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, 2023

or

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

For the transition period from ____________ to ____________

Commission File Number 001-15817

 

Old National Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana									35-1539838
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)
One Main Street									47708
Evansville,						Indiana			(Zip Code)
(Address of principal executive offices)

(800) 731-2265

(Registrant’s telephone number, including area code)

 

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

Title of each class

Trading 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 292,621,000 shares outstanding at October 31, 2023.

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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			14
			Note 5.			Investment Securities			15
			Note 6.			Loans and Allowance for Credit Losses			18
			Note 7.			Leases			29
			Note 8.			Goodwill and Other Intangible Assets			30
			Note 9.			Qualified Affordable Housing Projects and Other Tax Credit Investments			31
			Note 10.			Securities Sold Under Agreements to Repurchase			33
			Note 11.			Federal Home Loan Bank Advances			33
			Note 12.			Other Borrowings			34
			Note 13.			Accumulated Other Comprehensive Income (Loss)			36
			Note 14.			Income Taxes			38
			Note 15.			Derivative Financial Instruments			39
			Note 16.			Commitments, Contingencies, and Financial Guarantees			42
			Note 17.			Fair Value			43
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations						50
			Forward-Looking Statements						50
			Financial Highlights						51
			Non-GAAP Financial Measures						53
			Executive Summary						56
			Results of Operations						57
			Financial Condition						64
			Risk Management						68
			Critical Accounting Estimates						74
Item 3.			Quantitative and Qualitative Disclosures About Market Risk						74
Item 4.			Controls and Procedures						75
PART II.			OTHER INFORMATION						76
Item 1A.			Risk Factors						76
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds						76
Item 5.			Other Information						76
Item 6.			Exhibits						77
SIGNATURE									78

2

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GLOSSARY OF ABBREVIATIONS AND ACRONYMS

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

The acronyms and abbreviations identified below are used throughout this report, including the Notes to Consolidated Financial Statements (Unaudited). You may find it helpful to refer to this page as you read this report.

AOCI:  accumulated other comprehensive income (loss)

AQR:  asset quality rating

ASC:  Accounting Standards Codification

ASU:  Accounting Standards Update

ATM:  automated teller machine

BBCC: business banking credit center (small business)

CECL: current expected credit loss

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

DTI:  debt-to-income

FASB:  Financial Accounting Standards Board

FDIC:  Federal Deposit Insurance Corporation

FHLB:  Federal Home Loan Bank

FHTC:  Federal Historic Tax Credit

FICO:  Fair Isaac Corporation

First Midwest: First Midwest Bancorp, Inc.

GAAP:  U.S. generally accepted accounting principles

LGD:  loss given default

LIBOR:  London Interbank Offered Rate

LIHTC:  Low Income Housing Tax Credit

LTV:  loan-to-value

N/A:  not applicable

N/M:  not meaningful

NASDAQ: The NASDAQ Stock Market LLC

NMTC: New Markets Tax Credit

NOW:  negotiable order of withdrawal

OCC:  Office of the Comptroller of the Currency

PCD: purchased credit deteriorated

PD:  probability of default

Renewable Energy:  investment tax credits for solar projects

SEC:  U.S. Securities and Exchange Commission

SOFR: Secured Overnight Financing Rate

TDR:  troubled debt restructuring

UMB: UMB Bank, n.a.

3

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OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars and shares in thousands, except per share data)			September 30, 2023						December 31, 2022
			(unaudited)
Assets
Cash and due from banks			$	381,343					$	453,432
Money market and other interest-earning investments			1,282,087						274,980
Total cash and cash equivalents			1,663,430						728,412
Equity securities, at fair value			69,880						52,507
Investment securities - available-for-sale, at fair value (amortized cost    $7,719,944 and $7,772,603, respectively)			6,414,761						6,773,712
Investment securities - held-to-maturity, at amortized cost (fair value    $2,393,621 and $2,643,682, respectively)			3,027,914						3,089,147
Federal Home Loan Bank/Federal Reserve Bank stock, at cost			365,588						314,168
Loans held-for-sale, at fair value			122,033						11,926
Loans:
Commercial			9,333,448						9,508,904
Commercial real estate			13,916,221						12,457,070
Residential real estate			6,696,288						6,460,441
Consumer credit, net of unearned income			2,631,877						2,697,226
Total loans			32,577,834						31,123,641
Allowance for credit losses on loans			(303,982)						(303,671)
Net loans			32,273,852						30,819,970
Premises and equipment, net			565,607						557,307
Operating lease right-of-use assets			179,284						189,714
Accrued interest receivable			209,503						190,521
Goodwill			1,998,716						1,998,716
Other intangible assets			108,119						126,405
Company-owned life insurance			774,517						768,552
Other assets			1,286,244						1,142,315
Total assets			$	49,059,448					$	46,763,372
Liabilities
Deposits:
Noninterest-bearing demand			$	10,091,352					$	11,930,798
Interest-bearing:
Checking and NOW			7,495,417						8,340,955
Savings			5,296,985						6,326,158
Money market			8,793,218						5,389,139
Time deposits			5,575,704						3,013,780
Total deposits			37,252,676						35,000,830
Federal funds purchased and interbank borrowings			918						581,489
Securities sold under agreements to repurchase			279,061						432,804
Federal Home Loan Bank advances			4,412,576						3,829,018
Other borrowings			863,455						743,003
Operating lease liabilities			199,937						211,964
Accrued expenses and other liabilities			811,288						835,669
Total liabilities			43,819,911						41,634,777
Shareholders’ Equity
Preferred stock, 2,000 shares authorized, 231 shares issued and outstanding			230,500						230,500
Common stock, no par value, $1.00 per share stated value, 600,000 shares authorized,    292,586 and 292,903 shares issued and outstanding, respectively			292,586						292,903
Capital surplus			4,153,977						4,174,265
Retained earnings			1,531,289						1,217,349
Accumulated other comprehensive income (loss), net of tax			(968,815)						(786,422)
Total shareholders’ equity			5,239,537						5,128,595
Total liabilities and shareholders’ equity			$	49,059,448					$	46,763,372

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)			2023						2022						2023						2022
Interest Income
Loans including fees:
Taxable			$	474,387					$	331,271					$	1,334,658					$	800,535
Nontaxable			11,181						6,461						32,318						14,770
Investment securities:
Taxable			66,924						56,765						191,797						145,633
Nontaxable			10,833						11,086						33,039						32,370
Money market and other interest-earning investments			13,194						935						25,258						3,073
Total interest income			576,519						406,518						1,617,070						996,381
Interest Expense
Deposits			147,428						10,820						310,995						19,201
Federal funds purchased and interbank borrowings			910						720						11,404						722
Securities sold under agreements to repurchase			710						106						2,389						287
Federal Home Loan Bank advances			40,382						13,027						123,466						25,915
Other borrowings			12,003						5,256						30,071						13,410
Total interest expense			201,433						29,929						478,325						59,535
Net interest income			375,086						376,589						1,138,745						936,846
Provision for credit losses			19,068						15,490						47,292						133,391
Net interest income after provision for credit losses			356,018						361,099						1,091,453						803,455
Noninterest Income
Wealth and investment services fees			26,687						25,359						80,128						75,183
Service charges on deposit accounts			18,524						20,042						53,278						54,392
Debit card and ATM fees			10,818						10,608						31,453						29,429
Mortgage banking revenue			5,063						5,360						12,628						19,127
Capital markets income			5,891						8,906						19,003						20,609
Company-owned life insurance			3,740						3,361						11,624						11,456
Debt securities gains (losses), net			(241)						(172)						(5,440)						85
Other income			10,456						6,921						30,574						24,461
Total noninterest income			80,938						80,385						233,248						234,742
Noninterest Expense
Salaries and employee benefits			131,541						147,203						404,715						433,167
Occupancy			25,795						26,418						80,162						73,933
Equipment			8,284						7,328						23,394						20,046
Marketing			9,448						10,361						28,698						23,756
Technology			20,592						20,269						59,850						64,914
Communication			4,075						5,392						12,768						14,687
Professional fees			5,956						6,559						19,085						32,686
FDIC assessment			9,000						6,249						29,028						13,523
Amortization of intangibles			6,040						7,089						18,286						19,070
Amortization of tax credit investments			2,644						2,662						8,167						5,703
Property optimization			—						—						1,559						—
Other expense			21,401						22,914						56,359						54,023
Total noninterest expense			244,776						262,444						742,071						755,508
Income before income taxes			192,180						179,040						582,630						282,689
Income tax expense			44,304						38,887						133,118						55,137
Net income			147,876						140,153						449,512						227,552
Preferred dividends			(4,034)						(4,034)						(12,101)						(10,084)
Net income applicable to common shareholders			$	143,842					$	136,119					$	437,411					$	217,468
Net income per common share - basic			$	0.49					$	0.47					$	1.50					$	0.81
Net income per common share - diluted			0.49						0.47						1.50						0.80
Weighted average number of common shares outstanding - basic			290,648						290,961						290,763						269,843
Weighted average number of common shares outstanding - diluted			291,717						292,483						291,809						271,123
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)			2023						2022			2023						2022
Net income			$	147,876					$	140,153		$	449,512					$	227,552
Other comprehensive income (loss):
Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period			(208,626)						(285,798)			(304,061)						(1,019,782)
Reclassification for securities transferred to held-to-maturity			—						—			—						165,473
Reclassification adjustment for securities (gains) losses    realized in income			241						172			5,440						(85)
Income tax effect			51,903						68,356			83,092						202,999
Unrealized gains (losses) on available-for-sale securities			(156,482)						(217,270)			(215,529)						(651,395)
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			5,623						6,772			16,574						10,774
Income tax effect			(1,430)						(1,651)			(2,861)						37,621
Changes from securities held-to-maturity			4,193						5,121			13,713						(117,078)
Change in hedges:
Net unrealized derivative gains (losses) on hedges			(15,574)						(36,755)			45,547						(49,679)
Reclassification adjustment for (gains) losses realized in net    income			4,927						749			(19,893)						(139)
Income tax effect			2,754						8,846			(6,094)						12,240
Changes from hedges			(7,893)						(27,160)			19,560						(37,578)
Change in defined benefit pension plans:
Amortization of net (gains) losses recognized in income			—						(11)			(182)						(32)
Income tax effect			—						3			45						8
Changes from defined benefit pension plans			—						(8)			(137)						(24)
Other comprehensive income (loss), net of tax			(160,182)						(239,317)			(182,393)						(806,075)
Comprehensive income (loss)			$	(12,306)					$	(99,164)		$	267,119					$	(578,523)

