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Old National Bancorp (ONB)

Filed: 3 Aug 22, 11:08am
0000707179us-gaap:FairValueInputsLevel3Memberus-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:ResidentialPortfolioSegmentMember2021-12-31

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 June 30, 2022
or
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 001-15817
 
Old National Bancorp
(Exact name of registrant as specified in its charter)
 
Indiana35-1539838
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
One Main Street47708
Evansville,Indiana(Zip Code)
(Address of principal executive offices)
(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)
 Name of each exchange on which registered
Common stock, no par value ONB TheNASDAQStock Market LLC
Depositary Shares, each representing a 1/40th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series AONBPPTheNASDAQStock Market LLC
Depositary Shares, each representing a 1/40th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series CONBPOTheNASDAQStock 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 such filing requirements for 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 (§232.405 of this chapter) during the preceding 12 months (or for such 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 Exchange Act).    Yes      No  
The registrant has one class of common stock (no par value) with 292,893,000 shares outstanding at June 30, 2022.



OLD NATIONAL BANCORP
FORM 10-Q
TABLE OF CONTENTS
  Page
PART I. 
Item 1. 
 
 
 
 
 
 
 Note 1.
 Note 2.
Note 3.
 Note 4.
 Note 5.
 Note 6.
 Note 7.
 Note 8.
 Note 9.
 Note 10.
 Note 11.
 Note 12.
 Note 13.
 Note 14.
 Note 15.
 Note 16.
 Note 17.
 Note 18.
 Note 19.
 Note 20.
 Note 21.
Item 2.
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II.
Item 1A.
Item 2.
Item 5.
Item 6.
2


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 Bancorp’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, no par value
COVID-19: coronavirus disease 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
First Midwest: First Midwest Bancorp, Inc.
GAAP:  U.S. generally accepted accounting principles
LGD:  loss given default
LIBOR:  London Interbank Offered Rate
LIHTC:  Low Income Housing Tax Credit
LTV:  loan-to-value
N/A:  not applicable
NASDAQ: The NASDAQ Stock Market LLC
N/M:  not meaningful
NMTC: New Markets Tax Credit
NOW:  negotiable order of withdrawal
OCC:  Office of the Comptroller of the Currency
PCD: purchased credit deteriorated
PD:  probability of default
PPP: Paycheck Protection Program
Renewable Energy:  investment tax credits for solar projects
SBA:  Small Business Administration
SEC:  Securities and Exchange Commission
TBA:  to be announced
TDR:  troubled debt restructuring


3


OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars and shares in thousands, except per share data)June 30,
2022
December 31,
2021
 (unaudited) 
Assets  
Cash and due from banks$455,620 $172,663 
Money market and other interest-earning investments342,344 649,356 
Total cash and cash equivalents797,964 822,019 
Equity securities, at fair value55,879 13,211 
Investment securities - available-for-sale, at fair value:
U.S. Treasury402,783 235,584 
U.S. government-sponsored entities and agencies1,242,557 1,542,773 
Mortgage-backed securities4,827,708 3,698,831 
States and political subdivisions720,041 1,654,986 
Other securities374,612 249,892 
Total investment securities - available-for-sale7,567,701 7,382,066 
Investment securities - held-to-maturity, at amortized cost (fair value
   $2,779,290 and $0, respectively)
3,084,186 — 
Federal Home Loan Bank/Federal Reserve Bank stock, at cost288,884 169,375 
Loans held for sale, at fair value26,217 35,458 
Loans:
Commercial8,923,983 3,391,769 
Commercial real estate11,796,503 6,380,674 
Residential real estate6,079,057 2,255,289 
Consumer credit, net of unearned income2,754,105 1,574,114 
Total loans29,553,648 13,601,846 
Allowance for credit losses(288,003)(107,341)
Net loans29,265,645 13,494,505 
Premises and equipment, net586,031 476,186 
Operating lease right-of-use assets192,196 69,560 
Accrued interest receivable157,079 84,109 
Goodwill1,991,534 1,036,994 
Other intangible assets140,281 34,678 
Company-owned life insurance769,595 463,324 
Other assets825,163 372,079 
Total assets$45,748,355 $24,453,564 
Liabilities
Deposits:
Noninterest-bearing demand$12,388,379 $6,303,106 
Interest-bearing:
Checking and NOW8,473,510 5,338,022 
Savings6,796,152 3,798,494 
Money market5,373,318 2,169,160 
Time deposits2,507,616 960,413 
Total deposits35,538,975 18,569,195 
Federal funds purchased and interbank borrowings1,561 276 
Securities sold under agreements to repurchase476,173 392,275 
Federal Home Loan Bank advances3,283,963 1,886,019 
Other borrowings622,714 296,670 
Operating lease liabilities215,188 76,236 
Accrued expenses and other liabilities530,998 220,875 
Total liabilities40,669,572 21,441,546 
Shareholders' Equity
Preferred stock, 2,000 shares authorized, 231 and 0 shares issued and outstanding, respectively230,500 — 
Common stock, $1.00 per share stated value, 600,000 shares authorized,
   292,893 and 165,838 shares issued and outstanding, respectively
292,893 165,838 
Capital surplus4,157,543 1,880,545 
Retained earnings966,980 968,010 
Accumulated other comprehensive income (loss), net of tax(569,133)(2,375)
Total shareholders' equity5,078,783 3,012,018 
Total liabilities and shareholders' equity$45,748,355 $24,453,564 
The accompanying notes to consolidated financial statements are an integral part of these statements.
4


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars and shares in thousands, except per share data)2022202120222021
Interest Income    
Loans including fees:    
Taxable$285,249 $123,577 $469,264 $246,106 
Nontaxable4,802 3,171 8,309 6,528 
Investment securities:
Taxable51,459 24,401 88,868 48,532 
Nontaxable11,018 9,261 21,284 18,393 
Money market and other interest-earning investments1,830 48 2,138 136 
Total interest income354,358 160,458 589,863 319,695 
Interest Expense
Deposits5,187 2,732 8,381 5,891 
Federal funds purchased and interbank borrowings2 — 2 — 
Securities sold under agreements to repurchase85 95 181 215 
Federal Home Loan Bank advances6,925 5,218 12,888 10,627 
Other borrowings4,687 2,486 8,154 4,915 
Total interest expense16,886 10,531 29,606 21,648 
Net interest income337,472 149,927 560,257 298,047 
Provision for credit losses9,245 (4,929)106,814 (22,285)
Net interest income after provision for credit losses328,227 154,856 453,443 320,332 
Noninterest Income
Wealth management fees19,304 10,734 33,934 20,442 
Service charges on deposit accounts21,144 8,514 35,870 16,638 
Debit card and ATM fees10,402 5,583 17,301 10,726 
Mortgage banking revenue6,522 7,827 13,767 24,352 
Investment product fees8,568 6,042 15,890 11,906 
Capital markets income7,261 5,871 11,703 9,586 
Company-owned life insurance4,571 2,783 8,095 5,497 
Debt securities gains (losses), net(85)692 257 2,685 
Other income11,430 3,462 17,540 6,388 
Total noninterest income89,117 51,508 154,357 108,220 
Noninterest Expense
Salaries and employee benefits161,817 72,640 285,964 140,757 
Occupancy26,496 14,054 47,515 28,926 
Equipment7,550 4,506 12,718 8,475 
Marketing9,119 2,632 13,395 4,694 
Data processing25,883 11,697 44,645 24,050 
Communication5,878 2,411 9,295 5,289 
Professional fees6,336 8,528 26,127 11,252 
FDIC assessment4,699 1,226 7,274 2,833 
Amortization of intangibles7,170 2,909 11,981 5,984 
Amortization of tax credit investments1,525 1,813 3,041 3,015 
Other expense20,922 7,202 42,196 12,083 
Total noninterest expense277,395 129,618 504,151 247,358 
Income before income taxes139,949 76,746 103,649 181,194 
Income tax expense24,964 13,960 16,250 31,590 
Net income114,985 62,786 87,399 149,604 
Preferred dividends(4,033)— (6,050)— 
Net income applicable to common shareholders$110,952 $62,786 $81,349 $149,604 
Net income per common share - basic$0.38 $0.38 $0.31 $0.91 
Net income per common share - diluted0.38 0.38 0.31 0.90 
Weighted average number of common shares outstanding - basic290,862 165,175 259,108 165,086 
Weighted average number of common shares outstanding - diluted291,881 165,934 260,253 165,821 
Dividends per common share$0.14 $0.14 $0.28 $0.28 
The accompanying notes to consolidated financial statements are an integral part of these statements.
5


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Net income$114,985 $62,786 $87,399 $149,604 
Other comprehensive income (loss):
Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period(304,514)(35,818)(733,984)(109,332)
Reclassification for securities transferred to held-to-maturity143,310 — 165,473 — 
Reclassification adjustment for securities (gains) losses
   realized in income
85 (692)(257)(2,685)
Income tax effect38,408 9,110 134,643 25,777 
Unrealized gains (losses) on available-for-sale securities(122,711)(27,400)(434,125)(86,240)
Change in securities held-to-maturity:
Adjustment for securities transferred from available-for-sale(143,310)— (165,473)— 
Amortization of unrealized losses on securities transferred
    from available-for-sale
3,692 — 4,002 — 
Income tax effect34,146 — 39,272 — 
Changes from securities held-to-maturity(105,472)— (122,199)— 
Change in cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges(3,418)(1,272)(12,924)2,776 
Reclassification adjustment for (gains) losses realized in net
   income
(219)(1,756)(888)(1,905)
Income tax effect894 744 3,394 (214)
Changes from cash flow hedges(2,743)(2,284)(10,418)657 
Change in defined benefit pension plans:
Amortization of net (gains) losses recognized in income(10)49 (21)98 
Income tax effect2 (12)5 (24)
Changes from defined benefit pension plans(8)37 (16)74 
Other comprehensive income (loss), net of tax(230,934)(29,647)(566,758)(85,509)
Comprehensive income (loss)$(115,949)$33,139 $(479,359)$64,095 
The accompanying notes to consolidated financial statements are an integral part of these statements.
6


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(dollars in thousands, except per
   share data)
Preferred StockCommon StockCapital SurplusRetained EarningsAccumulated
Other
Comprehensive Income (Loss)
Total
Shareholders' Equity
Balance, December 31, 2020$— $165,367 $1,875,626 $783,892 $147,771 $2,972,656 
Net income   86,818  86,818 
Other comprehensive income (loss)    (55,862)(55,862)
Dividends - common stock
   ($0.14 per share)
   (23,195) (23,195)
Common stock issued— 130   139 
Common stock repurchased— (160)(2,696)  (2,856)
Share-based compensation expense  1,747   1,747 
Stock activity under incentive
   compensation plans
— 460 (235)(225) — 
Balance, March 31, 2021— 165,676 1,874,572 847,290 91,909 2,979,447 
Net income   62,786  62,786 
Other comprehensive income (loss)    (29,647)(29,647)
Dividends - common stock
   ($0.14 per share)
   (23,202) (23,202)
Common stock issued— 136   143 
Common stock repurchased— (24)(425)  (449)
Share-based compensation expense  1,816   1,816 
Stock activity under incentive
   compensation plans
— 73 273 (122) 224 
Balance, June 30, 2021$— $165,732 $1,876,372 $886,752 $62,262 $2,991,118 
Balance, December 31, 2021$ $165,838 $1,880,545 $968,010 $(2,375)$3,012,018 
Net income (loss)   (27,586) (27,586)
Other comprehensive income (loss)    (335,824)(335,824)
First Midwest Bancorp, Inc. merger:
Issuance of common stock 129,365 2,316,947   2,446,312 
Issuance of preferred stock, net of
   issuance costs
230,500  13,219   243,719 
Cash dividends:
Common ($0.14 per share)   (40,782) (40,782)
Preferred dividends   (2,017) (2,017)
Common stock issued 10 155   165 
Common stock repurchased (3,890)(66,188)  (70,078)
Share-based compensation expense  6,284   6,284 
Stock activity under incentive
   compensation plans
 1,636 (1,368)(365) (97)
Balance, March 31, 2022230,500 292,959 4,149,594 897,260 (338,199)5,232,114 
Net income   114,985  114,985 
Other comprehensive income (loss)    (230,934)(230,934)
Cash dividends:
Common ($0.14 per share)   (40,901) (40,901)
Preferred dividends   (4,033) (4,033)
Common stock issued 10 152   162 
Common stock repurchased (21)(301)  (322)
Share-based compensation expense  7,813   7,813 
Stock activity under incentive
   compensation plans
 (55)285 (331) (101)
Balance, June 30, 2022$230,500 $292,893 $4,157,543 $966,980 $(569,133)$5,078,783 
The accompanying notes to consolidated financial statements are an integral part of these statements.
7


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
June 30,
(dollars in thousands)20222021
Cash Flows From Operating Activities  
Net income$87,399 $149,604 
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation17,742 14,068 
Amortization of other intangible assets11,981 5,984 
Amortization of tax credit investments3,041 3,015 
Net premium amortization on investment securities9,413 7,526 
Accretion income related to acquired loans(44,083)(9,781)
Share-based compensation expense14,097 3,563 
Provision for credit losses106,814 (22,285)
Debt securities (gains) losses, net(257)(2,685)
Net (gains) losses on sales of loans and other assets(4,010)(18,202)
Increase in cash surrender value of company-owned life insurance(8,095)(5,497)
Residential real estate loans originated for sale(364,018)(645,624)
Proceeds from sales of residential real estate loans395,829 677,888 
(Increase) decrease in interest receivable(19,468)(288)
(Increase) decrease in other assets127,991 40,951 
Increase (decrease) in accrued expenses and other liabilities104,456 (33,062)
Net cash flows provided by (used in) operating activities438,832 165,175 
Cash Flows From Investing Activities
Cash received (paid) from merger, net1,912,629 — 
Purchases of investment securities available-for-sale(1,276,205)(1,801,957)
Purchases of investment securities held-to-maturity(117,141)— 
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock(97,359)— 
Purchases of equity securities(1,417)— 
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale659,922 820,305 
Proceeds from sales of investment securities available-for-sale12,742 67,715 
Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity30,744 — 
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock83,947 44 
Proceeds from sales of equity securities49,709 325 
Loan originations and payments, net(1,524,289)11,924 
Proceeds from company-owned life insurance death benefits2,849 2,042 
Proceeds from sales of premises and equipment and other assets2,751 7,632 
Purchases of premises and equipment and other assets(17,459)(34,411)
Net cash flows provided by (used in) investing activities(278,577)(926,381)
Cash Flows From Financing Activities
Net increase (decrease) in:
Deposits(279,624)831,458 
Federal funds purchased and interbank borrowings1,285 357 
Securities sold under agreements to repurchase(51,296)(35,037)
Other borrowings53,136 12,428 
Payments for maturities of Federal Home Loan Bank advances(1,100,005)(145,005)
Payments for modification of Federal Home Loan Bank advances (2,156)
Proceeds from Federal Home Loan Bank advances1,350,000 50,000 
Cash dividends paid(87,733)(46,397)
Common stock repurchased(70,400)(3,305)
Common stock issued327 282 
Net cash flows provided by (used in) financing activities(184,310)662,625 
Net increase (decrease) in cash and cash equivalents(24,055)(98,581)
Cash and cash equivalents at beginning of period822,019 589,712 
Cash and cash equivalents at end of period$797,964 $491,131 

