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10-Q

Old National Bancorp /In/ (ONB)

10-Q 2023-05-03 For: 2023-03-31
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Added on April 07, 2026
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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 March 31, 2023

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)

Indiana 35-1539838
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
One Main Street 47708
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<br>Symbol(s) Name of each exchange on which registered
Common stock, no par value ONB The NASDAQ Stock Market LLC
Depositary Shares, each representing a 1/40th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series A ONBPP The NASDAQ Stock Market LLC
Depositary Shares, each representing a 1/40th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series C ONBPO The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to 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 292,599,000 shares outstanding at April 30, 2023.

OLD NATIONAL BANCORP

FORM 10-Q

TABLE OF CONTENTS

Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) 4
Consolidated Statements of Income (unaudited) 5
Consolidated Statements of Comprehensive Income (Loss) (unaudited) 6
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) 7
Consolidated Statements of Cash Flows (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 10
Note 1. Basis of Presentation 10
Note 2. Recent Accounting Pronouncements 10
Note 3. Acquisition and Divestiture Activity 12
Note 4. Net Income(Loss)Per Common Share 12
Note 5. Investment Securities 13
Note 6. Loans and Allowance for Credit Losses 16
Note 7. Leases 27
Note 8. Goodwill and Other Intangible Assets 29
Note 9. Qualified Affordable Housing Projects and Other Tax Credit Investments 30
Note 10. Securities Sold Under Agreements to Repurchase 31
Note 11. Federal Home Loan Bank Advances 31
Note 12. Other Borrowings 32
Note 13. Accumulated Other Comprehensive Income (Loss) 34
Note 14. Income Taxes 35
Note 15. Derivative Financial Instruments 36
Note 16. Commitments, Contingencies, and Financial Guarantees 39
Note 17. Fair Value 40
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 46
Forward-Looking Statements 46
Financial Highlights 47
Non-GAAP Financial Measures 48
Executive Summary 50
Results of Operations 51
Financial Condition 55
Risk Management 59
Critical Accounting Estimates 65
Item 3. Quantitative and Qualitative Disclosures About Market Risk 65
Item 4. Controls and Procedures 66
PART II. OTHER INFORMATION 67
Item 1A. Risk Factors 67
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 67
Item 5. Other Information 67
Item 6. Exhibits 68
SIGNATURE 69

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

As used in this report, references to “Old National,” “the Company,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Old National Bancorp and its wholly-owned subsidiaries. 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 throughout this report, including the Notes to Consolidated Financial Statements (Unaudited). You may find it helpful to refer to this page as you read this report.

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

N/M:  not meaningful

NASDAQ: The NASDAQ Stock Market LLC

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

Renewable Energy:  investment tax credits for solar projects

SEC:  U.S. Securities and Exchange Commission

TDR:  troubled debt restructuring

UMB: UMB Bank, n.a.

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars and shares in thousands, except per share data) March 31,<br>2023 December 31, <br>2022
(unaudited)
Assets
Cash and due from banks $ 386,879 $ 453,432
Money market and other interest-earning investments 727,056 274,980
Total cash and cash equivalents 1,113,935 728,412
Equity securities, at fair value 72,158 52,507
Investment securities - available-for-sale, at fair value (amortized cost<br><br>$7,592,765 and $7,772,603, respectively) 6,687,066 6,773,712
Investment securities - held-to-maturity, at amortized cost (fair value<br><br>$2,663,374 and $2,643,682, respectively) 3,071,190 3,089,147
Federal Home Loan Bank/Federal Reserve Bank stock, at cost 413,326 314,168
Loans held for sale, at fair value 10,584 11,926
Loans:
Commercial 9,751,875 9,508,904
Commercial real estate 12,908,380 12,457,070
Residential real estate 6,568,666 6,460,441
Consumer credit, net of unearned income 2,593,453 2,697,226
Total loans 31,822,374 31,123,641
Allowance for credit losses on loans (298,711) (303,671)
Net loans 31,523,663 30,819,970
Premises and equipment, net 566,758 557,307
Operating lease right-of-use assets 183,687 189,714
Accrued interest receivable 188,988 190,521
Goodwill 1,998,716 1,998,716
Other intangible assets 120,219 126,405
Company-owned life insurance 770,471 768,552
Other assets 1,121,883 1,142,315
Total assets $ 47,842,644 $ 46,763,372
Liabilities
Deposits:
Noninterest-bearing demand $ 10,995,083 $ 11,930,798
Interest-bearing:
Checking and NOW 7,903,520 8,340,955
Savings 6,030,255 6,326,158
Money market 5,867,239 5,389,139
Time deposits 4,121,695 3,013,780
Total deposits 34,917,792 35,000,830
Federal funds purchased and interbank borrowings 618,955 581,489
Securities sold under agreements to repurchase 393,018 432,804
Federal Home Loan Bank advances 4,981,612 3,829,018
Other borrowings 746,869 743,003
Operating lease liabilities 205,249 211,964
Accrued expenses and other liabilities 701,723 835,669
Total liabilities 42,565,218 41,634,777
Shareholders' Equity
Preferred stock, 2,000 shares authorized, 231 shares issued and outstanding 230,500 230,500
Common stock, no par value, $1.00 per share stated value, 600,000 shares authorized,<br><br>291,922 and 292,903 shares issued and outstanding, respectively 291,922 292,903
Capital surplus 4,144,730 4,174,265
Retained earnings 1,318,632 1,217,349
Accumulated other comprehensive income (loss), net of tax (708,358) (786,422)
Total shareholders' equity 5,277,426 5,128,595
Total liabilities and shareholders' equity $ 47,842,644 $ 46,763,372

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

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Three Months Ended<br>March 31,
(dollars and shares in thousands, except per share data) 2023 2022
Interest Income
Loans including fees:
Taxable $ 410,375 $ 184,015
Nontaxable 10,212 3,507
Investment securities:
Taxable 60,801 37,409
Nontaxable 11,163 10,266
Money market and other interest-earning investments 3,098 308
Total interest income 495,649 235,505
Interest Expense
Deposits 62,593 3,194
Federal funds purchased and interbank borrowings 4,839 —
Securities sold under agreements to repurchase 779 96
Federal Home Loan Bank advances 37,996 5,963
Other borrowings 7,954 3,467
Total interest expense 114,161 12,720
Net interest income 381,488 222,785
Provision for credit losses 13,437 108,736
Net interest income after provision for credit losses 368,051 114,049
Noninterest Income
Wealth management fees 18,760 14,630
Service charges on deposit accounts 17,003 14,026
Debit card and ATM fees 9,982 7,599
Mortgage banking revenue 3,400 7,245
Investment product fees 8,160 7,322
Capital markets income 6,939 4,442
Company-owned life insurance 3,186 3,524
Debt securities gains (losses), net (5,216) 342
Other income 8,467 6,110
Total noninterest income 70,681 65,240
Noninterest Expense
Salaries and employee benefits 137,364 124,147
Occupancy 28,282 21,019
Equipment 7,389 5,168
Marketing 9,417 4,276
Technology 19,202 18,762
Communication 4,461 3,417
Professional fees 6,732 19,791
FDIC assessment 10,404 2,575
Amortization of intangibles 6,186 4,811
Amortization of tax credit investments 2,761 1,516
Property optimization 1,317 —
Other expense 17,196 10,107
Total noninterest expense 250,711 215,589
Income (loss) before income taxes 188,021 (36,300)
Income tax expense (benefit) 41,421 (8,714)
Net income (loss) 146,600 (27,586)
Preferred dividends (4,034) (2,017)
Net income (loss) applicable to common shareholders $ 142,566 $ (29,603)
Net income (loss) per common share - basic $ 0.49 $ (0.13)
Net income (loss) per common share - diluted 0.49 (0.13)
Weighted average number of common shares outstanding - basic 291,088 227,002
Weighted average number of common shares outstanding - diluted 292,756 227,002
Dividends per common share $ 0.14 $ 0.14

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

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Net income (loss) $ 146,600 $ (27,586)
Other comprehensive income (loss):
Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period 24,724 (429,470)
Reclassification for securities transferred to held-to-maturity — 22,163
Reclassification adjustment for securities (gains) losses<br>   realized in income 5,216 (342)
Income tax effect 1,146 96,235
Unrealized gains (losses) on available-for-sale securities 31,086 (311,414)
Change in securities held-to-maturity:
Adjustment for securities transferred from available-for-sale — (22,163)
Amortization of unrealized losses on securities transferred<br>    from available-for-sale 5,829 310
Income tax effect (131) 5,126
Changes from securities held-to-maturity 5,698 (16,727)
Change in hedges:
Net unrealized derivative gains (losses) on hedges 47,849 (9,506)
Reclassification adjustment for (gains) losses realized in net<br>   income 7,292 (669)
Income tax effect (13,720) 2,500
Changes from hedges 41,421 (7,675)
Change in defined benefit pension plans:
Amortization of net (gains) losses recognized in income (188) (11)
Income tax effect 47 3
Changes from defined benefit pension plans (141) (8)
Other comprehensive income (loss), net of tax 78,064 (335,824)
Comprehensive income (loss) $ 224,664 $ (363,410)

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

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

(dollars in thousands, except per<br>   share data) Preferred Stock Common Stock Capital Surplus Retained Earnings Accumulated<br>Other<br>Comprehensive Income (Loss) Total<br>Shareholders' Equity
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<br>   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<br>   compensation plans — 1,636 (1,368) (365) — (97)
Balance, March 31, 2022 $ 230,500 $ 292,959 $ 4,149,594 $ 897,260 $ (338,199) $ 5,232,114
Balance, December 31, 2022 $ 230,500 $ 292,903 $ 4,174,265 $ 1,217,349 $ (786,422) $ 5,128,595
Net income (loss) — — — 146,600 — 146,600
Other comprehensive income (loss) — — — — 78,064 78,064
Cash dividends:
Common ($0.14 per share) — — — (41,088) — (41,088)
Preferred dividends — — — (4,034) — (4,034)
Common stock issued — 15 247 — — 262
Common stock repurchased — (2,598) (41,112) — — (43,710)
Share-based compensation expense — — 12,742 — — 12,742
Stock activity under incentive<br>   compensation plans — 1,602 (1,412) (195) — (5)
Balance, March 31, 2023 $ 230,500 $ 291,922 $ 4,144,730 $ 1,318,632 $ (708,358) $ 5,277,426

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

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Cash Flows From Operating Activities
Net income (loss) $ 146,600 $ (27,586)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation 9,121 7,790
Amortization of other intangible assets 6,186 4,811
Amortization of tax credit investments 2,761 1,516
Net premium amortization on investment securities 3,603 4,462
Accretion income related to acquired loans (6,410) (14,241)
Share-based compensation expense 12,742 6,284
Provision for credit losses 13,437 108,736
Debt securities (gains) losses, net 5,216 (342)
Net (gains) losses on sales of loans and other assets 829 (2,381)
Increase in cash surrender value of company-owned life insurance (3,186) (3,524)
Residential real estate loans originated for sale (65,148) (205,945)
Proceeds from sales of residential real estate loans 67,468 220,534
(Increase) decrease in interest receivable 1,533 635
(Increase) decrease in other assets (3,833) 98,413
Increase (decrease) in accrued expenses and other liabilities (137,230) (38,102)
Net cash flows provided by (used in) operating activities 53,689 161,060
Cash Flows From Investing Activities
Cash received from merger, net — 1,912,629
Purchases of investment securities available-for-sale (44,413) (814,796)
Purchases of investment securities held-to-maturity (1,941) (30,418)
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock (99,158) (69,818)
Purchases of equity securities (20,807) (904)
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale 164,893 342,435
Proceeds from sales of investment securities available-for-sale 51,522 10,839
Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity 24,744 2,752
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock — 54,897
Proceeds from sales of equity securities 615 41,313
Loan originations and payments, net (708,752) (336,091)
Proceeds from company-owned life insurance death benefits 2,257 1,582
Proceeds from sales of premises and equipment and other assets 1,410 2,751
Purchases of premises and equipment and other assets (10,456) (9,588)
Net cash flows provided by (used in) investing activities (640,086) 1,107,583
Cash Flows From Financing Activities
Net increase (decrease) in:
Deposits (83,038) (211,209)
Federal funds purchased and interbank borrowings 37,466 1,445
Securities sold under agreements to repurchase (39,786) (18,194)
Other borrowings (4,002) 26,566
Payments for maturities of Federal Home Loan Bank advances (750,150) (6)
Proceeds from Federal Home Loan Bank advances 1,900,000 200,000
Cash dividends paid (45,122) (42,799)
Common stock repurchased (43,710) (70,078)
Common stock issued 262 165
Net cash flows provided by (used in) financing activities 971,920 (114,110)
Net increase (decrease) in cash and cash equivalents 385,523 1,154,533
Cash and cash equivalents at beginning of period 728,412 822,019
Cash and cash equivalents at end of period $ 1,113,935 $ 1,976,552

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) – (Continued)

Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Supplemental cash flow information:
Total interest paid $ 104,917 $ 17,854
Total income taxes paid (net of refunds) 1,182 1,471
Common stock issued for merger, net — 2,446,312
Preferred stock issued for merger, net — 243,870
Investment securities purchased but not settled — 22,183
Securities transferred from available-for-sale to held-to-maturity — 2,038,900
Operating lease right-of-use assets obtained in exchange for lease obligations 222 2,249
Finance lease right-of-use assets obtained in exchange for lease obligations 9,141 $ —

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

OLD NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned 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 March 31, 2023 and December 31, 2022, and the results of its operations for the three months ended March 31, 2023 and 2022.   Interim results do not necessarily represent annual results. Certain information and disclosures normally included in notes to consolidated annual financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q pursuant to SEC rules and regulations. These financial statements should be read in conjunction with Old National’s Annual Report on Form 10-K for the year ended December 31, 2022.

All 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.

Financial Difficulty Modifications

Any loans that are modified are reviewed by Old National to identify if a financial difficulty modification has occurred, which is when Old National Bank modifies a loan related to a borrower experiencing financial difficulties. 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, a permanent reduction of the recorded investment of the loan, or an other-than-insignificant payment delay. As a result of the adoption of ASU 2022-02 on January 1, 2023, the TDR classification is no longer applicable subsequent to December 31, 2022. See Note 2 to the consolidated financial statements for additional detail regarding the adoption of ASU 2022-02.

Other than the changes for financial difficulty modifications, 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, 2022.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2023

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. The adoption of this guidance on January 1, 2023 did not 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. The adoption of this guidance on January 1, 2023 did not have a material impact 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. Old National adopted the provision in ASU 2022-02 related to the recognition and measurement of TDRs on a prospective basis on January 1, 2023, which 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.

In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of relief provisions within Topic 848 from December 31, 2022 to December 31, 2024. The objective of the guidance in Topic 848 is to provide relief during the transition period.

The amendments in this ASU are effective March 12, 2020 through December 31, 2024. Old National believes the adoption of this guidance on activities subsequent to March 31, 2023 will not have a material impact on the consolidated financial statements.

Accounting Guidance Pending Adoption

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.

FASB ASC 842 – In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements, which requires all entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been made available for issuance. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. Transition can be done either retrospectively or prospectively. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

FASB ASC 323 – In March 2023, the FASB issued ASU 2023-02, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, which allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. 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. 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.

As of December 31, 2022, Old National finalized its valuation of all assets acquired and liabilities assumed. Transaction costs totaling $14.6 million associated with the merger have been expensed for the three months ended March 31, 2023, compared to $41.3 million during the three months ended March 31, 2022. Additional transaction and integration costs will be expensed in future periods as incurred.

Divestiture

On November 18, 2022, Old National completed its previously announced transaction with UMB, pursuant to which UMB acquired Old National’s business of acting as a qualified custodian for, and administering, health savings accounts. Old National served as custodian for health savings accounts comprised of both investment accounts and deposit accounts. At closing, the health savings accounts held in deposit accounts that were transferred totaled approximately $382 million and the transaction resulted in a $90.7 million pre-tax gain.

