UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

For the quarterly period ended September 30, 2021

 

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

For the transition period from ____________ to ____________

Commission File Number 1-15817

 

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

 

Indiana									35-1539838
(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 Symbol(s)

Name of each exchange on which registered

Common Stock, No Par Value

ONB

The

NASDAQ

Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit such files).    Yes   ☑   No  ☐

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

 

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock.  The registrant has one class of common stock (no par value) with 165,814,000 shares outstanding at September 30, 2021.

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OLD NATIONAL BANCORP

FORM 10-Q

TABLE OF CONTENTS

									Page
PART I.			FINANCIAL INFORMATION
Item 1.			Financial Statements
			Consolidated Balance Sheets						4
			Consolidated Statements of Income (unaudited)						5
			Consolidated Statements of Comprehensive Income (unaudited)						6
			Consolidated Statements of Changes in Shareholders’ Equity (unaudited)						7
			Consolidated Statements of Cash Flows (unaudited)						8
			Notes to Consolidated Financial Statements (unaudited)						9
			Note 1.			Basis of Presentation			9
			Note 2.			Recent Accounting Pronouncements			9
			Note 3.			Acquisition Activity			12
			Note 4.			Net Income Per Share			12
			Note 5.			Investment Securities			13
			Note 6.			Loans and Allowance for Credit Losses			16
			Note 7.			Other Real Estate Owned			30
			Note 8.			Premises and Equipment			30
			Note 9.			Leases			30
			Note 10.			Goodwill and Other Intangible Assets			32
			Note 11.			Loan Servicing Rights			33
			Note 12.			Qualified Affordable Housing Projects and Other Tax Credit Investments			34
			Note 13.			Securities Sold Under Agreements to Repurchase			35
			Note 14.			Federal Home Loan Bank Advances			36
			Note 15.			Other Borrowings			37
			Note 16.			Accumulated Other Comprehensive Income (Loss)			39
			Note 17.			Share-Based Compensation			40
			Note 18.			Income Taxes			41
			Note 19.			Derivative Financial Instruments			43
			Note 20.			Commitments and Contingencies			46
			Note 21.			Financial Guarantees			47
			Note 22.			Segment Information			48
			Note 23.			Fair Value			48
			Note 24.			Revenue from Contracts with Customers			55
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations						56
			Forward-Looking Statements						56
			Financial Highlights						58
			Non-GAAP Financial Measures						59
			Executive Summary						61
			Results of Operations						62
			Financial Condition						69
			Risk Management						73
			Off-Balance Sheet Arrangements						84
			Contractual Obligations						84
			Critical Accounting Policies and Estimates						85
Item 3.			Quantitative and Qualitative Disclosures About Market Risk						87
Item 4.			Controls and Procedures						87
PART II.			OTHER INFORMATION						88
Item 1A.			Risk Factors						88
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds						91
Item 5.			Other Information						91
Item 6.			Exhibits						92
SIGNATURE									93

2

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GLOSSARY OF ABBREVIATIONS AND ACRONYMS

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

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

Anchor (MN):  Anchor Bancorp, Inc.

Anchor (WI):  Anchor BanCorp Wisconsin Inc.

AOCI:  accumulated other comprehensive income (loss)

AQR:  asset quality rating

ASC:  Accounting Standards Codification

ASU:  Accounting Standards Update

ATM:  automated teller machine

BBCC: business banking credit center (small business)

CAA: Consolidated Appropriations Act

CARES Act: Coronavirus Aid, Relief and Economic Security Act

CECL: current expected credit loss

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

COVID-19: coronavirus 2019

DTI:  debt-to-income

FASB:  Financial Accounting Standards Board

FDIC:  Federal Deposit Insurance Corporation

FHLB:  Federal Home Loan Bank

FHTC:  Federal Historic Tax Credit

FICO:  Fair Isaac Corporation

First Midwest: First Midwest Bancorp, Inc.

GAAP:  U.S. generally accepted accounting principles

LGD:  loss given default

LIBOR:  London Interbank Offered Rate

LIHTC:  Low Income Housing Tax Credit

LTV:  loan-to-value

N/A:  not applicable

NASDAQ: The NASDAQ Stock Market LLC

N/M:  not meaningful

NMTC: New Markets Tax Credit

NOW:  negotiable order of withdrawal

OCC:  Office of the Comptroller of the Currency

PD:  probability of default

PPP: Paycheck Protection Program

Renewable Energy:  investment tax credits for solar projects

SBA:  Small Business Administration

SEC:  Securities and Exchange Commission

TBA:  to be announced

TDR:  troubled debt restructuring

3

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OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars and shares in thousands, except per share data)			September 30, 2021						December 31, 2020
			(unaudited)
Assets
Cash and due from banks			$	180,583					$	268,208
Money market and other interest-earning investments			616,875						321,504
Total cash and cash equivalents			797,458						589,712
Equity securities, at fair value			12,427						2,547
Investment securities - available-for-sale, at fair value:
U.S. Treasury			240,577						10,208
U.S. government-sponsored entities and agencies			1,562,696						841,988
Mortgage-backed securities			3,354,701						3,339,098
States and political subdivisions			1,609,283						1,492,162
Other securities			260,693						286,659
Total investment securities - available-for-sale			7,027,950						5,970,115
Federal Home Loan Bank/Federal Reserve Bank stock, at cost			169,383						169,433
Loans held for sale, at fair value			51,306						63,250
Loans:
Commercial			3,505,183						3,956,422
Commercial real estate			6,290,632						5,946,512
Residential real estate			2,224,782						2,248,422
Consumer credit, net of unearned income			1,564,231						1,635,123
Total loans			13,584,828						13,786,479
Allowance for credit losses			(107,868)						(131,388)
Net loans			13,476,960						13,655,091
Premises and equipment, net			476,036						464,408
Operating lease right-of-use assets			69,912						76,197
Accrued interest receivable			74,038						85,306
Goodwill			1,036,994						1,036,994
Other intangible assets			37,251						46,014
Company-owned life insurance			461,310						456,110
Other assets			327,708						345,445
Total assets			$	24,018,733					$	22,960,622
Liabilities
Deposits:
Noninterest-bearing demand			$	6,440,526					$	5,633,672
Interest-bearing:
Checking and NOW			4,956,012						4,977,046
Savings			3,708,807						3,395,747
Money market			2,097,967						1,908,118
Time deposits			992,837						1,122,870
Total deposits			18,196,149						17,037,453
Federal funds purchased and interbank borrowings			34						1,166
Securities sold under agreements to repurchase			375,247						431,166
Federal Home Loan Bank advances			1,890,054						1,991,435
Other borrowings			270,968						252,787
Operating lease liabilities			76,771						86,598
Accrued expenses and other liabilities			173,618						187,361
Total liabilities			20,982,841						19,987,966
Shareholders' Equity
Preferred stock, 2,000 shares authorized, no shares issued or outstanding			—						—
Common stock, $1.00 per share stated value, 300,000 shares authorized,    165,814 and 165,367 shares issued and outstanding, respectively			165,814						165,367
Capital surplus			1,878,106						1,875,626
Retained earnings			935,162						783,892
Accumulated other comprehensive income (loss), net of tax			56,810						147,771
Total shareholders' equity			3,035,892						2,972,656
Total liabilities and shareholders' equity			$	24,018,733					$	22,960,622

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

4

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars and shares in thousands, except per share data)			2021						2020						2021						2020
Interest Income
Loans including fees:
Taxable			$	124,488					$	124,261					$	370,594					$	377,725
Nontaxable			3,119						3,312						9,647						10,390
Investment securities:
Taxable			24,773						23,839						73,305						76,593
Nontaxable			9,469						8,615						27,862						24,909
Money market and other interest-earning investments			177						59						313						442
Total interest income			162,026						160,086						481,721						490,059
Interest Expense
Deposits			2,578						5,297						8,469						24,393
Federal funds purchased and interbank borrowings			—						12						—						1,296
Securities sold under agreements to repurchase			90						160						305						729
Federal Home Loan Bank advances			5,326						6,709						15,953						21,321
Other borrowings			2,460						2,335						7,375						7,305
Total interest expense			10,454						14,513						32,102						55,044
Net interest income			151,572						145,573						449,619						435,015
Provision for credit losses			(4,613)						—						(26,898)						39,495
Net interest income after provision for credit losses			156,185						145,573						476,517						395,520
Noninterest Income
Wealth management fees			10,134						9,239						30,576						27,547
Service charges on deposit accounts			8,926						8,698						25,564						26,357
Debit card and ATM fees			4,942						5,276						15,668						15,106
Mortgage banking revenue			10,870						18,110						35,222						46,542
Investment product fees			6,475						5,351						18,381						16,070
Capital markets income			6,017						5,428						15,603						15,935
Company-owned life insurance			2,355						2,830						7,852						8,878
Debt securities gains (losses), net			1,207						4,921						3,892						10,606
Other income			3,589						4,906						9,977						13,681
Total noninterest income			54,515						64,759						162,735						180,722
Noninterest Expense
Salaries and employee benefits			71,005						69,860						211,762						215,589
Occupancy			12,757						13,930						41,683						42,308
Equipment			3,756						3,754						12,231						12,912
Marketing			3,267						2,140						7,961						7,632
Data processing			11,508						9,628						35,558						28,724
Communication			2,372						2,241						7,661						7,335
Professional fees			3,416						3,083						14,668						10,921
FDIC assessment			1,628						1,319						4,461						4,942
Amortization of intangibles			2,779						3,459						8,763						10,847
Amortization of tax credit investments			1,736						3,115						4,751						8,917
Other expense			7,050						7,705						19,133						48,972
Total noninterest expense			121,274						120,234						368,632						399,099
Income before income taxes			89,426						90,098						270,620						177,143
Income tax expense			17,680						12,154						49,270						24,854
Net income			$	71,746					$	77,944					$	221,350					$	152,289
Net income per common share - basic			$	0.43					$	0.47					$	1.34					$	0.92
Net income per common share - diluted			0.43						0.47						1.33						0.92
Weighted average number of common shares outstanding - basic			165,258						164,773						165,144						165,748
Weighted average number of common shares outstanding - diluted			165,939						165,419						165,862						166,370
Dividends per common share			$	0.14					$	0.14					$	0.42					$	0.42

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

5

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

			Three Months Ended September 30,									Nine Months Ended September 30,
(dollars in thousands)			2021						2020			2021						2020
Net income			$	71,746					$	77,944		$	221,350					$	152,289
Other comprehensive income (loss):
Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period			(3,595)						6,599			(112,927)						126,281
Reclassification adjustment for securities (gains) losses    realized in income			(1,207)						(4,921)			(3,892)						(10,606)
Income tax effect			627						(281)			26,404						(25,598)
Unrealized gains (losses) on available-for-sale debt securities			(4,175)						1,397			(90,415)						90,077
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges			(164)						(11)			2,612						7,546
Reclassification adjustment for (gains) losses realized in net    income			(1,578)						(1,550)			(3,483)						(3,651)
Income tax effect			428						384			214						(957)
Changes from cash flow hedges			(1,314)						(1,177)			(657)						2,938
Defined benefit pension plans:
Amortization of net loss recognized in income			49						28			147						82
Income tax effect			(12)						(7)			(36)						(20)
Changes from defined benefit pension plans			37						21			111						62
Other comprehensive income (loss), net of tax			(5,452)						241			(90,961)						93,077
Comprehensive income			$	66,294					$	78,185		$	130,389					$	245,366

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

6

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

(dollars in thousands, except per share data)			Common Stock						Capital Surplus						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total Shareholders' Equity
Balance, December 31, 2019			$	169,616					$	1,944,445					$	682,185					$	56,207					$	2,852,453
Cumulative effect of change in accounting principles			—						—						(31,150)						—						(31,150)
Balance, January 1, 2020			169,616						1,944,445						651,035						56,207						2,821,303
Net income			—						—						22,640						—						22,640
Other comprehensive income (loss)			—						—						—						81,950						81,950
Dividends - common stock ($0.14 per share)			—						—						(23,535)						—						(23,535)
Common stock issued			9						142						—						—						151
Common stock repurchased			(5,076)						(76,746)						—						—						(81,822)
Share-based compensation expense			—						2,748						—						—						2,748
Stock activity under incentive compensation plans			560						(329)						(231)						—						—
Balance, March 31, 2020			165,109						1,870,260						649,909						138,157						2,823,435
Net income			—						—						51,705						—						51,705
Other comprehensive income (loss)			—						—						—						10,886						10,886
Dividends - common stock ($0.14 per share)			—						—						(23,113)						—						(23,113)
Common stock issued			11						134						—						—						145
Common stock repurchased			(34)						(439)						—						—						(473)
Share-based compensation expense			—						1,480						—						—						1,480
Stock activity under incentive compensation plans			7						306						(123)						—						190
Balance, June 30, 2020			165,093						1,871,741						678,378						149,043						2,864,255
Net income			—						—						77,944						—						77,944
Other comprehensive income (loss)			—						—						—						241						241
Dividends - common stock ($0.14 per share)			—						—						(23,147)						—						(23,147)
Common stock issued			11						125						—						—						136
Common stock repurchased			(2)						(12)						—						—						(14)
Share-based compensation expense			—						1,734						—						—						1,734
Stock activity under incentive compensation plans			231						(105)						(126)						—						—
Balance, September 30, 2020			$	165,333					$	1,873,483					$	733,049					$	149,284					$	2,921,149
Balance, December 31, 2020			$	165,367					$	1,875,626					$	783,892					$	147,771					$	2,972,656
Net income			—						—						86,818						—						86,818
Other comprehensive income (loss)			—						—						—						(55,862)						(55,862)
Dividends - common stock ($0.14 per share)			—						—						(23,195)						—						(23,195)
Common stock issued			9						130						—						—						139
Common stock repurchased			(160)						(2,696)						—						—						(2,856)
Share-based compensation expense			—						1,747						—						—						1,747
Stock activity under incentive compensation plans			460						(235)						(225)						—						—
Balance, March 31, 2021			165,676						1,874,572						847,290						91,909						2,979,447
Net income			—						—						62,786						—						62,786
Other comprehensive income (loss)			—						—						—						(29,647)						(29,647)
Dividends - common stock ($0.14 per share)			—						—						(23,202)						—						(23,202)
Common stock issued			7						136						—						—						143
Common stock repurchased			(24)						(425)						—						—						(449)
Share-based compensation expense			—						1,816						—						—						1,816
Stock activity under incentive compensation plans			73						273						(122)						—						224
Balance, June 30, 2021			165,732						1,876,372						886,752						62,262						2,991,118
Net income			—						—						71,746						—						71,746
Other comprehensive income (loss)			—						—						—						(5,452)						(5,452)
Dividends - common stock ($0.14 per share)			—						—						(23,214)						—						(23,214)
Common stock issued			9						138						—						—						147
Common stock repurchased			(23)						(385)						—						—						(408)
Share-based compensation expense			—						1,955						—						—						1,955
Stock activity under incentive compensation plans			96						26						(122)						—						—
Balance, September 30, 2021			$	165,814					$	1,878,106					$	935,162					$	56,810					$	3,035,892

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

7

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			Nine Months Ended September 30,
(dollars in thousands)			2021						2020
Cash Flows From Operating Activities
Net income			$	221,350					$	152,289
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			20,585						21,807
Amortization of other intangible assets			8,763						10,847
Amortization of tax credit investments			4,751						8,917
Net premium amortization on investment securities			11,793						14,664
Accretion income related to acquired loans			(12,818)						(17,883)
Share-based compensation expense			5,518						5,962
Provision for credit losses			(26,898)						39,495
Debt securities (gains) losses, net			(3,892)						(10,606)
Net (gains) losses on sales of loans and other assets			(27,433)						(8,636)
Increase in cash surrender value of company-owned life insurance			(7,852)						(8,878)
Residential real estate loans originated for sale			(929,943)						(1,114,932)
Proceeds from sales of residential real estate loans			967,573						1,099,258
(Increase) decrease in interest receivable			11,268						2,071
(Increase) decrease in other assets			46,203						(96,468)
Increase (decrease) in accrued expenses and other liabilities			(24,295)						764
Net cash flows provided by (used in) operating activities			264,673						98,671
Cash Flows From Investing Activities
Purchases of investment securities available-for-sale			(2,550,248)						(1,859,755)
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock			—						(10,025)
Purchases of equity securities			(10,000)						—
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale			1,174,037						1,475,609
Proceeds from sales of investment securities available-for-sale			189,091						296,075
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock			50						4,672
Proceeds from sales of equity securities			437						39,218
Loan originations and payments, net			217,847						(1,756,697)
Proceeds from company-owned life insurance death benefits			2,652						1,870
Proceeds from sales of premises and equipment and other assets			16,741						7,014
Purchases of premises and equipment and other assets			(40,774)						(26,865)
Net cash flows provided by (used in) investing activities			(1,000,167)						(1,828,884)
Cash Flows From Financing Activities
Net increase (decrease) in:
Deposits			1,158,696						1,953,097
Federal funds purchased and interbank borrowings			(1,132)						(349,155)
Securities sold under agreements to repurchase			(55,919)						71,359
Other borrowings			11,651						(429)
Payments for maturities of Federal Home Loan Bank advances			(145,005)						(550,004)
Payments for modification of Federal Home Loan Bank advances			(2,156)						(13,570)
Proceeds from Federal Home Loan Bank advances			50,000						825,000
Cash dividends paid on common stock			(69,611)						(69,795)
Common stock repurchased			(3,713)						(82,309)
Common stock issued			429						432
Net cash flows provided by (used in) financing activities			943,240						1,784,626
Net increase (decrease) in cash and cash equivalents			207,746						54,413
Cash and cash equivalents at beginning of period			589,712						276,337
Cash and cash equivalents at end of period			$	797,458					$	330,750
Supplemental cash flow information:
Total interest paid			$	33,910					$	59,037
Total taxes paid (net of refunds)			$	15,476					$	15,836
Investment securities purchased but not settled			$	594					$	50,317
Operating lease right-of-use assets obtained in exchange for lease obligations			$	(1,190)					$	(1,133)
Finance lease right-of-use assets obtained in exchange for lease obligations			$	6,367					$	5,225

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

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OLD NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.  Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of September 30, 2021 and December 31, 2020, and the results of its operations for the three and nine months ended September 30, 2021 and 2020.  Interim results do not necessarily represent annual results.  These financial statements should be read in conjunction with Old National’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2021

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

FASB ASC 740 – In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this update became effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and did not have a material impact on the financial statements.

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

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within those fiscal years. The amendments are to be applied prospectively and did not have a material impact on the consolidated financial statements.

Acquisitions and Dispositions of Businesses and Related Pro Forma Information – In May 2020, the SEC issued a final rule that revises the circumstances that require financial statements and related pro forma information for acquisitions and dispositions of businesses. The intent of the rule is to allow for more meaningful conclusions on when an acquired or disposed business is significant as well as to improve the related disclosure requirements. The changes are intended to improve the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure. The final rule was effective January 1, 2021.

FASB ASC 310 – In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs, to clarify that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. The ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The new guidance did not have a material impact on the consolidated financial statements.

FASB ASC 470 – In October 2020, the FASB issued ASU No. 2020-09, Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762, which amends and supersedes various SEC paragraphs to reflect SEC Release No. 33-10762. That release amends the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. These changes are intended to both improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings on a registered basis. The final rules were effective on January 4, 2021. The amendments did not have a material impact on the consolidated financial statements.

Codification Improvements – In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. The amendments improve codification by having all disclosure-related guidance available in the disclosure sections of the codification. Prior to this ASU, various disclosure requirements or options to present information on the face of the financial statements or as a note to the financial statements were not included in the appropriate disclosure sections of the codification. The codification improvements also contain various other minor amendments to codification that are not expected to have a significant effect on current accounting practice. The amendments became effective for annual periods beginning after December 15, 2020.

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. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include:

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

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

The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022.

ASU 2020-04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, Old National is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, Old National elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform.

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In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is expected to be modified as a result of reference rate reform, commonly referred to as the “discounting transition.” The amendments clarify that certain optional expedients and exceptions in Topic 848 do apply to derivatives that are affected by the discounting transition. The amendments in ASU 2021-01 are effective immediately.

Old National believes the adoption of this guidance on activities subsequent to September 30, 2021 through December 31, 2022 will not have a material impact on the consolidated financial statements.

Guidance on Non-TDR Loan Modifications due to COVID-19 – The CAA, which was signed into law on December 27, 2020, extends certain provisions of the CARES Act. Section 4013 of the CARES Act provided temporary relief from TDR accounting and is amended by Division N, Section 540 of the CAA, by extending the end date from December 31, 2020, to the earlier of January 1, 2022, or 60 days after the date on which the COVID-19 national emergency terminates. In response, the OCC updated its two-page reference guide, “TDR Designation and COVID-19 Loan Modifications,” to conform to the extended TDR provisions. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 6 for further information on non-TDR loan modifications.

Accounting Guidance Pending Adoption 

FASB ASC 470 and 815 – In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to clarify the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature model. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in-capital. In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The ASU also revises the derivative scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption will be permitted, but no earlier than for fiscal years beginning after December 15, 2020. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

FASB ASC 842 – In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments, to amend the lease classification requirements for lessors to align them with practice under ASC Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in ASC paragraphs 842-10-25-2 through 25-3; and (2) The lessor would have otherwise recognized a day-one loss. When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. The amendments in this update are effective for fiscal years beginning after December 15, 2021, 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 205, 942, and 946 – In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical

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Disclosures for Bank and Savings and Loan Registrants. The amendments in this update are effective upon addition to the FASB Codification and will not have a material impact on the consolidated financial statements.