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, 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

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, 2022			$	230,500					$	292,903					$	4,174,265					$	1,217,349					$	(786,422)					$	5,128,595
Net income			—						—						—						146,600						—						146,600
Other comprehensive income (loss)			—						—						—						—						78,064						78,064
Cash dividends:
Common ($0.14 per share)			—						—						—						(41,088)						—						(41,088)
Preferred dividends			—						—						—						(4,034)						—						(4,034)
Common stock issued			—						15						247						—						—						262
Common stock repurchased			—						(2,598)						(41,112)						—						—						(43,710)
Share-based compensation expense			—						—						12,742						—						—						12,742
Stock activity under incentive    compensation plans			—						1,602						(1,412)						(195)						—						(5)
Balance, March 31, 2023			230,500						291,922						4,144,730						1,318,632						(708,358)						5,277,426
Net income			—						—						—						155,036						—						155,036
Other comprehensive income (loss)			—						—						—						—						(100,275)						(100,275)
Cash dividends:
Common ($0.14 per share)			—						—						—						(40,932)						—						(40,932)
Preferred dividends			—						—						—						(4,033)						—						(4,033)
Common stock issued			—						20						252						—						—						272
Common stock repurchased			—						(8)						(97)						—						—						(105)
Share-based compensation expense			—						—						5,247						—						—						5,247
Stock activity under incentive    compensation plans			—						663						(1,043)						(161)						—						(541)
Balance, June 30, 2023			230,500						292,597						4,149,089						1,428,542						(808,633)						5,292,095
Net income			—						—						—						147,876						—						147,876
Other comprehensive income (loss)			—						—						—						—						(160,182)						(160,182)
Cash dividends:
Common ($0.14 per share)			—						—						—						(40,933)						—						(40,933)
Preferred dividends			—						—						—						(4,034)						—						(4,034)
Common stock issued			—						20						243						—						—						263
Common stock repurchased			—						(31)						(420)						—						—						(451)
Share-based compensation expense			—						—						4,914						—						—						4,914
Stock activity under incentive    compensation plans			—						—						151						(162)						—						(11)
Balance, September 30, 2023			$	230,500					$	292,586					$	4,153,977					$	1,531,289					$	(968,815)					$	5,239,537

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

8

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

			Nine Months Ended September 30,
(dollars in thousands)			2023						2022
Cash Flows From Operating Activities
Net income			$	449,512					$	227,552
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			28,162						26,893
Amortization of other intangible assets			18,286						19,070
Amortization of tax credit investments			8,167						5,703
Net premium amortization on investment securities			8,673						14,625
Accretion income related to acquired loans			(17,484)						(63,472)
Share-based compensation expense			22,903						21,582
Provision for credit losses			47,292						133,391
Debt securities (gains) losses, net			5,440						(85)
Net (gains) losses on sales of loans and other assets			(727)						(5,911)
Increase in cash surrender value of company-owned life insurance			(11,624)						(11,456)
Residential real estate loans originated for sale			(366,340)						(490,288)
Proceeds from sales of residential real estate loans			366,485						531,121
(Increase) decrease in interest receivable			(18,982)						(29,088)
(Increase) decrease in other assets			(56,116)						36,049
Increase (decrease) in accrued expenses and other liabilities			(40,132)						271,625
Net cash flows provided by (used in) operating activities			443,515						687,311
Cash Flows From Investing Activities
Cash received from merger, net			—						1,912,629
Purchases of investment securities available-for-sale			(626,820)						(1,367,896)
Purchases of investment securities held-to-maturity			(1,941)						(156,378)
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock			(99,158)						(115,488)
Purchases of equity securities			(20,862)						(5,843)
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale			614,782						1,117,620
Proceeds from sales of investment securities available-for-sale			54,056						13,371
Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity			76,276						61,172
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock			47,738						108,697
Proceeds from sales of equity securities			2,610						52,034
Loan originations and payments, net			(2,269,544)						(2,481,620)
Proceeds from sales of commercial loans			679,952						—
Proceeds from company-owned life insurance death benefits			5,865						8,716
Proceeds from sales of premises and equipment and other assets			3,513						3,202
Purchases of premises and equipment and other assets			(28,074)						(28,739)
Net cash flows provided by (used in) investing activities			(1,561,607)						(878,523)
Cash Flows From Financing Activities
Net increase (decrease) in:
Deposits			2,251,846						235,064
Federal funds purchased and interbank borrowings			(580,571)						300,755
Securities sold under agreements to repurchase			(153,743)						(89,416)
Other borrowings			114,251						152,324
Payments for maturities of Federal Home Loan Bank advances			(1,850,150)						(1,674,875)
Proceeds from Federal Home Loan Bank advances			2,450,000						1,450,000
Cash dividends paid			(135,054)						(132,674)
Common stock repurchased			(44,266)						(70,931)
Common stock issued			797						557
Net cash flows provided by (used in) financing activities			2,053,110						170,804
Net increase (decrease) in cash and cash equivalents			935,018						(20,408)
Cash and cash equivalents at beginning of period			728,412						822,019
Cash and cash equivalents at end of period			$	1,663,430					$	801,611

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OLD NATIONAL BANCORP

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

			Nine Months Ended September 30,
(dollars in thousands)			2023						2022
Supplemental cash flow information:
Total interest paid			$	450,939					$	62,207
Total income taxes paid (net of refunds)			158,478						14,759
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
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			7,899						17,376
Finance lease right-of-use assets obtained in exchange for lease obligations			10,019						629

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, 2023 and December 31, 2022, and the results of its operations for the three and nine months ended September 30, 2023 and 2022.   Interim results do not necessarily represent annual results. Certain information and disclosures normally included in notes to consolidated annual financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q pursuant to SEC rules and regulations. These financial statements should be read in conjunction with Old National’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

Financial Difficulty Modifications

Any loans that are modified are reviewed by Old National to identify if a financial difficulty modification has occurred, which is when Old National Bank modifies a loan related to a borrower experiencing financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans includes one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date, a permanent reduction of the recorded investment of the loan, or an other-than-insignificant payment delay. The adoption of ASU 2022-02 on January 1, 2023 eliminated the recognition and measurement of TDRs and enhanced disclosures for modifications to loans related to borrowers experiencing financial difficulties. See Note 2 to the consolidated financial statements for additional detail regarding the adoption of ASU 2022-02.

Other than the changes for financial difficulty modifications, there have been no material changes from the significant accounting policies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2023

FASB ASC 805 – In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers, to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and liabilities. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. The adoption of this guidance on January 1, 2023 did not have a material impact on the consolidated financial statements.

FASB ASC 815 – In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method, to expand the current single-layer method of electing hedge accounting to allow multiple hedged layers of a single closed portfolio under the method and rename the last-of-layer method the portfolio layer method. The amendments in this update are effective for fiscal years beginning after December 15,

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2022, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2023 did not have a material impact on the consolidated financial statements.

FASB ASC 326 – In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, to eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in leases within the vintage disclosures required by ASC 326. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Old National adopted the provision in ASU 2022-02 related to the recognition and measurement of TDRs on a prospective basis on January 1, 2023, which did not have a material impact on the consolidated financial statements.