NOTE 4 – NET INCOME (LOSS) PER COMMON SHARE

Basic and diluted net income (loss) per common share are calculated using the two-class method.  Net income (loss) 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 (loss) 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 (loss) per common share:

Three Months Ended<br>March 31,
(dollars and shares in thousands, except per share data) 2023 2022
Net income (loss) $ 146,600 $ (27,586)
Preferred dividends (4,034) (2,017)
Net income (loss) applicable to common shares $ 142,566 $ (29,603)
Weighted average common shares outstanding:
Weighted average common shares outstanding (basic) 291,088 227,002
Effect of dilutive securities:
Restricted stock 1,666 —
Stock appreciation rights 2 —
Weighted average diluted shares outstanding 292,756 227,002
Basic Net Income (Loss) Per Common Share $ 0.49 $ (0.13)
Diluted Net Income (Loss) Per Common Share $ 0.49 $ (0.13)

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 AOCI and gross unrecognized gains and losses.

(dollars in thousands) Amortized<br>Cost Unrealized<br>Gains Unrealized<br>Losses Basis<br><br>Adjustments (1) Fair<br>Value
March 31, 2023
Available-for-Sale
U.S. Treasury $ 268,894 $ 34 $ (10,755) $ (36,301) $ 221,872
U.S. government-sponsored entities and agencies 1,450,300 — (201,717) (54,892) 1,193,691
Mortgage-backed securities - Agency 4,861,624 641 (553,490) — 4,308,775
States and political subdivisions 641,317 2,138 (21,968) — 621,487
Pooled trust preferred securities 13,787 — (2,938) — 10,849
Other securities 356,843 277 (26,728) — 330,392
Total available-for-sale securities $ 7,592,765 $ 3,090 $ (817,596) $ (91,193) $ 6,687,066
Held-to-Maturity
U.S. government-sponsored entities and agencies $ 820,849 $ — $ (157,226) $ — $ 663,623
Mortgage-backed securities - Agency 1,086,905 — (113,419) — 973,486
States and political subdivisions 1,163,586 744 (137,915) — 1,026,415
Allowance for securities held-to-maturity (150) — — — (150)
Total held-to-maturity securities $ 3,071,190 $ 744 $ (408,560) $ — $ 2,663,374
December 31, 2022
Available-for-Sale
U.S. Treasury $ 253,148 $ 5 $ (5,189) $ (47,037) $ 200,927
U.S. government-sponsored entities and agencies 1,451,736 — (169,248) (107,408) 1,175,080
Mortgage-backed securities - Agency 4,986,354 976 (617,428) — 4,369,902
States and political subdivisions 688,159 1,789 (26,096) — 663,852
Pooled trust preferred securities 13,783 — (2,972) — 10,811
Other securities 379,423 258 (26,541) — 353,140
Total available-for-sale securities $ 7,772,603 $ 3,028 $ (847,474) $ (154,445) $ 6,773,712
Held-to-Maturity
U.S. government-sponsored entities and agencies $ 819,168 $ — $ (162,810) $ — $ 656,358
Mortgage-backed securities - Agency 1,106,817 — (123,854) — 982,963
States and political subdivisions 1,163,312 221 (159,022) — 1,004,511
Allowance for securities held-to-maturity (150) — — — (150)
Total held-to-maturity securities $ 3,089,147 $ 221 $ (445,686) $ — $ 2,643,682

(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.

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<br>March 31,
(dollars in thousands) 2023 2022
Proceeds $ 57,955 $ 50,113
Realized gains 909 463
Realized losses (6,125) (121)

Substantially all of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities.  The table below shows the amortized cost and fair value of the investment securities portfolio 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.

March 31, 2023
(dollars in thousands) Amortized<br>Cost Fair<br>Value Weighted<br>Average<br>Yield
Maturity
Available-for-Sale
Within one year $ 141,160 $ 138,855 3.10 %
One to five years 1,751,081 1,635,833 2.79
Five to ten years 4,031,392 3,556,971 2.34
Beyond ten years 1,669,132 1,355,407 2.41
Total $ 7,592,765 $ 6,687,066 2.47 %
Held-to-Maturity
One to five years 162,300 141,113 2.74 %
Five to ten years 928,090 838,844 2.67
Beyond ten years 1,980,800 1,683,417 2.73
Total $ 3,071,190 $ 2,663,374 2.71 %

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

Less than 12 months 12 months or longer Total
(dollars in thousands) Fair<br>Value Unrealized<br>Losses Fair<br>Value Unrealized<br>Losses Fair<br>Value Unrealized Losses
March 31, 2023
Available-for-Sale
U.S. Treasury $ 23,229 $ (106) $ 190,653 $ (10,649) $ 213,882 $ (10,755)
U.S. government-sponsored entities<br>   and agencies 96,117 (2,554) 1,097,574 (199,163) 1,193,691 (201,717)
Mortgage-backed securities - Agency 758,680 (26,422) 3,513,804 (527,068) 4,272,484 (553,490)
States and political subdivisions 112,958 (1,576) 233,172 (20,392) 346,130 (21,968)
Pooled trust preferred securities — — 10,849 (2,938) 10,849 (2,938)
Other securities 42,014 (1,404) 273,603 (25,324) 315,617 (26,728)
Total available-for-sale $ 1,032,998 $ (32,062) $ 5,319,655 $ (785,534) $ 6,352,653 $ (817,596)
December 31, 2022
Available-for-Sale
U.S. Treasury $ 130,967 $ (3,264) $ 66,992 $ (1,925) $ 197,959 $ (5,189)
U.S. government-sponsored entities<br>   and agencies 454,854 (75,795) 720,226 (93,453) 1,175,080 (169,248)
Mortgage-backed securities - Agency 3,207,319 (358,507) 1,116,205 (258,921) 4,323,524 (617,428)
States and political subdivisions 414,813 (25,555) 2,703 (541) 417,516 (26,096)
Pooled trust preferred securities — — 10,811 (2,972) 10,811 (2,972)
Other securities 257,775 (17,045) 75,309 (9,496) 333,084 (26,541)
Total available-for-sale $ 4,465,728 $ (480,166) $ 1,992,246 $ (367,308) $ 6,457,974 $ (847,474)

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

Less than 12 months 12 months or longer Total
(dollars in thousands) Fair<br>Value Unrecognized<br>Losses Fair<br>Value Unrecognized<br>Losses Fair<br>Value Unrecognized<br>Losses
March 31, 2023
Held-to-Maturity
U.S. government-sponsored entities<br>   and agencies $ 82,080 $ (7,003) $ 581,543 $ (150,223) $ 663,623 $ (157,226)
Mortgage-backed securities - Agency 254,788 (18,775) 718,698 (94,644) 973,486 (113,419)
States and political subdivisions 40,220 (2,238) 931,463 (135,677) 971,683 (137,915)
Total held-to-maturity $ 377,088 $ (28,016) $ 2,231,704 $ (380,544) $ 2,608,792 $ (408,560)
December 31, 2022
Held-to-Maturity
U.S. government-sponsored entities<br>   and agencies 354,293 (110,523) 302,066 (52,287) 656,359 (162,810)
Mortgage-backed securities - Agency 367,849 (42,438) 615,114 (81,416) 982,963 (123,854)
States and political subdivisions 838,689 (127,355) 135,573 (31,667) 974,262 (159,022)
Total available-for-sale $ 1,560,831 $ (280,316) $ 1,052,753 $ (165,370) $ 2,613,584 $ (445,686)

The unrecognized losses on held-to-maturity investment securities presented in the table above do not include unrecognized losses on securities that were transferred from available-for-sale to held-to-maturity totaling $143.0 million at March 31, 2023 that are included as a separate component of shareholders’ equity and are being amortized over the remaining term of the securities.

No allowance for credit losses on available-for-sale debt securities was needed at March 31, 2023 or December 31, 2022.

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 March 31, 2023 and December 31, 2022.

Accrued interest receivable on the securities portfolio is excluded from the estimate of credit losses and totaled $39.1 million at March 31, 2023 and $50.9 million at December 31, 2022.

At March 31, 2023, Old National’s securities portfolio consisted of 3,093 securities, 2,688 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 March 31, 2023, 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 two pooled trust preferred securities with fair values totaling $10.8 million and unrealized losses totaling $2.9 million 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 three months ended March 31, 2023 or 2022.

Equity Securities

Old National’s equity securities with readily determinable fair values totaled $72.2 million at March 31, 2023 and $52.5 million at December 31, 2022.  There were losses on equity securities of $0.8 million during the three months ended March 31, 2023, compared to losses of $1.9 million during the three months ended March 31, 2022.

Alternative Investments

Old National has alternative investments without readily determinable fair values that are included in other assets totaling $395.9 million at March 31, 2023, consisting of $243.4 million of illiquid investments in partnerships, limited liability companies, and other ownership interests that support affordable housing and $152.5 million of economic development and community revitalization initiatives in low-to-moderate income neighborhoods. These alternative investments totaled $396.8 million at December 31, 2022.  There have been no impairments or adjustments on equity securities without readily determinable fair values, except for amortization of tax credit investments in the three months ended March 31, 2023 and 2022. See Note 9 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 real estate rental and leasing, manufacturing, healthcare, wholesale trade, construction, and agriculture, among others.  Most of Old National’s lending activity occurs within our principal geographic markets in the Midwest region.  Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.

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 on loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios used to monitor and analyze interest income and yields – commercial, commercial real estate, residential real estate, and consumer – are reclassified into seven segments of loans – commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity for purposes of determining the allowance for credit losses on loans. 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:

Balance Sheet<br>Line Item Portfolio<br>Segment<br>Reclassifications After<br>Reclassifications
(dollars in thousands)
March 31, 2023
Loans:
Commercial $ 9,751,875 $ (213,187) $ 9,538,688
Commercial real estate 12,908,380 (160,041) 12,748,339
BBCC N/A 373,228 373,228
Residential real estate 6,568,666 — 6,568,666
Consumer 2,593,453 (2,593,453) N/A
Indirect N/A 1,003,287 1,003,287
Direct N/A 580,726 580,726
Home equity N/A 1,009,440 1,009,440
Total $ 31,822,374 $ — $ 31,822,374
December 31, 2022
Loans:
Commercial $ 9,508,904 $ (210,280) $ 9,298,624
Commercial real estate 12,457,070 (158,322) 12,298,748
BBCC N/A 368,602 368,602
Residential real estate 6,460,441 — 6,460,441
Consumer 2,697,226 (2,697,226) N/A
Indirect N/A 1,034,257 1,034,257
Direct N/A 629,186 629,186
Home equity N/A 1,033,783 1,033,783
Total $ 31,123,641 $ — $ 31,123,641

The composition of loans by portfolio segment follows:

(dollars in thousands) March 31,<br>2023 December 31, <br>2022
Commercial (1) $ 9,538,688 $ 9,298,624
Commercial real estate 12,748,339 12,298,748
BBCC 373,228 368,602
Residential real estate 6,568,666 6,460,441
Indirect 1,003,287 1,034,257
Direct 580,726 629,186
Home equity 1,009,440 1,033,783
Total loans 31,822,374 31,123,641
Allowance for credit losses on loans (298,711) (303,671)
Net loans $ 31,523,663 $ 30,819,970

(1)Includes direct finance leases of $178.7 million at March 31, 2023 and $188.1 million at December 31, 2022.

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 234%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained below the regulatory guideline limit of 300% at March 31, 2023.

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 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 on 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 on 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 $144.1 million at March 31, 2023 and $137.7 million at December 31, 2022.

The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of our 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.

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 are 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 a variety of factors including monetary actions to control inflation, recent instability in the banking sector, conflict in Ukraine, and global supply chain issues. Old National’s activity in the allowance for credit losses on loans by portfolio segment was as follows:

(dollars in thousands) Balance at<br>Beginning of<br>Period Allowance<br>Established<br>for Acquired<br>PCD Loans Charge-offs Recoveries Provision<br>for Loan<br>Losses Balance at<br>End of<br>Period
Three Months Ended<br>March 31, 2023
Commercial $ 120,612 $ — $ (12,423) $ 283 $ 17,296 $ 125,768
Commercial real estate 138,244 — (1,189) 263 (1,970) 135,348
BBCC 2,431 — (28) 73 (160) 2,316
Residential real estate 21,916 — (23) 72 (1,758) 20,207
Indirect 1,532 — (1,197) 412 687 1,434
Direct 12,116 — (3,238) 581 (2,693) 6,766
Home equity 6,820 — (82) 67 67 6,872
Total $ 303,671 $ — $ (18,180) $ 1,751 $ 11,469 $ 298,711
Three Months Ended<br>March 31, 2022
Commercial $ 27,232 $ 35,040 $ (1,880) $ 325 $ 38,754 $ 99,471
Commercial real estate 64,004 42,601 (507) 182 34,210 140,490
BBCC 2,458 — (28) 57 (418) 2,069
Residential real estate 9,347 136 (185) 440 7,514 17,252
Indirect 1,743 — (483) 222 166 1,648
Direct 528 31 (1,530) 582 14,839 14,450
Home equity 2,029 723 (51) 82 2,344 5,127
Total $ 107,341 $ 78,531 $ (4,664) $ 1,890 $ 97,409 $ 280,507

Unfunded Loan Commitments

Old National maintains an allowance for credit losses on unfunded loan commitments 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 on 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 unfunded loan commitments is included in the provision for credit losses. Old National’s activity in the allowance for credit losses on unfunded loan commitments was as follows:

Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Allowance for credit losses on unfunded loan commitments:
Balance at beginning of period $ 32,188 $ 10,879
Provision for credit losses on unfunded commitments<br>   acquired during the period — 11,013
Provision for unfunded loan commitments 1,968 154
Balance at end of period $ 34,156 $ 22,046

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.