NOTE 3 – ACQUISITION ACTIVITY

Pending Acquisition

First Midwest Bancorp, Inc.

On May 30, 2021, Old National entered into a definitive merger agreement with First Midwest to combine in an all-stock merger of equals transaction. Under the terms of the merger agreement, which has been unanimously approved by the Boards of Directors of both companies, First Midwest stockholders will receive 1.1336 shares of Old National common stock for each share of First Midwest common stock they own. Holders of First Midwest Common Stock will receive cash in lieu of fractional shares. Each share of 7.000% fixed-rate non-cumulative perpetual preferred stock, Series A, no par value, and each share of 7.000% fixed-rate non-cumulative perpetual preferred stock, Series C, no par value, of First Midwest will be converted into the right to receive one share of a newly created series of preferred stock of Old National having terms that are not materially less favorable than the First Midwest preferred stock. Following completion of the transaction, former First Midwest stockholders are expected to collectively represent approximately 44% of the combined company. The new organization will operate under the Old National Bancorp and Old National Bank names, with headquarters and the main office located in Evansville, Indiana and commercial and consumer banking operations headquartered in Chicago, Illinois. Based on Old National’s September 30, 2021 closing price of $16.95 per share, this represents a total transaction value of approximately $2.210 billion. The transaction value is likely to change until closing due to fluctuations in the price of Old National common stock and is also subject to adjustment under certain circumstances as provided in the merger agreement. During the third quarter of 2021, we received approval of the merger from the OCC and the shareholders of Old National and First Midwest. The transaction is expected to be completed as soon as practical after we receive Federal Reserve approval.

Transaction costs totaling $7.9 million associated with the merger have been expensed through September 30, 2021 and additional transaction and integration costs will be expensed in future periods as incurred.

NOTE 4 – NET INCOME PER SHARE

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

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars and shares in thousands, except per share data)			2021						2020						2021						2020
Basic Net Income Per Share
Net income			$	71,746					$	77,944					$	221,350					$	152,289
Weighted average common shares outstanding			165,258						164,773						165,144						165,748
Basic Net Income Per Share			$	0.43					$	0.47					$	1.34					$	0.92
Diluted Net Income Per Share
Net income			$	71,746					$	77,944					$	221,350					$	152,289
Weighted average common shares outstanding			165,258						164,773						165,144						165,748
Effect of dilutive securities:
Restricted stock			660						611						696						586
Stock options and appreciation rights			21						35						22						36
Weighted average shares outstanding			165,939						165,419						165,862						166,370
Diluted Net Income Per Share			$	0.43					$	0.47					$	1.33					$	0.92

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NOTE 5 – INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio and the corresponding amounts of unrealized gains, unrealized losses, and basis adjustments recognized in accumulated other comprehensive income (loss):

(dollars in thousands)			Amortized Cost						Unrealized Gains						Unrealized Losses						Basis Adjustments (1)						Fair Value
September 30, 2021
Available-for-Sale
U.S. Treasury			$	237,345					$	—					$	(898)					$	4,130					$	240,577
U.S. government-sponsored entities and agencies			1,582,406						16,714						(26,168)						(10,256)						1,562,696
Mortgage-backed securities - Agency			3,349,118						44,243						(38,660)						—						3,354,701
States and political subdivisions			1,540,053						72,248						(3,018)						—						1,609,283
Pooled trust preferred securities			13,751						—						(4,384)						—						9,367
Other securities			241,893						9,982						(549)						—						251,326
Total available-for-sale securities			$	6,964,566					$	143,187					$	(73,677)					$	(6,126)					$	7,027,950
December 31, 2020
Available-for-Sale
U.S. Treasury			$	9,909					$	299					$	—					$	—					$	10,208
U.S. government-sponsored entities and agencies			841,133						5,744						(3,921)						(968)						841,988
Mortgage-backed securities - Agency			3,249,002						91,086						(990)						—						3,339,098
States and political subdivisions			1,405,868						86,325						(31)						—						1,492,162
Pooled trust preferred securities			13,763						—						(5,850)						—						7,913
Other securities			265,079						14,260						(593)						—						278,746
Total available-for-sale securities			$	5,784,754					$	197,714					$	(11,385)					$	(968)					$	5,970,115

(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 September 30,												Nine Months Ended September 30,
(dollars in thousands)			2021						2020						2021						2020
Proceeds from sales of available-for-sale debt securities			$	121,376					$	39,637					$	189,091					$	296,075
Proceeds from calls of available-for-sale debt securities			54,966						82,410						111,961						388,145
Total			$	176,342					$	122,047					$	301,052					$	684,220
Realized gains on sales of available-for-sale debt securities			$	1,093					$	4,942					$	3,829					$	11,082
Realized gains on calls of available-for-sale debt securities			119						10						180						50
Realized losses on sales of available-for-sale debt securities			—						(30)						(85)						(500)
Realized losses on calls of available-for-sale debt securities			(5)						(1)						(32)						(26)
Debt securities gains (losses), net			$	1,207					$	4,921					$	3,892					$	10,606

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

			September 30, 2021
(dollars in thousands)			Amortized Cost						Fair Value						Weighted Average Yield
Maturity
Available-for-Sale
Within one year			$	148,758					$	150,704					2.56		%
One to five years			2,625,098						2,657,122						2.01
Five to ten years			1,827,081						1,816,752						1.82
Beyond ten years			2,363,629						2,403,372						2.43
Total			$	6,964,566					$	7,027,950					2.11		%

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

			Less than 12 months												12 months or longer												Total
(dollars in thousands)			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
September 30, 2021
Available-for-Sale
U.S. Treasury			$	—					$	—					$	237,577					$	(898)					$	237,577					$	(898)
U.S. government-sponsored entities    and agencies			1,028,283						(24,465)						47,296						(1,703)						1,075,579						(26,168)
Mortgage-backed securities - Agency			1,809,662						(37,027)						54,558						(1,633)						1,864,220						(38,660)
States and political subdivisions			261,759						(2,974)						2,725						(44)						264,484						(3,018)
Pooled trust preferred securities			—						—						9,367						(4,384)						9,367						(4,384)
Other securities			28,584						(245)						26,542						(304)						55,126						(549)
Total available-for-sale			$	3,128,288					$	(64,711)					$	378,065					$	(8,966)					$	3,506,353					$	(73,677)
December 31, 2020
Available-for-Sale
U.S. government-sponsored entities    and agencies			$	355,528					$	(3,921)					$	—					$	—					$	355,528					$	(3,921)
Mortgage-backed securities - Agency			275,833						(895)						3,572						(95)						279,405						(990)
States and political subdivisions			3,497						(31)						—						—						3,497						(31)
Pooled trust preferred securities			—						—						7,913						(5,850)						7,913						(5,850)
Other securities			19,404						(70)						24,871						(523)						44,275						(593)
Total available-for-sale			$	654,262					$	(4,917)					$	36,356					$	(6,468)					$	690,618					$	(11,385)

Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for sale debt securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale debt securities

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was needed at September 30, 2021 or December 31, 2020. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses and totaled $25.6 million at September 30, 2021 and $27.0 million at December 31, 2020.

The U.S. government sponsored entities and agencies and mortgage-backed securities – agency 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.

At September 30, 2021, Old National’s securities portfolio consisted of 1,925 securities, 329 of which were in an unrealized loss position.  The unrealized losses attributable to our U.S. Treasury, U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates.  Our pooled trust preferred securities are discussed below.  At September 30, 2021, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.

Pooled Trust Preferred Securities

At September 30, 2021, our securities portfolio contained two pooled trust preferred securities with a fair value of $9.4 million and unrealized losses of $4.4 million.  These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows.  For the nine months ended September 30, 2021 and 2020, we did not recognize any losses on these securities.

The table below summarizes the relevant characteristics of our pooled trust preferred securities as well as our single issuer trust preferred securities that are included in the “other securities” category in this footnote.  Each of the pooled trust preferred securities support a more senior tranche of security holders.  Both pooled trust preferred securities have experienced credit defaults.  However, 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.

(dollars in thousands)			Class			Lowest Credit Rating (1)			Amortized Cost						Fair Value						Unrealized Gain/ (Loss)			# of Issuers Currently Performing/ Remaining			Actual Deferrals and Defaults as a % of Original Collateral			Expected Defaults as a % of Remaining Performing Collateral			Excess Subordination as a % of Current Performing Collateral
September 30, 2021
Pooled trust preferred securities:
Pretsl XXVII LTD			B			BB			$	4,197					$	2,920					$	(1,277)		31/40			12.3%			13.5%			40.8%
Trapeza Ser 13A			A2A			A			9,554						6,447						(3,107)			38/40			4.5%			6.2%			61.2%
									13,751						9,367						(4,384)
Single Issuer trust preferred securities:
JP Morgan Chase & Co						BBB-			4,819						4,633						(186)
Total									$	18,570					$	14,000					$	(4,570)

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

Equity Securities

Old National’s equity securities with readily determinable fair values totaled $12.4 million at September 30, 2021 and $2.5 million at December 31, 2020.  There were gains on equity securities of $0.1 million during the three months ended September 30, 2021 and $0.3 million during the nine months ended September 30, 2021, compared to $0.5 million during the three months ended September 30, 2020 and $1.3 million during the nine months ended September 30, 2020.  Old National also has equity securities without readily determinable fair values that are included in other assets that totaled $124.8 million at September 30, 2021 and $105.8 million at December 31, 2020.  These equity securities without readily determinable fair values are illiquid investments that consist of partnerships, limited liability companies, and other ownership interests that support affordable housing, economic development, and community revitalization initiatives in low-to-moderate income neighborhoods.  There have been no impairments or adjustments on equity securities without readily determinable fair values, except for amortization of tax credit investments in the nine months ended September 30, 2021 or 2020.

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NOTE 6 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans

Old National’s loans consist primarily of loans made to consumers and commercial clients in various industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.  Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, Minnesota, and Wisconsin.  Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size.  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.

The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios are classified into seven segments of loans - commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The composition of loans by portfolio segment as of September 30, 2021 follows:

			September 30, 2021						Segment						September 30, 2021
			Statement						Portfolio						After
(dollars in thousands)			Balance						Reclassifications						Reclassifications
Loans:
Commercial			$	3,505,183					$	(192,390)					$	3,312,793
Commercial real estate			6,290,632						(158,297)						6,132,335
BBCC			N/A						350,687						350,687
Residential real estate			2,224,782						—						2,224,782
Consumer			1,564,231						(1,564,231)						N/A
Indirect			N/A						860,785						860,785
Direct			N/A						149,124						149,124
Home equity			N/A						554,322						554,322
Total			$	13,584,828					$	—					$	13,584,828

The composition of loans by portfolio segment follows:

(dollars in thousands)			September 30, 2021						December 31, 2020
Commercial (1) (2)			$	3,312,793					$	3,757,700
Commercial real estate			6,132,335						5,774,811
BBCC			350,687						370,423
Residential real estate			2,224,782						2,248,422
Indirect			860,785						913,902
Direct			149,124						164,807
Home equity			554,322						556,414
Total loans			13,584,828						13,786,479
Allowance for credit losses			(107,868)						(131,388)
Net loans			$	13,476,960					$	13,655,091

(1)Includes direct finance leases of $26.0 million at September 30, 2021 and $32.3 million at December 31, 2020.

(2)Includes PPP loans of $354.9 million at September 30, 2021 and $943.0 million at December 31, 2020.

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

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availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Section 1102 of the CARES Act created the PPP, a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. Old National has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees. During 2020, Old National originated over 9,700 loans with balances in excess of $1.5 billion to new and existing customers through the PPP.

On December 27, 2020, President Trump signed into law the CAA. The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. Old National has participated in the CAA’s second round of PPP lending. In mid-January Old National opened its lending portal and began processing PPP loan applications. Old National initially focused on helping minority-owned business, women-owned business, not-for-profit entities, and existing first round PPP customers with the lending process. During the nine months ended September 30, 2021, Old National originated approximately 6,200 loans totaling $583.7 million through the second round of the PPP. Additionally, section 541 of the CAA extended the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022.

At September 30, 2021, remaining PPP loans totaled $354.9 million.

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 233%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at September 30, 2021.

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 changes in economic conditions such as unemployment levels.

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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 for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans is excluded from the estimate of credit losses and totaled $47.2 million at September 30, 2021 and $57.3 million at December 31, 2020.

The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall

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loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

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The allowance for credit losses decreased for the nine months ended September 30, 2021 primarily due to changes in the economic forecast. The forecast scenario includes improved unemployment, gross domestic product, and house price index. In addition to the quantitative inputs, several qualitative factors were considered. These factors include the risk that unemployment and gross domestic product prove to be more severe and/or prolonged than our baseline forecast, the consumption of the vaccine is less than anticipated, the presence of communicable strains of the virus, and the slow return to full employment. The mitigating impacts of the reopening of the economy and distribution of child tax credits were also considered. Old National’s activity in the allowance for credit losses for loans by portfolio segment was as follows:

(dollars in thousands)			Balance at Beginning of Period						Impact of Adopting ASC 326						Sub-Total						Charge-offs						Recoveries						Provision for Credit Losses						Balance at End of Period
Three Months Ended September 30, 2021
Commercial			$	25,731					$	—					$	25,731					$	(354)					$	106					$	677					$	26,160
Commercial real estate			65,469						—						65,469						(86)						3,371						(3,657)						65,097
BBCC			2,798						—						2,798						(8)						31						(259)						2,562
Residential real estate			10,419						—						10,419						(85)						79						(887)						9,526
Indirect			2,043						—						2,043						(113)						294						(363)						1,861
Direct			640						—						640						(355)						153						148						586
Home equity			2,344						—						2,344						(214)						218						(272)						2,076
Total			$	109,444					$	—					$	109,444					$	(1,215)					$	4,252					$	(4,613)					$	107,868
Three Months Ended September 30, 2020
Commercial			$	29,618					$	—					$	29,618					$	(128)					$	2,192					$	(3,289)					$	28,393
Commercial real estate			71,069						—						71,069						(2,709)						3,379						4,173						75,912
BBCC			6,332						—						6,332						(10)						—						15						6,337
Residential real estate			14,244						—						14,244						(321)						220						(219)						13,924
Indirect			4,453						—						4,453						(556)						587						(394)						4,090
Direct			835						—						835						(445)						187						248						825
Home equity			1,843						—						1,843						—						598						(534)						1,907
Total			$	128,394					$	—					$	128,394					$	(4,169)					$	7,163					$	—					$	131,388
Nine Months Ended September 30, 2021
Commercial			$	30,567					$	—					$	30,567					$	(940)					$	549					$	(4,016)					$	26,160
Commercial real estate			75,810						—						75,810						(264)						3,555						(14,004)						65,097
BBCC			6,120						—						6,120						(144)						87						(3,501)						2,562
Residential real estate			12,608						—						12,608						(305)						217						(2,994)						9,526
Indirect			3,580						—						3,580						(903)						1,395						(2,211)						1,861
Direct			855						—						855						(913)						622						22						586
Home equity			1,848						—						1,848						(296)						718						(194)						2,076
Total			$	131,388					$	—					$	131,388					$	(3,765)					$	7,143					$	(26,898)					$	107,868
Nine Months Ended September 30, 2020
Commercial			$	21,359					$	7,150					$	28,509					$	(5,303)					$	3,100					$	2,087					$	28,393
Commercial real estate			20,535						25,548						46,083						(5,164)						4,297						30,696						75,912
BBCC			2,279						3,702						5,981						(92)						122						326						6,337
Residential real estate			2,299						6,986						9,285						(637)						431						4,845						13,924
Indirect			5,319						(1,669)						3,650						(2,125)						1,494						1,071						4,090
Direct			1,863						(1,059)						804						(1,326)						571						776						825
Home equity			965						689						1,654						(199)						758						(306)						1,907
Total			$	54,619					$	41,347					$	95,966					$	(14,846)					$	10,773					$	39,495					$	131,388

PPP loans were factored in the provision for credit losses for the three and nine months ended September 30, 2021; however, due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant.

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Unfunded Loan Commitments

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2021						2020						2021						2020
Allowance for credit losses on unfunded loan commitments:
Balance at beginning of period			$	10,429					$	11,026					$	11,689					$	2,656
Impact of adopting ASC 326			—						—						—						4,549
Sub-Total			10,429						11,026						11,689						7,205
Expense (reversal of expense) for credit losses			(132)						—						(1,392)						3,821
Balance at end of period			$	10,297					$	11,026					$	10,297					$	11,026

Credit Quality

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

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

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

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

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

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

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

			Origination Year																																										Revolving to Term
(dollars in thousands)			2021						2020						2019						2018						2017						Prior						Revolving												Total
September 30, 2021
Commercial:
Risk Rating:
Pass			$	897,040					$	638,945					$	317,026					$	125,230					$	165,228					$	245,618					$	608,212					$	164,020					$	3,161,319
Criticized			11,262						8,747						2,473						—						7,964						2,901						7,784						11,533						52,664
Classified:
Substandard			8,024						16,399						12,056						11,253						6,874						5,171						7,642						4,857						72,276
Nonaccrual			1,096						3,710						1,031						2,407						4,019						—						188						7,994						20,445
Doubtful			—						148						653						1,296						181						3,811						—						—						6,089
Total			$	917,422					$	667,949					$	333,239					$	140,186					$	184,266					$	257,501					$	623,826					$	188,404					$	3,312,793
Commercial real estate:
Risk Rating:
Pass			$	1,058,090					$	1,561,584					$	902,806					$	580,718					$	558,072					$	711,425					$	22,791					$	430,064					$	5,825,550
Criticized			28,606						5,243						53,705						34,005						18,706						23,259						152						17,012						180,688
Classified:
Substandard			4,878						10,254						7,168						7,201						21,423						13,290						2,291						4,382						70,887
Nonaccrual			306						2,509						—						1,472						6,229						10,089						321						147						21,073
Doubtful			—						—						2,021						1,146						18,201						12,769						—						—						34,137
Total			$	1,091,880					$	1,579,590					$	965,700					$	624,542					$	622,631					$	770,832					$	25,555					$	451,605					$	6,132,335
BBCC:
Risk Rating:
Pass			$	59,605					$	77,065					$	57,928					$	38,168					$	27,380					$	12,867					$	44,982					$	18,622					$	336,617
Criticized			1,189						1,381						1,063						306						—						—						1,449						1,475						6,863
Classified:
Substandard			287						61						1,113						209						912						139						289						576						3,586
Nonaccrual			—						135						—						—						230						—						—						1,335						1,700
Doubtful			—						—						289						1,418						—						214						—						—						1,921
Total			$	61,081					$	78,642					$	60,393					$	40,101					$	28,522					$	13,220					$	46,720					$	22,008					$	350,687

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			Origination Year																																										Revolving to Term
(dollars in thousands)			2020						2019						2018						2017						2016						Prior						Revolving												Total
December 31, 2020
Commercial:
Risk Rating:
Pass			$	1,675,964					$	420,736					$	171,228					$	227,710					$	124,041					$	262,538					$	549,849					$	148,508					$	3,580,574
Criticized			23,982						9,603						15,003						9,508						3,383						5,369						10,307						2,685						79,840
Classified:
Substandard			6,501						6,369						10,077						9,836						2,774						8,441						15,344						3,049						62,391
Nonaccrual			2,600						3,754						4,701						6,951						49						4,379						778						7,013						30,225
Doubtful			—						—						1,016						2,748						296						610						—						—						4,670
Total			$	1,709,047					$	440,462					$	202,025					$	256,753					$	130,543					$	281,337					$	576,278					$	161,255					$	3,757,700
Commercial real estate:
Risk Rating:
Pass			$	1,537,226					$	1,041,305					$	749,102					$	677,119					$	496,086					$	513,658					$	28,122					$	382,219					$	5,424,837
Criticized			6,874						49,271						26,464						46,994						17,648						33,490						—						19,804						200,545
Classified:
Substandard			11,451						4,700						13,565						26,691						5,308						8,665						—						2,911						73,291
Nonaccrual			1,408						2,054						5,393						9,456						1,635						12,564						—						313						32,823
Doubtful			—						1,832						—						18,926						19,283						3,274						—						—						43,315
Total			$	1,556,959					$	1,099,162					$	794,524					$	779,186					$	539,960					$	571,651					$	28,122					$	405,247					$	5,774,811
BBCC:
Risk Rating:
Pass			$	94,828					$	73,913					$	49,875					$	36,288					$	24,946					$	5,327					$	52,393					$	19,353					$	356,923
Criticized			1,599						1,403						621						414						643						—						868						1,259						6,807
Classified:
Substandard			233						1,417						195						246						33						—						317						701						3,142
Nonaccrual			161						551						134						200						—						—						89						1,466						2,601
Doubtful			—						3						847						70						—						30						—						—						950
Total			$	96,821					$	77,287					$	51,672					$	37,218					$	25,622					$	5,357					$	53,667					$	22,779					$	370,423

