for the three months ended ~~September 30, 2019 and $1.6 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018~~three months ended March 31, 2019 primarily due to ~~higher interchange income attributable to the Klein partnership.~~

lower overdraft fees.

Mortgage banking revenue increased ~~$4.5~~$6.1 million for the three months ended ~~September 30, 2019 and $7.3 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods~~three months ended March 31, 2019 reflecting the change in ~~2018 primarily due to~~our pipeline valuation, as well as increased mortgage originations and ~~strong pipeline growth~~sales in ~~2019.~~

the first quarter 2020..

Investment product fees increased $0.6 million for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019 primarily due to higher advisor fees.

Capital markets income is comprised of customer interest rate swap fees, foreign currency exchange fees, net gains (losses) on foreign currency adjustments, and tax credit fee income. Capital markets income increased ~~$1.9~~$1.8 million for the three months ended ~~September 30, 2019 and $6.1 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018~~three months ended March 31, 2019 primarily due to higher customer interest rate swap fees.

~~Net debt~~

Debt securities gains (losses), net had ~~an unfavorable~~a favorable variance of ~~$0.9~~$5.3 million for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 when compared to the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 primarily due to higher realized ~~losses~~gains on sales of available-for-sale securities in ~~2019.~~

2020.

Other income decreased ~~$2.7~~$1.7 million for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 when compared to the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 primarily due to ~~a $2.2 million gain~~unfavorable variances in net gains (losses) on the sale of our student loan portfolio in the second quarter of 2018. Also contributing to the decrease in other income was the recognition of deferred gains on sale leaseback transactions of $1.2 million in the nine months ended September 30, 2018. The deferred gains were eliminated as a cumulative-effect adjustment upon adoption of the new accounting guidance in Topic 842 effective January 1, 2019. These decreases were partially offset by other income attributable to the Klein partnership.

derivatives and equity securities.

Noninterest Expense

The following table details the components in noninterest expense:


	Three Months Ended March 31,						%
(dollars in thousands)	2020		2019		Change
Salaries and employee benefits	$	79,173	$	71,183	11.2	%
Occupancy	15,133		14,578		3.8
Equipment	5,305		4,474		18.6
Marketing	3,097		3,723		(16.8)
Data processing	9,467		9,341		1.3
Communication	2,798		3,054		(8.4)
Professional fees	4,293		2,910		47.5
Loan expenses	1,771		1,912		(7.4)
FDIC assessment	1,609		2,087		(22.9)
Amortization of intangibles	3,776		4,472		(15.6)
Amortization of tax credit investments	5,515		260		2,021.2
Other expense	26,807		5,047		431.1
Total noninterest expense	$	158,744	$	123,041	29.0	%

Noninterest expense increased $35.7 million for the three ~~and nine~~ months ended ~~September 30, 2019 and 2018:~~

Three Months Ended

Nine Months Ended

September 30,

%

September 30,

%

(dollars in thousands)

2019

2018

Change

2019

2018

Change

Salaries and employee benefits

$
71,729

$
63,158

13.6

%

$
214,478

$
193,929

10.6

%
Occupancy

11,934

12,578

(5.1
)

41,071

38,731

6.0

Equipment

3,954

3,652

8.3

12,945

10,945

18.3

Marketing

4,105

3,406

20.5

12,267

11,065

10.9

Data processing

8,961

8,628

3.9

28,509

26,752

6.6

Communication

2,349

2,473

(5.0
)

8,252

8,309

(0.7
)

Professional fees

5,037

3,235

55.7

12,868

8,888

44.8

Loan expenses

1,811

1,564

15.8

5,380

5,151

4.4

FDIC assessment

960

2,722

(64.7
)

4,501

8,528

(47.2
)

Amortization of intangibles

4,168

3,283

27.0

12,965

10,308

25.8

Amortization of tax credit investments

1,211

9,233

(86.9
)

2,039

21,807

(90.6
)

Other expense

6,366

5,444

16.9

18,469

22,580

(18.2
)

Total noninterest expense

$
122,585

$
119,376

2.7

%

$
373,744

$
366,993

1.8

%

~~Noninterest expense increased $3.2 million for the~~ ~~three months ended September 30, 2019~~March 31, 2020 when compared to the three months ended ~~September 30, 2018~~March 31, 2019 reflecting ~~higher operating expenses and acquisition and integration costs~~ ~~associated with Klein~~ $31.2 million of charges related to The ONB Way strategic initiative and higher ~~commissions and incentive compensation~~ ~~expenses. These increases were substantially offset by a decrease in~~ amortization of tax credit ~~investments totaling $8.0 million.~~

~~Noninterest expense increased $6.8 million for the~~ ~~nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018 reflecting~~ ~~higher operating expenses and acquisition and integration costs~~ associated with Klein, higher commissions and incentive compensation expenses, and higher professional fees. These increases were partially offset by a decrease in amortization of tax credit investments totaling $19.8 million.

investments.

Salaries and employee benefits increased ~~$8.6~~$8.0 million for the three months ended ~~September 30, 2019 and $20.5 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018~~three months ended March 31, 2019 primarily due to personnel expenses related to The ONB Way totaling $7.0 million and higher ~~salaries and employee benefits~~ ~~attributable to the Klein partnership. Also contributing to the increase in salaries and benefits were higher commissions and incentive compensation~~ ~~expenses.~~

commissions.

Equipment expenses increased ~~$2.0 million for the nine months ended September 30, 2019 when compared to the same period in 2018 primarily due to~~ ~~higher equipment expenses~~ ~~attributable to the Klein partnership and an increase in small equipment expenses~~.

~~Professional fees increased $1.8~~$0.8 million for the three months ended ~~September 30, 2019 and $4.0 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018~~three months ended March 31, 2019 primarily due to ~~higher consulting fees~~.

~~FDIC assessment~~$1.4 million of accelerated depreciation expenses of non-deployed assets related to the optimization of our branch network as part of The ONB Way strategic initiative.

Marketing expenses decreased ~~$1.8~~$0.6 million for the three months ended ~~September 30, 2019 and $4.0 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods~~three months ended March 31, 2019 primarily due to lower advertising expenses.

Professional fees increased $1.4 million for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019 reflecting $1.3 million in ~~2018~~consulting fees incurred in the first quarter of 2020 related to The ONB Way.

FDIC assessment expenses decreased $0.5 million for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019 primarily due to the elimination of an FDIC surcharge.

Amortization of ~~intangibles~~tax credit investments increased ~~$0.9~~$5.3 million for the three months ended ~~September 30, 2019 and $2.7 million for the nine months ended September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018 primarily due to amortization of core deposit intangibles related to the Klein acquisition~~.

~~Amortization of tax credit investments decreased $8.0 million for the~~ three months ended ~~September 30, 2019 and $19.8 million for the nine months ended September 30, 2019 when compared to the same periods in 2018.~~March 31, 2019. The recognition of tax credit amortization expense is contingent upon the successful completion of the rehabilitation of a historic building or completion of a solar project within the reporting period. Many factors including weather, labor availability, building regulations, inspections, and other unexpected construction delays related to a rehabilitation project can cause a project to exceed its estimated completion date. See Note 1312 to the consolidated financial statements for additional information on our tax credit investments.

Other expense increased ~~$0.9~~$21.8 million for the three months ended ~~September 30, 2019~~March 31, 2020 when compared to the three months ended ~~September 30, 2018~~ March 31, 2019 primarily due to ~~an unfavorable variance in provision for unfunded commitments.~~ ~~Other expense decreased $4.1~~$20.6 million ~~for the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018~~ ~~primarily due to~~ of lease termination charges and impairments ofon long-lived assets ~~of $2.5 million in the nine months ended September 30, 2018~~ related to branch consolidations ~~and higher integration expenses associated with the Anchor (MN) partnership totaling $1.5 million in the nine months ended September 30, 2018~~that were part of The ONB Way strategic initiative.

Provision for Income Taxes

We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes. The major difference between the effective tax rate applied to our financial statement income and the federal statutory tax rate is caused by a tax benefit from our tax credit investments and interest on tax-exempt securities and loans. The provision for income taxes, as a percentage of pre-tax income, was ~~16.0%~~11.5% for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to ~~9.4%~~18.9% for the three months ended September 30, 2018. The provision for income taxes, as a percentage of pre-tax income, was 17.7% for the nine months ended September 30, 2019, compared to 9.3% for the nine months ended September 30, 2018.March 31, 2019. In accordance with ASC 740-270,

Accounting for Interim Reporting, the provision for income taxes was recorded at ~~September 30, 2019~~March 31, 2020 based on the current estimate of the effective annual rate. The ~~higher~~lower effective tax rate during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 when compared to the ~~same periods in 2018~~three months ended March 31, 2019 was primarily the result of ~~a decrease~~an increase in federal tax credits ~~available as well as an increase in pre-tax book income.~~available. See Note 1918 to the consolidated financial statements for additional information.

FINANCIAL CONDITION

Overview

At ~~September 30, 2019~~,March 31, 2020, our assets were ~~$20.439~~$20.741 billion, a ~~$2.871 billion increase compared to assets of $17.568 billion at~~ ~~September 30, 2018, and a $710.4~~$329.5 million increase compared to assets of ~~$19.728~~$20.412 billion at December 31, ~~2018.~~2019. The increase ~~from~~ ~~September 30, 2018~~ to ~~September 30, 2019~~ was primarily due to ~~the acquisition of Klein~~an increase in ~~November 2018, which had $2.157 billion in assets as~~commercial and commercial real estate loans.

As a result of the ~~closing date~~spread of ~~the acquisition, including goodwill of $208.8 million. An increase in investment securities also contributed~~COVID-19, economic uncertainties have arisen that are likely to ~~the~~ ~~September 30, 2018~~ to ~~September 30, 2019~~ ~~increase in assets.~~

negatively impact our financial condition. Any potential financial impacts are unknown at this time.

Earning Assets

Our earning assets are comprised of investment securities, portfolio loans, loans held for sale, money market investments, interest earning accounts with the Federal Reserve, and equity securities. Earning assets were ~~$17.670~~$18.119 billion at ~~September 30, 2019~~,March 31, 2020, a ~~$2.358 billion increase compared to earning assets of $15.312 billion at~~ ~~September 30, 2018, and a $600.0~~$357.4 million increase compared to earning assets of ~~$17.070~~$17.762 billion at December 31, ~~2018.~~

2019.

Investment Securities

We classify the majority of our investment securities as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements.~~However, we also have $33.3 million of U.S. government-sponsored entities and agencies securities, $112.2 million of~~ ~~fixed-rate mortgage-backed securities,~~ ~~and $261.8 million of state and political subdivision securities in our held-to-maturity investment portfolio at September 30, 2019.~~

Equity securities are recorded at fair value and totaled ~~$6.6~~$6.9 million at ~~September 30, 2019~~March 31, 2020 compared to ~~$5.8~~$6.8 million at ~~September 30, 2018.~~

December 31, 2019.

At ~~September 30, 2019~~,March 31, 2020, the investment securities portfolio, including equity securities, was ~~$5.495~~$5.541 billion compared to ~~$3.927~~$5.556 billion at ~~September 30, 2018, an increase~~December 31, 2019, a decrease of ~~$1.568 billion. Investment securities attributable to the Klein acquisition totaled $700.6 million as of the closing date of the acquisition.~~$15.0 million. Investment securities represented 31% of earning assets at ~~September 30, 2019, compared to 26% at~~ ~~September 30, 2018~~ March 31, 2020 and ~~28% at~~ December 31, ~~2018. Excess liquidity generated in 2019 resulted in a higher percentage of investment securities compared to December 31, 2018.~~2019. Stronger commercial loan demand in the future could result in management’s decision to reduce the securities portfolio. At ~~September 30, 2019~~,March 31, 2020, management does not intend to sell any securities in an unrealized loss position and does not believe we will be required to sell such securities.

The investment securities available-for-sale portfolio had net unrealized gains of ~~$82.4~~$170.7 million at ~~September 30, 2019~~,March 31, 2020, compared to net unrealized ~~losses~~gains of ~~$96.1 million at~~ ~~September 30, 2018, and net unrealized losses of $49.2~~$71.9 million at December 31, ~~2018.~~2019. Net unrealized gains (losses) increased from December 31, ~~2018~~2019 to ~~September 30, 2019~~ March 31, 2020 reflecting higher net unrealized gains on mortgage-backed ~~securities and state and political subdivision~~ securities due to a decline in long-term interest rates.