The following table summarizes the amortized cost of term loans by risk category and gross charge-offs of commercial, commercial real estate, and BBCC loans by loan portfolio segment, class of loan, and origination year:

Origination Year Revolving to Term
(dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Total
March 31, 2023
Commercial:
Risk Rating:
Pass $ 673,613 $ 2,299,378 $ 1,517,883 $ 712,011 $ 629,196 $ 694,970 $ 2,041,109 $ 433,838 $ 9,001,998
Criticized 24,476 38,369 26,289 52,907 31,378 6,538 56,784 10,792 247,533
Classified:
Substandard 5,879 16,596 75,646 15,505 21,896 3,401 40,883 47,187 226,993
Nonaccrual — — 1,462 2,049 1,468 — 6,436 5,172 16,587
Doubtful — 20,828 11,687 3,633 73 9,356 — — 45,577
Total $ 703,968 $ 2,375,171 $ 1,632,967 $ 786,105 $ 684,011 $ 714,265 $ 2,145,212 $ 496,989 $ 9,538,688
Gross charge-offs $ — $ — $ 5,230 $ — $ 6,789 $ 239 $ 165 $ — $ 12,423
Commercial real estate:
Risk Rating:
Pass $ 600,890 $ 3,129,239 $ 2,833,471 $ 1,942,417 $ 1,171,555 $ 1,560,183 $ 74,982 $ 643,987 $ 11,956,724
Criticized 217 56,997 40,407 22,202 70,931 105,130 — 42,466 338,350
Classified:
Substandard 8,653 89,716 22,101 20,207 98,147 82,928 — 18,138 339,890
Nonaccrual — 648 9,785 4,879 — 21,708 — 3,151 40,171
Doubtful — 2,627 35,723 9,919 4,507 20,428 — — 73,204
Total $ 609,760 $ 3,279,227 $ 2,941,487 $ 1,999,624 $ 1,345,140 $ 1,790,377 $ 74,982 $ 707,742 $ 12,748,339
Gross charge-offs $ — $ 54 $ 735 $ 400 $ — $ — $ — $ — $ 1,189
BBCC:
Risk Rating:
Pass $ 25,194 $ 86,881 $ 59,220 $ 48,866 $ 35,291 $ 27,217 $ 59,846 $ 17,644 $ 360,159
Criticized 50 1,843 479 265 1,023 57 2,047 1,660 7,424
Classified:
Substandard 10 986 641 33 415 — 603 658 3,346
Nonaccrual — 39 36 130 — 626 — 836 1,667
Doubtful — 39 73 276 108 136 — — 632
Total $ 25,254 $ 89,788 $ 60,449 $ 49,570 $ 36,837 $ 28,036 $ 62,496 $ 20,798 $ 373,228
Gross charge-offs $ — $ — $ 28 $ — $ — $ — $ — $ — $ 28
Origination Year Revolving to Term
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
(dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Total
December 31, 2022
Commercial:
Risk Rating:
Pass $ 2,388,618 $ 1,754,364 $ 796,340 $ 738,208 $ 362,986 $ 388,617 $ 1,988,763 $ 329,119 $ 8,747,015
Criticized 40,856 30,661 63,557 33,490 9,195 5,312 61,036 4,327 248,434
Classified:
Substandard 37,223 47,522 16,540 22,925 4,844 21,204 67,402 25,143 242,803
Nonaccrual 3,627 1,453 566 — — — 1,634 6,623 13,903
Doubtful 2,821 17,604 3,720 8,005 5,968 8,351 — — 46,469
Total $ 2,473,145 $ 1,851,604 $ 880,723 $ 802,628 $ 382,993 $ 423,484 $ 2,118,835 $ 365,212 $ 9,298,624
Commercial real estate:
Risk Rating:
Pass $ 3,066,960 $ 2,828,758 $ 1,989,000 $ 1,219,025 $ 675,572 $ 1,018,719 $ 57,818 $ 689,553 $ 11,545,405
Criticized 75,306 34,422 22,569 82,637 86,504 56,864 — 23,282 381,584
Classified:
Substandard 46,231 16,928 24,319 78,468 57,824 21,591 — 4,108 249,469
Nonaccrual 3,151 9,541 5,014 — 2,312 22,155 — 3,257 45,430
Doubtful 1,934 38,386 10,011 4,605 1,523 20,401 — — 76,860
Total $ 3,193,582 $ 2,928,035 $ 2,050,913 $ 1,384,735 $ 823,735 $ 1,139,730 $ 57,818 $ 720,200 $ 12,298,748
BBCC:
Risk Rating:
Pass $ 90,341 $ 64,161 $ 52,304 $ 36,868 $ 23,618 $ 11,333 $ 60,016 $ 18,881 $ 357,522
Criticized 1,504 525 368 692 353 — 1,006 1,603 6,051
Classified:
Substandard 811 143 — 421 — — 543 682 2,600
Nonaccrual 42 37 118 — 429 284 — 639 1,549
Doubtful 40 107 439 157 64 73 — — 880
Total $ 92,738 $ 64,973 $ 53,229 $ 38,138 $ 24,464 $ 11,690 $ 61,565 $ 21,805 $ 368,602

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 Year Revolving to Term
(dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Total
March 31, 2023
Residential real estate:
Risk Rating:
Performing $ 92,032 $ 1,419,736 $ 1,975,809 $ 1,749,348 $ 472,547 $ 823,622 $ — $ 84 $ 6,533,178
Nonperforming — 1,272 2,373 2,421 2,796 26,620 — 6 35,488
Total $ 92,032 $ 1,421,008 $ 1,978,182 $ 1,751,769 $ 475,343 $ 850,242 $ — $ 90 $ 6,568,666
Gross charge-offs $ — $ — $ — $ — $ — $ 23 $ — $ — $ 23
Indirect:
Risk Rating:
Performing $ 74,980 $ 465,805 $ 225,377 $ 126,788 $ 69,147 $ 37,704 $ — $ 58 $ 999,859
Nonperforming — 505 1,286 627 467 543 — — 3,428
Total $ 74,980 $ 466,310 $ 226,663 $ 127,415 $ 69,614 $ 38,247 $ — $ 58 $ 1,003,287
Gross charge-offs $ — $ 514 $ 430 $ 93 $ 111 $ 49 $ — $ — $ 1,197
Direct:
Risk Rating:
Performing $ 27,097 $ 121,525 $ 141,746 $ 68,407 $ 48,981 $ 92,285 $ 74,520 $ 2,118 $ 576,679
Nonperforming — 401 554 580 636 1,863 7 6 4,047
Total $ 27,097 $ 121,926 $ 142,300 $ 68,987 $ 49,617 $ 94,148 $ 74,527 $ 2,124 $ 580,726
Gross charge-offs $ — $ 471 $ 794 $ 286 $ 327 $ 195 $ 1,165 $ — $ 3,238
Home equity:
Risk Rating:
Performing $ — $ 1,273 $ 876 $ 1,382 $ 1,068 $ 7,938 $ 962,911 $ 20,456 $ 995,904
Nonperforming — 162 133 161 930 5,470 1,924 4,756 13,536
Total $ — $ 1,435 $ 1,009 $ 1,543 $ 1,998 $ 13,408 $ 964,835 $ 25,212 $ 1,009,440
Gross charge-offs $ — $ — $ — $ — $ — $ 82 $ — $ — $ 82
Origination Year Revolving to Term
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
2022 2021 2020 2019 2018 Prior Revolving Total
December 31, 2022
Residential real estate:
Risk Rating:
Performing $ 1,327,168 $ 1,945,792 $ 1,825,762 $ 478,529 $ 136,260 $ 712,175 $ 7 $ 88 $ 6,425,781
Nonperforming 59 529 861 873 1,826 30,512 — — 34,660
Total $ 1,327,227 $ 1,946,321 $ 1,826,623 $ 479,402 $ 138,086 $ 742,687 $ 7 $ 88 $ 6,460,441
Indirect:
Risk Rating:
Performing $ 504,410 $ 249,407 $ 144,265 $ 82,304 $ 31,484 $ 19,095 $ — $ 62 $ 1,031,027
Nonperforming 348 1,074 645 531 304 328 — — 3,230
Total $ 504,758 $ 250,481 $ 144,910 $ 82,835 $ 31,788 $ 19,423 $ — $ 62 $ 1,034,257
Direct:
Risk Rating:
Performing $ 132,934 $ 164,126 $ 77,406 $ 57,919 $ 45,299 $ 59,212 $ 87,622 $ 671 $ 625,189
Nonperforming 115 851 614 205 327 1,526 5 354 3,997
Total $ 133,049 $ 164,977 $ 78,020 $ 58,124 $ 45,626 $ 60,738 $ 87,627 $ 1,025 $ 629,186
Home equity:
Risk Rating:
Performing $ 919 $ 896 $ 1,849 $ 1,497 $ 983 $ 11,646 $ 990,001 $ 14,792 $ 1,022,583
Nonperforming 166 160 166 446 794 4,308 1,698 3,462 11,200
Total $ 1,085 $ 1,056 $ 2,015 $ 1,943 $ 1,777 $ 15,954 $ 991,699 $ 18,254 $ 1,033,783

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<br>Past Due 60-89 Days<br>Past Due Past Due<br>90 Days or<br>More Total<br>Past Due Current Total<br>Loans
March 31, 2023
Commercial $ 8,463 $ 3,397 $ 9,333 $ 21,193 $ 9,517,495 $ 9,538,688
Commercial real estate 14,648 256 26,659 41,563 12,706,776 12,748,339
BBCC 1,618 552 430 2,600 370,628 373,228
Residential 19,495 310 9,725 29,530 6,539,136 6,568,666
Indirect 4,229 1,141 511 5,881 997,406 1,003,287
Direct 3,759 955 1,511 6,225 574,501 580,726
Home equity 6,279 1,923 4,802 13,004 996,436 1,009,440
Total $ 58,491 $ 8,534 $ 52,971 $ 119,996 $ 31,702,378 $ 31,822,374
December 31, 2022
Commercial $ 14,147 $ 4,801 $ 11,080 $ 30,028 $ 9,268,596 $ 9,298,624
Commercial real estate 47,240 1,312 32,892 81,444 12,217,304 12,298,748
BBCC 730 365 603 1,698 366,904 368,602
Residential 24,181 5,033 11,753 40,967 6,419,474 6,460,441
Indirect 6,302 2,118 958 9,378 1,024,879 1,034,257
Direct 5,404 2,118 1,928 9,450 619,736 629,186
Home equity 6,585 1,966 4,707 13,258 1,020,525 1,033,783
Total $ 104,589 $ 17,713 $ 63,921 $ 186,223 $ 30,937,418 $ 31,123,641

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:

March 31, 2023 December 31, 2022
(dollars in thousands) Nonaccrual<br>Amortized<br>Cost Nonaccrual<br>With No<br>Related<br>Allowance Past Due<br>90 Days or<br>More and<br>Accruing Nonaccrual<br>Amortized<br>Cost Nonaccrual<br>With No<br>Related<br>Allowance Past Due<br>90 Days or<br>More and<br>Accruing
Commercial $ 62,164 $ 14,695 $ — $ 60,372 $ 7,873 $ 152
Commercial real estate 113,375 36,495 — 122,290 33,445 —
BBCC 2,299 — — 2,429 — —
Residential 35,488 — 1,070 34,660 — 1,808
Indirect 3,428 — — 3,230 — 28
Direct 4,047 — 119 3,997 — 133
Home equity 13,536 — 42 11,200 — 529
Total $ 234,337 $ 51,190 $ 1,231 $ 238,178 $ 41,318 $ 2,650

Interest income recognized on nonaccrual loans was insignificant during the three months ended March 31, 2023 and 2022.

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<br>Estate Blanket<br>Lien Investment<br>Securities/Cash Auto Other
March 31, 2023
Commercial $ 13,899 $ 41,674 $ 2,219 $ 1,103 $ 124
Commercial real estate 100,490 — 1,661 — 6,334
BBCC 1,823 464 — 12 —
Residential 35,488 — — — —
Indirect — — — 3,428 —
Direct 2,961 2 — 253 34
Home equity 13,536 — — —
Total loans $ 168,197 $ 42,140 $ 3,880 $ 4,796 $ 6,492
December 31, 2022
Commercial $ 8,962 $ 42,754 $ 2,690 $ 1,611 $ 980
Commercial real estate 108,871 — 1,718 — 6,411
BBCC 1,939 478 — 12 —
Residential 34,660 — — — —
Indirect — — — 3,230 —
Direct 2,991 13 — 232 23
Home equity 11,200 — — — —
Total loans $ 168,623 $ 43,245 $ 4,408 $ 5,085 $ 7,414

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions.  At March 31, 2023, these loans totaled $2.6 billion, of which $1.2 billion had been sold to other financial institutions and $1.4 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.

Financial Difficulty Modifications

Occasionally, Old National modifies loans to borrowers experiencing financial difficulty in the form of principal forgiveness, term extension, an other-than-insignificant payment delay, or interest rate reduction (or a combination thereof). When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses on loans.

The following table presents the amortized cost basis of loans with modifications to borrowers experiencing financial difficulty during the three months ended March 31, 2023 by class of loans and type of modification:

(dollars in thousands) Term<br>Extension Total<br>Class of<br>Loans
Commercial $ 17,342 0.2 %
Commercial real estate 9,926 0.1 %
Total $ 27,268 0.1 %

Old National closely monitors the performance of loan modifications to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of loans that have been modified during the three months ended March 31, 2023:

(dollars in thousands) 30-59 Days<br>Past Due 60-89 Days<br>Past Due Past Due<br>90 Days or<br>More Total<br>Past Due Current Total<br>Loans
March 31, 2023
Commercial $ — $ 2,637 $ — $ 2,637 $ 14,705 $ 17,342
Commercial real estate — — — — 9,926 9,926
Total $ — $ 2,637 $ — $ 2,637 $ 24,631 $ 27,268

The following table summarizes the nature of the loan modifications to borrowers experiencing financial difficulty during the three months ended March 31, 2023 by class of loans:

(dollars in thousands) Weighted-<br>Average<br>Term<br>Extension<br>(in months)
Commercial 6.8
Commercial real estate 4.1
Total 5.6

There were no payment defaults on these loans subsequent to their modifications during the three months ended March 31, 2023. At March 31, 2023, Old National had not committed to lend any material additional funds to the borrowers whose loans were modified due to financial difficulties.

NOTE 7 – 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<br>Item in the<br>Statement of Income Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Operating lease cost Occupancy/Equipment expense $ 8,638 $ 5,108
Finance lease cost:
Amortization of right-of-use assets Occupancy expense 691 675
Interest on lease liabilities Interest expense 169 107
Sub-lease income Occupancy expense (60) (128)
Total $ 9,438 $ 5,762

Supplemental balance sheet information related to leases was as follows:

(dollars in thousands) March 31,<br>2023 December 31, <br>2022
Operating Leases
Operating lease right-of-use assets $ 183,687 $ 189,714
Operating lease liabilities 205,249 211,964
Finance Leases
Premises and equipment, net 21,173 10,799
Other borrowings 21,983 13,469
Weighted-Average Remaining Lease Term (in Years)
Operating leases 8.9 9.1
Finance leases 10.6 7.2
Weighted-Average Discount Rate
Operating leases 2.90 % 2.88 %
Finance leases 3.82 % 3.30 %

Supplemental cash flow information related to leases was as follows:

Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 7,932 $ 5,341
Operating cash flows from finance leases 169 107
Financing cash flows from finance leases 628 616

The following table presents a maturity analysis of the Company’s lease liability by lease classification at March 31, 2023:

(dollars in thousands) Operating<br>Leases Finance<br>Leases
2023 $ 22,933 $ 2,432
2024 29,819 3,278
2025 28,513 3,301
2026 27,600 2,075
2027 26,668 2,078
Thereafter 98,709 13,964
Total undiscounted lease payments 234,242 27,128
Amounts representing interest (28,993) (5,145)
Lease liability $ 205,249 $ 21,983

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in the carrying amount of goodwill:

Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Balance at beginning of period $ 1,998,716 $ 1,036,994
Acquisitions and adjustments — 960,163
Balance at end of period $ 1,998,716 $ 1,997,157

The increase in goodwill for the three months ended March 31, 2022 was due to 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, 2022 and there was no impairment.  No events or circumstances since the August 31, 2022 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<br>Carrying<br>Amount Accumulated<br>Amortization<br>and Impairment Net<br>Carrying<br>Amount
March 31, 2023
Core deposit $ 170,642 $ (85,861) $ 84,781
Customer trust relationships 56,243 (20,805) 35,438
Total other intangible assets $ 226,885 $ (106,666) $ 120,219
December 31, 2022
Core deposit $ 170,642 $ (80,951) $ 89,691
Customer trust relationships 56,243 (19,529) 36,714
Total other intangible assets $ 226,885 $ (100,480) $ 126,405

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

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded during the three months ended March 31, 2023 or 2022.  Total amortization expense associated with intangible assets was $6.2 million for the three months ended March 31, 2023, compared to $4.8 million for the three months ended March 31, 2022.

Estimated amortization expense for future years is as follows:

(dollars in thousands)
2023 remaining $ 17,969
2024 21,239
2025 18,358
2026 15,555
2027 12,867
Thereafter 34,231
Total $ 120,219

NOTE 9 – 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 March 31, 2023, 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) March 31, 2023 December 31, 2022
Investment Accounting Method Investment Unfunded<br><br>Commitment (1) Investment Unfunded<br>Commitment
LIHTC Proportional amortization $ 82,950 $ 46,743 $ 84,428 $ 55,754
FHTC Equity 18,892 9,019 19,316 9,588
NMTC Consolidation 49,820 — 51,912 —
Renewable Energy Equity 854 — 1,099 —
Total $ 152,516 $ 55,762 $ 156,755 $ 65,342

(1)All commitments will be paid by Old National by December 31, 2027.