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

			Origination Year																																										Revolving to Term
(dollars in thousands)			2021						2020						2019						2018						2017						Prior						Revolving												Total
September 30, 2021
Residential real estate:
Risk Rating:
Performing			$	476,235					$	659,413					$	304,715					$	81,974					$	119,596					$	563,796					$	—					$	110					$	2,205,839
Nonperforming			—						314						168						294						1,030						17,137						—						—						18,943
Total			$	476,235					$	659,727					$	304,883					$	82,268					$	120,626					$	580,933					$	—					$	110					$	2,224,782
Indirect:
Risk Rating:
Performing			$	265,815					$	260,763					$	169,061					$	81,733					$	52,028					$	28,918					$	—					$	22					$	858,340
Nonperforming			195						356						500						560						489						345						—						—						2,445
Total			$	266,010					$	261,119					$	169,561					$	82,293					$	52,517					$	29,263					$	—					$	22					$	860,785
Direct:
Risk Rating:
Performing			$	28,564					$	19,025					$	16,984					$	17,674					$	8,926					$	18,004					$	38,211					$	541					$	147,929
Nonperforming			4						61						129						166						137						691						3						4						1,195
Total			$	28,568					$	19,086					$	17,113					$	17,840					$	9,063					$	18,695					$	38,214					$	545					$	149,124
Home equity:
Risk Rating:
Performing			$	—					$	—					$	628					$	390					$	568					$	436					$	529,967					$	18,695					$	550,684
Nonperforming			—						—						—						59						96						62						193						3,228						3,638
Total			$	—					$	—					$	628					$	449					$	664					$	498					$	530,160					$	21,923					$	554,322
			Origination Year																																										Revolving to Term
			2020						2019						2018						2017						2016						Prior						Revolving												Total
December 31, 2020
Residential real estate:
Risk Rating:
Performing			$	624,435					$	453,132					$	132,107					$	190,376					$	202,457					$	620,999					$	—					$	122					$	2,223,628
Nonperforming			65						251						680						892						2,131						20,775						—						—						24,794
Total			$	624,500					$	453,383					$	132,787					$	191,268					$	204,588					$	641,774					$	—					$	122					$	2,248,422
Indirect:
Risk Rating:
Performing			$	352,989					$	253,514					$	134,893					$	96,587					$	52,225					$	21,088					$	—					$	77					$	911,373
Nonperforming			22						443						777						666						429						192						—						—						2,529
Total			$	353,011					$	253,957					$	135,670					$	97,253					$	52,654					$	21,280					$	—					$	77					$	913,902
Direct:
Risk Rating:
Performing			$	32,499					$	29,189					$	30,510					$	16,182					$	8,527					$	19,465					$	26,028					$	1,229					$	163,629
Nonperforming			22						141						171						64						247						526						4						3						1,178
Total			$	32,521					$	29,330					$	30,681					$	16,246					$	8,774					$	19,991					$	26,032					$	1,232					$	164,807
Home equity:
Risk Rating:
Performing			$	1					$	997					$	444					$	891					$	238					$	—					$	529,275					$	20,314					$	552,160
Nonperforming			—						37						—						—						11						116						94						3,996						4,254
Total			$	1					$	1,034					$	444					$	891					$	249					$	116					$	529,369					$	24,310					$	556,414

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Nonaccrual and Past Due Loans

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

The following table presents the aging of the amortized cost basis in past due loans by class of loans:

(dollars in thousands)			30-59 Days Past Due						60-89 Days Past Due						Past Due 90 Days or More						Total Past Due						Current						Total Loans
September 30, 2021
Commercial			$	509					$	663					$	750					$	1,922					$	3,310,871					$	3,312,793
Commercial real estate			1,401						83						14,869						16,353						6,115,982						6,132,335
BBCC			—						38						300						338						350,349						350,687
Residential			7,592						2,140						5,615						15,347						2,209,435						2,224,782
Indirect			3,160						552						462						4,174						856,611						860,785
Direct			391						175						217						783						148,341						149,124
Home equity			324						586						912						1,822						552,500						554,322
Total			$	13,377					$	4,237					$	23,125					$	40,739					$	13,544,089					$	13,584,828
December 31, 2020
Commercial			$	2,977					$	664					$	2,100					$	5,741					$	3,751,959					$	3,757,700
Commercial real estate			887						128						27,272						28,287						5,746,524						5,774,811
BBCC			894						882						61						1,837						368,586						370,423
Residential			11,639						3,296						7,666						22,601						2,225,821						2,248,422
Indirect			5,222						960						492						6,674						907,228						913,902
Direct			753						533						426						1,712						163,095						164,807
Home equity			1,075						377						1,663						3,115						553,299						556,414
Total			$	23,447					$	6,840					$	39,680					$	69,967					$	13,716,512					$	13,786,479

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:

			September 30, 2021																		December 31, 2020
(dollars in thousands)			Nonaccrual Amortized Cost						Nonaccrual With No Related Allowance						Past Due 90 Days or More and Accruing						Nonaccrual Amortized Cost						Nonaccrual With No Related Allowance						Past Due 90 Days or More and Accruing
Commercial			$	26,534					$	2,617					$	96					$	34,895					$	3,394					$	122
Commercial real estate			55,210						27,756						—						76,138						22,152						20
BBCC			3,621						—						—						3,551						—						—
Residential			18,943						—						—						24,794						—						—
Indirect			2,445						—						—						2,529						—						12
Direct			1,195						—						17						1,178						27						13
Home equity			3,638						—						—						4,254						45						—
Total			$	111,586					$	30,373					$	113					$	147,339					$	25,618					$	167

Interest income recognized on nonaccrual loans was insignificant during the three and nine months ended September 30, 2021 and 2020.

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When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of collateral dependent loans by class of loan:

			Type of Collateral
(dollars in thousands)			Real Estate						Blanket Lien						Investment Securities/Cash						Auto						Other
September 30, 2021
Commercial			$	6,762					$	16,299					$	2,984					$	95					$	394
Commercial real estate			41,170						364						1,003						—						12,673
BBCC			1,884						1,579						45						113						—
Residential			18,943						—						—						—						—
Indirect			—						—						—						2,445						—
Direct			998						—						5						149						41
Home equity			3,638						—						—						—						—
Total loans			$	73,395					$	18,242					$	4,037					$	2,802					$	13,108
December 31, 2020
Commercial			$	8,976					$	19,253					$	5,379					$	394					$	893
Commercial real estate			60,844						472						1,137						—						13,685
BBCC			1,425						1,929						63						134						—
Residential			24,794						—						—						—						—
Indirect			—						—						—						2,529						—
Direct			901						—						2						235						29
Home equity			4,254						—						—						—						—
Total loans			$	101,194					$	21,654					$	6,581					$	3,292					$	14,607

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions.  At September 30, 2021, these loans totaled $1.124 billion, of which $529.7 million had been sold to other financial institutions and $594.3 million was retained by Old National.  The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.

Troubled Debt Restructurings

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

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

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

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If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss.  For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances.  For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

For commercial TDRs, an allocated reserve is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value.  To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent.  The allocated reserve is established as the difference between the carrying value of the loan and the collectable value.  If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.

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

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The following table presents activity in TDRs:

(dollars in thousands)			Beginning Balance						(Charge-offs)/ Recoveries						(Payments)/ Disbursements						(Removals)/ Additions						Ending Balance
Three Months Ended September 30, 2021
Commercial			$	8,264					$	1					$	(156)					$	2,073					$	10,182
Commercial real estate			15,970						58						(369)						—						15,659
BBCC			97						2						(10)						—						89
Residential			2,582						(7)						(108)						—						2,467
Indirect			—						1						(1)						—						—
Direct			665						—						(15)						—						650
Home equity			217						1						(10)						—						208
Total			$	27,795					$	56					$	(669)					$	2,073					$	29,255
Three Months Ended September 30, 2020
Commercial			$	10,598					$	1,326					$	(3,168)					$	—					$	8,756
Commercial real estate			12,706						1,993						(3,950)						5,907						16,656
BBCC			147						(52)						43						—						138
Residential			3,012						—						(171)						—						2,841
Indirect			—						2						(2)						—						—
Direct			779						(11)						(18)						—						750
Home equity			367						1						(77)						—						291
Total			$	27,609					$	3,259					$	(7,343)					$	5,907					$	29,432
Nine Months Ended September 30, 2021
Commercial			$	11,090					$	1					$	(1,810)					$	901					$	10,182
Commercial real estate			17,606						72						(2,019)						—						15,659
BBCC			112						8						(31)						—						89
Residential			2,824						(11)						(346)						—						2,467
Indirect			—						4						(4)						—						—
Direct			739						3						(92)						—						650
Home equity			282						2						(76)						—						208
Total			$	32,653					$	79					$	(4,378)					$	901					$	29,255
Nine Months Ended September 30, 2020
Commercial			$	12,412					$	632					$	(4,288)					$	—					$	8,756
Commercial real estate			14,277						741						(4,269)						5,907						16,656
BBCC			578						(22)						(418)						—						138
Residential			3,107						—						(266)						—						2,841
Indirect			—						7						(7)						—						—
Direct			983						(9)						(224)						—						750
Home equity			381						2						(92)						—						291
Total			$	31,738					$	1,351					$	(9,564)					$	5,907					$	29,432

TDRs included within nonaccrual loans totaled $12.8 million at September 30, 2021 and $14.9 million at December 31, 2020.  Old National has allocated specific reserves to customers whose loan terms have been modified as TDRs totaling $0.8 million at September 30, 2021 and $1.6 million at December 31, 2020.  Old National had not committed to lend any additional funds to customers with outstanding loans that were classified as TDRs at September 30, 2021 or December 31, 2020.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the nine months ended September 30, 2021 and 2020 are the same except for when the loan modifications involve the forgiveness of principal.  One loan met the qualifications to be removed from TDR status for the nine months ended September 30, 2021.

The TDRs that occurred during the nine months ended September 30, 2021 and 2020 did not have a material impact on the allowance for credit losses and resulted in no charge-offs.

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

TDRs for which there was a payment default within twelve months following the modification were insignificant during the nine months ended September 30, 2021 and 2020.

The terms of certain other loans were modified during 2021 and 2020 that did not meet the definition of a TDR.  It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification.  The evaluation is performed under our internal underwriting policy.  We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee.  We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

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

Non-TDR Loan Modifications due to COVID-19

On March 22, 2020, the Interagency Statement was issued by our banking regulators that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. Additionally, section 541 of the CAA extends the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The table below presents these loan deferrals by loan category:

									December 31, 2020						September 30, 2021
(dollars in thousands)									Deferrals Balance						Deferrals Balance (1)						Number of Deferrals
Commercial and commercial real estate									$	53,823					$	16,641					34
Residential real estate									1,855						767						2
Consumer									8,224						2,763						151
Total									$	63,902					$	20,171					187

(1)    Includes second deferrals between 90 and 180 days totaling $4.2 million of commercial and commercial real estate loans, $0.1 million of residential real estate loans, and $0.4 million of consumer loans.

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NOTE 7 – OTHER REAL ESTATE OWNED

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2021						2020						2021						2020
Balance at beginning of period			$	520					$	1,786					$	1,324					$	2,169
Additions			1,703						368						1,858						572
Sales			(280)						(843)						(1,154)						(1,267)
Impairments			—						(63)						(85)						(226)
Balance at end of period (1)			$	1,943					$	1,248					$	1,943					$	1,248

(1)Includes repossessed personal property of $0.1 million at September 30, 2021 and $0.2 million September 30, 2020.

Foreclosed residential real estate property recorded as a result of obtaining physical possession of the property included in the table above totaled $23 thousand at September 30, 2021 and $0.8 million at December 31, 2020.  Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.7 million at September 30, 2021 and December 31, 2020.

NOTE 8 – PREMISES AND EQUIPMENT

The composition of premises and equipment was as follows:

(dollars in thousands)			September 30, 2021						December 31, 2020
Land			$	71,414					$	72,600
Buildings			393,418						373,660
Furniture, fixtures, and equipment			114,632						110,735
Leasehold improvements			46,638						44,734
Total			626,102						601,729
Accumulated depreciation			(150,066)						(137,321)
Premises and equipment, net			$	476,036					$	464,408

Depreciation expense was $6.5 million for the three months ended September 30, 2021 and $20.6 million for the nine months ended September 30, 2021, compared to $6.8 million for the three months ended September 30, 2020 and $21.8 million for the nine months ended September 30, 2020.

Finance Leases

Old National leases certain banking center buildings and equipment under finance leases that are included in premises and equipment.  See Notes 9 and 15 to the consolidated financial statements for detail regarding these leases.

NOTE 9 – 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

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they are generally able to be segregated.  For certain equipment leases, Old National accounts for the lease and non-lease components as a single lease component using the practical expedient available for that class of assets.

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

The components of lease expense were as follows:

			Affected Line Item in the Statement of Income						Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)									2021						2020						2021						2020
Operating lease cost			Occupancy/Equipment expense						$	2,995					$	3,952					$	9,388					$	19,786
Finance lease cost:
Amortization of right-of-use assets			Occupancy expense						593						311						1,714						733
Interest on lease liabilities			Interest expense						108						98						323						267
Sub-lease income			Occupancy expense						(142)						(129)						(420)						(378)
Total									$	3,554					$	4,232					$	11,005					$	20,408

Supplemental balance sheet information related to leases was as follows:

(dollars in thousands)			September 30, 2021						December 31, 2020
Operating Leases
Operating lease right-of-use assets			$	69,912					$	76,197
Operating lease liabilities			76,771						86,598
Finance Leases
Premises and equipment, net			16,004						11,351
Other borrowings			16,688						11,813
Weighted-Average Remaining Lease Term (in Years)
Operating leases			10.4						10.6
Finance leases			8.0						10.3
Weighted-Average Discount Rate
Operating leases			3.39		%				3.40		%
Finance leases			3.06		%				3.46		%

Supplemental cash flow information related to leases was as follows:

			Nine Months Ended September 30,
(dollars in thousands)			2021						2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases			$	10,692					$	12,194
Operating cash flows from finance leases			323						267
Financing cash flows from finance leases			1,492						569

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The following table presents a maturity analysis of the Company’s lease liability by lease classification at September 30, 2021:

(dollars in thousands)			Operating Leases						Finance Leases
2021			$	3,464					$	640
2022			13,002						2,641
2023			9,273						2,673
2024			8,219						2,683
2025			8,079						2,682
Thereafter			49,815						7,591
Total undiscounted lease payments			91,852						18,910
Amounts representing interest			(15,081)						(2,222)
Lease liability			$	76,771					$	16,688

Old National leases certain office space and buildings to unrelated parties in exchange for consideration.  All of these tenant leases are classified as operating leases.  The following table presents a maturity analysis of the Company’s tenant leases at September 30, 2021:

(dollars in thousands)			Tenant Leases
2021			$	642
2022			2,047
2023			1,598
2024			1,420
2025			1,083
Thereafter			2,922
Total undiscounted lease payments			$	9,712

NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2021						2020						2021						2020
Balance at beginning of period			$	1,036,994					$	1,036,994					$	1,036,994					$	1,036,994
Acquisitions and adjustments			—						—						—						—
Balance at end of period			$	1,036,994					$	1,036,994					$	1,036,994					$	1,036,994

Old National performed the required annual goodwill impairment test as of August 31, 2021 and there was no impairment.  No events or circumstances since the August 31, 2021 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

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The gross carrying amounts and accumulated amortization of other intangible assets were as follows: 

(dollars in thousands)			Gross Carrying Amount						Accumulated Amortization and Impairment						Net Carrying Amount
September 30, 2021
Core deposit			$	92,754					$	(57,684)					$	35,070
Customer trust relationships			16,547						(14,366)						2,181
Total intangible assets			$	109,301					$	(72,050)					$	37,251
December 31, 2020
Core deposit			$	112,723					$	(69,623)					$	43,100
Customer trust relationships			16,547						(13,633)						2,914
Total intangible assets			$	129,270					$	(83,256)					$	46,014

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 nine months ended September 30, 2021 or 2020.  Total amortization expense associated with intangible assets was $2.8 million for the three months ended September 30, 2021 and $8.8 million for the nine months ended September 30, 2021, compared to $3.5 million for the three months ended September 30, 2020 and $10.8 million for the nine months ended September 30, 2020.

Estimated amortization expense for future years is as follows:

(dollars in thousands)
2021 remaining			$	2,573
2022			9,014
2023			7,053
2024			5,645
2025			4,509
Thereafter			8,457
Total			$	37,251

NOTE 11 – LOAN SERVICING RIGHTS

Loan servicing rights are included in other assets on the balance sheet. At September 30, 2021, loan servicing rights derived from mortgage loans sold with servicing retained totaled $29.2 million, compared to $26.7 million at December 31, 2020.  Loans serviced for others are not reported as assets.  The principal balance of mortgage loans serviced for others was $3.618 billion at September 30, 2021, compared to $3.613 billion at December 31, 2020.  Custodial escrow balances maintained in connection with serviced loans were $43.8 million at September 30, 2021 and $16.2 million at December 31, 2020.

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2021						2020						2021						2020
Balance at beginning of period			$	28,886					$	26,288					$	28,124					$	25,399
Additions			2,671						4,446						8,842						9,849
Amortization			(2,236)						(2,885)						(7,645)						(7,399)
Balance before valuation allowance at end of period			29,321						27,849						29,321						27,849
Valuation allowance:
Balance at beginning of period			(105)						(2,253)						(1,407)						(31)
(Additions)/recoveries			5						(95)						1,307						(2,317)
Balance at end of period			(100)						(2,348)						(100)						(2,348)
Loan servicing rights, net			$	29,221					$	25,501					$	29,221					$	25,501

At September 30, 2021, the fair value of servicing rights was $31.9 million, which was determined using a discount rate of 9% and a conditional prepayment rate of 11%.  At December 31, 2020, the fair value of servicing rights was $26.8 million, which was determined using a discount rate of 9% and a conditional prepayment rate of 14%.

NOTE 12 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS

Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects.  These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. As of September 30, 2021, 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)						September 30, 2021												December 31, 2020
Investment			Accounting Method			Investment						Unfunded Commitment (1)						Investment						Unfunded Commitment
LIHTC			Proportional amortization			$	41,033					$	14,283					$	33,609					$	6,845
FHTC			Equity			21,288						16,850						18,660						22,398
NMTC			Equity			9,675						—						6,120						—
Renewable Energy			Equity			2,294						—						3,611						862
Total						$	74,290					$	31,133					$	62,000					$	30,105

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

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

(dollars in thousands)			Amortization Expense (1)						Tax Expense (Benefit) Recognized (2)
Three Months Ended September 30, 2021
LIHTC			$	863					$	(1,135)
FHTC			1,151						(1,052)
NMTC			375						(463)
Renewable Energy			210						—
Total			$	2,599					$	(2,650)
Three Months Ended September 30, 2020
LIHTC			$	776					$	(1,015)
FHTC			816						(1,479)
Renewable Energy			2,299						(2,262)
Total			$	3,891					$	(4,756)
Nine Months Ended September 30, 2021
LIHTC			$	2,588					$	(3,407)
FHTC			2,510						(2,308)
NMTC			1,125						(1,388)
Renewable Energy			1,116						(562)
Total			$	7,339					$	(7,665)
Nine Months Ended September 30, 2020
LIHTC			$	2,329					$	(3,053)
FHTC			5,959						(4,191)
Renewable Energy			2,958						(2,970)
Total			$	11,246					$	(10,214)

(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 13 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are secured borrowings.  Old National pledges investment securities to secure these borrowings. The following table presents securities sold under agreements to repurchase and related weighted-average interest rates:

			At or for the Nine Months Ended September 30, 2021						At December 31, 2020						At or for the Nine Months Ended September 30, 2020
(dollars in thousands)
Outstanding at period end			$	375,247					$	431,166					$	399,141
Average amount outstanding during the period			396,495						N/A						355,039
Maximum amount outstanding at any month-end during the period			405,278						N/A						399,141
Weighted-average interest rate:
During the period			0.10		%				N/A						0.27		%
At period end			0.10		%				0.12		%				0.12		%

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

			At September 30, 2021
			Remaining Contractual Maturity of the Agreements
(dollars in thousands)			Overnight and Continuous						Up to 30 Days						30-90 Days						Greater Than 90 days						Total
Repurchase Agreements:
U.S. Treasury and agency securities			$	375,247					$	—					$	—					$	—					$	375,247
Total			$	375,247					$	—					$	—					$	—					$	375,247

The fair value of securities pledged to secure repurchase agreements may decline.  Old National has pledged securities valued at 120% of the gross outstanding balance of repurchase agreements at September 30, 2021 to manage this risk.

NOTE 14 – FEDERAL HOME LOAN BANK ADVANCES

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

(dollars in thousands)			September 30, 2021						December 31, 2020
FHLB advances (fixed rates 0.45% to 4.96%    and variable rates 0.07% to 0.09%) maturing    October 2022 to January 2041			$	1,904,155					$	1,999,160
Fair value hedge basis adjustments and unamortized    prepayment fees			(14,101)						(7,725)
Total			$	1,890,054					$	1,991,435

FHLB advances had weighted-average rates of 1.30% at September 30, 2021 and 1.32% at December 31, 2020.  Investment securities and residential real estate loans collateralize these borrowings up to 140% of outstanding debt.

In the first quarter of 2021, Old National modified $50.0 million pertaining to two FHLB advances, which lowered their weighted average effective rates from 1.53% to 0.33%. At September 30, 2021, total unamortized prepayment fees related to all debt modifications totaled $27.7 million, compared to $30.0 million at December 31, 2020.