The investment portfolio had an effective duration of ~~3.04~~3.10 at ~~September 30, 2019,~~March 31, 2020, compared to ~~4.49 at September 30, 2018, and~~ ~~4.00~~3.86 at December 31, ~~2018~~.2019. Effective duration measures the percentage change in value of the portfolio in response to a change in interest rates. Generally, there is more uncertainty in interest rates over a longer average maturity, resulting in a higher duration ~~percentage~~. percentage. The annualized average yields on investment securities, on a taxable equivalent basis, were ~~2.82%~~2.71% for the three months ended ~~September 30, 2019 and 2.94% for the nine months ended September 30, 2019,~~March 31, 2020, compared to ~~2.82%~~3.03% for the three months ended ~~September 30, 2018 and 2.78% for the nine months ended September 30, 2018.~~

March 31, 2019.

Loans Held for Sale

Mortgage loans held for immediate sale in the secondary market were ~~$58.3~~$54.2 million at ~~September 30, 2019,~~March 31, 2020, compared to ~~$14.9~~$46.9 million at December 31, ~~2018.~~2019. Certain mortgage loans are committed for sale at or prior to origination at a contracted price to an outside investor.Other mortgage loans held for immediate sale are hedged with TBA forward

agreements and committed for sale when they are ready for delivery and remain on the Company’s balance sheet for a short period of time (typically 30 to 60 days).These loans are sold without recourse, beyond customary representations and warranties, and Old National has not experienced material losses arising from these sales.Mortgage originations are subject to volatility due to interest rates and home sales, among other factors.

We have elected the fair value option prospectively for residential loans held for sale. The aggregate fair value exceeded the unpaid principal balance by ~~$1.8~~ $3.0 million at ~~September 30, 2019~~,March 31, 2020, compared to ~~$0.5~~$1.5 million at December 31, ~~2018.~~

2019.

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classification within earning assets, representing 46% of earning assets at ~~September 30, 2019~~,March 31, 2020, compared to ~~49% at~~ ~~September 30, 2018~~ ~~and 48%~~45% at December 31, ~~2018.~~2019. At ~~September 30, 2019~~,March 31, 2020, commercial and commercial real estate loans were ~~$8.063~~$8.330 billion, an increase of ~~$631.9~~$273.0 million ~~or 9%, compared to~~ ~~September 30, 2018, and a decrease of $129.1 million, or 2%,~~ compared to December 31, ~~2018. Commercial and commercial real estate loans attributable to the Klein acquisition totaled $836.8 million as of the closing date of the acquisition.~~

2019.

Residential Real Estate Loans

At ~~September 30, 2019~~,March 31, 2020, residential real estate loans held in our loan portfolio were ~~$2.237~~$2.328 billion, ~~an increase of $70.4 million compared to~~ ~~September 30, 2018, and~~ a decrease of ~~$11.8~~$6.4 million compared to December 31, ~~2018. Residential real estate loans attributable to the Klein acquisition totaled $77.7 million as of the closing date of the acquisition.~~2019. Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans.

Consumer Loans

Consumer loans, including automobile loans and personal and home equity loans and lines of credit, increased ~~$22.7~~$0.6 million at ~~September 30, 2019~~ March 31, 2020 compared to ~~September 30, 2018, and decreased $85.3 million from~~ December 31, ~~2018. Consumer loans attributable~~2019 primarily due to ~~the Klein acquisition totaled $134.6 million as of the closing date of the acquisition. We continue to see runoff in our less profitable indirect consumer loan portfolio.~~

~~Operating Lease Right-of-Use Assets~~

~~Old National adopted ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ on January 1, 2019, which required the recognition of operating lease right-of-use assets. Operating lease right-of-use assets represent the lessee’s right to use, or control the use of, specified assets for the lease term. Operating lease right-of-use assets are recognized based on the present value of lease payments over the lease term. ~~Operating lease right-of-use assets totaled $103.0 million at September 30, 2019.~~

~~Goodwill and Other Intangible Assets~~

~~Goodwill and other intangible assets at September 30, 2019 totaled $1.101 billion,~~ an increase ~~of $230.1 million compared to $870.9 million at September 30, 2018. During 2018, we recorded $247.8 million of goodwill and other intangible assets associated with the acquisition of Klein.~~

in consumer indirect loans.

Net Deferred Tax Assets

Net deferred tax assets decreased ~~$68.1~~$12.1 million compared to ~~September 30, 2018~~December 31, 2019 primarily due to ~~decreases~~an increase in deferred tax liabilities related to net unrealized gains on available-for-sale investment securities and a decrease in deferred tax assets related to ~~net unrealized gains or losses on available-for-sale investment securities, federal tax credits, and net operating loss carryforwards. Net deferred tax assets decreased $60.5 million compared to~~

~~December 31, 2018 primarily due to decreases~~benefit plan accruals, partially offset by an increase in ~~net~~ deferred tax assets related to ~~net unrealized gains or losses on available-for-sale investment securities, acquired loans, net operating loss carryforwards, and benefit plan accruals.~~allowance for loan losses. Future changes in the corporate tax rate could result in a change in value of Old National’s net deferred tax assets and future income tax expense. See Note 1918 to the consolidated financial statements for additional information.

Other Assets

Other assets increased ~~$60.5~~$115.5 million, or ~~36%, compared to September 30, 2018 and $44.3 million, or 24%~~59%, compared to December 31, ~~2018~~2019 primarily due to ~~increases~~an increase in derivative assets.

Funding

Total funding, comprised of deposits and wholesale borrowings, was ~~$17.280~~$17.551 billion at ~~September 30, 2019,~~March 31, 2020, an increase of ~~$2.106 billion from $15.174 billion at September 30, 2018, and an increase of $436.5~~$252.5 million from ~~$16.844~~$17.298 billion at December 31, ~~2018.~~2019. Included in total funding were deposits of ~~$14.448~~$14.305 billion at ~~September 30, 2019, an increase~~March 31, 2020, a decrease of ~~$1.850 billion from $12.598 billion at September 30, 2018, and an increase of $98.4~~$248.0 million from ~~$14.350~~$14.553 billion at December 31, ~~2018. Deposits~~ ~~attributable to the Klein acquisition totaled $1.713 billion as of the closing date of the acquisition.~~ 2019. Noninterest-bearing deposits increased ~~$407.9~~$16.3 million from ~~September 30, 2018~~December 31, 2019 to ~~September 30, 2019.~~March 31, 2020. Interest-bearing checking and NOW deposits ~~increased $924.8~~decreased $44.6 million from ~~September 30, 2018~~December 31, 2019 to ~~September 30, 2019,~~March 31, 2020, while savings deposits ~~decreased $57.0~~increased $7.9 million. Money market deposits ~~increased $636.6~~decreased $87.0 million from ~~September 30, 2018~~December 31, 2019 to ~~September 30, 2019,~~March 31, 2020, while time deposits decreased ~~$62.1~~$140.5 million.

We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position. At ~~September 30, 2019, wholesale~~March 31, 2020, wholesale borrowings, including federal funds purchased and interbank borrowings, securities sold under agreements to repurchase, FHLB advances, and other borrowings, totaled ~~$2.832~~$3.245 billion, an increase of ~~$255.8 million from~~ ~~September 30, 2018, and an increase of $338.1~~$500.5 million from December 31, ~~2018.~~2019. Wholesale funding as a percentage of total funding was ~~16%~~18% at ~~September 30, 2019, 17% at~~ ~~September 30, 2018~~,March 31, 2020 and ~~15%~~16% at December 31, ~~2018.~~2019. The increase in wholesale funding from ~~September 30, 2018~~December 31, 2019 to ~~September 30, 2019~~ March 31, 2020 was due to increases in FHLB advances and federal funds purchased and interbank borrowings, partially offset by decreases in securities sold under agreements to repurchase ~~partially offset by a decrease in federal funds purchased~~ and ~~interbank~~other borrowings.

~~Operating Lease Liabilities~~

~~The adoption of ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ on January 1, 2019 also required the recognition of operating lease liabilities. Operating lease liabilities represent a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. ~~Operating lease liabilities totaled $107.3 million at September 30, 2019.~~

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities increased ~~$45.9~~$109.7 million, or ~~27%~~68%, from ~~September 30, 2018 and $23.6 million, or 12%, compared to~~ December 31, ~~2018~~2019 to March 31, 2020 primarily due to investment securities purchased but not settled before ~~September 30, 2019. The~~March 31, 2020 and an increase in accrued expenses and other liabilities from December 31, 2018 to September 30, 2019 was partially offset by decreases in accrued expenses related to the Klein acquisition and decreases in unfunded commitments on various tax credit investmentsderivative liabilities.

.Capital

~~Capital~~

Shareholders’ equity totaled ~~$2.833~~$2.823 billion at ~~September 30, 2019~~,March 31, 2020, compared to ~~$2.221 billion at~~ ~~September 30, 2018~~ ~~and $2.690~~$2.852 billion at December 31, ~~2018. Shareholders’ equity at~~ 2019. Old National~~September 30, 2019~~ ~~included $406.5 million from the 22.8~~ repurchased 4.9 million shares of Common Stock that were issued in conjunction with the acquisition of Klein. The change in unrealized gains (losses) on available-for-sale investment securities increased equity by $101.6 million during the nine months ended September 30, 2019. Old National ~~repurchased 5.6 million shares of Common Stock in the nine months ended September 30, 2019~~ under a stock repurchase plan that was approved by the Company’s Board of Directors ~~which reduced~~reducing equity by ~~$91.9 million.~~$78.7 million and 0.2 million shares of Common Stock associated with employee share-based incentive programs reducing equity by $3.1 million in the three months ended March 31, 2020. We have suspended the stock repurchase plan approved by the Company’s Board of Directors in the near term given the uncertain economic conditions. We also paid cash dividends of ~~$0.39~~$0.14 per share in the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, which reduced equity by ~~$67.4~~$23.5 million. The change in unrealized gains (losses) on available-for-sale investment securities increased equity by $76.4 million during the three months ended March 31, 2020. The Company’s Common Stock is traded on the NASDAQ under the symbol “ONB” with ~~37,053~~36,161 shareholders of record at ~~September 30, 2019.~~

March 31, 2020.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At ~~September 30, 2019,~~March 31, 2020, Old National and its bank subsidiary exceeded the regulatory minimums and Old National Bank met the regulatory definition of ~~well-capitalized~~"well-capitalized" based on the most recent regulatory definition.

~~At September 30, 2019,~~

Old National’s consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios.


	Regulatory Guidelines			September 30,						December 31,				Regulatory Guidelines Minimum		March 31,						December 31,
	Minimum			2019			2018										2020		2019		2019
Risk-based capital:													Risk-based capital:
Tier 1 capital to total average assets (leverage ratio)		4.00	%		8.79	%		8.56	%		9.17	%	Tier 1 capital to total average assets (leverage ratio)	4.00	%	8.46	%	8.80	%	8.88	%
Common equity Tier 1 capital to risk-adjusted total assets		7.00			12.03			11.09			11.36		Common equity Tier 1 capital to risk-adjusted total assets	7.00		11.40		11.77		12.13
Tier 1 capital to risk-adjusted total assets		8.50			12.03			11.09			11.36		Tier 1 capital to risk-adjusted total assets	8.50		11.40		11.77		12.13
Total capital to risk-adjusted total assets		10.50			12.97			12.09			12.27		Total capital to risk-adjusted total assets	10.50		12.28		12.70		12.99
Shareholders' equity to assets	N/A				13.86			12.64			13.63		Shareholders' equity to assets	N/A		13.61		13.70		13.97

~~At September 30, 2019,~~

Old National Bank, Old National’s bank subsidiary, maintained a strong capital position as evidenced by the following comparisons of key industry ratios.


	Regulatory Guidelines			Well Capitalized			September 30,						December 31,				Regulatory Guidelines Minimum		Prompt Corrective Action "Well Capitalized" Guidelines		March 31,						December 31,
	Minimum			Guidelines			2019			2018													2020		2019		2019
Risk-based capital:																Risk-based capital:
Tier 1 capital to total average assets (leverage ratio)		4.00	%		5.00	%		9.57	%		9.08	%		9.58	%	Tier 1 capital to total average assets (leverage ratio)	4.00	%	5.00	%	9.23	%	9.30	%	9.62	%
Common equity Tier 1 capital to risk-adjusted
total assets		7.00			6.50			13.00			11.86			11.98
Common equity Tier 1 capital to risk-adjusted total assets																Common equity Tier 1 capital to risk-adjusted total assets	7.00		6.50		12.29		12.48		13.01
Tier 1 capital to risk-adjusted total assets		8.50			8.00			13.00			11.86			11.98		Tier 1 capital to risk-adjusted total assets	8.50		8.00		12.29		12.48		13.01
Total capital to risk-adjusted total assets		10.50			10.00			13.51			12.39			12.47		Total capital to risk-adjusted total assets	10.50		10.00		12.86		12.98		13.50

2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). Old National is ~~planning on~~ adopting the capital transition relief over the permissible ~~three-year~~five-year period.