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

(dollars in thousands) Amortization<br><br>Expense (1) Tax Expense<br><br>(Benefit)<br><br>Recognized (2)
Three Months Ended March 31, 2023
LIHTC $ 1,463 $ (1,908)
FHTC 424 (512)
NMTC 2,091 (2,611)
Renewable Energy 246 —
Total $ 4,224 $ (5,031)
Three Months Ended March 31, 2022
LIHTC $ 1,253 $ (1,650)
FHTC 205 (251)
NMTC 1,101 (1,375)
Renewable Energy 210 —
Total $ 2,769 $ (3,276)

(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).

NOTE 10 – 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<br><br>Three Months<br><br>Ended<br><br>March 31,<br>2023 At<br><br>December 31, <br>2022 At or for the<br><br>Three Months<br><br>Ended<br><br>March 31,<br>2022
(dollars in thousands)
Outstanding at period end $ 393,018 $ 432,804 $ 509,275
Average amount outstanding during the period 412,819 N/A 449,939
Maximum amount outstanding at any month-end during the period 430,537 N/A 509,275
Weighted-average interest rate:
During the period 0.77 % N/A 0.09 %
At period end 0.88 % 1.31 % 0.08 %

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

At March 31, 2023
Remaining Contractual Maturity of the Agreements
(dollars in thousands) Overnight and Continuous Up to<br>30 Days 30-90 Days Greater Than 90 days Total
Repurchase Agreements:
U.S. Treasury and agency securities $ 393,018 $ — $ — $ — $ 393,018
Total $ 393,018 $ — $ — $ — $ 393,018

The fair value of securities pledged to secure repurchase agreements may decline.  Old National has pledged securities valued at 125% of the gross outstanding balance of repurchase agreements at March 31, 2023 to manage this risk.

NOTE 11 – FEDERAL HOME LOAN BANK ADVANCES

The following table summarizes Old National Bank’s FHLB advances:

(dollars in thousands) March 31,<br>2023 December 31, <br>2022
FHLB advances (fixed rates 0.00% to 5.11%<br><br>and variable rates 4.57% to 5.24%) maturing<br><br>April 2023 to September 2042 $ 5,000,528 $ 3,850,677
Fair value hedge basis adjustments and unamortized<br>   prepayment fees (18,916) (21,659)
Total $ 4,981,612 $ 3,829,018

FHLB advances had weighted-average rates of 3.45% at March 31, 2023 and 3.15% at December 31, 2022. Certain FHLB advances are collateralized with residential real estate loans at 148%.

At March 31, 2023, total unamortized prepayment fees related to debt modifications completed in prior years totaled $18.7 million, compared to $20.2 million at December 31, 2022.

Contractual maturities of FHLB advances at March 31, 2023 were as follows:

(dollars in thousands)
Due in 2023 $ 1,250,000
Due in 2024 25,243
Due in 2025 550,285
Due in 2026 100,000
Thereafter 3,075,000
Fair value hedge basis adjustments and unamortized prepayment fees (18,916)
Total $ 4,981,612

NOTE 12 – OTHER BORROWINGS

The following table summarizes Old National’s other borrowings:

(dollars in thousands) March 31,<br>2023 December 31, <br>2022
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 (208) (247)
Subordinated debentures (fixed rate 5.875%) maturing September 2026 150,000 150,000
Junior subordinated debentures (variable rates of<br><br>6.27% to 8.41%) maturing July 2031 to September 2037 136,643 136,643
Other basis adjustments 22,073 23,363
Old National Bank:
Finance lease liabilities 21,983 13,469
Subordinated debentures (variable rate 9.16%) maturing October 2025 12,000 12,000
Leveraged loans for NMTC (fixed rates of 1.00% to 1.43%)<br><br>maturing December 2046 to June 2060 143,745 143,187
Other (1) 85,633 89,588
Total other borrowings $ 746,869 $ 743,003

(1)Includes overnight borrowings to collateralize certain derivative positions totaling $84.4 million at March 31, 2023 and $88.0 million at December 31, 2022.

Contractual maturities of other borrowings at March 31, 2023 were as follows:

(dollars in thousands)
Due in 2023 $ 86,291
Due in 2024 177,609
Due in 2025 14,696
Due in 2026 151,529
Due in 2027 1,587
Thereafter 292,059
Unamortized debt issuance costs and other basis adjustments 23,098
Total $ 746,869

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

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

The following table summarizes the terms of our outstanding junior subordinated debentures at March 31, 2023:

(dollars in thousands) Rate at<br><br>March 31,<br>2023
Name of Trust Issuance Date Issuance<br>Amount Rate Maturity Date
Bridgeview Statutory Trust I July 2001 $ 15,464 3-month LIBOR plus 3.58% 8.41% July 31, 2031
Bridgeview Capital Trust II December 2002 15,464 3-month LIBOR plus 3.35% 8.18% January 7, 2033
First Midwest Capital Trust I November 2003 37,825 6.95% fixed 6.95% December 1, 2033
St. Joseph Capital Trust II March 2005 5,155 3-month LIBOR plus 1.75% 6.66% March 17, 2035
Northern States Statutory Trust I September 2005 10,310 3-month LIBOR plus 1.80% 6.67% September 15, 2035
Anchor Capital Trust III August 2005 5,000 3-month LIBOR plus 1.55% 6.71% September 30, 2035
Great Lakes Statutory Trust II December 2005 6,186 3-month LIBOR plus 1.40% 6.27% December 15, 2035
Home Federal Statutory<br>   Trust I September 2006 15,464 3-month LIBOR plus 1.65% 6.52% September 15, 2036
Monroe Bancorp Capital<br>   Trust I July 2006 3,093 3-month LIBOR plus 1.60% 6.43% October 7, 2036
Tower Capital Trust 3 December 2006 9,279 3-month LIBOR plus 1.69% 6.65% March 1, 2037
Monroe Bancorp Statutory<br>   Trust II March 2007 5,155 3-month LIBOR plus 1.60% 6.47% June 15, 2037
Great Lakes Statutory Trust III June 2007 8,248 3-month LIBOR plus 1.70% 6.57% September 15, 2037
Total $ 136,643

Subordinated Debentures

Old National assumed $12.0 million of subordinated fixed-to-floating notes related to the acquisition of Anchor Bancorp, Inc. (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%.

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 NMTC 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 NMTC seven-year compliance period. See Note 9 to the consolidated financial statements for additional information on the Company’s NMTC investments.

Finance Lease Liabilities

Old National has long-term finance lease liabilities for certain banking centers and equipment totaling $22.0 million at March 31, 2023.  See Note 7 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities.

NOTE 13 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

(dollars in thousands) Unrealized<br>Gains and<br>Losses on<br>Available-<br>for-Sale<br>Debt<br>Securities Unrealized<br>Gains and<br>Losses on<br>Held-to-<br>Maturity<br>Securities Gains and<br>Losses on<br>Hedges Defined<br>Benefit<br>Pension<br>Plans Total
Three Months Ended March 31, 2023
Balance at beginning of period $ (642,346) $ (112,664) $ (31,549) $ 137 $ (786,422)
Other comprehensive income (loss) before<br>   reclassifications 27,219 1,325 35,985 — 64,529
Amounts reclassified from AOCI to income (1) 3,867 4,373 5,436 (141) 13,535
Balance at end of period $ (611,260) $ (106,966) $ 9,872 $ (4) $ (708,358)
Three Months Ended March 31, 2022
Balance at beginning of period $ (2,950) $ — $ 543 $ 32 $ (2,375)
Other comprehensive income (loss) before<br>   reclassifications (311,153) (16,963) (7,170) — (335,286)
Amounts reclassified from AOCI to income (1) (261) 236 (505) (8) (538)
Balance at end of period $ (314,364) $ (16,727) $ (7,132) $ 24 $ (338,199)

(1)See table below for details about reclassifications to income.

The following table summarizes the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2023 and 2022:

Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Details about AOCI Components Amount Reclassified<br>from AOCI Affected Line Item in the<br>Statement of Income
Unrealized gains and losses on<br>   available-for-sale securities $ (5,216) $ 342 Debt securities gains (losses), net
1,349 (81) Income tax (expense) benefit
$ (3,867) $ 261 Net income (loss)
Unrealized gains and losses on<br>   held-to-maturity securities $ (5,829) $ (310) Interest income (expense)
1,456 74 Income tax (expense) benefit
$ (4,373) $ (236) Net income (loss)
Gains and losses on hedges<br>   Interest rate contracts $ (7,292) $ 669 Interest income (expense)
1,856 (164) Income tax (expense) benefit
$ (5,436) $ 505 Net income (loss)
Amortization of defined benefit<br>   pension items
Actuarial gains (losses) $ 188 $ 11 Salaries and employee benefits
(47) (3) Income tax (expense) benefit
$ 141 $ 8 Net income (loss)
Total reclassifications for the period $ (13,535) $ 538 Net income (loss)

NOTE 14 – 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<br>March 31,
(dollars in thousands) 2023 2022
Provision at statutory rate of 21% $ 39,484 $ (7,623)
Tax-exempt income:
Tax-exempt interest (4,486) (2,992)
Section 291/265 interest disallowance 386 28
Company-owned life insurance income (627) (718)
Tax-exempt income (4,727) (3,682)
State income taxes 8,142 (3,327)
Interim period effective rate adjustment (1,717) 7,040
Tax credit investments - federal (2,526) (1,270)
Officer compensation limitation 1,040 —
Other, net 1,725 148
Income tax expense (benefit) $ 41,421 $ (8,714)
Effective tax rate 22.0 % 24.0 %

The provision for income taxes was recorded at March 31, 2023 and 2022 based on the current estimate of the effective annual rate.

The lower effective tax rate during the three months ended March 31, 2023 compared to the same period in 2022 was primarily the result of higher tax-exempt income and tax credits and a decrease in non-deductible merger-related expenses. These benefits were partially offset by increases in non-deductible officer compensation and non-deductible FDIC premiums.

Net Deferred Tax Assets

Net deferred tax assets are included in other assets on the balance sheet. At March 31, 2023, net deferred tax assets totaled $391.4 million, compared to $435.8 million at December 31, 2022. The decrease in net deferred tax assets was driven by $27.4 million of payouts on benefit plans, such as bonus compensation, and a $13.2 million reduction in deferred taxes on the market valuation of certain investments.

The Company’s retained earnings at March 31, 2023 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 March 31, 2023 or December 31, 2022 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 $77.1 million at March 31, 2023 and $81.5 million at December 31, 2022.  This federal net operating loss was acquired from the acquisition of Anchor BanCorp Wisconsin Inc. 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 $121.4 million at March 31, 2023 and $124.4 million at December 31, 2022.  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.

NOTE 15 – DERIVATIVE FINANCIAL INSTRUMENTS

As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, collars, caps, and floors.  The notional amount does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts.  Old National’s exposure is limited to the termination value of the contracts rather than the notional, principal, or contract amounts.  There are provisions in our agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold.  Exposures in excess of the agreed thresholds are collateralized.  In addition, we minimize credit risk through credit approvals, limits, and monitoring procedures.

Derivatives Designated as Hedges

Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner:

Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income (loss).

Fair value hedges: changes in fair value are recognized concurrently in earnings.

As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings.

The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item.

Cash Flow Hedges

Interest rate swaps of certain borrowings were designated as cash flow hedges totaling $150.0 million notional amount at both March 31, 2023 and December 31, 2022. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $1.9 billion notional amount at both March 31, 2023 and December 31, 2022. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.

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 $200.0 million notional amount at March 31, 2023 and $300.0 million notional amount at December 31, 2022. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $910.0 million notional amount at both March 31, 2023 and December 31, 2022. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.

The following table summarizes Old National’s derivatives designated as hedges:

March 31, 2023 December 31, 2022
Fair Value Fair Value
(dollars in thousands) Notional Assets (1) Liabilities (2) Notional Assets (1) Liabilities (2)
Cash flow hedges
Interest rate collars and floors on loan pools $ 1,900,000 $ 17,328 $ 38,276 $ 1,900,000 $ 11,764 $ 47,859
Interest rate swaps on borrowings (3) 150,000 — — 150,000 — —
Fair value hedges
Interest rate swaps on investment securities (3) 909,957 — 4,833 909,957 — —
Interest rate swaps on borrowings (3) 200,000 — — 300,000 — —
Total $ 17,328 $ 43,109 $ 11,764 $ 47,859

(1)Derivative assets are included in other assets on the balance sheet.

(2)Derivative liabilities are included in other liabilities on the balance sheet.

(3)The fair values of certain counterparty interest rate swaps are zero due to the settlement of centrally cleared variation margin rules.

The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income were as follows:

(dollars in thousands) Gain (Loss)<br>Recognized<br>in Income on<br>Related<br>Hedged<br>Items
Derivatives in <br>Fair Value Hedging<br>Relationships Location of Gain or <br>(Loss) Recognized in <br>Income on Derivative Gain (Loss)<br>Recognized<br>in Income on<br>Derivative Hedged Items <br>in Fair Value<br>Hedging<br>Relationships Location of Gain or <br>(Loss) Recognized in <br>in Income on Related <br>Hedged Item
Three Months Ended<br><br>March 31, 2023
Interest rate contracts Interest income/(expense) $ 2,153 Fixed-rate debt Interest income/(expense) $ (2,218)
Interest rate contracts Interest income/(expense) (63,115) Fixed-rate<br>investment<br>securities Interest income/(expense) 63,251
Total $ (60,962) $ 61,033
Three Months Ended<br>March 31, 2022
Interest rate contracts Interest income/(expense) $ (4,833) Fixed-rate debt Interest income/(expense) $ 4,956
Interest rate contracts Interest income/(expense) 57,654 Fixed-rate<br>investment<br>securities Interest income/(expense) (58,029)
Total $ 52,821 $ (53,073)

The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income were as follows:

Three Months Ended<br>March 31, Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022 2023 2022
Derivatives in<br>Cash Flow Hedging<br>Relationships Location of Gain or<br>(Loss) Reclassified<br>from AOCI into Income Gain (Loss)<br>Recognized in Other<br>Comprehensive<br>Income on Derivative Gain (Loss)<br>Reclassified from<br>AOCI into<br>Income
Interest rate contracts Interest income/(expense) $ 6,603 $ (9,506) $ (7,637) $ 669

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 $4.4 million will be reclassified to interest income and $23.1 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 March 31, 2023, the notional amounts of the interest rate lock commitments were $38.9 million and forward commitments were $45.0 million.  At December 31, 2022, the notional amounts of the interest rate lock commitments were $21.4 million and forward commitments were $30.3 million.  It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.

Old National also enters into derivative instruments for the benefit of its clients.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $5.6 billion at March 31, 2023 and $5.2 billion at December 31, 2022.  These derivative contracts do not qualify for hedge accounting.  These instruments include interest rate swaps, caps, and collars.  Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of clients by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

Old National enters into derivative financial instruments as part of its foreign currency risk management strategies.  These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its clients.  Old National does not designate these foreign currency forward contracts for hedge accounting treatment.

The following table summarizes Old National’s derivatives not designated as hedges:

March 31, 2023 December 31, 2022
Fair Value Fair Value
(dollars in thousands) Notional Assets (1) Liabilities (2) Notional Assets (1) Liabilities (2)
Interest rate lock commitments $ 38,945 $ 380 $ — $ 21,401 $ 93 $ —
Forward mortgage loan contracts 45,047 — 148 30,330 32 —
Customer interest rate swaps 5,575,403 19,470 257,902 5,220,363 5,676 326,924
Counterparty interest rate swaps (3) 5,575,403 128,487 19,610 5,220,363 151,111 5,711
Customer foreign currency forward contracts 14,165 382 21 8,341 253 42
Counterparty foreign currency forward contracts 14,143 22 205 8,297 72 168
Total $ 148,741 $ 277,886 $ 157,237 $ 332,845

(1)Derivative assets are included in other assets on the balance sheet.