Contractual maturities of FHLB advances at September 30, 2021 were as follows:

(dollars in thousands)
Due in 2021			$	—
Due in 2022			29,000
Due in 2023			155
Due in 2024			25,000
Due in 2025			550,000
Thereafter			1,300,000
Fair value hedge basis adjustments and unamortized prepayment fees			(14,101)
Total			$	1,890,054

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NOTE 15 – OTHER BORROWINGS

The following table summarizes Old National’s other borrowings:

(dollars in thousands)			September 30, 2021						December 31, 2020
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			(442)						(559)
Junior subordinated debentures (variable rates of    1.68% to 1.87%) maturing March 2035 to June 2037			42,000						42,000
Other basis adjustments			(3,082)						(3,195)
Old National Bank:
Finance lease liabilities			16,688						11,813
Subordinated debentures (variable rate 4.48%)			12,000						12,000
Leveraged loans for NMTC (fixed rates of 1.00% to 1.43%)    maturing December 2046 to December 2052			25,655						15,300
Other			3,149						428
Total other borrowings			$	270,968					$	252,787

Contractual maturities of other borrowings at September 30, 2021 were as follows:

(dollars in thousands)
Due in 2021			$	533
Due in 2022			2,242
Due in 2023			2,319
Due in 2024			177,377
Due in 2025			2,426
Thereafter			86,446
Unamortized debt issuance costs and other basis adjustments			(375)
Total			$	270,968

Senior Notes

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

Junior Subordinated Debentures

Junior subordinated debentures related to trust preferred securities are classified in “other borrowings.”  Junior subordinated debentures qualify as Tier 2 capital for regulatory purposes, subject to certain limitations.

Through various acquisitions, Old National assumed junior subordinated debenture obligations related to various trusts that issued trust preferred securities.  Old National guarantees the payment of distributions on the trust 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.

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The following table summarizes the terms of our outstanding junior subordinated debentures:

(dollars in thousands)

Rate at September 30, 2021

Name of Trust

Issuance Date

Issuance Amount

Rate

Maturity Date

St. Joseph Capital Trust II

March 2005

$

5,000

3-month LIBOR plus 1.75%

1.87%

March 17, 2035

Anchor Capital Trust III

August 2005

5,000

3-month LIBOR plus 1.55%

1.68%

September 30, 2035

Home Federal Statutory    Trust I

September 2006

15,000

3-month LIBOR plus 1.65%

1.77%

September 15, 2036

Monroe Bancorp Capital    Trust I

July 2006

3,000

3-month LIBOR plus 1.60%

1.73%

October 7, 2036

Tower Capital Trust 3

December 2006

9,000

3-month LIBOR plus 1.69%

1.81%

March 1, 2037

Monroe Bancorp Statutory    Trust II

March 2007

5,000

3-month LIBOR plus 1.60%

1.72%

June 15, 2037

Total

$

42,000

Subordinated Debentures

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

Finance Lease Liabilities

Old National has long-term finance lease liabilities for certain banking centers and equipment totaling $16.7 million.  See Note 9 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities.

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NOTE 16 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

(dollars in thousands)			Unrealized Gains and Losses on Available- for-Sale Debt Securities												Gains and Losses on Cash Flow Hedges						Defined Benefit Pension Plans						Total
Three Months Ended September 30, 2021
Balance at beginning of period			$	59,095											$	3,241					$	(74)					$	62,262
Other comprehensive income (loss) before    reclassifications			(3,230)												(124)						—						(3,354)
Amounts reclassified from AOCI to income (1)			(945)												(1,190)						37						(2,098)
Balance at end of period			$	54,920											$	1,927					$	(37)					$	56,810
Three Months Ended September 30, 2020
Balance at beginning of period			$	144,811											$	4,355					$	(123)					$	149,043
Other comprehensive income (loss) before    reclassifications			5,234												(8)						—						5,226
Amounts reclassified from AOCI to income (1)			(3,837)												(1,169)						21						(4,985)
Balance at end of period			$	146,208											$	3,178					$	(102)					$	149,284
Nine Months Ended September 30, 2021
Balance at beginning of period			$	145,335											$	2,584					$	(148)					$	147,771
Other comprehensive income (loss) before    reclassifications			(87,403)												1,970						—						(85,433)
Amounts reclassified from AOCI to income (1)			(3,012)												(2,627)						111						(5,528)
Balance at end of period			$	54,920											$	1,927					$	(37)					$	56,810
Nine Months Ended September 30, 2020
Balance at beginning of period			$	56,131											$	240					$	(164)					$	56,207
Other comprehensive income (loss) before    reclassifications			98,336												5,692						—						104,028
Amounts reclassified from AOCI to income (1)			(8,259)												(2,754)						62						(10,951)
Balance at end of period			$	146,208											$	3,178					$	(102)					$	149,284

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

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The following table summarizes the significant amounts reclassified out of each component of AOCI for the three months ended September 30, 2021 and 2020:

			Three Months Ended September 30,
(dollars in thousands)			2021						2020
Details about AOCI Components			Amount Reclassified from AOCI												Affected Line Item in the Statement of Income
Unrealized gains and losses on    available-for-sale debt securities			$	1,207					$	4,921					Debt securities gains (losses), net
			(262)						(1,084)						Income tax (expense) benefit
			$	945					$	3,837					Net income
Gains and losses on cash flow hedges    Interest rate contracts			$	1,578					$	1,550					Interest income (expense)
			(388)						(381)						Income tax (expense) benefit
			$	1,190					$	1,169					Net income
Amortization of defined benefit    pension items
Actuarial gains (losses)			$	(49)					$	(28)					Salaries and employee benefits
			12						7						Income tax (expense) benefit
			$	(37)					$	(21)					Net income
Total reclassifications for the period			$	2,098					$	4,985					Net income

The following table summarizes the significant amounts reclassified out of each component of AOCI for the nine months ended September 30, 2021 and 2020:

			Nine Months Ended September 30,
(dollars in thousands)			2021						2020
Details about AOCI Components			Amount Reclassified from AOCI												Affected Line Item in the Statement of Income
Unrealized gains and losses on    available-for-sale debt securities			$	3,892					$	10,606					Debt securities gains (losses), net
			(880)						(2,347)						Income tax (expense) benefit
			$	3,012					$	8,259					Net income
Gains and losses on cash flow hedges    Interest rate contracts			$	3,483					$	3,651					Interest income (expense)
			(856)						(897)						Income tax (expense) benefit
			$	2,627					$	2,754					Net income
Amortization of defined benefit    pension items
Actuarial gains (losses)			$	(147)					$	(82)					Salaries and employee benefits
			36						20						Income tax (expense) benefit
			$	(111)					$	(62)					Net income
Total reclassifications for the period			$	5,528					$	10,951					Net income

NOTE 17 – SHARE-BASED COMPENSATION

At September 30, 2021, Old National had 2.3 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan.  The granting of awards to key employees is typically in the form of restricted stock awards or units.

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Restricted Stock Awards

Old National granted 0.3 million time-based restricted stock awards to certain key officers during the nine months ended September 30, 2021, with shares vesting generally over a 36 month period.  At September 30, 2021, nonvested shares totaled 0.6 million. Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.  At September 30, 2021, unrecognized compensation expense for unvested restricted stock awards was $7.0 million.  The cost is expected to be recognized over a weighted-average period of 2.0 years.

Old National recorded share-based compensation expense, net of tax, related to restricted stock awards of $0.8 million during the three months ended September 30, 2021 and $2.2 million during the nine months ended September 30, 2021, compared to $0.7 million for the three months ended September 30, 2020 and $1.9 million for the nine months ended September 30, 2020.

Restricted Stock Units

Old National granted 0.2 million shares of performance based restricted stock units to certain key officers during the nine months ended September 30, 2021, with shares vesting at the end of a 36 month period based on the achievement of certain targets.   At September 30, 2021, nonvested shares totaled 0.9 million. For certain awards, the level of performance could increase or decrease the number of shares earned.  Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.  At September 30, 2021, unrecognized compensation expense was $4.8 million.  The cost is expected to be recognized over a weighted-average period of 1.8 years.

Old National recorded share-based compensation expense, net of tax, related to restricted stock units of $0.7 million during the three months ended September 30, 2021 and $2.0 million during the nine months ended September 30, 2021, compared to $0.6 million during the three months ended September 30, 2020 and $2.6 million for the nine months ended September 30, 2020.

Stock Options and Appreciation Rights

Old National has not granted stock options since 2009. However, Old National did acquire stock options and stock appreciation rights through prior year acquisitions. Old National recorded no incremental expense associated with the conversion of these options and stock appreciation rights. At September 30, 2021, 28 thousand stock appreciation rights remained outstanding.

NOTE 18 – 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 September 30,												Nine Months Ended September 30,
(dollars in thousands)			2021						2020						2021						2020
Provision at statutory rate of 21%			$	18,779					$	18,920					$	56,830					$	37,200
Tax-exempt income:
Tax-exempt interest			(2,786)						(2,682)						(8,327)						(7,985)
Section 291/265 interest disallowance			28						36						92						153
Company-owned life insurance income			(483)						(386)						(1,582)						(1,657)
Tax-exempt income			(3,241)						(3,032)						(9,817)						(9,489)
State income taxes			2,282						656						7,455						2,367
Interim period effective rate adjustment			1,077						(2,501)						(1,360)						840
Tax credit investments - federal			(315)						(2,575)						(2,838)						(6,296)
Other, net			(902)						686						(1,000)						232
Income tax expense			$	17,680					$	12,154					$	49,270					$	24,854
Effective tax rate			19.8		%				13.5		%				18.2		%				14.0		%

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The provision for income taxes was recorded at September 30, 2021 and 2020 based on the current estimate of the effective annual rate.

The higher effective tax rate during the three and nine months ended September 30, 2021 when compared to the three and nine months ended September 30, 2020 is primarily the result of increases in pre-tax book income and lower tax credits.

Net Deferred Tax Assets

Net deferred tax assets are included in other assets on the balance sheet. Significant components of net deferred tax assets (liabilities) were as follows:

(dollars in thousands)			September 30, 2021						December 31, 2020
Deferred Tax Assets
Allowance for credit losses, net of recapture			$	28,791					$	34,971
Benefit plan accruals			15,579						20,076
Net operating loss carryforwards			14,823						18,982
Deferred gain on securities			1,334						2,102
Acquired loans			8,949						11,989
Operating lease liabilities			22,959						24,245
Tax credit investments and other partnerships			494						1,054
Other, net			942						488
Total deferred tax assets			93,871						113,907
Deferred Tax Liabilities
Purchase accounting			(18,524)						(18,232)
Loan servicing rights			(7,179)						(6,582)
Premises and equipment			(14,550)						(14,008)
Prepaid expenses			(953)						(955)
Operating lease right-of-use assets			(21,106)						(21,569)
Unrealized gains on available-for-sale investment securities			(14,590)						(40,756)
Unrealized gains on hedges			(628)						(1,080)
Other, net			(1,561)						(1,555)
Total deferred tax liabilities			(79,091)						(104,737)
Net deferred tax assets			$	14,780					$	9,170

Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at September 30, 2021 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million.  Of this total, $50.9 million was acquired from Anchor (WI), and $1.9 million was acquired from Lafayette Savings Bank.  Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates.  Old National Bank has no intention of making such a nondividend distribution.  Accordingly, under current accounting principles, a related deferred income tax liability of $13.0 million has not been recognized.

No valuation allowance was recorded at September 30, 2021 or December 31, 2020 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 $36.7 million at September 30, 2021 and $52.4 million at December 31, 2020.  This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016.  If not used, the federal net operating loss carryforwards will expire from 2030 to 2033.  Old National has recorded state net operating loss carryforwards totaling $116.1 million at September 30, 2021 and $132.2 million at December 31, 2020.  If not used, the state net operating loss carryforwards will expire from 2027 to 2033.

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

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NOTE 19 – 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.

In accordance with ASC 815-20-35-1, subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship should be accounted for in the following manner:

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

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

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 September 30, 2021 and $325.0 million notional amount at December 31, 2020. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $450.0 million notional amount at September 30, 2021 and $400.0 million notional amount at December 31, 2020. 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 $377.5 million notional amount at September 30, 2021 and $379.0 million notional amount at December 31, 2020. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $910.0 million notional amount at September 30, 2021 and $347.5 million notional amount at December 31, 2020. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.

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Derivatives Designated as Hedges

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

			September 30, 2021																		December 31, 2020
									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			$	450,000					$	1,559					$	459					$	400,000					$	6,636					$	—
Interest rate swaps on borrowings			150,000						3,422						—						325,000						628						1,816
Fair value hedges
Interest rate swaps on investment securities			909,957						16,516						9,883						347,516						1,145						172
Interest rate swaps on borrowings			377,500						4,976						—						379,000						8,793						—
Total									$	26,473					$	10,342											$	17,202					$	1,988

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

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

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

(dollars in thousands)																		Gain (Loss) Recognized in Income on Related Hedged Items
Derivatives in Fair Value Hedging Relationships			Location of Gain or (Loss) Recognized in Income on Derivative			Gain (Loss) Recognized in Income on Derivative			Hedged Items in Fair Value Hedging Relationships						Location of Gain or (Loss) Recognized in in Income on Related Hedged Item
Three Months Ended September 30, 2021
Interest rate contracts			Interest income/(expense)			$	(991)		Fixed-rate debt						Interest income/(expense)			$	943
Interest rate contracts			Interest income/(expense)			5,650			Fixed-rate investment securities						Interest income/(expense)			(5,096)
Total						$	4,659											$	(4,153)
Three Months Ended September 30, 2020
Interest rate contracts			Interest income/(expense)			$	(1,294)		Fixed-rate debt						Interest income/(expense)			$	1,290
Nine Months Ended September 30, 2021
Interest rate contracts			Interest income/(expense)			$	(3,817)		Fixed-rate debt						Interest income/(expense)			$	3,772
Interest rate contracts			Interest income/(expense)			5,659			Fixed-rate investment securities						Interest income/(expense)			(5,158)
Total						$	1,842											$	(1,386)
Nine Months Ended September 30, 2020
Interest rate contracts			Interest income/(expense)			$	8,678		Fixed-rate debt						Interest income/(expense)			$	(8,726)

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

						Three Months Ended September 30,									Three Months Ended September 30,
(dollars in thousands)						2021						2020			2021						2020
Derivatives in Cash Flow Hedging Relationships			Location of Gain or (Loss) Reclassified from AOCI into Income			Gain (Loss) Recognized in Other Comprehensive Income on Derivative									Gain (Loss) Reclassified from AOCI into Income
Interest rate contracts			Interest income/(expense)			$	(164)					$	(11)		$	1,578					$	1,550
						Nine Months Ended September 30,									Nine Months Ended September 30,
						2021						2020			2021						2020
Derivatives in Cash Flow Hedging Relationships			Location of Gain or (Loss) Reclassified from AOCI into Income			Gain (Loss) Recognized in Other Comprehensive Income on Derivative									Gain (Loss) Reclassified from AOCI into Income
Interest rate contracts			Interest income/(expense)			$	2,612					$	7,546		$	3,483					$	3,651

Amounts reported in AOCI related to cash flow hedges will be reclassified to interest income or interest expense as interest payments are received or paid on Old National’s derivative instruments.  During the next 12 months, we estimate that $1.5 million will be reclassified to interest income and $0.1 million will be reclassified to interest expense.

Commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.  These derivative contracts do not qualify for hedge accounting.  At September 30, 2021, the notional amounts of the interest rate lock commitments were $189.0 million and forward commitments were $215.2 million.  At December 31, 2020, the notional amounts of the interest rate lock commitments were $224.7 million and forward commitments were $261.0 million.  It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.

Old National also enters into derivative instruments for the benefit of its customers.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $2.384 billion at September 30, 2021.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $2.008 billion at December 31, 2020.  These derivative contracts do not qualify for hedge accounting.  These instruments include interest rate swaps, caps, and collars.  Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

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

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

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Derivatives Not Designated as Hedges

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

			September 30, 2021																		December 31, 2020
									Fair Value																		Fair Value
(dollars in thousands)			Notional						Assets (1)						Liabilities (2)						Notional						Assets (1)						Liabilities (2)
Interest rate lock commitments			$	188,963					$	4,472					$	—					$	224,719					$	9,375					$	—
Forward mortgage loan contracts			215,238						1,305						—						261,027						—						2,335
Customer interest rate swaps			2,384,213						65,882						7,202						2,008,149						113,300						133
Counterparty interest rate swaps (3)			2,384,213						453						9,438						2,008,149						—						13,543
Customer foreign currency forward contracts			15,861						402						—						9,990						324						—
Counterparty foreign currency forward contracts			15,724						—						301						9,854						—						188
Total									$	72,514					$	16,941											$	122,999					$	16,199

(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 net adjustment was $50.1 million as of September 30, 2021 and $100.4 million as of December 31, 2020.

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

						Three Months Ended September 30,
(dollars in thousands)						2021						2020
Derivatives Not Designated as Hedging Instruments			Location of Gain or (Loss) Recognized in Income on Derivative			Gain (Loss) Recognized in Income on Derivative
Interest rate contracts (1)			Other income/(expense)			$	46					$	5
Mortgage contracts			Mortgage banking revenue			1,054						(2,811)
Foreign currency contracts			Other income/(expense)			3						49
Total						$	1,103					$	(2,757)
						Nine Months Ended September 30,
						2021						2020
Derivatives Not Designated as Hedging Instruments			Location of Gain or (Loss) Recognized in Income on Derivative			Gain (Loss) Recognized in Income on Derivative
Interest rate contracts (1)			Other income/(expense)			$	356					$	(582)
Mortgage contracts			Mortgage banking revenue			(1,262)						9,244
Foreign currency contracts			Other income/(expense)			(46)						25
Total						$	(952)					$	8,687

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

NOTE 20 – COMMITMENTS AND CONTINGENCIES

COVID-19

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Future effects, including additional actions taken by federal, state, and local governments to contain COVID-19 or treat its impact, are unknown. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of Old National’s customers to fulfill their contractual obligations to the Company. This could cause Old

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National to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Old National’s intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

Litigation

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

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

Old National is not currently involved in any material litigation.

Credit-Related Financial Instruments

In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of $4.241 billion and standby letters of credit of $65.8 million at September 30, 2021.  At September 30, 2021, approximately $3.900 billion of the loan commitments had fixed rates and $341.3 million had floating rates, with the floating interest rates ranging from 0% to 14%.  At December 31, 2020, loan commitments totaled $3.720 billion and standby letters of credit totaled $86.9 million.  These commitments are not reflected in the consolidated financial statements.  The allowance for unfunded loan commitments totaled $10.3 million at September 30, 2021 and $11.7 million at December 31, 2020.

Old National had credit extensions with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients totaling $7.8 million at September 30, 2021 and $7.9 million December 31, 2020.  Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $7.4 million at September 30, 2021 and $7.5 million at December 31, 2020.  Old National did not provide collateral for the remaining credit extensions.

Visa Class B Restricted Shares

In 2008, Old National received Visa Class B restricted shares as part of Visa’s initial public offering.  These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares.  This conversion will not occur until the final settlement of certain litigation for which Visa is indemnified by the holders of Visa’s Class B shares, including Old National.  Visa funded an escrow account from its initial public offering to settle these litigation claims.  Increases in litigation claims requiring Visa to fund the escrow account due to insufficient funds will result in a reduction of the conversion ratio of each Visa Class B share to unrestricted Class A shares.  As of September 30, 2021, the conversion ratio was 1.6228.  Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the 65,466 Class B shares that Old National owns at September 30, 2021 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 21 – FINANCIAL GUARANTEES

Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees in accordance with FASB ASC 460-10 (FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others), which requires Old National to record the instruments at fair value.  Standby letters of credit guarantees are issued in connection with agreements made by

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clients to counterparties.  Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract.  Credit risk associated with standby letters of credit is essentially the same as that associated with extending loans to clients and is subject to normal credit policies.  The term of these standby letters of credit is typically one year or less.  At September 30, 2021, the notional amount of standby letters of credit was $65.8 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.4 million.  At December 31, 2020, the notional amount of standby letters of credit was $86.9 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.5 million.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of $99.9 million at September 30, 2021.

NOTE 22 – SEGMENT INFORMATION

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

NOTE 23 – 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: The fair values for investment securities are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  Discounted cash flows are calculated using swap and LIBOR curves plus spreads that adjust for loss severities, volatility, credit risk, and optionality.  During times when trading is more liquid, broker quotes are used (if available) to validate the model.  Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Derivative financial instruments: The fair values of derivative financial instruments are based on derivative valuation models using market data inputs as of the valuation date (Level 2).