FASB ASC 848 – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from LIBOR or other interbank offered rate on financial reporting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued.

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

The amendments in this ASU are effective March 12, 2020 through December 31, 2024. Old National believes the adoption of this guidance on activities subsequent to September 30, 2023 will not have a material impact on the consolidated financial statements.

Accounting Guidance Pending Adoption 

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

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

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

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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. The combined organization has a presence in additional Midwestern markets, strong commercial banking capabilities, a robust retail footprint, a significant wealth management platform, and an enhanced ability to attract talent. The combined organization also creates the scale and profitability to accelerate digital and technology capabilities to drive future investments in consumer and commercial banking, as well as wealth management services.

As of December 31, 2022, Old National finalized its valuation of all assets acquired and liabilities assumed. Transaction costs totaling $23.2 million associated with the merger have been expensed for the nine months ended September 30, 2023, compared to $100.6 million during the nine months ended September 30, 2022. Additional transaction and integration costs will be expensed in future periods as incurred.

Divestiture

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

Pending Acquisition

CapStar Financial Holdings, Inc.

On October 26, 2023, Old National announced that it entered into a definitive merger agreement pursuant to which Old National will acquire CapStar Financial Holdings, Inc. (“CapStar”) and its wholly-owned subsidiary, CapStar Bank, in an all-stock transaction. This partnership transaction will strengthen Old National’s recently formed Nashville presence and add several new high-growth markets. As of September 30, 2023, CapStar had approximately $3.3 billion of total assets, $2.3 billion of total loans, and $2.8 billion of deposits. Under the terms of the merger agreement, each outstanding share of CapStar common stock will be converted into the right to receive 1.155 shares of Old National common stock, valuing the transaction at approximately $344.4 million, or $16.64 per share, based on Old National’s 30-day volume weighted average closing stock price ending October 25, 2023. The transaction value is likely to change until closing due to fluctuations in the price of Old National common stock. The definitive merger agreement has been approved by the Board of Directors of each company. The transaction remains subject to regulatory approval and the approval of CapStar shareholders. The transaction is anticipated to close in the second quarter of 2024.

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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)			2023						2022						2023						2022
Net income			$	147,876					$	140,153					$	449,512					$	227,552
Preferred dividends			(4,034)						(4,034)						(12,101)						(10,084)
Net income applicable to common shares			$	143,842					$	136,119					$	437,411					$	217,468
Weighted average common shares outstanding:
Weighted average common shares outstanding (basic)			290,648						290,961						290,763						269,843
Effect of dilutive securities:
Restricted stock			1,069						1,516						1,045						1,273
Stock appreciation rights			—						6						1						7
Weighted average diluted shares outstanding			291,717						292,483						291,809						271,123
Basic Net Income Per Common Share			$	0.49					$	0.47					$	1.50					$	0.81
Diluted Net Income Per Common Share			$	0.49					$	0.47					$	1.50					$	0.80

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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 AOCI and gross unrecognized gains and losses.

(dollars in thousands)			Amortized Cost						Unrealized Gains						Unrealized Losses						Basis Adjustments (1)						Fair Value
September 30, 2023
Available-for-Sale
U.S. Treasury			$	616,608					$	98					$	(10,258)					$	(58,322)					$	548,126
U.S. government-sponsored entities and agencies			1,475,307						—						(229,113)						(103,294)						1,142,900
Mortgage-backed securities - Agency			4,686,448						17						(823,760)						—						3,862,705
States and political subdivisions			592,495						7						(47,058)						(500)						544,944
Pooled trust preferred securities			13,794						—						(2,669)						—						11,125
Other securities			335,292						112						(30,443)						—						304,961
Total available-for-sale securities			$	7,719,944					$	234					$	(1,143,301)					$	(162,116)					$	6,414,761
Held-to-Maturity
U.S. government-sponsored entities and agencies			$	824,223					$	—					$	(207,213)					$	—					$	617,010
Mortgage-backed securities - Agency			1,043,585						—						(195,933)						—						847,652
States and political subdivisions			1,160,256						—						(231,147)						—						929,109
Allowance for securities held-to-maturity			(150)						—						—						—						(150)
Total held-to-maturity securities			$	3,027,914					$	—					$	(634,293)					$	—					$	2,393,621
December 31, 2022
Available-for-Sale
U.S. Treasury			$	253,148					$	5					$	(5,189)					$	(47,037)					$	200,927
U.S. government-sponsored entities and agencies			1,451,736						—						(169,248)						(107,408)						1,175,080
Mortgage-backed securities - Agency			4,986,354						976						(617,428)						—						4,369,902
States and political subdivisions			688,159						1,789						(26,096)						—						663,852
Pooled trust preferred securities			13,783						—						(2,972)						—						10,811
Other securities			379,423						258						(26,541)						—						353,140
Total available-for-sale securities			$	7,772,603					$	3,028					$	(847,474)					$	(154,445)					$	6,773,712
Held-to-Maturity
U.S. government-sponsored entities and agencies			$	819,168					$	—					$	(162,810)					$	—					$	656,358
Mortgage-backed securities - Agency			1,106,817						—						(123,854)						—						982,963
States and political subdivisions			1,163,312						221						(159,022)						—						1,004,511
Allowance for securities held-to-maturity			(150)						—						—						—						(150)
Total held-to-maturity securities			$	3,089,147					$	221					$	(445,686)					$	—					$	2,643,682

(1)    Basis adjustments represent the cumulative amount of fair value hedging adjustments included in the carrying amounts of fixed-rate investment securities assets designated in fair value hedging arrangements. See Note 15 to the consolidated financial statements for additional information regarding these derivative financial instruments.

Substantially all of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities.  

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)			2023						2022						2023						2022
Proceeds			$	28,531					$	5,221					$	111,419					$	78,568
Realized gains			54						17						1,002						528
Realized losses			(295)						(189)						(6,442)						(443)

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The table below shows the amortized cost and fair value of the investment securities portfolio by contractual maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Weighted average yield is based on amortized cost.

			September 30, 2023
(dollars in thousands)			Amortized Cost						Fair Value						Weighted Average Yield
Maturity
Available-for-Sale
Within one year			$	539,157					$	535,193					4.71		%
One to five years			1,567,565						1,395,867						2.80
Five to ten years			3,987,461						3,285,183						2.37
Beyond ten years			1,625,761						1,198,518						2.46
Total			$	7,719,944					$	6,414,761					2.64		%
Held-to-Maturity
One to five years			$	161,837					$	127,716					2.68		%
Five to ten years			954,756						797,284						2.64
Beyond ten years			1,911,321						1,468,621						2.71
Total			$	3,027,914					$	2,393,621					2.69		%

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, 2023
Available-for-Sale
U.S. Treasury			$	37,492					$	(144)					$	178,540					$	(10,114)					$	216,032					$	(10,258)
U.S. government-sponsored entities    and agencies			32,821						(58)						1,110,079						(229,055)						1,142,900						(229,113)
Mortgage-backed securities - Agency			124,895						(5,798)						3,736,306						(817,962)						3,861,201						(823,760)
States and political subdivisions			258,362						(7,749)						260,563						(39,309)						518,925						(47,058)
Pooled trust preferred securities			—						—						11,125						(2,669)						11,125						(2,669)
Other securities			11,737						(323)						262,912						(30,120)						274,649						(30,443)
Total available-for-sale			$	465,307					$	(14,072)					$	5,559,525					$	(1,129,229)					$	6,024,832					$	(1,143,301)
December 31, 2022
Available-for-Sale
U.S. Treasury			$	130,967					$	(3,264)					$	66,992					$	(1,925)					$	197,959					$	(5,189)
U.S. government-sponsored entities    and agencies			454,854						(75,795)						720,226						(93,453)						1,175,080						(169,248)
Mortgage-backed securities - Agency			3,207,319						(358,507)						1,116,205						(258,921)						4,323,524						(617,428)
States and political subdivisions			414,813						(25,555)						2,703						(541)						417,516						(26,096)
Pooled trust preferred securities			—						—						10,811						(2,972)						10,811						(2,972)
Other securities			257,775						(17,045)						75,309						(9,496)						333,084						(26,541)
Total available-for-sale			$	4,465,728					$	(480,166)					$	1,992,246					$	(367,308)					$	6,457,974					$	(847,474)

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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, 2023
Held-to-Maturity
U.S. government-sponsored entities    and agencies			$	—					$	—					$	617,010					$	(207,213)					$	617,010					$	(207,213)
Mortgage-backed securities - Agency			—						—						847,652						(195,933)						847,652						(195,933)
States and political subdivisions			64,441						(4,877)						864,668						(226,270)						929,109						(231,147)
Total held-to-maturity			$	64,441					$	(4,877)					$	2,329,330					$	(629,416)					$	2,393,771					$	(634,293)
December 31, 2022
Held-to-Maturity
U.S. government-sponsored entities    and agencies			$	354,293					$	(110,523)					$	302,066					$	(52,287)					$	656,359					$	(162,810)
Mortgage-backed securities - Agency			367,849						(42,438)						615,114						(81,416)						982,963						(123,854)
States and political subdivisions			838,689						(127,355)						135,573						(31,667)						974,262						(159,022)
Total held-to-maturity			$	1,560,831					$	(280,316)					$	1,052,753					$	(165,370)					$	2,613,584					$	(445,686)

The unrecognized losses on held-to-maturity investment securities presented in the table above do not include unrecognized losses on securities that were transferred from available-for-sale to held-to-maturity totaling $132.3 million at September 30, 2023 and $148.9 million at December 31, 2022. These unrecognized losses are included as a separate component of shareholders’ equity and are being amortized over the remaining term of the securities.