RISK MANAGEMENT

Overview

Old National has adopted a Risk Appetite Statement to enable the Board of Directors, Executive Leadership Group, and Senior Management to better assess, understand, and mitigate the risks of Old National.The Risk Appetite Statement addresses the following major risks:strategic, market, liquidity, credit, operational/technology/cyber, regulatory/compliance/legal, reputational, and human resources.Our Chief Risk Officer is independent of management and reports directly to the Chair of the Board’s Enterprise Risk Management Committee.The following discussion addresses these major risks: credit, market, liquidity, operational/technology/cyber, and regulatory/compliance/legal.

As the spread of COVID-19 has evolved, we have taken various precautions to keep our clients, colleagues, and communities safe. These include temporary changes at our banking centers. On Friday, March 20, 2020, we began to serve clients through our drive-thru windows or by appointment inside a banking center. We are closely monitoring the COVID-19 outbreak, and proactively planning for potential impacts on our clients and team members. During this period of disruption, for our clients facing unanticipated financial hardships, we are providing various assistance to mutually mitigate the financial impact from COVID-19.

Credit Risk

Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Our primary credit risks result from our investment and lending ~~activities.~~

activities

Investment Activities

We carry a higher exposure to loss in our pooled trust preferred securities, which are collateralized debt obligations, due to illiquidity in that market and the performance of the underlying collateral. At ~~September 30, 2019,~~March 31, 2020, we had pooled trust preferred securities with a fair value of ~~$7.7~~$7.4 million, or less than 1% of the available-for-sale securities portfolio. These securities remained classified as available-for-sale and at ~~September 30, 2019,~~March 31, 2020, the unrealized loss on our pooled trust preferred securities was ~~$6.1~~$6.4 million. The fair value of these securities should improve as we get closer to maturity, but not in all cases. ~~There was no OTTI recorded during the nine months ended September 30, 2019 or 2018~~.

All of our mortgage-backed securities are backed by U.S. government-sponsored or federal agencies. Municipal bonds, corporate bonds, and other debt securities are evaluated by reviewing the credit-worthiness of the issuer and general market conditions. See Note 54 to the consolidated financial statements for additional details about our investment security portfolio.

Counterparty Exposure

Counterparty exposure is the risk that the other party in a financial transaction will not fulfill its obligation. We define counterparty exposure as nonperformance risk in transactions involving federal funds sold and purchased, repurchase agreements, correspondent bank relationships, and derivative contracts with companies in the financial services industry. Old National manages exposure to counterparty risk in connection with its derivatives transactions by generally engaging in transactions with counterparties having ratings of at least A by Standard & Poor’s Rating Service or A2 by Moody’s Investors Service. Total credit exposure is monitored by counterparty and managed within limits that management believes to be prudent. Old National’s net counterparty exposure was a liability of ~~$51.1~~$483.8 million at ~~September 30, 2019.~~

March 31, 2020.

Lending Activities

Commercial

Commercial and industrial loans are made primarily for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes. Lease financing consists of direct financing leases and are used by commercial customers to finance capital purchases ranging from computer equipment to transportation equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. In addition to an evaluation of the applicant’s financial condition, a determination is made of the probable adequacy of the primary and secondary sources of repayment, such as additional collateral or personal guarantees, to be relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthiness.

Commercial mortgages and construction loans are offered to real estate investors, developers, and builders primarily domiciled in the geographic market areas we serve: Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. These loans are secured by first mortgages on real estate at LTV margins deemed appropriate for the property type, quality, location, and sponsorship. Generally, these LTV ratios do not exceed 80%. The commercial properties are predominantly non-residential properties such as retail centers, ~~apartments,~~ industrial properties and, to a lesser extent, more specialized properties. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.

In the underwriting of our commercial real estate loans, we obtain appraisals for the underlying properties. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we primarily emphasize the ratio of the property’s projected net cash flows to the loan’s debt service requirement. The debt service coverage ratio normally is not less than 120% and it is computed after deduction for a vacancy factor and property expenses as appropriate. In addition, a personal guarantee of the loan or a portion thereof is often required from the principal(s) of the borrower. In most cases, we require title insurance insuring the priority of our lien, fire, and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property. In addition, business interruption insurance or other insurance may be required.

Construction loans are underwritten against projected cash flows derived from rental income, business income from an owner-occupant, or the sale of the property to an end-user. We may mitigate the risks associated with these types of loans by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

Consumer

We offer a variety of first mortgage and junior lien loans to consumers within our markets, with residential home mortgages comprising our largest consumer loan category. These loans are secured by a primary residence and are underwritten using traditional underwriting systems to assess the credit risks of the consumer. Decisions are primarily based on LTV ratios, DTI ratios, liquidity, and credit scores. A maximum LTV ratio of 80% is generally required, although higher levels are permitted with mortgage insurance or other mitigating factors. We offer fixed rate mortgages and variable rate mortgages with interest rates that are subject to change every year after the first, third, fifth, or seventh year, depending on the product and are based on fully-indexed rates such as LIBOR. We do not offer payment-option facilities, sub-prime loans, or any product with negative amortization.

Home equity loans are secured primarily by second mortgages on residential property of the borrower. The underwriting terms for the home equity product generally ~~permits~~permit borrowing availability, in the aggregate, up to 90% of the appraised value of the collateral property at the time of origination. We offer fixed and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios, and credit scores. We do not offer home equity loan products with reduced documentation.

Automobile loans include loans and leases secured by new or used automobiles. We originate automobile loans and leases primarily on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans, with us listed as loss payee. Our procedures for underwriting automobile loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is

the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount.

Asset Quality

Community-based lending personnel, along with region-based independent underwriting and analytic support staff, extend credit under guidelines established and administered by our Enterprise Risk Committee. This committee, which meets quarterly, is made up of outside directors. The committee monitors credit quality through its review of information such as delinquencies, credit exposures, peer comparisons, problem loans, and charge-offs. In addition, the committee reviews and approves recommended loan policy changes to assure it remains appropriate for the current lending environment.

We lend to commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. At ~~September 30, 2019,~~March 31, 2020, our average commercial loan size was under ~~$300,000~~$325,000 and our average commercial real estate loan size was under ~~$675,000.~~$700,000. In addition, while loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold. At ~~September 30, 2019,~~March 31, 2020, we had minimal exposure to foreign borrowers and no sovereign debt. Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. We have experienced minimal impact from COVID-19 as of March 31, 2020; however, the depth of this crisis is yet to be known and its effect is anticipated to be very broad-based. Our geographic footprint, the Midwest, has not experienced the same shock as other parts of the country and we are ~~experiencing a slow and gradual improvement~~hopeful that the relief programs we have put in place coupled with various governmental programs, will ultimately blunt the ~~economy of~~economic strain to our ~~principal markets.~~clients. Management expects that trends in under-performing, criticized, and classified loans will be influenced by the degree to which the economy strengthens or weakens.

On November 1, 2018, Old National closed on its acquisition of Klein. As of the closing date of the acquisition, loans totaled $1.049 billion and other real estate owned totaled $1.0 million. In accordance with accounting for business combinations, there was no allowance brought forward on any of the acquired loans, as the credit losses evident in the loans were included in the determination of the fair value of the loans at the acquisition date. Old National reviewed the acquired loans and determined that as of September 30, 2019, $27.3 million met the definition of criticized and $37.7 million were considered classified (of which $12.1 million are reported with nonaccrual

loans). Our current preference would be to work these loans and avoid foreclosure actions unless additional credit deterioration becomes apparent. These acquired impaired loans are included in our summary of under-performing, criticized, and classified assets found below.

Summary of under-performing, criticized, and classified assets:

September 30,

December 31,

(dollars in thousands)

2019

2018

2018

Nonaccrual loans:

Commercial

$
37,880

$
36,515

$
38,648

Commercial real estate

70,443

81,233

86,601

Residential real estate

20,759

23,435

24,954

Consumer

9,416

7,633

7,281

Total nonaccrual loans (1)

138,498

148,816

157,484

Renegotiated loans not on nonaccrual

18,884

17,547

17,356

Past due loans (90 days or more and still accruing):

Commercial

100

1

52

Commercial real estate

—

—

40

Residential real estate

64

190

258

Consumer

539

789

1,003

Total past due loans

703

980

1,353

Other real estate owned

2,941

3,563

3,232

Total under-performing assets

$
161,026

$
170,906

$
179,425

Classified loans (includes nonaccrual, renegotiated,
past due 90 days, and other problem loans)

$
285,188

$
257,053

$
334,785

Other classified assets (2)

2,556

3,070

2,820

Criticized loans

233,519

181,165

238,752

Total criticized and classified assets

$
521,263

$
441,288

$
576,357

Asset Quality Ratios:

Non-performing loans/total loans (3) (4)

1.31

%

1.47

%

1.43

%
Under-performing assets/total loans and
other real estate owned (3)

1.34

1.51

1.47

Under-performing assets/total assets

0.79

0.97

0.91

Allowance for loan losses/under-performing assets (5)

35.34

30.84

30.91

Allowance for loan losses/nonaccrual loans (1)

41.09

35.42

35.22

~~(1)~~

Includes purchased credit impaired loans of $11.0 million at September 30, 2019, $9.9 million at September 30, 2018, and $20.5 million at December 31, 2018 that are categorized as nonaccrual for credit analysis purposes because the collection of principal or interest is doubtful. However, these loans are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.


	March 31,									December 31,
(dollars in thousands)	2020			2019			2019
Total nonaccrual loans	$	126,987		$	152,881		$	126,412
Renegotiated loans not on nonaccrual	17,040			17,123			18,338
Total past due loans (90 days or more and still accruing)	658			560			570
Other real estate owned	2,163			3,279			2,169
Total under-performing assets	$	146,848		$	173,843		$	147,489
Classified loans (includes nonaccrual, renegotiated, past due 90 days, and other problem loans)	$	308,802		$	364,121		$	296,671
Other classified assets (1)	2,616			2,715			2,933
Criticized loans	238,011			268,836			234,841
Total criticized and classified assets	$	549,429		$	635,672		$	534,445
Asset Quality Ratios:
Non-performing loans/total loans (2) (3)	1.16		%	1.41		%	1.19		%
Under-performing assets/total loans and other real estate owned (4)	1.19			1.44			1.22
Under-performing assets/total assets	0.71			0.87			0.72
Allowance/under-performing assets (5)	72.44			31.96			37.03
Allowance/nonaccrual loans (5)	83.77			36.34			43.21

~~(2)~~(1)Includes one pooled trust preferred security and one insurance policy at March 31, 2020.

~~Includes one pooled trust preferred security and one insurance policy at September 30, 2019.~~

~~(3)~~(2)Loans exclude loans held for sale.

~~Loans exclude loans held for sale.~~

~~(4)~~(3)Non-performing loans include nonaccrual and renegotiated loans.

~~Non-performing loans include nonaccrual and renegotiated loans.~~

~~(5)~~(4)Includes acquired loans that were recorded at fair value at the date of acquisition. As such, the credit risk was incorporated in the fair value recorded and no allowance for loan losses was recorded at March 31, 2019 or December 31, 2019.

Because the acquired loans were recorded at fair value at the date of acquisition, the credit risk is incorporated in the fair value recorded. No allowance for loan losses is recorded on the acquisition date.

(5)Beginning January 1, 2020, the allowance is based on current expected loss methodology. Prior to January 1, 2020, the allowance was based on incurred loss methodology.

Under-performing assets totaled ~~$161.0~~$146.8 million at ~~September 30, 2019,~~March 31, 2020, compared to ~~$170.9~~$173.8 million at ~~September 30, 2018~~March 31, 2019 and ~~$179.4~~$147.5 million at December 31, ~~2018.~~2019. Under-performing assets as a percentage of total loans and other real

estate owned at ~~September 30, 2019~~March 31, 2020 were ~~1.34%~~1.19%, a ~~decrease of 17~~25 basis ~~points~~point improvement from ~~1.51%~~1.44% at ~~September 30, 2018~~March 31, 2019 and a ~~decrease of 13~~3 basis ~~points~~point improvement from ~~1.47%~~1.22% at December 31, ~~2018.~~

2019.

Nonaccrual loans decreased from ~~September 30, 2018~~March 31, 2019 primarily due to a decrease in commercial real estate nonaccrual loans. ~~Nonaccrual loans at September 30, 2019 include $12.1 million of loans related to the Klein acquisition.~~ As a percentage of nonaccrual loans, the allowance ~~for loan losses~~ was ~~41.09%~~83.77% at ~~September 30, 2019,~~March 31, 2020, compared to ~~35.42%~~36.34% at ~~September 30, 2018~~March 31, 2019 and ~~35.22%~~43.21% at December 31, ~~2018. PCI loans that were included in~~2019. Beginning January 1, 2020, the ~~nonaccrual category for credit analysis purposes because~~allowance is based on current expected loss methodology. Prior to January 1, 2020, the collection of principal or interest is doubtful totaled $11.0 million at September 30, 2019, compared to $9.9 million at September 30, 2018 and $20.5 million at December 31, 2018. However, they are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.

allowance was based on incurred loss methodology.