8


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)
Six Months Ended
June 30,
(dollars in thousands)20222021
Supplemental cash flow information:
Total interest paid$30,904 $22,368 
Total income taxes paid (net of refunds)(183)3,526 
Common stock issued for merger, net2,446,312 — 
Preferred stock issued for merger, net243,870 — 
Investment securities purchased but not settled 8,046 
Securities transferred from available-for-sale to held-to-maturity2,986,736 — 
Operating lease right-of-use assets obtained in exchange for lease obligations3,141 499 
Finance lease right-of-use assets obtained in exchange for lease obligations209 $4,994 
The accompanying notes to consolidated financial statements are an integral part of these statements.
9


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 subsidiaries (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 June 30, 2022 and December 31, 2021, and the results of its operations for the three and six months ended June 30, 2022 and 2021.  Interim results do not necessarily represent annual results.  These financial statements should be read in conjunction with Old National’s Annual Report on Form 10-K for the year ended December 31, 2021.
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.
There have been no material changes from the significant accounting policies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2022
FASB ASC 470 and 815 – In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to clarify the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature model. In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2022 did not have a material impact on the consolidated financial statements.
FASB ASC 842 – In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments, to amend the lease classification requirements for lessors to align them with practice under ASC Topic 840. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2022 did not have a material impact on the consolidated financial statements.
FASB ASC 848 – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. 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 the transition period, it will be in effect for a limited time and will not apply to 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 end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. Old National believes the adoption of this guidance on activities subsequent to June 30, 2022 through December 31, 2022 will not have a material impact on the consolidated financial statements.
10


Accounting Guidance Pending Adoption 
FASB ASC 805 – In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers, to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and liabilities. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period. The new guidance is not expected to have a material impact on the consolidated financial statements.
FASB ASC 815 – In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method, to expand the current single-layer method of electing hedge accounting to allow multiple hedged layers of a single closed portfolio under the method and renames the last-of-layer method the portfolio layer method. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted for any entity that has adopted the amendments in ASU No. 2017-12 for the corresponding period. If an entity adopts the amendments in an interim period, the effect of adopting the amendments related to basis adjustments should be reflected as of the beginning of the fiscal year of adoption (i.e., the initial application date). Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
FASB ASC 326 – In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, to eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in leases within the vintage disclosures required by ASC 326. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, which an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted if an entity has adopted ASU No. 2016-13, including adoption in an interim period. If an entity elects to early adopt ASU No. 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
FASB ASC 820 – In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, to clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments in this update are effective for fiscal years beginning after December 15, 2023, 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.
NOTE 3 – ACQUISITION AND DIVESTITURE ACTIVITY
Merger
First Midwest Bancorp, Inc.
On February 15, 2022, Old National completed its previously announced merger of equals transaction with First Midwest pursuant to an agreement and plan of merger, dated as of May 30, 2021, to combine in an all-stock transaction. Following the merger, the new organization is operating under the Old National Bancorp and Old National Bank names, with the corporate headquarters and principal office located in Evansville, Indiana and commercial and consumer banking operations headquartered in Chicago, Illinois. Old National believes that it will
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be able to achieve synergies and cost savings by integrating the operations of the companies. The combined organization has a presence in additional Midwestern markets, strong commercial banking capabilities, a robust retail footprint, a significant wealth platform, and an enhanced ability to attract talent. The combined organization also creates the scale and profitability to accelerate digital and technology capabilities to drive future investments in consumer and commercial banking, as well as wealth management services.
Pursuant to the terms of the merger agreement, each First Midwest common stockholder received 1.1336 shares of Old National common stock for each share of First Midwest common stock such stockholder owned, plus, if applicable, cash in lieu of fractional shares of Old National common stock resulting from the exchange ratio. Each outstanding share of 7.000% fixed-rate non-cumulative perpetual preferred stock, Series A, no par value, and each outstanding share of 7.000% fixed-rate non-cumulative perpetual preferred stock, Series C, no par value, of First Midwest was converted into the right to receive 1 share of an applicable newly created series of Old National preferred stock, no par value, having terms that are not materially less favorable than the applicable series of outstanding First Midwest preferred stock (respectively, “Old National Series A Preferred Stock” and “Old National Series C Preferred Stock,” and collectively, the “Old National Preferred Stock”). In this regard, Old National issued 108,000 shares of Old National Series A Preferred Stock and 122,500 shares of Old National Series C Preferred Stock. Old National entered into 2 deposit agreements, each dated as of February 15, 2022, by and among Old National, Continental Stock Transfer & Trust Company, as depository, and the holders from time to time of the depositary receipts in connection with the issuance of the Old National Preferred Stock. Pursuant to the deposit agreements, Old National issued 4,320,000 depositary shares, each representing a 1/40th interest in a share of Old National Series A Preferred Stock, and 4,900,000 depositary shares, each representing a 1/40th interest in a share of Old National Series C Preferred Stock.
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The assets acquired and liabilities assumed, both intangible and tangible, in the merger were recorded at their estimated fair values as of the merger date and have been accounted for under the acquisition method of accounting. During the three months ended June 30, 2022, Old National decreased goodwill totaling $5.6 million to update the provisional valuation of the fair values of assets acquired and liabilities assumed. These adjustments affected goodwill, loans, premises and equipment, operating lease right-of-use assets, other assets, and accrued expenses and other liabilities. The following table presents the preliminary valuation of the assets acquired and liabilities assumed, net of the fair value adjustments and the fair value of consideration as of the merger date:
(dollars and shares in thousands)February 15,
2022
Assets
Cash and cash equivalents$1,912,629 
Investment securities3,526,278 
FHLB/Federal Reserve Bank stock106,097 
Loans held for sale13,809 
Loans, net of allowance for credit losses14,309,431 
Premises and equipment112,426 
Operating lease right-of-use assets129,698 
Accrued interest receivable53,502 
Goodwill954,540 
Other intangible assets117,584 
Company-owned life insurance301,025 
Other assets314,459 
Total assets$21,851,478 
Liabilities
Deposits$17,249,404 
Securities sold under agreements to repurchase135,194 
Federal Home Loan Bank advances1,158,623 
Other borrowings274,569 
Accrued expenses and other liabilities343,506 
Total liabilities$19,161,296 
Fair value of consideration
Preferred stock$243,870 
Common stock (129,365 shares issued at $18.92 per share)2,446,312 
Total consideration$2,690,182 
Goodwill related to this merger will not be deductible for tax purposes.
Other intangible assets acquired included core deposit intangibles and customer trust relationships. The estimated fair value of the core deposit intangible was $77.9 million and is being amortized over an estimated useful life of 10 years. The estimated fair value of customer trust relationships was $39.7 million and is being amortized over an estimated useful life of 13 years.
The fair value of purchased financial assets with credit deterioration was $1.4 billion on the date of the merger. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $1.5 billion. Old National estimates, on the date of the merger, that $78.5 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected.
Transaction costs totaling $77.9 million associated with the merger have been expensed for the six months ended June 30, 2022 and additional transaction and integration costs will be expensed in future periods as incurred.
As a result of the merger, Old National assumed sponsorship of First Midwest’s defined benefit pension plan (the “Pension Plan”) under which both plan participation and benefit accruals had been previously frozen. Subsequent to the close of the merger, Old National began taking the steps required to terminate the Pension Plan. At June 30, 2022, the accumulated benefit obligation was $55.9 million and the fair value of Pension Plan assets was $72.4 million. Pension costs were not material for the six months ended June 30, 2022.
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Summary of Unaudited Pro-Forma Financial Information
The following table presents supplemental unaudited pro-forma financial information as if the First Midwest merger had occurred on January 1, 2021. The pro-forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effective as of this assumed date.
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Total revenues (1)
$426,589 $391,993 $798,935 $786,304 
Income before income taxes176,549 109,285 264,868 127,879 
(1)    Includes net interest income and total noninterest income.
Supplemental pro-forma earnings for the three months ended June 30, 2022 were adjusted to exclude $36.6 million of merger-related costs. Supplemental pro-forma earnings for the three months ended June 30, 2021 were adjusted to include these costs. Supplemental pro-forma earnings for the six months ended June 30, 2022 were adjusted to exclude $77.9 million of merger-related costs, $11.0 million of provision for credit losses on unfunded loan commitments, and $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the transaction. Supplemental pro-forma earnings for the six months ended June 30, 2021 were adjusted to include these costs.
Divestiture
On June 27, 2022, Old National entered into a Custodial Transfer and Asset Purchase Agreement with UMB Bank, n.a. (“UMB”), pursuant to which UMB will acquire Old National’s business of acting as a qualified custodian for, and administering, health savings accounts. Old National serves as custodian for health savings accounts comprised of both investment accounts and deposit accounts. Upon completion of the sale, UMB will pay Old National a premium on deposit account balances transferred at closing, or approximately $95 million based on June 30, 2022 balances. Subject to customary closing conditions and regulatory approval, the parties anticipate completing the sale in the fourth quarter of 2022.
NOTE 4 – NET INCOME PER COMMON SHARE
Basic and diluted net income per common share are calculated using the two-class method.  Net income applicable to common shares 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 applicable to common shares is then divided by the weighted-average number of common shares and common share equivalents during the period.
The following table presents the calculation of basic and diluted net income per common share:
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars and shares in thousands, except per share data)2022202120222021
Net income$114,985 $62,786 $87,399 $149,604 
Preferred dividends(4,033)— (6,050)— 
Net income applicable to common shares$110,952 $62,786 $81,349 $149,604 
Weighted average common shares outstanding:
Weighted average common shares outstanding (basic)290,862 165,175 259,108 165,086 
Effect of dilutive securities:
Restricted stock1,014 737 1,136 713 
Stock appreciation rights5 22 9 22 
Weighted average diluted shares outstanding291,881 165,934 260,253 165,821 
Basic Net Income Per Common Share$0.38 $0.38 $0.31 $0.91 
Diluted Net Income Per Common Share$0.38 $0.38 $0.31 $0.90 

