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, 2022

or

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

For the transition period from ____________ to ____________

Commission File Number 001-15817

 

Old National Bancorp

(Exact name of registrant as specified in its charter)

 

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

Depositary Shares, each representing a 1/40th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series A

ONBPP

The

NASDAQ

Stock Market LLC

Depositary Shares, each representing a 1/40th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series C

ONBPO

The

NASDAQ

Stock Market LLC

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

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

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

 

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

The registrant has one class of common stock (no par value) with 292,890,000 shares outstanding at October 31, 2022.

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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 (unaudited)						4
			Consolidated Statements of Income (unaudited)						5
			Consolidated Statements of Comprehensive Income (Loss) (unaudited)						6
			Consolidated Statements of Changes in Shareholders’ Equity (unaudited)						7
			Consolidated Statements of Cash Flows (unaudited)						9
			Notes to Consolidated Financial Statements (unaudited)						11
			Note 1.			Basis of Presentation			11
			Note 2.			Recent Accounting Pronouncements			11
			Note 3.			Acquisition and Divestiture Activity			13
			Note 4.			Net Income Per Common Share			15
			Note 5.			Investment Securities			16
			Note 6.			Loans and Allowance for Credit Losses			19
			Note 7.			Premises and Equipment			32
			Note 8.			Leases			33
			Note 9.			Goodwill and Other Intangible Assets			35
			Note 10.			Loan Servicing Rights			36
			Note 11.			Qualified Affordable Housing Projects and Other Tax Credit Investments			36
			Note 12.			Securities Sold Under Agreements to Repurchase			38
			Note 13.			Federal Home Loan Bank Advances			38
			Note 14.			Other Borrowings			39
			Note 15.			Accumulated Other Comprehensive Income (Loss)			41
			Note 16.			Share-Based Compensation			43
			Note 17.			Income Taxes			44
			Note 18.			Derivative Financial Instruments			45
			Note 19.			Commitments, Contingencies, and Financial Guarantees			48
			Note 20.			Fair Value			50
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations						58
			Forward-Looking Statements						58
			Financial Highlights						59
			Non-GAAP Financial Measures						60
			Executive Summary						62
			Results of Operations						63
			Financial Condition						69
			Risk Management						73
			Critical Accounting Estimates						82
Item 3.			Quantitative and Qualitative Disclosures About Market Risk						83
Item 4.			Controls and Procedures						83
PART II.			OTHER INFORMATION						84
Item 1A.			Risk Factors						84
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds						84
Item 5.			Other Information						84
Item 6.			Exhibits						85
SIGNATURE									86

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)

CECL: current expected credit loss

Common Stock:  Old National Bancorp common stock, no par value

COVID-19: coronavirus disease 2019

DTI:  debt-to-income

FASB:  Financial Accounting Standards Board

FDIC:  Federal Deposit Insurance Corporation

FHLB:  Federal Home Loan Bank

FHTC:  Federal Historic Tax Credit

FICO:  Fair Isaac Corporation

First Midwest: First Midwest Bancorp, Inc.

GAAP:  U.S. generally accepted accounting principles

LGD:  loss given default

LIBOR:  London Interbank Offered Rate

LIHTC:  Low Income Housing Tax Credit

LTV:  loan-to-value

N/A:  not applicable

NASDAQ: The NASDAQ Stock Market LLC

N/M:  not meaningful

NMTC: New Markets Tax Credit

NOW:  negotiable order of withdrawal

OCC:  Office of the Comptroller of the Currency

PCD: purchased credit deteriorated

PD:  probability of default

PPP: Paycheck Protection Program

Renewable Energy:  investment tax credits for solar projects

SBA:  Small Business Administration

SEC:  Securities and Exchange Commission

TBA:  to be announced

TDR:  troubled debt restructuring

3

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OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars and shares in thousands, except per share data)			September 30, 2022						December 31, 2021
			(unaudited)
Assets
Cash and due from banks			$	466,846					$	172,663
Money market and other interest-earning investments			334,765						649,356
Total cash and cash equivalents			801,611						822,019
Equity securities, at fair value			51,846						13,211
Investment securities - available-for-sale, at fair value:
U.S. Treasury			193,605						235,584
U.S. government-sponsored entities and agencies			1,175,457						1,542,773
Mortgage-backed securities			4,459,527						3,698,831
States and political subdivisions			675,047						1,654,986
Other securities			359,344						249,892
Total investment securities - available-for-sale			6,862,980						7,382,066
Investment securities - held-to-maturity, at amortized cost (fair value    $2,600,440 and $0, respectively)			3,096,567						—
Federal Home Loan Bank/Federal Reserve Bank stock, at cost			282,263						169,375
Loans held for sale, at fair value			19,748						35,458
Loans:
Commercial			9,311,148						3,391,769
Commercial real estate			12,227,888						6,380,674
Residential real estate			6,267,306						2,255,289
Consumer credit, net of unearned income			2,722,591						1,574,114
Total loans			30,528,933						13,601,846
Allowance for credit losses			(302,254)						(107,341)
Net loans			30,226,679						13,494,505
Premises and equipment, net			588,021						476,186
Operating lease right-of-use assets			187,626						69,560
Accrued interest receivable			166,699						84,109
Goodwill			2,002,599						1,036,994
Other intangible assets			133,193						34,678
Company-owned life insurance			767,089						463,324
Other assets			1,028,605						372,079
Total assets			$	46,215,526					$	24,453,564
Liabilities
Deposits:
Noninterest-bearing demand			$	12,400,077					$	6,303,106
Interest-bearing:
Checking and NOW			8,963,014						5,338,022
Savings			6,616,512						3,798,494
Money market			5,602,729						2,169,160
Time deposits			2,471,331						960,413
Total deposits			36,053,663						18,569,195
Federal funds purchased and interbank borrowings			301,031						276
Securities sold under agreements to repurchase			438,053						392,275
Federal Home Loan Bank advances			2,804,617						1,886,019
Other borrowings			721,049						296,670
Operating lease liabilities			207,725						76,236
Accrued expenses and other liabilities			746,005						220,875
Total liabilities			41,272,143						21,441,546
Shareholders' Equity
Preferred stock, 2,000 shares authorized, 231 and 0 shares issued and outstanding, respectively			230,500						—
Common stock, $1.00 per share stated value, 600,000 shares authorized,    292,880 and 165,838 shares issued and outstanding, respectively			292,880						165,838
Capital surplus			4,166,583						1,880,545
Retained earnings			1,061,870						968,010
Accumulated other comprehensive income (loss), net of tax			(808,450)						(2,375)
Total shareholders' equity			4,943,383						3,012,018
Total liabilities and shareholders' equity			$	46,215,526					$	24,453,564

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)			2022						2021						2022						2021
Interest Income
Loans including fees:
Taxable			$	331,271					$	124,488					$	800,535					$	370,594
Nontaxable			6,461						3,119						14,770						9,647
Investment securities:
Taxable			56,765						24,773						145,633						73,305
Nontaxable			11,086						9,469						32,370						27,862
Money market and other interest-earning investments			935						177						3,073						313
Total interest income			406,518						162,026						996,381						481,721
Interest Expense
Deposits			10,820						2,578						19,201						8,469
Federal funds purchased and interbank borrowings			720						—						722						—
Securities sold under agreements to repurchase			106						90						287						305
Federal Home Loan Bank advances			13,027						5,326						25,915						15,953
Other borrowings			5,256						2,460						13,410						7,375
Total interest expense			29,929						10,454						59,535						32,102
Net interest income			376,589						151,572						936,846						449,619
Provision for credit losses			11,287						(4,613)						118,101						(26,898)
Net interest income after provision for credit losses			365,302						156,185						818,745						476,517
Noninterest Income
Wealth management fees			17,317						10,134						51,251						30,576
Service charges on deposit accounts			20,042						8,123						54,392						23,270
Debit card and ATM fees			10,608						5,745						29,429						17,962
Mortgage banking revenue			5,360						10,870						19,127						35,222
Investment product fees			8,042						6,475						23,932						18,381
Capital markets income			8,906						6,017						20,609						15,603
Company-owned life insurance			3,361						2,355						11,456						7,852
Debt securities gains (losses), net			(172)						1,207						85						3,892
Other income			6,921						3,589						24,461						9,977
Total noninterest income			80,385						54,515						234,742						162,735
Noninterest Expense
Salaries and employee benefits			147,203						71,005						433,167						211,762
Occupancy			26,418						12,757						73,933						41,683
Equipment			7,328						3,756						20,046						12,231
Marketing			10,361						3,267						23,756						7,961
Data processing			20,269						11,508						64,914						35,558
Communication			5,392						2,372						14,687						7,661
Professional fees			6,559						3,416						32,686						14,668
FDIC assessment			6,249						1,628						13,523						4,461
Amortization of intangibles			7,089						2,779						19,070						8,763
Amortization of tax credit investments			2,662						1,736						5,703						4,751
Other expense			27,117						7,050						69,313						19,133
Total noninterest expense			266,647						121,274						770,798						368,632
Income before income taxes			179,040						89,426						282,689						270,620
Income tax expense			38,887						17,680						55,137						49,270
Net income			140,153						71,746						227,552						221,350
Preferred dividends			(4,034)						—						(10,084)						—
Net income applicable to common shareholders			$	136,119					$	71,746					$	217,468					$	221,350
Net income per common share - basic			$	0.47					$	0.43					$	0.81					$	1.34
Net income per common share - diluted			0.47						0.43						0.80						1.33
Weighted average number of common shares outstanding - basic			290,961						165,258						269,843						165,144
Weighted average number of common shares outstanding - diluted			292,483						165,939						271,123						165,862
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 (LOSS) (unaudited)

			Three Months Ended September 30,									Nine Months Ended September 30,
(dollars in thousands)			2022						2021			2022						2021
Net income			$	140,153					$	71,746		$	227,552					$	221,350
Other comprehensive income (loss):
Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period			(285,798)						(3,595)			(1,019,782)						(112,927)
Reclassification for securities transferred to held-to-maturity			—						—			165,473						—
Reclassification adjustment for securities (gains) losses    realized in income			172						(1,207)			(85)						(3,892)
Income tax effect			68,356						627			202,999						26,404
Unrealized gains (losses) on available-for-sale securities			(217,270)						(4,175)			(651,395)						(90,415)
Change in securities held-to-maturity:
Adjustment for securities transferred from available-for-sale			—						—			(165,473)						—
Amortization of unrealized losses on securities transferred     from available-for-sale			6,772						—			10,774						—
Income tax effect			(1,651)						—			37,621						—
Changes from securities held-to-maturity			5,121						—			(117,078)						—
Change in cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges			(36,755)						(164)			(49,679)						2,612
Reclassification adjustment for (gains) losses realized in net    income			749						(1,578)			(139)						(3,483)
Income tax effect			8,846						428			12,240						214
Changes from cash flow hedges			(27,160)						(1,314)			(37,578)						(657)
Change in defined benefit pension plans:
Amortization of net (gains) losses recognized in income			(11)						49			(32)						147
Income tax effect			3						(12)			8						(36)
Changes from defined benefit pension plans			(8)						37			(24)						111
Other comprehensive income (loss), net of tax			(239,317)						(5,452)			(806,075)						(90,961)
Comprehensive income (loss)			$	(99,164)					$	66,294		$	(578,523)					$	130,389

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)			Preferred Stock						Common Stock						Capital Surplus						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total Shareholders' Equity
Balance, December 31, 2020			$	—					$	165,367					$	1,875,626					$	783,892					$	147,771					$	2,972,656
Net income			—						—						—						86,818						—						86,818
Other comprehensive income (loss)			—						—						—						—						(55,862)						(55,862)
Dividends - common stock    ($0.14 per share)			—						—						—						(23,195)						—						(23,195)
Common stock issued			—						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

7

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OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) – (Continued)
(dollars in thousands, except per    share data)			Preferred Stock						Common Stock						Capital Surplus						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total Shareholders' Equity
Balance, December 31, 2021			$	—					$	165,838					$	1,880,545					$	968,010					$	(2,375)					$	3,012,018
Net income (loss)			—						—						—						(27,586)						—						(27,586)
Other comprehensive income (loss)			—						—						—						—						(335,824)						(335,824)
First Midwest Bancorp, Inc. merger:
Issuance of common stock			—						129,365						2,316,947						—						—						2,446,312
Issuance of preferred stock, net of    issuance costs			230,500						—						13,219						—						—						243,719
Cash dividends:
Common ($0.14 per share)			—						—						—						(40,782)						—						(40,782)
Preferred dividends			—						—						—						(2,017)						—						(2,017)
Common stock issued			—						10						155						—						—						165
Common stock repurchased			—						(3,890)						(66,188)						—						—						(70,078)
Share-based compensation expense			—						—						6,284						—						—						6,284
Stock activity under incentive    compensation plans			—						1,636						(1,368)						(365)						—						(97)
Balance, March 31, 2022			230,500						292,959						4,149,594						897,260						(338,199)						5,232,114
Net income			—						—						—						114,985						—						114,985
Other comprehensive income (loss)			—						—						—						—						(230,934)						(230,934)
Cash dividends:
Common ($0.14 per share)			—						—						—						(40,901)						—						(40,901)
Preferred dividends			—						—						—						(4,033)						—						(4,033)
Common stock issued			—						10						152						—						—						162
Common stock repurchased			—						(21)						(301)						—						—						(322)
Share-based compensation expense			—						—						7,813						—						—						7,813
Stock activity under incentive    compensation plans			—						(55)						285						(331)						—						(101)
Balance, June 30, 2022			230,500						292,893						4,157,543						966,980						(569,133)						5,078,783
Net income			—						—						—						140,153						—						140,153
Other comprehensive income (loss)			—						—						—						—						(239,317)						(239,317)
Cash dividends:
Common ($0.14 per share)			—						—						—						(40,907)						—						(40,907)
Preferred dividends			—						—						—						(4,034)						—						(4,034)
Common stock issued			—						17						213						—						—						230
Common stock repurchased			—						(34)						(497)						—						—						(531)
Share-based compensation expense			—						—						7,485						—						—						7,485
Stock activity under incentive    compensation plans			—						4						1,839						(322)						—						1,521
Balance, September 30, 2022			$	230,500					$	292,880					$	4,166,583					$	1,061,870					$	(808,450)					$	4,943,383

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

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			Nine Months Ended September 30,
(dollars in thousands)			2022						2021
Cash Flows From Operating Activities
Net income			$	227,552					$	221,350
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			26,893						20,585
Amortization of other intangible assets			19,070						8,763
Amortization of tax credit investments			5,703						4,751
Net premium amortization on investment securities			14,625						11,793
Accretion income related to acquired loans			(63,472)						(12,818)
Share-based compensation expense			21,582						5,518
Provision for credit losses			118,101						(26,898)
Debt securities (gains) losses, net			(85)						(3,892)
Net (gains) losses on sales of loans and other assets			(5,911)						(27,433)
Increase in cash surrender value of company-owned life insurance			(11,456)						(7,852)
Residential real estate loans originated for sale			(490,288)						(929,943)
Proceeds from sales of residential real estate loans			531,121						967,573
(Increase) decrease in interest receivable			(29,088)						11,268
(Increase) decrease in other assets			36,049						46,203
Increase (decrease) in accrued expenses and other liabilities			286,915						(24,295)
Net cash flows provided by (used in) operating activities			687,311						264,673
Cash Flows From Investing Activities
Cash received (paid) from merger, net			1,912,629						—
Purchases of investment securities available-for-sale			(1,367,896)						(2,550,248)
Purchases of investment securities held-to-maturity			(156,378)						—
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock			(115,488)						—
Purchases of equity securities			(5,843)						(10,000)
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale			1,117,620						1,174,037
Proceeds from sales of investment securities available-for-sale			13,371						189,091
Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity			61,172						—
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock			108,697						50
Proceeds from sales of equity securities			52,034						437
Loan originations and payments, net			(2,481,620)						217,847
Proceeds from company-owned life insurance death benefits			8,716						2,652
Proceeds from sales of premises and equipment and other assets			3,202						16,741
Purchases of premises and equipment and other assets			(28,739)						(40,774)
Net cash flows provided by (used in) investing activities			(878,523)						(1,000,167)
Cash Flows From Financing Activities
Net increase (decrease) in:
Deposits			235,064						1,158,696
Federal funds purchased and interbank borrowings			300,755						(1,132)
Securities sold under agreements to repurchase			(89,416)						(55,919)
Other borrowings			152,324						11,651
Payments for maturities of Federal Home Loan Bank advances			(1,674,875)						(145,005)
Payments for modification of Federal Home Loan Bank advances			—						(2,156)
Proceeds from Federal Home Loan Bank advances			1,450,000						50,000
Cash dividends paid			(132,674)						(69,611)
Common stock repurchased			(70,931)						(3,713)
Common stock issued			557						429
Net cash flows provided by (used in) financing activities			170,804						943,240
Net increase (decrease) in cash and cash equivalents			(20,408)						207,746
Cash and cash equivalents at beginning of period			822,019						589,712
Cash and cash equivalents at end of period			$	801,611					$	797,458

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OLD NATIONAL BANCORP

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

			Nine Months Ended September 30,
(dollars in thousands)			2022						2021
Supplemental cash flow information:
Total interest paid			$	62,207					$	33,910
Total income taxes paid (net of refunds)			14,759						15,476
Common stock issued for merger, net			2,446,312						—
Preferred stock issued for merger, net			243,870						—
Investment securities purchased but not settled			3,858						594
Securities transferred from available-for-sale to held-to-maturity			2,986,736						—
Operating lease right-of-use assets obtained in exchange for lease obligations			17,376						(1,190)
Finance lease right-of-use assets obtained in exchange for lease obligations			629						$	6,367

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 subsidiaries (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.  Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of September 30, 2022 and December 31, 2021, and the results of its operations for the three and nine months ended September 30, 2022 and 2021.  Interim results do not necessarily represent annual results.  These financial statements should be read in conjunction with Old National’s Annual Report on Form 10-K for the year ended December 31, 2021.

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

There have been no material changes from the significant accounting policies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2022

FASB ASC 470 and 815 – In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to clarify the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature model. In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2022 did not have a material impact on the consolidated financial statements.

FASB ASC 842 – In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments, to amend the lease classification requirements for lessors to align them with practice under ASC Topic 840. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2022 did not have a material impact on the consolidated financial statements.

FASB ASC 848 – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. Old National believes the adoption of this guidance on activities subsequent to September 30, 2022 through December 31, 2022 will not have a material impact on the consolidated financial statements.

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Accounting Guidance Pending Adoption 

FASB ASC 805 – In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers, to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and liabilities. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period. The new guidance is not expected to have a material impact on the consolidated financial statements.