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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 September 30, 2021 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Financial Assets
Equity securities			$	12,427					$	12,427					$	—					$	—
Investment securities available-for-sale:
U.S. Treasury			240,577						240,577						—						—
U.S. government-sponsored entities and agencies			1,562,696						—						1,562,696						—
Mortgage-backed securities - Agency			3,354,701						—						3,354,701						—
States and political subdivisions			1,609,283						—						1,609,283						—
Pooled trust preferred securities			9,367						—						—						9,367
Other securities			251,326						—						251,326						—
Residential loans held for sale			51,306						—						51,306						—
Derivative assets			98,987						—						98,987						—
Financial Liabilities
Derivative liabilities			27,283						—						27,283						—

									Fair Value Measurements at December 31, 2020 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Financial Assets
Equity securities			$	2,547					$	2,547					$	—					$	—
Investment securities available-for-sale:
U.S. Treasury			10,208						10,208						—						—
U.S. government-sponsored entities and agencies			841,988						—						841,988						—
Mortgage-backed securities - Agency			3,339,098						—						3,339,098						—
States and political subdivisions			1,492,162						—						1,492,162						—
Pooled trust preferred securities			7,913						—						—						7,913
Other securities			278,746						—						278,746						—
Residential loans held for sale			63,250						—						63,250						—
Derivative assets			140,201						—						140,201						—
Financial Liabilities
Derivative liabilities			18,187						—						18,187						—

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The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

(dollars in thousands)			Pooled Trust Preferred Securities						States and Political Subdivisions
Three Months Ended September 30, 2021
Balance at beginning of period			$	9,388					$	—
Accretion of discount			4						—
Decrease in fair value of securities			(25)						—
Balance at end of period			$	9,367					$	—
Three Months Ended September 30, 2020
Balance at beginning of period			$	7,185					$	—
Accretion of discount			4						—
Sales/payments received			(16)						—
Increase in fair value of securities			354						—
Balance at end of period			$	7,527					$	—
Nine Months Ended September 30, 2021
Balance at beginning of period			$	7,913					$	—
Accretion of discount			14						—
Sales/payments received			(27)						—
Increase in fair value of securities			1,467						—
Balance at end of period			$	9,367					$	—
Nine Months Ended September 30, 2020
Balance at beginning of period			$	8,222					$	40
Accretion of discount			11						—
Sales/payments received			(49)						(40)
Decrease in fair value of securities			(657)						—
Balance at end of period			$	7,527					$	—

The accretion of discounts on securities in the table above is included in interest income.  The increase or decrease in the fair value of securities in the table above is included in the unrealized holding gains (losses) for the period in the statement of other comprehensive income. An increase in fair value is reflected in the balance sheet as an increase in the fair value of investment securities available-for-sale, an increase in accumulated other comprehensive income, which is included in shareholders’ equity, and a decrease in other assets related to the tax impact. A decrease in fair value is reflected in the balance sheet as a decrease in the fair value of investment securities available-for-sale, a decrease in accumulated other comprehensive income, which is included in shareholders’ equity, and an increase in other assets related to the tax impact. 

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

(dollars in thousands)

Fair Value

Valuation Techniques

Unobservable Input

Range (Weighted Average) (4)

September 30, 2021

Pooled trust preferred securities

$

9,367

Discounted cash flow

Constant prepayment rate (1)

0.00%

Additional asset defaults (2)

5.7% - 11.3% (7.5%)

Expected asset recoveries (3)

0.0% - 23.5% (7.6%)

December 31, 2020

Pooled trust preferred securities

$

7,913

Discounted cash flow

Constant prepayment rate (1)

0.00%

Additional asset defaults (2)

6.0% - 8.7% (6.8%)

Expected asset recoveries (3)

0.0% - 23.2% (7.3%)

(1)Assuming no prepayments.

(2)Each currently performing pool asset is assigned a default probability based on the banking environment, which is adjusted for specific issuer evaluation, of 0%, 50%, or 100%.

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

(4)Unobservable inputs are weighted by the estimated number of defaults and current performing collateral of the instruments.

Significant changes in any of the unobservable inputs used in the fair value measurement in isolation would have resulted in a significant change to the fair value measurement.  The pooled trust preferred securities Old National owns are subordinate note classes that rely on an ongoing cash flow stream to support their values.  The senior note classes receive the benefit of prepayments to the detriment of subordinate note classes since the ongoing interest cash flow stream is reduced by the early redemption.  Generally, a change in prepayment rates or additional pool asset defaults would have an impact that is directionally opposite from a change in the expected recovery of a defaulted pool asset.

Non-Recurring Basis

Assets measured at fair value at September 30, 2021 on a non-recurring basis are summarized below:

									Fair Value Measurements at September 30, 2021 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Collateral Dependent Loans:
Commercial loans			$	12,586					$	—					$	—					$	12,586
Commercial real estate loans			14,957						—						—						14,957
Loan servicing rights			270						—						270						—

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 $32.0 million, with a valuation allowance of $4.4 million at September 30, 2021.  Old National recorded provision expense associated with these loans totaling $0.1 million for the three months ended September 30, 2021 and for the nine months ended September 30, 2021.  Old National recorded provision recoveries associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $5.0 million for the three months ended September 30, 2020 and provision expense totaling $1.5 million for the nine months ended September 30, 2020.

Other real estate owned and other repossessed property is measured at fair value less costs to sell. Old National did not have any other real estate owned or repossessed property measured at fair value on a non-recurring basis at September 30, 2021. There were no write-downs of other real estate owned for the three months ended September 30, 2021 and $23 thousand for the nine months ended September 30, 2021. There were write-downs of other real estate owned of $63 thousand for the three months ended September 30, 2020 and $161 thousand for the nine months ended September 30, 2020.

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Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount.  If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value.  Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).  The valuation allowance for loan servicing rights with impairments at September 30, 2021 totaled $0.1 million.  Old National recorded recoveries associated with these loan servicing rights totaling $5 thousand during the three months ended September 30, 2021 and $1.3 million for the nine months ended September 30, 2021. There were impairments of $0.1 million for the three months ended September 30, 2020 and $2.3 million for the nine months ended September 30, 2020.

Assets measured at fair value at December 31, 2020 on a non-recurring basis are summarized below:

									Fair Value Measurements at December 31, 2020 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Collateral Dependent Loans:
Commercial loans			$	10,747					$	—					$	—					$	10,747
Commercial real estate loans			40,653						—						—						40,653
Loan servicing rights			26,717						—						26,717						—

At December 31, 2020, commercial and commercial real estate loans that are deemed collateral dependent had a principal amount of $57.2 million, with a valuation allowance of $5.8 million.

The valuation allowance for loan servicing rights with impairments at December 31, 2020 totaled $1.4 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)

September 30, 2021

Collateral Dependent Loans

Commercial loans

$

12,586

Discounted

Discount for type of property,

1% - 26% (11%)

cash flow

age of appraisal, and current status

Commercial real estate loans

14,957

Discounted

Discount for type of property,

10% - 19% (16%)

cash flow

age of appraisal, and current status

December 31, 2020

Collateral Dependent Loans

Commercial loans

$

10,747

Discounted

Discount for type of property,

0% - 33% (12%)

cash flow

age of appraisal, and current status

Commercial real estate loans

40,653

Discounted

Discount for type of property,

0% - 18% (7%)

cash flow

age of appraisal, and current status

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

Fair Value Option

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

Residential Loans Held For Sale

Old National has elected the fair value option for residential loans held for sale.  For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the

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financial assets (except any that are on nonaccrual status).  None of these loans are 90 days or more past due, nor are any on nonaccrual status.  Included in the income statement is interest income for loans held for sale totaling $0.4 million for the three months ended September 30, 2021 and $1.1 million for the nine months ended September 30, 2021, compared to $0.6 million for the three months ended September 30, 2020 and $1.5 million for the nine months ended September 30, 2020.

Old National has elected the fair value option for newly originated conforming fixed-rate and adjustable-rate first mortgage loans held for sale.  These loans are intended for sale and are hedged with derivative instruments.  Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.  The fair value option was not elected for loans held for investment.

The difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was as follows: 

(dollars in thousands)			Aggregate Fair Value						Difference						Contractual Principal
September 30, 2021
Residential loans held for sale			$	51,306					$	1,441					$	49,865
December 31, 2020
Residential loans held for sale			$	63,250					$	3,485					$	59,765

Accrued interest at period end is included in the fair value of the instruments.

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value:

(dollars in thousands)			Other Gains and (Losses)						Interest Income						Interest (Expense)						Total Changes in Fair Values Included in Current Period Earnings
Three Months Ended September 30, 2021
Residential loans held for sale			$	(453)					$	—					$	(2)					$	(455)
Three Months Ended September 30, 2020
Residential loans held for sale			$	(1,360)					$	16					$	—					$	(1,344)
Nine Months Ended September 30, 2021
Residential loans held for sale			$	(2,043)					$	2					$	(3)					$	(2,044)
Nine Months Ended September 30, 2020
Residential loans held for sale			$	3,658					$	18					$	(2)					$	3,674

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Financial Instruments Not Carried at Fair Value

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

									Fair Value Measurements at September 30, 2021 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,    and other interest-earning investments			$	797,458					$	797,458					$	—					$	—
Loans, net:
Commercial			3,477,584						—						—						3,464,740
Commercial real estate			6,224,412						—						—						6,146,427
Residential real estate			2,215,256						—						—						2,209,236
Consumer credit			1,559,708						—						—						1,578,912
Accrued interest receivable			74,038						946						25,867						47,225
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits			$	6,440,526					$	6,440,526					$	—					$	—
Checking, NOW, savings, and money market    interest-bearing deposits			10,762,786						10,762,786						—						—
Time deposits			992,837						—						1,005,601						—
Federal funds purchased and interbank borrowings			34						34						—						—
Securities sold under agreements to repurchase			375,247						375,247						—						—
FHLB advances			1,890,054						—						1,954,334						—
Other borrowings			270,968						—						288,496						—
Accrued interest payable			3,635						—						3,635						—
Standby letters of credit			356						—						—						356
Off-Balance Sheet Financial Instruments
Commitments to extend credit			$	—					$	—					$	—					$	6,824

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									Fair Value Measurements at December 31, 2020 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,    and other interest-earning investments			$	589,712					$	589,712					$	—					$	—
Loans, net:
Commercial			3,922,642						—						—						3,912,948
Commercial real estate			5,867,795						—						—						5,797,447
Residential real estate			2,235,814						—						—						2,264,274
Consumer credit			1,628,840						—						—						1,618,365
Accrued interest receivable			85,306						21						27,977						57,308
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits			$	5,633,672					$	5,633,672					$	—					$	—
Checking, NOW, savings, and money market    interest-bearing deposits			10,280,911						10,180,911						99,957						—
Time deposits			1,122,870						—						1,140,922						—
Federal funds purchased and interbank borrowings			1,166						1,166						—						—
Securities sold under agreements to repurchase			431,166						431,166						—						—
FHLB advances			1,991,435						—						2,092,033						—
Other borrowings			252,787						—						254,612						—
Accrued interest payable			5,443						—						5,443						—
Standby letters of credit			462						—						—						462
Off-Balance Sheet Financial Instruments
Commitments to extend credit			$	—					$	—					$	—					$	11,822

The methods utilized to measure the fair value of financial instruments at September 30, 2021 and December 31, 2020 represent an approximation of exit price, however, an actual exit price may differ.

NOTE 24 – REVENUE FROM CONTRACTS WITH CUSTOMERS

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2021						2020						2021						2020
Wealth management fees			$	10,134					$	9,239					$	30,576					$	27,547
Service charges on deposit accounts			8,926						8,698						25,564						26,357
Debit card and ATM fees			4,942						5,276						15,668						15,106
Investment product fees			6,475						5,351						18,381						16,070
Other income:
Merchant processing fees			992						852						2,786						2,363
Gain (loss) on other real estate owned			63						260						293						238
Safe deposit box fees			215						223						783						741
Insurance premiums and commissions			38						61						76						373
Total			$	31,785					$	29,960					$	94,127					$	88,795

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Wealth management fees: Old National earns wealth management fees based upon asset custody and investment management services provided to individual and institutional customers.  Most of these customers receive monthly or quarterly billings for services rendered based upon the market value of assets in custody.  Fees that are transaction based are recognized at the point in time that the transaction is executed.

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

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

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

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

The following discussion is an analysis of our results of operations for the three and nine months ended September 30, 2021 and 2020, and financial condition as of September 30, 2021, compared to December 31, 2020.  This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes.

FORWARD-LOOKING STATEMENTS

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

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

•the possibility that the merger between Old National and First Midwest will not close when expected or at all because required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated (and the risk that required regulatory approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed transaction);

•the occurrence of any event, change, or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive merger agreement between First Midwest and Old National;

•the risk that any announcements relating to the merger could have adverse effects on the market price of the common stock of either or both parties to the transaction;

•the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

•the length, severity, magnitude, and duration of the COVID-19 pandemic and the direct and indirect impact of such pandemic, including its impact on the Company’s financial conditions and business operations;

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

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

•competition;

•government legislation and policies, including changes to address the impact of COVID-19 through the CARES Act and other legislative and regulatory responses to the COVID-19 pandemic;

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

•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;

•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;

•failure or disruption of our information systems;

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

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

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

•operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cyber-security, technological changes, vendor problems, business interruption, and fraud risks.

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

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FINANCIAL HIGHLIGHTS

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

			Three Months Ended																		Nine Months Ended
(dollars and shares in thousands,			September 30,						June 30,						September 30,						September 30,
except per share data)			2021						2021						2020						2021						2020
Income Statement:
Net interest income			$	151,572					$	149,927					$	145,573					$	449,619					$	435,015
Taxable equivalent adjustment (1)			3,501						3,470						3,379						10,471						10,069
Net interest income - tax equivalent basis			155,073						153,397						148,952						460,090						445,084
Provision for credit losses			(4,613)						(4,929)						—						(26,898)						39,495
Noninterest income			54,515						51,508						64,759						162,735						180,722
Noninterest expense			121,274						129,618						120,234						368,632						399,099
Net income			71,746						62,786						77,944						221,350						152,289
Per Common Share Data:
Weighted average diluted shares			165,939						165,934						165,419						165,862						166,370
Net income (diluted)			$	0.43					$	0.38					$	0.47					$	1.33					$	0.92
Cash dividends			0.14						0.14						0.14						0.42						0.42
Common dividend payout ratio (2)			33		%				37		%				30		%				31		%				46		%
Book value			$	18.31					$	18.05					$	17.67					$	18.31					$	17.67
Stock price			16.95						17.61						12.56						16.95						12.56
Tangible common book value (3)			11.83						11.55						11.10						11.83						11.10
Performance Ratios:
Return on average assets			1.20		%				1.06		%				1.40		%				1.25		%				0.95		%
Return on average common equity			9.48						8.39						10.79						9.85						7.11
Return on tangible common equity (3)			15.05						13.58						17.56						15.49						11.66
Return on average tangible common equity (3)			15.13						13.58						17.88						15.84						12.12
Net interest margin (3)			2.92						2.91						3.03						2.92						3.15
Efficiency ratio (3)			56.86						62.05						55.93						58.14						63.11
Net charge-offs (recoveries) to average loans			(0.09)						(0.01)						(0.09)						(0.03)						0.04
Allowance for credit losses to ending loans			0.79						0.79						0.95						0.79						0.95
Non-performing loans to ending loans			0.94						1.03						1.15						0.94						1.15
Balance Sheet:
Total loans			$	13,584,828					$	13,784,677					$	13,892,509					$	13,584,828					$	13,892,509
Total assets			24,018,733						23,675,666						22,460,476						24,018,733						22,460,476
Total deposits			18,196,149						17,868,911						16,506,494						18,196,149						16,506,494
Total borrowed funds			2,536,303						2,559,113						2,725,731						2,536,303						2,725,731
Total shareholders' equity			3,035,892						2,991,118						2,921,149						3,035,892						2,921,149
Capital Ratios:
Risk-based capital ratios:
Tier 1 common equity			12.08		%				11.95		%				11.84		%				12.08		%				11.84		%
Tier 1			12.08						11.95						11.84						12.08						11.84
Total			12.84						12.73						12.81						12.84						12.81
Leverage ratio (to average assets)			8.54						8.38						8.15						8.54						8.15
Total equity to assets (averages)			12.69						12.61						12.97						12.69						13.33
Tangible common equity to tangible assets (3)			8.55						8.47						8.58						8.55						8.58
Nonfinancial Data:
Full-time equivalent employees			2,410						2,465						2,484						2,410						2,484
Banking centers			162						162						162						162						162

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

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

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

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NON-GAAP FINANCIAL MEASURES

The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance. Management believes these non-GAAP financial measures enhance an investor’s understanding of our financial results by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements and notes thereto for the quarter ended September 30, 2021, included elsewhere in this report, and included in our Annual Report on Form 10-K for the year ended December 31, 2020. Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP.

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The following table presents GAAP to non-GAAP reconciliations.

									Three Months Ended September 30,									Nine Months Ended September 30,
(dollars and shares in thousands, except per share data)									2021			2020						2021			2020
Tangible common book value:
Shareholders' equity (GAAP)									$	3,035,892		$	2,921,149					$	3,035,892		$	2,921,149
Deduct:						Goodwill			1,036,994			1,036,994						1,036,994			1,036,994
						Intangible assets			37,251			49,258						37,251			49,258
Tangible shareholders' equity (non-GAAP)									$	1,961,647		$	1,834,897					$	1,961,647		$	1,834,897
Period end common shares									165,814			165,333						165,814			165,333
Tangible common book value									11.83			11.10						11.83			11.10
Return on tangible common equity:
Net income (GAAP)									$	71,746		$	77,944					$	221,350		$	152,289
Add: Intangible amortization (net of tax)									2,084			2,595						6,572			8,152
Tangible net income (non-GAAP)									$	73,830		$	80,539					$	227,922		$	160,441
Tangible shareholders' equity (non-GAAP) (see above)									$	1,961,647		$	1,834,897					$	1,961,647		$	1,834,897
Return on tangible common equity									15.05		%	17.56		%				15.49		%	11.66		%
Return on average tangible common equity:
Tangible net income (non-GAAP) (see above)									$	73,830		$	80,539					$	227,922		$	160,441
Average shareholders' equity (GAAP)									$	3,027,935		$	2,889,545					$	2,997,081		$	2,856,277
Deduct:						Average goodwill			1,036,994			1,036,994						1,036,994			1,036,994
						Average intangible assets			38,585			50,926						41,447			54,488
Average tangible shareholders' equity (non-GAAP)									$	1,952,356		$	1,801,625					$	1,918,640		$	1,764,795
Return on average tangible common equity									15.13		%	17.88		%				15.84		%	12.12		%
Net interest margin:
Net interest income (GAAP)									$	151,572		$	145,573					$	449,619		$	435,015
Taxable equivalent adjustment									3,501			3,379						10,471			10,069
Net interest income - taxable equivalent basis (non-GAAP)									$	155,073		$	148,952					$	460,090		$	445,084
Average earning assets									$	21,228,590		$	19,654,292					$	20,977,471		$	18,815,088
Net interest margin									2.92		%	3.03		%				2.92		%	3.15		%
Efficiency ratio:
Noninterest expense (GAAP)									$	121,274		$	120,234					$	368,632		$	399,099
Deduct: Intangible amortization expense									2,779			3,459						8,763			10,847
Adjusted noninterest expense (non-GAAP)									$	118,495		$	116,775					$	359,869		$	388,252
Net interest income - taxable equivalent basis (non-GAAP)     (see above)									$	155,073		$	148,952					$	460,090		$	445,084
Noninterest income									54,515			64,759						162,735			180,722
Deduct: Debt securities gains (losses), net									1,207			4,921						3,892			10,606
Adjusted total revenue (non-GAAP)									$	208,381		$	208,790					$	618,933		$	615,200
Efficiency ratio									56.86		%	55.93		%				58.14		%	63.11		%
Tangible common equity to tangible assets:
Tangible shareholders' equity (non-GAAP) (see above)									$	1,961,647		$	1,834,897					$	1,961,647		$	1,834,897
Assets (GAAP)									$	24,018,733		$	22,460,476					$	24,018,733		$	22,460,476
Add:						Trust overdrafts			116			17						116			17
Deduct:						Goodwill			1,036,994			1,036,994						1,036,994			1,036,994
						Intangible assets			37,251			49,258						37,251			49,258
Tangible assets (non-GAAP)									$	22,944,604		$	21,374,241					$	22,944,604		$	21,374,241
Tangible common equity to tangible assets									8.55		%	8.58		%				8.55		%	8.58		%

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

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EXECUTIVE SUMMARY

Old National is devoted to the basic banking principles of organic loan growth, increases in non-interest income, prudent capital deployment, and expense management. We strive to continuously improve our operating leverage by growing our revenue faster than our expenses. In addition, we continue to actively seek new ways to serve our clients better by simplifying processes, offering superior products and services, and embracing new technologies. As previously disclosed Old National and First Midwest entered into a merger agreement. We believe this merger will create powerful synergies, additional market coverage, and create financial strength that will drive long-term shareholder value.

During the third quarter of 2021, we received approval of the merger from our shareholders and the OCC. Our Federal Reserve application remains pending with the board in Washington D.C., along with many other bank holding companies’ merger applications. We stand ready to close quickly once we receive final Federal Reserve approval.

Old National is being targeted in a lawsuit filed in October 2021 by the Fair Housing Center of Central Indiana related to certain lending practices in our Indianapolis market. We strongly and categorically deny these claims. Old National is committed to engaging in fair and equal lending practices.

During the third quarter of 2021, net income was $71.7 million, or $0.43 per diluted share. Net income was $77.9 million, or $0.47 per diluted share, for the third quarter of 2020.

During the third quarter of 2021, we recorded a provision for credit losses recapture of $4.6 million. This provision recapture was derived from the Moody’s baseline forecast, which included improved unemployment, gross domestic product, and house price index when compared to the forecast used in the prior quarter.

Despite the challenging operating environment, we achieved strong fundamental results during the third quarter of 2021.

Loans:  Our loan balances, excluding loans held for sale, decreased $199.8 million to $13.585 billion at September 30, 2021 compared to $13.785 billion at June 30, 2021.  This was primarily driven by a decline in PPP loans of $366.1 million, partially offset by growth in other commercial and commercial real estate loans.  We reported strong total commercial loan production of $1.0 billion in the third quarter of 2021 and the commercial loan pipeline totaled $2.7 billion at September 30, 2021.