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NOTE 5 – INVESTMENT SECURITIES
The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolios and the corresponding amounts of gross unrealized gains, unrealized losses, and basis adjustments in accumulated other comprehensive income (loss) and gross unrecognized gains and losses. The Company held no securities classified as held-to-maturity as of December 31, 2021.
(dollars in thousands)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Basis
Adjustments (1)
Fair
Value
June 30, 2022    
Available-for-Sale    
U.S. Treasury$441,846 $9 $(7,739)$(31,333)$402,783 
U.S. government-sponsored entities and agencies1,442,261 1 (123,234)(76,471)1,242,557 
Mortgage-backed securities - Agency5,227,908 794 (400,994) 4,827,708 
States and political subdivisions740,026 4,132 (24,117) 720,041 
Pooled trust preferred securities13,768  (2,667) 11,101 
Other securities384,417 176 (21,082) 363,511 
Total available-for-sale securities$8,250,226 $5,112 $(579,833)$(107,804)$7,567,701 
Held-to-Maturity
U.S. government-sponsored entities and agencies$815,833 $ $(95,398)$ $720,435 
Mortgage-backed securities - Agency1,149,212 170 (59,940) 1,089,442 
States and political subdivisions1,119,292 69 (149,797) 969,564 
Allowance for securities held-to-maturity(151)   (151)
Total held-to-maturity securities$3,084,186 $239 $(305,135)$ $2,779,290 
December 31, 2021
Available-for-Sale
U.S. Treasury$234,555 $1,233 $(7,751)$7,547 $235,584 
U.S. government-sponsored entities and agencies1,575,994 7,354 (37,014)(3,561)1,542,773 
Mortgage-backed securities - Agency3,737,484 27,421 (66,074)— 3,698,831 
States and political subdivisions1,587,172 69,696 (1,882)— 1,654,986 
Pooled trust preferred securities13,756 — (4,260)— 9,496 
Other securities235,072 6,578 (1,254)— 240,396 
Total available-for-sale securities$7,384,033 $112,282 $(118,235)$3,986 $7,382,066 
(1)    Basis adjustments represent the cumulative fair value adjustments included in the carrying amounts of fixed-rate investment securities assets in fair value hedging arrangements.
During the six months ended June 30, 2022, U.S government-sponsored entities and agencies, agency mortgage-backed securities, and state and political subdivision securities with a fair value of $3.0 billion were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. The $125.2 million unrealized holding loss, net of tax, at the date of transfer will continue to be reported as a separate component of shareholders’ equity and is being amortized over the remaining term of the securities as an adjustment to yield. The corresponding discount on these securities will offset this adjustment to yield as it is amortized.
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Proceeds from sales or calls of available-for-sale investment securities and the resulting realized gains and realized losses were as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Proceeds from sales of available-for-sale securities$1,903 $15,247 $12,742 $67,715 
Proceeds from calls of available-for-sale securities21,331 46,750 60,605 56,995 
Total$23,234 $61,997 $73,347 $124,710 
Realized gains on sales of available-for-sale securities$5 $736 $344 $2,736 
Realized gains on calls of available-for-sale securities43 48 167 61 
Realized losses on sales of available-for-sale securities(52)(85)(147)(85)
Realized losses on calls of available-for-sale securities(81)(7)(107)(27)
Debt securities gains (losses), net$(85)$692 $257 $2,685 
Substantially all of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities.  The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Weighted average yield is based on amortized cost.
 June 30, 2022
(dollars in thousands)Amortized
Cost
Fair
Value
Weighted
Average
Yield
Maturity
Available-for-Sale   
Within one year$315,154 $314,532 1.11 %
One to five years1,731,888 1,662,131 2.56 
Five to ten years4,076,303 3,738,698 2.30 
Beyond ten years2,126,881 1,852,340 2.43 
Total$8,250,226 $7,567,701 2.34 %
Held-to-Maturity
Within one year$100 $100 2.47 %
One to five years70,765 68,860 3.72 
Five to ten years987,729 934,946 2.75 
Beyond ten years2,025,592 1,775,384 2.76 
Total$3,084,186 $2,779,290 2.78 %
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The following table summarizes the available-for-sale investment securities with unrealized losses for which an allowance for credit losses has not been recorded by aggregated major security type and length of time in a continuous unrealized loss position:
 Less than 12 months12 months or longerTotal
(dollars in thousands)Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized Losses
June 30, 2022
Available-for-Sale
U.S. Treasury$400,802 $(7,739)$ $ $400,802 $(7,739)
U.S. government-sponsored entities
   and agencies
803,249 (27,407)437,307 (95,827)1,240,556 (123,234)
Mortgage-backed securities - Agency4,149,631 (311,841)509,634 (89,153)4,659,265 (400,994)
States and political subdivisions372,074 (24,117)  372,074 (24,117)
Pooled trust preferred securities  11,102 (2,667)11,102 (2,667)
Other securities301,443 (18,960)32,799 (2,122)334,242 (21,082)
Total available-for-sale$6,027,199 $(390,064)$990,842 $(189,769)$7,018,041 $(579,833)
December 31, 2021
Available-for-Sale
U.S. Treasury$91,063 $(7,751)$— $— $91,063 $(7,751)
U.S. government-sponsored entities
   and agencies
1,032,566 (21,167)312,949 (15,847)1,345,515 (37,014)
Mortgage-backed securities - Agency2,415,923 (59,277)163,685 (6,797)2,579,608 (66,074)
States and political subdivisions178,570 (1,849)2,729 (33)181,299 (1,882)
Pooled trust preferred securities— — 9,496 (4,260)9,496 (4,260)
Other securities56,976 (943)21,133 (311)78,109 (1,254)
Total available-for-sale$3,775,098 $(90,987)$509,992 $(27,248)$4,285,090 $(118,235)
The following table summarizes the held-to-maturity investment securities with unrecognized losses aggregated by major security type and length of time in a continuous loss position:
 Less than 12 months12 months or longerTotal
(dollars in thousands)Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
June 30, 2022
Held-to-Maturity
U.S. government-sponsored entities
   and agencies
$529,507 $(69,932)$190,927 $(25,466)$720,434 $(95,398)
Mortgage-backed securities - Agency649,804 (47,157)419,930 (12,783)1,069,734 (59,940)
States and political subdivisions929,474 (143,443)31,684 (6,354)961,158 (149,797)
Total held-to-maturity$2,108,785 $(260,532)$642,541 $(44,603)$2,751,326 $(305,135)
The unrecognized losses on held-to-maturity investment securities presented in the table above include unrecognized losses on securities that were transferred from available-for-sale to held-for-maturity totaling $161.5 million at June 30, 2022.
Available-for-sale securities in unrealized loss positions are evaluated at least quarterly to determine if a decline in fair value should be recorded through income or other comprehensive income. For available-for sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security, before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for sale securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair
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value of the security is less than its amortized cost basis. Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was needed at June 30, 2022 or December 31, 2021.
An allowance on held-to-maturity debt securities is maintained for certain municipal bonds to account for expected lifetime credit losses. Substantially all of the U.S. government-sponsored entities and agencies and agency mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. The allowance for credit losses on held-to-maturity debt securities was $0.2 million at June 30, 2022.
Accrued interest receivable on the securities portfolio is excluded from the estimate of credit losses and totaled $50.9 million at June 30, 2022 and $35.5 million at December 31, 2021.
At June 30, 2022, Old National’s securities portfolio consisted of 3,232 securities, 2,679 of which were in an unrealized loss position.  The unrealized losses attributable to our U.S. Treasury, U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates and temporary market movements.  Old National’s pooled trust preferred securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows.  At June 30, 2022, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.
Old National’s pooled trust preferred securities have experienced credit defaults.  However, we believe that the value of the instruments lies in the full and timely interest payments that will be received through maturity, the steady amortization that will be experienced until maturity, and the full return of principal by the final maturity of the collateralized debt obligations. Old National did not recognize any losses on these securities for the six months ended June 30, 2022 or 2021.
Equity Securities
Old National’s equity securities with readily determinable fair values totaled $55.9 million at June 30, 2022 and $13.2 million at December 31, 2021.  There were losses on equity securities of $2.4 million during the three months ended June 30, 2022 and losses of $4.2 million during the six months ended June 30, 2022, compared to gains of $0.2 million during the three months ended June 30, 2021 and gains of $0.7 million during the six months ended June 30, 2021. 
Alternative Investments
Old National has alternative investments without readily determinable fair values that are included in other assets totaling $265.7 million at June 30, 2022, consisting of $143.0 million of illiquid investments of partnerships, limited liability companies, and other ownership interests that support affordable housing and $122.7 million of economic development and community revitalization initiatives in low-to-moderate income neighborhoods. These alternative investments totaled $186.0 million at December 31, 2021.  There have been no impairments or adjustments on equity securities without readily determinable fair values, except for amortization of tax credit investments in the six months ended June 30, 2022 and 2021. See Note 11 to the consolidated financial statements for detail regarding these investments.
NOTE 6 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans
Old National’s loans consist primarily of loans made to consumers and commercial clients in many diverse industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing, among others.  Most of Old National’s lending activity occurs within our principal geographic markets of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Wisconsin, and Missouri.  Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.
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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 – commercial, commercial real estate, residential real estate, and consumer – 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 portfolio segment reclassifications follow:
Segment
StatementPortfolioAfter
(dollars in thousands)BalanceReclassificationsReclassifications
June 30, 2022
Loans:
Commercial$8,923,983 $(191,996)$8,731,987 
Commercial real estate11,796,503 (154,769)11,641,734 
BBCCN/A346,765 346,765 
Residential real estate6,079,057  6,079,057 
Consumer2,754,105 (2,754,105)N/A
IndirectN/A981,741 981,741 
DirectN/A674,512 674,512 
Home equityN/A1,097,852 1,097,852 
Total$29,553,648 $ $29,553,648 
December 31, 2021
Loans:
Commercial$3,391,769 $(191,557)$3,200,212 
Commercial real estate6,380,674 (159,190)6,221,484 
BBCCN/A350,747 350,747 
Residential real estate2,255,289 — 2,255,289 
Consumer1,574,114 (1,574,114)N/A
IndirectN/A873,139 873,139 
DirectN/A140,385 140,385 
Home equityN/A560,590 560,590 
Total$13,601,846 $— $13,601,846 
The composition of loans by portfolio segment follows:
(dollars in thousands)June 30,
2022
December 31,
2021
Commercial (1) (2)
$8,731,987 $3,200,212 
Commercial real estate11,641,734 6,221,484 
BBCC346,765 350,747 
Residential real estate6,079,057 2,255,289 
Indirect981,741 873,139 
Direct674,512 140,385 
Home equity1,097,852 560,590 
Total loans29,553,648 13,601,846 
Allowance for credit losses(288,003)(107,341)
Net loans$29,265,645 $13,494,505 
(1)Includes direct finance leases of $66.5 million at June 30, 2022 and $25.1 million at December 31, 2021.
(2)Includes PPP loans of $81.6 million at June 30, 2022 and $169.0 million at December 31, 2021.
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The risk characteristics of each loan portfolio segment are as follows:
Commercial
Commercial loans are classified primarily 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 clients.
Commercial Real Estate
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 224%, 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 June 30, 2022.
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 owners and guarantors, 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 factors such as changes in economic conditions and 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.  Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Indirect
Indirect loans are secured by 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 by establishing 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
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such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, conservative credit policies, and ongoing reviews of 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.
Allowance for Credit Losses
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 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 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. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans is excluded from the estimate of credit losses and totaled $104.6 million at June 30, 2022 and $47.6 million at December 31, 2021.
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 based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a 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 future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the 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, 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 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.
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The base forecast scenario considers unemployment, gross domestic product, and the BBB ratio (BBB spread to the 10-year U.S. Treasury rate). In addition to the quantitative inputs, several qualitative factors were considered. These factors include the risk that unemployment, gross domestic product, housing product index, and the BBB ratio prove to be more severe and/or prolonged than our baseline forecast due to the conflict in Ukraine, supply chain issues, inflation, and the ongoing impact of the COVID-19 pandemic. Activity in the allowance for credit losses for loans by portfolio segment was as follows:
(dollars in thousands)Balance at
Beginning of
Period
Allowance
Established
for Acquired
PCD Loans
Charge-offsRecoveriesProvision
for Credit
Losses
Balance at
End of
Period
Three Months Ended
June 30, 2022
   
Commercial$99,471 $ $(1,344)$781 $3,911 $102,819 
Commercial real estate140,490  (318)320 1,310 141,802 
BBCC2,069  (20)91 (76)2,064 
Residential real estate17,252  (137)130 2,484 19,729 
Indirect1,648  (528)320 201 1,641 
Direct14,450  (1,722)676 1,008 14,412 
Home equity5,127  (27)20 416 5,536 
Total$280,507 $ $(4,096)$2,338 $9,254 $288,003 
Three Months Ended
June 30, 2021
Commercial$25,130 $— $(178)$204 $575 $25,731 
Commercial real estate70,561 — (178)111 (5,025)65,469 
BBCC2,537 — (100)15 346 2,798 
Residential real estate10,265 — (62)51 165 10,419 
Indirect2,255 — (206)565 (571)2,043 
Direct665 — (256)209 22 640 
Home equity2,624 — — 161 (441)2,344 
Total$114,037 $— $(980)$1,316 $(4,929)$109,444 
Six Months Ended
June 30, 2022
Commercial$27,232 $35,040 $(3,223)$1,013 $42,757 $102,819 
Commercial real estate64,004 42,601 (824)502 35,519 141,802 
BBCC2,458  (48)148 (494)2,064 
Residential real estate9,347 136 (324)570 10,000 19,729 
Indirect1,743  (1,012)542 368 1,641 
Direct528 31 (3,251)1,270 15,834 14,412 
Home equity2,029 723 (78)183 2,679 5,536 
Total$107,341 $78,531 $(8,760)$4,228 $106,663 $288,003 
Six Months Ended
June 30, 2021
Commercial$30,567 $— $(586)$443 $(4,693)$25,731 
Commercial real estate75,810 — (178)184 (10,347)65,469 
BBCC6,120 — (136)56 (3,242)2,798 
Residential real estate12,608 — (220)138 (2,107)10,419 
Indirect3,580 — (790)1,101 (1,848)2,043 
Direct855 — (558)469 (126)640 
Home equity1,848 — (82)500 78 2,344 
Total$131,388 $— $(2,550)$2,891 $(22,285)$109,444 
The allowance for credit losses increased for the six months ended June 30, 2022 primarily due to $78.5 million of allowance for credit losses on acquired PCD loans established through acquisition accounting adjustments on the merger date and $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD
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loans acquired in the First Midwest merger. Loan growth and qualitative factors contributed to the increase in the allowance for credit losses in the three months ended June 30, 2022.
Unfunded Loan Commitments
Old National maintains 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 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 within accrued expenses and other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. Old National’s activity in the allowance for credit losses on unfunded loan commitments was as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Allowance for credit losses on unfunded loan commitments: 
Balance at beginning of period$22,045 $10,365 $10,879 $11,689 
Provision for credit losses on unfunded commitments
   for loans acquired during the period
 — 11,013 — 
Expense (reversal of expense) for credit losses(79)64 74 (1,260)
Balance at end of period$21,966 $10,429 $21,966 $10,429 
Credit Quality
Old National’s management monitors the credit quality of its loans on an 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, commercial real estate, and BBCC loan in the portfolio.  The primary determinants of the AQR are 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 collection or liquidation in 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.
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The following table summarizes the amortized cost of term loans by risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment, class of loan, and origination year:
Origination YearRevolving to Term
(dollars in thousands)20222021202020192018PriorRevolvingTotal
June 30, 2022
Commercial:
Risk Rating:
Pass$1,085,570 $1,982,733 $1,016,391 $888,392 $426,282 $467,789 $2,313,545 $132,149 $8,312,851 
Criticized5,285 23,442 17,524 28,488 15,752 10,798 48,442 1,352 151,083 
Classified:
Substandard31,062 33,265 16,647 44,642 25,021 15,349 41,626 18,092 225,704 
Nonaccrual347 3,640 1,164 1,071 1  2,402 3,479 12,104 
Doubtful 299 930 592 4,679 16,004 7,741  30,245 
Total$1,122,264 $2,043,379 $1,052,656 $963,185 $471,735 $509,940 $2,413,756 $155,072 $8,731,987 
Commercial real estate:
Risk Rating:
Pass$1,552,841 $2,787,599 $2,234,315 $1,472,777 $867,430 $1,446,189 $163,533 $443,935 $10,968,619 
Criticized43,201 31,765 18,257 51,824 66,566 50,919  33,801 296,333 
Classified:
Substandard51,283 36,711 22,940 47,348 55,284 35,047 2,291 4,212 255,116 
Nonaccrual918 12,535 3,545  2,666 7,285 303 786 28,038 
Doubtful 37,124 12,041 669 1,171 42,623   93,628 
Total$1,648,243 $2,905,734 $2,291,098 $1,572,618 $993,117 $1,582,063 $166,127 $482,734 $11,641,734 
BBCC:
Risk Rating:
Pass$44,590 $73,821 $60,244 $45,049 $28,071 $20,216 $46,062 $19,013 $337,066 
Criticized669 1,083 667 744 270  451 1,535 5,419 
Classified:
Substandard72 274 13 576  152 923 313 2,323 
Nonaccrual  276  45   737 1,058 
Doubtful  25 387 364 123   899 
Total$45,331 $75,178 $61,225 $46,756 $28,750 $20,491 $47,436 $21,598 $346,765 
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Origination YearRevolving to Term
(dollars in thousands)20212020201920182017PriorRevolvingTotal
December 31, 2021
Commercial:
Risk Rating:
Pass$918,456 $563,869 $271,158 $98,468 $156,136 $235,639 $667,628 $130,470 $3,041,824 
Criticized9,998 7,885 6,660 — 7,809 2,658 14,601 10,076 59,687 
Classified:
Substandard14,773 14,468 10,200 9,849 5,521 945 6,883 10,322 72,961 
Nonaccrual1,069 3,507 1,276 3,721 1,448 — 845 7,796 19,662 
Doubtful— 178 — 288 337 5,275 — — 6,078 
Total$944,296 $589,907 $289,294 $112,326 $171,251 $244,517 $689,957 $158,664 $3,200,212 
Commercial real estate:
Risk Rating:
Pass$1,555,880 $1,474,271 $846,921 $481,508 $462,176 $611,680 $42,609 $451,544 $5,926,589 
Criticized27,622 24,790 39,914 — 21,614 22,157 — 34,387 170,484 
Classified:
Substandard4,706 12,118 9,933 9,058 18,165 11,351 2,291 4,339 71,961 
Nonaccrual1,620 2,997 — 1,627 3,419 8,905 315 871 19,754 
Doubtful6,653 — 1,970 342 11,218 12,513 — — 32,696 
Total$1,596,481 $1,514,176 $898,738 $492,535 $516,592 $666,606 $45,215 $491,141 $6,221,484 
BBCC:
Risk Rating:
Pass$81,710 $69,749 $54,580 $34,461 $25,113 $8,296 $47,571 $18,778 $340,258 
Criticized1,320 1,170 841 160 — — 670 1,578 5,739 
Classified:
Substandard284 24 79 187 465 103 239 1,388 
Nonaccrual— 88 — — 66 162 — 1,136 1,452 
Doubtful— 25 284 1,391 — 210 — — 1,910 
Total$83,314 $71,056 $55,784 $36,019 $25,366 $9,133 $48,344 $21,731 $350,747 