FASB ASC 815 – In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method, to expand the current single-layer method of electing hedge accounting to allow multiple hedged layers of a single closed portfolio under the method and renames the last-of-layer method the portfolio layer method. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted for any entity that has adopted the amendments in ASU No. 2017-12 for the corresponding period. If an entity adopts the amendments in an interim period, the effect of adopting the amendments related to basis adjustments should be reflected as of the beginning of the fiscal year of adoption (i.e., the initial application date). Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

FASB ASC 326 – In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, to eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in leases within the vintage disclosures required by ASC 326. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, which an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted if an entity has adopted ASU No. 2016-13, including adoption in an interim period. If an entity elects to early adopt ASU No. 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

FASB ASC 820 – In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, to clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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NOTE 3 – ACQUISITION AND DIVESTITURE ACTIVITY

Merger

First Midwest Bancorp, Inc.

On February 15, 2022, Old National completed its previously announced merger of equals transaction with First Midwest pursuant to an agreement and plan of merger, dated as of May 30, 2021, to combine in an all-stock transaction. Following the merger, the new organization is operating under the Old National Bancorp and Old National Bank names, with the corporate headquarters and principal office located in Evansville, Indiana and commercial and consumer banking operations headquartered in Chicago, Illinois. Old National believes that it will be able to achieve synergies and cost savings by integrating the operations of the companies. The combined organization has a presence in additional Midwestern markets, strong commercial banking capabilities, a robust retail footprint, a significant wealth platform, and an enhanced ability to attract talent. The combined organization also creates the scale and profitability to accelerate digital and technology capabilities to drive future investments in consumer and commercial banking, as well as wealth management services.

Pursuant to the terms of the merger agreement, each First Midwest common stockholder received 1.1336 shares of Old National common stock for each share of First Midwest common stock such stockholder owned, plus, if applicable, cash in lieu of fractional shares of Old National common stock resulting from the exchange ratio. Each outstanding share of 7.000% fixed-rate non-cumulative perpetual preferred stock, Series A, no par value, and each outstanding share of 7.000% fixed-rate non-cumulative perpetual preferred stock, Series C, no par value, of First Midwest was converted into the right to receive one share of an applicable newly created series of Old National preferred stock, no par value, having terms that are not materially less favorable than the applicable series of outstanding First Midwest preferred stock (respectively, “Old National Series A Preferred Stock” and “Old National Series C Preferred Stock,” and collectively, the “Old National Preferred Stock”). In this regard, Old National issued 108,000 shares of Old National Series A Preferred Stock and 122,500 shares of Old National Series C Preferred Stock. Old National entered into two deposit agreements, each dated as of February 15, 2022, by and among Old National, Continental Stock Transfer & Trust Company, as depository, and the holders from time to time of the depositary receipts in connection with the issuance of the Old National Preferred Stock. Pursuant to the deposit agreements, Old National issued 4,320,000 depositary shares, each representing a 1/40th interest in a share of Old National Series A Preferred Stock, and 4,900,000 depositary shares, each representing a 1/40th interest in a share of Old National Series C Preferred Stock.

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The assets acquired and liabilities assumed, both intangible and tangible, in the merger were recorded at their estimated fair values as of the merger date and have been accounted for under the acquisition method of accounting. Subsequent to the initial valuation, Old National increased goodwill totaling $5.4 million to update the provisional valuation of the fair values of assets acquired and liabilities assumed. These adjustments affected goodwill, loans, premises and equipment, operating lease right-of-use assets, other assets, and accrued expenses and other liabilities. The following table presents the preliminary valuation of the assets acquired and liabilities assumed, net of the fair value adjustments and the fair value of consideration as of the merger date:

(dollars and shares in thousands)			February 15, 2022
Assets
Cash and cash equivalents			$	1,912,629
Investment securities			3,526,278
FHLB/Federal Reserve Bank stock			106,097
Loans held for sale			13,809
Loans, net of allowance for credit losses			14,298,873
Premises and equipment			111,867
Operating lease right-of-use assets			129,698
Accrued interest receivable			53,502
Goodwill			965,605
Other intangible assets			117,584
Company-owned life insurance			301,025
Other assets			315,241
Total assets			$	21,852,208
Liabilities
Deposits			$	17,249,404
Securities sold under agreements to repurchase			135,194
Federal Home Loan Bank advances			1,158,623
Other borrowings			274,569
Accrued expenses and other liabilities			344,236
Total liabilities			$	19,162,026
Fair value of consideration
Preferred stock			$	243,870
Common stock (129,365 shares issued at $18.92 per share)			2,446,312
Total consideration			$	2,690,182

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

Other intangible assets acquired included core deposit intangibles and customer trust relationships. The estimated fair value of the core deposit intangible was $77.9 million and is being amortized over an estimated useful life of 10 years. The estimated fair value of customer trust relationships was $39.7 million and is being amortized over an estimated useful life of 13 years.

The fair value of purchased financial assets with credit deterioration was $1.4 billion on the date of the merger. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $1.5 billion. Old National estimates, on the date of the merger, that $89.1 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected.

Transaction costs totaling $100.6 million associated with the merger have been expensed for the nine months ended September 30, 2022 and additional transaction and integration costs will be expensed in future periods as incurred.

As a result of the merger, Old National assumed sponsorship of First Midwest’s defined benefit pension plan (the “Pension Plan”) under which both plan participation and benefit accruals had been previously frozen. Subsequent to the close of the merger, Old National began taking the steps required to terminate the Pension Plan. At September 30, 2022, the accumulated benefit obligation was $49.7 million, and the fair value of Pension Plan assets was $67.1 million. Pension costs were not material for the nine months ended September 30, 2022.

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Summary of Unaudited Pro-Forma Financial Information

The following table presents supplemental unaudited pro-forma financial information as if the First Midwest merger had occurred on January 1, 2021. The pro-forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effective as of this assumed date.

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2022						2021						2022						2021
Total revenues (1)			$	456,974					$	396,463					$	1,255,909					$	1,182,767
Income before income taxes			201,783						141,005						466,651						268,884

(1)    Includes net interest income and total noninterest income.

Supplemental pro-forma earnings for the three months ended September 30, 2022 were adjusted to exclude $22.7 million of merger-related costs. Supplemental pro-forma earnings for the three months ended September 30, 2021 were adjusted to include these costs. Supplemental pro-forma earnings for the nine months ended September 30, 2022 were adjusted to exclude $100.6 million of merger-related costs, $11.0 million of provision for credit losses on unfunded loan commitments, and $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the transaction. Supplemental pro-forma earnings for the nine months ended September 30, 2021 were adjusted to include these costs.

Divestiture

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

NOTE 4 – NET INCOME PER COMMON SHARE

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

The following table presents the calculation of basic and diluted net income per common share:

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars and shares in thousands, except per share data)			2022						2021						2022						2021
Net income			$	140,153					$	71,746					$	227,552					$	221,350
Preferred dividends			(4,034)						—						(10,084)						—
Net income applicable to common shares			$	136,119					$	71,746					$	217,468					$	221,350
Weighted average common shares outstanding:
Weighted average common shares outstanding (basic)			290,961						165,258						269,843						165,144
Effect of dilutive securities:
Restricted stock			1,516						660						1,273						696
Stock appreciation rights			6						21						7						22
Weighted average diluted shares outstanding			292,483						165,939						271,123						165,862
Basic Net Income Per Common Share			$	0.47					$	0.43					$	0.81					$	1.34
Diluted Net Income Per Common Share			$	0.47					$	0.43					$	0.80					$	1.33

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NOTE 5 – INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolios and the corresponding amounts of gross unrealized gains, unrealized losses, and basis adjustments in accumulated other comprehensive income (loss) and gross unrecognized gains and losses. The Company held no securities classified as held-to-maturity as of December 31, 2021.

(dollars in thousands)			Amortized Cost						Unrealized Gains						Unrealized Losses						Basis Adjustments (1)						Fair Value
September 30, 2022
Available-for-Sale
U.S. Treasury			$	246,987					$	—					$	(7,010)					$	(46,372)					$	193,605
U.S. government-sponsored entities and agencies			1,453,829						—						(168,963)						(109,409)						1,175,457
Mortgage-backed securities - Agency			5,074,503						56						(615,032)						—						4,459,527
States and political subdivisions			713,669						666						(39,288)						—						675,047
Pooled trust preferred securities			13,776						—						(2,454)						—						11,322
Other securities			376,344						95						(28,417)						—						348,022
Total available-for-sale securities			$	7,879,108					$	817					$	(861,164)					$	(155,781)					$	6,862,980
Held-to-Maturity
U.S. government-sponsored entities and agencies			$	817,489					$	—					$	(159,054)					$	—					$	658,435
Mortgage-backed securities - Agency			1,124,714						—						(123,568)						—						1,001,146
States and political subdivisions			1,154,514						—						(213,505)						—						941,009
Allowance for securities held-to-maturity			(150)						—						—						—						(150)
Total held-to-maturity securities			$	3,096,567					$	—					$	(496,127)					$	—					$	2,600,440
December 31, 2021
Available-for-Sale
U.S. Treasury			$	234,555					$	1,233					$	(7,751)					$	7,547					$	235,584
U.S. government-sponsored entities and agencies			1,575,994						7,354						(37,014)						(3,561)						1,542,773
Mortgage-backed securities - Agency			3,737,484						27,421						(66,074)						—						3,698,831
States and political subdivisions			1,587,172						69,696						(1,882)						—						1,654,986
Pooled trust preferred securities			13,756						—						(4,260)						—						9,496
Other securities			235,072						6,578						(1,254)						—						240,396
Total available-for-sale securities			$	7,384,033					$	112,282					$	(118,235)					$	3,986					$	7,382,066

(1)    Basis adjustments represent the cumulative fair value adjustments included in the carrying amounts of fixed-rate investment securities assets in fair value hedging arrangements.

During the nine months ended September 30, 2022, U.S government-sponsored entities and agencies, agency mortgage-backed securities, and state and political subdivision securities with a fair value of $3.0 billion were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. The $125.2 million unrealized holding loss, net of tax, at the date of transfer will continue to be reported as a separate component of shareholders’ equity and is being amortized over the remaining term of the securities as an adjustment to yield. The corresponding discount on these securities will offset this adjustment to yield as it is amortized.

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Proceeds from sales or calls of available-for-sale investment securities and the resulting realized gains and realized losses were as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2022						2021						2022						2021
Proceeds from sales of available-for-sale securities			$	629					$	121,376					$	13,371					$	189,091
Proceeds from calls of available-for-sale securities			4,592						54,966						65,197						111,961
Total			$	5,221					$	176,342					$	78,568					$	301,052
Realized gains on sales of available-for-sale securities			$	—					$	1,093					$	344					$	3,829
Realized gains on calls of available-for-sale securities			17						119						184						180
Realized losses on sales of available-for-sale securities			(58)						—						(205)						(85)
Realized losses on calls of available-for-sale securities			(131)						(5)						(238)						(32)
Debt securities gains (losses), net			$	(172)					$	1,207					$	85					$	3,892

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

			September 30, 2022
(dollars in thousands)			Amortized Cost						Fair Value						Weighted Average Yield
Maturity
Available-for-Sale
Within one year			$	103,486					$	102,344					2.52		%
One to five years			1,757,898						1,640,096						2.73
Five to ten years			3,863,056						3,374,078						2.32
Beyond ten years			2,154,668						1,746,462						2.40
Total			$	7,879,108					$	6,862,980					2.44		%
Held-to-Maturity
One to five years			71,344						66,878						3.63		%
Five to ten years			977,435						867,476						2.67
Beyond ten years			2,047,788						1,666,086						2.81
Total			$	3,096,567					$	2,600,440					2.78		%

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

			Less than 12 months												12 months or longer												Total
(dollars in thousands)			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
September 30, 2022
Available-for-Sale
U.S. Treasury			$	193,605					$	(7,010)					$	—					$	—					$	193,605					$	(7,010)
U.S. government-sponsored entities    and agencies			639,031						(18,655)						530,776						(150,308)						1,169,807						(168,963)
Mortgage-backed securities - Agency			3,784,833						(462,383)						671,031						(152,649)						4,455,864						(615,032)
States and political subdivisions			503,025						(38,724)						1,850						(564)						504,875						(39,288)
Pooled trust preferred securities			—						—						11,322						(2,454)						11,322						(2,454)
Other securities			285,278						(22,318)						52,322						(6,099)						337,600						(28,417)
Total available-for-sale			$	5,405,772					$	(549,090)					$	1,267,301					$	(312,074)					$	6,673,073					$	(861,164)
December 31, 2021
Available-for-Sale
U.S. Treasury			$	91,063					$	(7,751)					$	—					$	—					$	91,063					$	(7,751)
U.S. government-sponsored entities    and agencies			1,032,566						(21,167)						312,949						(15,847)						1,345,515						(37,014)
Mortgage-backed securities - Agency			2,415,923						(59,277)						163,685						(6,797)						2,579,608						(66,074)
States and political subdivisions			178,570						(1,849)						2,729						(33)						181,299						(1,882)
Pooled trust preferred securities			—						—						9,496						(4,260)						9,496						(4,260)
Other securities			56,976						(943)						21,133						(311)						78,109						(1,254)
Total available-for-sale			$	3,775,098					$	(90,987)					$	509,992					$	(27,248)					$	4,285,090					$	(118,235)

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

			Less than 12 months												12 months or longer												Total
(dollars in thousands)			Fair Value						Unrecognized Losses						Fair Value						Unrecognized Losses						Fair Value						Unrecognized Losses
September 30, 2022
Held-to-Maturity
U.S. government-sponsored entities    and agencies			$	434,505					$	(113,697)					$	223,930					$	(45,357)					$	658,435					$	(159,054)
Mortgage-backed securities - Agency			513,470						(53,629)						487,676						(69,939)						1,001,146						(123,568)
States and political subdivisions			820,108						(177,033)						117,043						(36,472)						937,151						(213,505)
Total held-to-maturity			$	1,768,083					$	(344,359)					$	828,649					$	(151,768)					$	2,596,732					$	(496,127)

The unrecognized losses on held-to-maturity investment securities presented in the table above do not include unrecognized losses on securities that were transferred from available-for-sale to held-for-maturity totaling $154.7 million at September 30, 2022 that are included as a separate component of shareholders’ equity and are being amortized over the remaining term of the securities.

Available-for-sale securities in unrealized loss positions are evaluated at least quarterly to determine if a decline in fair value should be recorded through income or other comprehensive income. For available-for sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security, before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis

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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 decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was needed at September 30, 2022 or December 31, 2021.

An allowance on held-to-maturity debt securities is maintained for certain municipal bonds to account for expected lifetime credit losses. Substantially all of the U.S. government-sponsored entities and agencies and agency mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. The allowance for credit losses on held-to-maturity debt securities was $0.2 million at September 30, 2022.

Accrued interest receivable on the securities portfolio is excluded from the estimate of credit losses and totaled $39.9 million at September 30, 2022 and $35.5 million at December 31, 2021.

At September 30, 2022, Old National’s securities portfolio consisted of 3,201 securities, 2,970 of which were in an unrealized loss position.  The unrealized losses attributable to our U.S. Treasury, U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates and temporary market movements.  Old National’s pooled trust preferred securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows.  At September 30, 2022, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.

Old National’s pooled trust preferred securities have experienced credit defaults.  However, we believe that the value of the instruments lies in the full and timely interest payments that will be received through maturity, the steady amortization that will be experienced until maturity, and the full return of principal by the final maturity of the collateralized debt obligations. Old National did not recognize any losses on these securities for the nine months ended September 30, 2022 or 2021.

Equity Securities

Old National’s equity securities with readily determinable fair values totaled $51.8 million at September 30, 2022 and $13.2 million at December 31, 2021.  There were losses on equity securities of $0.7 million during the three months ended September 30, 2022 and losses of $4.9 million during the nine months ended September 30, 2022, compared to gains of $0.1 million during the three months ended September 30, 2021 and gains of $0.3 million during the nine months ended September 30, 2021.

Alternative Investments

Old National has alternative investments without readily determinable fair values that are included in other assets totaling $322.3 million at September 30, 2022, consisting of $185.9 million of illiquid investments of partnerships, limited liability companies, and other ownership interests that support affordable housing and $136.4 million of economic development and community revitalization initiatives in low-to-moderate income neighborhoods. These alternative investments totaled $186.0 million at December 31, 2021.  There have been no impairments or adjustments on equity securities without readily determinable fair values, except for amortization of tax credit investments in the nine months ended September 30, 2022 and 2021. See Note 11 to the consolidated financial statements for detail regarding these investments.

NOTE 6 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans

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

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The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios – commercial, commercial real estate, residential real estate, and consumer – 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 portfolio segment reclassifications follow:

									Segment
			Statement						Portfolio						After
(dollars in thousands)			Balance						Reclassifications						Reclassifications
September 30, 2022
Loans:
Commercial			$	9,311,148					$	(197,169)					$	9,113,979
Commercial real estate			12,227,888						(153,784)						12,074,104
BBCC			N/A						350,953						350,953
Residential real estate			6,267,306						—						6,267,306
Consumer			2,722,591						(2,722,591)						N/A
Indirect			N/A						1,004,054						1,004,054
Direct			N/A						674,943						674,943
Home equity			N/A						1,043,594						1,043,594
Total			$	30,528,933					$	—					$	30,528,933
December 31, 2021
Loans:
Commercial			$	3,391,769					$	(191,557)					$	3,200,212
Commercial real estate			6,380,674						(159,190)						6,221,484
BBCC			N/A						350,747						350,747
Residential real estate			2,255,289						—						2,255,289
Consumer			1,574,114						(1,574,114)						N/A
Indirect			N/A						873,139						873,139
Direct			N/A						140,385						140,385
Home equity			N/A						560,590						560,590
Total			$	13,601,846					$	—					$	13,601,846

The composition of loans by portfolio segment follows:

(dollars in thousands)			September 30, 2022						December 31, 2021
Commercial (1) (2)			$	9,113,979					$	3,200,212
Commercial real estate			12,074,104						6,221,484
BBCC			350,953						350,747
Residential real estate			6,267,306						2,255,289
Indirect			1,004,054						873,139
Direct			674,943						140,385
Home equity			1,043,594						560,590
Total loans			30,528,933						13,601,846
Allowance for credit losses			(302,254)						(107,341)
Net loans			$	30,226,679					$	13,494,505

(1)Includes direct finance leases of $196.7 million at September 30, 2022 and $25.1 million at December 31, 2021.

(2)Includes PPP loans of $43.5 million at September 30, 2022 and $169.0 million at December 31, 2021.

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

Commercial

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

Commercial Real Estate

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

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

At 223%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained below the regulatory guideline limit of 300% at September 30, 2022.

BBCC

BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owners and guarantors, and the ability to show relatively stable earnings as criteria to help mitigate risk. Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by factors such as changes in economic conditions and unemployment levels.

Residential

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

Indirect

Indirect loans are secured by automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint. Old National typically mitigates the risk of indirect loans by establishing minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions

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such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, conservative credit policies, and ongoing reviews of dealer relationships.