(2)Derivative liabilities are included in other liabilities on the balance sheet.

(3)The fair values of certain counterparty interest rate swaps are zero due to the settlement of centrally cleared variation margin rules.

The effect of derivatives not designated as hedging instruments on the consolidated statements of income were as follows:

Three Months Ended<br>March 31,
(dollars in thousands) 2023 2022
Derivatives Not Designated as<br>Hedging Instruments Location of Gain or (Loss)<br>Recognized in Income on<br>Derivative Gain (Loss)<br>Recognized in Income on<br>Derivative
Interest rate contracts (1) Other income/(expense) $ (138) $ 501
Mortgage contracts Mortgage banking revenue 107 130
Foreign currency contracts Other income/(expense) (1) (28)
Total $ (32) $ 603

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

NOTE 16 – COMMITMENTS, CONTINGENCIES, AND FINANCIAL GUARANTEES

Litigation

In the normal course of business, Old National Bancorp and its subsidiaries are subject to pending and threatened litigation, claims, investigations, and legal and administrative cases and proceedings.  Certain of the actual or threatened legal actions may include claims for compensatory 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 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.

Credit-Related Financial Instruments

Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees and are recorded 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.  These commitments are not recorded in the consolidated financial statements.

The following table summarizes Old National Bank’s unfunded loan commitments and standby letters of credit:

(dollars in thousands) March 31,<br>2023 December 31, <br>2022
Unfunded loan commitments $ 9,386,866 $ 8,979,334
Standby letters of credit (1) 181,476 174,070

(1)Notional amount, which represents the maximum amount of future funding requirements. The carrying value was $0.9 million at March 31, 2023 and $0.8 million at December 31, 2022.

At March 31, 2023, approximately 6% of the unfunded loan commitments had fixed rates, with the remainder having floating rates ranging from 0% to 22%.  The allowance for unfunded loan commitments totaled $34.2 million at March 31, 2023 and $32.2 million at December 31, 2022.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amounts of $381.8 million at March 31, 2023 and $398.9 million at December 31, 2022.

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 March 31, 2023, the conversion ratio was 1.5991.  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 March 31, 2023 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 17 – 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).

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 March 31, 2023 Using
(dollars in thousands) Carrying Value Quoted Prices in<br>Active Markets for<br>Identical Assets (Level 1) Significant<br>Other<br>Observable<br>Inputs <br>(Level 2) Significant<br>Unobservable<br>Inputs <br>(Level 3)
Financial Assets
Equity securities $ 72,158 $ 72,158 $ — $ —
Investment securities available-for-sale:
U.S. Treasury 221,872 221,872 — —
U.S. government-sponsored entities and agencies 1,193,691 — 1,193,691 —
Mortgage-backed securities - Agency 4,308,775 — 4,308,775 —
States and political subdivisions 621,487 — 621,487 —
Pooled trust preferred securities 10,849 — 10,849 —
Other securities 330,392 — 330,392 —
Residential loans held for sale 10,584 — 10,584 —
Derivative assets 166,069 — 166,069 —
Financial Liabilities
Derivative liabilities 320,995 — 320,995 — Fair Value Measurements at December 31, 2022 Using
--- --- --- --- --- --- --- --- ---
(dollars in thousands) Carrying Value Quoted Prices in<br>Active Markets for<br>Identical Assets (Level 1) Significant<br>Other<br>Observable<br>Inputs <br>(Level 2) Significant<br>Unobservable<br>Inputs <br>(Level 3)
Financial Assets
Equity securities $ 52,507 $ 52,507 $ — $ —
Investment securities available-for-sale:
U.S. Treasury 200,927 200,927 — —
U.S. government-sponsored entities and agencies 1,175,080 — 1,175,080 —
Mortgage-backed securities - Agency 4,369,902 — 4,369,902 —
States and political subdivisions 663,852 — 663,852 —
Pooled trust preferred securities 10,811 — 10,811 —
Other securities 353,140 — 353,140 —
Residential loans held for sale 11,926 — 11,926 —
Derivative assets 169,001 — 169,001 —
Financial Liabilities
Derivative liabilities 380,704 — 380,704 —

Non-Recurring Basis

Assets measured at fair value at March 31, 2023 on a non-recurring basis are summarized below:

Fair Value Measurements at March 31, 2023 Using
(dollars in thousands) Carrying<br>Value Quoted Prices in<br>Active Markets for<br>Identical Assets<br>(Level 1) Significant<br>Other<br>Observable<br>Inputs<br>(Level 2) Significant<br>Unobservable<br>Inputs<br>(Level 3)
Collateral Dependent Loans:
Commercial loans $ 16,686 $ — $ — $ 16,686
Commercial real estate loans 43,924 — — 43,924
Foreclosed Assets:
Commercial 240 — — 240
Residential 511 — — 511

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 $85.4 million, with a valuation allowance of $24.8 million at March 31, 2023.  Old National recorded provision expense associated with these loans totaling $11.9 million for the three months ended March 31, 2023.  Old National recorded provision expense associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $15.8 million for the three months ended March 31, 2022.

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 $0.8 million at March 31, 2023. There were $27 thousand of write-downs on other real estate owned for the three months ended March 31, 2023 and $0.2 million for the three months ended March 31, 2022.

Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount.  If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value.  Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).  There was no valuation allowance for loan servicing rights with impairments at March 31, 2023 and no impairments or recoveries recorded during the three months ended March 31, 2023. Old National recorded recoveries associated with these loan servicing rights totaling $45 thousand during the three months ended March 31, 2022.

Assets measured at fair value at December 31, 2022 on a non-recurring basis are summarized below:

Fair Value Measurements at December 31, 2022 Using
(dollars in thousands) Carrying Value Quoted Prices in<br>Active Markets for<br>Identical Assets (Level 1) Significant<br>Other<br>Observable<br>Inputs (Level 2) Significant<br>Unobservable<br>Inputs (Level 3)
Collateral Dependent Loans:
Commercial loans $ 22,562 $ — $ — $ 22,562
Commercial real estate loans 48,026 — — 48,026

At December 31, 2022, commercial and commercial real estate loans that are deemed collateral dependent had a principal amount of $92.0 million, with a valuation allowance of $21.5 million.

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 Value Valuation Techniques Unobservable Input Range (Weighted Average) (1)
March 31, 2023
Collateral Dependent Loans
Commercial loans $ 16,686 Discounted Discount for type of property, 10% - 40% (33%)
cash flow age of appraisal, and current status
Commercial real estate loans 43,924 Discounted Discount for type of property, 0% - 30% (14%)
cash flow age of appraisal, and current status
Foreclosed Assets
Commercial real estate (2) 240 Fair value of Discount for type of property, —%
collateral age of appraisal, and current status
Residential (2) 511 Fair value of Discount for type of property, 5%
collateral age of appraisal, and current status
December 31, 2022
Collateral Dependent Loans
Commercial loans $ 22,562 Discounted Discount for type of property, 10% - 47% (28%)
cash flow age of appraisal, and current status
Commercial real estate loans 48,026 Discounted Discount for type of property, 1% - 26% (11%)
cash flow age of appraisal, and current status

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

(2)There were no writedowns on foreclosed commercial real estate and only one residential real estate property written down during the three months ended March 31, 2023, so no range or weighted average is reported.

Fair Value Option

Old National may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income.  After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur.  The fair value election may not be revoked once an election is made.

Residential Loans Held For Sale

Old National has elected the fair value option for residential loans held for sale.  For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the financial assets (except any that are on nonaccrual status).  None of these loans are 90 days or more past due, nor are any on nonaccrual status.  Included in the income statement is interest income for loans held for sale totaling $0.2 million for the three months ended March 31, 2023, compared to $0.5 million for the three months ended March 31, 2022.

Newly originated conforming fixed-rate and adjustable-rate first mortgage 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 Value Difference Contractual Principal
March 31, 2023
Residential loans held for sale $ 10,584 $ 165 $ 10,419
December 31, 2022
Residential loans held for sale $ 11,926 $ 221 $ 11,705

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<br>Gains and (Losses) Interest Income Interest (Expense) Total Changes<br>in Fair Values<br>Included in<br>Current Period Earnings
Three Months Ended March 31, 2023
Residential loans held for sale $ (53) $ — $ (3) $ (56)
Three Months Ended March 31, 2022
Residential loans held for sale $ (1,343) $ — $ (3) $ (1,346)

Financial Instruments Not Carried at Fair Value

The carrying amounts and estimated exit price fair values of financial instruments not carried at fair value were as follows:

Fair Value Measurements at March 31, 2023 Using
(dollars in thousands) Carrying Value Quoted Prices in<br>Active Markets<br>for Identical<br>Assets (Level 1) Significant<br>Other<br>Observable<br>Inputs (Level 2) Significant<br>Unobservable<br>Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,<br>   and other interest-earning investments $ 1,113,935 $ 1,113,935 $ — $ —
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies 820,849 — 663,623 —
Mortgage-backed securities - Agency 1,086,905 — 973,486 —
State and political subdivisions 1,163,436 — 1,026,265 —
Loans, net:
Commercial 9,624,779 — — 9,477,212
Commercial real estate 12,772,044 — — 12,477,217
Residential real estate 6,548,459 — — 5,760,254
Consumer credit 2,578,381 — — 2,481,269
Accrued interest receivable 188,988 1,046 43,858 144,084
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits $ 10,995,083 $ 10,995,083 $ — $ —
Checking, NOW, savings, and money market<br>   interest-bearing deposits 19,801,014 19,801,014 — —
Time deposits 4,121,695 — 4,066,499 —
Federal funds purchased and interbank borrowings 618,955 618,955 — —
Securities sold under agreements to repurchase 393,018 393,018 — —
FHLB advances 4,981,612 — 4,764,172 —
Other borrowings 746,869 — 717,801 —
Accrued interest payable 28,792 — 28,792 —
Standby letters of credit 846 — — 846
Off-Balance Sheet Financial Instruments
Commitments to extend credit $ — $ — $ — $ 3,649
Fair Value Measurements at December 31, 2022 Using
--- --- --- --- --- --- --- --- ---
(dollars in thousands) Carrying Value Quoted Prices in<br>Active Markets<br>for Identical<br>Assets (Level 1) Significant<br>Other<br>Observable<br>Inputs (Level 2) Significant<br>Unobservable<br>Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,<br>   and other interest-earning investments $ 728,412 $ 728,412 $ — $ —
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies 819,168 — 656,358 —
Mortgage-backed securities - Agency 1,106,817 — 982,963 —
State and political subdivisions 1,163,162 — 1,004,361 —
Loans, net:
Commercial 9,386,862 — — 9,066,583
Commercial real estate 12,317,825 — — 11,867,851
Residential real estate 6,438,525 — — 5,372,491
Consumer credit 2,676,758 — — 2,557,115
Accrued interest receivable 190,521 758 52,081 137,682
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits $ 11,930,798 $ 11,930,798 $ — $ —
Checking, NOW, savings, and money market<br>   interest-bearing deposits 20,056,252 20,056,252 — —
Time deposits 3,013,780 — 2,976,389 —
Federal funds purchased and interbank borrowings 581,489 581,489 — —
Securities sold under agreements to repurchase 432,804 432,804 — —
FHLB advances 3,829,018 — 3,739,780 —
Other borrowings 743,003 — 703,156 —
Accrued interest payable 19,547 — 19,547 —
Standby letters of credit 755 — — 755
Off-Balance Sheet Financial Instruments
Commitments to extend credit $ — $ — $ — $ 3,666

The methods utilized to measure the fair value of financial instruments at March 31, 2023 and December 31, 2022 represent an approximation of exit price, however, an actual exit price may differ.

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 months ended March 31, 2023 and 2022, and financial condition as of March 31, 2023, compared to December 31, 2022.  This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes, as well as our 2022 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 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the SEC, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute forward‐looking statements within the meaning of the Act. 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 continued effects of the COVID-19 pandemic and related variants and mutations, including the continued effects on our business, operations, and employees as well as the businesses of our customers; competition; government legislation, regulations and policies; the 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; inflation and governmental responses to inflation, including increasing interest rates; 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; the effects of climate change on Old National and its customers, borrowers, or service providers; political and economic uncertainty and instability; other matters discussed in this report; and other factors identified in 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 the factors under the heading “Risk Factors” included our other filings with the SEC.

FINANCIAL HIGHLIGHTS

The following table sets forth certain financial highlights of Old National for the previous five quarters:

Three Months Ended
(dollars and shares in thousands,<br>except per share data) March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Income Statement:
Net interest income $ 381,488 $ 391,090 $ 376,589 $ 337,472 $ 222,785
Taxable equivalent adjustment (1) (4) 5,666 5,378 4,950 4,314 3,772
Net interest income - taxable equivalent basis (4) 387,154 396,468 381,539 341,786 226,557
Provision for credit losses (2) 13,437 11,408 15,490 9,165 108,736
Noninterest income 70,681 165,037 80,385 89,117 65,240
Noninterest expense (2) 250,711 282,675 262,444 277,475 215,589
Net income (loss) available to common shareholders $ 142,566 $ 196,701 $ 136,119 $ 110,952 $ (29,603)
Per Common Share Data:
Weighted average diluted common shares 292,756 293,131 292,483 291,881 227,002
Net income (loss) (diluted) $ 0.49 $ 0.67 $ 0.47 $ 0.38 $ (0.13)
Cash dividends 0.14 0.14 0.14 $ 0.14 $ 0.14
Common dividend payout ratio (3) 29 % 21 % 30 % 37 % (108) %
Book value $ 17.24 $ 16.68 $ 16.05 $ 16.51 $ 17.03
Stock price 14.42 17.98 16.47 14.79 16.38
Tangible common book value (4) 9.98 9.42 8.75 9.23 9.71
Performance Ratios:
Return on average assets 1.25 % 1.74 % 1.22 % 1.01 % (0.31) %
Return on average common equity 11.58 16.77 11.13 9.08 (2.89)
Return on tangible common equity (4) 20.20 29.25 22.07 17.21 (3.61)
Return on average tangible common equity (4) 21.03 31.53 20.49 16.93 (4.03)
Net interest margin (4) 3.69 3.85 3.71 3.33 2.88
Efficiency ratio (4) 52.81 49.12 55.26 62.72 72.32
Efficiency ratio (prior presentation) (5) N/A N/A 56.17 62.70 76.15
Net charge-offs (recoveries) to average loans 0.21 0.05 0.10 0.02 0.05
Allowance for credit losses on loans to ending loans 0.94 0.98 0.99 0.97 0.99
Allowance for credit losses (6) to ending loans 1.05 1.08 1.08 1.05 1.07
Non-performing loans to ending loans 0.74 0.81 0.81 0.78 0.88
Balance Sheet:
Total loans $ 31,822,374 $ 31,123,641 $ 30,528,933 $ 29,553,648 $ 28,336,244
Total assets 47,842,644 46,763,372 46,215,526 45,748,355 45,834,648
Total deposits 34,917,792 35,000,830 36,053,663 35,538,975 35,607,390
Total borrowed funds 6,740,454 5,586,314 4,264,750 4,384,411 4,347,560
Total shareholders' equity 5,277,426 5,128,595 4,943,383 5,078,783 5,232,114
Capital Ratios:
Risk-based capital ratios:
Tier 1 common equity 9.98 % 10.03 % 9.88 % 9.90 % 10.04 %
Tier 1 10.64 10.71 10.58 10.63 10.79
Total 11.96 12.02 11.84 12.03 12.19
Leverage ratio (to average assets) 8.53 8.52 8.26 8.19 10.58
Total equity to assets (averages) 11.00 10.70 11.18 11.22 12.03
Tangible common equity to tangible assets (4) 6.37 6.18 5.82 6.20 6.51
Nonfinancial Data:
Full-time equivalent employees 4,023 3,967 4,008 4,196 4,333
Banking centers 256 263 263 266 267

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

(2)Provision for unfunded loan commitments is included in the provision for credit losses. The reclassification of the provision for unfunded loan commitments out of other expense as a component of noninterest expense was made to amounts prior to December 31, 2022 to conform to the current period presentation.