No allowance for credit losses on available-for-sale debt securities was needed at September 30, 2023 or December 31, 2022.

An allowance on held-to-maturity debt securities is maintained for certain municipal bonds to account for expected lifetime credit losses. Substantially all of the U.S. government-sponsored entities and agencies and agency mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. The allowance for credit losses on held-to-maturity debt securities was $0.2 million at September 30, 2023 and December 31, 2022.

Accrued interest receivable on the securities portfolio is excluded from the estimate of credit losses and totaled $38.0 million at September 30, 2023 and $50.9 million at December 31, 2022.

At September 30, 2023, Old National’s securities portfolio consisted of 3,007 securities, 2,917 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, 2023, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.

Old National’s two pooled trust preferred securities with fair values totaling $11.1 million and unrealized losses totaling $2.7 million have experienced credit defaults.  However, we believe that the value of the instruments lies in the full and timely interest payments that will be received through maturity, the steady amortization that will be experienced until maturity, and the full return of principal by the final maturity of the collateralized debt obligations. Old National did not recognize any losses on these securities for the nine months ended September 30, 2023 or 2022.

Equity Securities

Equity securities consist of mutual funds for Community Reinvestment Act qualified investments and diversified investment securities held in a grantor trust for participants in the Company’s nonqualified deferred compensation plan. Old National’s equity securities with readily determinable fair values totaled $69.9 million at September 30,

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2023 and $52.5 million at December 31, 2022.  There were losses on equity securities of $0.8 million during the three months ended September 30, 2023 and losses of $1.4 million during the nine months ended September 30, 2023, compared to losses of $0.7 million and $4.9 million during the three and nine months ended September 30, 2022, respectively.

Alternative Investments

Old National has alternative investments without readily determinable fair values that are included in other assets totaling $418.3 million at September 30, 2023, consisting of $242.3 million of illiquid investments in partnerships, limited liability companies, and other ownership interests that support affordable housing and $176.0 million of economic development and community revitalization initiatives in low-to-moderate income neighborhoods. These alternative investments totaled $396.8 million at December 31, 2022.  There have been no impairments or adjustments on equity securities without readily determinable fair values, except for amortization of tax credit investments in the nine months ended September 30, 2023 and 2022. See Note 9 to the consolidated financial statements for detail regarding these investments.

NOTE 6 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans

Old National’s loans consist primarily of loans made to consumers and commercial clients in many diverse industries, including real estate rental and leasing, manufacturing, healthcare, wholesale trade, construction, and agriculture, among others.  Most of Old National’s lending activity occurs within our principal geographic markets in the Midwest region.  Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.

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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 on loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios used to monitor and analyze interest income and yields – commercial, commercial real estate, residential real estate, and consumer – are reclassified into seven segments of loans – commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity for purposes of determining the allowance for credit losses on loans. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The portfolio segment reclassifications follow:

			Balance Sheet Line Item						Portfolio Segment Reclassifications						After Reclassifications
(dollars in thousands)
September 30, 2023
Loans:
Commercial			$	9,333,448					$	(226,353)					$	9,107,095
Commercial real estate			13,916,221						(165,593)						13,750,628
BBCC			N/A						391,946						391,946
Residential real estate			6,696,288						—						6,696,288
Consumer			2,631,877						(2,631,877)						N/A
Indirect			N/A						1,047,224						1,047,224
Direct			N/A						542,689						542,689
Home equity			N/A						1,041,964						1,041,964
Total			$	32,577,834					$	—					$	32,577,834
December 31, 2022
Loans:
Commercial			$	9,508,904					$	(210,280)					$	9,298,624
Commercial real estate			12,457,070						(158,322)						12,298,748
BBCC			N/A						368,602						368,602
Residential real estate			6,460,441						—						6,460,441
Consumer			2,697,226						(2,697,226)						N/A
Indirect			N/A						1,034,257						1,034,257
Direct			N/A						629,186						629,186
Home equity			N/A						1,033,783						1,033,783
Total			$	31,123,641					$	—					$	31,123,641

The composition of loans by portfolio segment follows:

(dollars in thousands)			September 30, 2023						December 31, 2022
Commercial (1)			$	9,107,095					$	9,298,624
Commercial real estate			13,750,628						12,298,748
BBCC			391,946						368,602
Residential real estate			6,696,288						6,460,441
Indirect			1,047,224						1,034,257
Direct			542,689						629,186
Home equity			1,041,964						1,033,783
Total loans			32,577,834						31,123,641
Allowance for credit losses on loans			(303,982)						(303,671)
Net loans			$	32,273,852					$	30,819,970

(1)Includes direct finance leases of $173.0 million at September 30, 2023 and $188.1 million at December 31, 2022.

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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 245%, Old National Bank’s applicable investor commercial real estate loans as a percentage of its risk-based capital remained below the regulatory guideline limit of 300% at September 30, 2023.

BBCC

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

Residential

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

Indirect

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

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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 on loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses on loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans is excluded from the estimate of credit losses and totaled $162.8 million at September 30, 2023 and $137.7 million at December 31, 2022.

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

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

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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 are considered. These factors include the risk that unemployment, gross domestic product, housing product index, and the BBB ratio prove to be more severe and/or prolonged than our baseline forecast due to a variety of factors including monetary actions to control inflation, recent instability in the banking sector, conflict in Ukraine, and global supply chain issues. Old National’s activity in the allowance for credit losses on loans by portfolio segment was as follows:

(dollars in thousands)			Balance at Beginning of Period						Allowance Established for Acquired PCD Loans						Charge-offs						Recoveries						Provision for Loan Losses						Balance at End of Period
Three Months Ended September 30, 2023
Commercial			$	127,403					$	—					$	(16,705)					$	1,616					$	12,441					$	124,755
Commercial real estate			136,897						—						(2,291)						102						10,267						144,975
BBCC			2,776						—						(1,049)						70						912						2,709
Residential real estate			20,421						—						(15)						28						346						20,780
Indirect			1,407						—						(490)						325						79						1,321
Direct			4,755						—						(2,180)						580						416						3,571
Home equity			6,896						—						(20)						341						(1,346)						5,871
Total			$	300,555					$	—					$	(22,750)					$	3,062					$	23,115					$	303,982
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
Nine Months Ended September 30, 2023
Commercial			$	120,612					$	—					$	(37,459)					$	3,713					$	37,889					$	124,755
Commercial real estate			138,244						—						(5,938)						1,394						11,275						144,975
BBCC			2,431						—						(1,171)						174						1,275						2,709
Residential real estate			21,916						—						(256)						153						(1,033)						20,780
Indirect			1,532						—						(2,089)						1,349						529						1,321
Direct			12,116						—						(8,018)						1,798						(2,325)						3,571
Home equity			6,820						—						(330)						471						(1,090)						5,871
Total			$	303,671					$	—					$	(55,261)					$	9,052					$	46,520					$	303,982
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

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Unfunded Loan Commitments

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2023						2022						2023						2022
Allowance for credit losses on unfunded loan commitments:
Balance at beginning of period			$	37,007					$	21,966					$	32,188					$	10,879
Provision for credit losses on unfunded loan commitments    acquired during the period			—						—						—						11,013
(Recapture of) provision for credit losses on unfunded loan    commitments			(4,047)						4,203						772						4,277
Balance at end of period			$	32,960					$	26,169					$	32,960					$	26,169

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:

(dollars in thousands)			Origination Year																																										Revolving to Term
			2023						2022						2021						2020						2019						Prior						Revolving												Total
September 30, 2023
Commercial:
Pass			$	1,615,716					$	1,690,168					$	1,095,758					$	553,187					$	479,907					$	501,610					$	2,000,147					$	454,995					$	8,391,488
Criticized			27,469						110,893						21,107						46,241						22,674						54,738						107,105						32,247						422,474
Classified:
Substandard			19,509						40,694						32,135						38,892						9,970						20,431						66,977						15,417						244,025
Nonaccrual			—						5,748						2,034						284						2,718						—						—						—						10,784
Doubtful			—						18,838						5,626						1,762						962						11,136						—						—						38,324
Total			$	1,662,694					$	1,866,341					$	1,156,660					$	640,366					$	516,231					$	587,915					$	2,174,229					$	502,659					$	9,107,095
Commercial real estate:
Pass			$	1,805,852					$	3,432,536					$	2,715,562					$	1,734,359					$	1,117,895					$	1,273,742					$	73,590					$	796,442					$	12,949,978
Criticized			58,440						62,461						42,128						28,716						27,978						90,549						9,959						21,023						341,254
Classified:
Substandard			21,214						84,269						23,589						16,822						78,165						41,313						—						50,424						315,796
Nonaccrual			—						2,983						11,470						1,428						52						11,385						—						792						28,110
Doubtful			—						1,649						33,564						4,142						38,199						37,936						—						—						115,490
Total			$	1,885,506					$	3,583,898					$	2,826,313					$	1,785,467					$	1,262,289					$	1,454,925					$	83,549					$	868,681					$	13,750,628
BBCC:
Pass			$	74,658					$	76,281					$	49,463					$	42,980					$	30,085					$	14,488					$	66,281					$	18,582					$	372,818
Criticized			2,295						2,469						1,114						76						1,110						—						2,470						2,264						11,798
Classified:
Substandard			98						733						619						24						401						1,196						100						438						3,609
Nonaccrual			216						451						310						340						—						87						477						278						2,159
Doubtful			—						865						492						50						67						88						—						—						1,562
Total			$	77,267					$	80,799					$	51,998					$	43,470					$	31,663					$	15,859					$	69,328					$	21,562					$	391,946

(dollars in thousands)			Origination Year																																										Revolving to Term
			2022						2021						2020						2019						2018						Prior						Revolving												Total
December 31, 2022
Commercial:
Pass			$	2,388,618					$	1,754,364					$	796,340					$	738,208					$	362,986					$	388,617					$	1,988,763					$	329,119					$	8,747,015
Criticized			40,856						30,661						63,557						33,490						9,195						5,312						61,036						4,327						248,434
Classified:
Substandard			37,223						47,522						16,540						22,925						4,844						21,204						67,402						25,143						242,803
Nonaccrual			3,627						1,453						566						—						—						—						1,634						6,623						13,903
Doubtful			2,821						17,604						3,720						8,005						5,968						8,351						—						—						46,469
Total			$	2,473,145					$	1,851,604					$	880,723					$	802,628					$	382,993					$	423,484					$	2,118,835					$	365,212					$	9,298,624
Commercial real estate:
Pass			$	3,066,960					$	2,828,758					$	1,989,000					$	1,219,025					$	675,572					$	1,018,719					$	57,818					$	689,553					$	11,545,405
Criticized			75,306						34,422						22,569						82,637						86,504						56,864						—						23,282						381,584
Classified:
Substandard			46,231						16,928						24,319						78,468						57,824						21,591						—						4,108						249,469
Nonaccrual			3,151						9,541						5,014						—						2,312						22,155						—						3,257						45,430
Doubtful			1,934						38,386						10,011						4,605						1,523						20,401						—						—						76,860
Total			$	3,193,582					$	2,928,035					$	2,050,913					$	1,384,735					$	823,735					$	1,139,730					$	57,818					$	720,200					$	12,298,748
BBCC:
Pass			$	90,341					$	64,161					$	52,304					$	36,868					$	23,618					$	11,333					$	60,016					$	18,881					$	357,522
Criticized			1,504						525						368						692						353						—						1,006						1,603						6,051
Classified:
Substandard			811						143						—						421						—						—						543						682						2,600
Nonaccrual			42						37						118						—						429						284						—						639						1,549
Doubtful			40						107						439						157						64						73						—						—						880
Total			$	92,738					$	64,973					$	53,229					$	38,138					$	24,464					$	11,690					$	61,565					$	21,805					$	368,602

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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)			2023						2022						2021						2020						2019						Prior						Revolving												Total
September 30, 2023
Residential real estate:
Risk Rating:
Performing			$	362,518					$	1,504,933					$	1,861,729					$	1,732,039					$	444,411					$	750,037					$	—					$	279					$	6,655,946
Nonperforming			—						3,529						2,905						4,538						3,343						26,027						—						—						40,342
Total			$	362,518					$	1,508,462					$	1,864,634					$	1,736,577					$	447,754					$	776,064					$	—					$	279					$	6,696,288
Indirect:
Risk Rating:
Performing			$	309,220					$	390,012					$	181,235					$	96,148					$	46,877					$	19,666					$	—					$	196					$	1,043,354
Nonperforming			120						1,270						1,175						604						361						340						—						—						3,870
Total			$	309,340					$	391,282					$	182,410					$	96,752					$	47,238					$	20,006					$	—					$	196					$	1,047,224
Direct:
Risk Rating:
Performing			$	84,749					$	99,625					$	107,539					$	54,070					$	35,065					$	87,207					$	63,877					$	4,852					$	536,984
Nonperforming			87						486						522						403						316						3,874						6						11						5,705
Total			$	84,836					$	100,111					$	108,061					$	54,473					$	35,381					$	91,081					$	63,883					$	4,863					$	542,689
Home equity:
Risk Rating:
Performing			$	1					$	692					$	387					$	690					$	743					$	5,736					$	994,797					$	23,918					$	1,026,964
Nonperforming			—						24						219						203						758						4,810						1,692						7,294						15,000
Total			$	1					$	716					$	606					$	893					$	1,501					$	10,546					$	996,489					$	31,212					$	1,041,964

			Origination Year																																										Revolving to Term
			2022						2021						2020						2019						2018						Prior						Revolving												Total
December 31, 2022
Residential real estate:
Risk Rating:
Performing			$	1,327,168					$	1,945,792					$	1,825,762					$	478,529					$	136,260					$	712,175					$	7					$	88					$	6,425,781
Nonperforming			59						529						861						873						1,826						30,512						—						—						34,660
Total			$	1,327,227					$	1,946,321					$	1,826,623					$	479,402					$	138,086					$	742,687					$	7					$	88					$	6,460,441
Indirect:
Risk Rating:
Performing			$	504,410					$	249,407					$	144,265					$	82,304					$	31,484					$	19,095					$	—					$	62					$	1,031,027
Nonperforming			348						1,074						645						531						304						328						—						—						3,230
Total			$	504,758					$	250,481					$	144,910					$	82,835					$	31,788					$	19,423					$	—					$	62					$	1,034,257
Direct:
Risk Rating:
Performing			$	132,934					$	164,126					$	77,406					$	57,919					$	45,299					$	59,212					$	87,622					$	671					$	625,189
Nonperforming			115						851						614						205						327						1,526						5						354						3,997
Total			$	133,049					$	164,977					$	78,020					$	58,124					$	45,626					$	60,738					$	87,627					$	1,025					$	629,186
Home equity:
Risk Rating:
Performing			$	919					$	896					$	1,849					$	1,497					$	983					$	11,646					$	990,001					$	14,792					$	1,022,583
Nonperforming			166						160						166						446						794						4,308						1,698						3,462						11,200
Total			$	1,085					$	1,056					$	2,015					$	1,943					$	1,777					$	15,954					$	991,699					$	18,254					$	1,033,783

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The following table summarizes the gross charge-offs of loans by loan portfolio segment and origination year:

			Origination Year
(dollars in thousands)			2023						2022						2021						2020						2019						Prior						Revolving									Total
Three Months Ended September 30, 2023
Commercial			$	—					$	4,154					$	12,271					$	—					$	—					$	63					$	217											$	16,705
Commercial real estate			—						—						—						1,744						—						547						—												2,291
BBCC			499						501						49						—						—						—						—												1,049
Residential real estate			—						—						—						—						—						15						—												15
Indirect			75						276						86						12						10						31						—												490
Direct			19						429						423						112						270						60						867												2,180
Home equity			—						—						—						—						—						20						—												20
Total gross charge-offs			$	593					$	5,360					$	12,829					$	1,868					$	280					$	736					$	1,084											$	22,750
Nine Months Ended September 30, 2023
Commercial			$	—					$	6,254					$	23,432					$	120					$	6,789					$	302					$	562											$	37,459
Commercial real estate			—						54						735						2,144						—						3,005						—												5,938
BBCC			499						548						77						47						—						—						—												1,171
Residential real estate			—						—						—						—						—						256						—												256
Indirect			85						954						640						153						137						120						—												2,089
Direct			19						1,330						1,805						570						1,011						450						2,833												8,018
Home equity			—						—						—						—						—						330						—												330
Total gross charge-offs			$	603					$	9,140					$	26,689					$	3,034					$	7,937					$	4,463					$	3,395											$	55,261