Direct

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

Home Equity

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

Allowance for Credit Losses

Loans

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans is excluded from the estimate of credit losses and totaled $123.6 million at September 30, 2022 and $47.6 million at December 31, 2021.

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

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

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The base forecast scenario considers unemployment, gross domestic product, and the BBB ratio (BBB spread to the 10-year U.S. Treasury rate). In addition to the quantitative inputs, several qualitative factors were considered. These factors include the risk that unemployment, gross domestic product, housing product index, and the BBB ratio prove to be more severe and/or prolonged than our baseline forecast due to monetary actions to control inflation, conflict in Ukraine, and global supply chain issues. Activity in the allowance for credit losses for loans by portfolio segment was as follows:

(dollars in thousands)			Balance at Beginning of Period						Allowance Established for Acquired PCD Loans (1)						Charge-offs						Recoveries						Provision for Credit Losses						Balance at End of Period
Three Months Ended September 30, 2022
Commercial			$	102,819					$	3,740					$	(2,696)					$	2,206					$	6,344					$	112,413
Commercial real estate			141,802						6,818						(4,772)						287						(45)						144,090
BBCC			2,064						—						—						108						(4)						2,168
Residential real estate			19,729						—						(20)						66						1,481						21,256
Indirect			1,641						—						(624)						379						189						1,585
Direct			14,412						—						(3,299)						442						4,541						16,096
Home equity			5,536						—						(29)						357						(1,218)						4,646
Total			$	288,003					$	10,558					$	(11,440)					$	3,845					$	11,288					$	302,254
Three Months Ended September 30, 2021
Commercial			$	25,731					$	—					$	(354)					$	106					$	677					$	26,160
Commercial real estate			65,469						—						(86)						3,371						(3,657)						65,097
BBCC			2,798						—						(8)						31						(259)						2,562
Residential real estate			10,419						—						(85)						79						(887)						9,526
Indirect			2,043						—						(113)						294						(363)						1,861
Direct			640						—						(355)						153						148						586
Home equity			2,344						—						(214)						218						(272)						2,076
Total			$	109,444					$	—					$	(1,215)					$	4,252					$	(4,613)					$	107,868
Nine Months Ended September 30, 2022
Commercial			$	27,232					$	38,780					$	(5,919)					$	3,219					$	49,101					$	112,413
Commercial real estate			64,004						49,419						(5,596)						789						35,474						144,090
BBCC			2,458						—						(48)						256						(498)						2,168
Residential real estate			9,347						136						(344)						636						11,481						21,256
Indirect			1,743						—						(1,636)						921						557						1,585
Direct			528						31						(6,550)						1,712						20,375						16,096
Home equity			2,029						723						(107)						540						1,461						4,646
Total			$	107,341					$	89,089					$	(20,200)					$	8,073					$	117,951					$	302,254
Nine Months Ended September 30, 2021
Commercial			$	30,567					$	—					$	(940)					$	549					$	(4,016)					$	26,160
Commercial real estate			75,810						—						(264)						3,555						(14,004)						65,097
BBCC			6,120						—						(144)						87						(3,501)						2,562
Residential real estate			12,608						—						(305)						217						(2,994)						9,526
Indirect			3,580						—						(903)						1,395						(2,211)						1,861
Direct			855						—						(913)						622						22						586
Home equity			1,848						—						(296)						718						(194)						2,076
Total			$	131,388					$	—					$	(3,765)					$	7,143					$	(26,898)					$	107,868

(1)During the three months ended September 30, 2022, a measurement period adjustment was made on the allowance for credit losses for acquired PCD loans totaling $10.6 million.

The allowance for credit losses increased for the nine months ended September 30, 2022 primarily due to $89.1 million of allowance for credit losses on acquired PCD loans established through acquisition accounting

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adjustments on or after the merger date and $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. Loan growth and measurement period adjustments for PCD loans contributed to the increase in the allowance for credit losses in the three months ended September 30, 2022.

Unfunded Loan Commitments

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2022						2021						2022						2021
Allowance for credit losses on unfunded loan commitments:
Balance at beginning of period			$	21,966					$	10,429					$	10,879					$	11,689
Provision for credit losses on unfunded commitments    for loans acquired during the period			—						—						11,013						—
Expense (reversal of expense) for credit losses			4,203						(132)						4,277						(1,392)
Balance at end of period			$	26,169					$	10,297					$	26,169					$	10,297

Credit Quality

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

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

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

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

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

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

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

			Origination Year																																										Revolving to Term
(dollars in thousands)			2022						2021						2020						2019						2018						Prior						Revolving												Total
September 30, 2022
Commercial:
Risk Rating:
Pass			$	1,788,480					$	1,953,811					$	928,908					$	858,442					$	386,870					$	444,404					$	1,981,798					$	277,119					$	8,619,832
Criticized			42,688						27,736						41,026						44,508						10,165						6,293						61,764						4,397						238,577
Classified:
Substandard			40,035						35,516						20,640						13,877						8,661						21,806						31,913						26,566						199,014
Nonaccrual			—						2,158						1,356						1,127						—						—						7,892						7,645						20,178
Doubtful			4,151						6,658						3,280						7,158						5,851						9,280						—						—						36,378
Total			$	1,875,354					$	2,025,879					$	995,210					$	925,112					$	411,547					$	481,783					$	2,083,367					$	315,727					$	9,113,979
Commercial real estate:
Risk Rating:
Pass			$	2,375,092					$	2,864,028					$	2,141,691					$	1,322,839					$	803,056					$	1,209,592					$	54,548					$	597,665					$	11,368,511
Criticized			61,754						28,671						21,462						60,599						68,301						44,349						—						20,431						305,567
Classified:
Substandard			54,427						24,635						26,280						78,029						56,499						31,336						—						4,153						275,359
Nonaccrual			2,358						13,949						5,640						1,162						2,188						26,480						297						3,037						55,111
Doubtful			—						35,581						9,752						218						1,783						22,222						—						—						69,556
Total			$	2,493,631					$	2,966,864					$	2,204,825					$	1,462,847					$	931,827					$	1,333,979					$	54,845					$	625,286					$	12,074,104
BBCC:
Risk Rating:
Pass			$	63,023					$	70,355					$	56,446					$	40,627					$	26,382					$	14,995					$	50,146					$	18,477					$	340,451
Criticized			1,330						633						611						697						263						164						975						1,177						5,850
Classified:
Substandard			342						324						3						343						—						—						837						502						2,351
Nonaccrual			61						—						340						294						283						336						—						723						2,037
Doubtful			—						28						16						93						127						—						—						—						264
Total			$	64,756					$	71,340					$	57,416					$	42,054					$	27,055					$	15,495					$	51,958					$	20,879					$	350,953

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			Origination Year																																										Revolving to Term
(dollars in thousands)			2021						2020						2019						2018						2017						Prior						Revolving												Total
December 31, 2021
Commercial:
Risk Rating:
Pass			$	918,456					$	563,869					$	271,158					$	98,468					$	156,136					$	235,639					$	667,628					$	130,470					$	3,041,824
Criticized			9,998						7,885						6,660						—						7,809						2,658						14,601						10,076						59,687
Classified:
Substandard			14,773						14,468						10,200						9,849						5,521						945						6,883						10,322						72,961
Nonaccrual			1,069						3,507						1,276						3,721						1,448						—						845						7,796						19,662
Doubtful			—						178						—						288						337						5,275						—						—						6,078
Total			$	944,296					$	589,907					$	289,294					$	112,326					$	171,251					$	244,517					$	689,957					$	158,664					$	3,200,212
Commercial real estate:
Risk Rating:
Pass			$	1,555,880					$	1,474,271					$	846,921					$	481,508					$	462,176					$	611,680					$	42,609					$	451,544					$	5,926,589
Criticized			27,622						24,790						39,914						—						21,614						22,157						—						34,387						170,484
Classified:
Substandard			4,706						12,118						9,933						9,058						18,165						11,351						2,291						4,339						71,961
Nonaccrual			1,620						2,997						—						1,627						3,419						8,905						315						871						19,754
Doubtful			6,653						—						1,970						342						11,218						12,513						—						—						32,696
Total			$	1,596,481					$	1,514,176					$	898,738					$	492,535					$	516,592					$	666,606					$	45,215					$	491,141					$	6,221,484
BBCC:
Risk Rating:
Pass			$	81,710					$	69,749					$	54,580					$	34,461					$	25,113					$	8,296					$	47,571					$	18,778					$	340,258
Criticized			1,320						1,170						841						160						—						—						670						1,578						5,739
Classified:
Substandard			284						24						79						7						187						465						103						239						1,388
Nonaccrual			—						88						—						—						66						162						—						1,136						1,452
Doubtful			—						25						284						1,391						—						210						—						—						1,910
Total			$	83,314					$	71,056					$	55,784					$	36,019					$	25,366					$	9,133					$	48,344					$	21,731					$	350,747

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

			Origination Year																																										Revolving to Term
(dollars in thousands)			2022						2021						2020						2019						2018						Prior						Revolving												Total
September 30, 2022
Residential real estate:
Risk Rating:
Performing			$	1,070,939					$	1,920,008					$	1,861,893					$	496,062					$	144,400					$	742,078					$	8					$	92					$	6,235,480
Nonperforming			—						423						765						584						717						29,337						—						—						31,826
Total			$	1,070,939					$	1,920,431					$	1,862,658					$	496,646					$	145,117					$	771,415					$	8					$	92					$	6,267,306
Indirect:
Risk Rating:
Performing			$	404,054					$	274,254					$	162,221					$	95,443					$	39,202					$	25,995					$	—					$	45					$	1,001,214
Nonperforming			203						756						548						531						360						442						—						—						2,840
Total			$	404,257					$	275,010					$	162,769					$	95,974					$	39,562					$	26,437					$	—					$	45					$	1,004,054
Direct:
Risk Rating:
Performing			$	120,960					$	185,466					$	86,802					$	67,478					$	52,671					$	65,437					$	89,675					$	1,530					$	670,019
Nonperforming			161						620						647						388						301						2,635						40						132						4,924
Total			$	121,121					$	186,086					$	87,449					$	67,866					$	52,972					$	68,072					$	89,715					$	1,662					$	674,943
Home equity:
Risk Rating:
Performing			$	741					$	992					$	1,863					$	2,035					$	1,008					$	11,171					$	999,869					$	15,370					$	1,033,049
Nonperforming			224						96						231						728						824						4,335						868						3,239						10,545
Total			$	965					$	1,088					$	2,094					$	2,763					$	1,832					$	15,506					$	1,000,737					$	18,609					$	1,043,594
			Origination Year																																										Revolving to Term
			2021						2020						2019						2018						2017						Prior						Revolving												Total
December 31, 2021
Residential real estate:
Risk Rating:
Performing			$	625,582					$	632,705					$	272,600					$	72,766					$	103,866					$	529,293					$	12					$	105					$	2,236,929
Nonperforming			96						165						166						350						855						16,728						—						—						18,360
Total			$	625,678					$	632,870					$	272,766					$	73,116					$	104,721					$	546,021					$	12					$	105					$	2,255,289
Indirect:
Risk Rating:
Performing			$	361,485					$	231,156					$	146,978					$	68,513					$	41,598					$	20,819					$	—					$	9					$	870,558
Nonperforming			262						524						614						510						430						241						—						—						2,581
Total			$	361,747					$	231,680					$	147,592					$	69,023					$	42,028					$	21,060					$	—					$	9					$	873,139
Direct:
Risk Rating:
Performing			$	34,058					$	16,135					$	14,396					$	14,579					$	7,432					$	15,831					$	36,812					$	192					$	139,435
Nonperforming			13						53						130						133						35						536						42						8						950
Total			$	34,071					$	16,188					$	14,526					$	14,712					$	7,467					$	16,367					$	36,854					$	200					$	140,385
Home equity:
Risk Rating:
Performing			$	—					$	—					$	633					$	349					$	535					$	—					$	539,057					$	16,768					$	557,342
Nonperforming			—						—						16						9						41						1						258						2,923						3,248
Total			$	—					$	—					$	649					$	358					$	576					$	1					$	539,315					$	19,691					$	560,590

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Nonaccrual and Past Due Loans

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

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

(dollars in thousands)			30-59 Days Past Due						60-89 Days Past Due						Past Due 90 Days or More						Total Past Due						Current						Total Loans
September 30, 2022
Commercial			$	8,575					$	758					$	11,885					$	21,218					$	9,092,761					$	9,113,979
Commercial real estate			23,786						7,235						27,286						58,307						12,015,797						12,074,104
BBCC			78						92						84						254						350,699						350,953
Residential			29,394						7,382						8,851						45,627						6,221,679						6,267,306
Indirect			4,929						1,735						850						7,514						996,540						1,004,054
Direct			4,459						2,926						2,503						9,888						665,055						674,943
Home equity			4,995						1,078						4,589						10,662						1,032,932						1,043,594
Total			$	76,216					$	21,206					$	56,048					$	153,470					$	30,375,463					$	30,528,933
December 31, 2021
Commercial			$	2,723					$	617					$	1,603					$	4,943					$	3,195,269					$	3,200,212
Commercial real estate			1,402						280						7,042						8,724						6,212,760						6,221,484
BBCC			747						162						109						1,018						349,729						350,747
Residential			8,273						2,364						4,554						15,191						2,240,098						2,255,289
Indirect			3,888						867						554						5,309						867,830						873,139
Direct			687						159						162						1,008						139,377						140,385
Home equity			693						199						777						1,669						558,921						560,590
Total			$	18,413					$	4,648					$	14,801					$	37,862					$	13,563,984					$	13,601,846

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

			September 30, 2022																		December 31, 2021
(dollars in thousands)			Nonaccrual Amortized Cost						Nonaccrual With No Related Allowance						Past Due 90 Days or More and Accruing						Nonaccrual Amortized Cost						Nonaccrual With No Related Allowance						Past Due 90 Days or More and Accruing
Commercial			$	56,556					$	3,836					$	—					$	25,740					$	9,574					$	—
Commercial real estate			124,667						35,989						—						52,450						25,139						—
BBCC			2,301						—						—						3,362						—						—
Residential			31,826						—						—						18,360						—						—
Indirect			2,840						—						—						2,581						—						4
Direct			4,924						—						767						950						—						3
Home equity			10,545						—						—						3,248						—						—
Total			$	233,659					$	39,825					$	767					$	106,691					$	34,713					$	7

Interest income recognized on nonaccrual loans was insignificant during the three and nine months ended September 30, 2022 and 2021.

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

			Type of Collateral
(dollars in thousands)			Real Estate						Blanket Lien						Investment Securities/Cash						Auto						Other
September 30, 2022
Commercial			$	7,417					$	43,620					$	2,301					$	134					$	987
Commercial real estate			112,275						—						590						—						6,487
BBCC			1,649						560						64						28						—
Residential			31,826						—						—						—						—
Indirect			—						—						—						2,840						—
Direct			3,861						2						—						198						16
Home equity			10,545						—						—						—						—
Total loans			$	167,573					$	44,182					$	2,955					$	3,200					$	7,490
December 31, 2021
Commercial			$	8,100					$	13,816					$	3,394					$	80					$	302
Commercial real estate			38,657						—						961						—						6,653
BBCC			1,895						1,331						43						93						—
Residential			18,360						—						—						—						—
Indirect			—						—						—						2,581						—
Direct			724						—						1						152						20
Home equity			3,248						—						—						—						—
Total loans			$	70,984					$	15,147					$	4,399					$	2,906					$	6,975

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions.  At September 30, 2022, these loans totaled $2.3 billion, of which $1.1 billion had been sold to other financial institutions and $1.2 billion was retained by Old National.  The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.

Troubled Debt Restructurings

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

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

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

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

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

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

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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, 2022
Commercial			$	7,216					$	—					$	(1,620)					$	—					$	5,596
Commercial real estate			27,531						—						(891)						—						26,640
BBCC			87						—						(13)						—						74
Residential			2,378						—						(37)						—						2,341
Direct			2,669						—						(12)						—						2,657
Home equity			131						—						(8)						—						123
Total			$	40,012					$	—					$	(2,581)					$	—					$	37,431
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
Nine Months Ended September 30, 2022
Commercial			$	7,456					$	—					$	(6,363)					$	4,503					$	5,596
Commercial real estate			17,158						4						(10,005)						19,483						26,640
BBCC			87						3						(16)						—						74
Residential			2,435						—						(94)						—						2,341
Indirect			—						1						(1)						—						—
Direct			2,704						—						(47)						—						2,657
Home equity			199						1						(77)						—						123
Total			$	30,039					$	9					$	(16,603)					$	23,986					$	37,431
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

TDRs included within nonaccrual loans totaled $23.8 million at September 30, 2022 and $11.7 million at December 31, 2021.  Old National has established specific allowances for credit losses for clients whose loan terms have been modified as TDRs totaling $5.2 million at September 30, 2022 and $0.7 million at December 31, 2021.  At September 30, 2022, Old National had committed to lend an additional $3.0 million to clients with outstanding loans that were classified as TDRs. At December 31, 2021, Old National had not committed to lend any additional funds to clients with outstanding loans that were classified as TDRs.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the nine months ended September 30, 2022 and 2021 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, 2022 increased the allowance for credit losses by $5.5 million and resulted in no charge-offs. The TDRs that occurred during the nine months ended September 30, 2021 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, 2022 and 2021.

The terms of certain other loans were modified during 2022 and 2021 that did not meet the definition of a TDR.  It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification.  The evaluation is performed under our internal underwriting policy.  We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee.  We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

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

Purchased Credit Deteriorated Loans

Old National has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:

(dollars in thousands)			First Midwest (1)
Purchase price of loans at acquisition			$	1,390,273
Allowance for credit losses at acquisition			89,089
Non-credit discount/(premium) at acquisition			9,003
Par value of acquired loans at acquisition			$	1,488,365

(1)Old National merged with First Midwest effective February 15, 2022.

NOTE 7 – PREMISES AND EQUIPMENT

The composition of premises and equipment was as follows:

(dollars in thousands)			September 30, 2022						December 31, 2021
Land			$	97,194					$	71,014
Buildings			450,957						394,400
Furniture, fixtures, and equipment			154,945						118,124
Leasehold improvements			62,400						46,330
Total			765,496						629,868
Accumulated depreciation			(177,475)						(153,682)
Premises and equipment, net			$	588,021					$	476,186

The increase in premises and equipment at September 30, 2022 when compared to December 31, 2021 was primarily due to assets acquired in the merger with First Midwest totaling $111.9 million.

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Depreciation expense was $9.2 million for the three months ended September 30, 2022 and $26.9 million for the nine months ended September 30, 2022, compared to $6.5 million for the three months ended September 30, 2021 and $20.6 million for the nine months ended September 30, 2021.