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For residential real estate and consumer loan classes, Old National 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 amortized cost of term residential real estate and consumer loans based on payment activity and origination year:
Origination YearRevolving to Term
(dollars in thousands)20222021202020192018PriorRevolvingTotal
June 30, 2022
Residential real estate:
Risk Rating:
Performing$1,316,193 $1,383,143 $1,895,059 $507,638 $147,478 $786,725 $10,863 $96 $6,047,195 
Nonperforming 198 666 587 1,239 29,172   31,862 
Total$1,316,193 $1,383,341 $1,895,725 $508,225 $148,717 $815,897 $10,863 $96 $6,079,057 
Indirect:
Risk Rating:
Performing$305,501 $302,525 $180,812 $109,194 $46,379 $35,067 $ $1 $979,479 
Nonperforming66 414 519 371 349 543   2,262 
Total$305,567 $302,939 $181,331 $109,565 $46,728 $35,610 $ $1 $981,741 
Direct:
Risk Rating:
Performing$91,675 $188,063 $100,504 $78,199 $58,343 $50,906 $103,998 $38 $671,726 
Nonperforming22 447 143 289 157 1,516 84 128 2,786 
Total$91,697 $188,510 $100,647 $78,488 $58,500 $52,422 $104,082 $166 $674,512 
Home equity:
Risk Rating:
Performing$11,875 $11,855 $8,137 $14,518 $13,076 $36,231 $975,416 $14,702 $1,085,810 
Nonperforming  34 16 593 8,224 212 2,963 12,042 
Total$11,875 $11,855 $8,171 $14,534 $13,669 $44,455 $975,628 $17,665 $1,097,852 
Origination YearRevolving to Term
20212020201920182017PriorRevolvingTotal
December 31, 2021
Residential real estate:
Risk Rating:
Performing$625,582 $632,705 $272,600 $72,766 $103,866 $529,293 $12 $105 $2,236,929 
Nonperforming96 165 166 350 855 16,728 — — 18,360 
Total$625,678 $632,870 $272,766 $73,116 $104,721 $546,021 $12 $105 $2,255,289 
Indirect:
Risk Rating:
Performing$361,485 $231,156 $146,978 $68,513 $41,598 $20,819 $— $$870,558 
Nonperforming262 524 614 510 430 241 — — 2,581 
Total$361,747 $231,680 $147,592 $69,023 $42,028 $21,060 $— $$873,139 
Direct:
Risk Rating:
Performing$34,058 $16,135 $14,396 $14,579 $7,432 $15,831 $36,812 $192 $139,435 
Nonperforming13 53 130 133 35 536 42 950 
Total$34,071 $16,188 $14,526 $14,712 $7,467 $16,367 $36,854 $200 $140,385 
Home equity:
Risk Rating:
Performing$— $— $633 $349 $535 $— $539,057 $16,768 $557,342 
Nonperforming— — 16 41 258 2,923 3,248 
Total$— $— $649 $358 $576 $$539,315 $19,691 $560,590 
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Nonaccrual and Past Due Loans
Old National does not record interest on nonaccrual loans until principal is recovered. 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 but not received is reversed against 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.
The following table presents the aging of the amortized cost basis in past due loans 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
CurrentTotal
Loans
June 30, 2022
Commercial$3,364 $117 $15,317 $18,798 $8,713,189 $8,731,987 
Commercial real estate7,061 3,320 59,986 70,367 11,571,367 11,641,734 
BBCC129 167 370 666 346,099 346,765 
Residential37,902 4,304 12,611 54,817 6,024,240 6,079,057 
Indirect4,140 673 362 5,175 976,566 981,741 
Direct6,496 969 2,044 9,509 665,003 674,512 
Home equity4,190 1,030 5,076 10,296 1,087,556 1,097,852 
Total$63,282 $10,580 $95,766 $169,628 $29,384,020 $29,553,648 
December 31, 2021
Commercial$2,723 $617 $1,603 $4,943 $3,195,269 $3,200,212 
Commercial real estate1,402 280 7,042 8,724 6,212,760 6,221,484 
BBCC747 162 109 1,018 349,729 350,747 
Residential8,273 2,364 4,554 15,191 2,240,098 2,255,289 
Indirect3,888 867 554 5,309 867,830 873,139 
Direct687 159 162 1,008 139,377 140,385 
Home equity693 199 777 1,669 558,921 560,590 
Total$18,413 $4,648 $14,801 $37,862 $13,563,984 $13,601,846 
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:
June 30, 2022December 31, 2021
(dollars in thousands)Nonaccrual
Amortized
Cost
Nonaccrual
With No
Related
Allowance
Past Due
90 Days or
More and
Accruing
Nonaccrual
Amortized
Cost
Nonaccrual
With No
Related
Allowance
Past Due
90 Days or
More and
Accruing
Commercial$42,349 $13,762 $474 $25,740 $9,574 $— 
Commercial real estate121,666 9,714 216 52,450 25,139 — 
BBCC1,957   3,362 — — 
Residential31,862   18,360 — — 
Indirect2,262   2,581 — 
Direct2,786  182 950 — 
Home equity12,042  10 3,248 — — 
Total$214,924 $23,476 $882 $106,691 $34,713 $
Interest income recognized on nonaccrual loans was insignificant during the three and six months ended June 30, 2022 and 2021.
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When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. 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 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:
Type of Collateral
(dollars in thousands)Real
Estate
Blanket
Lien
Investment
Securities/Cash
AutoOther
June 30, 2022
Commercial$11,766 $25,147 $2,545 $57 $1,843 
Commercial real estate108,312  917  6,563 
BBCC1,364 539 26 28  
Residential31,862     
Indirect   2,262  
Direct1,810  1 272 21 
Home equity11,377     
Total loans$166,491 $25,686 $3,489 $2,619 $8,427 
December 31, 2021
Commercial$8,100 $13,816 $3,394 $80 $302 
Commercial real estate38,657 — 961 — 6,653 
BBCC1,895 1,331 43 93 — 
Residential18,360 — — — — 
Indirect— — — 2,581 — 
Direct724 — 152 20 
Home equity3,248 — — — — 
Total loans$70,984 $15,147 $4,399 $2,906 $6,975 
Loan Participations
Old National has loan participations, which qualify as participating interests, with other financial institutions.  At June 30, 2022, these loans totaled $2.4 billion, of which $1.2 billion had been sold to other financial institutions and $1.2 billion 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 includes 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 months.
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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.  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 allocation is established within the allowance for 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, if the loan is collateral dependent.  The allocation 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, the allowance allocation is recalculated and 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.
29


The following table presents activity in TDRs:
(dollars in thousands)Beginning
Balance
(Charge-offs)/
Recoveries
(Payments)/
Disbursements
(Removals)/
Additions
Ending
Balance
Three Months Ended June 30, 2022
Commercial$7,044 $ $(2,846)$3,018 $7,216 
Commercial real estate32,428  (8,903)4,006 27,531 
BBCC87    87 
Residential2,405  (27) 2,378 
Indirect     
Direct2,679  (10) 2,669 
Home equity180  (49) 131 
Total$44,823 $ $(11,835)$7,024 $40,012 
Three Months Ended June 30, 2021
Commercial$8,471 $— $(207)$— $8,264 
Commercial real estate17,385 (1,420)— 15,970 
BBCC105 (11)— 97 
Residential2,603 (4)(17)— 2,582 
Indirect— (1)— — 
Direct726 (62)— 665 
Home equity276 (60)— 217 
Total$29,566 $$(1,778)$— $27,795 
Six Months Ended June 30, 2022
Commercial$7,456 $ $(4,743)$4,503 $7,216 
Commercial real estate17,158 4 (9,114)19,483 27,531 
BBCC87 3 (3) 87 
Residential2,435  (57) 2,378 
Indirect 1 (1)  
Direct2,704  (35) 2,669 
Home equity199 1 (69) 131 
Total$30,039 $9 $(14,022)$23,986 $40,012 
Six Months Ended June 30, 2021
Commercial$11,090 $— $(1,655)$(1,171)$8,264 
Commercial real estate17,606 15 (1,651)— 15,970 
BBCC112 (20)— 97 
Residential2,824 (4)(238)— 2,582 
Indirect— (3)— — 
Direct739 (76)— 665 
Home equity282 (66)— 217 
Total$32,653 $22 $(3,709)$(1,171)$27,795 
TDRs included within nonaccrual loans totaled $24.3 million at June 30, 2022 and $11.7 million at December 31, 2021.  Old National has established specific allowances for credit losses for clients whose loan terms have been modified as TDRs totaling $5.8 million at June 30, 2022 and $0.7 million at December 31, 2021.  Old National had not committed to lend any additional funds to clients with outstanding loans that were classified as TDRs at June 30, 2022 or December 31, 2021.
The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the six months ended June 30, 2022 and 2021 are the same except for when the loan modifications involve the forgiveness of principal.  NaN loan met the qualifications to be removed from TDR status for the six months ended June 30, 2021.
The TDRs that occurred during the six months ended June 30, 2022 increased the allowance for credit losses by $5.5 million and resulted in no charge-offs. The TDRs that occurred during the six months ended June 30, 2021 did not have a material impact on the allowance for credit losses and resulted in no charge-offs.
30


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 six months ended June 30, 2022 and 2021.
The terms of certain other loans were modified during 2022 and 2021 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.
In general, once a modified loan is considered a TDR, the loan will always be considered a TDR 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.
Purchased Credit Deteriorated Loans
Old National has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:
(dollars in thousands)
First Midwest (1)
Purchase price of loans at acquisition$1,400,831 
Allowance for credit losses at acquisition78,531 
Non-credit discount/(premium) at acquisition9,003 
Par value of acquired loans at acquisition$1,488,365 
(1)Old National merged with First Midwest effective February 15, 2022.
NOTE 7 – PREMISES AND EQUIPMENT
The composition of premises and equipment was as follows:
(dollars in thousands)June 30,
2022
December 31,
2021
Land$97,194 $71,014 
Buildings450,537 394,400 
Furniture, fixtures, and equipment143,975 118,124 
Leasehold improvements62,400 46,330 
Total754,106 629,868 
Accumulated depreciation(168,075)(153,682)
Premises and equipment, net$586,031 $476,186 
The increase in premises and equipment at June 30, 2022 when compared to December 31, 2021 was primarily due to assets acquired in the merger with First Midwest totaling $112.4 million.
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Depreciation expense was $10.0 million for the three months ended June 30, 2022 and $17.7 million for the six months ended June 30, 2022, compared to $7.0 million for the three months ended June 30, 2021 and $14.1 million for the six months ended June 30, 2021.
Finance Leases
Old National leases certain banking center buildings and equipment under finance leases that are included in premises and equipment.  See Notes 8 and 14 to the consolidated financial statements for detail regarding these leases.
NOTE 8 – LEASES
Old National has operating and finance leases for land, office space, banking centers, and equipment.  These leases are generally for periods of 5 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 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.
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
Item in the
Statement of Income
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Operating lease costOccupancy/Equipment expense$8,558 $3,092 $13,666 $6,393 
Finance lease cost: 
Amortization of right-of-use assetsOccupancy expense648 810 1,323 1,121 
Interest on lease liabilitiesInterest expense103 120 210 215 
Sub-lease incomeOccupancy expense(174)(135)(302)(278)
Total $9,135 $3,887 $14,897 $7,451 
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Supplemental balance sheet information related to leases was as follows:
(dollars in thousands)June 30,
2022
December 31,
2021
Operating Leases 
Operating lease right-of-use assets$192,196 $69,560 
Operating lease liabilities215,188 76,236 
 
Finance Leases
Premises and equipment, net15,017 16,451 
Other borrowings15,910 17,233 
 
Weighted-Average Remaining Lease Term (in Years)
Operating leases9.210.4
Finance leases7.37.6
 
Weighted-Average Discount Rate
Operating leases2.89 %3.34 %
Finance leases3.10 %3.02 %
Supplemental cash flow information related to leases was as follows:
Six Months Ended
June 30,
(dollars in thousands)20222021
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows from operating leases$13,705 $7,166 
Operating cash flows from finance leases210 215 
Financing cash flows from finance leases1,210 993 
The following table presents a maturity analysis of the Company’s lease liability by lease classification at June 30, 2022:
(dollars in thousands)Operating
Leases
Finance
Leases
2022$16,553 $1,432 
202330,296 2,892 
202428,888 2,942 
202527,581 2,952 
202626,582 1,712 
Thereafter116,859 5,914 
Total undiscounted lease payments246,759 17,844 
Amounts representing interest(31,571)(1,934)
Lease liability$215,188 $15,910 