Net Interest Income: For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, our net interest income increased primarily due to higher average loans and investment securities, higher PPP related interest and net fees combined, and lower costs of interest-bearing liabilities, partially offset by decreased loan and investment securities yields.  Net interest income increased in the third quarter of 2021 compared to the second quarter of 2021 primarily due to higher average investment securities, higher loan yields, higher PPP related interest and net fees combined, and higher interest collected on nonaccrual loans, partially offset by lower average loans, lower accretion income, and decreased investment securities yields. 

Noninterest Income:  Noninterest income decreased $18.0 million to $162.7 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to lower mortgage banking revenue and lower debt securities gains. The third quarter of 2021 compared to the second quarter of 2021 increased $3.0 million primarily due to higher mortgage banking revenue.

Expenses:  Noninterest expenses decreased $30.5 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.  The decrease was primarily attributable to $39.0 million of charges related to the ONB Way in the nine months ended September 30, 2020.  The third quarter of 2021 compared to the second quarter of 2021 decreased $8.3 million reflecting lower professional fees, salaries, and occupancy expenses.

Our robust commercial pipeline at September 30, 2021, along with the third quarter’s commercial loan growth, coupled with well controlled expenses and strong credit quality metrics bolster management’s confidence in future quarters. However, we recognize that the economy has not fully recovered and is susceptible to the long-term impacts of the pandemic, lingering higher inflation, labor supply constraints, and supply chain disruptions that could stall the economy and negate the success achieved during the first three quarters of 2021.

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Pandemic Update

As previously disclosed, the COVID-19 pandemic has created economic and financial disruptions that have adversely affected our operations during 2020 and the nine months ended September 30, 2021. Our historically careful underwriting practices, diverse and granular portfolios, and Midwest-based footprint has helped mitigate any adverse impact to Old National. In addition, the combination of the vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the impact of the pandemic on the Company’s business, financial condition, results of operations, and its customers as of September 30, 2021. However, there are some concerns that indicate a slower return to pre-pandemic routines. Examples of these concerns relate to more people than anticipated who refuse the vaccines, the emergence of resistant strains, supply chain issues, labor supply constraints, and inflation, all of which may cause businesses in some parts of the country to be much slower to reopen. Given the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict the future adverse financial impact to Old National.

RESULTS OF OPERATIONS

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

			Three Months Ended September 30,												%						Nine Months Ended September 30,												%
(dollars in thousands)			2021						2020						Change						2021						2020						Change
Income Statement Summary:
Net interest income			$	151,572					$	145,573					4.1			%			$	449,619					$	435,015					3.4			%
Provision for credit losses			(4,613)						—						N/M						(26,898)						39,495						(168.1)
Noninterest income			54,515						64,759						(15.8)						162,735						180,722						(10.0)
Noninterest expense			121,274						120,234						0.9						368,632						399,099						(7.6)
Other Data:
Return on average common equity			9.48			%			10.79			%									9.85			%			7.11			%
Return on tangible common equity (1)			15.05						17.56												15.49						11.66
Return on average tangible common    equity (1)			15.13						17.88												15.84						12.12
Efficiency ratio (1)			56.86						55.93												58.14						63.11
Tier 1 leverage ratio			8.54						8.15												8.54						8.15
Net charge-offs (recoveries) to    average loans			(0.09)						(0.09)												(0.03)						0.04

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

Net Interest Income

Net interest income is the most significant component of our earnings, comprising 73% of revenues for the nine months ended September 30, 2021.  Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations.  Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of interest-earning assets and interest-bearing liabilities. We have observed signs of an economic recovery in the United States, with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels. However, there have been concerns about the emergence of communicable strains of the virus, whether enough people will agree to be vaccinated, supply chain issues, labor supply constraints, and inflation. Economic uncertainty remains and bouts of elevated volatility are expected to continue.

Interest rates remained at near historic lows during the third quarter of 2021 after declining dramatically in the first half of 2020 due to the COVID-19 pandemic. The Federal Reserve’s Federal Funds range is currently in a target range of 0.00% to 0.25%, with the Effective Fed Funds Rate in the 0.05% to 0.10% range. If interest rates decline further, our interest rate spread could decline, which may result in a decrease in our net interest income. However, management has taken balance sheet restructuring, derivative, and deposit pricing actions to help mitigate this risk.

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

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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 federal statutory tax rate in effect of 21% for all periods.  This analysis portrays the income tax benefits related to tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets.  Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis.  Therefore, management believes these measures provide useful information for both management and investors by allowing them to make better peer comparisons.

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2021						2020						2021						2020
Net interest income			$	151,572					$	145,573					$	449,619					$	435,015
Conversion to fully taxable equivalent			3,501						3,379						10,471						10,069
Net interest income - taxable equivalent basis			$	155,073					$	148,952					$	460,090					$	445,084
Average earning assets			$	21,228,590					$	19,654,292					$	20,977,471					$	18,815,088
Net interest margin			2.86			%			2.96			%			2.86			%			3.08			%
Net interest margin - taxable equivalent basis			2.92			%			3.03			%			2.92			%			3.15			%

The increase in net interest income for the three and nine months ended September 30, 2021 when compared to the three and nine months ended September 30, 2020 was primarily due to higher average earning assets, lower costs of average interest-bearing liabilities, and higher interest and fees related to PPP loans. Partially offsetting these increases were lower yields on average earning assets and lower accretion income in the three and nine months ended September 30, 2021 when compared to the three and nine months ended September 30, 2020. Net interest income for the three and nine months ended September 30, 2021 and 2020 included accretion income (interest income in excess of contractual interest income) associated with acquired loans. Accretion income totaled $3.0 million in the three months ended September 30, 2021 and $12.8 million for the nine months ended September 30, 2021, compared to $5.4 million in the three months ended September 30, 2020 and $17.9 million in the nine months ended September 30, 2020. We expect accretion income on loans to decrease over time, but this may be offset by future acquisitions. Net interest income included interest and net fees combined on PPP loans totaling $12.2 million for the three months ended September 30, 2021 and $36.7 million for the nine months ended September 30, 2021, compared to $8.8 million for the three months ended September 30, 2020 and $15.4 million for the nine months ended September 30, 2020.

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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, dollars in thousands)			Three Months Ended September 30, 2021																		Three Months Ended September 30, 2020
Earning Assets			Average Balance						Income (1)/ Expense						Yield/ Rate						Average Balance						Income (1)/ Expense						Yield/ Rate
Money market and other interest-earning    investments			$	467,572					$	177					0.15		%				$	137,880					$	59					0.17		%
Investment securities:
Treasury and government sponsored agencies			1,730,553						6,968						1.61		%				454,005						2,457						2.17		%
Mortgage-backed securities			3,313,027						14,509						1.75		%				3,342,284						17,478						2.09		%
States and political subdivisions			1,586,743						12,609						3.18		%				1,383,765						11,860						3.43		%
Other securities			443,393						2,638						2.38		%				487,405						2,922						2.40		%
Total investment securities			7,073,716						36,724						2.08		%				5,667,459						34,717						2.45		%
Loans: (2)
Commercial			3,645,197						36,139						3.88		%				4,274,894						33,223						3.04		%
Commercial real estate			6,200,144						57,820						3.65		%				5,546,486						55,891						3.94		%
Residential real estate loans			2,274,347						20,529						3.61		%				2,355,512						23,604						4.01		%
Consumer			1,567,614						14,138						3.58		%				1,672,061						15,971						3.80		%
Total loans			13,687,302						128,626						3.70		%				13,848,953						128,689						3.66		%
Total earning assets			21,228,590						$	165,527					3.08		%				19,654,292						$	163,465					3.29		%
Less: Allowance for credit losses			(111,216)																		(132,447)
Non-Earning Assets
Cash and due from banks			272,855																		346,343
Other assets			2,479,079																		2,405,517
Total assets			$	23,869,308																	$	22,273,705
Interest-Bearing Liabilities
Checking and NOW accounts			$	4,873,914					$	484					0.04		%				$	4,607,427					$	886					0.08		%
Savings accounts			3,678,944						500						0.05		%				3,232,375						634						0.08		%
Money market accounts			2,110,981						438						0.08		%				1,902,407						724						0.15		%
Time deposits			998,060						1,156						0.46		%				1,403,603						3,053						0.87		%
Total interest-bearing deposits			11,661,899						2,578						0.09		%				11,145,812						5,297						0.19		%
Federal funds purchased and interbank    borrowings			689						—						—		%				18,347						12						0.25		%
Securities sold under agreements to repurchase			384,724						90						0.09		%				385,149						160						0.16		%
FHLB advances			1,890,916						5,326						1.12		%				2,021,468						6,709						1.32		%
Other borrowings			270,597						2,460						3.64		%				237,811						2,335						3.93		%
Total borrowed funds			2,546,926						7,876						1.23		%				2,662,775						9,216						1.38		%
Total interest-bearing liabilities			$	14,208,825					$	10,454					0.29		%				$	13,808,587					$	14,513					0.42		%
Noninterest-Bearing Liabilities and    Shareholders' Equity
Demand deposits			$	6,314,100																	$	5,291,037
Other liabilities			318,448																		284,536
Shareholders' equity			3,027,935																		2,889,545
Total liabilities and shareholders' equity			$	23,869,308																	$	22,273,705
Net interest rate spread															2.79		%																2.87		%
Net interest margin (3)															2.92		%																3.03		%
Taxable equivalent adjustment									$	3,501																	$	3,379

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

(2)Includes loans held for sale.

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

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(Tax equivalent basis, dollars in thousands)			Nine Months Ended September 30, 2021																		Nine Months Ended September 30, 2020
Earning Assets			Average Balance						Income (1)/ Expense						Yield/ Rate						Average Balance						Income (1)/ Expense						Yield/ Rate
Money market and other interest-earning    investments			$	357,151					$	313					0.12		%				$	94,149					$	442					0.63		%
Investment securities:
Treasury and government sponsored agencies			1,509,931						17,820						1.57		%				513,055						9,187						2.39		%
Mortgage-backed securities			3,304,200						45,408						1.83		%				3,231,439						54,474						2.25		%
States and political subdivisions			1,523,175						37,174						3.25		%				1,317,136						35,026						3.55		%
Other securities			445,298						8,071						2.42		%				493,016						9,361						2.53		%
Total investment securities			6,782,604						108,473						2.13		%				5,554,646						108,048						2.59		%
Loans: (2)
Commercial			3,878,630						106,421						3.62		%				3,745,803						94,005						3.30		%
Commercial real estate			6,109,795						171,221						3.70		%				5,359,254						176,337						4.32		%
Residential real estate loans			2,268,142						63,350						3.72		%				2,365,037						71,732						4.04		%
Consumer			1,581,149						42,414						3.59		%				1,696,199						49,564						3.90		%
Total loans			13,837,716						383,406						3.67		%				13,166,293						391,638						3.93		%
Total earning assets			20,977,471						$	492,192					3.11		%				18,815,088						$	500,128					3.52		%
Less: Allowance for credit losses			(120,619)																		(107,860)
Non-Earning Assets
Cash and due from banks			266,543																		322,318
Other assets			2,495,512																		2,392,893
Total assets			$	23,618,907																	$	21,422,439
Interest-Bearing Liabilities
Checking and NOW accounts			$	4,934,367					$	1,622					0.04		%				$	4,381,919					$	4,820					0.15		%
Savings accounts			3,608,078						1,479						0.05		%				3,040,889						2,669						0.12		%
Money market accounts			2,076,808						1,300						0.08		%				1,843,902						4,141						0.30		%
Time deposits			1,034,390						4,068						0.53		%				1,498,334						12,763						1.14		%
Total interest-bearing deposits			11,653,643						8,469						0.10		%				10,765,044						24,393						0.30		%
Federal funds purchased and interbank    borrowings			1,096						—						—		%				184,397						1,296						0.94		%
Securities sold under agreements to repurchase			396,495						305						0.10		%				355,039						729						0.27		%
FHLB advances			1,907,322						15,953						1.12		%				2,043,617						21,321						1.39		%
Other borrowings			267,650						7,375						3.67		%				243,255						7,305						4.00		%
Total borrowed funds			2,572,563						23,633						1.23		%				2,826,308						30,651						1.45		%
Total interest-bearing liabilities			$	14,226,206					$	32,102					0.30		%				$	13,591,352					$	55,044					0.54		%
Noninterest-Bearing Liabilities and    Shareholders' Equity
Demand deposits			$	6,072,310																	$	4,710,969
Other liabilities			323,310																		263,841
Shareholders' equity			2,997,081																		2,856,277
Total liabilities and shareholders' equity			$	23,618,907																	$	21,422,439
Net interest rate spread															2.81		%																2.98		%
Net interest margin (3)															2.92		%																3.15		%
Taxable equivalent adjustment									$	10,471																	$	10,069

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

(2)Includes loans held for sale.

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

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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 September 30, 2020 to Three Months Ended September 30, 2021																		From Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2021
			Total Change (1)						Attributed to												Total Change (1)						Attributed to
(dollars in thousands)									Volume						Rate												Volume						Rate
Interest Income
Money market and other interest-earning    investments			$	118					$	132					$	(14)					$	(129)					$	734					$	(863)
Investment securities (2)			2,007						7,957						(5,950)						425						21,762						(21,337)
Loans (2)			(63)						(1,454)						1,391						(8,232)						18,808						(27,040)
Total interest income			2,062						6,635						(4,573)						(7,936)						41,304						(49,240)
Interest Expense
Checking and NOW deposits			(402)						34						(436)						(3,198)						462						(3,660)
Savings deposits			(134)						74						(208)						(1,190)						458						(1,648)
Money market deposits			(286)						66						(352)						(2,841)						362						(3,203)
Time deposits			(1,897)						(676)						(1,221)						(8,695)						(2,903)						(5,792)
Federal funds purchased and interbank    borrowings			(12)						(5)						(7)						(1,296)						(644)						(652)
Securities sold under agreements to    repurchase			(70)						(1)						(69)						(424)						58						(482)
FHLB advances			(1,383)						(394)						(989)						(5,368)						(1,286)						(4,082)
Other borrowings			125						310						(185)						70						702						(632)
Total interest expense			(4,059)						(592)						(3,467)						(22,942)						(2,791)						(20,151)
Net interest income			$	6,121					$	7,227					$	(1,106)					$	15,006					$	44,095					$	(29,089)

(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 $2.5 million and $1.0 million, respectively, during the three months ended September 30, 2021; and $7.3 million and $3.2 million, respectively, during the nine months ended September 30, 2021 using the federal statutory rate in effect of 21%.

The decrease in the net interest margin on a fully taxable equivalent basis for the three and nine months ended September 30, 2021 when compared to the three and nine months ended September 30, 2020 was primarily due to lower yields on interest earning assets and a change in the mix of average interest earning assets and interest-bearing liabilities, partially offset by higher average earning assets and lower costs of interest-bearing liabilities. The yield on interest earning assets decreased 21 basis points and the cost of interest-bearing liabilities decreased 13 basis points in the quarterly year-over-year comparison.  The yield on interest earning assets is calculated by dividing annualized taxable equivalent net interest income by average interest earning assets while the cost of interest-bearing liabilities is calculated by dividing annualized interest expense by average interest-bearing liabilities.  The yield on interest earning assets decreased 41 basis points and the cost of interest-bearing liabilities decreased 24 basis points in the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020. Accretion income represented 6 basis points of the net interest margin in the three months ended September 30, 2021 and 8 basis points in the nine months ended September 30, 2021, compared to 11 basis points for the three months ended September 30, 2020 and 12 basis points for the nine months ended September 30, 2020.

Average earning assets were $21.229 billion for the three months ended September 30, 2021, compared to $19.654 billion for the three months ended September 30, 2020, an increase of $1.575 billion, or 8%. The increase in average earning assets for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020 was due to increases in average investment securities and money market and other interest-earning investments, partially offset by a decrease in average loans. Average earning assets were $20.977 billion for the nine months ended September 30, 2021, compared to $18.815 billion for the nine months ended September 30, 2020, an increase of $2.162 billion, or 11%. The increase in average earning assets for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 was primarily due to increases in average investment securities and average loans. The loan portfolio including loans held for sale, which generally has an average yield higher than the investment portfolio, was 66% of average interest earning assets for the nine months ended September 30, 2021, compared to 70% for the nine months ended September 30, 2020.

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Average loans including loans held for sale decreased $161.7 million for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020 due to lower average commercial loans, residential real estate loans, and consumer loans, partially offset by higher average commercial real estate loans. Average loans including loans held for sale increased $671.4 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 due to higher average commercial loans and commercial real estate loans, partially offset by lower average residential real estate loans and consumer loans. The increase in average commercial loans for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 reflected organic growth, partially offset by a decline in average PPP loans. Average commercial loans included PPP loans totaling $522.4 million for the three months ended September 30, 2021 and $847.2 million for the nine months ended September 30, 2021, compared to $1.477 billion for the three months ended September 30, 2020 and $869.4 million for the nine months ended September 30, 2020.

Average investments increased $1.406 billion for the three months ended September 30, 2021 and $1.228 billion for the nine months ended September 30, 2021 when compared to the same periods in 2020 reflecting excess liquidity.

Average noninterest-bearing deposits increased $1.023 billion for the three months ended September 30, 2021 and $1.361 billion for the nine months ended September 30, 2021 when compared to the same periods in 2020. Average interest-bearing deposits increased $516.1 million for the three months ended September 30, 2021 and $888.6 million for the nine months ended September 30, 2021 when compared to the same periods in 2020. This growth was primarily driven by the increased business and personal savings rates from various government stimulus actions.

Average borrowed funds decreased $115.8 million for the three months ended September 30, 2021 and $253.7 million for the nine months ended September 30, 2021 when compared to the same periods in 2020.

Provision for Credit Losses

Old National recorded a provision for credit losses recapture of $4.6 million for the three months ended September 30, 2021, compared to zero provision for credit losses expense for the three months ended September 30, 2020. Net recoveries on loans totaled $3.0 million during both the three months ended September 30, 2021 and the three months ended September 30, 2020.  The provision for credit losses was a recapture of $26.9 million for the nine months ended September 30, 2021, compared to expense of $39.5 million for the nine months ended September 30, 2020. Net recoveries on loans totaled $3.4 million for the nine months ended September 30, 2021, compared to net charge-offs of $4.1 million for the nine months ended September 30, 2021. The provision for credit losses recapture in the three and nine months ended September 30, 2021 reflected the improved economic forecast. PPP loans were factored in the provision for credit losses for the three and nine months ended September 30, 2021; however, due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Noninterest Income

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

			Three Months Ended September 30,												%						Nine Months Ended September 30,												%
(dollars in thousands)			2021						2020						Change						2021						2020						Change
Wealth management fees			$	10,134					$	9,239					9.7			%			$	30,576					$	27,547					11.0			%
Service charges on deposit accounts			8,926						8,698						2.6						25,564						26,357						(3.0)
Debit card and ATM fees			4,942						5,276						(6.3)						15,668						15,106						3.7
Mortgage banking revenue			10,870						18,110						(40.0)						35,222						46,542						(24.3)
Investment product fees			6,475						5,351						21.0						18,381						16,070						14.4
Capital markets income			6,017						5,428						10.9						15,603						15,935						(2.1)
Company-owned life insurance			2,355						2,830						(16.8)						7,852						8,878						(11.6)
Debt securities gains (losses), net			1,207						4,921						(75.5)						3,892						10,606						(63.3)
Other income			3,589						4,906						(26.8)						9,977						13,681						(27.1)
Total noninterest income			$	54,515					$	64,759					(15.8)			%			$	162,735					$	180,722					(10.0)			%

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Noninterest income decreased $10.2 million for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020 primarily due to lower mortgage banking revenue and lower debt securities gains.

Noninterest income decreased $18.0 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 primarily due to lower mortgage banking revenue and lower debt securities gains.

Wealth management fees increased $0.9 million for the three months ended September 30, 2021 and $3.0 million for the nine months ended September 30, 2021 when compared to the same periods in 2020 primarily due to higher personal trust fees, fiduciary account fees, and corporate trust fees.

Mortgage banking revenue decreased $7.2 million for the three months ended September 30, 2021 and $11.3 million for the nine months ended September 30, 2021 when compared to the same periods in 2020 reflecting lower refinance transactions related to higher rates in 2021, which caused pipeline levels to drop and gain on sale margins to partially normalize.

Investment product fees increased $1.1 million for the three months ended September 30, 2021 and $2.3 million for the nine months ended September 30, 2021 when compared to the same periods in 2020 reflecting higher investment and advisor fees in 2021.

Capital markets income increased $0.6 million for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020 primarily due to higher tax credit fee income and customer interest rate swap fees.

Debt securities gains (losses), net had an unfavorable variance of $3.7 million for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020 primarily due to lower realized gains on sales of available-for-sale securities in 2021. Debt securities gains (losses), net had an unfavorable variance of $6.7 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 primarily due to lower realized gains on sales of available-for-sale securities in 2021, partially offset by lower realized losses on sales of available-for-sale securities in 2021.

Other income decreased $1.3 million for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020 primarily due to lower branded card incentives. Other income decreased $3.7 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 primarily due to $1.5 million of swap termination fees in the nine months ended September 30, 2021 and lower branded card incentives.