Finance Leases

Old National leases certain banking center buildings and equipment under finance leases that are included in premises and equipment.  See Notes 8 and 14 to the consolidated financial statements for detail regarding these leases.

NOTE 8 – LEASES

Old National has operating and finance leases for land, office space, banking centers, and equipment.  These leases are generally for periods of 5 to 20 years with various renewal options.  We include certain renewal options in the measurement of our right-of-use assets and lease liabilities if they are reasonably certain to be exercised.  Variable lease payments that are dependent on an index or a rate are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Variable lease payments that are not dependent on an index or a rate are excluded from the measurement of the lease liability and are recognized in profit and loss when incurred.  Variable lease payments are defined as payments made for the right to use an asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.

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

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

The components of lease expense were as follows:

			Affected Line Item in the Statement of Income						Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)									2022						2021						2022						2021
Operating lease cost			Occupancy/Equipment expense						$	7,657					$	2,995					$	21,323					$	9,388
Finance lease cost:
Amortization of right-of-use assets			Occupancy expense						680						593						2,003						1,714
Interest on lease liabilities			Interest expense						105						108						315						323
Sub-lease income			Occupancy expense						(87)						(142)						(389)						(420)
Total									$	8,355					$	3,554					$	23,252					$	11,005

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Supplemental balance sheet information related to leases was as follows:

(dollars in thousands)			September 30, 2022						December 31, 2021
Operating Leases
Operating lease right-of-use assets			$	187,626					$	69,560
Operating lease liabilities			207,725						76,236
Finance Leases
Premises and equipment, net			14,756						16,451
Other borrowings			15,700						17,233
Weighted-Average Remaining Lease Term (in Years)
Operating leases			9.2						10.4
Finance leases			7.1						7.6
Weighted-Average Discount Rate
Operating leases			2.91		%				3.34		%
Finance leases			3.14		%				3.02		%

Supplemental cash flow information related to leases was as follows:

			Nine Months Ended September 30,
(dollars in thousands)			2022						2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases			$	22,223					$	10,692
Operating cash flows from finance leases			315						323
Financing cash flows from finance leases			1,839						1,492

The following table presents a maturity analysis of the Company’s lease liability by lease classification at September 30, 2022:

(dollars in thousands)			Operating Leases						Finance Leases
2022			$	7,983					$	736
2023			30,128						2,968
2024			28,717						3,018
2025			27,407						3,029
2026			26,405						1,790
Thereafter			117,486						6,031
Total undiscounted lease payments			238,126						17,572
Amounts representing interest			(30,401)						(1,872)
Lease liability			$	207,725					$	15,700

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NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2022						2021						2022						2021
Balance at beginning of period			$	1,991,534					$	1,036,994					$	1,036,994					$	1,036,994
Acquisitions and adjustments			11,065						—						965,605						—
Balance at end of period			$	2,002,599					$	1,036,994					$	2,002,599					$	1,036,994

During the nine months ended September 30, 2022, Old National recorded $965.6 million of goodwill associated with the First Midwest merger. The increase in goodwill for the three months ended September 30, 2022 resulted from the measurement period adjustments related to updating the fair values of the assets acquired and liabilities assumed in the First Midwest merger. See Note 3 to the consolidated financial statements for additional detail regarding this transaction.

Old National performed the required annual goodwill impairment test as of August 31, 2022 and there was no impairment.  No events or circumstances since the August 31, 2022 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

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

(dollars in thousands)			Gross Carrying Amount						Accumulated Amortization and Impairment						Net Carrying Amount
September 30, 2022
Core deposit			$	170,642					$	(75,531)					$	95,111
Customer trust relationships			56,243						(18,161)						38,082
Total intangible assets			$	226,885					$	(93,692)					$	133,193
December 31, 2021
Core deposit			$	92,754					$	(60,036)					$	32,718
Customer trust relationships			16,547						(14,587)						1,960
Total intangible assets			$	109,301					$	(74,623)					$	34,678

Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years. During the nine months ended September 30, 2022, Old National recorded $77.9 million of core deposit intangibles and $39.7 million of customer trust relationships intangible associated with the First Midwest merger.

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded during the nine months ended September 30, 2022 or 2021.  Total amortization expense associated with intangible assets was $7.1 million for the three months ended September 30, 2022 and $19.1 million for the nine months ended September 30, 2022, compared to $2.8 million for the three months ended September 30, 2021 and $8.8 million for the nine months ended September 30, 2021.

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Estimated amortization expense for future years is as follows:

(dollars in thousands)
2022 remaining			$	6,788
2023			24,214
2024			21,298
2025			18,417
2026			15,614
Thereafter			46,862
Total			$	133,193

NOTE 10 – LOAN SERVICING RIGHTS

Loan servicing rights are included in other assets on the balance sheet. At September 30, 2022, loan servicing rights derived from mortgage loans sold with servicing retained totaled $37.8 million, compared to $30.0 million at December 31, 2021.  Loans serviced for others are not reported as assets.  The principal balance of mortgage loans serviced for others was $4.4 billion at September 30, 2022, compared to $3.7 billion at December 31, 2021.  Custodial escrow balances maintained in connection with serviced loans were $50.1 million at September 30, 2022 and $18.2 million at December 31, 2021.

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2022						2021						2022						2021
Balance at beginning of period			$	38,121					$	28,886					$	30,085					$	28,124
Additions (1)			1,280						2,671						12,293						8,842
Amortization			(1,569)						(2,236)						(4,546)						(7,645)
Balance before valuation allowance at end of period			37,832						29,321						37,832						29,321
Valuation allowance:
Balance at beginning of period			—						(105)						(46)						(1,407)
(Additions)/recoveries			—						5						46						1,307
Balance at end of period			—						(100)						—						(100)
Loan servicing rights, net			$	37,832					$	29,221					$	37,832					$	29,221

(1)Additions in the nine months ended September 30, 2022 include loan servicing rights of $7.7 million acquired in the First Midwest merger on February 15, 2022.

At September 30, 2022, the fair value of servicing rights was $48.8 million, which was determined using a discount rate of 9% and a conditional prepayment rate of 9%.  At December 31, 2021, the fair value of servicing rights was $33.8 million, which was determined using a discount rate of 9% and a conditional prepayment rate of 10%.

NOTE 11 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS

Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects.  These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. As of September 30, 2022, Old National expects to recover its remaining investments through the use of the tax credits that are generated by the investments.

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The following table summarizes Old National’s investments in qualified affordable housing projects and other tax credit investments:

(dollars in thousands)						September 30, 2022												December 31, 2021
Investment			Accounting Method			Investment						Unfunded Commitment (1)						Investment						Unfunded Commitment
LIHTC			Proportional amortization			$	70,701					$	44,141					$	68,989					$	41,355
FHTC			Equity			20,606						9,589						21,241						15,252
NMTC			Consolidation			43,813						—						18,727						—
Renewable Energy			Equity			1,309						—						1,985						—
Total						$	136,429					$	53,730					$	110,942					$	56,607

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

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

(dollars in thousands)			Amortization Expense (1)						Tax Expense (Benefit) Recognized (2)
Three Months Ended September 30, 2022
LIHTC			$	1,240					$	(1,650)
FHTC			215						(262)
NMTC			2,237						(2,788)
Renewable Energy			210						—
Total			$	3,902					$	(4,700)
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)
Nine Months Ended September 30, 2022
LIHTC			$	3,734					$	(4,950)
FHTC			635						(776)
NMTC			4,439						(5,538)
Renewable Energy			629						—
Total			$	9,437					$	(11,264)
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)

(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).

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NOTE 12 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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

			At or for the Nine Months Ended September 30, 2022						At December 31, 2021						At or for the Nine Months Ended September 30, 2021
(dollars in thousands)
Outstanding at period end			$	438,053					$	392,275					$	375,247
Average amount outstanding during the period			450,966						N/A						396,495
Maximum amount outstanding at any month-end during the period			509,275						N/A						405,278
Weighted-average interest rate:
During the period			0.09		%				N/A						0.10		%
At period end			0.40		%				0.10		%				0.10		%

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

			At September 30, 2022
			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			$	438,053					$	—					$	—					$	—					$	438,053
Total			$	438,053					$	—					$	—					$	—					$	438,053

The fair value of securities pledged to secure repurchase agreements may decline.  Old National has pledged securities valued at 110% of the gross outstanding balance of repurchase agreements at September 30, 2022 to manage this risk.

NOTE 13 – FEDERAL HOME LOAN BANK ADVANCES

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

(dollars in thousands)			September 30, 2022						December 31, 2021
FHLB advances (fixed rates 0.00% to 4.96%    and variable rates 2.57% to 3.05%) maturing    October 2022 to September 2042			$	2,828,308					$	1,902,655
Fair value hedge basis adjustments and unamortized    prepayment fees			(23,691)						(16,636)
Total			$	2,804,617					$	1,886,019

FHLB advances had weighted-average rates of 2.48% at September 30, 2022 and 1.30% at December 31, 2021. Investment securities and residential real estate loans collateralize these borrowings up to 140% of outstanding debt.

At September 30, 2022, total unamortized prepayment fees related to debt modifications completed in prior years totaled $21.7 million, compared to $26.2 million at December 31, 2021.

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Contractual maturities of FHLB advances at September 30, 2022 were as follows:

(dollars in thousands)
Due in 2022			$	127,500
Due in 2023			100,280
Due in 2024			25,243
Due in 2025			550,285
Due in 2026			100,000
Thereafter			1,925,000
Fair value hedge basis adjustments and unamortized prepayment fees			(23,691)
Total			$	2,804,617

NOTE 14 – OTHER BORROWINGS

The following table summarizes Old National’s other borrowings:

(dollars in thousands)			September 30, 2022						December 31, 2021
Old National Bancorp:
Senior unsecured notes (fixed rate 4.125%) maturing August 2024			$	175,000					$	175,000
Unamortized debt issuance costs related to senior unsecured notes			(286)						(403)
Subordinated debentures (fixed rate 5.875%) maturing September 2026			150,000						—
Junior subordinated debentures (variable rates of    4.11% to 6.95%) maturing July 2031 to September 2037			136,643						42,000
Other basis adjustments			24,653						(3,044)
Old National Bank:
Finance lease liabilities			15,700						17,233
Subordinated debentures (variable rate 7.14%) maturing October 2025			12,000						12,000
Leveraged loans for NMTC (fixed rates of 1.00% to 1.43%)    maturing December 2046 to June 2058			117,308						51,045
Other (1)			90,031						2,839
Total other borrowings			$	721,049					$	296,670

(1)Includes overnight borrowings to collateralize certain derivative positions totaling $88.2 million at September 30, 2022.

Contractual maturities of other borrowings at September 30, 2022 were as follows:

(dollars in thousands)
Due in 2022			$	88,786
Due in 2023			2,593
Due in 2024			177,697
Due in 2025			14,763
Due in 2026			151,574
Thereafter			259,390
Unamortized debt issuance costs and other basis adjustments			26,246
Total			$	721,049

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.

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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.

The following table summarizes the terms of our outstanding junior subordinated debentures at September 30, 2022:

(dollars in thousands)

Rate at September 30, 2022

Name of Trust

Issuance Date

Issuance Amount

Rate

Maturity Date

St. Joseph Capital Trust II

March 2005

$

5,155

3-month LIBOR plus 1.75%

5.28%

March 17, 2035

Anchor Capital Trust III

August 2005

5,000

3-month LIBOR plus 1.55%

5.22%

September 30, 2035

Home Federal Statutory    Trust I

September 2006

15,464

3-month LIBOR plus 1.65%

4.94%

September 15, 2036

Monroe Bancorp Capital    Trust I

July 2006

3,093

3-month LIBOR plus 1.60%

4.11%

October 7, 2036

Tower Capital Trust 3

December 2006

9,279

3-month LIBOR plus 1.69%

4.77%

March 1, 2037

Monroe Bancorp Statutory    Trust II

March 2007

5,155

3-month LIBOR plus 1.60%

4.89%

June 15, 2037

First Midwest Capital Trust I

November 2003

37,825

6.95% fixed

6.95%

December 1, 2033

Great Lakes Statutory Trust II

December 2005

6,186

3-month LIBOR plus 1.40%

4.69%

December 15, 2035

Great Lakes Statutory Trust III

June 2007

8,248

3-month LIBOR plus 1.70%

4.99%

September 15, 2037

Northern States Statutory Trust I

September 2005

10,310

3-month LIBOR plus 1.80%

5.09%

September 15, 2035

Bridgeview Statutory Trust I

July 2001

15,464

3-month LIBOR plus 3.58%

6.36%

July 31, 2031

Bridgeview Capital Trust II

December 2002

15,464

3-month LIBOR plus 3.35%

5.86%

January 7, 2033

Total

$

136,643

Subordinated Debentures

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

On February 15, 2022, Old National assumed $150.0 million of subordinated fixed rate notes related to the First Midwest merger. The subordinated debentures have a 5.875% fixed rate of interest through the September 29, 2026 maturity date.

Leveraged Loans

The leveraged loans are directly related to the New Markets Tax Credit structure. As part of the transaction structure, Old National has the right to sell its interest in the entity that received the leveraged loans at an agreed upon price to the leveraged lender at the end of the New Markets Tax Credit seven-year compliance period. See Note 11 to the consolidated financial statements for additional information on the Company’s New Markets Tax Credit investments.

Finance Lease Liabilities

Old National has long-term finance lease liabilities for certain banking centers and equipment totaling $15.7 million at September 30, 2022.  See Note 8 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities.

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NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

(dollars in thousands)			Unrealized Gains and Losses on Available- for-Sale Debt Securities						Unrealized Gains and Losses on Held-to- Maturity Securities						Gains and Losses on Cash Flow Hedges						Defined Benefit Pension Plans						Total
Three Months Ended September 30, 2022
Balance at beginning of period			$	(437,075)					$	(122,199)					$	(9,875)					$	16					$	(569,133)
Other comprehensive income (loss) before    reclassifications			(217,401)						—						(27,725)						—						(245,126)
Amounts reclassified from AOCI to income (1)			131						5,121						565						(8)						5,809
Balance at end of period			$	(654,345)					$	(117,078)					$	(37,035)					$	8					$	(808,450)
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
Nine Months Ended September 30, 2022
Balance at beginning of period			$	(2,950)					$	—					$	543					$	32					$	(2,375)
Other comprehensive income (loss) before    reclassifications			(651,330)						(125,229)						(37,473)						—						(814,032)
Amounts reclassified from AOCI to income (1)			(65)						8,151						(105)						(24)						7,957
Balance at end of period			$	(654,345)					$	(117,078)					$	(37,035)					$	8					$	(808,450)
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

(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, 2022 and 2021:

			Three Months Ended September 30,
(dollars in thousands)			2022						2021
Details about AOCI Components			Amount Reclassified from AOCI												Affected Line Item in the Statement of Income
Unrealized gains and losses on    available-for-sale securities			$	(172)					$	1,207					Debt securities gains (losses), net
			41						(262)						Income tax (expense) benefit
			$	(131)					$	945					Net income
Unrealized gains and losses on    held-to-maturity securities			$	(6,772)					$	—					Interest income (expense)
			1,651						—						Income tax (expense) benefit
			$	(5,121)					$	—					Net income
Gains and losses on cash flow hedges    Interest rate contracts			$	(749)					$	1,578					Interest income (expense)
			184						(388)						Income tax (expense) benefit
			$	(565)					$	1,190					Net income
Amortization of defined benefit    pension items
Actuarial gains (losses)			$	11					$	(49)					Salaries and employee benefits
			(3)						12						Income tax (expense) benefit
			$	8					$	(37)					Net income
Total reclassifications for the period			$	(5,809)					$	2,098					Net income

The following table summarizes the significant amounts reclassified out of each component of AOCI for the nine months ended September 30, 2022 and 2021:

			Nine Months Ended September 30,
(dollars in thousands)			2022						2021
Details about AOCI Components			Amount Reclassified from AOCI												Affected Line Item in the Statement of Income
Unrealized gains and losses on    available-for-sale securities			$	85					$	3,892					Debt securities gains (losses), net
			(20)						(880)						Income tax (expense) benefit
			$	65					$	3,012					Net income
Unrealized gains and losses on    held-to-maturity securities			$	(10,774)					$	—					Interest income (expense)
			2,623						—						Income tax (expense) benefit
			$	(8,151)					$	—					Net income
Gains and losses on cash flow hedges    Interest rate contracts			$	139					$	3,483					Interest income (expense)
			(34)						(856)						Income tax (expense) benefit
			$	105					$	2,627					Net income
Amortization of defined benefit    pension items
Actuarial gains (losses)			$	32					$	(147)					Salaries and employee benefits
			(8)						36						Income tax (expense) benefit
			$	24					$	(111)					Net income
Total reclassifications for the period			$	(7,957)					$	5,528					Net income

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NOTE 16 – SHARE-BASED COMPENSATION

At September 30, 2022, Old National had 9.1 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan (the “ICP”).  An amendment to increase the number of shares authorized for issuance under the ICP by 9.0 million was approved on May 18, 2022. The granting of awards to key employees is typically in the form of restricted stock awards or units.

Restricted Stock Awards

Old National granted 1.0 million time-based restricted stock awards to certain key employees during the nine months ended September 30, 2022. Additionally, in connection with the First Midwest merger, each restricted stock award of First Midwest common stock that was outstanding, unvested, and unsettled at the merger date was assumed and converted into a number of Old National restricted stock relating to a number of shares of Old National common stock equal to the number of First Midwest restricted stock multiplied by the exchange ratio (rounded up to the nearest whole number) subject to the same vested terms and conditions, resulting in an issuance of an aggregate 0.9 million restricted stock awards of Old National common stock. Shares generally vest annually over a three-year period, cliff vest in three years from the grant date, or vest 50% on the second anniversary of the grant date and 50% on the third anniversary of the grant date.  At September 30, 2022, unvested shares totaled 1.9 million. Compensation expense is measured as the fair value of the award at grant date recognized over the service period of the award. Shares are subject to certain restrictions and risk of forfeiture by the participants.  At September 30, 2022, unrecognized compensation expense for unvested restricted stock awards was $20.1 million.  

Old National recorded share-based compensation expense, net of tax, related to restricted stock awards of $2.9 million and $8.3 million during the three and nine months ended September 30, 2022, respectively, compared to $0.8 million and $2.2 million during the three and nine months ended September 30, 2021, respectively.