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

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

(5)Presented as calculated prior to December 31, 2022, which included the provision for unfunded loan commitments in noninterest expense. Management believes that removing the provision for unfunded loan commitments from this metric enhances comparability for peer comparison purposes.

(6)Includes the allowance for credit losses on loans and unfunded loan commitments.

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 taxable 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 AOCI 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.

The following table presents GAAP to non-GAAP reconciliations for the previous five quarters:

Three Months Ended
(dollars and shares in thousands,<br>except per share data) March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Tangible common book value:
Shareholders' common equity $ 5,033,707 $ 4,884,876 $ 4,699,664 $ 4,835,064 $ 4,988,395
Deduct: Goodwill and intangible assets 2,118,935 2,125,121 2,135,792 2,131,815 2,144,609
Tangible shareholders' common equity (1) $ 2,914,772 $ 2,759,755 $ 2,563,872 $ 2,703,249 $ 2,843,786
Period end common shares 291,922 292,903 292,880 292,893 292,959
Tangible common book value (1) 9.98 9.42 8.75 9.23 9.71
Return on tangible common equity:
Net income (loss) applicable to common shares $ 142,566 $ 196,701 $ 136,119 $ 110,952 $ (29,603)
Add:  Intangible amortization (net of tax) (2) 4,639 5,090 5,317 5,378 3,934
Tangible net income (loss) (1) $ 147,205 $ 201,791 $ 141,436 $ 116,330 $ (25,669)
Tangible shareholders' common equity (1)<br><br>(see above) $ 2,914,772 $ 2,759,755 $ 2,563,872 $ 2,703,249 $ 2,843,786
Return on tangible common equity (1) 20.20 % 29.25 % 22.07 % 17.21 % (3.61) %
Return on average tangible common equity:
Tangible net income (loss) (1) (see above) $ 147,205 $ 201,791 $ 141,436 $ 116,330 $ (25,669)
Average shareholders' common equity $ 4,922,469 $ 4,692,863 $ 4,890,434 $ 4,886,181 $ 4,101,206
Deduct: Average goodwill and intangible assets 2,122,157 2,132,480 2,129,858 2,136,964 1,550,624
Average tangible shareholders' common equity (1) $ 2,800,312 $ 2,560,383 $ 2,760,576 $ 2,749,217 $ 2,550,582
Return on average tangible common equity (1) 21.03 % 31.53 % 20.49 % 16.93 % (4.03) %
Net interest margin:
Net interest income $ 381,488 $ 391,090 $ 376,589 $ 337,472 $ 222,785
Taxable equivalent adjustment 5,666 5,378 4,950 4,314 3,772
Net interest income - taxable equivalent basis (1) $ 387,154 $ 396,468 $ 381,539 $ 341,786 $ 226,557
Average earning assets $ 41,941,913 $ 41,206,695 $ 41,180,026 $ 41,003,338 $ 31,483,553
Net interest margin (1) 3.69 % 3.85 % 3.71 % 3.33 % 2.88 %
Efficiency ratio:
Noninterest expense $ 250,711 $ 282,675 $ 262,444 $ 277,475 $ 215,589
Deduct:  Intangible amortization expense 6,186 6,787 7,089 7,170 4,811
Adjusted noninterest expense (1) $ 244,525 $ 275,888 $ 255,355 $ 270,305 $ 210,778
Net interest income - taxable equivalent basis (1)<br><br>(see above) $ 387,154 $ 396,468 $ 381,539 $ 341,786 $ 226,557
Noninterest income 70,681 165,037 80,385 89,117 65,240
Deduct:  Debt securities gains (losses), net (5,216) (173) (172) (85) 342
Adjusted total revenue (1) $ 463,051 $ 561,678 $ 462,096 $ 430,988 $ 291,455
Efficiency ratio (1) 52.81 % 49.12 % 55.26 % 62.72 % 72.32 %
Tangible common equity to tangible assets:
Tangible shareholders' equity (1) (see above) $ 2,914,772 $ 2,759,755 $ 2,563,872 $ 2,703,249 $ 2,843,786
Assets $ 47,842,644 $ 46,763,372 $ 46,215,526 $ 45,748,355 $ 45,834,648
Deduct: Goodwill and intangible assets 2,118,935 2,125,121 2,135,792 2,131,815 2,144,609
Tangible assets (1) $ 45,723,709 $ 44,638,251 $ 44,079,734 $ 43,616,540 $ 43,690,039
Tangible common equity to tangible assets (1) 6.37 % 6.18 % 5.82 % 6.20 % 6.51 %

(1)Represents a non-GAAP financial measure.

(2)Calculated using management’s estimate of the annual fully taxable equivalent rates (federal and state).

EXECUTIVE SUMMARY

Old National is the largest financial holding company headquartered in the state of Indiana and the sixth largest Midwestern bank by asset size with consolidated assets of $48 billion at March 31, 2023.  The Company’s corporate headquarters and principal executive office is located in Evansville, Indiana with commercial and consumer banking operations headquartered in Chicago, Illinois. Old National, through Old National Bank, provides a wide range of banking services throughout the Midwest region, including commercial and consumer loan and depository services, and other traditional banking services.  Old National also provides services to supplement its traditional banking business including fiduciary and wealth management services, investment and brokerage services, investment consulting, and other financial services.

Net income applicable to common shareholders for the first quarter of 2023 was $142.6 million, or $0.49 per diluted common share, compared to $196.7 million, or $0.67 per diluted common share, for the fourth quarter of 2022 and $29.6 million net loss, or $(0.13) per diluted common share, for the first quarter of 2022.

Results for the three months ended March 31, 2023 were impacted by $14.6 million of merger-related charges, compared to $20.3 million and $52.3 million for the fourth and first quarters of 2022, respectively. The first quarter of 2022 merger-related charges included $11.0 million attributable to the provision for credit losses on unfunded loan commitments. In addition, the first quarter of 2022 provision expense 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. The first quarter of 2023 was also impacted by $1.3 million of property optimization expenses and $5.2 million in debt securities losses. Property optimization costs for the fourth quarter of 2022 were $26.8 million.

We achieved strong results during the first quarter of 2023, including stable total deposits, ample liquidity, strong credit quality, disciplined expense management, and loan growth.

Deposits:  Period-end total deposits were stable at $34.9 billion, including normal seasonal patterns in public funds compared to December 31, 2022.

Loans:  Our loan balances, excluding loans held for sale, increased $698.7 million to $31.8 billion at March 31, 2023 compared to December 31, 2022.  This was primarily driven by disciplined commercial loan growth.

Net Interest Income: Net interest income decreased $9.6 million to $381.5 million compared to the fourth quarter of 2022 driven by loan growth and the higher rate environment, which were more than offset by higher funding costs, fewer days in the quarter, and lower accretion income on loans.

Noninterest Income:  Noninterest income decreased $94.4 million to $70.7 million compared to the fourth quarter of 2022 reflecting $5.2 million of net debt securities losses in the first quarter of 2023 and a $90.7 million gain on the sale of health savings accounts in the fourth quarter of 2022. The remaining change was impacted by higher capital markets income as well as wealth management and investment product fees, partially offset by lower service charges on deposit accounts and debit card and ATM fees. In addition, mortgage banking revenue continues to be impacted by the higher rate environment and lower gain on sale margins.

Noninterest Expense:  Noninterest expense decreased $32.0 million compared to the fourth quarter of 2022 primarily due to lower merger-related and property optimization expenses, lower salary and employee benefits and tax credit amortization, partly offset by higher FDIC assessment and technology expenses. Noninterest expense included $14.6 million of merger-related expenses and $1.3 million of property optimization expenses, compared to $20.3 million and $26.8 million, respectively, in the fourth quarter of 2022.

RESULTS OF OPERATIONS

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

Three Months Ended<br>March 31, %
(dollars in thousands, except per share data) 2023 2022 Change
Income Statement Summary:
Net interest income $ 381,488 $ 222,785 71.2 %
Provision for credit losses 13,437 108,736 (87.6)
Noninterest income 70,681 65,240 8.3
Noninterest expense 250,711 215,589 16.3
Net income (loss) applicable to common shareholders 142,566 (29,603) (581.6)
Net income (loss) per common share - diluted 0.49 (0.13) (476.9)
Other Data:
Return on average common equity 11.58 % (2.89) %
Return on tangible common equity (1) 20.20 (3.61)
Return on average tangible common equity (1) 21.03 (4.03)
Efficiency ratio (1) 52.81 72.32
Efficiency ratio (prior presentation) (2) N/A 76.15
Tier 1 leverage ratio 8.53 10.58
Net charge-offs (recoveries) to average loans 0.21 0.05

(1)Represents a non-GAAP financial measure.  Refer to “Non-GAAP Financial Measures” section for reconciliations to GAAP financial measures.

(2)Presented as calculated prior to December 31, 2022, which included the provision for unfunded loan commitments in noninterest expense. Management believes that removing the provision for unfunded loan commitments from this metric enhances comparability for peer comparison purposes.

Net Interest Income

Net interest income is the most significant component of our earnings, comprising 84% of revenues for the three months ended March 31, 2023.  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 during the first quarter of 2023. The Federal Reserve’s Federal Funds Rate is currently in a target range of 4.75% to 5.00%, with the Effective Federal Funds Rate at 4.83% at March 31, 2023. Management actively takes balance sheet restructuring, derivative, and deposit pricing actions to help mitigate interest rate risk. See the section of this Item 7 titled “Market Risk” for additional information regarding this risk.

Loans typically generate more interest income than investment securities with similar maturities.  Funding from client deposits generally costs less than wholesale funding sources.  Factors such as general economic activity, Federal Reserve monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize our mix of assets and funding, net interest income, and net interest margin.

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

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

(Tax equivalent basis,<br>dollars in thousands) Three Months Ended<br>March 31, 2023 Three Months Ended<br>March 31, 2022
Earning Assets Average <br>Balance Income (1)/<br><br>Expense Yield/<br>Rate Average <br>Balance Income (1)/<br><br>Expense Yield/<br>Rate
Money market and other interest-earning<br>   investments $ 497,953 $ 3,098 2.52 % $ 1,336,404 $ 308 0.09 %
Investment securities:
Treasury and government sponsored agencies 2,197,426 16,531 3.01 % 2,195,470 8,219 1.50 %
Mortgage-backed securities 5,429,200 35,090 2.59 % 4,869,038 24,377 2.00 %
States and political subdivisions 1,808,316 14,690 3.25 % 1,738,652 13,637 3.14 %
Other securities 738,139 8,604 4.66 % 605,552 4,144 2.74 %
Total investment securities 10,173,081 74,915 2.95 % 9,408,712 50,377 2.14 %
Loans: (2)
Commercial 9,457,089 147,620 6.24 % 5,893,907 55,283 3.75 %
Commercial real estate 12,654,366 179,475 5.67 % 8,749,162 77,408 3.54 %
Residential real estate loans 6,523,074 58,099 3.56 % 3,990,716 33,986 3.41 %
Consumer 2,636,350 38,108 5.86 % 2,104,652 21,915 4.22 %
Total loans 31,270,879 423,302 5.42 % 20,738,437 188,592 3.64 %
Total earning assets 41,941,913 $ 501,315 4.79 % 31,483,553 $ 239,277 3.04 %
Deduct: Allowance for credit losses on loans (304,393) (168,175)
Non-Earning Assets
Cash and due from banks 437,872 268,836
Other assets 4,907,115 3,480,640
Total assets $ 46,982,507 $ 35,064,854
Interest-Bearing Liabilities
Checking and NOW $ 7,988,579 $ 19,359 0.98 % $ 6,784,653 $ 596 0.04 %
Savings 6,183,409 2,230 0.15 % 5,302,015 589 0.05 %
Money market 5,641,288 20,010 1.44 % 3,778,682 691 0.07 %
Time deposits 3,558,400 20,994 2.39 % 1,745,153 1,318 0.31 %
Total interest-bearing deposits 23,371,676 62,593 1.09 % 17,610,503 3,194 0.07 %
Federal funds purchased and interbank<br>   borrowings 419,291 4,839 4.68 % 1,113 — 0.01 %
Securities sold under agreements to repurchase 412,819 779 0.77 % 449,939 96 0.09 %
FHLB advances 4,273,343 37,996 3.61 % 2,589,984 5,963 0.93 %
Other borrowings 781,221 7,954 4.13 % 432,434 3,467 3.21 %
Total borrowed funds 5,886,674 51,568 3.55 % 3,473,470 9,526 1.11 %
Total interest-bearing liabilities $ 29,258,350 $ 114,161 1.58 % $ 21,083,973 $ 12,720 0.24 %
Noninterest-Bearing Liabilities and<br>   Shareholders' Equity
Demand deposits $ 11,526,267 $ 9,294,876
Other liabilities 1,031,702 467,589
Shareholders' equity 5,166,188 4,218,416
Total liabilities and shareholders' equity $ 46,982,507 $ 35,064,854
Net interest income - taxable equivalent basis $ 387,154 3.69 % $ 226,557 2.88 %
Taxable equivalent adjustment (5,666) (3,772)
Net interest income (GAAP) $ 381,488 3.64 % $ 222,785 2.83 %

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

(2)Includes loans held for sale.

The following table presents the dollar amount of changes in taxable equivalent net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid.

From Three Months Ended<br><br>March 31, 2022 to Three<br><br>Months Ended March 31, 2023
Total<br><br>Change (1) Attributed to
(dollars in thousands) Volume Rate
Interest Income
Money market and other interest-earning <br>   investments $ 2,790 $ (2,762) $ 5,552
Investment securities (2) 24,538 4,861 19,677
Loans (2) 234,710 119,213 115,497
Total interest income 262,038 121,312 140,726
Interest Expense
Checking and NOW deposits 18,763 1,426 17,337
Savings deposits 1,641 199 1,442
Money market deposits 19,319 3,382 15,937
Time deposits 19,676 5,987 13,689
Federal funds purchased and interbank borrowings 4,839 2,418 2,421
Securities sold under agreements to repurchase 683 (45) 728
FHLB advances 32,033 9,330 22,703
Other borrowings 4,487 3,146 1,341
Total interest expense 101,441 25,843 75,598
Net interest income $ 160,597 $ 95,469 $ 65,128

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

(2)Interest on investment securities and loans includes the effect of taxable equivalent adjustments of $3.0 million and $2.7 million, respectively, during the three months ended March 31, 2023 using the federal statutory rate in effect of 21%.

The increase in net interest income for the three months ended March 31, 2023 when compared to the same period in 2022 was primarily due to higher rates and loan growth. Partially offsetting these increases were higher costs of average interest-bearing liabilities and higher average interest-bearing liabilities. Accretion income associated with acquired loans and borrowings totaled $7.9 million three months ended March 31, 2023, compared to $15.9 million three months ended March 31, 2022.

The increase in the net interest margin on a fully taxable equivalent basis for the three months ended March 31, 2023 when compared to the same period in 2022 was primarily due to higher yields on interest earning assets, partially offset by higher costs of interest-bearing liabilities. The yield on interest earning assets increased 175 basis points and the cost of interest-bearing liabilities increased 134 basis points in the quarterly year-over-year comparison.  Accretion income represented 8 basis points of the net interest margin in the three months ended March 31, 2023, compared to 20 basis points in the three months ended March 31, 2022.

Average earning assets were $41.9 billion and $31.5 billion for the three months ended March 31, 2023 and 2022, respectively, an increase of $10.5 billion, or 33%. The increase in average earning assets was primarily due to the merger with First Midwest and strong loan growth.

Average loans including loans held for sale increased $10.5 billion for the three months ended March 31, 2023 when compared to the same period in 2022 primarily due to the First Midwest merger and strong organic loan growth.