Noninterest Expense

The following table details the components in noninterest expense:

			Three Months Ended September 30,												%						Nine Months Ended September 30,												%
(dollars in thousands)			2021						2020						Change						2021						2020						Change
Salaries and employee benefits			$	71,005					$	69,860					1.6			%			$	211,762					$	215,589					(1.8)			%
Occupancy			12,757						13,930						(8.4)						41,683						42,308						(1.5)
Equipment			3,756						3,754						0.1						12,231						12,912						(5.3)
Marketing			3,267						2,140						52.7						7,961						7,632						4.3
Data processing			11,508						9,628						19.5						35,558						28,724						23.8
Communication			2,372						2,241						5.8						7,661						7,335						4.4
Professional fees			3,416						3,083						10.8						14,668						10,921						34.3
FDIC assessment			1,628						1,319						23.4						4,461						4,942						(9.7)
Amortization of intangibles			2,779						3,459						(19.7)						8,763						10,847						(19.2)
Amortization of tax credit investments			1,736						3,115						(44.3)						4,751						8,917						(46.7)
Other expense			7,050						7,705						(8.5)						19,133						48,972						(60.9)
Total noninterest expense			$	121,274					$	120,234					0.9			%			$	368,632					$	399,099					(7.6)			%

Noninterest expense decreased $30.5 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 reflecting $39.0 million of charges in the nine months ended September 30,

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2020 related to the ONB Way strategic initiative. This decrease was partially offset by $7.9 million of diligence and merger charges in 2021 associated with the anticipated First Midwest merger.

Salaries and employee benefits decreased $3.8 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 primarily due to personnel expenses related to the ONB Way totaling $7.6 million in the nine months ended September 30, 2020. This decrease was partially offset by higher corporate incentives.

Marketing expenses increased $1.1 million for the three months ended September 30, 2021 when compared to the three months ended September 30, 2020 primarily due to higher advertising, public relations, and business development expenses.

Data processing expenses increased $1.9 million for the three months ended September 30, 2021 and $6.8 million for the nine months ended September 30, 2021 when compared to the same periods in 2020 related to the modernization of our technology infrastructure.

Professional fees increased $0.3 million for the three months ended September 30, 2021 and $3.7 million for the nine months ended September 30, 2021 when compared to the same periods in 2020 reflecting professional fees incurred in 2021 related to the First Midwest merger, partially offset by consulting fees incurred in 2020 related to the ONB Way.

Amortization of intangibles decreased $0.7 million for the three months ended September 30, 2021 and $2.1 million for the nine months ended September 30, 2021 when compared to the same periods in 2020 primarily due to lower amortization of core deposit intangibles.

Amortization of tax credit investments decreased $1.4 million and for the three months ended September 30, 2021 and $4.2 million for the nine months ended September 30, 2021 when compared to the same periods in 2020. 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 12 to the consolidated financial statements for additional information on our tax credit investments.

Other expense decreased $29.8 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 primarily due to lease termination charges and impairments on long-lived assets related to branch consolidations that were part of the ONB Way strategic initiative totaling $25.8 million in the nine months ended September 30, 2020. The decrease in other expense also reflected a favorable variance in provision for credit losses on unfunded loan commitments totaling $5.2 million.

Provision for Income Taxes

We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes.  The major difference between the effective tax rate applied to our financial statement income and the federal statutory tax rate is caused by a tax benefit from our tax credit investments and interest on tax-exempt securities and loans.  The provision for income taxes, as a percentage of pre-tax income, was 19.8% for the three months ended September 30, 2021, compared to 13.5% for the three months ended September 30, 2020.  The provision for income taxes, as a percentage of pre-tax income, was 18.2% for the nine months ended September 30, 2021, compared to 14.0% for the nine months ended September 30, 2020.  In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at September 30, 2021 based on the current estimate of the effective annual rate.  The higher effective tax rate during the three and nine months ended September 30, 2021 when compared to the same periods in 2020 reflected increases in pre-tax book income and lower tax credits.  See Note 18 to the consolidated financial statements for additional information.

FINANCIAL CONDITION

Overview

At September 30, 2021, our assets were $24.019 billion, a $1.058 billion increase compared to assets of $22.961 billion at December 31, 2020.  The increase was primarily due to higher investment securities.

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We have observed signs of an economic recovery in the United States, with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels. However, there have been concerns about the emergence of communicable strains of the virus, whether enough people will agree to be vaccinated, supply chain issues, labor supply constraints, and inflation. Economic uncertainty remains and bouts of elevated volatility are expected to continue.

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 $21.463 billion at September 30, 2021, a $1.150 billion increase compared to earning assets of $20.313 billion at December 31, 2020.

Investment Securities

We classify substantially all 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.

Equity securities are recorded at fair value and totaled $12.4 million at September 30, 2021 compared to $2.5 million at December 31, 2020. The increase in equity securities was primarily due to an increase in mutual funds.

At September 30, 2021, the investment securities portfolio, including equity securities, was $7.210 billion compared to $6.142 billion at December 31, 2020, an increase of $1.068 billion.  Investment securities represented 34% of earning assets at September 30, 2021, compared to 30% at December 31, 2020.  Stronger commercial loan demand in the future could result in management’s decision to reduce the securities portfolio.  At September 30, 2021, 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 gains of $69.5 million at September 30, 2021, compared to net unrealized gains of $186.3 million at December 31, 2020.  Net unrealized gains decreased from December 31, 2020 to September 30, 2021 reflecting lower net unrealized gains on mortgage-backed, tax exempt municipal securities, and U.S. government-sponsored entities and agencies due to an increase in long-term interest rates.

The investment portfolio had an effective duration of 4.50 at September 30, 2021, compared to 4.08 at December 31, 2020.  Effective duration measures the percentage change in value of the portfolio in response to a change in interest rates.  Generally, there is more uncertainty in interest rates over a longer average maturity, resulting in a higher duration percentage.  The annualized average yields on investment securities, on a taxable equivalent basis, were 2.08% for the three months ended September 30, 2021 and 2.13% for the nine months ended September 30, 2021, compared to 2.45% for the three months ended September 30, 2020 and 2.59% for the nine months ended September 30, 2020.

Loans Held for Sale

Mortgage loans held for immediate sale in the secondary market were $51.3 million at September 30, 2021, compared to $63.3 million at December 31, 2020.  Certain mortgage loans are committed for sale at or prior to origination at a contracted price to an outside investor.  Other mortgage loans held for immediate sale are hedged with TBA forward agreements and committed for sale when they are ready for delivery and remain on the Company’s balance sheet for a short period of time (typically 30 to 60 days).  These loans are sold without recourse, beyond customary representations and warranties, and Old National has not experienced material losses arising from these sales.  Mortgage originations are subject to volatility due to interest rates and home sales, among other factors. 

We have elected the fair value option prospectively for residential loans held for sale.  The aggregate fair value exceeded the unpaid principal balance by $1.4 million at September 30, 2021, compared to $3.5 million at December 31, 2020.

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classification within earning assets, representing 46% of earning assets at September 30, 2021, compared to 49% at December 31, 2020.  At September 30, 2021, commercial and commercial real estate loans were $9.796 billion, a decrease of $107.1 million compared to

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December 31, 2020 driven by a decline in PPP loans, partially offset by organic loan growth. As of September 30, 2021, total PPP loans were $354.9 million, compared to $943.0 million at December 31, 2020.

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

			September 30, 2021									December 31, 2020
(dollars in thousands)			Outstanding			Exposure			Nonaccrual			Outstanding			Exposure			Nonaccrual
By Industry:
Manufacturing			$	621,023		$	1,129,254		$	7,637		$	586,074		$	1,019,149		$	11,036
Construction			363,577			772,199			1,508			462,140			903,604			1,036
Health care and social assistance			377,040			532,465			481			412,807			604,493			691
Public administration			248,007			363,996			—			299,748			371,846			—
Wholesale trade			257,210			459,847			1,654			241,432			483,253			3,647
Educational services			211,458			317,520			—			245,896			418,277			1,428
Other services			133,575			267,472			2,094			194,822			307,205			2,363
Professional, scientific, and   technical services			154,739			280,434			435			182,228			320,983			864
Finance and insurance			152,774			213,596			50			186,079			246,551			57
Retail trade			130,408			288,956			1,005			151,869			329,160			1,788
Real estate rental and leasing			200,778			354,618			523			169,935			356,169			759
Transportation and warehousing			130,273			203,110			2,494			139,398			216,495			1,397
Administrative and support and   waste management and   remediation services			95,235			147,075			—			119,220			173,538			383
Agriculture, forestry, fishing,   and hunting			102,972			163,571			196			145,624			192,602			358
Accommodation and food services			101,105			121,968			3,444			105,560			118,497			3,239
Utilities			32,685			83,347			—			88,607			98,996			—
Arts, entertainment, and recreation			79,668			119,335			2,095			82,305			111,729			2,590
Information			51,219			79,912			1,967			61,883			95,774			2,286
Mining			32,381			58,074			10			57,142			77,067			19
Management of companies and   enterprises			11,576			32,502			—			13,605			28,276			—
Other			17,480			17,533			—			10,048			10,086			—
Total			$	3,505,183		$	6,006,784		$	25,593		$	3,956,422		$	6,483,750		$	33,941
By Loan Size:
Less than $200,000			9		%	7		%	8		%	11		%	8		%	10		%
$200,000 to $1,000,000			19			17			37			20			18			40
$1,000,000 to $5,000,000			32			30			55			34			32			50
$5,000,000 to $10,000,000			14			15			—			15			15			—
$10,000,000 to $25,000,000			19			18			—			14			16			—
Greater than $25,000,000			7			13			—			6			11			—
Total			100		%	100		%	100		%	100		%	100		%	100		%

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

			September 30, 2021												December 31, 2020
(dollars in thousands)			Outstanding						%						Outstanding						%
By Property Type:
Multifamily			$	1,903,007					30		%				$	1,598,614					27		%
Retail			1,008,541						16						1,041,384						17
Office			1,030,401						16						1,001,589						17
Warehouse / Industrial			849,049						14						821,022						14
Single family			339,081						5						341,273						6
Other (1)			1,160,553						19						1,142,630						19
Total			$	6,290,632					100		%				$	5,946,512					100		%

(1)    Other includes construction and land development properties, senior housing properties, religion properties, and mixed use properties.

Residential Real Estate Loans

At September 30, 2021, residential real estate loans held in our loan portfolio were $2.225 billion, a decrease of $23.6 million compared to December 31, 2020.  Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans.

Consumer Loans

Consumer loans, including automobile loans and personal and home equity loans and lines of credit, decreased $70.9 million at September 30, 2021 compared to December 31, 2020 primarily due to decreases in consumer indirect loans and consumer direct loans.

Funding

Total funding, comprised of deposits and wholesale borrowings, was $20.732 billion at September 30, 2021, an increase of $1.018 billion from $19.714 billion at December 31, 2020.  Included in total funding were deposits of $18.196 billion at September 30, 2021, an increase of $1.159 billion from $17.037 billion at December 31, 2020.  Noninterest-bearing deposits increased $806.9 million from December 31, 2020 to September 30, 2021.  Interest-bearing checking and NOW deposits decreased $21.0 million from December 31, 2020 to September 30, 2021, while savings deposits increased $313.1 million.  Money market deposits increased $189.8 million from December 31, 2020 to September 30, 2021. Time deposits decreased $130.0 million from December 31, 2020 to September 30, 2021.

We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position.  At September 30, 2021, wholesale borrowings, including federal funds purchased and interbank borrowings, securities sold under agreements to repurchase, FHLB advances, and other borrowings, totaled $2.536 billion, a decrease of $140.3 million from December 31, 2020.  Wholesale funding as a percentage of total funding was 12% at September 30, 2021 and 14% at December 31, 2020.  The decrease in wholesale funding from December 31, 2020 to September 30, 2021 was primarily due to decreases in securities sold under agreements to repurchase and FHLB advances, partially offset by an increase in other borrowings.

Capital 

Shareholders’ equity totaled $3.036 billion at September 30, 2021, compared to $2.973 billion at December 31, 2020.  Old National paid cash dividends of $0.42 per share in the nine months ended September 30, 2021, which reduced equity by $69.6 million. The change in unrealized gains (losses) on available-for-sale investment securities decreased equity by $90.4 million during the nine months ended September 30, 2021.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At September 30, 2021, 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.

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

			Regulatory Guidelines Minimum						September 30,												December 31,
									2021						2020						2020
Risk-based capital:
Tier 1 capital to total average assets (leverage ratio)			4.00			%			8.54			%			8.15			%			8.20			%
Common equity Tier 1 capital to risk-adjusted    total assets			7.00						12.08						11.84						11.75
Tier 1 capital to risk-adjusted total assets			8.50						12.08						11.84						11.75
Total capital to risk-adjusted total assets			10.50						12.84						12.81						12.69
Shareholders' equity to assets			N/A						12.64						13.01						12.95

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

			Regulatory Guidelines Minimum						Prompt Corrective Action "Well Capitalized" Guidelines						September 30,												December 31,
															2021						2020						2020
Risk-based capital:
Tier 1 capital to total average assets (leverage    ratio)			4.00			%			5.00			%			8.80			%			8.71			%			8.67			%
Common equity Tier 1 capital to risk-adjusted    total assets			7.00						6.50						12.34						12.49						12.23
Tier 1 capital to risk-adjusted total assets			8.50						8.00						12.34						12.49						12.23
Total capital to risk-adjusted total assets			10.50						10.00						12.84						13.19						12.90

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC published an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). Old National is adopting 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. 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 the Board of Directors, Executive Leadership Group, and Senior Management to better assess, understand, and mitigate the risks of Old National.  The Risk Appetite Statement addresses the following major risks:  strategic, market, liquidity, credit, operational/technology/cyber, regulatory/compliance/legal, reputational, and human resources.  Our Chief Risk Officer is independent of

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management and reports directly to the Chair of the Board’s Enterprise Risk Management Committee.  The following discussion addresses these major risks: credit, market, liquidity, operational/technology/cyber, and regulatory/compliance/legal.

During the COVID-19 pandemic, we are committed and focused on the health and safety of our team members, clients, and communities. We will continue to evaluate and adjust our banking center hours and lobby usage as necessary depending on the path of the virus across our footprint. Our banking centers are still open for business and we continue to lend to qualified businesses for working capital and general business purposes, while our online banking network is continuously available for digital banking transactions.

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.

Investment Activities

We carry a higher exposure to loss in our pooled trust preferred securities, which are collateralized debt obligations, due to illiquidity in that market and the performance of the underlying collateral.  At September 30, 2021, we had pooled trust preferred securities with a fair value of $9.4 million, or less than 1% of the available-for-sale securities portfolio.  These securities remained classified as available-for-sale and at September 30, 2021, the unrealized loss on our pooled trust preferred securities was $4.4 million. The fair value of these securities is expected to improve as we get closer to maturity, but may be adversely impacted by credit deterioration.

All of our mortgage-backed securities are backed by U.S. government-sponsored or federal agencies.  Municipal bonds, corporate bonds, and other debt securities are evaluated by reviewing the credit-worthiness of the issuer and general market conditions.  See Note 5 to the consolidated financial statements for additional details about our investment security portfolio.

Counterparty Exposure

Counterparty exposure is the risk that the other party in a financial transaction will not fulfill its obligation.  We define counterparty exposure as nonperformance risk in transactions involving federal funds sold and purchased, repurchase agreements, correspondent bank relationships, and derivative contracts with companies in the financial services industry.  Old National manages exposure to counterparty risk in connection with its derivatives transactions by generally engaging in transactions with counterparties having ratings of at least “A” by Standard & Poor’s Rating Service or “A2” by Moody’s Investors Service.  Total credit exposure is monitored by counterparty and managed within limits that management believes to be prudent. Old National’s net counterparty exposure was an asset of $526.0 million at September 30, 2021.

Lending Activities

Commercial

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

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

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

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

Consumer

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

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

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

Asset Quality

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

We lend to commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.  Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size.  At September 30, 2021, our average commercial loan size was approximately $295,000 and our average commercial real estate loan size was approximately $930,000. 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 September 30, 2021, we had minimal exposure to foreign borrowers and no sovereign debt.  Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. We have experienced an adverse impact from COVID-19 during 2020 and 2021; however, the depth of this crisis is ongoing and its effect is very broad-based. Management believes that trends in

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under-performing, criticized, and classified loans will be highly dependent on the distribution of vaccinations, as well as the length of time it will take consumers to return to their pre-pandemic spending routines.

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

			September 30,												December 31,
(dollars in thousands)			2021						2020						2020
Total nonaccrual loans			$	111,586					$	137,611					$	147,339
TDRs still accruing			16,420						22,037						17,749
Total past due loans (90 days or more and still accruing)			113						90						167
Other real estate owned			1,943						1,248						1,324
Total under-performing assets			$	130,062					$	160,986					$	166,579
Classified loans (includes nonaccrual, TDRs still accruing,    past due 90 days, and other problem loans)			$	275,891					$	327,225					$	304,782
Other classified assets (1)			4,300						3,860						3,706
Criticized loans			240,215						272,859						287,192
Total criticized and classified assets			$	520,406					$	603,944					$	595,680
Asset Quality Ratios:
Non-performing loans/total loans (2) (3)			0.94			%			1.15			%			1.20			%
Under-performing assets/total loans and     other real estate owned			0.96						1.16						1.21
Under-performing assets/total assets			0.54						0.72						0.73
Allowance/under-performing assets			82.94						81.61						78.87
Allowance/nonaccrual loans			96.67						95.48						89.17

(1)Includes one pooled trust preferred security and two insurance policies at September 30, 2021.

(2)Loans exclude loans held for sale.

(3)Non-performing loans include nonaccrual loans and TDRs still accruing.

Under-performing assets totaled $130.1 million at September 30, 2021, compared to $161.0 million at September 30, 2020 and $166.6 million at December 31, 2020.  Under-performing assets as a percentage of total loans and other real estate owned at September 30, 2021 were 0.96%, a 20 basis point improvement from 1.16% at September 30, 2020 and a 25 basis point improvement from 1.21% at December 31, 2020.

Nonaccrual loans decreased from December 31, 2020 primarily due to decreases in commercial, commercial real estate, and residential real estate nonaccrual loans.  As a percentage of nonaccrual loans, the allowance was 96.67% at September 30, 2021, compared to 95.48% at September 30, 2020 and 89.17% at December 31, 2020.

Total criticized and classified assets were $520.4 million at September 30, 2021, a decrease of $83.5 million from September 30, 2020, and a decrease of $75.3 million from December 31, 2020. Other classified assets include investment securities that fell below investment grade rating totaling $4.3 million at September 30, 2021, compared to $3.9 million at September 30, 2020 and $3.7 million at December 31, 2020.

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

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

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

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If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss.  For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances.  For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

For commercial TDRs, an allocated reserve is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value.  To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent.  The allocated reserve is established as the difference between the carrying value of the loan and the collectable value.  If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.

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

At September 30, 2021, TDRs consisted of $10.2 million of commercial loans, $15.7 million of commercial real estate loans, $0.1 million of BBCC loans, $2.5 million of residential real estate loans, $0.6 million of direct consumer loans, and $0.2 million of home equity loans totaling $29.3 million. TDRs included within nonaccrual loans totaled $12.8 million at September 30, 2021. At December 31, 2020, TDRs consisted of $11.1 million of commercial loans, $17.6 million of commercial real estate loans, $0.1 million of BBCC loans, $2.8 million of residential real estate loans, $0.8 million of direct consumer loans, and $0.3 million of home equity loans, totaling $32.7 million. TDRs included within nonaccrual loans totaled $14.9 million at December 31, 2020.

Old National has allocated specific reserves to customers whose loan terms have been modified as TDRs totaling $0.8 million at September 30, 2021 and $1.6 million of December 31, 2020.  Old National had not committed to lend any additional funds to customers with outstanding loans that were classified as TDRs at September 30, 2021 or December 31, 2020.

The terms of certain other loans were modified during 2021 and 2020 that did not meet the definition of a TDR.  It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification.  The evaluation is performed under our internal underwriting policy.  We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee.  We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

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

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We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. The Interagency Statement issued by our banking regulators encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. Additionally, section 541 of the CAA extended the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The table below presents these loan deferrals by loan category:

									December 31, 2020						September 30, 2021
(dollars in thousands)									Deferrals Balance						Deferrals Balance (1)						Number of Deferrals
Commercial and commercial real estate									$	53,823					$	16,641					34
Residential real estate									1,855						767						2
Consumer									8,224						2,763						151
Total									$	63,902					$	20,171					187

(1)    Includes second deferrals between 90 and 180 days totaling $4.2 million of commercial and commercial real estate loans, $0.1 million of residential real estate loans, and $0.4 million of consumer loans.

U.S. Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the PPP, a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. Old National has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees are required. Neither the government nor lenders are permitted to charge the recipients any fees. During 2020, Old National originated over 9,700 loans with balances in excess of $1.5 billion to new and existing customers through the PPP. As of September 30, 2021, we have received payment from the SBA on 9,274, or 95%, of these loans totaling $1.481 billion.

On December 27, 2020, President Trump signed into law the CAA. The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. Old National has participated in the CAA’s second round of PPP lending. In mid-January we opened our lending portal and began processing PPP loan applications. During the nine months ended September 30, 2021, Old National originated approximately 6,200 loans totaling $583.7 million through the second round of the PPP. As of September 30, 2021, we have received payment from the SBA on 3,132, or 51%, of second round PPP loans totaling $250.4 million.

At September 30, 2021, remaining PPP loans totaled $354.9 million.

To the extent the PPP loans are forgiven, this represents outside equity contributions to our borrowers; and, especially with respect to vulnerable industries, we believe these capital injections are going to be instrumental in assisting our borrowers in navigating through the pandemic. This capital injection, along with the level of capital each borrower had just prior to COVID-19 impacting them, are critical factors in determining the staying power of our borrowers. Upon receipt of interim financial results from our borrowers, we will use that information to update our understanding of the underlying strengths or weaknesses in each individual relationship and take actions, as appropriate.