Performance-Based Restricted Stock Units

Old National granted 1.2 million shares of performance-based restricted stock units to certain key officers during the nine months ended September 30, 2022. Additionally, in connection with the First Midwest merger, each time-based or performance-based restricted stock unit award of First Midwest that was outstanding, unvested, and unsettled at the merger date was assumed and converted into a time-based restricted stock unit award of Old National common stock subject to the same vested terms and conditions (other than performance conditions), resulting in an issuance of an aggregate 0.7 million restricted stock units of Old National common stock. The performance components of the First Midwest equity awards were deemed earned at target. Shares vest at the end of a 24 or 36 month period based on the achievement of certain targets. If targets are achieved prior to the end of the 24 month performance period, vesting can be accelerated. At September 30, 2022, unvested shares totaled 2.1 million. Compensation expense is recognized on a straight line basis over the performance period of the award. For certain awards, the level of performance could increase or decrease the number of shares earned.  Shares are subject to certain restrictions and risk of forfeiture by the participants.  As of September 30, 2022, there was $18.2 million of unrecognized compensation cost related to unvested restricted stock units.

Old National recorded share-based compensation expense, net of tax, related to restricted stock units of $2.8 million and $8.2 million during the three and nine months ended September 30, 2022, respectively, compared to $0.7 million and $2.0 million during the three and nine months ended September 30, 2021, respectively.

Stock Options and Appreciation Rights

Old National has not granted stock options since 2009. However, Old National did acquire stock options and stock appreciation rights through its prior acquisitions. Old National recorded no incremental expense associated with the conversion of these options and stock appreciation rights. At September 30, 2022, 8 thousand stock appreciation rights remained outstanding.

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NOTE 17 – INCOME TAXES

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2022						2021						2022						2021
Provision at statutory rate of 21%			$	37,598					$	18,779					$	59,365					$	56,830
Tax-exempt income:
Tax-exempt interest			(3,929)						(2,786)						(10,335)						(8,327)
Section 291/265 interest disallowance			85						28						150						92
Company-owned life insurance income			(684)						(483)						(2,340)						(1,582)
Tax-exempt income			(4,528)						(3,241)						(12,525)						(9,817)
State income taxes			7,050						2,282						7,808						7,455
Interim period effective rate adjustment			(31)						1,077						3,042						(1,360)
Tax credit investments - federal			(2,407)						(315)						(4,968)						(2,838)
Other, net			1,205						(902)						2,415						(1,000)
Income tax expense (benefit)			$	38,887					$	17,680					$	55,137					$	49,270
Effective tax rate			21.7		%				19.8		%				19.5		%				18.2		%

The provision for income taxes was recorded at September 30, 2022 and 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, 2022 compared to the same periods in 2021 reflected the increase in pre-tax book income and higher post-merger estimated state effective tax rates.

Net Deferred Tax Assets

Net deferred tax assets are included in other assets on the balance sheet. At September 30, 2022, net deferred tax assets totaled $426.0 million, compared to $32.9 million at December 31, 2021. The increase in net deferred tax assets was driven by $255.7 million of deferred tax assets related to the market value adjustments of certain investments and $130.3 million related to the merger with First Midwest.

The Company’s retained earnings at September 30, 2022 included an appropriation for acquired thrifts’ tax bad debt allowances totaling $58.6 million for which no provision for federal or state income taxes has been made.  If, in the future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates.

No valuation allowance was recorded at September 30, 2022 or December 31, 2021 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets.  Old National has federal net operating loss carryforwards totaling $85.7 million at September 30, 2022 and $36.7 million at December 31, 2021.  This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016 and First Midwest in 2022.  If not used, the federal net operating loss carryforwards will begin expiring in 2030 and later.  Old National has recorded state net operating loss carryforwards totaling $130.1 million at September 30, 2022 and $116.1 million at December 31, 2021.  If not used, the state net operating loss carryforwards will expire from 2027 to 2036.

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

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NOTE 18 – DERIVATIVE FINANCIAL INSTRUMENTS

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

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

Derivatives Designated as Hedges

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

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

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

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

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

Cash Flow Hedges

Interest rate swaps of certain borrowings were designated as cash flow hedges totaling $150.0 million notional amount at both September 30, 2022 and December 31, 2021. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $1.5 billion notional amount at September 30, 2022 and $600.0 million notional amount at December 31, 2021. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.

Old National has designated its interest rate collars as cash flow hedges.  The structure of these instruments is such that Old National pays the counterparty an incremental amount if the collar index exceeds the cap rate.  Conversely, Old National receives an incremental amount if the index falls below the floor rate.  No payments are required if the collar index falls between the cap and floor rates. 

Old National has designated its interest rate floor transactions as cash flow hedges.  The structure of these instruments is such that Old National receives an incremental amount if the index falls below the floor strike rate. No payments are required if the index remains above the floor strike rate.

Fair Value Hedges

Interest rate swaps of certain borrowings were designated as fair value hedges totaling $327.5 million notional amount at September 30, 2022 and $377.5 million notional amount at December 31, 2021. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $910.0 million notional amount at both September 30, 2022 and December 31, 2021. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.

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

			September 30, 2022																		December 31, 2021
									Fair Value																		Fair Value
(dollars in thousands)			Notional						Assets (1)						Liabilities (2)						Notional						Assets (1)						Liabilities (2)
Cash flow hedges
Interest rate collars and floors on loan pools			$	1,500,000					$	3,446					$	52,171					$	600,000					$	459					$	2,173
Interest rate swaps on borrowings (3)			150,000						—						—						150,000						4,316						—
Fair value hedges
Interest rate swaps on investment securities (3)			909,957						—						—						909,957						10,961						14,643
Interest rate swaps on borrowings (3)			327,500						—						—						377,500						2,475						96
Total									$	3,446					$	52,171											$	18,211					$	16,912

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

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

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

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

(dollars in thousands)																		Gain (Loss) Recognized in Income on Related Hedged Items
Derivatives in Fair Value Hedging Relationships			Location of Gain or (Loss) Recognized in Income on Derivative			Gain (Loss) Recognized in Income on Derivative			Hedged Items in Fair Value Hedging Relationships						Location of Gain or (Loss) Recognized in in Income on Related Hedged Item
Three Months Ended September 30, 2022
Interest rate contracts			Interest income/(expense)			$	(532)		Fixed-rate debt						Interest income/(expense)			$	638
Interest rate contracts			Interest income/(expense)			47,963			Fixed-rate investment securities						Interest income/(expense)			(47,975)
Total						$	47,431											$	(47,337)
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)
Nine Months Ended September 30, 2022
Interest rate contracts			Interest income/(expense)			$	(7,889)		Fixed-rate debt						Interest income/(expense)			$	8,193
Interest rate contracts			Interest income/(expense)			159,397			Fixed-rate investment securities						Interest income/(expense)			(159,767)
Total						$	151,508											$	(151,574)
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)

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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)						2022						2021			2022						2021
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)			$	(36,755)					$	(164)		$	(749)					$	1,578
						Nine Months Ended September 30,									Nine Months Ended September 30,
						2022						2021			2022						2021
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)			$	(49,679)					$	2,612		$	139					$	3,483

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 $3.9 million will be reclassified to interest income and $15.7 million will be reclassified to interest expense.

Derivatives Not Designated as Hedges

Commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.  These derivative contracts do not qualify for hedge accounting.  At September 30, 2022, the notional amounts of the interest rate lock commitments were $51.2 million and forward commitments were $71.0 million.  At December 31, 2021, the notional amounts of the interest rate lock commitments were $90.7 million and forward commitments were $126.1 million.  It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.

Old National also enters into derivative instruments for the benefit of its clients.  The notional amounts of these customer derivative instruments, and the offsetting counterparty derivative instruments were $5.1 billion at September 30, 2022 and $2.4 billion at December 31, 2021.  These derivative contracts do not qualify for hedge accounting.  These instruments include interest rate swaps, caps, and collars.  Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of clients by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

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

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

			September 30, 2022																		December 31, 2021
									Fair Value																		Fair Value
(dollars in thousands)			Notional						Assets (1)						Liabilities (2)						Notional						Assets (1)						Liabilities (2)
Interest rate lock commitments			$	51,177					$	—					$	512					$	90,731					$	2,352					$	—
Forward mortgage loan contracts			71,000						2,370						—						126,107						242						—
Customer interest rate swaps			5,062,757						1,506						344,676						2,433,177						52,439						11,658
Counterparty interest rate swaps (3)			5,062,757						140,440						1,513						2,433,177						583						12,956
Customer foreign currency forward contracts			12,533						107						677						10,292						399						—
Counterparty foreign currency forward contracts			13,281						709						9						10,205						—						346
Total									$	145,132					$	347,387											$	56,015					$	24,960

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

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

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

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

						Three Months Ended September 30,
(dollars in thousands)						2022						2021
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)			$	108					$	46
Mortgage contracts			Mortgage banking revenue			638						1,054
Foreign currency contracts			Other income/(expense)			75						3
Total						$	821					$	1,103
						Nine Months Ended September 30,
						2022						2021
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)			$	1,058					$	356
Mortgage contracts			Mortgage banking revenue			(735)						(1,262)
Foreign currency contracts			Other income/(expense)			113						(46)
Total						$	436					$	(952)

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

NOTE 19 – COMMITMENTS, CONTINGENCIES, AND FINANCIAL GUARANTEES

Litigation

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

Old National contests liability and/or the amount of damages as appropriate in each pending matter.  In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek indeterminate damages or where investigations and proceedings are in the early stages, Old National cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of Old

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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

Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees and are recorded at fair value.  Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties.  Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract.  Credit risk associated with standby letters of credit is essentially the same as that associated with extending loans to clients and is subject to normal credit policies.  The term of these standby letters of credit is typically one year or less.  These commitments are not recorded in the consolidated financial statements.  

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

(dollars in thousands)			September 30, 2022						December 31, 2021
Unfunded loan commitments			$	8,124,828					$	4,489,238
Standby letters of credit (1)			173,650						75,726

(1)Notional amount, which represents the maximum amount of future funding requirements. The carrying value was $0.9 million at September 30, 2022 and $0.5 million at December 31, 2021.

At September 30, 2022, approximately 6% of the unfunded loan commitments had fixed rates, with the remainder having floating rates ranging from 1% to 21%.  The allowance for unfunded loan commitments totaled $26.2 million at September 30, 2022 and $10.9 million at December 31, 2021. The increase in the allowance for credit losses on unfunded loan commitments was driven by the merger with First Midwest as well as organic loan growth.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amounts of $297.5 million at September 30, 2022 and $97.7 million at December 31, 2021.

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, 2022, the conversion ratio was 1.6059.  Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the 65,466 Class B shares that Old National owns at September 30, 2022 are carried at a zero cost basis and are included in other assets with our equity securities that have no readily determinable fair value.

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NOTE 20 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Old National used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

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

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

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

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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, 2022 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Financial Assets
Equity securities			$	51,846					$	51,846					$	—					$	—
Investment securities available-for-sale:
U.S. Treasury			193,605						193,605						—						—
U.S. government-sponsored entities and agencies			1,175,457						—						1,175,457						—
Mortgage-backed securities - Agency			4,459,527						—						4,459,527						—
States and political subdivisions			675,047						—						675,047						—
Pooled trust preferred securities			11,322						—						11,322						—
Other securities			348,022						—						348,022						—
Residential loans held for sale			19,748						—						19,748						—
Derivative assets			148,578						—						148,578						—
Financial Liabilities
Derivative liabilities			399,558						—						399,558						—

									Fair Value Measurements at December 31, 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			$	13,211					$	13,211					$	—					$	—
Investment securities available-for-sale:
U.S. Treasury			235,584						235,584						—						—
U.S. government-sponsored entities and agencies			1,542,773						—						1,542,773						—
Mortgage-backed securities - Agency			3,698,831						—						3,698,831						—
States and political subdivisions			1,654,986						—						1,654,986						—
Pooled trust preferred securities			9,496						—						—						9,496
Other securities			240,396						—						240,396						—
Residential loans held for sale			35,458						—						35,458						—
Derivative assets			74,226						—						74,226						—
Financial Liabilities
Derivative liabilities			41,872						—						41,872						—

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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
Three Months Ended September 30, 2022
Balance at beginning of period			$	—
Accretion of discount			—
Increase in fair value of securities			—
Balance at end of period			$	—
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
Nine Months Ended September 30, 2022
Balance at beginning of period			$	9,496
Accretion of discount			12
Increase in fair value of securities			1,593
Transfers out of Level 3			(11,101)
Balance at end of period			$	—
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

The accretion of discounts on securities in the table above is included in interest income.  The increase or decrease in the fair value of securities in the table above is included in the unrealized holding gains (losses) for the period in the statement of other comprehensive income. An increase in fair value is reflected in the balance sheet as an increase in the fair value of investment securities available-for-sale, an increase in accumulated other comprehensive income, which is included in shareholders’ equity, and a decrease in other assets related to the tax impact. A decrease in fair value is reflected in the balance sheet as a decrease in the fair value of investment securities available-for-sale, a decrease in accumulated other comprehensive income, which is included in shareholders’ equity, and an increase in other assets related to the tax impact. Old National’s pooled trust preferred securities with a fair value of $11.1 million were transferred out of Level 3 and into Level 2 in the nine months ended September 30, 2022 because of available observable market data for these investments.

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)

December 31, 2021

Pooled trust preferred securities

$

9,496

Discounted cash flow

Constant prepayment rate (1)

0.00%

Additional asset defaults (2)

5.7% - 8.5% (6.5%)

Expected asset recoveries (3)

0.0% - 46.0% (14.1%)

(1)Assuming no prepayments.

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

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

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

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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, 2022 on a non-recurring basis are summarized below:

									Fair Value Measurements at September 30, 2022 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Collateral Dependent Loans:
Commercial loans			$	29,500					$	—					$	—					$	29,500
Commercial real estate loans			44,401						—						—						44,401
Foreclosed Assets:
Commercial			278						—						—						278

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 $95.4 million, with a valuation allowance of $21.5 million at September 30, 2022.  Old National recorded provision expense associated with these loans totaling $7.3 million for the three months ended September 30, 2022 and $20.1 million for the nine months ended September 30, 2022.  Old National recorded provision expense associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $0.1 million for the three and nine months ended September 30, 2021.

Other real estate owned and other repossessed property is measured at fair value less costs to sell on a non-recurring basis and had a net carrying amount of $0.3 million at September 30, 2022. There were $0.2 million write-downs of other real estate owned for the three months ended September 30, 2022 and $0.6 million for the nine months ended September 30, 2022. There were no writedowns of other real estate owned for the three months ended September 30, 2021 and $23 thousand for the nine months ended September 30, 2021.

Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount.  If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value.  Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).  There was no valuation allowance for loan servicing rights with impairments at September 30, 2022 and no impairments or recoveries recorded during the three months ended September 30, 2022. Old National recorded recoveries associated with these loan servicing rights totaling $46 thousand for the nine months ended September 30, 2022. There were recoveries of $5 thousand for the three months ended September 30, 2021 and $1.3 million for the nine months ended September 30, 2021.

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Assets measured at fair value at December 31, 2021 on a non-recurring basis are summarized below:

									Fair Value Measurements at December 31, 2021 Using
(dollars in thousands)			Carrying 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			$	2,634					$	—					$	—					$	2,634
Commercial real estate loans			16,308						—						—						16,308
Loan servicing rights			140						—						140						—

At December 31, 2021, commercial and commercial real estate loans that are deemed collateral dependent had a principal amount of $21.0 million, with a valuation allowance of $2.1 million.

The valuation allowance for loan servicing rights with impairments at December 31, 2021 totaled $46 thousand.

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

(dollars in thousands)

Fair Value

Valuation Techniques

Unobservable Input

Range (Weighted Average) (1)

September 30, 2022

Collateral Dependent Loans

Commercial loans

$

29,500

Discounted

Discount for type of property,

4% - 32% (22%)

cash flow

age of appraisal, and current status

Commercial real estate loans

44,401

Discounted

Discount for type of property,

1% - 28% (15%)

cash flow

age of appraisal, and current status

Foreclosed Assets

Commercial real estate (1)

278

Fair value of

Discount for type of property,

46%

collateral

age of appraisal, and current status

December 31, 2021

Collateral Dependent Loans

Commercial loans

$

2,634

Discounted

Discount for type of property,

14% - 15% (14%)

cash flow

age of appraisal, and current status

Commercial real estate loans

16,308

Discounted

Discount for type of property,

6% - 10% (8%)

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 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, 2022 and $1.6 million for the nine months ended September 30, 2022, compared to $0.4 million for the three months ended September 30, 2021 and $1.1 million for the nine months ended September 30, 2021.

Old National has elected the fair value option for newly originated conforming fixed-rate and adjustable-rate first mortgage loans held for sale.  These loans are intended for sale and are hedged with derivative instruments.  Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is

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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, 2022
Residential loans held for sale			$	19,748					$	(426)					$	20,174
December 31, 2021
Residential loans held for sale			$	35,458					$	1,342					$	34,116

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

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

(dollars in thousands)			Other Gains and (Losses)						Interest Income						Interest (Expense)						Total Changes in Fair Values Included in Current Period Earnings
Three Months Ended September 30, 2022
Residential loans held for sale			$	(710)					$	1					$	—					$	(709)
Three Months Ended September 30, 2021
Residential loans held for sale			$	(453)					$	—					$	(2)					$	(455)
Nine Months Ended September 30, 2022
Residential loans held for sale			$	(1,775)					$	7					$	—					$	(1,768)
Nine Months Ended September 30, 2021
Residential loans held for sale			$	(2,043)					$	2					$	(3)					$	(2,044)

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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, 2022 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,    and other interest-earning investments			$	801,611					$	801,611					$	—					$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies			817,489						—						658,435						—
Mortgage-backed securities - Agency			1,124,714						—						1,001,146						—
State and political subdivisions			1,154,364						—						940,859						—
Loans, net:
Commercial			9,197,495						—						—						9,093,210
Commercial real estate			12,082,870						—						—						11,933,915
Residential real estate			6,246,050						—						—						5,689,328
Consumer credit			2,700,264						—						—						2,726,540
Accrued interest receivable			166,699						997						42,119						123,583
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits			$	12,400,077					$	12,400,077					$	—					$	—
Checking, NOW, savings, and money market    interest-bearing deposits			21,182,255						21,182,255						—						—
Time deposits			2,471,331						—						2,426,080						—
Federal funds purchased and interbank borrowings			301,031						301,031						—						—
Securities sold under agreements to repurchase			438,053						438,053						—						—
FHLB advances			2,804,617						—						2,717,824						—
Other borrowings			721,049						—						587,370						—
Accrued interest payable			8,774						—						8,774						—
Standby letters of credit			904						—						—						904
Off-Balance Sheet Financial Instruments
Commitments to extend credit			$	—					$	—					$	—					$	3,708

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									Fair Value Measurements at December 31, 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			$	822,019					$	822,019					$	—					$	—
Loans, net:
Commercial			3,363,175						—						—						3,335,009
Commercial real estate			6,315,574						—						—						6,211,854
Residential real estate			2,245,942						—						—						2,216,900
Consumer credit			1,569,814						—						—						1,582,600
Accrued interest receivable			84,109						688						35,790						47,631
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits			$	6,303,106					$	6,303,106					$	—					$	—
Checking, NOW, savings, and money market    interest-bearing deposits			11,305,676						11,305,676						—						—
Time deposits			960,413						—						968,658						—
Federal funds purchased and interbank borrowings			276						276						—						—
Securities sold under agreements to repurchase			392,275						392,275						—						—
FHLB advances			1,886,019						—						1,935,140						—
Other borrowings			296,670						—						311,532						—
Accrued interest payable			5,496						—						5,496						—
Standby letters of credit			454						—						—						454
Off-Balance Sheet Financial Instruments
Commitments to extend credit			$	—					$	—					$	—					$	4,678

The methods utilized to measure the fair value of financial instruments at September 30, 2022 and December 31, 2021 represent an approximation of exit price, however, an actual exit price may differ.