Total criticized and classified assets were ~~$521.3~~$549.4 million at ~~September 30,~~March 31, 2020, a decrease of $86.2 million from March 31, 2019, and an increase of ~~$80.0 million from~~ ~~September 30, 2018, and a decrease of $55.1~~$15.0 million from December 31, ~~2018.~~2019. Other classified assets include investment securities that fell below investment grade rating totaling $2.6 million at ~~September 30, 2019~~,March 31, 2020, compared to ~~$3.1~~$2.7 million at ~~September 30, 2018~~ March 31, 2019 and ~~$2.8~~$2.9 million at December 31, ~~2018~~.

2019.

Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that are 90 days or more delinquent and do not have adequate collateral support. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs.

At ~~September 30, 2019, our~~March 31, 2020, TDRs consisted of ~~$17.1~~$10.9 million of commercial loans, ~~$18.3~~$12.9 million of commercial real estate loans, ~~$2.8~~$0.6 million of BBCC loans, $3.0 million of residential real estate loans, $0.9 million of direct consumer loans, and ~~$2.2~~$0.4 million of ~~consumer~~home equity loans totaling ~~$40.4~~$28.7 million. TDRs included ~~with~~within nonaccrual loans totaled ~~$21.8~~$11.8 million at ~~September 30, 2019.~~March 31, 2020. At December 31, ~~2018, our~~2019, TDRs consisted of ~~$10.3~~$12.4 million of commercial loans, ~~$27.6~~$14.2 million of commercial real estate loans, ~~$3.4~~$0.6 million of BBCC loans, $3.1 million of residential real estate loans, $1.0 million of direct consumer loans, and ~~$2.4~~$0.4 million of ~~consumer~~home equity loans totaling ~~$43.7~~$31.7 million. TDRs included ~~with~~within nonaccrual loans totaled ~~$26.3~~$13.8 million at December 31, ~~2018.~~

2019,

Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling ~~$6.3~~$1.4 million at ~~September 30, 2019~~March 31, 2020 and ~~$3.0~~$0.9 million of December 31, ~~2018.~~2019. At ~~September 30, 2019,~~March 31, 2020, Old National had committed to lend an additional ~~$1.8~~$0.9 million to customers with outstanding loans that are classified as ~~TDRs.~~

TDRs, compared to $2.3 million at December 31, 2019.

concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

PCI loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. If a PCI loan is subsequently modified, and meets the definition of a TDR, it will be removed from PCI accounting and accounted for as a TDR only if the PCI loan was being accounted for individually. If the PCI loan is being accounted for as part of a pool, it will not be removed from the pool. At September 30, 2019, it has not been necessary to remove any loans from PCI accounting.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold, or charged off. However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall. However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. The March 22, 2020 statement issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), passed on March 27, 2020 provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The modifications completed in the three months ended March 31, 2020 were immaterial. The table below presents the volume of loan deferrals and approvals through April 16, 2020 by loan category:


(dollars in thousands)	Approved Number	Approved Amount		Approved % of Portfolio
Commercial and commercial real estate	908	$	1,125,163	14	%
Residential real estate	229	60,121		3
Consumer	1,538	43,120		2
Total	2,675	$	1,228,404	10	%

U.S. Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the Paycheck Protection Program ("PPP"), which appropriated $349 billion in loans designed to provide a direct incentive for sole proprietors, independent contractors, self-employed persons, non-profits and small businesses with less than 500 employees, allowing for narrow exceptions with businesses greater than 500 employees, to keep their workers on the payroll. These loans will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, or utilities as long as at least 75% of the forgiven amount was used for payroll. Additionally, loan payments will also be deferred for six months. The Program started on April 3, 2020 and was available through June 30, 2020, or as long as the appropriated funding is available. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees.

Old National began accepting applications from qualified customers on April 3, 2020 and has helped provide over $1.3 billion in funding to over 5,100 clients through the PPP until available funding for the PPP was fully appropriated on April 16, 2020. Additional appropriations in the amount of $321 billion, including $60 billion set aside for small, midsize, and community lenders, have been approved and the SBA commenced acceptances on new PPP applications on April 27, 2020.

Allowance for ~~Loan~~Credit Losses on Loans and ~~Reserve for~~ Unfunded Commitments

Loan charge-offs, net of recoveries, totaled ~~$0.8~~$6.5 million for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to ~~$1.7~~$0.9 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Annualized, net charge-offs (recoveries) to average loans were 0.21% for the three months ended March 31, 2020 compared to 0.03% for the three months ended September 30, 2019 compared to 0.06% for the three months ended September 30, 2018. Loan charge-offs, net of recoveries, totaled $2.0 million for the nine months ended September 30, 2019, compared to $1.2 million for the nine months ended September 30, 2018. Annualized, net charge-offs (recoveries) to average loans were 0.02% for the nine months ended September 30, 2019 compared to 0.01% for the nine months ended September 30, 2018.March 31, 2019. Management will continue its efforts to reduce the level of non-performing loans and may consider the possibility of sales of troubled and non-performing loans, which could result in additional charge-offs to the allowance for credit losses on loans.

Beginning January 1, 2020, we calculated allowance for credit losses using current expected credit losses methodology. As of January 1, 2020, Old National increased the allowance for credit losses for loans by $41.3 million and increased the allowance for credit losses for unfunded loan ~~losses.~~

~~To provide~~commitments by $4.5 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions.The increase related to the acquired loan portfolio totaled $27.1 million.

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the ~~risk~~allowance for credit losses for loans.The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio.Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in ~~extending~~non-cancelable off-balance-sheet credit ~~we maintain an~~exposures is accounted for as a separate liability included in other liabilities on the consolidated statements of financial condition.The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing the level of expected credit losses, ~~is maintained at~~credit loss assumptions are estimated using a ~~level believed adequate by management to absorb probable losses incurred in~~model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the ~~consolidated loan portfolio. Management’s evaluation of~~future. Determining the ~~adequacy~~appropriateness of the allowance is ~~an estimate based on reviews~~complex and requires judgment by management about the effect of ~~individual loans, pools of homogeneous loans, assessments~~matters that are inherently uncertain. In future periods evaluations of the ~~impact~~overall loan portfolio, in light of ~~current~~the factors and ~~anticipated economic conditions on~~forecasts then prevailing, may result in significant changes in the ~~portfolio,~~allowance and credit loss expense in those future periods.

The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience,.

~~At September 30, 2019,~~ and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for ~~loan~~credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

At March 31, 2020, the allowance for credit losses for loans was ~~$56.9 million, an increase of $4.2 million compared to $52.7 million at September 30, 2018, and an increase of $1.4 million compared to $55.5 million at December 31, 2018.~~$106.4 million. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense.

~~As a percentage~~ Additionally, with the adoption of ~~total loans excluding loans held for sale,~~CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance ~~was 0.47% at September 30, 2019, compared~~for credit losses balance.

Prior to ~~0.47% at September 30, 2018 and 0.45% at~~January 1, 2020, we calculated allowance for loan losses using incurred losses methodology. At December 31, ~~2018.~~

~~The following table provides additional details of the components of~~2019, the allowance for loan losses ~~including ASC 450,~~ ~~Contingencies, for loans collectively evaluated for impairment, ASC 310-10,~~ ~~Receivables, for loans individually evaluated for impairment, and ASC 310-30,~~ ~~Loans and Debt Securities Acquired with Deteriorated Credit Quality, for loans acquired with deteriorated credit quality:~~

was $54.6 million.

Collectively

Individually

Acquired with

Evaluated for

Evaluated for

Deteriorated

(dollars in thousands)

Impairment

Impairment

Credit Quality

Total

Originated loans

$
9,329,103

$
86,525

$
—

$
9,415,628

Acquired loans

2,605,085

28,599

55,407

2,689,091

Total loans

$
11,934,188

$
115,124

$
55,407

$
12,104,719

Remaining purchase discount

(68,314
)

(1,227
)

(17,530
)

(87,071
)
Loans, net of discount

$
11,865,874

$
113,897

$
37,877

$
12,017,648

Allowance, January 1, 2019

$
40,642

$
14,341

$
478

$
55,461

Charge-offs

(6,483
)

(1,914
)

(88
)

(8,485
)
Recoveries

2,906

3,462

83

6,451

Provision expense

7,160

(3,549
)

(128
)

3,483

Allowance, September 30, 2019

$
44,225

$
12,340

$
345

$
56,910

We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar

to that used to determine the allowance for ~~loan~~credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The ~~reserve~~allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet and totaled ~~$2.3~~$9.0 million at ~~September 30, 2019, compared~~March 31, 2020.

Prior to ~~$2.5 million at~~January 1, 2020, we calculated allowance for losses on unfunded loan commitments using incurred losses methodology. At December 31, ~~2018.~~

~~Old National will adopt ASU No. 2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ ~~(“CECL”) effective January 1, 2019. The main objective of this amendment is to provide financial statement users with more decision-useful information about~~2019, the ~~expected credit~~allowance losses on ~~financial instruments and other~~unfunded commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. As of the beginning of the first reporting period in which the new standard is effective, Old National expects to recognize a one-time cumulative effect adjustment increasing the allowance for loan losses, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. Old National currently estimates an increase to the allowance for credit losses of approximately $35 million to $45 million upon adoption, which includes a range of $3 million to $8 million for off-balance sheet exposures. At this point in time, the vast majority of this increase is related to the acquired loan portfolio. Under the current accounting guidance, any remaining unamortized loan discount on an individual loan can be used to offset a charge-off for that loan, so the allowance for loan losses needed for the acquired loans is reduced by the remaining loan discounts. The new accounting under the ASU removes the ability to offset a charge-off against the remaining loan discount and requires an allowance for credit losses to be recognized in addition to the loan discount. The ultimate impact of adopting the ASU will be highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and securities portfolios, and other management judgements at the time of adoption. The transition adjustment to record the allowance for credit losses may fall outside of management’s estimated increase based on material changes in these dependencies, specifically the macroeconomic forecast and conditions, used in calculating the allowance for credit losses upon the adoption of CECL.

Old National does not expect a material allowance for credit losses to be recorded on held-to-maturity securities under the CECL credit impairment model, as the composition of these securities are government agency-backed securities for which the risk the risk of loss is minimal. Additionally, Old National does not expect a material allowance for credit losses to be recorded on its available-for-sale debt securities under the available-for-sale debt security impairment model, as the majority of these securities are government agency-backed securities for which the risk of loss is minimal.

was $2.7 million.

Market Risk

Market risk is the risk that the estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.

The objective of our interest rate management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.

Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Our earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve.

In managing interest rate risk, we, through the Funds Management Committee, a committee of the Board of Directors, establish guidelines, for asset and liability management, including measurement of short and long-term sensitivities to changes in interest rates. Based on the results of our analysis, we may use different techniques to manage changing trends in interest rates including:

•

~~adjusting balance sheet mix or altering interest rate characteristics of assets and liabilities;~~

•adjusting balance sheet mix or altering interest rate characteristics of assets and liabilities;

~~changing product pricing strategies;~~

•changing product pricing strategies;

~~modifying characteristics of the investment securities portfolio; or~~

•modifying characteristics of the investment securities portfolio; or

•using derivative financial instruments, to a limited degree.

•

~~using derivative financial instruments, to a limited degree.~~

A key element in our ongoing process is to measure and monitor interest rate risk using a model to quantify the impact of changing interest rates on Old National.The model quantifies the effects of various possible interest rate scenarios on projected net interest income.The model measures the impact on net interest income relative to a base case scenario.The base case scenario assumes that the balance sheet and interest rates are held at current levels.The model shows our projected net interest income sensitivity based on interest rate changes only and does not consider other forecast assumptions.