Allowance for Credit Losses on Loans and Unfunded Commitments

Net recoveries on loans totaled $3.0 million during both the three months ended September 30, 2021 and the three months ended September 30, 2020. Annualized, net charge-offs (recoveries) to average loans were (0.09)% for both the three months ended September 30, 2021 and the three months ended September 30, 2020. Net recoveries on loans totaled $3.4 million for the nine months ended September 30, 2021, compared to $4.1 million of net charge-

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offs for the nine months ended September 30, 2020. Annualized, net charge-offs (recoveries) to average loans were (0.03)% for the nine months ended September 30, 2021, compared to 0.04% for the nine months ended September 30, 2020. 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 for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of 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 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 for loans was $107.9 million at September 30, 2021, compared to $131.4 million at December 31, 2020. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment.  The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. The allowance for credit losses on unfunded loan commitments totaled $10.3 million at September 30, 2021, compared to $11.7 million at December 31, 2020.

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.

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

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

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

•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. Interest rates are floored at 0.00% in the down 50 basis points scenario. The model shows our projected net interest income sensitivity based on interest rate changes only and does not consider other forecast assumptions.

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The following table illustrates our projected net interest income sensitivity over a two year cumulative horizon based on the asset/liability model at September 30, 2021 and 2020:

			Immediate Rate Decrease												Immediate Rate Increase
(dollars in thousands)			-50 Basis Points						Base						+100 Basis Points						+200 Basis Points						+300 Basis Points
September 30, 2021
Projected interest income:
Money market, other interest earning    investments, and investment    securities			$	272,337					$	290,049					$	326,179					$	357,884					$	387,685
Loans			845,675						875,583						1,015,477						1,157,274						1,296,748
Total interest income			1,118,012						1,165,632						1,341,656						1,515,158						1,684,433
Projected interest expense:
Deposits			14,597						23,943						104,651						185,529						266,403
Borrowings			63,711						71,372						103,309						137,039						174,510
Total interest expense			78,308						95,315						207,960						322,568						440,913
Net interest income			$	1,039,704					$	1,070,317					$	1,133,696					$	1,192,590					$	1,243,520
Change from base			$	(30,613)											$	63,379					$	122,273					$	173,203
% change from base			(2.86)		%										5.92		%				11.42		%				16.18		%
September 30, 2020
Projected interest income:
Money market, other interest earning    investments, and investment    securities			$	246,473					$	260,660					$	286,999					$	302,789					$	315,236
Loans			875,589						904,055						1,028,043						1,153,281						1,276,757
Total interest income			1,122,062						1,164,715						1,315,042						1,456,070						1,591,993
Projected interest expense:
Deposits			20,288						29,827						110,549						191,267						271,981
Borrowings			67,767						71,004						102,471						133,577						168,418
Total interest expense			88,055						100,831						213,020						324,844						440,399
Net interest income			$	1,034,007					$	1,063,884					$	1,102,022					$	1,131,226					$	1,151,594
Change from base			$	(29,877)											$	38,138					$	67,342					$	87,710
% change from base			(2.81)		%										3.58		%				6.33		%				8.24		%

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

A key element in the measurement and modeling of interest rate risk is the re-pricing assumptions of our transaction deposit accounts, which have no contractual maturity dates. Because the models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect our net interest income, we recognize that model outputs are not guarantees of actual results. For this reason, we model many different combinations of interest rates and balance sheet assumptions to understand our overall sensitivity to market interest rate changes, including shocks, ramps, yield curve flattening, yield curve steepening, as well as forecasts of likely interest rate scenarios tested. At September 30, 2021, our projected net interest income sensitivity based on the asset/liability models we utilize was within the limits of our interest rate risk policy for the scenarios tested.

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 asset position with a fair value of $16.1 million at September 30, 2021, compared to a net asset position with a fair value of $15.2 million at December 31, 2020.  See Note 19 to the consolidated financial statements for further discussion of derivative financial instruments.

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Liquidity Risk

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

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

A maturity schedule for Old National Bank’s time deposits is shown in the following table at September 30, 2021.

(dollars in thousands)
Maturity Bucket			Amount						Rate
2021			$	302,154					0.20			%
2022			432,122						0.37
2023			128,973						0.84
2024			75,259						0.94
2025			30,347						0.70
2026 and beyond			23,982						0.72
Total			$	992,837					0.44			%

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.  For both Old National and Old National Bank:

•Moody’s Investors Service affirmed the Long-Term Rating of “A3” for Old National’s senior unsecured/issuer rating on February 17, 2021.

•Moody’s Investors Service affirmed Old National Bank’s long-term deposit rating of “Aa3” on February 17, 2021.  The bank’s short-term deposit rating was affirmed at “P-1” and the bank’s issuer rating was affirmed at “A3.”

Moody’s Investors Service concluded a rating review of Old National Bank on February 17, 2021. The rating outlook from Moody’s Investors Service was moved from “Stable” to “Ratings Under Review” on June 2, 2021 due to the merger announced June 1, 2021.  

The credit ratings of Old National and Old National Bank at September 30, 2021 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

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Old National Bank maintains relationships in capital markets with brokers and dealers to issue certificates of deposit and short-term and medium-term bank notes as well.  At September 30, 2021, 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			$	113,893					$	683,565
Unencumbered government-issued debt securities			—						160,888
Unencumbered investment grade municipal securities			—						1,025,086
Unencumbered corporate securities			—						2,965,555
Availability of borrowings:
Amount available from Federal Reserve discount window*			—						440,877
Amount available from Federal Home Loan Bank Indianapolis*			—						515,089
Total available funds			$	113,893					$	5,791,060

* Based on collateral pledged

Old National Bancorp has routine funding requirements consisting primarily of operating expenses, dividends to shareholders, debt service, net derivative cash flows, and funds used for acquisitions.  Old National Bancorp can obtain funding to meet its obligations from dividends and management fees collected from its subsidiaries, operating line of credit, and through the issuance of debt securities.  Additionally, Old National Bancorp has a shelf registration in place with the SEC permitting ready access to the public debt and equity markets.  At September 30, 2021, Old National Bancorp’s other borrowings outstanding were $213.5 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 banking subsidiaries without prior approval.  Prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year plus retained net profits for the preceding two years.  Prior regulatory approval to pay dividends was not required in 2020 and is not currently required.

Operational/Technology/Cyber Risk

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

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

Regulatory/Compliance/Legal Risk

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

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OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements include commitments to extend credit and financial guarantees.  Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers.  Our banking affiliates have entered into various agreements to extend credit, including loan commitments of $4.241 billion and standby letters of credit of $65.8 million at September 30, 2021.  At September 30, 2021, approximately $3.900 billion of the loan commitments had fixed rates and $341.3 million had floating rates, with the floating rates ranging from 0% to 14%.  At December 31, 2020, loan commitments were $3.720 billion and standby letters of credit were $86.9 million.  The term of these off-balance sheet arrangements is typically one year or less.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of $99.9 million at September 30, 2021.

CONTRACTUAL OBLIGATIONS

The following table presents our significant fixed and determinable contractual obligations at September 30, 2021:

			Payments Due In
(dollars in thousands)			One Year or Less (1)						One to Three Years						Three to Five Years						Over Five Years						Total
Deposits without stated maturity			$	17,203,312					$	—					$	—					$	—					$	17,203,312
IRAs, consumer, and brokered certificates    of deposit			302,154						561,095						105,606						23,982						992,837
Federal funds purchased and interbank borrowings			34						—						—						—						34
Securities sold under agreements to repurchase			375,247						—						—						—						375,247
FHLB advances			—						29,155						575,000						1,285,899						1,890,054
Other borrowings			533						4,561						179,803						86,071						270,968
Fixed interest payments (2)			8,565						65,886						53,985						61,938						190,374
Operating leases			3,464						22,275						16,298						49,815						91,852
Other long-term liabilities (3)			6,569						24,385						157						22						31,133

(1)For the remaining three months of fiscal 2021.

(2)Our senior notes, subordinated notes, certain trust preferred securities, and certain FHLB advances have fixed rates ranging from 0.45% to 4.96%.  All of our other long-term debt is at LIBOR based variable rates at September 30, 2021.  The projected variable interest assumes no increase in LIBOR rates from September 30, 2021.

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

We rent certain premises and equipment under operating leases.  See Note 9 to the consolidated financial statements for additional information on long-term lease arrangements.

We are party to various derivative contracts as a means to manage the balance sheet and our related exposure to changes in interest rates, to manage our residential real estate loan origination and sale activity, and to provide derivative contracts to our clients.  Since the derivative liabilities recorded on the balance sheet change frequently and do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above.  Further discussion of derivative instruments is included in Note 19 to the consolidated financial statements.

In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged.  Further discussion of contingent liabilities is included in Note 20 to the consolidated financial statements.

In addition, liabilities recorded under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109) are not included in the table because the amount and timing of any cash payments cannot be reasonably estimated.  Further discussion of income taxes and liabilities is included in Note 18 to the consolidated financial statements.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.  Certain accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities.  We consider these policies to be critical accounting policies.  The judgment and assumptions made are based upon historical experience, 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.

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

Goodwill

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

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

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

•Pandemic. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. Based on the required annual impairment test as of August 31, 2021, we have concluded that our goodwill was not impaired. On a quarterly basis, we will continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) forecasted revenues, expenses, and cash flows; (2) current discount rates; (3) our market capitalization; (4) observable market transactions and multiples; (5) changes to the regulatory environment; and (6) the nature and amount of government support that has been and is expected to be provided in the future. A prolonged economic downturn or deterioration in the economic outlook may lead management to conclude that an interim quantitative impairment test of our goodwill is required prior to the annual impairment test conducted on August 31.

Allowance for Credit Losses for Loans

•Description.  The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.

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

•Judgments and Uncertainties.  We utilize a discounted cashflow approach to determine the allowance for credit losses for performing loans and nonperforming loans. Expected cashflows are created for each loan and discounted using the effective yield. The discounted sum of expected cashflows is then compared to the amortized cost and any shortfall is recorded as reserve. Expected cashflows are created using a combination

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of contractual payment schedules, calculated PDs, LGD and prepayment assumptions as well as qualitative factors. For the commercial and commercial real estate loans, the PD is forecast using a regression model to determine the likelihood of a loan moving into nonaccrual within the time horizon. For residential and consumer loans, the PD is forecast using a regression model to determine the likelihood of a loan being charged-off within the time horizon. The regression models use combinations of variables to assess systematic and unsystematic risk. Variables used for unsystematic risk are borrower specific and help to gauge the risk of default from an individual borrower. Variables for systematic risk, risk inherent to all borrowers, come from the use of forward-looking economic forecasts and include variables such as unemployment rate, gross domestic product, and house price index. The LGD is defined as credit loss incurred when an obligor of the bank defaults. Qualitative factors include items such as changes in lending policies or procedures and economic uncertainty in forward-looking forecasts.

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

The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.

Derivative Financial Instruments

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

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

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

Income Taxes

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

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

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

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

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

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be only reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, 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.

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PART II

OTHER INFORMATION

ITEM 1A.  RISK FACTORS

A discussion of certain risks and uncertainties faced by the Company is provided in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. These risks and uncertainties are not exhaustive. Additional risks and uncertainties are discussed in the Company’s other filings made with the SEC.

As a result of Old National entering into the merger agreement with First Midwest, certain risk factors have been identified:

Old National has incurred and expects to incur substantial costs related to the merger with First Midwest (the “merger”) and integration.

Old National has incurred and expects to incur a number of non-recurring costs associated with the merger. These costs include legal, financial advisory, accounting, consulting and other advisory fees, retention, severance and employee benefit-related costs, public company filing fees and other regulatory fees, financial printing and other printing costs, closing, integration and other related costs. Some of these costs are payable by Old National regardless of whether or not the merger is completed.

Combining Old National and First Midwest may be more difficult, costly or time-consuming than expected, and Old National may fail to realize the anticipated benefits of the merger.

The success of the merger will depend, in part, on the ability to realize the anticipated cost savings from combining the businesses of Old National and First Midwest. To realize the anticipated benefits and cost savings from the merger, Old National and First Midwest must successfully integrate and combine their businesses in a manner that permits those cost savings to be realized without adversely affecting current revenues and future growth. If Old National and First Midwest are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings of the merger could be less than anticipated, and integration may result in additional and unforeseen expenses.

An inability to realize the full extent of the anticipated benefits of the merger and the other transactions contemplated by the merger agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating results of the combined company following the completion of the merger, which may adversely affect the value of the common stock of the combined company following the completion of the merger.

Old National and First Midwest have operated and, until the completion of the merger, must continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. Integration efforts between the companies may also divert management attention and resources. These integration matters could have an adverse effect on Old National during this transition period and on the combined company for an undetermined period after completion of the merger.

Furthermore, the board of directors and executive leadership of the combined company will consist of former directors and executive officers from each of Old National and First Midwest. Combining the boards of directors and management teams of each company into a single board and a single management team could require the reconciliation of differing priorities and philosophies.

The combined company may be unable to retain Old National and/or First Midwest personnel successfully after the merger is completed.

The success of the merger will depend in part on the combined company’s ability to retain the talent and dedication of key employees currently employed by Old National and First Midwest. It is possible that these employees may decide not to remain with Old National or First Midwest, as applicable, while the merger is pending or with the combined company after the merger is consummated. If Old National and First Midwest are unable to retain key

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employees, including management, who are critical to the successful integration and future operations of the companies, Old National and First Midwest could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition, following the merger, if key employees terminate their employment, the combined company’s business activities may be adversely affected, and management’s attention may be diverted from successfully hiring suitable replacements, all of which may cause the combined company’s business to suffer. Old National and First Midwest also may not be able to locate or retain suitable replacements for any key employees who leave either company.

The COVID-19 pandemic may delay and adversely affect the completion of the merger.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the business, financial condition, liquidity, capital and results of operations of Old National. If the effects of the COVID-19 pandemic cause a continued or extended decline in the economic environment and the financial results of Old National, or the business operations of Old National are further disrupted as a result of the COVID-19 pandemic, efforts to complete the merger and integrate the businesses of Old National and First Midwest may also be delayed and adversely affected. Additional time may be required to obtain the requisite regulatory approvals, and regulators may impose additional requirements on Old National or First Midwest that must be satisfied prior to completion of the merger, which could delay and adversely affect the completion of the merger.

Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.

Before the merger and the subsequent merger of First Midwest Bank and Old National Bank (the “bank merger”) may be completed, various approvals, consents and non-objections must be obtained from the Federal Reserve Board, the OCC, and other regulatory authorities in the United States. In determining whether to grant these approvals, such regulatory authorities consider a variety of factors, including the regulatory standing of each party. These approvals could be delayed or not obtained at all, including due to an adverse development in either party’s regulatory standing or in any other factors considered by regulators when granting such approvals; governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment generally.

The approvals that are granted may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the merger agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reducing the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the merger. Additionally, the completion of the merger is conditioned on the absence of certain orders, injunctions or decrees by any court or regulatory agency of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated by the merger agreement.

In addition, despite the parties’ commitments to using their reasonable best efforts to comply with conditions imposed by regulators, under the terms of the merger agreement, neither Old National nor First Midwest, nor any of their respective subsidiaries, is permitted (without the written consent of the other party), to take any action, or commit to take any action, or agree to any condition or restriction, in connection with obtaining the required permits, consents, approvals and authorizations of governmental entities that would reasonably be expected to have a material adverse effect on the combined company and its subsidiaries, taken as a whole, after giving effect to the merger and the bank merger.

Failure to complete the merger could negatively impact Old National.

If the merger is not completed for any reason, there may be various adverse consequences and Old National may experience negative reactions from the financial markets and from its customers and employees. For example, Old National’s business may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of Old National common stock could decline

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to the extent that current market prices reflect a market assumption that the merger will be beneficial and will be completed. Old National also could be subject to litigation related to any failure to complete the merger or to proceedings commenced against Old National to perform its obligations under the merger agreement. If the merger agreement is terminated under certain circumstances, Old National may be required to pay a termination fee of $97 million to First Midwest.

Additionally, Old National has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of preparing, filing, printing, and mailing the joint proxy statement/prospectus, and all filing and other fees paid in connection with the merger. If the merger is not completed, Old National would have to pay these expenses without realizing the expected benefits of the merger.

Old National will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Old National. These uncertainties may impair Old National’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with Old National to seek to change existing business relationships with Old National. In addition, subject to certain exceptions, Old National has agreed to operate its business in the ordinary course in all material respects and to refrain from taking certain actions that may adversely affect its ability to consummate the transactions contemplated by the merger agreement on a timely basis without the consent of First Midwest. These restrictions may prevent Old National from pursuing attractive business opportunities that may arise prior to the completion of the merger.

Shareholder litigation related to the merger could prevent or delay the completion of the merger, result in the payment of damages or otherwise negatively impact the business and operations of Old National.

Two lawsuits and four demand letters relating to the disclosures contained in the joint proxy statement/prospectus distributed to Old National stockholders in connection with the merger have been filed or delivered by alleged stockholders of First Midwest. Among other remedies, these lawsuits and demand letters, and additional litigation or demand letters related to the merger in the future, may seek damages and/or to enjoin the merger. While Old National believes that the claims asserted in the civil litigation are without merit, if any plaintiff were successful in obtaining an injunction prohibiting First Midwest or Old National from completing the merger or any other transactions contemplated by the merger agreement, then such injunction may delay or prevent the effectiveness of the merger and could result in costs to Old National, including costs in connection with the defense or settlement of any stockholder lawsuits filed in connection with the merger. Further, such lawsuits and demand letters and the defense or settlement of claims contained in any such lawsuits or demand letters may have an adverse effect on the financial condition and results of operations of Old National.

The merger agreement may be terminated in accordance with its terms and the merger may not be completed.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: (i) approval by First Midwest stockholders of the First Midwest merger proposal and the approval by Old National shareholders of the Old National merger proposal at each company’s respective special meeting held on September 15, 2021, which approvals were obtained; (ii) authorization for listing on NASDAQ of the shares of Old National common stock and new Old National preferred stock to be issued in the merger, subject to official notice of issuance; (iii) the receipt of required regulatory approvals, including the approval of the OCC, which has been obtained, and the Federal Reserve Board; and (iv) the absence of any order, injunction, decree or other legal restraint preventing the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement or making the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement illegal. Each party’s obligation to complete the merger is also subject to certain additional customary conditions, including (a) subject to applicable materiality standards, the accuracy of the representations and warranties of the other party, (b) the performance in all material respects by the other party of its obligations under the merger agreement, (c) the receipt by each party of an opinion from its counsel to the effect that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986 and (d) the execution and delivery of the bank merger agreement.

These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the merger may not be completed. In addition, the parties can mutually decide to terminate the merger agreement at any time, before or after the requisite shareholder and stockholder approvals, or Old National or First Midwest may elect to terminate the merger agreement in certain other circumstances.

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

(c)ISSUER PURCHASES OF EQUITY SECURITIES

Period			Total Number of Shares Purchased (1)						Average Price Paid Per Share						Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)						Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
07/01/21 - 07/31/21			22,576						$	17.73					—						$	100,000,000
08/01/21 - 08/31/21			—						$	—					—						$	100,000,000
09/01/21 - 09/30/21			496						$	16.45					—						$	100,000,000
Total			23,072						$	17.70					—						$	100,000,000

(1)Reflects the repurchase of shares associated with employee share-based incentive programs. No shares were purchased under the program referred to in note 2 to this table during the third quarter of 2021.

(2)In the first quarter of 2021, the Board of Directors approved the adoption of a stock repurchase plan that authorizes the repurchase of up to $100 million of shares of Common Stock, as conditions warrant, through January 31, 2022.

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.

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ITEM 6.  EXHIBITS

Exhibit No.						Description
2.1						Agreement and Plan of Merger dated as of May 30, 2021 by and between Old National and First Midwest Bancorp, Inc. (the schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K) (incorporated by reference to Exhibit 2.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 2, 2021).
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						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).
4.1						Senior Indenture between Old National and The Bank of New York Trust Company (as successor to J.P. Morgan Trust Company, National Association (as successor to Bank One, N.A.)), as trustee, dated as of July 23, 1997 (incorporated by reference to Exhibit 4.3 to Old National’s Registration Statement on Form S-3, Registration No. 333-118374, filed with the Securities and Exchange Commission on December 2, 2004).
4.2						Second Indenture Supplement, dated as of August 15, 2014, between Old National and The Bank of New York Mellon Trust Company, N.A., as trustee, providing for the issuance of its 4.125% Senior Notes due 2024 (incorporated by reference to Exhibit 4.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 15, 2014).
10.1						Stock Purchase and Dividend Reinvestment Plan (incorporated by reference to Old National’s Registration Statement on Form S-3, Registration No. 333-258774 filed with the Securities and Exchange Commission on August 13, 2021).
31.1						Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2						Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1						Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2						Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101						The following materials from Old National’s Form 10-Q Report for the quarterly period ended September 30, 2021, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
104						The cover page from Old National’s Form 10-Q Report for the quarterly period ended September 30, 2021, formatted in inline XBRL and contained in Exhibit 101.

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SIGNATURE

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

						OLD NATIONAL BANCORP
						(Registrant)
By:						/s/  Brendon B. Falconer
						Brendon B. Falconer
						Senior Executive Vice President and Chief Financial Officer
						Duly Authorized Officer and Principal Financial Officer
						Date:  October 27, 2021

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