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

The following discussion is an analysis of our results of operations for the three and nine months ended September 30, 2022 and 2021, and financial condition as of September 30, 2022, compared to December 31, 2021.  This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes, as well as our 2021 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, descriptions of Old National’s financial condition, results of operations, asset and credit quality trends, profitability and business plans or opportunities. Forward-looking statements can be identified by the use of the words “anticipate,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “should,” and “will,” and other words of similar meaning. These forward-looking statements express management’s current expectations or forecasts of future events and, by their nature, are subject to risks and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those in such statements. Factors that might cause such a difference include, but are not limited to: the duration, extent, and severity of the COVID-19 pandemic and related variants and mutations, including the continued effects on our business, operations, and employees as well as the business of our customers; competition; government legislation, regulations and policies; ability of Old National to execute its business plan, including the completion of the integration related to the merger between Old National and First Midwest, and the achievement of the synergies and other benefits from the merger; unanticipated changes in our liquidity position, including but not limited to changes in our access to sources of liquidity and capital to address our liquidity needs; changes in economic conditions which could materially impact credit quality trends and the ability to generate loans and gather deposits; market, economic, operational, liquidity, credit, and interest rate risks associated with our business; our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses; uncertainty about the discontinued use of LIBOR and the transition to an alternative rate; failure or circumvention of our internal controls; operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cybersecurity, technological changes, vendor issues, business interruption, and fraud risks; significant changes in accounting, tax or regulatory practices or requirements; new legal obligations or liabilities or unfavorable resolutions of litigation; disruptive technologies in payment systems and other services traditionally provided by banks; failure or disruption of our information systems; computer hacking and other cybersecurity threats; other matters discussed in this report; and other factors identified in our Annual Report on Form 10-K for the year ended December 31, 2021 and other filings with the SEC. These forward-looking statements are made only as of the date of this report and are not guarantees of future results or performance.

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

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

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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)			2022						2022						2021						2022						2021
Income Statement:
Net interest income			$	376,589					$	337,472					$	151,572					$	936,846					$	449,619
Taxable equivalent adjustment (1)			4,950						4,314						3,501						13,036						10,471
Net interest income - tax equivalent basis			381,539						341,786						155,073						949,882						460,090
Provision for credit losses			11,287						9,245						(4,613)						118,101						(26,898)
Noninterest income			80,385						89,117						54,515						234,742						162,735
Noninterest expense			266,647						277,395						121,274						770,798						368,632
Net income available to common shareholders			136,119						110,952						71,746						217,468						221,350
Per Common Share Data:
Weighted average diluted common shares			292,483						291,881						165,939						271,123						165,862
Net income (diluted)			$	0.47					$	0.38					$	0.43					$	0.80					$	1.33
Cash dividends			0.14						0.14						0.14						0.42						0.42
Common dividend payout ratio (2)			30		%				37		%				33		%				53		%				31		%
Book value			$	16.05					$	16.51					$	18.31					$	16.05					$	18.31
Stock price			16.47						14.79						16.95						16.47						16.95
Tangible common book value (3)			8.75						9.23						11.83						8.75						11.83
Performance Ratios:
Return on average assets			1.22		%				1.01		%				1.20		%				0.72		%				1.25		%
Return on average common equity			11.13						9.08						9.48						6.26						9.85
Return on tangible common equity (3)			22.07						17.21						15.05						12.05						15.49
Return on average tangible common equity (3)			20.49						16.93						15.13						11.50						15.84
Net interest margin (3)			3.71						3.33						2.92						3.34						2.92
Efficiency ratio (3)			56.17						62.70						56.86						63.46						58.14
Net charge-offs (recoveries) to average loans			0.10						0.02						(0.09)						0.06						(0.03)
Allowance for credit losses to ending loans			0.99						0.97						0.79						0.99						0.79
Non-performing loans to ending loans			0.81						0.78						0.94						0.81						0.94
Balance Sheet:
Total loans			$	30,528,933					$	29,553,648					$	13,584,828					$	30,528,933					$	13,584,828
Total assets			46,215,526						45,748,355						24,018,733						46,215,526						24,018,733
Total deposits			36,053,663						35,538,975						18,196,149						36,053,663						18,196,149
Total borrowed funds			4,264,750						4,384,411						2,536,303						4,264,750						2,536,303
Total shareholders' equity			4,943,383						5,078,783						3,035,892						4,943,383						3,035,892
Capital Ratios:
Risk-based capital ratios:
Tier 1 common equity			9.88		%				9.90		%				12.08		%				9.88		%				12.08		%
Tier 1			10.58						10.63						12.08						10.58						12.08
Total			11.84						12.03						12.84						11.84						12.84
Leverage ratio (to average assets)			8.26						8.19						8.54						8.26						8.54
Total equity to assets (averages)			11.18						11.22						12.69						11.43						12.69
Tangible common equity to tangible assets (3)			5.82						6.20						8.55						5.82						8.55
Nonfinancial Data:
Full-time equivalent employees			4,008						4,196						2,410						4,008						2,410
Banking centers			263						266						162						263						162

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

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

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

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NON-GAAP FINANCIAL MEASURES

The Company’s accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist investors in assessing the Company’s operating performance. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the following table.

The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes.

In management’s view, tangible common equity measures are capital adequacy metrics that may be meaningful to the Company, as well as analysts and investors, in assessing the Company’s use of equity and in facilitating comparisons with peers. These non-GAAP measures are valuable indicators of a financial institution’s capital strength since they eliminate intangible assets from shareholders’ equity and retain the effect of accumulated other comprehensive loss in shareholders’ equity.

Although intended to enhance investors’ understanding of the Company’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance. See the previously provided tables and the following reconciliations in the “Non-GAAP Reconciliations” section for details on the calculation of these measures to the extent presented herein.

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The following table presents GAAP to non-GAAP reconciliations.

									Three Months Ended												Nine Months Ended
(dollars and shares in thousands, except per    share data)									September 30, 2022			June 30, 2022			September 30, 2021						September 30, 2022			September 30, 2021
Tangible common book value:
Shareholders' common equity									$	4,699,664		$	4,835,064		$	3,035,892					$	4,699,664		$	3,035,892
Deduct: Goodwill and intangible assets									2,135,792			2,131,815			1,074,245						2,135,792			1,074,245
Tangible shareholders' common equity (1)									$	2,563,872		$	2,703,249		$	1,961,647					$	2,563,872		$	1,961,647
Period end common shares									292,880			292,893			165,814						292,880			165,814
Tangible common book value (1)									8.75			9.23			11.83						8.75			11.83
Return on tangible common equity:
Net income applicable to common shares									$	136,119		$	110,952		$	71,746					$	217,468		$	221,350
Add: Intangible amortization (net of tax) (2)									5,317			5,378			2,084						14,302			6,572
Tangible net income (1)									$	141,436		$	116,330		$	73,830					$	231,770		$	227,922
Tangible shareholders' common equity (1)    (see above)									$	2,563,872		$	2,703,249		$	1,961,647					$	2,563,872		$	1,961,647
Return on tangible common equity (1)									22.07		%	17.21		%	15.05		%				12.05		%	15.49		%
Return on average tangible common equity:
Tangible net income (1) (see above)									$	141,436		$	116,330		$	73,830					$	231,770		$	227,922
Average shareholders' common equity									$	4,890,434		$	4,886,181		$	3,027,935					$	4,628,831		$	2,997,081
Deduct: Average goodwill and intangible assets									2,129,858			2,136,964			1,075,579						1,941,270			1,078,441
Average tangible shareholders' common equity (1)									$	2,760,576		$	2,749,217		$	1,952,356					$	2,687,561		$	1,918,640
Return on average tangible common equity (1)									20.49		%	16.93		%	15.13		%				11.50		%	15.84		%
Net interest margin:
Net interest income									$	376,589		$	337,472		$	151,572					$	936,846		$	449,619
Taxable equivalent adjustment									4,950			4,314			3,501						13,036			10,471
Net interest income - taxable equivalent basis (1)									$	381,539		$	341,786		$	155,073					$	949,882		$	460,090
Average earning assets									$	41,180,026		$	41,003,338		$	21,228,590					$	37,924,490		$	20,977,471
Net interest margin (1)									3.71		%	3.33		%	2.92		%				3.34		%	2.92		%
Efficiency ratio:
Noninterest expense									$	266,647		$	277,395		$	121,274					$	770,798		$	368,632
Deduct: Intangible amortization expense									7,089			7,170			2,779						19,070			8,763
Adjusted noninterest expense (1)									$	259,558		$	270,225		$	118,495					$	751,728		$	359,869
Net interest income - taxable equivalent basis (1)    (see above)									$	381,539		$	341,786		$	155,073					$	949,882		$	460,090
Noninterest income									80,385			89,117			54,515						234,742			162,735
Deduct: Debt securities gains (losses), net									(172)			(85)			1,207						85			3,892
Adjusted total revenue (1)									$	462,096		$	430,988		$	208,381					$	1,184,539		$	618,933
Efficiency ratio (1)									56.17		%	62.70		%	56.86		%				63.46		%	58.14		%
Tangible common equity to tangible assets:
Tangible shareholders' common equity (1)    (see above)									$	2,563,872		$	2,703,249		$	1,961,647					$	2,563,872		$	1,961,647
Assets									$	46,215,526		$	45,748,355		$	24,018,733					$	46,215,526		$	24,018,733
Add:						Trust overdrafts			—			—			116						—			116
Deduct:						Goodwill and intangible assets			2,135,792			2,131,815			1,074,245						2,135,792			1,074,245
Tangible assets (1)									$	44,079,734		$	43,616,540		$	22,944,604					$	44,079,734		$	22,944,604
Tangible common equity to tangible assets (1)									5.82		%	6.20		%	8.55		%				5.82		%	8.55		%

(1)Represents a non-GAAP financial measure.

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

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EXECUTIVE SUMMARY

Old National is the sixth largest commercial bank headquartered in the Midwest by assets. With approximately $46 billion of assets and $27 billion of assets under management, Old National ranks among the top 35 banking companies based in the U.S. by assets and has been recognized as a World’s Most Ethical Company by the Ethisphere Institute for eleven consecutive years. Old National Bank has focused on community banking by building long-term, highly valued partnerships with clients and in the communities it serves. In addition to providing extensive services in retail and commercial banking, Old National offers comprehensive wealth management, investment, and capital market services.

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

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

Net income applicable to common shareholders for the third quarter of 2022 was $136.1 million, or $0.47 per diluted common share, compared to $111.0 million, or $0.38 per diluted common share, for the second quarter of 2022 and $71.7 million, or $0.43 per diluted common share, for the third quarter of 2021.

Results for the three and nine months ended September 30, 2022 were impacted by $22.7 million and $111.6 million, respectively, of merger-related expenses. The nine months ended September 30, 2022 merger-related expenses included $11.0 million in the first quarter of 2022 attributable to the provision for credit losses on unfunded loan commitments. In addition, the first quarter of 2022 provision expense included $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger.

We achieved strong results during the third quarter of 2022, including robust loan growth and net interest margin expansion.

Loans:  Our loan balances, excluding loans held for sale, increased $1.0 billion, or 13% annualized, to $30.5 billion at September 30, 2022 compared to June 30, 2022.  This was primarily driven by strong commercial and consumer loan production.

Net Interest Income: Net interest income increased $39.1 million to $376.6 million compared to the second quarter of 2022 driven by higher interest rates, loan growth, and an additional day in the quarter, partially offset by lower accretion income on loans.

Noninterest Income:  Noninterest income decreased $8.7 million to $80.4 million compared to the second quarter of 2022. Wealth management fees decreased as a result of current market conditions and mortgage banking revenue continues to be impacted by the higher rate environment, as well as lower production and gain on sale margins. Other income for the second quarter of 2022 was elevated primarily due to equity investment returns and recoveries on previously charged-off acquired loans in addition to increased proceeds from company-owned life insurance.

Noninterest Expense:  Noninterest expense decreased $10.7 million compared to the second quarter of 2022 primarily due to lower merger-related expenses, partially offset by higher incentive accruals and marketing costs, as well as $4.2 million in provision for unfunded commitments due to loan growth. Noninterest expense included $22.7 million of merger-related expenses, compared to $36.6 million in the second quarter of 2022.

Pandemic Update

As previously disclosed, the COVID-19 pandemic has created economic and financial disruptions that continued to adversely affect our operations during the three and nine months ended September 30, 2022. Our historically careful underwriting practices, diverse and granular portfolios, and Midwest-based footprint have helped minimize the

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adverse impact to Old National. The pandemic has become less disruptive to the Company’s business, financial condition, results of operations, and its clients as of September 30, 2022 than in prior periods.

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, except per share data)			2022						2021						% Change						2022						2021						% Change
Income Statement Summary:
Net interest income			$	376,589					$	151,572					148.5			%			$	936,846					$	449,619					108.4			%
Provision for credit losses			11,287						(4,613)						(344.7)						118,101						(26,898)						(539.1)
Noninterest income			80,385						54,515						47.5						234,742						162,735						44.2
Noninterest expense			266,647						121,274						119.9						770,798						368,632						109.1
Net income applicable to common    shareholders			136,119						71,746						89.7						217,468						221,350						(1.8)
Net income per common share -    diluted			0.47						0.43						9.3						0.80						1.33						(39.8)
Other Data:
Return on average common equity			11.13			%			9.48			%									6.26			%			9.85			%
Return on tangible common equity (1)			22.07						15.05												12.05						15.49
Return on average tangible common    equity (1)			20.49						15.13												11.50						15.84
Efficiency ratio (1)			56.17						56.86												63.46						58.14
Tier 1 leverage ratio			8.26						8.54												8.26						8.54
Net charge-offs (recoveries) to    average loans			0.10						(0.09)												0.06						(0.03)

(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 80% of revenues for the nine months ended September 30, 2022.  Net interest income and net interest margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations.  Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of interest-earning assets and interest-bearing liabilities.

Interest rates increased significantly during the third quarter of 2022 with the rate on the 2-Year U.S. Treasury increasing from 2.95% to 4.28%. The Federal Reserve’s Federal Funds Rate increased 150 basis points to a target range of 3.00% to 3.25%, with the Effective Federal Funds Rate at 3.08% at September 30, 2022. The Federal Reserve is expected to continue to increase the Federal Funds Rate throughout 2022 and into 2023. If interest rates increase, our interest rate spread may improve, which may result in an increase in our net interest income. If interest rates decline, our interest rate spread could decline, which may result in a decrease in our net interest income. However, management has 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 our mix of assets and funding, net interest income, and net interest margin.

Net interest income is the excess of interest received from interest-earning assets over interest paid on interest-bearing liabilities.  For analytical purposes, net interest income is presented in the table that follows, adjusted to a taxable equivalent basis to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset.  We used the 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

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measures provide useful information for both management and investors by allowing them to make better peer comparisons.

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, 2022																		Three Months Ended September 30, 2021
Earning Assets			Average Balance						Income (1)/ Expense						Yield/ Rate						Average Balance						Income (1)/ Expense						Yield/ Rate
Money market and other interest-earning    investments			$	514,362					$	935					0.72		%				$	467,572					$	177					0.15		%
Investment securities:
Treasury and government sponsored agencies			2,326,070						13,212						2.27		%				1,730,553						6,968						1.61		%
Mortgage-backed securities			5,891,283						36,157						2.45		%				3,313,027						14,509						1.75		%
States and political subdivisions			1,829,322						14,631						3.20		%				1,586,743						12,609						3.18		%
Other securities			718,735						6,781						3.77		%				443,393						2,638						2.38		%
Total investment securities			10,765,410						70,781						2.63		%				7,073,716						36,724						2.08		%
Loans: (2)
Commercial			9,045,009						113,491						5.02		%				3,645,197						36,139						3.88		%
Commercial real estate			11,929,892						136,780						4.59		%				6,200,144						57,820						3.65		%
Residential real estate loans			6,189,503						56,432						3.65		%				2,274,347						20,529						3.61		%
Consumer			2,735,850						33,049						4.79		%				1,567,614						14,138						3.58		%
Total loans			29,900,254						339,752						4.54		%				13,687,302						128,626						3.70		%
Total earning assets			41,180,026						$	411,468					3.99		%				21,228,590						$	165,527					3.08		%
Deduct: Allowance for credit losses			(290,215)																		(111,216)
Non-Earning Assets
Cash and due from banks			503,841																		272,855
Other assets			4,522,171																		2,479,079
Total assets			$	45,915,823																	$	23,869,308
Interest-Bearing Liabilities
Checking and NOW			$	8,681,392					$	5,751					0.26		%				$	4,873,914					$	484					0.04		%
Savings			6,733,465						547						0.03		%				3,678,944						500						0.05		%
Money market			5,344,567						2,072						0.15		%				2,110,981						438						0.08		%
Time deposits			2,508,152						2,450						0.39		%				998,060						1,156						0.46		%
Total interest-bearing deposits			23,267,576						10,820						0.18		%				11,661,899						2,578						0.09		%
Federal funds purchased and interbank    borrowings			122,311						720						2.34		%				689						—						—		%
Securities sold under agreements to repurchase			436,225						106						0.10		%				384,724						90						0.09		%
FHLB advances			3,025,844						13,027						1.71		%				1,890,916						5,326						1.12		%
Other borrowings			676,874						5,256						3.08		%				270,597						2,460						3.64		%
Total borrowed funds			4,261,254						19,109						1.78		%				2,546,926						7,876						1.23		%
Total interest-bearing liabilities			$	27,528,830					$	29,929					0.43		%				$	14,208,825					$	10,454					0.29		%
Noninterest-Bearing Liabilities and    Shareholders' Equity
Demand deposits			$	12,575,011																	$	6,314,100
Other liabilities			677,829																		318,448
Shareholders' equity			5,134,153																		3,027,935
Total liabilities and shareholders' equity			$	45,915,823																	$	23,869,308
Net interest income - taxable equivalent basis									$	381,539					3.71		%										$	155,073					2.92		%
Taxable equivalent adjustment									(4,950)																		(3,501)
Net interest income (GAAP)									$	376,589					3.66		%										$	151,572					2.86		%

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

(2)Includes loans held for sale.