Average investments increased $764.4 million for the three months ended March 31, 2023, when compared to the same period in 2022 primarily due to the First Midwest merger.

Average noninterest-bearing and interest-bearing deposits increased $2.2 billion and $5.8 billion, respectively, for the three months ended March 31, 2023 when compared to the same period in 2022 primarily due to the First Midwest merger.

Average borrowed funds increased $2.4 billion for the three months ended March 31, 2023 when compared to the same period in 2022.

Provision for Credit Losses

Old National recorded provision for credit losses on loans of $11.5 million for the three months ended March 31, 2023, compared to $97.4 million for the three months ended March 31, 2022. The provision for credit losses on loans in the three months ended March 31, 2022 included $96.3 million to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. Net charge-offs on loans totaled $16.4 million during the three months ended March 31, 2023, compared to net charge-offs of $2.8 million for the three months ended March 31, 2022.  Net charge-offs for the three months ended March 31, 2023 included $12.4 million in PCD charge-offs. Provision for credit losses on unfunded loan commitments totaled $2.0 million for the three months ended March 31, 2023, compared to $11.2 million for the three months ended March 31, 2022. The provision for credit losses on unfunded loan commitments in the three months ended March 31, 2022 included $11.0 million for unfunded loan commitments acquired in the First Midwest merger. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, provision expense may be volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Noninterest Income

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

Three Months Ended<br>March 31, %
(dollars in thousands) 2023 2022 Change
Wealth management fees $ 18,760 $ 14,630 28.2 %
Service charges on deposit accounts 17,003 14,026 21.2
Debit card and ATM fees 9,982 7,599 31.4
Mortgage banking revenue 3,400 7,245 (53.1)
Investment product fees 8,160 7,322 11.4
Capital markets income 6,939 4,442 56.2
Company-owned life insurance 3,186 3,524 (9.6)
Debt securities gains (losses), net (5,216) 342 N/M
Other income 8,467 6,110 38.6
Total noninterest income $ 70,681 $ 65,240 8.3 %

Noninterest income increased $5.4 million for the three months ended March 31, 2023 when compared to the same period in 2022 primarily due to the First Midwest merger in February of 2022. The increase in noninterest income was partially offset by $5.2 million of net losses on sales of debt securities in the three months ended March 31, 2023 and lower mortgage banking revenue, which continues to be impacted by the higher rate environment and lower gain on sale margins.

Noninterest Expense

The following table details the components in noninterest expense:

Three Months Ended<br>March 31, %
(dollars in thousands) 2023 2022 Change
Salaries and employee benefits $ 137,364 $ 124,147 10.6 %
Occupancy 28,282 21,019 34.6
Equipment 7,389 5,168 43.0
Marketing 9,417 4,276 120.2
Technology 19,202 18,762 2.3
Communication 4,461 3,417 30.6
Professional fees 6,732 19,791 (66.0)
FDIC assessment 10,404 2,575 304.0
Amortization of intangibles 6,186 4,811 28.6
Amortization of tax credit investments 2,761 1,516 82.1
Property optimization 1,317 — N/A
Other expense 17,196 10,107 70.1
Total noninterest expense $ 250,711 $ 215,589 16.3 %

Noninterest expense increased $35.1 million for the three months ended March 31, 2023 when compared to the same period in 2022 reflective of the additional operating costs associated with the First Midwest merger and higher FDIC assessment expense. Noninterest expense included $14.6 million of merger-related expenses for the three months ended March 31, 2023, compared to $41.3 million for the three months ended March 31, 2022.

Amortization of tax credit investments increased $1.2 million for the three months ended March 31, 2023 when compared to the same period in 2022. The recognition of tax credit amortization expense is contingent upon the successful completion of the rehabilitation of a historic building or completion of a solar project within the reporting period. Many factors including weather, labor availability, building regulations, inspections, and other unexpected construction delays related to a rehabilitation project can cause a project to exceed its estimated completion date.  See Note 9 to the consolidated financial statements for additional information on our tax credit investments.

Provision for Income Taxes

We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes.  The major difference between the effective tax rate applied to our financial statement income and the federal statutory tax rate is caused by a tax benefit from our tax credit investments and interest on tax-exempt securities and loans.  The effective tax rate was 22.0% for the three months ended March 31, 2023, compared to 24.0% for the same period in 2022.  In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, 2023 based on the current estimate of the effective annual rate.  The lower effective tax rate during the three months ended March 31, 2023 compared to the same period in 2022 was primarily the result of higher tax-exempt income and tax credits and a decrease in non-deductible merger-related expenses. These benefits were partially offset by increases in non-deductible officer compensation and non-deductible FDIC premiums. See Note 14 to the consolidated financial statements for additional information.

FINANCIAL CONDITION

Overview

At March 31, 2023, our assets were $47.8 billion, a $1.1 billion increase compared to assets of $46.8 billion at December 31, 2022.  The increase was driven by disciplined loan growth and higher cash balances funded through stable deposits and higher borrowings.

Earning Assets

Our earning assets are comprised of investment securities, portfolio loans, loans held for sale, money market investments, interest earning accounts with the Federal Reserve, and equity securities.  Earning assets were $42.8

billion at March 31, 2023, a $1.2 billion increase compared to earning assets of $41.6 billion at December 31, 2022 driven primarily by loan growth.

Investment Securities

We classify the majority of our investment securities as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements. During 2022, we transferred $3.0 billion of securities available-for-sale to held-to-maturity due to rising interest rates and related effects on the value of our investment securities.

Equity securities are recorded at fair value and totaled $72.2 million at March 31, 2023 compared to $52.5 million at December 31, 2022.

The investment securities portfolio, including equity securities, was $10.2 billion at both March 31, 2023 and December 31, 2022.  Investment securities represented 24% of earning assets at March 31, 2023, compared to 25% at December 31, 2022.  At March 31, 2023, 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.

The investment securities available-for-sale portfolio had net unrealized losses of $814.5 million at March 31, 2023, compared to net unrealized losses of $844.4 million at December 31, 2022.  The investment securities held-to-maturity portfolio had net unrealized losses of $407.8 million at March 31, 2023, compared to net unrealized losses of $445.5 million at December 31, 2022. Net unrealized losses decreased from December 31, 2022 to March 31, 2023 primarily due to a decline in market interest rates.

The investment securities available-for-sale portfolio including securities hedges had an effective duration of 4.43 at March 31, 2023, compared to 4.57 at December 31, 2022.  The total investment securities portfolio had an effective duration of 5.57 at March 31, 2023, compared to 6.45 at December 31, 2022. Effective duration represents the percentage change in the fair value of the portfolio in response to a change in interest rates and is used to evaluate the portfolio’s price volatility at a single point in time.  Generally, there is more uncertainty in interest rates over a longer average maturity, resulting in a higher duration percentage.  The annualized average yields on investment securities, on a taxable equivalent basis, were 2.95% for the three months ended March 31, 2023, compared to 2.14% for the three months ended March 31, 2022.

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classifications within earning assets, representing 53% of earning assets at both March 31, 2023 and December 31, 2022.  At March 31, 2023, commercial and commercial real estate loans were $22.7 billion, an increase of $694.3 million compared to December 31, 2022 driven by disciplined loan production in the three months ended March 31, 2023 that was well balanced across our market footprint and product lines.

The following table provides detail on commercial loans by industry classification (as defined by the North American Industry Classification System) and by loan size.

March 31, 2023 December 31, 2022
(dollars in thousands) Outstanding Exposure(1) Nonaccrual Outstanding Exposure(1) Nonaccrual
By Industry:
Manufacturing $ 1,839,041 $ 2,949,868 $ 2,218 $ 1,757,907 $ 2,803,883 $ 2,464
Health care and social assistance 1,547,279 2,066,304 6,614 1,588,392 2,043,105 11,806
Wholesale trade 823,273 1,587,693 4,852 857,400 1,552,985 2,895
Real estate rental and leasing 684,762 975,367 1,121 642,511 962,549 1,135
Construction 557,233 1,311,635 1,360 556,913 1,307,582 1,517
Professional, scientific, and<br>  technical services 532,386 848,346 4,691 507,940 832,407 4,735
Finance and insurance 520,676 885,526 16 484,532 858,391 17
Transportation and warehousing 452,628 693,200 2,712 422,643 633,267 3,496
Accommodation and food services 419,808 566,248 541 399,915 512,025 596
Retail trade 404,323 686,379 7,061 332,367 538,135 7,386
Administrative and support and<br>  waste management and<br>  remediation services 319,715 488,693 9,889 315,785 446,655 13,860
Public administration 219,897 313,742 — 231,453 325,834 846
Other services 215,427 396,876 14,505 194,998 356,743 2,656
Educational services 213,835 369,592 3,792 210,850 378,955 3,750
Agriculture, forestry, fishing, <br>  and hunting 207,416 371,072 959 261,355 382,376 996
Other 794,176 1,080,282 505 743,943 1,122,409 739
Total $ 9,751,875 $ 15,590,823 $ 60,836 $ 9,508,904 $ 15,057,301 $ 58,894
By Loan Size:
Less than $200,000 3 % 2 % 3 % 3 % 3 % 3 %
$200,000 to $1,000,000 11 11 15 11 11 20
$1,000,000 to $5,000,000 24 25 34 25 26 36
$5,000,000 to $10,000,000 15 15 12 15 15 24
$10,000,000 to $25,000,000 31 29 36 31 27 17
Greater than $25,000,000 16 18 — 15 18 —
Total 100 % 100 % 100 % 100 % 100 % 100 %

(1)    Includes unfunded loan commitments.

The following table provides detail on commercial real estate loans classified by property type.

March 31, 2023 December 31, 2022
(dollars in thousands) Outstanding % Outstanding %
By Property Type:
Multifamily $ 4,321,782 33 % $ 4,188,137 34 %
Warehouse / Industrial 2,110,884 16 1,976,804 16
Retail 1,876,410 15 1,808,041 14
Office 1,809,477 14 1,813,007 15
Commercial development 511,717 4 660,798 5
Single family 490,042 4 515,390 4
Other (1) 1,788,068 14 1,494,893 12
Total $ 12,908,380 100 % $ 12,457,070 100 %

(1)    Other includes agriculture real estate, hotels, self-storage, senior housing, land development, religion, and mixed-use properties.

Residential Real Estate Loans

At March 31, 2023, residential real estate loans held in our loan portfolio were $6.6 billion, an increase of $108.2 million compared to December 31, 2022.  Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans.

Consumer Loans

Consumer loans, including automobile loans, personal, and home equity loans and lines of credit, decreased $103.8 million to $2.6 billion at March 31, 2023 compared to December 31, 2022.

Funding

The following table summarizes Old National’s total funding, comprised of deposits and wholesale borrowings:

(dollars in thousands) March 31,<br>2023 December 31, <br>2022 Change % Change
Deposits:
Noninterest-bearing demand $ 10,995,083 $ 11,930,798 (8) %
Interest-bearing:
Checking and NOW 7,903,520 8,340,955 (437,435) (5) %
Savings 6,030,255 6,326,158 (295,903) (5) %
Money market 5,867,239 5,389,139 478,100 9 %
Time deposits 4,121,695 3,013,780 1,107,915 37 %
Total deposits 34,917,792 35,000,830 (83,038) — %
Wholesale borrowings:
Federal funds purchased and interbank borrowings 618,955 581,489 37,466 6 %
Securities sold under agreements to repurchase 393,018 432,804 (39,786) (9) %
Federal Home Loan Bank advances 4,981,612 3,829,018 1,152,594 30 %
Other borrowings 746,869 743,003 3,866 1 %
Total wholesale borrowings 6,740,454 5,586,314 1,154,140 21 %
Total funding $ 41,658,246 $ 40,587,144 3 %

All values are in US Dollars.

We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position.  Wholesale funding as a percentage of total funding was 16% at March 31, 2023 and 14% at December 31, 2022.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at March 31, 2023 decreased $133.9 million from December 31, 2022 primarily due to incentive payments during the three months ended March 31, 2023 and lower derivative liabilities.

Capital

Shareholders’ equity totaled $5.3 billion at March 31, 2023, compared to $5.1 billion at December 31, 2022.  This increase was driven by retained earnings along with changes in unrealized gains (losses) on derivatives and available-for-sale investment securities. These increases were partially offset by dividends and the repurchase of 1.8 million shares of Common Stock in the three months ended March 31, 2023 under a stock repurchase plan that was approved by the Company’s Board of Directors, which reduced equity by $29.5 million.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At March 31, 2023, Old National and its bank subsidiary exceeded the regulatory minimums and Old National Bank met the regulatory definition of “well-capitalized” based on the most recent regulatory definition.

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

Regulatory<br>Guidelines<br>Minimum Prompt<br>Corrective<br>Action "Well<br>Capitalized"<br>Guidelines March 31, December 31,
2023 2022 2022
Risk-based capital:
Tier 1 capital to total average assets (leverage<br>   ratio) 4.00 % N/A % 8.53 % 10.58 % 8.52 %
Common equity Tier 1 capital to risk-adjusted<br>   total assets 7.00 N/A 9.98 10.04 10.03
Tier 1 capital to risk-adjusted total assets 8.50 6.00 10.64 10.79 10.71
Total capital to risk-adjusted total assets 10.50 10.00 11.96 12.19 12.02
Shareholders' equity to assets N/A N/A 11.03 11.42 10.97

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

Regulatory<br>Guidelines<br>Minimum Prompt<br>Corrective<br>Action "Well<br>Capitalized"<br>Guidelines March 31, December 31,
2023 2022 2022
Risk-based capital:
Tier 1 capital to total average assets (leverage<br>   ratio) 4.00 % 5.00 % 8.68 % 10.07 % 8.47 %
Common equity Tier 1 capital to risk-adjusted<br>   total assets 7.00 6.50 10.83 10.28 10.66
Tier 1 capital to risk-adjusted total assets 8.50 8.00 10.83 10.28 10.66
Total capital to risk-adjusted total assets 10.50 10.00 11.55 10.89 11.35

During 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC issued final rules to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The final rules provide banking organizations the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). Old National adopted the capital transition relief over the permissible five-year period.

Management views stress testing as an integral part of the Company’s risk management and strategic planning activities. Old National performs stress testing periodically throughout the year. The primary objective of the stress test is to ensure that Old National has a robust, forward-looking stress testing process and maintains sufficient capital to continue operations throughout times of economic and financial stress. Management also uses the stress testing framework to evaluate decisions relating to pricing, loan concentrations, capital deployment, and mergers and acquisitions to ensure that strategic decisions align with Old National’s risk appetite statement. Old National’s stress testing process incorporates key risks that include strategic, market, liquidity, credit, operational, regulatory, compliance, legal, and reputational risks. Old National’s stress testing policy outlines steps that will be taken if stress test results do not meet internal thresholds under severely adverse economic scenarios.

RISK MANAGEMENT

Overview

Old National has adopted a Risk Appetite Statement to enable our Board of Directors, Executive Leadership Team, and Senior Management to better assess, understand, monitor, and mitigate Old National’s risks.  The Risk Appetite Statement addresses the following major risks:  strategic, market, liquidity, credit, operational, talent management, compliance and regulatory, legal, and reputational.  Our Chief Risk Officer is independent of all other management and provides quarterly reports to the Board’s Enterprise Risk Committee.  The following discussion addresses certain of these major risks including credit, market, and liquidity. Discussion of operational, compliance and regulatory, legal, strategic, talent management, and reputational risks is provided in the section entitled “Risk Factors” in the Company’s 2022 Annual Report on Form 10-K.

Credit Risk

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

Asset Quality

We lend to commercial and commercial real estate clients in many diverse industries including, among others, real estate rental and leasing, manufacturing, healthcare, wholesale trade, construction, and agriculture.  Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.  At March 31, 2023, our average commercial loan size was approximately $720,000 and our average commercial real estate loan size was approximately $1,300,000. In addition, while loans to lessors of residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold.  At March 31, 2023, we had minimal exposure to foreign borrowers and no sovereign debt.  Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily in the Midwest region.