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, 2023
Commercial			$	2,754					$	4,214					$	12,504					$	19,472					$	9,087,623					$	9,107,095
Commercial real estate			15,954						6,295						21,366						43,615						13,707,013						13,750,628
BBCC			1,273						511						712						2,496						389,450						391,946
Residential			29,762						6,784						12,733						49,279						6,647,009						6,696,288
Indirect			5,576						1,368						1,156						8,100						1,039,124						1,047,224
Direct			3,626						1,059						1,588						6,273						536,416						542,689
Home equity			5,840						1,808						6,077						13,725						1,028,239						1,041,964
Total			$	64,785					$	22,039					$	56,136					$	142,960					$	32,434,874					$	32,577,834
December 31, 2022
Commercial			$	14,147					$	4,801					$	11,080					$	30,028					$	9,268,596					$	9,298,624
Commercial real estate			47,240						1,312						32,892						81,444						12,217,304						12,298,748
BBCC			730						365						603						1,698						366,904						368,602
Residential			24,181						5,033						11,753						40,967						6,419,474						6,460,441
Indirect			6,302						2,118						958						9,378						1,024,879						1,034,257
Direct			5,404						2,118						1,928						9,450						619,736						629,186
Home equity			6,585						1,966						4,707						13,258						1,020,525						1,033,783
Total			$	104,589					$	17,713					$	63,921					$	186,223					$	30,937,418					$	31,123,641

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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, 2023																		December 31, 2022
(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			$	49,108					$	13,432					$	577					$	60,372					$	7,873					$	152
Commercial real estate			143,600						29,721						104						122,290						33,445						—
BBCC			3,721						—						—						2,429						—						—
Residential			40,342						—						—						34,660						—						1,808
Indirect			3,870						—						54						3,230						—						28
Direct			5,705						—						109						3,997						—						133
Home equity			15,000						—						348						11,200						—						529
Total			$	261,346					$	43,153					$	1,192					$	238,178					$	41,318					$	2,650

Interest income recognized on nonaccrual loans was insignificant during the three and nine months ended September 30, 2023 and 2022.

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

			Type of Collateral
(dollars in thousands)			Real Estate						Blanket Lien						Investment Securities/Cash						Auto						Other
September 30, 2023
Commercial			$	13,635					$	31,856					$	466					$	288					$	347
Commercial real estate			131,826						—						1,205						—						6,184
BBCC			2,131						1,174						—						416						—
Residential			40,342						—						—						—						—
Indirect			—						—						—						3,870						—
Direct			4,622						1						3						296						31
Home equity			15,000						—						—						—						—
Total loans			$	207,556					$	33,031					$	1,674					$	4,870					$	6,562
December 31, 2022
Commercial			$	8,962					$	42,754					$	2,690					$	1,611					$	980
Commercial real estate			108,871						—						1,718						—						6,411
BBCC			1,939						478						—						12						—
Residential			34,660						—						—						—						—
Indirect			—						—						—						3,230						—
Direct			2,991						13						—						232						23
Home equity			11,200						—						—						—						—
Total loans			$	168,623					$	43,245					$	4,408					$	5,085					$	7,414

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions.  At September 30, 2023, these loans totaled $2.8 billion, of which $1.2 billion had been sold to other financial institutions and $1.6 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.

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Financial Difficulty Modifications

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

The following table presents the amortized cost basis of financial difficulty modifications at September 30, 2023 that were modified during the three and nine months ended September 30, 2023 by class of loans and type of modification:

(dollars in thousands)									Term Extension																														Total Class of Loans
Three Months Ended September 30, 2023
Commercial									$	3,502																													0.0		%
Commercial real estate									93,844																														0.7		%
Total									$	97,346																													0.3		%
Nine Months Ended September 30, 2023
Commercial									$	20,811																													0.2		%
Commercial real estate									116,580																														0.8		%
Total									$	137,391																													0.4		%

Old National closely monitors the performance of financial difficulty modifications to understand the effectiveness of its efforts. The following table presents the performance of loans identified as financial difficulty modifications at September 30, 2023:

(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, 2023
Commercial			$	—					$	—					$	2,541					$	2,541					$	18,270					$	20,811
Commercial real estate			1,086						—						—						1,086						115,494						116,580
Total			$	1,086					$	—					$	2,541					$	3,627					$	133,764					$	137,391

The following table summarizes the nature of the financial difficulty modifications during the three and nine months ended September 30, 2023 by class of loans:

(dollars in thousands)

Weighted- Average Term Extension (in months)

Three Months Ended September 30, 2023

Commercial

7.3

Commercial real estate

9.2

Total

9.2

Nine Months Ended September 30, 2023

Commercial

5.7

Commercial real estate

8.9

Total

8.4

There were no payment defaults on these loans subsequent to their modifications during the three and nine months ended September 30, 2023. At September 30, 2023, Old National had not committed to lend any material additional funds to the borrowers whose loans were modified due to financial difficulties.

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NOTE 7 – LEASES

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

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

The components of lease expense were as follows:

			Affected Line Item in the Statement of Income						Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)									2023						2022						2023						2022
Operating lease cost			Occupancy/Equipment expense						$	7,462					$	7,657					$	23,569					$	21,323
Finance lease cost:
Amortization of right-of-use assets			Occupancy expense						742						680						2,170						2,003
Interest on lease liabilities			Interest expense						183						105						536						315
Sub-lease income			Occupancy expense						(119)						(87)						(281)						(389)
Total									$	8,268					$	8,355					$	25,994					$	23,252

Supplemental balance sheet information related to leases was as follows:

(dollars in thousands)			September 30, 2023						December 31, 2022
Operating Leases
Operating lease right-of-use assets			$	179,284					$	189,714
Operating lease liabilities			199,937						211,964
Finance Leases
Premises and equipment, net			20,571						10,799
Other borrowings			21,595						13,469
Weighted-Average Remaining Lease Term (in Years)
Operating leases			8.5						9.1
Finance leases			10.6						7.2
Weighted-Average Discount Rate
Operating leases			2.93		%				2.88		%
Finance leases			3.89		%				3.30		%

Supplemental cash flow information related to leases was as follows:

			Nine Months Ended September 30,
(dollars in thousands)			2023						2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases			$	23,766					$	22,223
Operating cash flows from finance leases			536						315
Financing cash flows from finance leases			1,893						1,839

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The following table presents a maturity analysis of the Company’s lease liability by lease classification at September 30, 2023:

(dollars in thousands)			Operating Leases						Finance Leases
2023			$	7,959					$	826
2024			31,183						3,357
2025			29,564						3,380
2026			28,622						2,154
2027			27,662						2,157
Thereafter			102,282						14,809
Total undiscounted lease payments			227,272						26,683
Amounts representing interest			(27,335)						(5,088)
Lease liability			$	199,937					$	21,595

NOTE 8 – 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)			2023						2022						2023						2022
Balance at beginning of period			$	1,998,716					$	1,991,534					$	1,998,716					$	1,036,994
Acquisitions and adjustments			—						11,065						—						965,605
Balance at end of period			$	1,998,716					$	2,002,599					$	1,998,716					$	2,002,599

The increase in goodwill for the three and nine months ended September 30, 2022 was due to the First Midwest merger. See Note 3 to the consolidated financial statements for additional detail regarding this transaction.

Old National performed the required annual goodwill impairment test as of August 31, 2023 and concluded that there was no impairment.  No events or circumstances since the August 31, 2023 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, 2023
Core deposit			$	143,511					$	(68,312)					$	75,199
Customer trust relationships			52,621						(19,701)						32,920
Total other intangible assets			$	196,132					$	(88,013)					$	108,119
December 31, 2022
Core deposit			$	170,642					$	(80,951)					$	89,691
Customer trust relationships			56,243						(19,529)						36,714
Total other intangible assets			$	226,885					$	(100,480)					$	126,405

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

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded during the nine months ended September 30, 2023 or 2022.  Total amortization expense associated with intangible assets was

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$6.0 million and $18.3 million for the three and nine months ended September 30, 2023, respectively, compared to $7.1 million and $19.1 million for the three and nine months ended September 30, 2022, respectively.

Estimated amortization expense for future years is as follows:

(dollars in thousands)
2023 remaining			$	5,869
2024			21,239
2025			18,358
2026			15,555
2027			12,867
Thereafter			34,231
Total			$	108,119

NOTE 9 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS

Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects.  These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. As of September 30, 2023, Old National expects to recover its remaining investments through the use of the tax credits that are generated by the investments.