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(Tax equivalent basis, dollars in thousands)			Nine Months Ended September 30, 2022																		Nine Months Ended September 30, 2021
Earning Assets			Average Balance						Income (1)/ Expense						Yield/ Rate						Average Balance						Income (1)/ Expense						Yield/ Rate
Money market and other interest-earning    investments			$	976,579					$	3,073					0.42		%				$	357,151					$	313					0.12		%
Investment securities:
Treasury and government sponsored agencies			2,336,897						33,249						1.90		%				1,509,931						17,820						1.57		%
Mortgage-backed securities			5,593,341						94,067						2.24		%				3,304,200						45,408						1.83		%
States and political subdivisions			1,801,053						42,839						3.17		%				1,523,175						37,174						3.25		%
Other securities			682,937						16,392						3.20		%				445,298						8,071						2.42		%
Total investment securities			10,414,228						186,547						2.39		%				6,782,604						108,473						2.13		%
Loans: (2)
Commercial			7,888,730						264,517						4.47		%				3,878,630						106,421						3.62		%
Commercial real estate			10,753,988						327,733						4.06		%				6,109,795						171,221						3.70		%
Residential real estate loans			5,369,844						142,105						3.53		%				2,268,142						63,350						3.72		%
Consumer			2,521,121						85,442						4.53		%				1,581,149						42,414						3.59		%
Total loans			26,533,683						819,797						4.12		%				13,837,716						383,406						3.67		%
Total earning assets			37,924,490						$	1,009,417					3.55		%				20,977,471						$	492,192					3.11		%
Deduct: Allowance for credit losses			(247,558)																		(120,619)
Non-Earning Assets
Cash and due from banks			350,848																		266,543
Other assets			4,249,986																		2,495,512
Total assets			$	42,277,766																	$	23,618,907
Interest-Bearing Liabilities
Checking and NOW			$	7,977,524					$	8,133					0.14		%				$	4,934,367					$	1,622					0.04		%
Savings			6,295,628						1,809						0.04		%				3,608,078						1,479						0.05		%
Money market			4,819,252						3,791						0.11		%				2,076,808						1,300						0.08		%
Time deposits			2,253,711						5,468						0.32		%				1,034,390						4,068						0.53		%
Total interest-bearing deposits			21,346,115						19,201						0.12		%				11,653,643						8,469						0.10		%
Federal funds purchased and interbank    borrowings			41,993						722						2.30		%				1,096						—						—		%
Securities sold under agreements to repurchase			450,966						287						0.09		%				396,495						305						0.10		%
FHLB advances			2,891,347						25,915						1.20		%				1,907,322						15,953						1.12		%
Other borrowings			574,589						13,410						3.12		%				267,650						7,375						3.67		%
Total borrowed funds			3,958,895						40,334						1.36		%				2,572,563						23,633						1.23		%
Total interest-bearing liabilities			$	25,305,010					$	59,535					0.31		%				$	14,226,206					$	32,102					0.30		%
Noninterest-Bearing Liabilities and    Shareholders' Equity
Demand deposits			$	11,540,293																	$	6,072,310
Other liabilities			601,619																		323,310
Shareholders' equity			4,830,844																		2,997,081
Total liabilities and shareholders' equity			$	42,277,766																	$	23,618,907
Net interest income - taxable equivalent basis									$	949,882					3.34		%										$	460,090					2.92		%
Taxable equivalent adjustment									(13,036)																		(10,471)
Net interest income (GAAP)									$	936,846					3.29		%										$	449,619					2.86		%

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

(2)Includes loans held for sale.

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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, 2021 to Three Months Ended September 30, 2022																		From Nine Months Ended September 30, 2021 to Nine Months Ended September 30, 2022
			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			$	758					$	54					$	704					$	2,760					$	1,246					$	1,514
Investment securities (2)			34,057						21,765						12,292						78,074						61,566						16,508
Loans (2)			211,126						166,150						44,976						436,391						369,536						66,855
Total interest income			245,941						187,969						57,972						517,225						432,348						84,877
Interest Expense
Checking and NOW			5,267						1,484						3,783						6,511						1,862						4,649
Savings			47						296						(249)						330						825						(495)
Money market			1,634						956						678						2,491						1,835						656
Time deposits			1,294						1,603						(309)						1,400						3,938						(2,538)
Federal funds purchased and interbank    borrowings			720						358						362						722						352						370
Securities sold under agreements to    repurchase			16						11						5						(18)						38						(56)
FHLB advances			7,701						4,050						3,651						9,962						8,554						1,408
Other borrowings			2,796						3,435						(639)						6,035						7,793						(1,758)
Total interest expense			19,475						12,193						7,282						27,433						25,197						2,236
Net interest income			$	226,466					$	175,776					$	50,690					$	489,792					$	407,151					$	82,641

(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 $2.9 million and $2.0 million, respectively, during the three months ended September 30, 2022; and $8.5 million and $4.5 million, respectively, during the nine months ended September 30, 2022 using the federal statutory rate in effect of 21%.

The increase in net interest income for the three and nine months ended September 30, 2022 when compared to the same periods in 2021 was primarily due to higher average earning assets as a result of the merger, loan growth, higher rates, and higher accretion income. Partially offsetting these increases were lower interest and fees related to PPP loans, higher average interest-bearing liabilities as a result of the merger, and higher costs of average interest-bearing liabilities. Accretion income associated with acquired loans and borrowings totaled $25.4 million and $76.2 million in the three and nine months ended September 30, 2022, respectively, compared to $3.0 million and $12.8 million in the three and nine months ended September 30, 2021, respectively. Net interest income included interest and net fees on PPP loans totaling $1.5 million and $6.9 million in the three and nine months ended September 30, 2022, respectively, compared to $12.2 million and $36.7 million in the three and nine months ended September 30, 2021, respectively. There were no unamortized fees on remaining PPP loans at September 30, 2022.

The increase in the net interest margin on a fully taxable equivalent basis for the three and nine months ended September 30, 2022 when compared to the same periods in 2021 was primarily due to higher yields on interest earning assets, partially offset by higher costs of interest-bearing liabilities. The yield on interest earning assets increased 91 basis points and the cost of interest-bearing liabilities increased 14 basis points in the quarterly year-over-year comparison.  The yield on interest earning assets increased 44 basis points and the cost of interest-bearing liabilities increased 1 basis point in the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021. Accretion income represented 25 basis points and 27 basis points of the net interest margin in the three and nine months ended September 30, 2022, respectively, compared to 6 basis points and 8 basis points in the three and nine months ended September 30, 2021, respectively.

Average earning assets were $41.2 billion and $21.2 billion for the three months ended September 30, 2022 and 2021, respectively, an increase of $20.0 billion, or 94%. Average earning assets were $37.9 billion and $21.0 billion for the nine months ended September 30, 2022 and 2021, respectively, an increase of $16.9 billion, or 81%. The increases in average earning assets were primarily due to the merger with First Midwest and strong loan growth.

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Average loans including loans held for sale increased $16.2 billion and $12.7 billion for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the First Midwest merger and strong loan growth.

Average investments increased $3.7 billion and $3.6 billion for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021 reflecting the First Midwest merger.

Average noninterest-bearing and interest-bearing deposits increased $6.3 billion and $11.6 billion, respectively, for the three months ended September 30, 2022 when compared to the same period in 2021. Average noninterest-bearing and interest-bearing deposits increased $5.5 billion and $9.7 billion, respectively, for the nine months ended September 30, 2022 when compared to the same period in 2021. This growth was primarily driven by the First Midwest merger.

Average borrowed funds increased $1.7 billion and $1.4 billion, respectively, for the three and nine months ended September 30, 2022 when compared to the same periods in 2021, driven by the First Midwest merger.

Provision for Credit Losses

Old National recorded provision for credit losses of $11.3 million for the three months ended September 30, 2022, compared to $4.6 million provision for credit losses recapture for the three months ended September 30, 2021. Net charge-offs on loans totaled $7.6 million during the three months ended September 30, 2022, which included $5.9 million of net charge-offs on PCD loans, compared to net recoveries of $3.0 million for the three months ended September 30, 2021.  The provision for credit losses totaled $118.1 million for the nine months ended September 30, 2022, compared to $26.9 million provision for credit losses recapture for the nine months ended September 30, 2021. Net charge-offs on loans totaled $12.1 million during the nine months ended September 30, 2022, which included $10.5 million of net charge-offs on PCD loans, compared to net recoveries of $3.4 million during the nine months ended September 30, 2021. The provision for credit losses expense in the nine months ended September 30, 2022 included $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, provision expense may be volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Noninterest Income

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

			Three Months Ended September 30,												%						Nine Months Ended September 30,												%
(dollars in thousands)			2022						2021						Change						2022						2021						Change
Wealth management fees			$	17,317					$	10,134					70.9			%			$	51,251					$	30,576					67.6			%
Service charges on deposit accounts			20,042						8,123						146.7						54,392						23,270						133.7
Debit card and ATM fees			10,608						5,745						84.6						29,429						17,962						63.8
Mortgage banking revenue			5,360						10,870						(50.7)						19,127						35,222						(45.7)
Investment product fees			8,042						6,475						24.2						23,932						18,381						30.2
Capital markets income			8,906						6,017						48.0						20,609						15,603						32.1
Company-owned life insurance			3,361						2,355						42.7						11,456						7,852						45.9
Debt securities gains (losses), net			(172)						1,207						(114.3)						85						3,892						(97.8)
Other income			6,921						3,589						92.8						24,461						9,977						145.2
Total noninterest income			$	80,385					$	54,515					47.5			%			$	234,742					$	162,735					44.2			%

Noninterest income increased $25.9 million and $72.0 million, respectively, for the three and nine months ended September 30, 2022 when compared to the same periods in 2021 primarily due to the First Midwest merger in February of 2022. The increases in noninterest income were partially offset by lower mortgage banking revenue, which was impacted by the higher rate environment, as well as lower production and gain on sale margins. In addition, wealth management fees were negatively impacted by current market conditions.

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Noninterest Expense

The following table details the components in noninterest expense:

			Three Months Ended September 30,												%						Nine Months Ended September 30,												%
(dollars in thousands)			2022						2021						Change						2022						2021						Change
Salaries and employee benefits			$	147,203					$	71,005					107.3			%			$	433,167					$	211,762					104.6			%
Occupancy			26,418						12,757						107.1						73,933						41,683						77.4
Equipment			7,328						3,756						95.1						20,046						12,231						63.9
Marketing			10,361						3,267						217.1						23,756						7,961						198.4
Data processing			20,269						11,508						76.1						64,914						35,558						82.6
Communication			5,392						2,372						127.3						14,687						7,661						91.7
Professional fees			6,559						3,416						92.0						32,686						14,668						122.8
FDIC assessment			6,249						1,628						283.8						13,523						4,461						203.1
Amortization of intangibles			7,089						2,779						155.1						19,070						8,763						117.6
Amortization of tax credit investments			2,662						1,736						53.3						5,703						4,751						20.0
Other expense			27,117						7,050						284.6						69,313						19,133						262.3
Total noninterest expense			$	266,647					$	121,274					119.9			%			$	770,798					$	368,632					109.1			%

Noninterest expense increased $145.4 million for the three months ended September 30, 2022 when compared to the same period in 2021 reflective of the additional operating costs associated with the First Midwest merger, as well as $22.7 million of merger-related expenses. In addition, higher incentive accruals resulting from strong performance contributed to the increase. Noninterest expense for the three months ended September 30, 2021 included $1.4 million of merger-related expenses.

Noninterest expense increased $402.2 million for the nine months ended September 30, 2022 when compared to the same period in 2021 reflective of the additional operating costs associated with the First Midwest merger, as well as $111.6 million of merger-related expenses, including $11.0 million of other expenses attributable to the provision for credit losses on unfunded loan commitments. In addition, higher incentive accruals resulting from strong performance contributed to the increase. Noninterest expense for the nine months ended September 30, 2021 included $7.9 million of merger-related expenses.

Amortization of tax credit investments increased $0.9 million and $1.0 million, respectively, for the three and nine months ended September 30, 2022 when compared to the same periods in 2021. 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 11 to the consolidated financial statements for additional information on our tax credit investments.

Provision for Income Taxes

We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to temporary 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 21.7% for the three months ended September 30, 2022, compared to 19.8% for the same period in 2021.  The provision for income taxes as a percentage of pre-tax income was 19.5% for the nine months ended September 30, 2022, compared to 18.2% for the same period in 2021. In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at September 30, 2022 based on the current estimate of the effective annual rate.  The higher effective tax rate during the three and nine months ended September 30, 2022 compared to the same periods in 2021 reflected the increase in pre-tax book income and higher post-merger estimated state effective tax rates.  See Note 17 to the consolidated financial statements for additional information.

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FINANCIAL CONDITION

Overview

At September 30, 2022, our assets were $46.2 billion, a $21.8 billion increase compared to assets of $24.5 billion at December 31, 2021.  The increase was driven primarily by the merger with First Midwest in February of 2022, as well as loan growth.

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 $41.2 billion at September 30, 2022, a $19.3 billion increase compared to earning assets of $21.9 billion at December 31, 2021 driven primarily by the merger with First Midwest, as well as loan growth.

Investment Securities

We classify the majority of our investment securities as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements. During the nine months ended September 30, 2022, we transferred $3.0 billion of securities available-for-sale to held-to-maturity in light of the rate environment.

Equity securities are recorded at fair value and totaled $51.8 million at September 30, 2022 compared to $13.2 million at December 31, 2021. The increase in equity securities was driven by the merger with First Midwest.

At September 30, 2022, the investment securities portfolio, including equity securities, was $10.3 billion compared to $7.6 billion at December 31, 2021, an increase of $2.7 billion driven primarily by the merger with First Midwest.  Investment securities represented 25% of earning assets at September 30, 2022, compared to 35% at December 31, 2021.  Stronger loan demand in the future could result in management’s decision to reduce the securities portfolio.  At September 30, 2022, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.

The investment securities available-for-sale portfolio had net unrealized losses of $860.3 million at September 30, 2022, compared to net unrealized losses of $6.0 million at December 31, 2021.  Net unrealized losses increased from December 31, 2021 to September 30, 2022 primarily due to an increase in rates impacting market values for mortgage-backed, U.S. government-sponsored entities and agencies, and tax exempt municipal securities.

The investment securities available-for-sale portfolio including securities hedges had an effective duration of 4.64 at September 30, 2022, compared to 4.26 at December 31, 2021.  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 2.63% and 2.39% for the three and nine months ended September 30, 2022, respectively, compared to 2.08% and 2.13% for the three and nine months ended September 30, 2021, respectively.

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classifications within earning assets, representing 52% of earning assets at September 30, 2022, compared to 45% at December 31, 2021.  At September 30, 2022, commercial and commercial real estate loans were $21.5 billion, an increase of $11.8 billion compared to December 31, 2021 driven by the merger with First Midwest and strong loan production in the nine months ended September 30, 2022.

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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, 2022									December 31, 2021
(dollars in thousands)			Outstanding			Exposure			Nonaccrual			Outstanding			Exposure			Nonaccrual
By Industry:
Manufacturing			$	1,763,364		$	2,711,356		$	2,788		$	612,873		$	1,152,774		$	6,689
Construction			593,184			1,321,767			1,739			310,649			744,610			1,429
Health care and social assistance			1,511,547			1,889,178			11,773			376,664			550,400			444
Public administration			226,873			381,541			874			247,770			357,310			—
Wholesale trade			849,340			1,413,972			2,465			240,618			438,357			1,598
Educational services			221,992			386,266			3,953			216,384			295,065			—
Other services			193,737			344,741			2,084			121,577			260,413			2,542
Professional, scientific, and   technical services			529,493			808,457			3,761			141,364			279,185			937
Finance and insurance			422,961			763,438			22			162,920			232,847			44
Retail trade			308,901			524,397			6,187			131,303			289,478			945
Real estate rental and leasing			612,723			897,883			1,142			204,612			347,991			504
Transportation and warehousing			318,577			485,990			2,035			134,072			243,086			1,594
Administrative and support and   waste management and   remediation services			316,467			456,132			15,233			86,307			149,417			—
Agriculture, forestry, fishing,   and hunting			230,039			365,527			999			114,699			164,364			1,521
Accommodation and food services			434,010			561,774			842			78,689			108,724			2,399
Other			777,940			1,069,952			937			211,268			388,110			4,003
Total			$	9,311,148		$	14,382,371		$	56,834		$	3,391,769		$	6,002,131		$	24,649
By Loan Size:
Less than $200,000			3		%	3		%	3		%	8		%	6		%	7		%
$200,000 to $1,000,000			12			12			21			18			16			42
$1,000,000 to $5,000,000			25			27			30			31			29			51
$5,000,000 to $10,000,000			16			16			27			15			16			—
$10,000,000 to $25,000,000			31			27			19			18			18			—
Greater than $25,000,000			13			15			—			10			15			—
Total			100		%	100		%	100		%	100		%	100		%	100		%

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

			September 30, 2022												December 31, 2021
(dollars in thousands)			Outstanding						%						Outstanding						%
By Property Type:
Multifamily			$	3,972,918					32		%				$	1,995,803					31		%
Retail			1,850,030						15						1,037,034						16
Office			1,794,623						15						1,018,973						16
Warehouse / Industrial			1,914,365						16						851,956						14
Single family			504,143						4						333,221						5
Other (1)			2,191,809						18						1,143,687						18
Total			$	12,227,888					100		%				$	6,380,674					100		%

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

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Residential Real Estate Loans

At September 30, 2022, residential real estate loans held in our loan portfolio were $6.3 billion, an increase of $4.0 billion compared to December 31, 2021 driven by the merger with First Midwest and loan growth.  Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans.

Consumer Loans

Consumer loans, including automobile loans and personal and home equity loans and lines of credit, increased $1.1 billion to $2.7 billion at September 30, 2022 compared to December 31, 2021 driven by the merger with First Midwest and loan growth.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets at September 30, 2022 totaled $2.1 billion, an increase of $1.1 billion from December 31, 2021 as a result of goodwill and other intangible assets recorded with the First Midwest merger.

Other Assets

Other assets at September 30, 2022 increased $656.5 million from December 31, 2021 primarily due to higher net deferred tax assets related to the market value adjustments of certain investment securities and $130.3 million of deferred tax assets related to the First Midwest merger.