The following table illustrates our projected net interest income sensitivity over a two year cumulative horizon based on the asset/liability model at ~~September 30, 2019~~March 31, 2020 and ~~2018:~~

2019:

	Immediate
	Rate Decrease					Immediate Rate Increase
	-50					+100			+200			+300				Immediate Rate Decrease					Immediate Rate Increase
(dollars in thousands)	Basis Points			Base		Basis Points			Basis Points			Basis Points			(dollars in thousands)	-50 Basis Points			Base		+100 Basis Points			+200 Basis Points			+300 Basis Points
September 30, 2019
March 31, 2020															March 31, 2020
Projected interest income:															Projected interest income:
Money market, other interest earning investments, and investment securities	$	312,946		$	330,216	$	353,274		$	367,236		$	380,849		Money market, other interest earning investments, and investment securities	$	267,951		$	283,927	$	318,870		$	339,578		$	354,092
Loans		1,007,193			1,064,314		1,184,097			1,299,709			1,413,164		Loans	869,090			916,978		1,037,778			1,161,678			1,281,085
Total interest income		1,320,139			1,394,530		1,537,371			1,666,945			1,794,013		Total interest income	1,137,041			1,200,905		1,356,648			1,501,256			1,635,177
Projected interest expense:															Projected interest expense:
Deposits		101,683			140,784		234,087			327,527			420,967		Deposits	31,040			45,374		125,648			205,917			286,174
Borrowings		108,043			119,660		147,381			176,206			205,321		Borrowings	73,648			85,870		122,950			164,338			206,964
Total interest expense		209,726			260,444		381,468			503,733			626,288		Total interest expense	104,688			131,244		248,598			370,255			493,138
Net interest income	$	1,110,413		$	1,134,086	$	1,155,903		$	1,163,212		$	1,167,725		Net interest income	$	1,032,353		$	1,069,661	$	1,108,050		$	1,131,001		$	1,142,039
Change from base	$	(23,673	)			$	21,817		$	29,126		$	33,639		Change from base	$	(37,308)				$	38,389		$	61,340		$	72,378
% change from base		(2.09	)%				1.92	%		2.57	%		2.97	%	% change from base	(3.49)		%			3.59		%	5.73		%	6.77		%

September 30, 2018
March 31, 2019															March 31, 2019
Projected interest income:															Projected interest income:
Money market, other interest earning investments, and investment securities	$	238,894		$	245,374	$	258,572		$	271,183		$	283,562		Money market, other interest earning investments, and investment securities	$	323,632		$	335,556	$	352,559		$	368,113		$	382,116
Loans		968,240			1,023,923		1,136,505			1,247,110			1,357,113		Loans	1,067,651			1,125,848		1,242,294			1,354,498			1,466,586
Total interest income		1,207,134			1,269,297		1,395,077			1,518,293			1,640,675		Total interest income	1,391,283			1,461,404		1,594,853			1,722,611			1,848,702
Projected interest expense:															Projected interest expense:
Deposits		68,155			101,836		181,611			260,799			339,983		Deposits	97,668			139,307		229,789			320,256			410,715
Borrowings		113,459			131,669		168,032			204,404			240,783		Borrowings	119,915			140,240		180,901			221,569			262,270
Total interest expense		181,614			233,505		349,643			465,203			580,766		Total interest expense	217,583			279,547		410,690			541,825			672,985
Net interest income	$	1,025,520		$	1,035,792	$	1,045,434		$	1,053,090		$	1,059,909		Net interest income	$	1,173,700		$	1,181,857	$	1,184,163		$	1,180,786		$	1,175,717
Change from base	$	(10,272	)			$	9,642		$	17,298		$	24,117		Change from base	$	(8,157)				$	2,306		$	(1,071)		$	(6,140)
% change from base		(0.99	)%				0.93	%		1.67	%		2.33	%	% change from base	(0.69)		%			0.20		%	(0.09)		%	(0.52)		%

Our asset sensitivity increased year over year primarily due to deposit pricing actions and changes in our hedging strategies, balance sheet mix, investment duration, and prepayment speed behavior.

A key element in the measurement and modeling of interest rate risk is the re-pricing assumptions of our transaction deposit accounts, which have no contractual maturity dates. Because the models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect our net interest income, we recognize that model outputs are not guarantees of actual results. For this reason, we model many different combinations of interest rates and balance sheet assumptions to understand our overall sensitivity to market interest rate changes, including shocks, ramps, yield curve flattening, yield curve steepening, as well as forecasts of likely interest rate ~~scenarios.~~scenarios tested. At ~~September 30, 2019,~~March 31, 2020, our projected net interest income sensitivity based on the asset/liability models we utilize was within the limits of our interest rate risk policy for the scenarios ~~tested~~.

tested.

We use ~~derivative instruments,~~cash flow and fair value hedges, primarily interest rate swaps, collars, and ~~floor spreads,~~floors, to mitigate interest rate ~~risk, including certain cash flow hedges on variable-rate assets and liabilities~~risk. Derivatives designated as hedging instruments were in a net asset position with a ~~notional amount~~fair value of ~~$535~~$20.2 million at ~~September 30, 2019.~~ ~~Our derivatives had an estimated~~March 31, 2020, compared to a net asset position with a fair value ~~gain~~ of ~~$54.9 million at September 30, 2019, compared to an estimated fair value gain of $16.5~~$6.1 million at December 31, ~~2018.~~2019. See Note 2019 to the consolidated financial statements for further discussion of derivative financial instruments.

Liquidity Risk

Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The Funds Management Committee of the Board of Directors establishes liquidity risk guidelines and, along with the Balance Sheet Management Committee, monitors liquidity risk. The objective of liquidity management is to ensure we have the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. We maintain strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, properly manage capital markets’ funding sources and to address unexpected liquidity requirements.

Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. We continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.

A time deposit maturity schedule for Old National Bank is shown in the following table at ~~September 30, 2019.~~

March 31, 2020.


(dollars in thousands)						(dollars in thousands)
Maturity Bucket	Amount		Rate			Maturity Bucket	Amount		Rate
2019	$	640,625		1.73	%
2020		864,303		1.64		2020	$	1,021,361	1.27	%
2021		154,333		1.31		2021	313,715		1.15
2022		70,583		1.40		2022	92,742		1.31
2023		55,600		1.73		2023	59,582		1.64
2024 and beyond		44,619		1.75
2024						2024	36,367		1.68
2025 and beyond						2025 and beyond	17,927		1.38
Total	$	1,830,063		1.64	%	Total	$	1,541,694	1.28	%

Our ability to acquire funding at competitive prices is influenced by rating agencies’ views of our credit quality, liquidity, capital, and earnings. Moody’s Investor Service places us in an investment grade that indicates a low risk of default. For both Old National and Old National Bank:

•

~~Moody’s Investor Service affirmed the Long-Term Rating of A3 of Old National’s senior unsecured/issuer rating on February 2, 2018.~~

•Moody’s Investor Service affirmed the Long-Term Rating of A3 of Old National’s senior unsecured/issuer rating on February 3, 2020.

Moody’s Investor Service affirmed Old National Bank’s long-term deposit rating of Aa3 on February 2, 2018. The bank’s short-term deposit rating was affirmed at P-1 and the bank’s issuer rating was affirmed at A3.

•Moody’s Investor Service affirmed Old National Bank’s long-term deposit rating of Aa3 on February 3, 2020. The bank’s short-term deposit rating was affirmed at P-1 and the bank’s issuer rating was affirmed at A3.

The rating outlook from Moody’s Investor Service is ~~negative.~~stable. Moody’s Investor Service concluded a rating review of Old National Bank on February ~~2, 2018.~~

3, 2020.

The credit ratings of Old National and Old National Bank at ~~September 30, 2019~~March 31, 2020 are shown in the following table.

Moody's Investor Service

Long-term

~~Long-term~~

Short-term

Old National

N/A

Old National Bank

Aa3

~~Aa3~~

P-1

Old National Bank maintains relationships in capital markets with brokers and dealers to issue certificates of deposit and short-term and medium-term bank notes as well. At ~~September 30, 2019,~~March 31, 2020, Old National and its subsidiaries had the following availability of liquid funds and borrowings:

Parent

(dollars in thousands)

Company

Subsidiaries

Available liquid funds:

Cash and due from banks

$
30,714

$
389,536

Unencumbered government-issued debt securities

—

2,302,441

Unencumbered investment grade municipal securities

—

627,127

Unencumbered corporate securities

—

146,191

Availability of borrowings:

Amount available from Federal Reserve discount window*

—

377,268

Amount available from Federal Home Loan Bank Indianapolis*

—

339,655

Total available funds

$
30,714

$
4,182,218

~~Based on collateral pledged~~


(dollars in thousands)	Parent Company		Subsidiaries
Available liquid funds:
Cash and due from banks	$	22,027	$	321,150
Unencumbered government-issued debt securities	—		2,208,662
Unencumbered investment grade municipal securities	—		671,329
Unencumbered corporate securities	—		145,272
Availability of borrowings:
Amount available from Federal Reserve discount window*	—		465,753
Amount available from Federal Home Loan Bank Indianapolis*	—		164,264
Total available funds	$	22,027	$	3,976,430

* Based on collateral pledged

Old National Bancorp has routine funding requirements consisting primarily of operating expenses, dividends to shareholders, debt service, net derivative cash flows, and funds used for acquisitions. Old National Bancorp can obtain funding to meet its obligations from dividends and management fees collected from its subsidiaries, operating line of credit, and through the issuance of debt securities. Additionally, Old National Bancorp has a shelf registration in place with the SEC permitting ready access to the public debt and equity markets. At ~~September 30, 2019,~~March 31, 2020, Old National Bancorp’s other borrowings outstanding were ~~$231.7~~$216.3 million.

Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. Prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year plus retained net profits for the preceding two years. Prior regulatory approval to pay dividends was not required in ~~2018~~2019 and is not currently required.

Operational/Technology/Cyber Risk

Operational/technology/cyber risk is the potential that inadequate information systems, operational problems, breaches in internal controls, information security breaches, fraud, or unforeseen catastrophes will result in unexpected losses. We maintain frameworks, programs, and internal controls to prevent or minimize financial loss from failure of systems, people, or processes. This includes specific programs and frameworks intended to prevent or limit the effects of cyber risks including cyber-attacks or other information security breaches that might allow unauthorized transactions or unauthorized access to customer, associate, or company sensitive information. Metrics and measurements are used by Executive Leaders in the management of day-to-day operations to ensure effective customer service, minimization of service disruptions, and oversight of operational and cyber risk. We continually monitor and report on operational, technology, and cyber risks related to clients, products, and business practices; external and internal fraud; business disruptions and systems failures; cyber-attacks, information security or data breaches; damage to physical assets; and execution, delivery, and process management.

The Enterprise Risk Management Committee of the Board of Directors is responsible for the oversight, guidance, and monitoring of risks, including operational/technology/cyber risks, being taken by the Company. The monitoring is accomplished through ~~on-going~~ongoing review of management reports, data on risks, policy limits and discussion on enterprise risk management strategies, policies, and risk assessments.

Regulatory/Compliance/Legal Risk

Regulatory/compliance/legal risk is the risk that the Company violated or was not in compliance with applicable laws, regulations or practices, industry standards, or ethical standards. The legal portion assesses the risk that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively impact the Company. The Board of Directors expects we will perform business in a manner compliant with applicable laws and/or regulations and expects issues to be identified, analyzed, and remediated in a timely and complete manner.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements include commitments to extend credit and financial guarantees. Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers. Our banking affiliates have entered into various agreements to extend credit, including loan commitments of ~~$2.891~~$2.898 billion and standby letters of credit of ~~$93.3~~$82.4 million at ~~September 30, 2019.~~March 31, 2020. At ~~September 30, 2019,~~March 31, 2020, approximately ~~$2.650~~$2.621 billion of the loan commitments had fixed rates and ~~$241.2~~$277.0 million had floating rates, with the floating rates ranging from 1%0% to ~~15%~~13%. At December 31, ~~2018,~~2019, loan commitments were ~~$3.566~~$2.779 billion and standby letters of credit were ~~$319.0~~$87.8 million. The term of these off-balance sheet arrangements is typically one year or less.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of ~~$38.5~~$50.1 million at ~~September 30, 2019.~~

March 31, 2020.

CONTRACTUAL OBLIGATIONS

The following table presents our significant fixed and determinable contractual obligations at ~~September 30, 2019:~~

Payments Due In

One Year

One to

Three to

Over

(dollars in thousands)

or Less (1)

Three Years

Five Years

Five Years

Total

Deposits without stated maturity

$
12,618,289

$
—

$
—

$
—

$
12,618,289

IRAs, consumer, and brokered certificates
of deposit

640,625

1,018,636

126,183

44,619

1,830,063

Federal funds purchased and interbank borrowings

240,589

—

—

—

240,589

Securities sold under agreements to repurchase

337,551

—

—

—

337,551

FHLB advances

200,480

70,000

157,164

1,574,316

2,001,960

Other borrowings

120

1,023

1,144

249,476

251,763

Fixed interest payments (2)

12,672

97,460

90,986

125,847

326,965

Operating leases

4,314

32,470

23,820

69,091

129,695

Other long-term liabilities (3)

7,162

21,538

447

49

29,196

March 31, 2020:

~~(1)~~

~~For the remaining three months of fiscal 2019.~~


	Payments Due In
(dollars in thousands)	One Year or Less (1)		One to Three Years		Three to Five Years		Over Five Years		Total
Deposits without stated maturity	$	12,763,668	$	—	$	—	$	—	$	12,763,668
IRAs, consumer, and brokered certificates of deposit	1,021,361		406,457		95,949		17,927		1,541,694
Federal funds purchased and interbank borrowings	560,770		—		—		—		560,770
Securities sold under agreements to repurchase	318,067		—		—		—		318,067
FHLB advances	125,000		150,500		375,160		1,479,603		2,130,263
Other borrowings	376		1,077		176,234		58,427		236,114
Fixed interest payments (2)	35,080		90,633		78,447		86,143		290,303
Operating leases	12,306		29,187		16,918		56,858		115,269
Other long-term liabilities (3)	20,583		9,827		36		26		30,472

~~(2)~~(1)For the remaining nine months of fiscal 2020.