The following table presents a summary of under-performing, criticized, and classified assets:

March 31, December 31,
(dollars in thousands) 2023 2022 2022
Total nonaccrual loans $ 234,337 $ 227,925 $ 238,178
TDRs still accruing (1) N/A 20,999 15,313
Loans 90 days or more past due and still accruing 1,231 1,646 2,650
Foreclosed assets 10,817 19,713 10,845
Total under-performing assets $ 246,385 $ 270,283 $ 266,986
Classified loans (includes nonaccrual, TDRs still accruing,<br><br>past due 90 days, and other problem loans) (1) $ 805,797 $ 747,912 $ 745,485
Other classified assets (2) 26,441 24,676 24,735
Criticized loans 593,307 507,689 636,069
Total criticized and classified assets $ 1,425,545 $ 1,280,277 $ 1,406,289
Asset Quality Ratios:
Nonaccrual loans/total loans (3) 0.74 % 0.80 % 0.77 %
Non-performing loans/total loans (3) (4) 0.74 0.88 0.81
Under-performing assets/total loans (3) 0.77 0.95 0.86
Under-performing assets/total assets 0.51 0.59 0.57
Allowance for credit losses on loans/under-performing assets 121.24 103.78 113.74
Allowance for credit losses on loans/nonaccrual loans 127.47 123.07 127.50

(1)As a result of the adoption of ASU 2022-02 on January 1, 2023, the TDR classification is no longer applicable.

(2)Includes investment securities that fell below investment grade rating.

(3)Loans exclude loans held for sale.

(4)Non-performing loans include nonaccrual loans and TDRs still accruing for periods prior to January 1, 2023.

Under-performing assets decreased to $246.4 million at March 31, 2023, compared to $270.3 million at March 31, 2022 and $267.0 million at December 31, 2022.  Under-performing assets as a percentage of total loans at March 31, 2023 were 0.77%, an 18 basis point decrease from 0.95% at March 31, 2022 and a 9 basis point decrease from 0.86% at December 31, 2022.

Nonaccrual loans decreased from December 31, 2022 to March 31, 2023. As a percentage of nonaccrual loans, the allowance for credit losses on loans was 127.47% at March 31, 2023, compared to 123.07% at March 31, 2022 and 127.50% at December 31, 2022.

Total criticized and classified assets were $1.4 billion at March 31, 2023, an increase of $145.3 million and $19.3 million from March 31, 2022 and December 31, 2022, respectively. Other classified assets include investment securities that fell below investment grade rating totaling $26.4 million at March 31, 2023, compared to $24.7 million at both March 31, 2022 and December 31, 2022.

Allowance for Credit Losses on Loans and Unfunded Commitments

Net charge-offs on loans totaled $16.4 million during the three months ended March 31, 2023, compared to net charge-offs of $2.8 million for the same period in 2022. Annualized, net charge-offs (recoveries) to average loans were 0.21% for the three months ended March 31, 2023, compared to 0.05% for the same period in 2022. The three months ended March 31, 2023 included net charge-offs on PCD loans totaling $12.4 million, or 0.16% on an annualized basis of average loans. Management will continue its efforts to reduce the level of non-performing loans and may consider the possibility of sales of troubled and non-performing loans, which could result in additional charge-offs to the allowance for credit losses on loans.

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses on 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 on loans held for investment and unfunded loan commitments is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit loss estimation process involves procedures to consider the unique characteristics of our loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk of the loan 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 on loans 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.

The allowance for credit losses on loans was $298.7 million at March 31, 2023, compared to $303.7 million at December 31, 2022. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, provision expense may be volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

We maintain an allowance for credit losses on unfunded loan commitments 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 on 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 unfunded loan commitments is included in the provision for credit losses. The allowance for credit losses on unfunded loan commitments totaled $34.2 million at March 31, 2023, compared to $32.2 million at December 31, 2022.

See the section entitled “Risk Factors” in the Company’s 2022 Annual Report on Form 10-K for further discussion of our credit risk.

Market Risk

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

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

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

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

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

•changing product pricing strategies;

•modifying characteristics of the investment securities portfolio; or

•using derivative financial instruments, to a limited degree.

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

The following table illustrates our projected net interest income sensitivity over a two-year cumulative horizon based on the asset/liability model at March 31, 2023 and 2022:

Immediate Rate Decrease Immediate Rate Increase
(dollars in thousands) -300<br>Basis Points -200<br>Basis Points -100<br>Basis Points Base +100<br>Basis Points +200<br>Basis Points +300<br>Basis Points
March 31, 2023
Projected interest income:
Money market, other interest<br>   earning investments, and<br>   investment securities $ 638,159 $ 668,554 $ 711,908 $ 764,597 $ 815,964 $ 866,973 $ 918,430
Loans 2,516,865 2,868,902 3,220,937 3,569,373 3,908,901 4,247,694 4,586,338
Total interest income 3,155,024 3,537,456 3,932,845 4,333,970 4,724,865 5,114,667 5,504,768
Projected interest expense:
Deposits 347,614 520,021 699,243 879,315 1,063,942 1,248,569 1,433,196
Borrowings 333,258 441,566 539,054 636,325 736,439 836,612 936,862
Total interest expense 680,872 961,587 1,238,297 1,515,640 1,800,381 2,085,181 2,370,058
Net interest income $ 2,474,152 $ 2,575,869 $ 2,694,548 $ 2,818,330 $ 2,924,484 $ 3,029,486 $ 3,134,710
Change from base $ (344,178) $ (242,461) $ (123,782) $ 106,154 $ 211,156 $ 316,380
% change from base (12.21) % (8.60) % (4.39) % 3.77 % 7.49 % 11.23 %
Immediate<br>Rate<br>Decrease Immediate Rate Increase
-50<br>Basis Points Base +100<br>Basis Points +200<br>Basis Points +300<br>Basis Points
March 31, 2022
Projected interest income:
Money market, other interest<br>   earning investments, and<br>   investment securities $ 533,997 $ 569,202 $ 638,295 $ 707,979 $ 777,163
Loans 1,731,088 1,859,527 2,164,693 2,472,574 2,779,620
Total interest income 2,265,085 2,428,729 2,802,988 3,180,553 3,556,783
Projected interest expense:
Deposits 20,705 44,541 191,499 338,619 485,736
Borrowings 144,111 171,141 235,103 301,239 367,374
Total interest expense 164,816 215,682 426,602 639,858 853,110
Net interest income $ 2,100,269 $ 2,213,047 $ 2,376,386 $ 2,540,695 $ 2,703,673
Change from base $ (112,778) $ 163,339 $ 327,648 $ 490,626
% change from base (5.10) % 7.38 % 14.81 % 22.17 %

Our projected net interest income increased year over year due to loan growth and rising interest rates.

A key element in the measurement and modeling of interest rate risk is the re-pricing assumptions of our transaction deposit accounts, which have no contractual maturity dates. Because the models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect our net interest income, we recognize that model outputs are not guarantees of actual results. For this reason, we model many different combinations of interest rates and balance sheet assumptions to understand our overall sensitivity to market interest rate changes, including shocks, ramps, yield curve flattening, yield curve steepening, as well as forecasts of likely interest rate scenarios tested.

We use cash flow and fair value hedges, primarily interest rate swaps, collars, and floors, to mitigate interest rate risk. Derivatives designated as hedging instruments were in a net liability position with a fair value loss of $25.8 million at March 31, 2023, compared to a net liability position with a fair value loss of $36.1 million at December 31, 2022.  See Note 15 to the consolidated financial statements for further discussion of derivative financial instruments.

Liquidity Risk

Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources.  We establish liquidity risk guidelines that we review with the Enterprise Risk Committee of our Board of Directors and monitor through our Balance Sheet Management Committee.  The objective of liquidity management is to ensure we have the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner.  Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts.  We maintain strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, properly manage capital markets’ funding sources and to address unexpected liquidity requirements. On June 5, 2020, we filed an automatic shelf registration statement with the SEC that permits us to issue an unspecified amount of debt or equity securities. We intend to renew this shelf registration statement with the SEC prior to its expiration in June 2023.

Loan repayments and maturing investment securities are a relatively predictable source of funds.  However, deposit flows, calls of investment securities, and prepayments of loans and mortgage-related securities are not as predictable as they are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace.  We continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.

A maturity schedule for Old National Bank’s time deposits is shown in the following table at March 31, 2023.

(dollars in thousands)
Maturity Bucket Amount Rate
2023 $ 2,354,454 2.60 %
2024 1,533,221 3.64
2025 122,619 1.12
2026 63,404 0.67
2027 38,289 0.62
2027 and beyond 9,708 1.10
Total $ 4,121,695 2.89 %

Our ability to acquire funding at competitive prices is influenced by rating agencies’ views of our credit quality, liquidity, capital, and earnings.  Moody’s Investors Service places us in an investment grade that indicates a low risk of default.  On April 21, 2023, Moody’s Investors Service affirmed the long-term debt, deposit ratings, and assessments of Old National Bancorp (Old National, long-term senior unsecured debt “A3”) and its subsidiaries, including the Baseline Credit Assessment (“BCA”) of its banking subsidiary, Old National Bank (long-term deposits “Aa3 negative,” BCA “a2”). The outlooks on the senior unsecured debt rating and long-term issuer ratings of Old National and on the long-term deposit rating and issuer ratings of Old National Bank were changed to “negative” from “stable.”

The credit ratings of Old National and Old National Bank at March 31, 2023 are shown in the following table.

Moody's Investors Service
Long-term Short-term
Old National A3 N/A
Old National Bank Aa3 P-1

Old National Bank maintains relationships in capital markets with brokers and dealers to issue certificates of deposit and short-term and medium-term bank notes as well.  At March 31, 2023, Old National and its subsidiaries had the following availability of liquid funds and borrowings:

(dollars in thousands) Parent Company Subsidiaries
Available liquid funds:
Cash and due from banks $ 823,897 $ 290,038
Unencumbered government-issued debt securities — 525,898
Unencumbered investment grade municipal securities — 39,227
Unencumbered corporate securities — 29,706
Availability of borrowings:
Amount available from Federal Reserve discount window* — 952,201
Amount available from Federal Reserve Bank Term Funding Program — 2,300,000
Amount available from Federal Home Loan Bank* — 5,310,000
Total available funds $ 823,897 $ 9,447,070

* Based on collateral pledged

Old National Bancorp has routine funding requirements consisting primarily of operating expenses, dividends to shareholders, debt service, net derivative cash flows, and funds used for acquisitions.  Old National Bancorp can obtain funding to meet its obligations from dividends and management fees collected from its subsidiaries, operating line of credit, and through the issuance of debt securities.  Additionally, Old National Bancorp has a shelf registration in place with the SEC permitting ready access to the public debt and equity markets.  At March 31, 2023, Old National Bancorp’s other borrowings outstanding were $483.5 million. Management believes the Company has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term.

Federal banking laws regulate the amount of dividends that may be paid by Old National Bank to Old National Bancorp on an unconsolidated basis without obtaining prior regulatory approval.  Prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year plus retained net profits for the preceding two years.  Prior regulatory approval to pay dividends was not required in 2022 and is not currently required.

CRITICAL ACCOUNTING ESTIMATES

Our most significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.  Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities.  We consider these policies to be our critical accounting estimates.  The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances.  Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.

For additional information regarding critical accounting estimates, see the section titled “Critical Accounting Estimates” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes in the Company’s application of critical accounting estimates since December 31, 2022.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

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

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

Changes in Internal Control over Financial Reporting.  There were no changes in Old National’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, Old National’s internal control over financial reporting.

OTHER INFORMATION

ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors disclosed in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)ISSUER PURCHASES OF EQUITY SECURITIES

Period Total<br><br>Number<br><br>of Shares<br><br>Purchased (1) Average<br>Price<br>Paid Per<br>Share Total Number<br><br>of Shares<br><br>Purchased as<br><br>Part of Publicly<br><br>Announced Plans<br><br>or Programs (2) Maximum<br><br>Dollar Value of<br><br>Shares that<br><br>May Yet<br><br>Be Purchased<br><br>Under the Plans<br><br>or Programs (2)
01/01/23 - 03/31/23 175 $ 17.98 — $ 136,093,633
02/01/23 - 02/28/23 301,426 $ 17.76 1,772,316 $ 170,476,849
03/01/23 - 03/31/23 2,296,573 $ 16.72 — $ 170,476,849
Total 2,598,174 $ 16.84 1,772,316 $ 170,476,849

(1)Consists of shares acquired pursuant to the Company’s share-based incentive programs. Under the terms of the Company’s share-based incentive programs, the Company accepts previously owned shares of common stock surrendered to satisfy tax withholding obligations associated with the vesting of restricted stock.

(2)On February 22, 2023, the Company issued a press release announcing that its Board of Directors approved a stock repurchase program that authorizes the Company to repurchase up to $200 million of the Company’s outstanding shares of common stock, as conditions warrant, through February 29, 2024.

ITEM 5.  OTHER INFORMATION

(a)None

(b)There have been no material changes in the procedure by which security holders recommend nominees to the Company’s board of directors.

ITEM 6.  EXHIBITS

Exhibit No. Description
3.1 Fifth Amended and Restated Articles of Incorporation of Old National, amended April 30, 2020 (incorporated by reference to Exhibit 3.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2020).
3.2 Articles of Amendment to the Fifth Amended and Restated Articles of Incorporation of Old National authorizing additional shares of Old National capital stock (incorporated by reference to Exhibit 3.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2022).
3.3 Articles of Amendment to the Fifth Amended and Restated Articles of Incorporation of Old National designating the New Old National Series A Preferred Stock (incorporated by reference to Exhibit 3.3 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2022).
3.4 Articles of Amendment to the Fifth Amended and Restated Articles of Incorporation of Old National designating the New Old National Series C Preferred Stock (incorporated by reference to Exhibit 3.4 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2022).
3.5 Amended and Restated By-Laws of Old National, amended April 30, 2020 (incorporated by reference to Exhibit 3.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2020).
3.6 By-Laws Amendment to Amended and Restated By-Laws of Old National (incorporated by reference to Exhibit 3.6 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2022).
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following materials from Old National’s Form 10-Q Report for the quarterly period ended March 31, 2023, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
104 The cover page from Old National’s Form 10-Q Report for the quarterly period ended March 31, 2023, formatted in inline XBRL and contained in Exhibit 101.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OLD NATIONAL BANCORP
(Registrant)
By: /s/  Brendon B. Falconer
Brendon B. Falconer
Senior Executive Vice President and Chief Financial Officer
Duly Authorized Officer and Principal Financial Officer
Date:  May 3, 2023

69

Document

Exhibit 31.1

FORM OF SECTION 302 CERTIFICATION

I, James C. Ryan, III, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Old National Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 3, 2023 By: /s/  James C. Ryan, III
James C. Ryan, III
Chief Executive Officer
(Principal Executive Officer)

Document

Exhibit 31.2

FORM OF SECTION 302 CERTIFICATION

I, Brendon B. Falconer, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Old National Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 3, 2023 By: /s/  Brendon B. Falconer
Brendon B. Falconer
Chief Financial Officer
(Principal Financial Officer)

Document

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Old National Bancorp (the “Company”) on Form 10-Q for the quarter ending March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James C. Ryan, III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/  James C. Ryan, III
James C. Ryan, III
Chief Executive Officer
(Principal Executive Officer)
Date:  May 3, 2023

Document

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Old National Bancorp (the “Company”) on Form 10-Q for the quarter ending March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brendon B. Falconer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/  Brendon B. Falconer
Brendon B. Falconer
Chief Financial Officer
(Principal Financial Officer)
Date:  May 3, 2023

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