Funding

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

(dollars in thousands)			September 30, 2022						December 31, 2021						$ Change			% Change
Deposits:
Noninterest-bearing demand			$	12,400,077					$	6,303,106					$	6,096,971		97		%
Interest-bearing:
Checking and NOW			8,963,014						5,338,022						3,624,992			68		%
Savings			6,616,512						3,798,494						2,818,018			74		%
Money market			5,602,729						2,169,160						3,433,569			158		%
Time deposits			2,471,331						960,413						1,510,918			157		%
Total deposits			36,053,663						18,569,195						17,484,468			94		%
Wholesale borrowings:
Federal funds purchased and interbank borrowings			301,031						276						300,755			N/M
Securities sold under agreements to repurchase			438,053						392,275						45,778			12		%
Federal Home Loan Bank advances			2,804,617						1,886,019						918,598			49		%
Other borrowings			721,049						296,670						424,379			143		%
Total wholesale borrowings			4,264,750						2,575,240						1,689,510			66		%
Total funding			$	40,318,413					$	21,144,435					$	19,173,978		91		%

The increase in total funding was driven by the merger with First Midwest.  We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position.  Wholesale funding as a percentage of total funding was 11% at September 30, 2022 and 12% at December 31, 2021.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at September 30, 2022 increased $525.1 million from December 31, 2021 primarily due to higher derivative liabilities and accrued expenses and other liabilities associated with the First Midwest merger.

Capital 

Shareholders’ equity totaled $4.9 billion at September 30, 2022, compared to $3.0 billion at December 31, 2021.  In relation to the merger of equals transaction, Old National issued 108,000 shares of Old National Series A Preferred Stock and 122,500 shares of Old National Series C Preferred Stock. Old National entered into two deposit

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agreements, each dated as of February 15, 2022, by and among Old National, Continental Stock Transfer & Trust Company, as depository, and the holders from time to time of the depositary receipts in connection with the issuance of the Old National Preferred Stock. Pursuant to the deposit agreements, Old National issued 4,320,000 depositary shares, each representing a 1/40th interest in a share of Old National Series A Preferred Stock, and 4,900,000 depositary shares, each representing a 1/40th interest in a share of Old National Series C Preferred Stock.

Shareholders’ equity at September 30, 2022 included $2.4 billion from the 129.4 million shares of Common Stock that were issued in conjunction with the merger with First Midwest. The change in unrealized gains (losses) on available-for-sale investment securities decreased equity by $651.4 million during the nine months ended September 30, 2022. In addition, available-for-sale investment securities with a fair value of $3.0 billion were transferred from the available-for-sale portfolio to the held-to-maturity portfolio during the nine months ended September 30, 2022. The resulting unrealized holding loss, net of tax, is included in shareholders’ equity and totaled $117.1 million at September 30, 2022. Old National repurchased 3.5 million shares of Common Stock in the nine months ended September 30, 2022 under a stock repurchase plan that was approved by the Company’s Board of Directors, which reduced equity by $63.8 million. Old National also paid cash dividends of $0.42 per common share in the nine months ended September 30, 2022, which reduced equity by $122.6 million.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At September 30, 2022, Old National and its bank subsidiary exceeded the regulatory minimums and Old National Bank met the regulatory definition of “well-capitalized” based on the most recent regulatory definition.

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

			Regulatory Guidelines Minimum						September 30,												December 31,
									2022						2021						2021
Risk-based capital:
Tier 1 capital to total average assets (leverage ratio)			4.00			%			8.26			%			8.54			%			8.59			%
Common equity Tier 1 capital to risk-adjusted    total assets			7.00						9.88						12.08						12.04
Tier 1 capital to risk-adjusted total assets			8.50						10.58						12.08						12.04
Total capital to risk-adjusted total assets			10.50						11.84						12.84						12.77
Shareholders' equity to assets			N/A						10.70						12.64						12.32

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,
															2022						2021						2021
Risk-based capital:
Tier 1 capital to total average assets (leverage    ratio)			4.00			%			5.00			%			8.09			%			8.80			%			8.81			%
Common equity Tier 1 capital to risk-adjusted    total assets			7.00						6.50						10.38						12.34						12.34
Tier 1 capital to risk-adjusted total assets			8.50						8.00						10.38						12.34						12.34
Total capital to risk-adjusted total assets			10.50						10.00						10.99						12.84						12.82

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

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

RISK MANAGEMENT

Overview

Old National has adopted a Risk Appetite Statement to enable our Board of Directors, Executive Leadership Team, and Senior Management to better assess, understand, monitor, and mitigate the risks of Old National.  The Risk Appetite Statement addresses the following major risks:  strategic, market, liquidity, credit, operational, talent management, compliance and regulatory, legal, and reputational.  Our Chief Risk Officer reports directly to our Chief Executive Officer, is independent of all other management, and provides quarterly reports to the Board’s Enterprise Risk Committee.  The following discussion addresses certain of these major risks including credit, market, liquidity, operational, compliance and regulatory, and legal. Discussion of strategic, talent management, and reputational risks is provided in the section entitled “Risk Factors” in the Company’s 2021 Annual Report on Form 10-K.

Credit Risk

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

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, 2022, we had pooled trust preferred securities with a fair value of $11.3 million, or less than 1% of the available-for-sale securities portfolio.  These securities remained classified as available-for-sale and the unrealized loss on our pooled trust preferred securities was $2.5 million at September 30, 2022. 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 creditworthiness 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 $1.1 billion at September 30, 2022.

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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 clients 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:  Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Wisconsin, and Missouri.  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.

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

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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 management and overseen 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 provides oversight of loan policy changes as recommended by management to assure our policy remains appropriate for the current lending environment.

We lend to commercial and commercial real estate clients in many diverse industries including, among others, manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.  Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.  At September 30, 2022, our average commercial loan size was approximately $550,000 and our average commercial real estate loan size was approximately $1,200,000. 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, 2022, 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 Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Wisconsin, and Missouri.

On February 15, 2022, Old National closed on its merger with First Midwest. As of the closing date of the transaction, First Midwest loans totaled $14.3 billion. Old National reviewed the acquired loans and determined that as of September 30, 2022, $285.0 million met the definition of criticized and $442.7 million were considered classified (of which $157.8 million are reported with nonaccrual loans). These loans are included in our summary of under-performing, criticized, and classified assets table below.

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

			September 30,												December 31,
(dollars in thousands)			2022						2021						2021
Total nonaccrual loans			$	233,659					$	111,586					$	106,691
TDRs still accruing			13,674						16,420						18,378
Total past due loans (90 days or more and still accruing)			767						113						7
Foreclosed assets			11,967						1,943						2,030
Total under-performing assets			$	260,067					$	130,062					$	127,106
Classified loans (includes nonaccrual, TDRs still accruing,    past due 90 days, and other problem loans)			$	711,150					$	275,891					$	269,270
Other classified assets (1)			24,773						4,300						4,338
Criticized loans			549,994						240,215						235,910
Total criticized and classified assets			$	1,285,917					$	520,406					$	509,518
Asset Quality Ratios:
Nonaccrual loans/total loans (2)			0.77			%			0.82			%			0.78			%
Non-performing loans/total loans (2) (3)			0.81						0.94						0.92
Under-performing assets/total loans and     other real estate owned			0.85						0.96						0.93
Under-performing assets/total assets			0.56						0.54						0.52
Allowance/under-performing assets			116.22						82.94						84.45
Allowance/nonaccrual loans			129.36						96.67						100.61

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

(2)Loans exclude loans held for sale.

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

Under-performing assets increased to $260.1 million at September 30, 2022, compared to $130.1 million at September 30, 2021 and $127.1 million at December 31, 2021 due to the First Midwest merger.  Under-performing

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assets as a percentage of total loans and other real estate owned at September 30, 2022 were 0.85%, an 11 basis point decrease from 0.96% at September 30, 2021 and an 8 basis point decrease from 0.93% at December 31, 2021.

Nonaccrual loans increased from December 31, 2021 to September 30, 2022 primarily due to nonaccrual loans related to the First Midwest merger totaling $157.8 million. As a percentage of nonaccrual loans, the allowance was 129.36% at September 30, 2022, compared to 96.67% at September 30, 2021 and 100.61% at December 31, 2021.

Total criticized and classified assets were $1.3 billion at September 30, 2022, an increase of $765.5 million and $776.4 million from September 30, 2021 and December 31, 2021, respectively. Criticized and classified assets related to the First Midwest merger totaled $727.7 million at September 30, 2022. Other classified assets include investment securities that fell below investment grade rating totaling $24.8 million at September 30, 2022, compared to $4.3 million at September 30, 2021 and $4.3 million at December 31, 2021.

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.

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

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

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

At September 30, 2022, TDRs totaled $37.4 million, $23.8 million of which were included within nonaccrual loans. At December 31, 2021, TDRs totaled $30.0 million, $11.7 million of which were included within nonaccrual loans.

Old National has established specific allowances for credit losses for clients whose loan terms have been modified as TDRs totaling $5.2 million at September 30, 2022 and $0.7 million of December 31, 2021.  At September 30, 2022, Old National had committed to lend an additional $3.0 million to clients with outstanding loans that were classified as TDRs. At December 31, 2021, Old National had not committed to lend any additional funds to clients with outstanding loans that were classified as TDRs.

The terms of certain other loans were modified during 2022 and 2021 that did not meet the definition of a TDR.  It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification.  The evaluation is performed under our internal underwriting policy.  We also evaluate whether a

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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.

Allowance for Credit Losses on Loans and Unfunded Commitments

Net charge-offs on loans totaled $7.6 million during the three months ended September 30, 2022, which included $5.9 million of net charge-offs on PCD loans, compared to net recoveries of $3.0 million for the same period in 2021. Annualized, net charge-offs (recoveries) to average loans were 0.10% for the three months ended September 30, 2022, compared to (0.09)% for the same period in 2021. Net charge-offs on loans totaled $12.1 million during the nine months ended September 30, 2022, which included $10.5 million of net charge-offs on PCD loans, compared to net recoveries of $3.4 million during the same period in 2021. Annualized, net charge-offs (recoveries) to average loans were 0.06% for the nine months ended September 30, 2022, compared to (0.03)% for the same period in 2021. 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.

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The allowance for credit losses for loans was $302.3 million at September 30, 2022, compared to $107.3 million at December 31, 2021. The increase reflects $89.1 million of allowance for credit losses on acquired PCD loans established through acquisition accounting adjustments on or after the First Midwest merger date. In addition, the provision for credit losses expense in the nine months ended September 30, 2022 included $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, provision expense may be volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

We maintain an allowance for credit losses on unfunded 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 $26.2 million at September 30, 2022, compared to $10.9 million at December 31, 2021. The increase in the allowance for credit losses on unfunded loan commitments was driven by the merger with First Midwest as well as organic loan growth.

Market Risk

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

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

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

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

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

•changing product pricing strategies;

•modifying characteristics of the investment securities portfolio; or

•using derivative financial instruments, to a limited degree.

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

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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, 2022 and 2021:

			Immediate Rate Decrease												Immediate Rate Increase
(dollars in thousands)			-50 Basis Points						Base						+100 Basis Points						+200 Basis Points						+300 Basis Points
September 30, 2022
Projected interest income:
Money market, other interest earning    investments, and investment    securities			$	660,169					$	680,882					$	721,850					$	762,793					$	803,703
Loans			2,715,952						2,885,275						3,225,849						3,560,475						3,894,295
Total interest income			3,376,121						3,566,157						3,947,699						4,323,268						4,697,998
Projected interest expense:
Deposits			106,667						166,603						372,461						578,311						784,154
Borrowings			263,032						286,909						337,834						388,779						439,751
Total interest expense			369,699						453,512						710,295						967,090						1,223,905
Net interest income			$	3,006,422					$	3,112,645					$	3,237,404					$	3,356,178					$	3,474,093
Change from base			$	(106,223)											$	124,759					$	243,533					$	361,448
% change from base			(3.41)		%										4.01		%				7.82		%				11.61		%
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		%

Our projected net interest income increased year over year due to the First Midwest merger, loan growth, and rising interest rates.

A key element in the measurement and modeling of interest rate risk is the re-pricing assumptions of our transaction deposit accounts, which have no contractual maturity dates. Because the models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect our net interest income, we recognize that model outputs are not guarantees of actual results. For this reason, we model many different combinations of interest rates and balance sheet assumptions to understand our overall sensitivity to market interest rate changes, including shocks, ramps, yield curve flattening, yield curve steepening, as well as forecasts of likely interest rate scenarios tested. At September 30, 2022, 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 liability position with a fair value loss of $48.7 million at September 30, 2022, compared to a net asset position with a fair value gain of $1.3 million at December 31, 2021.  See Note 18 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.  We establish liquidity risk guidelines that we review with the Enterprise Risk Committee of our Board of Directors and monitor through our Balance Sheet Management Committee.  The objective of liquidity management is to ensure we have the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner.  Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts.  We maintain strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, properly manage capital markets’ funding sources and to address unexpected liquidity requirements. On June 5, 2020, we filed an automatic shelf registration statement with the SEC that permits us to issue an unspecified amount of debt or equity securities.

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, 2022.

(dollars in thousands)
Maturity Bucket			Amount						Rate
2022			$	796,910					0.34			%
2023			1,203,358						0.67
2024			241,239						0.90
2025			114,953						0.82
2026			68,339						0.49
2027 and beyond			46,532						0.56
Total			$	2,471,331					0.58			%

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 16, 2022.

•Moody’s Investors Service affirmed Old National Bank’s long-term deposit rating of “Aa3” on February 16, 2022.  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 16, 2022.

The credit ratings of Old National and Old National Bank at September 30, 2022 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, 2022, 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			$	322,234					$	479,377
Unencumbered government-issued debt securities			—						1,758,051
Unencumbered investment grade municipal securities			—						770,020
Unencumbered corporate securities			—						305,084
Availability of borrowings:
Amount available from Federal Reserve discount window*			—						555,290
Amount available from Federal Home Loan Bank*			—						1,255,645
Total available funds			$	322,234					$	5,123,467

* 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, 2022, Old National Bancorp’s other borrowings outstanding were $486.0 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 2021 and is not currently required.

Operational Risk

Operational risk is the risk that inadequate information systems, operational issues, 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 cybersecurity risk including, but not limited to, cyber-attacks or other information security breaches that might allow unauthorized transactions or unauthorized access to client, team member, or company sensitive information.  Metrics and measurements are used by our management team in the management of day-to-day operations to ensure effective client service, minimization of service disruptions, and oversight of cybersecurity risk.  We continually monitor and internally report on weaknesses in the internal control environment, third party risks, privacy and data governance, cyber-attacks, information security or data breaches; damage to physical assets; employee and workplace safety; execution, delivery, and process management; external and internal fraud; and model risk management.

Compliance and Regulatory Risk

Compliance and regulatory risk is the risk that the Company violated or was not in compliance with applicable laws, regulations or practices, industry standards, or ethical standards. Compliance with applicable regulatory requirements, internal policies and procedures, and ethical standards is not only the right thing to do, but it is embedded within our culture and mission to assist our clients in achieving financial success. Adherence to this belief is the responsibility of every employee, every day, in everything we do. It is Old National’s policy to comply with the letter and intent of all applicable regulatory requirements. Management, the first line of defense, is responsible for ensuring this expectation is met, with oversight from the second and third lines of defense, the risk and internal audit functions, respectively. Recognizing that inadvertent violations may occur, risk management activities are established to promptly identify, analyze, and if necessary, remediate compliance and regulatory issues to limit compliance risk exposure.

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Legal Risk

Legal risk generally results from unidentified or unmitigated risks that could result in lawsuits or adverse judgments that negatively affect the operations or condition of the Company. Business practices must be executed, as well as products and services delivered, in a manner that is compliant with laws, regulatory requirements, and agreements to which we are a party. Corporate governance practices must be compliant with applicable legal requirements and aligned with market practices. The Board of Directors expects that 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.

CRITICAL ACCOUNTING ESTIMATES

Our most significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.  Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities.  We consider these policies to be our critical accounting estimates.  The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances.  Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.

Business Combinations and Goodwill

•Description.  For acquisitions, we are required to record the assets acquired, including identified intangible assets such as core deposit and customer trust relationship intangibles, and the liabilities assumed at their fair value. The difference between consideration and the net fair value of assets acquired is recorded as goodwill. Management uses significant estimates and assumptions to value such items, including projected cash flows, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses for PCD loans is recognized within acquisition accounting. The allowance for credit losses for non-PCD assets is recognized as provision for credit losses in the same reporting period as the acquisition. Fair value adjustments are amortized or accreted into the income statement over the estimated life of the acquired assets or assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of goodwill recognized in connection with the acquisition. The use of different assumptions could produce significantly different valuation results, which could have material positive or negative effects on our results of operations. 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. In addition, we engage third party specialists to assist in the development of fair values. Preliminary estimates of fair values may be adjusted for a period of time subsequent to the acquisition date if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period. Management uses various valuation methodologies to estimate the fair value of these assets and liabilities, and often involves a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples of such items include loans, deposits, identifiable intangible assets, and certain other assets and liabilities.

•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 assets, including goodwill and liabilities, which 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 pandemic, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. Goodwill is especially susceptible to risk of impairment during prolonged periods of economic downturn.

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For additional information regarding critical accounting estimates, see the section titled “Critical Accounting Estimates” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes in the Company’s application of critical accounting estimates related to allowance for credit losses for loans, derivative financial instruments, or income taxes since December 31, 2021.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

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

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

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

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PART II

OTHER INFORMATION

ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors disclosed in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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)
07/01/22 - 07/31/22			27,944						$	15.32					—						$	136,093,633
08/01/22 - 08/31/22			3,948						$	16.18					—						$	136,093,633
09/01/22 - 09/30/22			2,303						$	16.73					—						$	136,093,633
Total			34,195						$	15.52					—						$	136,093,633

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

(2)On February 17, 2022, the Company issued a press release announcing that its Board of Directors approved a stock repurchase program that authorizes the Company to repurchase up to $200 million of the Company’s outstanding shares of common stock, as conditions warrant, through January 31, 2023. No shares were repurchased during the quarter under the Company’s Board-approved stock repurchase program.

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
3.1						Fifth Amended and Restated Articles of Incorporation of Old National, amended April 30, 2020 (incorporated by reference to Exhibit 3.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2020).
3.2						Articles of Amendment to the Fifth Amended and Restated Articles of Incorporation of Old National authorizing additional shares of Old National capital stock (incorporated by reference to Exhibit 3.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2022).
3.3						Articles of Amendment to the Fifth Amended and Restated Articles of Incorporation of Old National designating the New Old National Series A Preferred Stock (incorporated by reference to Exhibit 3.3 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2022).
3.4						Articles of Amendment to the Fifth Amended and Restated Articles of Incorporation of Old National designating the New Old National Series C Preferred Stock (incorporated by reference to Exhibit 3.4 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2022).
3.5						Amended and Restated By-Laws of Old National, amended April 30, 2020 (incorporated by reference to Exhibit 3.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2020).
3.6						By-Laws Amendment to Amended and Restated By-Laws of Old National (incorporated by reference to Exhibit 3.6 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2022).
31.1						Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2						Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1						Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2						Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101						The following materials from Old National’s Form 10-Q Report for the quarterly period ended September 30, 2022, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
104						The cover page from Old National’s Form 10-Q Report for the quarterly period ended September 30, 2022, 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:  November 2, 2022

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