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NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill:
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Balance at beginning of period$1,997,157 $1,036,994 $1,036,994 $1,036,994 
Acquisitions and adjustments(5,623)— 954,540 — 
Balance at end of period$1,991,534 $1,036,994 $1,991,534 $1,036,994 
During the six months ended June 30, 2022, Old National recorded $954.5 million of goodwill associated with the First Midwest merger. The decrease in goodwill for the three months ended June 30, 2022 resulted from the measurement period adjustments related to updating the fair values of the assets acquired and liabilities assumed in the First Midwest merger. See Note 3 to the consolidated financial statements for additional detail regarding this transaction.
Old National performed the required annual goodwill impairment test as of August 31, 2021 and there was no impairment.  No events or circumstances since the August 31, 2021 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.
The gross carrying amounts and accumulated amortization of other intangible assets were as follows: 
(dollars in thousands)Gross
Carrying
Amount
Accumulated
Amortization
and Impairment
Net
Carrying
Amount
June 30, 2022   
Core deposit$170,642 $(69,819)$100,823 
Customer trust relationships56,243 (16,785)39,458 
Total intangible assets$226,885 $(86,604)$140,281 
December 31, 2021
Core deposit$92,754 $(60,036)$32,718 
Customer trust relationships16,547 (14,587)1,960 
Total intangible assets$109,301 $(74,623)$34,678 
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. During the six months ended June 30, 2022, Old National recorded $77.9 million of core deposit intangibles and $39.7 million of customer trust relationships intangible associated with the First Midwest merger.
Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded during the six months ended June 30, 2022 or 2021.  Total amortization expense associated with intangible assets was $7.2 million for the three months ended June 30, 2022 and $12.0 million for the six months ended June 30, 2022, compared to $2.9 million for the three months ended June 30, 2021 and $6.0 million for the six months ended June 30, 2021.
Estimated amortization expense for future years is as follows:
(dollars in thousands) 
2022 remaining$13,748 
202324,342 
202421,298 
202518,417 
202615,614 
Thereafter46,862 
Total$140,281 
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NOTE 10 – LOAN SERVICING RIGHTS
Loan servicing rights are included in other assets on the balance sheet. At June 30, 2022, loan servicing rights derived from mortgage loans sold with servicing retained totaled $38.1 million, compared to $30.0 million at December 31, 2021.  Loans serviced for others are not reported as assets.  The principal balance of mortgage loans serviced for others was $4.4 billion at June 30, 2022, compared to $3.7 billion at December 31, 2021.  Custodial escrow balances maintained in connection with serviced loans were $58.1 million at June 30, 2022 and $18.2 million at December 31, 2021.
The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance: 
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Balance at beginning of period$38,246 $28,262 $30,085 $28,124 
Additions (1)
1,347 3,058 11,013 6,171 
Amortization(1,472)(2,434)(2,977)(5,409)
Balance before valuation allowance at end of period38,121 28,886 38,121 28,886 
Valuation allowance:
Balance at beginning of period(1)(146)(46)(1,407)
(Additions)/recoveries1 41 46 1,302 
Balance at end of period (105) (105)
Loan servicing rights, net$38,121 $28,781 $38,121 $28,781 
(1)Additions in the six months ended June 30, 2022 include loan servicing rights of $7.7 million acquired in the First Midwest merger on February 15, 2022.
At June 30, 2022, the fair value of servicing rights was $46.8 million, which was determined using a discount rate of 9% and a conditional prepayment rate of 9%.  At December 31, 2021, the fair value of servicing rights was $33.8 million, which was determined using a discount rate of 9% and a conditional prepayment rate of 10%.
NOTE 11 – 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 June 30, 2022, 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:
(dollars in thousands) June 30, 2022December 31, 2021
InvestmentAccounting MethodInvestment
Unfunded
Commitment (1)
InvestmentUnfunded
Commitment
LIHTCProportional amortization$71,973 $44,163 $68,989 $41,355 
FHTCEquity20,821 11,186 21,241 15,252 
NMTCConsolidation28,355  18,727 — 
Renewable EnergyEquity1,519  1,985 — 
Total $122,668 $55,349 $110,942 $56,607 
(1)All commitments will be paid by Old National by December 31, 2027.
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The following table summarizes the amortization expense and tax benefit recognized for Old National’s qualified affordable housing projects and other tax credit investments:
(dollars in thousands)
Amortization
Expense (1)
Tax Expense
(Benefit)
Recognized (2)
Three Months Ended June 30, 2022  
LIHTC$1,240 $(1,650)
FHTC215 (263)
NMTC1,100 (1,375)
Renewable Energy210  
Total$2,765 $(3,288)
Three Months Ended June 30, 2021
LIHTC$863 $(1,136)
FHTC1,228 (574)
NMTC375 (462)
Renewable Energy210 — 
Total$2,676 $(2,172)
Six Months Ended June 30, 2022
LIHTC$2,493 $(3,300)
FHTC420 (514)
NMTC2,201 (2,750)
Renewable Energy420  
Total$5,534 $(6,564)
Six Months Ended June 30, 2021
LIHTC$1,725 $(2,272)
FHTC1,359 (1,256)
NMTC750 (925)
Renewable Energy906 (562)
Total$4,740 $(5,015)
(1)The amortization expense for the LIHTC investments is included in our income tax expense. The amortization expense for the FHTC, NMTC, 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, NMTC, and Renewable Energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) and deferred tax liability of the investments’ income (loss).
36


NOTE 12 – 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
Six Months
Ended
June 30,
2022
At
December 31,
2021
At or for the
Six Months
Ended
June 30,
2021
(dollars in thousands)
Outstanding at period end$476,173 $392,275 $396,129 
Average amount outstanding during the period458,459 N/A402,478 
Maximum amount outstanding at any month-end during the period509,275 N/A405,278 
Weighted-average interest rate:
During the period0.08 %N/A0.11 %
At period end0.08 %0.10 %0.09 %
The following table presents the contractual maturity of our secured borrowings and class of collateral pledged:
 At June 30, 2022
 Remaining Contractual Maturity of the Agreements
(dollars in thousands)Overnight and ContinuousUp to
30 Days
 30-90 DaysGreater Than 90 daysTotal
Repurchase Agreements:     
U.S. Treasury and agency securities$475,992 $ $181 $ $476,173 
Total$475,992 $ $181 $ $476,173 
The fair value of securities pledged to secure repurchase agreements may decline.  Old National has pledged securities valued at 115% of the gross outstanding balance of repurchase agreements at June 30, 2022 to manage this risk.
NOTE 13 – FEDERAL HOME LOAN BANK ADVANCES
The following table summarizes Old National Bank’s FHLB advances:
(dollars in thousands)June 30,
2022
December 31,
2021
FHLB advances (fixed rates 0.00% to 4.96%
   and variable rates 0.91% to 1.60%) maturing
   July 2022 to January 2041
$3,303,178 $1,902,655 
Fair value hedge basis adjustments and unamortized
   prepayment fees
(19,215)(16,636)
Total$3,283,963 $1,886,019 
FHLB advances had weighted-average rates of 1.68% at June 30, 2022 and 1.30% at December 31, 2021. Investment securities and residential real estate loans collateralize these borrowings up to 140% of outstanding debt.
At June 30, 2022, total unamortized prepayment fees related to debt modifications completed in prior years totaled $23.2 million, compared to $26.2 million at December 31, 2021.
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Contractual maturities of FHLB advances at June 30, 2022 were as follows:
(dollars in thousands) 
Due in 2022$227,500 
Due in 2023100,150 
Due in 2024225,243 
Due in 2025550,285 
Due in 2026100,000 
Thereafter2,100,000 
Fair value hedge basis adjustments and unamortized prepayment fees(19,215)
Total$3,283,963 

NOTE 14 – OTHER BORROWINGS
The following table summarizes Old National’s other borrowings:
(dollars in thousands)June 30,
2022
December 31,
2021
Old National Bancorp:  
Senior unsecured notes (fixed rate 4.125%) maturing August 2024$175,000 $175,000 
Unamortized debt issuance costs related to senior unsecured notes(325)(403)
Subordinated debentures (fixed rate 5.875%) maturing September 2026150,000 — 
Junior subordinated debentures (variable rates of
   2.64% to 6.95%) maturing July 2031 to September 2037
136,643 42,000 
Other basis adjustments25,942 (3,044)
Old National Bank:
Finance lease liabilities15,910 17,233 
Subordinated debentures (variable rate 5.64%) maturing October 202512,000 12,000 
Leveraged loans for NMTC (fixed rates of 1.00% to 1.43%)
   maturing December 2046 to December 2052
77,550 51,045 
Other29,994 2,839 
Total other borrowings$622,714 $296,670 
Contractual maturities of other borrowings at June 30, 2022 were as follows:
(dollars in thousands) 
Due in 2022$1,232 
Due in 20232,529 
Due in 2024177,631 
Due in 202514,693 
Due in 2026151,501 
Thereafter219,517 
Unamortized debt issuance costs and other basis adjustments55,611 
Total$622,714 
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 and mature on August 15, 2024.
Junior Subordinated Debentures
Junior subordinated debentures related to trust preferred securities are classified in “other borrowings.”  Junior subordinated debentures qualify as Tier 2 capital for regulatory purposes, subject to certain limitations.
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
38


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.
The following table summarizes the terms of our outstanding junior subordinated debentures at June 30, 2022:
(dollars in thousands)   
Rate at
June 30,
2022
 
Name of TrustIssuance DateIssuance
Amount
RateMaturity Date
St. Joseph Capital Trust IIMarch 2005$5,155 3-month LIBOR plus 1.75%3.78%March 17, 2035
Anchor Capital Trust IIIAugust 20055,000 3-month LIBOR plus 1.55%3.80%September 30, 2035
Home Federal Statutory
   Trust I
September 200615,464 3-month LIBOR plus 1.65%3.48%September 15, 2036
Monroe Bancorp Capital
   Trust I
July 20063,093 3-month LIBOR plus 1.60%2.64%October 7, 2036
Tower Capital Trust 3December 20069,279 3-month LIBOR plus 1.69%3.29%March 1, 2037
Monroe Bancorp Statutory
   Trust II
March 20075,155 3-month LIBOR plus 1.60%3.43%June 15, 2037
First Midwest Capital Trust INovember 200337,825 6.95% fixed6.95%December 1, 2033
Great Lakes Statutory Trust IIDecember 20056,186 3-month LIBOR plus 1.40%3.23%December 15, 2035
Great Lakes Statutory Trust IIIJune 20078,248 3-month LIBOR plus 1.70%3.53%September 15, 2037
Northern States Statutory Trust ISeptember 200510,310 3-month LIBOR plus 1.80%3.63%September 15, 2035
Bridgeview Statutory Trust IJuly 200115,464 3-month LIBOR plus 3.58%4.87%July 31, 2031
Bridgeview Capital Trust IIDecember 200215,464 3-month LIBOR plus 3.35%4.39%January 7, 2033
Total$136,643 
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 had 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%.
On February 15, 2022, Old National assumed $150.0 million of subordinated fixed rate notes related to the First Midwest merger. The subordinated debentures have a 5.875% fixed rate of interest through the September 29, 2026 maturity date.
Leveraged Loans
The leveraged loans are directly related to the New Markets Tax Credit structure. As part of the transaction structure, Old National has the right to sell its interest in the entity that received the leveraged loans at an agreed upon price to the leveraged lender at the end of the New Markets Tax Credit seven year compliance period. See Note 11 to the consolidated financial statements for additional information on the Company’s New Markets Tax Credit investments.
Finance Lease Liabilities
Old National has long-term finance lease liabilities for certain banking centers and equipment totaling $15.9 million at June 30, 2022.  See Note 8 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities.
39


NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes within each classification of AOCI, net of 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 June 30, 2022     
Balance at beginning of period$(314,364)$(16,727)$(7,132)$24 $(338,199)
Other comprehensive income (loss) before
   reclassifications
(122,776)(108,266)(2,578) (233,620)
Amounts reclassified from AOCI to income (1)
65 2,794 (165)(8)2,686 
Balance at end of period$(437,075)$(122,199)$(9,875)$16 $(569,133)
Three Months Ended June 30, 2021
Balance at beginning of period$86,495 $— $5,525 $(111)$91,909 
Other comprehensive income (loss) before
   reclassifications
(26,886)— (959)— (27,845)
Amounts reclassified from AOCI to income (1)
(514)— (1,325)37 (1,802)
Balance at end of period$59,095 $— $3,241 $(74)$62,262 
Six Months Ended June 30, 2022
Balance at beginning of period$(2,950)$ $543 $32 $(2,375)
Other comprehensive income (loss) before
   reclassifications
(433,929)(125,229)(9,748) (568,906)
Amounts reclassified from AOCI to income (1)
(196)3,030 (670)(16)2,148 
Balance at end of period$(437,075)$(122,199)$(9,875)$16 $(569,133)
Six Months Ended June 30, 2021
Balance at beginning of period$145,335 $— $2,584 $(148)$147,771 
Other comprehensive income (loss) before
   reclassifications
(84,173)— 2,094 — (82,079)
Amounts reclassified from AOCI to income (1)
(2,067)— (1,437)74 (3,430)
Balance at end of period$59,095 $— $3,241 $(74)$62,262 
(1)See tables below for details about reclassifications to income.
40


The following table summarizes the significant amounts reclassified out of each component of AOCI for the three months ended June 30, 2022 and 2021:
 Three Months Ended
June 30,
 
(dollars in thousands)20222021 
Details about AOCI ComponentsAmount Reclassified
from AOCI
Affected Line Item in the
Statement of Income
Unrealized gains and losses on
   available-for-sale securities
$(85)$692 Debt securities gains (losses), net
 20 (178)Income tax (expense) benefit
 $(65)$514 Net income
Unrealized gains and losses on
   held-to-maturity securities
$(3,692)$— Interest income (expense)
 898 — Income tax (expense) benefit
 $(2,794)$— Net income
Gains and losses on cash flow hedges
   Interest rate contracts
$219 $1,756 Interest income (expense)
 (54)(431)Income tax (expense) benefit
 $165 $1,325 Net income
Amortization of defined benefit
   pension items
 