Our senior notes, subordinated notes, certain trust preferred securities, and certain FHLB advances have fixed rates ranging from 0.68% to 4.96%. All of our other long-term debt is at LIBOR based variable rates at September 30, 2019. The projected variable interest assumes no increase in LIBOR rates from September 30, 2019.

~~(3)~~(2)Our senior notes, subordinated notes, certain trust preferred securities, and certain FHLB advances have fixed rates ranging from 0.31% to 4.96%. All of our other long-term debt is at LIBOR based variable rates at March 31, 2020. The projected variable interest assumes no increase in LIBOR rates from March 31, 2020.

~~Includes unfunded commitments on qualified affordable housing projects and other tax credit investments.~~

(3)Includes unfunded commitments on qualified affordable housing projects and other tax credit investments.

We rent certain premises and equipment under operating leases. See Note 109 to the consolidated financial statements for additional information on long-term lease arrangements.

We are party to various derivative contracts as a means to manage the balance sheet and our related exposure to changes in interest rates, to manage our residential real estate loan origination and sale activity, and to provide derivative contracts to our clients. Since the derivative liabilities recorded on the balance sheet change frequently and do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above. Further discussion of derivative instruments is included in Note 2019 to the consolidated financial statements.

In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged. Further discussion of contingent liabilities is included in Note 2120 to the consolidated financial statements.

In addition, liabilities recorded under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109) are not included in the table because the amount and timing of any cash payments cannot be reasonably estimated. Further discussion of income taxes and liabilities is included in Note 1918 to the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. Certain accounting policies require management to

use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities. We consider these policies to be critical accounting policies. The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.

The following accounting policies materially affect our reported earnings and financial condition and require significant judgments and estimates. Management has reviewed these critical accounting estimates and related disclosures with our Audit Committee.

~~Goodwill~~

•

~~Description.~~ For acquisitions, we are required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors. Goodwill recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill.

•

~~Judgments and Uncertainties.~~ ~~The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors.~~

Goodwill

•Description. For acquisitions, we are required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors. Goodwill recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill.

~~Effect if Actual Results Differ From Assumptions.~~ Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financials as a whole and our banking subsidiary in which the goodwill resides.

•Judgments and Uncertainties. The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors.

•Effect if Actual Results Differ From Assumptions. Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill resides.

•Pandemic. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. While the spread of the COVID-19 virus has minimally impacted our operations, sustained disruption to our operations are likely to negatively impact our financial condition and results of operations. In subsequent reporting periods, this may lead management to conclude that an interim quantitative impairment test of our intangible assets and goodwill is required, prior to the annual impairment test conducted on August 31.

Allowance for ~~Loan~~Credit Losses

for Loans

•

Description. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous loans, assessments of the impact of current and anticipated economic conditions on the portfolio, and historical loss experience. The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations.

The allowance ~~is increased through a provision charged to operating expense. Uncollectible~~for credit losses for loans ~~are charged-off through~~represents management’s estimate of all expected credit losses over the ~~allowance. Recoveries of loans previously charged-off are added to the allowance. A loan is considered impaired when it is probable that~~expected contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. Our policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual status. A loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. We monitor the qualitylife of our loan portfolio.Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, onin light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.

The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an ~~on-going basis~~expense for credit losses, which is recognized in earnings, and ~~use~~reduced by the charge-off of loan amounts, net of recoveries.

•Judgments and Uncertainties. We utilize a discounted cashflow approach to determine the allowance for credit losses for performing loans and nonperforming loans. Expected cashflows are created for each loan and discounted using the effective yield. The discounted sum of expected cashflows is then compared to the amortized cost and any shortfall is recorded as reserve. Expected cashflows are created using a combination of ~~detailed~~contractual payment schedules, calculated PDs, LGD and prepayment assumptions as well as qualitative factors. For the commercial and commercial real estate loans, the PD is forecast using a regression model to determine the likelihood of a loan moving into nonaccrual within the time horizon. For residential and consumer loans, the PD is forecast using a regression model to determine the likelihood of a loan being charged-off within the time horizon. The regression models use combinations of variables to assess systematic and unsystematic risk.Variables used for unsystematic risk are borrower specific and help to gauge the risk of default from an individual borrower.Variables for systematic risk, risk inherent to all borrowers, come from the use of forward-looking economic forecasts and include variables such as

unemployment rate, gross domestic product, and house price index. The LGD is defined as credit ~~assessments by relationship managers and credit officers, historic~~ loss ~~trends,~~incurred when an obligor of the bank defaults. Qualitative factors include items such as changes in lending policies or procedures and economic uncertaintyin forward-looking forecasts.

•Effect if Actual Results Differ From Assumptions. The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and ~~business environment factors~~economic conditions could result in ~~determining~~a requirement for additional allowance.Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance.In either instance, unanticipated changes could have a significant impact on results of operations.

The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for ~~loan losses. We record provisions~~credit losses at the amount of expected credit losses inherent within the loans held for ~~loan losses based on current loans outstanding, grade changes, mix~~investment portfolio.The amount of loans, and expected losses. A detailed loan loss evaluation on an individual loan basis for our highest risk loans is performed quarterly. Management follows the progress of the economy and how it might affect our borrowers in both the nearexpense and the ~~intermediate term. We have a formalized and disciplined independent loan review program to evaluate loan administration, credit quality, and compliance with corporate loan~~

~~standards. This program includes periodic, regular reviews of problem loan reports, delinquencies and charge-offs~~.

•

~~Judgments and Uncertainties.~~ We utilize a PD/LGD model as a tool to determine the adequacy of the allowance for loan losses for performing commercial and commercial real estate loans. The PD is forecast using a transition matrix to determine the likelihood of a customer’s AQR migrating from its current AQR to any other status within the time horizon. Transition rates are measured using Old National’s own historical experience. The model assumes that recent historical transition rates will continue into the future. The LGD is defined as credit loss incurred when an obligor of the bank defaults. The sum of all net charge-offs for a particular portfolio segment are divided by all loans that have defaulted over a given period of time. The expected loss derived from the model considers the PD, LGD, and exposure at default. Additionally, qualitative factors, such as changes in lending policies or procedures, and economic business conditions are also considered.

~~We use historic loss ratios adjusted for economic conditions to determine the appropriate~~corresponding level of allowance for ~~residential real estate and consumer loans.~~

•

~~Effect if Actual Results Differ From Assumptions.~~ The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations.

~~Management’s analysis of probable~~credit losses ~~in the portfolio at September 30, 2019 resulted in a range~~ for ~~allowance for loan losses of $18.2 million. The range pertains to general (FASB ASC 450,~~ ~~Contingencies) reserves for both retail and performing commercial loans. Specific (FASB ASC 310,~~ ~~Receivables~~) reserves do not have a range of probable loss. Due to the risks and uncertainty associated with the economy and our projection of loss rates inherent in the portfolio, we establish a range of probable outcomes (a high-end estimate and a low-end estimate) and evaluate our position within this range. The potential effect to net incomeloans are based on our ~~position~~evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.

Derivative Financial Instruments

•Description. As part of our overall interest rate risk management, we use derivative instruments to reduce exposure to changes in interest rates and market prices for financial instruments. The application of the hedge accounting policy requires judgment in the ~~range relative~~assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items. To the extent hedging relationships are found to be effective, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. Management believes hedge effectiveness is evaluated properly in preparation of the financial statements. All of the derivative financial instruments we use have an active market and indications of fair value can be readily obtained. We are not using the “short-cut” method of accounting for any fair value derivatives.

•Judgments and Uncertainties. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items.

•Effect if Actual Results Differ From Assumptions. To the extent hedging relationships are found to be effective, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. However, if in the future the derivative financial instruments used by us no longer qualify for hedge accounting treatment, all changes in fair value of the derivative would flow through the consolidated statements of income in other noninterest income, resulting in greater volatility in our earnings.

Income Taxes

•Description. We are subject to the ~~high~~income tax laws of the U.S., its states, and ~~low endpoints is~~the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We review income tax expense and the carrying value of deferred tax assets quarterly; and as new information becomes available, the balances are adjusted as appropriate. FASB ASC 740-10 (FIN 48) prescribes a ~~decrease~~recognition threshold of ~~$2.0 million~~more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. See Note 18 to the consolidated financial statements for a further description of our provision and related income tax assets and liabilities.

•Judgments and Uncertainties. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

•Effect if Actual Results Differ From Assumptions. Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to

pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of ~~$11.7 million, respectively, after taking into account~~resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the ~~tax effects. These sensitivities are hypothetical and may not represent actual results.~~

~~Derivative Financial Instruments~~

•

~~Description.~~ As part of our overall interest rate risk management, we use derivative instruments to reduce exposure to changes in interest rates and market prices for financial instruments. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items. To the extent hedging relationships are found to be effective, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. Management believes hedge effectiveness is evaluated properly in preparation of the financial statements. All of the derivative financial instruments we use have an active market and indications of fair value can be readily obtained. We are not using the “short-cut” method of accounting for any fair value derivatives.

period of resolution.

•

~~Judgments and Uncertainties.~~ The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items.

•

~~Effect if Actual Results Differ From Assumptions.~~ To the extent hedging relationships are found to be effective, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. However, if in the future the derivative financial instruments used by us no longer qualify for hedge accounting treatment, all changes in fair value of the derivative would flow through the consolidated statements of income in other noninterest income, resulting in greater volatility in our earnings.

~~Income Taxes~~

•

~~Description.~~ We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We review income tax expense and the carrying value of deferred tax assets quarterly; and as new information becomes available, the balances are adjusted as appropriate. FASB ASC 740-10 (FIN 48) prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. See Note 19 to the consolidated financial statements for a further description of our provision and related income tax assets and liabilities.

•

~~Judgments and Uncertainties.~~ In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

•

~~Effect if Actual Results Differ From Assumptions.~~ Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee and the Audit Committee has reviewed our disclosure relating to it in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

FORWARD-LOOKING STATEMENTS

In this report, we have made various statements regarding current expectations or forecasts of future events, which speak only as of the date the statements are made. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are also made from time-to-time in press releases and in oral statements made by the officers of Old National Bancorp (“Old National” or the “Company”). Forward-looking statements can be identified by the use of the words “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe,” “anticipate,” and other words of similar meaning. Forward-looking statements also include, but are not limited to, statements regarding estimated cost savings, plans and objectives for future operations, the Company’s business and growth strategies, including future acquisitions of banks, regulatory developments, and expectations about performance as well as economic and market conditions and trends.

Such forward-looking statements are based on assumptions and estimates, which although believed to be reasonable, may turn out to be incorrect. Therefore, undue reliance should not be placed upon these estimates and statements. We cannot assure that any of these statements, estimates, or beliefs will be realized and actual results may differ from those contemplated in these “forward-looking statements.” We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised to consult further disclosures we may make on related subjects in our filings with the SEC. In addition to other factors discussed in this report, some of the important factors that could cause actual results to differ materially from those discussed in the forward-looking statements include the following:

•

~~market, economic, operational, liquidity, credit, and interest rate risks associated with our business;~~

•market, economic, operational, liquidity, credit, and interest rate risks associated with our business;

~~competition;~~

•competition;

~~government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and the Consumer Protection Act and its related regulations);~~

•government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and the Consumer Protection Act and its related regulations), including changes to address the impact of COVID-19;

~~our ability to execute our business plan;~~

•our ability to execute our business plan, including the anticipated impact from the ONB Way strategic plan that may differ from current estimates;

~~changes in the economy which could materially impact credit quality trends and the ability to generate loans and gather deposits;~~

•changes in the economy which could materially impact credit quality trends and the ability to generate loans and gather deposits, including the pace of recovery following the COVID-19 pandemic;

~~failure or circumvention of our internal controls;~~

•failure or circumvention of our internal controls;

~~failure or disruption of our information systems;~~

•failure or disruption of our information systems;

~~significant changes in accounting, tax, or regulatory practices or requirements, including the impact of the new CECL standard;~~

•significant changes in accounting, tax, or regulatory practices or requirements, including the impact of the new CECL standard;

~~new legal obligations or liabilities or unfavorable resolutions of litigations;~~

•the length and severity of the recent COVID-19 outbreak, including its impact on the Company’s financial conditions and business operations;

~~disruptive technologies in payment systems and other services traditionally provided by banks; and~~

•new legal obligations or liabilities or unfavorable resolutions of litigations;

~~computer hacking and other cybersecurity threats.~~

•disruptive technologies in payment systems and other services traditionally provided by banks; and

•computer hacking and other cybersecurity threats.