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

(dollars in thousands)						September 30, 2023												December 31, 2022
Investment			Accounting Method			Investment						Unfunded Commitment (1)						Investment						Unfunded Commitment
LIHTC			Proportional amortization			$	93,214					$	54,440					$	84,428					$	55,754
FHTC			Equity			36,715						27,214						19,316						9,588
NMTC			Consolidation			45,637						—						51,912						—
Renewable Energy			Equity			385						—						1,099						—
Total						$	175,951					$	81,654					$	156,755					$	65,342

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

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

(dollars in thousands)			Amortization Expense (1)						Tax Expense (Benefit) Recognized (2)
Three Months Ended September 30, 2023
LIHTC			$	3,208					$	(3,582)
FHTC			330						(399)
NMTC			2,092						(2,611)
Renewable Energy			222						—
Total			$	5,852					$	(6,592)
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)
Nine Months Ended September 30, 2023
LIHTC			$	6,135					$	(7,398)
FHTC			1,178						(1,423)
NMTC			6,275						(7,833)
Renewable Energy			714						—
Total			$	14,302					$	(16,654)
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)

(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 10 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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

			At or for the Nine Months Ended September 30,
(dollars in thousands)			2023						2022
Outstanding at period end			$	279,061					$	438,053
Average amount outstanding during the period			351,362						450,966
Maximum amount outstanding at any month-end during the period			430,537						509,275
Weighted-average interest rate:
During the period			0.91		%				0.09		%
At period end			1.35		%				0.40		%

At December 31, 2022, securities sold under agreements to repurchase totaled $432.8 million with a weighted-average interest rate of 1.31%.

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

			At September 30, 2023
			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			$	279,061					$	—					$	—					$	—					$	279,061
Total			$	279,061					$	—					$	—					$	—					$	279,061

The fair value of securities pledged to secure repurchase agreements may decline.  Old National has pledged securities valued at 107% of the gross outstanding balance of repurchase agreements at September 30, 2023 to manage this risk.

NOTE 11 – FEDERAL HOME LOAN BANK ADVANCES

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

(dollars in thousands)			September 30, 2023						December 31, 2022
FHLB advances (fixed rates 0.00% to 5.61%    and variable rates 5.35% to 5.36%) maturing    December 2023 to September 2042			$	4,450,528					$	3,850,677
Fair value hedge basis adjustments and unamortized    prepayment fees			(37,952)						(21,659)
Total			$	4,412,576					$	3,829,018

FHLB advances had weighted-average rates of 3.36% at September 30, 2023 and 3.15% at December 31, 2022. Certain FHLB advances are collateralized with loans and investment securities up to 190%.

At September 30, 2023, total unamortized prepayment fees related to debt modifications completed in prior years totaled $15.7 million, compared to $20.2 million at December 31, 2022.

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Contractual maturities of FHLB advances at September 30, 2023 were as follows:

(dollars in thousands)
Due in 2023			$	100,000
Due in 2024			25,243
Due in 2025			550,285
Due in 2026			100,000
Thereafter			3,675,000
Fair value hedge basis adjustments and unamortized prepayment fees			(37,952)
Total			$	4,412,576

NOTE 12 – OTHER BORROWINGS

The following table summarizes Old National’s other borrowings:

(dollars in thousands)			September 30, 2023						December 31, 2022
Old National Bancorp:
Senior unsecured notes (fixed rate 4.125%) maturing August 2024			$	175,000					$	175,000
Unamortized debt issuance costs related to senior unsecured notes			(130)						(247)
Subordinated debentures (fixed rate 5.875%) maturing September 2026			150,000						150,000
Junior subordinated debentures (rates of 6.95% to 9.21%) maturing    July 2031 to September 2037			136,643						136,643
Other basis adjustments			19,496						23,363
Old National Bank:
Finance lease liabilities			21,595						13,469
Subordinated debentures (variable rate 9.99%) maturing October 2025			12,000						12,000
Leveraged loans for NMTC (fixed rates of 1.00% to 1.43%)    maturing December 2046 to June 2060			143,745						143,187
Other (1)			205,106						89,588
Total other borrowings			$	863,455					$	743,003

(1)Includes overnight borrowings to collateralize certain derivative positions totaling $204.5 million at September 30, 2023 and $88.0 million at December 31, 2022.

Contractual maturities of other borrowings at September 30, 2023 were as follows:

(dollars in thousands)
Due in 2023			$	205,160
Due in 2024			177,653
Due in 2025			14,740
Due in 2026			151,576
Due in 2027			1,636
Thereafter			292,738
Unamortized debt issuance costs and other basis adjustments			19,952
Total			$	863,455

Junior Subordinated Debentures

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

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

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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, 2023:

(dollars in thousands)

Rate at September 30, 2023

Name of Trust

Issuance Date

Issuance Amount

Rate

Maturity Date

Bridgeview Statutory Trust I

July 2001

$

15,464

3-month SOFR plus 3.58%

9.21%

July 31, 2031

Bridgeview Capital Trust II

December 2002

15,464

3-month SOFR plus 3.35%

8.92%

January 7, 2033

First Midwest Capital Trust I

November 2003

37,825

6.95% fixed

6.95%

December 1, 2033

St. Joseph Capital Trust II

March 2005

5,155

3-month SOFR plus 1.75%

7.42%

March 17, 2035

Northern States Statutory Trust I

September 2005

10,310

3-month SOFR plus 1.80%

7.47%

September 15, 2035

Anchor Capital Trust III

August 2005

5,000

3-month SOFR plus 1.55%

7.21%

September 30, 2035

Great Lakes Statutory Trust II

December 2005

6,186

3-month SOFR plus 1.40%

7.07%

December 15, 2035

Home Federal Statutory    Trust I

September 2006

15,464

3-month SOFR plus 1.65%

7.32%

September 15, 2036

Monroe Bancorp Capital    Trust I

July 2006

3,093

3-month SOFR plus 1.60%

7.17%

October 7, 2036

Tower Capital Trust 3

December 2006

9,279

3-month SOFR plus 1.69%

7.36%

March 1, 2037

Monroe Bancorp Statutory    Trust II

March 2007

5,155

3-month SOFR plus 1.60%

7.27%

June 15, 2037

Great Lakes Statutory Trust III

June 2007

8,248

3-month SOFR plus 1.70%

7.37%

September 15, 2037

Total

$

136,643

Subordinated Debentures

Old National assumed $12.0 million of subordinated fixed-to-floating notes related to the acquisition of Anchor Bancorp, Inc. (MN).  The debentures currently have a floating rate of interest equal to the three-month term SOFR rate plus 4.618%.

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

Leveraged Loans

The leveraged loans are directly related to the NMTC structure. As part of the transaction structure, Old National has the right to sell its interest in the entity that received the leveraged loans at an agreed upon price to the leveraged lender at the end of the NMTC seven-year compliance period. See Note 9 to the consolidated financial statements for additional information on the Company’s NMTC investments.

Finance Lease Liabilities

Old National has long-term finance lease liabilities for certain banking centers and equipment totaling $21.6 million at September 30, 2023.  See Note 7 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities.

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NOTE 13 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

(dollars in thousands)			Unrealized Gains and Losses on Available- for-Sale Debt Securities						Unrealized Gains and Losses on Held-to- Maturity Securities						Gains and Losses on Hedges						Defined Benefit Pension Plans						Total
Three Months Ended September 30, 2023
Balance at beginning of period			$	(701,393)					$	(103,144)					$	(4,096)					$	—					$	(808,633)
Other comprehensive income (loss) before    reclassifications			(156,660)						—						(11,546)						—						(168,206)
Amounts reclassified from AOCI to income (1)			178						4,193						3,653						—						8,024
Balance at end of period			$	(857,875)					$	(98,951)					$	(11,989)					$	—					$	(968,815)
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)
Nine Months Ended September 30, 2023
Balance at beginning of period			$	(642,346)					$	(112,664)					$	(31,549)					$	137					$	(786,422)
Other comprehensive income (loss) before    reclassifications			(219,562)						1,325						34,279						—						(183,958)
Amounts reclassified from AOCI to income (1)			4,033						12,388						(14,719)						(137)						1,565
Balance at end of period			$	(857,875)					$	(98,951)					$	(11,989)					$	—					$	(968,815)
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)

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

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The following table summarizes the amounts reclassified out of each component of AOCI for the three months ended September 30, 2023 and 2022:

			Three Months Ended September 30,
(dollars in thousands)			2023						2022
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			$	(241)					$	(172)					Debt securities gains (losses), net
			63						41						Income tax (expense) benefit
			$	(178)					$	(131)					Net income (loss)
Unrealized gains and losses on    held-to-maturity securities			$	(5,623)					$	(6,772)					Interest income (expense)
			1,430						1,651						Income tax (expense) benefit
			$	(4,193)					$	(5,121)					Net income (loss)
Gains and losses on hedges    Interest rate contracts			$	(4,927)					$	(749)					Interest income (expense)
			1,274						184						Income tax (expense) benefit
			$	(3,653)					$	(565)					Net income (loss)
Amortization of defined benefit    pension items
Actuarial gains (losses)			$	—					$	11					Salaries and employee benefits
			—						(3)						Income tax (expense) benefit
			$	—					$	8					Net income (loss)
Total reclassifications for the period			$	(8,024)					$	(5,809)					Net income (loss)