Actuarial gains (losses)$10 $(49)Salaries and employee benefits
 (2)12 Income tax (expense) benefit
 $8 $(37)Net income
Total reclassifications for the period$(2,686)$1,802 Net income
The following table summarizes the significant amounts reclassified out of each component of AOCI for the six months ended June 30, 2022 and 2021:
 Six Months Ended
June 30,
 
(dollars in thousands)20222021 
Details about AOCI ComponentsAmount Reclassified
from AOCI
Affected Line Item in the
Statement of Income
Unrealized gains and losses on
   available-for-sale securities
$257 $2,685 Debt securities gains (losses), net
 (61)(618)Income tax (expense) benefit
 $196 $2,067 Net income
Unrealized gains and losses on
   held-to-maturity securities
$(4,002)$— Interest income (expense)
 972 — Income tax (expense) benefit
 $(3,030)$— Net income
Gains and losses on cash flow hedges
   Interest rate contracts
$888 $1,905 Interest income (expense)
 (218)(468)Income tax (expense) benefit
 $670 $1,437 Net income
Amortization of defined benefit
   pension items
 
Actuarial gains (losses)$21 $(98)Salaries and employee benefits
 (5)24 Income tax (expense) benefit
 $16 $(74)Net income
Total reclassifications for the period$(2,148)$3,430 Net income
41


NOTE 16 – SHARE-BASED COMPENSATION
At June 30, 2022, Old National had 9.1 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan (the “ICP”).  An amendment to increase the number of shares authorized for issuance under the ICP by 9.0 million was approved on May 18, 2022. The granting of awards to key employees is typically in the form of restricted stock awards or units.
Restricted Stock Awards
Old National granted 0.9 million time-based restricted stock awards to certain key employees during the six months ended June 30, 2022. Additionally, in connection with the First Midwest merger, each restricted stock award of First Midwest common stock that was outstanding, unvested, and unsettled at the merger date was assumed and equitably converted into a restricted stock award of Old National common stock subject to the same vested terms and conditions, resulting in an issuance of an aggregate 0.9 million restricted stock awards of Old National common stock. Shares generally vest annually over a three year period, cliff vest in three years from the grant date, or vest 50% on the second anniversary of the grant date and 50% on the third anniversary of the grant date.  At June 30, 2022, unvested shares totaled 2.0 million. Compensation expense is measured as the fair value of the award at grant date recognized over the service period of the award. Shares are subject to certain restrictions and risk of forfeiture by the participants.  At June 30, 2022, unrecognized compensation expense for unvested restricted stock awards was $23.6 million.  
Old National recorded share-based compensation expense, net of tax, related to restricted stock awards of $2.9 million during the three months ended June 30, 2022 and $5.4 million for the six months ended June 30, 2022, compared to $0.7 million for the three months ended June 30, 2021 and $1.4 million for the six months ended June 30, 2021.
Restricted Stock Units
Old National granted 1.2 million shares of performance based restricted stock units to certain key officers during the six months ended June 30, 2022. Additionally, in connection with the First Midwest merger, each time-based or performance-based restricted stock unit award of First Midwest common stock that was outstanding, unvested, and unsettled at the merger date was assumed and equitably converted into a time-based restricted stock unit award of Old National common stock subject to the same vested terms and conditions (other than performance conditions), resulting in an issuance of an aggregate 0.7 million restricted stock units of Old National common stock. Shares vest at the end of a 24 or 36 month period based on the achievement of certain targets. If targets are achieved prior to the end of the 24 month performance period, vesting can be accelerated. At June 30, 2022, unvested shares totaled 2.1 million. Compensation expense is recognized on a straight line basis over the performance period of the award. For certain awards, the level of performance could increase or decrease the number of shares earned.  Shares are subject to certain restrictions and risk of forfeiture by the participants.  As of June 30, 2022, there was $21.9 million of unrecognized compensation cost related to unvested restricted stock units.
Old National recorded share-based compensation expense, net of tax, related to restricted stock units of $3.0 million during the three months ended June 30, 2022 and $5.4 million for the six months ended June 30, 2022, compared to $0.7 million during the three months ended June 30, 2021 and $1.3 million for the six months ended June 30, 2021.
Stock Options and Appreciation Rights
Old National has not granted stock options since 2009. However, Old National did acquire stock options and stock appreciation rights through its prior acquisitions. Old National recorded no incremental expense associated with the conversion of these options and stock appreciation rights. At June 30, 2022, 8 thousand stock appreciation rights remained outstanding.
42


NOTE 17 – 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
June 30,
Six Months Ended
June 30,
(dollars in thousands)2022202120222021
Provision at statutory rate of 21%$29,389 $16,117 $21,766 $38,051 
Tax-exempt income:
Tax-exempt interest(3,413)(2,762)(6,406)(5,541)
Section 291/265 interest disallowance38 30 66 63 
Company-owned life insurance income(938)(556)(1,656)(1,099)
Tax-exempt income(4,313)(3,288)(7,996)(6,577)
State income taxes4,085 2,200 758 5,173 
Interim period effective rate adjustment(3,967)(662)3,073 (2,437)
Tax credit investments - federal(1,292)(1,430)(2,561)(2,523)
Other, net1,062 1,023 1,210 (97)
Income tax expense (benefit)$24,964 $13,960 $16,250 $31,590 
Effective tax rate17.8 %18.2 %15.7 %17.4 %
The provision for income taxes was recorded at June 30, 2022 and 2021 based on the current estimate of the effective annual rate.
The lower effective tax rate during the three and six months ended June 30, 2022 compared to the same periods in 2021 reflected the recognition of $1.7 million of previously unrealized tax benefits in the three months ended June 30, 2022, partially offset by higher post-merger estimated state effective tax rates. The six months ended June 30, 2022 also reflected additional one-time benefits of $1.2 million related to share-based payments and $0.9 million related to the remeasurement of the Company’s deferred taxes post-merger.
Net Deferred Tax Assets
Net deferred tax assets are included in other assets on the balance sheet. At June 30, 2022, net deferred tax assets totaled $337.5 million, compared to $32.9 million at December 31, 2021. The increase in net deferred tax assets was driven by $180.1 million of deferred tax assets related to the market value adjustments of certain investments and $126.6 million related to the merger with First Midwest.
The Company’s retained earnings at June 30, 2022 included an appropriation for acquired thrifts’ tax bad debt allowances totaling $58.6 million for which no provision for federal or state income taxes has been made.  If, in the future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates.
No valuation allowance was recorded at June 30, 2022 or December 31, 2021 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 $90.4 million at June 30, 2022 and $36.7 million at December 31, 2021.  This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016 and First Midwest in 2022.  If not used, the federal net operating loss carryforwards will begin expiring in 2030 and later.  Old National has recorded state net operating loss carryforwards totaling $133.9 million at June 30, 2022 and $116.1 million at December 31, 2021.  If not used, the state net operating loss carryforwards will expire from 2027 to 2036.
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 federal and recorded state net operating loss carryforwards will be used prior to expiration.
43


NOTE 18 – DERIVATIVE FINANCIAL INSTRUMENTS
As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, collars, caps, and floors.  The notional amount does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts.  Old National’s exposure is limited to the termination value of the contracts rather than the notional, principal, or contract amounts.  There are provisions in our agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold.  Exposures in excess of the agreed thresholds are collateralized.  In addition, we minimize credit risk through credit approvals, limits, and monitoring procedures.
Derivatives Designated as Hedges
Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner:
Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income.
Fair value hedges: changes in fair value are recognized concurrently in earnings.
As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings.
The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item.
Cash Flow Hedges
Interest rate swaps of certain borrowings were designated as cash flow hedges totaling $150.0 million notional amount at both June 30, 2022 and December 31, 2021. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $900.0 million notional amount at June 30, 2022 and $600.0 million notional amount at December 31, 2021. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.
Old National has designated its interest rate collars as cash flow hedges.  The structure of these instruments is such that Old National pays the counterparty an incremental amount if the collar index exceeds the cap rate.  Conversely, Old National receives an incremental amount if the index falls below the floor rate.  No payments are required if the collar index falls between the cap and floor rates. 
Old National has designated its interest rate floor transactions as cash flow hedges.  The structure of these instruments is such that Old National receives an incremental amount if the index falls below the floor strike rate. No payments are required if the index remains above the floor strike rate.
Fair Value Hedges
Interest rate swaps of certain borrowings were designated as fair value hedges totaling $352.5 million notional amount at June 30, 2022 and $377.5 million notional amount at December 31, 2021. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $910.0 million notional amount at both June 30, 2022 and December 31, 2021. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.
44


The following table summarizes Old National’s derivatives designated as hedges:
June 30, 2022December 31, 2021
Fair ValueFair Value
(dollars in thousands)Notional
Assets (1)
Liabilities (2)
Notional
Assets (1)
Liabilities (2)
Cash flow hedges
Interest rate collars and floors on loan pools$900,000 $5,493 $24,005 $600,000 $459 $2,173 
Interest rate swaps on borrowings (3)
150,000   150,000 4,316 — 
Fair value hedges
Interest rate swaps on investment securities (3)
909,957   909,957 10,961 14,643 
Interest rate swaps on borrowings (3)
352,500 66  377,500 2,475 96 
Total$5,559 $24,005 $18,211 $16,912 
(1)Derivative assets are included in other assets on the balance sheet.
(2)Derivative liabilities are included in other liabilities on the balance sheet.
(3)The fair values of certain counterparty interest rate swaps are zero due to the settlement of centrally-cleared variation margin rules.
The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income were as follows:
(dollars in thousands)Gain (Loss)
Recognized
in Income on
Related
Hedged
Items
Derivatives in
Fair Value Hedging
Relationships
Location of Gain or
(Loss) Recognized in
Income on Derivative
Gain (Loss)
Recognized
in Income on
Derivative
Hedged Items
in Fair Value
Hedging
Relationships
Location of Gain or
(Loss) Recognized in
in Income on Related
Hedged Item
Three Months Ended
June 30, 2022
Interest rate contractsInterest income/(expense)$(2,524)Fixed-rate debtInterest income/(expense)$2,600 
Interest rate contractsInterest income/(expense)53,779 Fixed-rate
investment
securities
Interest income/(expense)(53,762)
Total$51,255 $(51,162)
Three Months Ended
June 30, 2021
Interest rate contractsInterest income/(expense)$(1,251)Fixed-rate debtInterest income/(expense)$1,251 
Interest rate contractsInterest income/(expense)(45,829)Fixed-rate
investment
securities
Interest income/(expense)45,481 
Total$(47,080)$46,732 
Six Months Ended
June 30, 2022
Interest rate contractsInterest income/(expense)$(7,357)Fixed-rate debtInterest income/(expense)$7,555 
Interest rate contractsInterest income/(expense)111,433 Fixed-rate
investment
securities
Interest income/(expense)(111,791)
Total$104,076 $(104,236)
Six Months Ended
June 30, 2021
Interest rate contractsInterest income/(expense)$(2,826)Fixed-rate debtInterest income/(expense)$2,829 
Interest rate contractsInterest income/(expense)Fixed-rate
investment
securities
Interest income/(expense)(64)
Total$(2,817)$2,765 
45


The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income were as follows:
Three Months Ended
June 30,
Three Months Ended
June 30,
(dollars in thousands) 2022202120222021
Derivatives in
Cash Flow Hedging
Relationships
Location of Gain or
(Loss) Reclassified
from AOCI into Income
Gain (Loss)
Recognized in Other
Comprehensive
Income on Derivative
Gain (Loss)
Reclassified from
AOCI into
Income
Interest rate contractsInterest income/(expense)$(3,418)$(1,272)$219 $1,756 
  Six Months Ended
June 30,
Six Months Ended
June 30,
 2022202120222021
Derivatives in
Cash Flow Hedging
Relationships
Location of Gain or
(Loss) Reclassified
from AOCI into Income
Gain (Loss)
Recognized in Other
Comprehensive
Income on Derivative
Gain (Loss)
Reclassified from
AOCI into
Income
Interest rate contractsInterest income/(expense)$(12,924)$2,776 $888 $1,905 
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 $2.4 million will be reclassified to interest income and $7.2 million will be reclassified to interest expense.
Derivatives Not Designated as Hedges
Commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.  These derivative contracts do not qualify for hedge accounting.  At June 30, 2022, the notional amounts of the interest rate lock commitments were $94.7 million and forward commitments were $100.1 million.  At December 31, 2021, the notional amounts of the interest rate lock commitments were $90.7 million and forward commitments were $126.1 million.  It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.
Old National also enters into derivative instruments for the benefit of its clients.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $4.9 billion at June 30, 2022.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $2.4 billion at December 31, 2021.  These derivative contracts do not qualify for hedge accounting.  These instruments include interest rate swaps, caps, and collars.  Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of clients by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.
Old National enters into derivative financial instruments as part of its foreign currency risk management strategies.  These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its clients.  Old National does not designate these foreign currency forward contracts for hedge accounting treatment.
46


The following table summarizes Old National’s derivatives not designated as hedges:
June 30, 2022December 31, 2021
Fair ValueFair Value
(dollars in thousands)Notional
Assets (1)
Liabilities (2)
Notional
Assets (1)
Liabilities (2)
Interest rate lock commitments$94,678 $300 $ $90,731 $2,352 $— 
Forward mortgage loan contracts100,089 920  126,107 242 — 
Customer interest rate swaps4,931,862 8,821 194,038 2,433,177 52,439 11,658 
Counterparty interest rate swaps (3)
4,931,862 60,108 7,220 2,433,177 583 12,956 
Customer foreign currency forward contracts15,406 568  10,292 399 — 
Counterparty foreign currency forward contracts15,328  514 10,205 — 346 
Total$70,717 $201,772 $56,015 $24,960 
(1)Derivative assets are included in other assets on the balance sheet.
(2)Derivative liabilities are included in other liabilities on the balance sheet.
(3)The fair values of certain counterparty interest rate swaps are zero due to the settlement of centrally-cleared variation margin rules.
The effect of derivatives not designated as hedging instruments on the consolidated statements of income were as follows:
Three Months Ended
June 30,
(dollars in thousands) 20222021
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)$449 $(75)
Mortgage contractsMortgage banking revenue(1,503)(5,578)
Foreign currency contractsOther income/(expense)65 (85)
Total $(989)$(5,738)
  Six Months Ended
June 30,
 20222021
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)$950 $310 
Mortgage contractsMortgage banking revenue(1,374)(2,317)
Foreign currency contractsOther income/(expense)38 (49)
Total $(386)$(2,056)
(1)Includes the valuation differences between the customer and offsetting swaps.
NOTE 19 – COMMITMENTS AND CONTINGENCIES
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 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 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
47