Investors should consider these risks, uncertainties, and other factors in addition to risk factors included in this filing and our other filings with the SEC.

ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk and Liquidity Risk.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures. Old National’s principal executive officer and principal financial officer have concluded that Old National’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q, are effective at the reasonable assurance level as discussed below to ensure that information required to be disclosed by Old National in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to Old National’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Controls. Management, including the principal executive officer and principal financial officer, does not expect that Old National’s disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be only reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting. Effective January 1, 2020, Old National adopted the CECL accounting standard. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in Old National’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, Old National’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~

2019, except as described below.

The recent outbreak of the novel coronavirus ("COVID-19"), or other such epidemic, pandemic, or outbreak of a highly contagious disease, occurring in the United States or in the geographies in which we conduct operations could adversely affect Old National’s business operations, asset valuations, financial condition, and results of operations.

Old National’s business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The recent COVID-19 outbreak, or other highly contagious or infectious disease, could negatively impact the ability of our employees and customers to conduct such transactions and disrupt the business activities and operations of Old National’s customers in the geographic areas in which Old National operates. While the spread of the COVID-19 virus has minimally impacted Old National’s operations as of March 31, 2020, we may experience temporary closures of Old National’s offices and/or suspension of certain services. At this time, it is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses will be lifted and businesses and their employees will be able to resume normal activities. Further, additional information may emerge regarding the severity of COVID-19 and additional actions may be taken by federal, state, and local governments to contain COVID-19 or treat its impact. Sustained disruption to Old National’s operations are likely

to negatively impact Old National’s financial condition and results of operations. Notwithstanding Old National’s contingency plans and other safeguards against pandemics or another contagious disease, the spread of COVID-19 could also negatively impact the availability of Old National’s personnel who are necessary to conduct Old National’s business operations, as well as potentially impact the business and operations of Old National’s third party service providers who perform critical services for Old National. If the response to contain COVID-19, or another highly infectious or contagious disease, is unsuccessful, Old National could experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Old National's intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

Changes in interest rates could adversely affect Old National’s results of operations and financial condition.

Old National’s earnings depend substantially on Old National’s interest rate spread, which is the difference between (i) the rates Old National earns on loans, securities and other earning assets and (ii) the interest rates Old National pays on deposits and other borrowings. These rates are highly sensitive to many factors beyond Old National’s control, including general economic conditions and the policies of various governmental and regulatory authorities. If market interest rates rise, Old National will have competitive pressures to increase the rates that Old National pays on deposits, which could result in a decrease of Old National’s net interest income. If market interest rates decline, Old National could experience fixed-rate loan prepayments and higher investment portfolio cash flows, resulting in a lower yield on earning assets. Old National’s earnings can also be impacted by the spread between short-term and long-term market interest rates.

Following the COVID-19 and during the first quarter of 2020, market interest rates have declined significantly. The 10-year Treasury bond fell below 1.00% on March 3, 2020 for the first time and the Federal Open Market Committee reduced the target federal funds rate by 150 basis points to 0.00% to 0.25%. Additionally, the Federal Reserve has announced it will take the following actions:

•purchase U.S. Treasury bills;

•initiate overnight repurchase agreement operations;

•reinvest principal received on the Federal Reserve’s securities portfolio; and

•reduced the interest paid on excess bank reserves held by the Federal Reserve from 1.60% to 1.10%.

These actions may materially and adversely affect Old National’s financial condition and results of operations as well as negatively impact Old National’s customers, theirs and Old National’s respective suppliers, vendors, processors, and third party service providers.

Economic conditions have affected and could continue to adversely affect our revenues and profits.

Old National’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that Old National offers, is highly dependent upon the business environment in the markets where Old National operates and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, terrorist acts, or a combination of these or other factors.

An economic downturn or sustained, high unemployment levels, and stock market volatility may negatively impact our operating results and have a negative effect on the ability of our borrowers to make timely repayments of their loans increasing the risk of loan defaults and losses. If the forecasts of economic conditions and other economic predictions are not accurate, we may face challenges in accurately estimating the ability of our borrowers to repay their loans. Expectations of negative market and economic conditions will be reflected in the allowances for credit losses for loans and debt securities to the estimated extent they will impact the credit losses of new and existing loans and debt securities over their remaining lives. The provision for credit losses will report the entire increased credit loss expectations over the remaining lives of the loans and debt securities in the period in which the change in expectation arises. Further, because of the impact of such increased credit losses on earnings and capital our ability to make loans and pay dividends may be substantially diminished.

Our accounting estimates and risk management processes rely on analytical and forecasting models.

The processes that we use to estimate probable credit losses and to measure the fair value of assets carried on the balance sheet at fair value, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon the use of analytical and forecasting models. These models are complex and reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Although we have processes and procedures in place governing internal valuation models and their testing and calibration, such assumptions are complex as we must make judgments about the effect of matters that are inherently uncertain. Different assumptions could have resulted in significant changes in valuation, which in turn could have a material adverse effect on our financial condition and results of operations.

If Old National’s actual credit losses for loans or debt securities exceed Old National’s allowance for credit losses for loans or debt securities, Old National’s net income will decrease. Also, future additions to Old National’s allowance for credit losses will reduce Old National’s future earnings.

Old National’s business depends on the creditworthiness of our customers. As with most financial institutions, we maintain allowances for credit losses for loans and debt securities to provide for defaults and nonperformance, which represent an estimate of expected losses over the remaining contractual lives of the loan and debt security portfolios. This estimate is the result of our continuing evaluation of specific credit risks and loss experience, current loan and debt security portfolio quality, present economic, political and regulatory conditions, industry concentrations, reasonable and supportable forecasts for future conditions, and other factors that may indicate losses. The determination of the appropriate levels of the allowances for loan and debt security credit losses inherently involves a high degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes. Generally, our nonperforming loans and other real estate owned reflect operating difficulties of individual borrowers and weaknesses in the economies of the markets we serve. The allowances may not be adequate to cover actual losses, and future allowance for credit losses could materially and adversely affect our financial condition, results of operations, and cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~(c)~~

~~ISSUER PURCHASES OF EQUITY SECURITIES~~

Period

Total
Number
of Shares
Purchased

Average
Price
Paid Per
Share

Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum
Number of
Shares that
May Yet
Be Purchased
Under the Plans
or Programs

07/01/19 - 07/31/19

926

$
16.77

—

3,652,877

08/01/19 - 08/31/19

2,053,690

16.85

2,053,502

1,599,375

09/01/19 - 09/30/19

151,522

16.50

151,206

1,448,169

Quarter-to-date 09/30/19

2,206,138

$
16.82

2,204,708

1,448,169

(c)ISSUER PURCHASES OF EQUITY SECURITIES


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
01/01/20 - 01/31/20	570,200	$	18.09	570,200	6,429,800
02/01/20 - 02/29/20	1,294,731	$	17.83	1,121,725	5,308,075
03/01/20 - 03/31/20	3,210,602	$	15.11	3,208,616	2,099,459
Quarter-to-date 03/31/20	5,075,533	$	16.14	4,900,541	2,099,459

In the first quarter of ~~2019,~~2020, the Board of Directors approved the repurchase of up to 7.0 million shares of the Company’s stock to be repurchased, as conditions warrant, through January 31, ~~2020.~~2021. During the three months ended ~~September 30, 2019,~~March 31, 2020, Old National also repurchased a limited number of shares associated with employee share-based incentive programs.

ITEM 5. OTHER INFORMATION

(a)None

~~None~~

(b)There have been no material changes in the procedure by which security holders recommend nominees to the Company’s board of directors.

~~There have been no material changes in the procedure by which security holders recommend nominees to the Company’s board of directors.~~

ITEM 6. EXHIBITS

~~Exhibit No~~.	~~Description~~
Exhibit No.		Description
~~2.1~~
2.1		Agreement and Plan of Merger dated as of June 20, 2018 by and between Old National Bancorp and Klein Financial, Inc. (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference to Exhibit 2.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2018).

3.1		Fourth Amended and Restated Articles of Incorporation of Old National, amended May 13, 2016 (incorporated by reference to Exhibit 3.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 16, 2016).

3.2		Amended and Restated By-Laws of Old National, amended July 28, 2016 (incorporated by reference to Exhibit 3.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 1, 2016).

4.1		Senior Indenture between Old National and The Bank of New York Trust Company (as successor to J.P. Morgan Trust Company, National Association (as successor to Bank One, N.A.)), as trustee, dated as of July 23, 1997 (incorporated by reference to Exhibit 4.3 to Old National’s Registration Statement on Form S-3, Registration No. 333-118374, filed with the Securities and Exchange Commission on December 2, 2004).

4.2		Second Indenture Supplement, dated as of August 15, 2014, between Old National and The Bank of New York Mellon Trust Company, N.A., as trustee, providing for the issuance of its 4.125% Senior Notes due 2024 (incorporated by reference to Exhibit 4.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 15, 2014).

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from Old National’s Form 10-Q Report for the quarterly period ended ~~September 30, 2019,~~March 31, 2020, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

104		The cover page from Old National’s Form 10-Q Report for the quarterly period ended ~~September 30, 2019,~~March 31, 2020, formatted in inline XBRL and contained in Exhibit 101.

~~SIGNATURE~~

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						OLD NATIONAL BANCORP
						(Registrant)

By:						/s/ Brendon B. Falconer
						Brendon B. Falconer
						Senior Executive Vice President and Chief Financial Officer
						Duly Authorized Officer and Principal Financial Officer

						Date: ~~October 30, 2019~~ April 29, 2020

Cash and cash equivalents	$	60,759
Investment securities		697,951
FHLB/Federal Reserve Bank stock		2,637
Loans held for sale		3,371
Loans		1,049,073
Premises and equipment		32,408
Accrued interest receivable		7,896
Company-owned life insurance		36,380
Net deferred tax assets		6,746
Other real estate owned		954
Other assets		10,299
Deposits		(1,713,086	)
Securities sold under agreements to repurchase		(19,481	)
Accrued expenses and other liabilities		(17,506	)
Net tangible assets acquired		158,401
Definite-lived intangible assets acquired		39,017
Loan servicing rights		285
Goodwill		208,771
Total consideration	$	406,474

					Best Estimate at
					Acquisition Date of
	Fair Value		Gross Contractual		Contractual Cash
	of Acquired Loans		Cash Flows at		Flows Not Expected
(in thousands)	at Acquisition Date		Acquisition Date		to be Collected
Acquired receivables subject to ASC 310-30	$	11,663	$	18,568	$	4,521
Acquired receivables not subject to ASC 310-30	$	1,037,410	$	1,252,954	$	76,534

Held-to-Maturity
U.S. government-sponsored entities and agencies	$	73,986	$	—	$	(1,627	)	$	72,359
Mortgage-backed securities - Agency		127,120		39		(2,750	)		124,409
States and political subdivisions		305,228		6,208		(2,101	)		309,335
Total held-to-maturity securities	$	506,334	$	6,247	$	(6,478	)	$	506,103

			Consumer
			Home
(dollars in thousands)	Residential		Equity		Auto		Other
September 30, 2019
Performing	$	2,215,864	$	551,129	$	1,002,091	$	155,707
Nonperforming		20,759		4,776		3,444		1,196
Total	$	2,236,623	$	555,905	$	1,005,535	$	156,903

December 31, 2018
Performing	$	2,223,450	$	586,235	$	1,057,038	$	153,113
Nonperforming		24,954		3,087		2,595		1,599
Total	$	2,248,404	$	589,322	$	1,059,633	$	154,712

			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
September 30, 2019
With no related allowance recorded:
Commercial	$	19,154	$	19,462	$	—
Commercial Real Estate - Construction		10,890		10,890		—
Commercial Real Estate - Other		38,517		39,942		—
Residential		1,783		1,803		—
Consumer		1,137		1,303		—
With an allowance recorded:
Commercial		21,116		21,169		7,855
Commercial Real Estate - Construction		2,764		2,764		1,183
Commercial Real Estate - Other		21,456		21,456		3,302
Residential		990		990		39
Consumer		1,065		1,065		53
Total	$	118,872	$	120,844	$	12,432

December 31, 2018
With no related allowance recorded:
Commercial	$	22,031	$	22,292	$	—
Commercial Real Estate - Other		41,126		41,914		—
Residential		2,276		2,296		—
Consumer		362		535		—
With an allowance recorded:
Commercial		13,379		13,432		6,035
Commercial Real Estate - Construction		13,824		13,824		1,830
Commercial Real Estate - Other		28,154		28,154		6,476
Residential		889		889		44
Consumer		2,013		2,013		101
Total	$	124,054	$	125,349	$	14,486