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 $8.2 billion and standby letters of credit of $223.0 million at June 30, 2022.  At June 30, 2022, approximately 10% of the loan commitments had fixed rates, with the remainder having floating rates ranging from 0% to 21%.  At December 31, 2021, loan commitments totaled $4.5 billion and standby letters of credit totaled $75.7 million.  These commitments are not reflected in the consolidated financial statements.  The allowance for unfunded loan commitments totaled $22.0 million at June 30, 2022 and $10.9 million at December 31, 2021. The increase in the allowance for credit losses on unfunded loan commitments was driven by the merger with First Midwest.
Old National had credit extensions with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients totaling $6.7 million at June 30, 2022 and $21.8 million December 31, 2021.  Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $6.5 million at June 30, 2022 and December 31, 2021.  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 June 30, 2022, the conversion ratio was 1.6059.  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 June 30, 2022 are carried at a zero cost basis and are included in other assets with our equity securities that have no readily determinable fair value.
NOTE 20 – 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 June 30, 2022, the notional amount of standby letters of credit was $223.0 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.5 million.  At December 31, 2021, the notional amount of standby letters of credit was $75.7 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 $230.5 million at June 30, 2022.
48


NOTE 21 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Old National used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment securities and equity securities: The fair values for investment securities and equity 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).
49


Recurring Basis
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which we have elected the fair value option, are summarized below: 
Fair Value Measurements at June 30, 2022 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial Assets    
Equity securities$55,879 $55,879 $ $ 
Investment securities available-for-sale:
U.S. Treasury402,783 402,783   
U.S. government-sponsored entities and agencies1,242,557  1,242,557  
Mortgage-backed securities - Agency4,827,708  4,827,708  
States and political subdivisions720,041  720,041  
Pooled trust preferred securities11,101  11,101  
Other securities363,511  363,511  
Residential loans held for sale26,217  26,217  
Derivative assets76,276  76,276  
Financial Liabilities
Derivative liabilities225,777  225,777  
  Fair Value Measurements at December 31, 2021 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial Assets    
Equity securities$13,211 $13,211 $— $— 
Investment securities available-for-sale:
U.S. Treasury235,584 235,584 — — 
U.S. government-sponsored entities and agencies1,542,773 — 1,542,773 — 
Mortgage-backed securities - Agency3,698,831 — 3,698,831 — 
States and political subdivisions1,654,986 — 1,654,986 — 
Pooled trust preferred securities9,496 — — 9,496 
Other securities240,396 — 240,396 — 
Residential loans held for sale35,458 — 35,458 — 
Derivative assets74,226 — 74,226 — 
Financial Liabilities
Derivative liabilities41,872 — 41,872 — 
50


The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
(dollars in thousands)Pooled Trust
Preferred Securities
Three Months Ended June 30, 2022 
Balance at beginning of period$9,665 
Accretion of discount7 
Increase in fair value of securities1,429 
Transfers out of Level 3(11,101)
Balance at end of period$ 
Three Months Ended June 30, 2021
Balance at beginning of period$8,210 
Accretion of discount
Sales/payments received(12)
Increase in fair value of securities1,185 
Balance at end of period$9,388 
Six Months Ended June 30, 2022
Balance at beginning of period$9,496 
Accretion of discount12 
Increase in fair value of securities1,593 
Transfers out of Level 3(11,101)
Balance at end of period$ 
Six Months Ended June 30, 2021
Balance at beginning of period$7,913 
Accretion of discount10 
Sales/payments received(27)
Increase in fair value of securities1,492 
Balance at end of period$9,388 
The accretion of discounts on securities in the table above is included in interest income.  The increase or decrease in the fair value of securities in the table above is included in the unrealized holding gains (losses) for the period in the statement of other comprehensive income. An increase in fair value is reflected in the balance sheet as an increase in the fair value of investment securities available-for-sale, an increase in accumulated other comprehensive income, which is included in shareholders’ equity, and a decrease in other assets related to the tax impact. 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. Old National’s pooled trust preferred securities with a fair value of $11.1 million were transferred out of Level 3 and into Level 2 in the three and six months ended June 30, 2022 because of available observable market data for these investments.
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The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:
(dollars in thousands)Fair ValueValuation TechniquesUnobservable Input
Range (Weighted Average) (4)
December 31, 2021   
Pooled trust preferred securities$9,496 Discounted cash flow
Constant prepayment rate (1)
0.00%
  
Additional asset defaults (2)
5.7% - 8.5% (6.5%)
  
Expected asset recoveries (3)
0.0% - 46.0% (14.1%)
(1)Assuming no prepayments.
(2)Each currently performing pool asset is assigned a default probability based on the banking environment, which is adjusted for specific issuer evaluation, of 0%, 50%, or 100%.
(3)Each currently defaulted pool asset is assigned a recovery probability based on specific issuer evaluation of 0%, 25%, or 100%.
(4)Unobservable inputs are weighted by the estimated number of defaults and current performing collateral of the instruments.
Significant changes in any of the unobservable inputs used in the fair value measurement in isolation would have resulted in a significant change to the fair value measurement.  The pooled trust preferred securities Old National owns are subordinate note classes that rely on an ongoing cash flow stream to support their values.  The senior note classes receive the benefit of prepayments to the detriment of subordinate note classes since the ongoing interest cash flow stream is reduced by the early redemption.  Generally, a change in prepayment rates or additional pool asset defaults would have an impact that is directionally opposite from a change in the expected recovery of a defaulted pool asset.
Non-Recurring Basis
Assets measured at fair value at June 30, 2022 on a non-recurring basis are summarized below:
  Fair Value Measurements at June 30, 2022 Using
(dollars in thousands)Carrying
Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Collateral Dependent Loans:    
Commercial loans$15,443 $ $ $15,443 
Commercial real estate loans54,248   54,248 
Foreclosed Assets:
Commercial520   520 
Commercial and commercial real estate loans that are deemed collateral dependent are valued using the discounted cash flows.  The liquidation amounts are based on the fair value of the underlying collateral using the most recently available appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral.  These commercial and commercial real estate loans had a principal amount of $84.5 million, with a valuation allowance of $14.8 million at June 30, 2022.  Old National recorded provision expense associated with these loans totaling $12.8 million for the three months ended June 30, 2022 and $28.6 million for the six months ended June 30, 2022.  Old National recorded provision expense associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $0.2 million for the three months ended June 30, 2021 and provision recoveries totaling $38 thousand for the six months ended June 30, 2021.
Other real estate owned and other repossessed property is measured at fair value less costs to sell on a non-recurring basis and had a net carrying amount of $0.5 million at June 30, 2022. There were $0.1 million write-downs of other real estate owned for the three months ended June 30, 2022 and $0.3 million for the six months ended June 30, 2022. There were no writedowns of other real estate owned for the three months ended June 30, 2021 and $23 thousand for the six months ended June 30, 2021.
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
52


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).  There was no valuation allowance for loan servicing rights with impairments at June 30, 2022.  Old National recorded immaterial recoveries associated with these loan servicing rights during the three months ended June 30, 2022. Old National recorded recoveries associated with these loan servicing rights totaling $46 thousand for the six months ended June 30, 2022. There were recoveries of $41 thousand for the three months ended June 30, 2021 and $1.3 million for the six months ended June 30, 2021.
Assets measured at fair value at December 31, 2021 on a non-recurring basis are summarized below:
  Fair Value Measurements at December 31, 2021 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Collateral Dependent Loans:    
Commercial loans$2,634 $— $— $2,634 
Commercial real estate loans16,308 — — 16,308 
Loan servicing rights140 — 140 — 
At December 31, 2021, commercial and commercial real estate loans that are deemed collateral dependent had a principal amount of $21.0 million, with a valuation allowance of $2.1 million.
The valuation allowance for loan servicing rights with impairments at December 31, 2021 totaled $46 thousand.
The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:
(dollars in thousands)Fair ValueValuation TechniquesUnobservable Input
Range (Weighted Average) (1)
June 30, 2022    
Collateral Dependent Loans    
Commercial loans$15,443 DiscountedDiscount for type of property,3% - 30% (12%)
 cash flowage of appraisal, and current status
Commercial real estate loans54,248 DiscountedDiscount for type of property,2% - 37% (16%)
cash flowage of appraisal, and current status
Foreclosed Assets
Commercial real estate (1)
520 Fair value ofDiscount for type of property,19%
collateralage of appraisal, and current status
December 31, 2021  
Collateral Dependent Loans  
Commercial loans$2,634 DiscountedDiscount for type of property,14% - 15% (14%)
 cash flowage of appraisal, and current status
Commercial real estate loans16,308 DiscountedDiscount for type of property,6% - 10% (8%)
 cash flowage of appraisal, and current status
(1)Unobservable inputs were weighted by the relative fair value of the instruments.
Fair Value Option
Old National may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income.  After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur.  The fair value election may not be revoked once an election is made.
Residential Loans Held For Sale
Old National has elected the fair value option for residential loans held for sale.  For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the financial assets (except any that are on nonaccrual status).  None of these loans are 90 days or more past due, nor are
53


any on nonaccrual status.  Included in the income statement is interest income for loans held for sale totaling $0.7 million for the three months ended June 30, 2022 and $1.2 million for the six months ended June 30, 2022, compared to $0.4 million for the three months ended June 30, 2021 and $0.8 million for the six months ended June 30, 2021.
Old National has elected the fair value option for newly originated conforming fixed-rate and adjustable-rate first mortgage loans held for sale.  These loans are intended for sale and are hedged with derivative instruments.  Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.  The fair value option was not elected for loans held for investment.
The difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was as follows: 
(dollars in thousands)Aggregate Fair ValueDifference Contractual Principal
June 30, 2022   
Residential loans held for sale$26,217 $283 $25,934 
December 31, 2021
Residential loans held for sale$35,458 $1,342 $34,116 
Accrued interest at period end is included in the fair value of the instruments.
The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value:
(dollars in thousands)Other
Gains and (Losses)
Interest IncomeInterest (Expense)Total Changes
in Fair Values
Included in
Current Period Earnings
Three Months Ended June 30, 2022    
Residential loans held for sale$278 $9 $ $287 
Three Months Ended June 30, 2021
Residential loans held for sale$790 $— $(1)$789 
Six Months Ended June 30, 2022
Residential loans held for sale$(1,065)$9 $(3)$(1,059)
Six Months Ended June 30, 2021
Residential loans held for sale$(1,590)$$(1)$(1,589)
54


Financial Instruments Not Carried at Fair Value
The carrying amounts and estimated fair values of financial instruments not carried at fair value were as follows: 
  Fair Value Measurements at June 30, 2022 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Financial Assets    
Cash, due from banks, money market,
   and other interest-earning investments
$797,964 $797,964 $ $ 
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies815,833  720,435  
Mortgage-backed securities - Agency1,149,212  1,089,442  
State and political subdivisions1,119,141  969,413  
Loans, net:
Commercial8,819,983   8,837,714 
Commercial real estate11,653,818   11,711,358 
Residential real estate6,059,328   5,740,944 
Consumer credit2,732,516   2,880,432 
Accrued interest receivable157,079 699 51,770 104,610 
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits$12,388,379 $12,388,379 $ $ 
Checking, NOW, savings, and money market
   interest-bearing deposits
20,642,980 20,642,980   
Time deposits2,507,616  2,476,746  
Federal funds purchased and interbank borrowings1,561 1,561   
Securities sold under agreements to repurchase476,173 476,173   
FHLB advances3,283,963  3,257,920  
Other borrowings622,714  573,849  
Accrued interest payable10,148  10,148  
Standby letters of credit450   450 
Off-Balance Sheet Financial Instruments
Commitments to extend credit$ $ $ $2,610 
55


  Fair Value Measurements at December 31, 2021 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Financial Assets    
Cash, due from banks, money market,
   and other interest-earning investments
$822,019 $822,019 $— $— 
Loans, net:
Commercial3,363,175 — — 3,335,009 
Commercial real estate6,315,574 — — 6,211,854 
Residential real estate2,245,942 — — 2,216,900 
Consumer credit1,569,814 — — 1,582,600 
Accrued interest receivable84,109 688 35,790 47,631 
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits$6,303,106 $6,303,106 $— $— 
Checking, NOW, savings, and money market
   interest-bearing deposits
11,305,676 11,305,676 — — 
Time deposits960,413 — 968,658 — 
Federal funds purchased and interbank borrowings276 276 — — 
Securities sold under agreements to repurchase392,275 392,275 — — 
FHLB advances1,886,019 — 1,935,140 — 
Other borrowings296,670 — 311,532 — 
Accrued interest payable5,496 — 5,496 — 
Standby letters of credit454 — — 454 
Off-Balance Sheet Financial Instruments
Commitments to extend credit$— $— $— $4,678 
The methods utilized to measure the fair value of financial instruments at June 30, 2022 and December 31, 2021 represent an approximation of exit price, however, an actual exit price may differ.
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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 six months ended June 30, 2022 and 2021, and financial condition as of June 30, 2022, compared to December 31, 2021.  This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes, as well as our 2021 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, descriptions of Old National’s financial condition, results of operations, asset and credit quality trends, profitability and business plans or opportunities. Forward-looking statements can be identified by the use of the words “anticipate,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “should,” and “will,” and other words of similar meaning. These forward-looking statements express management’s current expectations or forecasts of future events and, by their nature, are subject to risks and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those in such statements. Factors that might cause such a difference include, but are not limited to: the duration, extent, and severity of the COVID-19 pandemic and related variants and mutations, including the continued effects on our business, operations, and employees as well as the business of our customers; competition; government legislation, regulations and policies; ability of Old National to execute its business plan, including the completion of the integration related to the merger between Old National and First Midwest, and the achievement of the synergies and other benefits from the merger; unanticipated changes in our liquidity position, including but not limited to changes in our access to sources of liquidity and capital to address our liquidity needs; changes in economic conditions which could materially impact credit quality trends and the ability to generate loans and gather deposits; market, economic, operational, liquidity, credit, and interest rate risks associated with our business; our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses; uncertainty about the discontinued use of LIBOR and the transition to an alternative rate; failure or circumvention of our internal controls; operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cybersecurity, technological changes, vendor issues, business interruption, and fraud risks; significant changes in accounting, tax or regulatory practices or requirements; new legal obligations or liabilities or unfavorable resolutions of litigation; disruptive technologies in payment systems and other services traditionally provided by banks; failure or disruption of our information systems; computer hacking and other cybersecurity threats; other matters discussed in this report; and other factors identified in our Annual Report on Form 10-K for the year ended December 31, 2021 and other filings with the SEC. These forward-looking statements are made only as of the date of this report and are not guarantees of future results or performance.
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 or outcomes 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 after the date of this report.  You are advised to consult further disclosures we may make on related subjects in our filings with the SEC.
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.
57