					Past Due
					90 Days or
	30-59 Days		60-89 Days		More and				Total
(dollars in thousands)	Past Due		Past Due		Accruing		Nonaccrual (1)		Past Due		Current
September 30, 2019
Commercial	$	2,218	$	1,181	$	100	$	37,880	$	41,379	$	2,909,180
Commercial Real Estate:
Construction		—		300		—		13,655		13,955		578,393
Other		549		90		—		56,788		57,427		4,462,348
Residential		8,620		3,546		64		20,759		32,989		2,203,634
Consumer:
Home equity		1,008		118		233		4,776		6,135		549,770
Auto		6,069		769		190		3,444		10,472		995,063
Other		695		105		116		1,196		2,112		154,791
Total loans	$	19,159	$	6,109	$	703	$	138,498	$	164,469	$	11,853,179

December 31, 2018
Commercial	$	3,627	$	279	$	52	$	38,648	$	42,606	$	3,190,364
Commercial Real Estate:
Construction		—		—		—		13,824		13,824		490,801
Other		1,633		500		40		72,777		74,950		4,379,276
Residential		25,947		3,437		258		24,954		54,596		2,193,808
Consumer:
Home equity		1,434		960		456		3,087		5,937		583,385
Auto		7,091		1,903		377		2,595		11,966		1,047,667
Other		711		210		170		1,599		2,690		152,022
Total loans	$	40,443	$	7,289	$	1,353	$	157,484	$	206,569	$	12,037,323

		Pre-modification		Post-modification
		Outstanding		Outstanding
	Number	Recorded		Recorded
(dollars in thousands)	of Loans	Investment		Investment
Nine Months Ended September 30, 2019
TDR:
Commercial	8	$	10,232	$	10,232
Commercial Real Estate - Other	4		10,027		10,027
Residential	1		557		557
Consumer	1		316		316
Total	14	$	21,132	$	21,132

Nine Months Ended September 30, 2018
TDR:
Commercial	5	$	3,038	$	3,038
Commercial Real Estate - Other	2		1,213		1,213
Residential	1		502		502
Consumer	1		432		432
Total	9	$	5,185	$	5,185

(dollars in thousands)	Klein (1)
Contractually required payments	$	18,568
Nonaccretable difference		(4,521	)
Cash flows expected to be collected at acquisition		14,047
Accretable yield		(2,384	)
Fair value of acquired loans at acquisition	$	11,663

	Tenant
(dollars in thousands)	Leases
2019	$	588
2020		2,034
2021		1,740
2022		1,431
2023		1,298
Thereafter		3,650
Total undiscounted lease payments	$	10,741

			Tax Expense
	Amortization		(Benefit)
(dollars in thousands)	Expense (1)		Recognized (2)
Three Months Ended September 30, 2019
LIHTC	$	793	$	(992	)
FHTC		1,113		(1,244	)
CReED		13		—
Renewable Energy		85		(70	)
Total	$	2,004	$	(2,306	)

Three Months Ended September 30, 2018
LIHTC	$	640	$	(832	)
FHTC		3,282		(1,258	)
CReED		687		—
Renewable Energy		5,264		(3,109	)
Total	$	9,873	$	(5,199	)

Nine Months Ended September 30, 2019
LIHTC	$	2,376	$	(3,076	)
FHTC		1,113	$	(1,244	)
CReED		13		—
Renewable Energy		913		(847	)
Total	$	4,415	$	(5,167	)

Nine Months Ended September 30, 2018
LIHTC	$	1,923	$	(2,494	)
FHTC		8,727		(5,154	)
CReED		687		—
Renewable Energy		12,393		(9,406	)
Total	$	23,730	$	(17,054	)

(dollars in thousands)
Due in 2019	$	200,480
Due in 2020		50,000
Due in 2021		20,000
Due in 2022		157,000
Due in 2023		164
Thereafter		1,550,000
ASC 815 fair value hedge and other basis adjustments		24,316
Total	$	2,001,960

	Balance			Balance
	Sheet	Fair		Sheet	Fair
(dollars in thousands)	Location	Value		Location	Value
September 30, 2019
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	8,937	Other liabilities	$	1,115
Total derivatives designated as hedging instruments		$	8,937		$	1,115
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other assets	$	57,695	Other liabilities	$	14,214
Mortgage contracts	Other assets		3,510	Other liabilities		—
Foreign currency contracts	Other assets		204	Other liabilities		155
Total derivatives not designated as hedging instruments		$	61,409		$	14,369
Total		$	70,346		$	15,484

December 31, 2018
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	12,741	Other liabilities	$	1,603
Total derivatives designated as hedging instruments		$	12,741		$	1,603
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other assets	$	15,278	Other liabilities	$	10,562
Mortgage contracts	Other assets		874	Other liabilities		316
Foreign currency contracts	Other assets		112	Other liabilities		69
Total derivatives not designated as hedging instruments		$	16,264		$	10,947
Total		$	29,005		$	12,550

			Valuation	Unobservable	Range (Weighted
(dollars in thousands)	Fair Value		Techniques	Input	Average)
September 30, 2019
Collateral Dependent Impaired Loans
Commercial loans	$	13,261	Fair value of	Discount for type of property,	0% - 90% (31%)
			collateral	age of appraisal, and current
				status
Commercial real estate loans		15,241	Fair value of	Discount for type of property,	35% - 45% (40%)
			collateral	age of appraisal and current
				status
December 31, 2018
Collateral Dependent Impaired Loans
Commercial loans	$	7,242	Fair value of	Discount for type of property,	0% - 90% (35%)
			collateral	age of appraisal, and current
				status
Commercial real estate loans		29,125	Fair value of	Discount for type of property,	0% - 50% (35%)
			collateral	age of appraisal and current
				status
Foreclosed Assets
Residential		68	Fair value of	Discount for type of property,	15% - 16% (15%)
			collateral	age of appraisal, and current status

(tax equivalent basis,	Three Months Ended								Three Months Ended
dollars in thousands)	September 30, 2019								September 30, 2018
	Average			Income (1)/		Yield/			Average			Income (1)/		Yield/
Earning Assets	Balance			Expense		Rate			Balance			Expense		Rate
Money market and other interest-earning investments	$	63,142		$	528		3.32	%	$	35,928		$	140		1.54	%
Investment securities:
Treasury and government sponsored agencies		682,940			4,341		2.54	%		685,919			3,748		2.19	%
Mortgage-backed securities		3,019,322			18,589		2.46	%		1,595,630			9,381		2.35	%
States and political subdivisions		1,172,017			10,896		3.72	%		1,103,347			10,110		3.67	%
Other securities		499,308			4,049		3.24	%		500,837			4,116		3.29	%
Total investment securities		5,373,587			37,875		2.82	%		3,885,733			27,355		2.82	%
Loans: (2)
Commercial		3,018,638			35,428		4.59	%		2,928,744			33,381		4.46	%
Commercial real estate		5,037,909			71,604		5.56	%		4,465,105			57,377		5.03	%
Residential real estate loans		2,283,704			24,261		4.25	%		2,187,130			22,536		4.12	%
Consumer		1,733,507			19,328		4.42	%		1,710,744			17,333		4.02	%
Total loans		12,073,758			150,621		4.91	%		11,291,723			130,627		4.56	%
Total earning assets		17,510,487		$	189,024		4.27	%		15,213,384		$	158,122		4.11	%
Less: Allowance for loan losses		(56,894	)							(53,734	)
Non-Earning Assets
Cash and due from banks		264,145								205,446
Other assets		2,429,466								2,068,469
Total assets	$	20,147,204							$	17,433,565

Interest-Bearing Liabilities
Checking and NOW accounts	$	3,895,654		$	4,448		0.45	%	$	3,026,289		$	1,180		0.15	%
Savings accounts		2,855,401			2,128		0.30	%		2,974,147			2,119		0.28	%
Money market accounts		1,822,698			4,017		0.87	%		1,153,906			1,254		0.43	%
Time deposits		1,914,917			8,114		1.68	%		1,847,322			6,636		1.43	%
Total interest-bearing deposits		10,488,670			18,707		0.71	%		9,001,664			11,189		0.49	%
Federal funds purchased and interbank borrowings		254,971			1,484		2.31	%		238,514			1,191		1.98	%
Securities sold under agreements to repurchase		340,158			715		0.83	%		352,998			535		0.60	%
FHLB advances		1,889,407			9,123		1.92	%		1,624,661			8,880		2.17	%
Other borrowings		251,817			2,728		4.33	%		250,255			2,732		4.37	%
Total borrowed funds		2,736,353			14,050		2.04	%		2,466,428			13,338		2.15	%
Total interest-bearing liabilities	$	13,225,023		$	32,757		0.98	%	$	11,468,092		$	24,527		0.85	%

Noninterest-Bearing Liabilities and Shareholders' Equity
Demand deposits	$	3,841,867							$	3,596,159
Other liabilities		262,862								156,614
Shareholders' equity		2,817,452								2,212,700
Total liabilities and shareholders' equity	$	20,147,204							$	17,433,565

Net interest rate spread							3.29	%							3.26	%
Net interest margin (3)							3.57	%							3.51	%
Taxable equivalent adjustment				$	3,171							$	2,753

	From Three Months Ended									From Nine Months Ended
	September 30, 2018 to Three									September 30, 2018 to Nine
	Months Ended September 30, 2019									Months Ended September 30, 2019
	Total			Attributed to						Total		Attributed to
(dollars in thousands)	Change			Volume			Rate			Change		Volume			Rate
Interest Income
Money market and other interest-earning investments	$	388		$	166		$	222		$	793	$	113		$	680
Investment securities (1)		10,520			10,480			40			32,435		26,839			5,596
Loans (1)		19,994			9,425			10,569			65,109		30,690			34,419
Total interest income		30,902			20,071			10,831			98,337		57,642			40,695
Interest Expense
Checking and NOW deposits		3,268			673			2,595			8,817		1,549			7,268
Savings deposits		9			(86	)		95			1,317		(262	)		1,579
Money market deposits		2,763			1,102			1,661			8,070		2,585			5,485
Time deposits		1,478			268			1,210			7,883		1,976			5,907
Federal funds purchased and interbank borrowings		293			89			204			2,364		1,211			1,153
Securities sold under agreements to repurchase		180			(22	)		202			720		7			713
FHLB advances		243			1,353			(1,110	)		3,609		1,307			2,302
Other borrowings		(4	)		17			(21	)		246		53			193
Total interest expense		8,230			3,394			4,836			33,026		8,426			24,600
Net interest income	$	22,672		$	16,677		$	5,995		$	65,311	$	49,216		$	16,095

	Collectively			Individually			Acquired with
	Evaluated for			Evaluated for			Deteriorated
(dollars in thousands)	Impairment			Impairment			Credit Quality			Total
Originated loans	$	9,329,103		$	86,525		$	—		$	9,415,628
Acquired loans		2,605,085			28,599			55,407			2,689,091
Total loans	$	11,934,188		$	115,124		$	55,407		$	12,104,719
Remaining purchase discount		(68,314	)		(1,227	)		(17,530	)		(87,071	)
Loans, net of discount	$	11,865,874		$	113,897		$	37,877		$	12,017,648

Allowance, January 1, 2019	$	40,642		$	14,341		$	478		$	55,461
Charge-offs		(6,483	)		(1,914	)		(88	)		(8,485	)
Recoveries		2,906			3,462			83			6,451
Provision expense		7,160			(3,549	)		(128	)		3,483
Allowance, September 30, 2019	$	44,225		$	12,340		$	345		$	56,910

	Parent
(dollars in thousands)	Company		Subsidiaries
Available liquid funds:
Cash and due from banks	$	30,714	$	389,536
Unencumbered government-issued debt securities		—		2,302,441
Unencumbered investment grade municipal securities		—		627,127
Unencumbered corporate securities		—		146,191
Availability of borrowings:
Amount available from Federal Reserve discount window*		—		377,268
Amount available from Federal Home Loan Bank Indianapolis*		—		339,655
Total available funds	$	30,714	$	4,182,218

	Payments Due In
	One Year		One to		Three to		Over
(dollars in thousands)	or Less (1)		Three Years		Five Years		Five Years		Total
Deposits without stated maturity	$	12,618,289	$	—	$	—	$	—	$	12,618,289
IRAs, consumer, and brokered certificates of deposit		640,625		1,018,636		126,183		44,619		1,830,063
Federal funds purchased and interbank borrowings		240,589		—		—		—		240,589
Securities sold under agreements to repurchase		337,551		—		—		—		337,551
FHLB advances		200,480		70,000		157,164		1,574,316		2,001,960
Other borrowings		120		1,023		1,144		249,476		251,763
Fixed interest payments (2)		12,672		97,460		90,986		125,847		326,965
Operating leases		4,314		32,470		23,820		69,091		129,695
Other long-term liabilities (3)		7,162		21,538		447		49		29,196