FINANCIAL HIGHLIGHTS
The following table sets forth certain financial highlights of Old National:
Three Months EndedSix Months Ended
(dollars and shares in thousands,June 30,March 31,June 30,June 30,
except per share data)20222022202120222021
Income Statement:
Net interest income$337,472 $222,785 $149,927 $560,257 $298,047 
Taxable equivalent adjustment (1)
4,314 3,772 3,470 8,086 6,970 
Net interest income - tax equivalent basis341,786 226,557 153,397 568,343 305,017 
Provision for credit losses9,245 97,569 (4,929)106,814 (22,285)
Noninterest income89,117 65,240 51,508 154,357 108,220 
Noninterest expense277,395 226,756 129,618 504,151 247,358 
Net income (loss) available to common
   shareholders
110,952 (29,603)62,786 81,349 149,604 
Per Common Share Data:
Weighted average diluted shares291,881 227,002 165,934 260,253 165,821 
Net income (loss) (diluted)$0.38 $(0.13)$0.38 $0.31 $0.90 
Cash dividends0.14 0.14 0.14 0.28 0.28 
Common dividend payout ratio (2)
37 %(108)%37 %90 %31 %
Book value$16.51 $17.03 $18.05 $16.51 $18.05 
Stock price14.79 16.38 17.61 14.79 17.61 
Tangible common book value (3)
9.23 9.71 11.55 9.23 11.55 
Performance Ratios:
Return on average assets1.01 %(0.31)%1.06 %0.43 %1.27 %
Return on average common equity9.08 (2.89)8.39 3.62 10.04 
Return on tangible common equity (3)
17.21 (3.61)13.58 6.71 16.10 
Return on average tangible common equity (3)
16.93 (4.03)13.58 6.84 16.21 
Net interest margin (3)
3.33 2.88 2.91 3.13 2.93 
Efficiency ratio (3)
62.70 76.15 62.05 68.13 58.79 
Net charge-offs (recoveries) to average loans0.02 0.05 (0.01)0.04 — 
Allowance for credit losses to ending loans0.97 0.99 0.79 0.97 0.79 
Non-performing loans to ending loans0.78 0.88 1.03 0.78 1.03 
Balance Sheet:
Total loans$29,553,648 $28,336,244 $13,784,677 $29,553,648 $13,784,677 
Total assets45,748,355 45,834,648 23,675,666 45,748,355 23,675,666 
Total deposits35,538,975 35,607,390 17,868,911 35,538,975 17,868,911 
Total borrowed funds4,384,411 4,347,560 2,559,113 4,384,411 2,559,113 
Total shareholders' equity5,078,783 5,232,114 2,991,118 5,078,783 2,991,118 
Capital Ratios:
Risk-based capital ratios:
Tier 1 common equity9.90 %10.04 %11.95 %9.90 %11.95 %
Tier 110.63 10.79 11.95 10.63 11.95 
Total12.03 12.19 12.73 12.03 12.73 
Leverage ratio (to average assets)8.19 10.58 8.38 8.19 8.38 
Total equity to assets (averages)11.22 12.03 12.61 11.57 12.69 
Tangible common equity to tangible assets (3)
6.20 6.51 8.47 6.20 8.47 
Nonfinancial Data:
Full-time equivalent employees4,196 4,333 2,465 4,196 2,465 
Banking centers266 267 162 266 162 
(1)Calculated using the federal statutory tax rate in effect of 21% for all periods.
(2)Cash dividends per common share divided by net income (loss) per common share (basic).
(3)Represents a non-GAAP financial measure.  Refer to the “Non-GAAP Financial Measures” section for reconciliations to GAAP financial measures.
58


NON-GAAP FINANCIAL MEASURES
The Company’s accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist investors in assessing the Company’s operating performance. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the following table.
The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes.
In management’s view, tangible common equity measures are capital adequacy metrics that may be meaningful to the Company, as well as analysts and investors, in assessing the Company’s use of equity and in facilitating comparisons with peers. These non-GAAP measures are valuable indicators of a financial institution’s capital strength since they eliminate intangible assets from shareholders’ equity and retain the effect of accumulated other comprehensive loss in shareholders’ equity.
Although intended to enhance investors’ understanding of the Company’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance. See the previously provided tables and the following reconciliations in the “Non-GAAP Reconciliations” section for details on the calculation of these measures to the extent presented herein.
59


The following table presents GAAP to non-GAAP reconciliations.
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars and shares in thousands, except per share data)2022202120222021
Tangible common book value:
Shareholders' common equity (GAAP)$4,835,064 $2,991,118 $4,835,064 $2,991,118 
Deduct:Goodwill1,991,534 1,036,994 1,991,534 1,036,994 
Intangible assets140,281 40,030 140,281 40,030 
Tangible shareholders' common equity (non-GAAP)$2,703,249 $1,914,094 $2,703,249 $1,914,094 
Period end common shares292,893 165,732 292,893 165,732 
Tangible common book value (non-GAAP)9.23 11.55 9.23 11.55 
Return on tangible common equity:
Net income applicable to common shares (GAAP)$110,952 $62,786 $81,349 $149,604 
Add: Intangible amortization (net of tax) (1)
5,378 2,182 9,312 4,488 
Tangible net income (non-GAAP)$116,330 $64,968 $90,661 $154,092 
Tangible shareholders' common equity (non-GAAP) (see above)$2,703,249 $1,914,094 $2,703,249 $1,914,094 
Return on tangible common equity (non-GAAP)17.21 %13.58 %6.71 %16.10 %
Return on average tangible common equity:
Tangible net income (non-GAAP) (see above)$116,330 $64,968 $90,661 $154,092 
Average shareholders' common equity (GAAP)$4,886,181 $2,992,693 $4,495,862 $2,981,398 
Deduct:Average goodwill1,992,860 1,036,994 1,736,227 1,036,994 
Average intangible assets144,104 41,410 109,195 42,901 
Average tangible shareholders' common equity (non-GAAP)$2,749,217 $1,914,289 $2,650,440 $1,901,503 
Return on average tangible common equity (non-GAAP)16.93 %13.58 %6.84 %16.21 %
Net interest margin:
Net interest income (GAAP)$337,472 $149,927 $560,257 $298,047 
Taxable equivalent adjustment4,314 3,470 8,086 6,970 
Net interest income - taxable equivalent basis (non-GAAP)$341,786 $153,397 $568,343 $305,017 
Average earning assets$41,003,338 $21,095,280 $36,269,744 $20,849,829 
Net interest margin (non-GAAP)3.33 %2.91 %3.13 %2.93 %
Efficiency ratio:
Noninterest expense (GAAP)$277,395 $129,618 $504,151 $247,358 
Deduct: Intangible amortization expense7,170 2,909 11,981 5,984 
Adjusted noninterest expense (non-GAAP)$270,225 $126,709 $492,170 $241,374 
Net interest income - taxable equivalent basis (non-GAAP) (see
    above)
$341,786 $153,397 $568,343 $305,017 
Noninterest income89,117 51,508 154,357 108,220 
Deduct: Debt securities gains (losses), net(85)692 257 2,685 
Adjusted total revenue (non-GAAP)$430,988 $204,213 $722,443 $410,552 
Efficiency ratio (non-GAAP)62.70 %62.05 %68.13 %58.79 %
Tangible common equity to tangible assets:
Tangible shareholders' common equity (non-GAAP) (see above)$2,703,249 $1,914,094 $2,703,249 $1,914,094 
Assets (GAAP)$45,748,355 $23,675,666 $45,748,355 $23,675,666 
Add:Trust overdrafts 24  24 
Deduct:Goodwill1,991,534 1,036,994 1,991,534 1,036,994 
Intangible assets140,281 40,030 140,281 40,030 
Tangible assets (non-GAAP)$43,616,540 $22,598,666 $43,616,540 $22,598,666 
Tangible common equity to tangible assets (non-GAAP)6.20 %8.47 %6.20 %8.47 %
(1)Calculated using management’s estimate of the annual fully taxable equivalent rates (federal and state).
60


EXECUTIVE SUMMARY
Old National is the sixth largest commercial bank headquartered in the Midwest. With approximately $46 billion of assets and $28 billion of assets under management, Old National ranks among the top 35 banking companies based in the U.S. and has been recognized as a World’s Most Ethical Company by the Ethisphere Institute for eleven consecutive years. Since its founding in 1834, Old National Bank has focused on community banking by building long-term, highly valued partnerships with clients and in the communities it serves. In addition to providing extensive services in retail and commercial banking, Old National offers comprehensive wealth management, investment, and capital market services.

On February 15, 2022, Old National completed its previously announced merger of equals transaction with First Midwest. At closing, Old National acquired $21.9 billion of assets, including $14.3 billion of loans, and assumed $17.2 billion of deposits. Old National completed branding and the majority of core banking systems conversions in early July of 2022.

On June 27, 2022, Old National entered into a Custodial Transfer and Asset Purchase Agreement with UMB, pursuant to which UMB will acquire Old National’s business of acting as a qualified custodian for, and administering, health savings accounts. Old National serves as custodian for health savings accounts comprised of both investment accounts and deposit accounts. Upon completion of the sale, UMB will pay Old National a premium on deposit account balances transferred at closing, or approximately $95 million based on June 30, 2022 balances. Subject to customary closing conditions and regulatory approval, the parties anticipate completing the sale in the fourth quarter of 2022.

Net income (loss) applicable to common shareholders for the second quarter of 2022 was $111.0 million, or $0.38 per diluted common share, compared to $(29.6) million, or $(0.13) per diluted common share, for the first quarter of 2022 and $62.8 million, or $0.38 per diluted common share, for the second quarter of 2021.

Results for the first and second quarters of 2022 were impacted by $52.3 million and $36.6 million, respectively, of merger-related expenses, which included $11.0 million in the first quarter of 2022 attributable to the provision for credit losses on unfunded loan commitments. In addition, the first quarter of 2022 provision expense of $97.6 million included $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger.

We achieved strong fundamental results during the second quarter of 2022.
Loans:  Our loan balances, excluding loans held for sale, increased $1.2 billion to $29.6 billion at June 30, 2022 compared to March 31, 2022.  This was primarily driven by strong commercial and consumer loan production.
Net Interest Income: Net interest income increased $114.7 million compared to the first quarter of 2022 driven by the full quarter impact of the merger, loan growth, the higher rate environment, higher accretion, and an additional day in the quarter.
Noninterest Income:  Noninterest income increased $23.9 million compared to the first quarter of 2022 driven by the full quarter impact of the merger. Mortgage banking revenue was impacted by the higher rate environment, lower gain on sale margins, and a higher mix of portfolio production.
Noninterest Expenses:  Noninterest expenses increased $50.6 million compared to the first quarter of 2022 primarily due to the full quarter impact of operating costs associated with the merger, as well as higher incentive accruals reflective of strong performance. Noninterest expenses included $36.6 million of merger-related expenses, compared to $52.3 million in the first quarter of 2022.
Pandemic Update
As previously disclosed, the COVID-19 pandemic has created economic and financial disruptions that continue to adversely affect our operations during the six months ended June 30, 2022. Our historically careful underwriting practices, diverse and granular portfolios, and Midwest-based footprint have helped minimize the adverse impact to Old National. The pandemic has become less disruptive to the Company’s business, financial condition, results of operations, and its clients as of June 30, 2022.
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RESULTS OF OPERATIONS
The following table sets forth certain income statement information of Old National:
Three Months Ended
June 30,
Six Months Ended
June 30,
(dollars in thousands, except per share data)20222021%
Change
20222021%
Change
Income Statement Summary:
Net interest income$337,472 $149,927 125.1 %$560,257 $298,047 88.0 %
Provision for credit losses9,245 (4,929)(287.6)106,814 (22,285)(579.3)
Noninterest income89,117 51,508 73.0 154,357 108,220 42.6 
Noninterest expense277,395 129,618 114.0 504,151 247,358 103.8 
Net income applicable to common
   shareholders
110,952 62,786 76.7 81,349 149,604 (45.6)
Net income per common share -
   diluted
0.38 0.38 — 0.31 0.90 (65.6)
Other Data:
Return on average common equity9.08 %8.39 %3.62 %10.04 %
Return on tangible common equity (1)
17.21 13.58 6.71 16.10 
Return on average tangible common
   equity (1)
16.93 13.58 6.84 16.21 
Efficiency ratio (1)
62.70 62.05 68.13 58.79 
Tier 1 leverage ratio8.19 8.38 8.19 8.38 
Net charge-offs (recoveries) to
   average loans
0.02 (0.01)0.04 — 
(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 78% of revenues for the six months ended June 30, 2022.  Net interest income and net interest 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 interest-earning assets and interest-bearing liabilities.

Interest rates increased significantly during the second quarter of 2022 with the rate on the 2-Year U.S. Treasury increasing from 2.34% to 2.95%. The Federal Reserve’s Federal Funds Rate increased 125 basis points to a target range of 1.50% to 1.75%, with the Effective Federal Funds Rate at 1.58% at June 30, 2022. The Federal Reserve is expected to continue to increase the Federal Funds Rate throughout 2022 and into 2023. If interest rates increase, our interest rate spread may improve, which may result in an increase in our net interest income. If interest rates decline, our interest rate spread could decline, which may result in a decrease in our net interest income. However, management has tak