The following table summarizes the amounts reclassified out of each component of AOCI for the nine months ended September 30, 2023 and 2022:

			Nine Months Ended September 30,
(dollars in thousands)			2023						2022
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			$	(5,440)					$	85					Debt securities gains (losses), net
			1,407						(20)						Income tax (expense) benefit
			$	(4,033)					$	65					Net income (loss)
Unrealized gains and losses on    held-to-maturity securities			$	(16,574)					$	(10,774)					Interest income (expense)
			4,186						2,623						Income tax (expense) benefit
			$	(12,388)					$	(8,151)					Net income (loss)
Gains and losses on hedges    Interest rate contracts			$	19,893					$	139					Interest income (expense)
			(5,174)						(34)						Income tax (expense) benefit
			$	14,719					$	105					Net income (loss)
Amortization of defined benefit    pension items
Actuarial gains (losses)			$	182					$	32					Salaries and employee benefits
			(45)						(8)						Income tax (expense) benefit
			$	137					$	24					Net income (loss)
Total reclassifications for the period			$	(1,565)					$	(7,957)					Net income (loss)

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NOTE 14 – INCOME TAXES

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

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2023						2022						2023						2022
Provision at statutory rate of 21%			$	40,358					$	37,598					$	122,352					$	59,365
Tax-exempt income:
Tax-exempt interest			(4,625)						(3,929)						(13,716)						(10,335)
Section 291/265 interest disallowance			675						85						1,593						150
Company-owned life insurance income			(743)						(684)						(2,315)						(2,340)
Tax-exempt income			(4,693)						(4,528)						(14,438)						(12,525)
State income taxes			8,163						7,050						24,856						7,808
Interim period effective rate adjustment			116						(31)						(607)						3,042
Tax credit investments - federal			(2,071)						(2,407)						(7,122)						(4,968)
Officer compensation limitation			1,040						401						3,120						1,053
Non-deductible FDIC premiums			1,949						1,178						6,096						2,549
Other, net			(558)						(374)						(1,139)						(1,187)
Income tax expense (benefit)			$	44,304					$	38,887					$	133,118					$	55,137
Effective tax rate			23.1		%				21.7		%				22.9		%				19.5		%

The provision for income taxes was recorded at September 30, 2023 and 2022 based on the current estimate of the effective annual rate.

The higher effective tax rate during the nine months ended September 30, 2023 compared to the same period in 2022 reflected an increase in pre-tax book income combined with smaller increases in tax-exempt income and tax credits. Other contributing factors were increases in non-deductible officer compensation and non-deductible FDIC premiums as well as the First Midwest merger in February 2022.

Net Deferred Tax Assets

Net deferred tax assets are included in other assets on the balance sheet. At September 30, 2023, net deferred tax assets totaled $480.7 million, compared to $435.8 million at December 31, 2022. No valuation allowance was required on the Company’s deferred tax assets at September 30, 2023 or December 31, 2022.

The Company’s retained earnings at September 30, 2023 included an appropriation for acquired thrifts’ tax bad debt allowances totaling $58.6 million for which no provision for federal or state income taxes has been made.  If in the future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates.

Old National has federal net operating loss carryforwards totaling $68.4 million at September 30, 2023 and $81.5 million at December 31, 2022.  This federal net operating loss was acquired from the acquisition of Anchor BanCorp Wisconsin Inc. in 2016 and First Midwest in 2022.  If not used, the federal net operating loss carryforwards will begin expiring in 2030 and later.  Old National has recorded state net operating loss carryforwards totaling $115.6 million at September 30, 2023 and $124.4 million at December 31, 2022.  If not used, the state net operating loss carryforwards will expire from 2027 to 2036.

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

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NOTE 15 – DERIVATIVE FINANCIAL INSTRUMENTS

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

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

Derivatives Designated as Hedges

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

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

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

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

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

Cash Flow Hedges

Interest rate swaps of certain borrowings were designated as cash flow hedges totaling $150.0 million notional amount at both September 30, 2023 and December 31, 2022. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $1.5 billion notional amount at September 30, 2023 and $1.9 billion notional amount at December 31, 2022. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.

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

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

Fair Value Hedges

Interest rate swaps of certain borrowings were designated as fair value hedges totaling $700.0 million notional amount at September 30, 2023 and $300.0 million notional amount at December 31, 2022. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $998.1 million notional amount at September 30, 2023 and $910.0 million notional amount at December 31, 2022. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms.

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

			September 30, 2023																		December 31, 2022
									Fair Value																		Fair Value
(dollars in thousands)			Notional						Assets (1)						Liabilities (2)						Notional						Assets (1)						Liabilities (2)
Cash flow hedges
Interest rate collars and floors on loan pools			$	1,500,000					$	2,214					$	27,749					$	1,900,000					$	11,764					$	47,859
Interest rate swaps on borrowings (3)			150,000						—						—						150,000						—						—
Fair value hedges
Interest rate swaps on investment securities (3)			998,107						—						—						909,957						—						—
Interest rate swaps on borrowings (3)			700,000						—						—						300,000						—						—
Total									$	2,214					$	27,749											$	11,764					$	47,859

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

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

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

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

(dollars in thousands)																		Gain (Loss) 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, 2023
Interest rate contracts			Interest income/(expense)			$	(9,553)		Fixed-rate debt						Interest income/(expense)			$	9,566
Interest rate contracts			Interest income/(expense)			45,537			Fixed-rate investment securities						Interest income/(expense)			(46,055)
Total						$	35,984											$	(36,489)
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)
Nine Months Ended September 30, 2023
Interest rate contracts			Interest income/(expense)			$	(18,500)		Fixed-rate debt						Interest income/(expense)			$	18,303
Interest rate contracts			Interest income/(expense)			7,268			Fixed-rate investment securities						Interest income/(expense)			(7,671)
Total						$	(11,232)											$	10,632
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)

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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)						2023						2022			2023						2022
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)			$	(15,574)					$	(36,755)		$	(5,960)					$	(749)
						Nine Months Ended September 30,									Nine Months Ended September 30,
						2023						2022			2023						2022
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)			$	4,302					$	(49,679)		$	17,481					$	139

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 $5.8 million will be reclassified to interest income and $26.3 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, 2023, the notional amounts of the interest rate lock commitments were $42.5 million and forward commitments were $54.7 million.  At December 31, 2022, the notional amounts of the interest rate lock commitments were $21.4 million and forward commitments were $30.3 million.  It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.

Old National also enters into derivative instruments for the benefit of its clients. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $5.8 billion at September 30, 2023 and $5.2 billion at December 31, 2022. These derivative contracts do not qualify for hedge accounting.  These instruments include interest rate swaps, caps, and collars.  Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of clients by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

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

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

			September 30, 2023																		December 31, 2022
									Fair Value																		Fair Value
(dollars in thousands)			Notional						Assets (1)						Liabilities (2)						Notional						Assets (1)						Liabilities (2)
Interest rate lock commitments			$	42,492					$	—					$	146					$	21,401					$	93					$	—
Forward mortgage loan contracts			54,730						1,031						—						30,330						32						—
Customer interest rate swaps			5,775,638						1,208						379,864						5,220,363						5,676						326,924
Counterparty interest rate swaps (3)			5,775,634						222,907						1,213						5,220,363						151,111						5,711
Customer foreign currency contracts			13,234						218						156						8,341						253						42
Counterparty foreign currency contracts			12,970						255						141						8,297						72						168
Total									$	225,619					$	381,520											$	157,237					$	332,845

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

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

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

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

						Three Months Ended September 30,
(dollars in thousands)						2023						2022
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)			$	426					$	108
Mortgage contracts			Mortgage banking revenue			391						638
Foreign currency contracts			Other income/(expense)			(3)						75
Total						$	814					$	821
						Nine Months Ended September 30,
						2023						2022
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)			$	1,125					$	1,058
Mortgage contracts			Mortgage banking revenue			760						(735)
Foreign currency contracts			Other income/(expense)			(16)						113
Total						$	1,869					$	436

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

NOTE 16 – COMMITMENTS, CONTINGENCIES, AND FINANCIAL GUARANTEES

Litigation

At September 30, 2023, there were certain legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company’s management does not expect that any potential liabilities arising from pending legal matters will have a material adverse effect on the Company’s business, financial position, or results of operations.

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

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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, 2023						December 31, 2022
Unfunded loan commitments			$	9,142,538					$	8,979,334
Standby letters of credit (1)			184,027						174,070

(1)Notional amount, which represents the maximum amount of future funding requirements. The carrying value was $1.2 million at September 30, 2023 and $0.8 million at December 31, 2022.

At September 30, 2023, approximately 4% of the unfunded loan commitments had fixed rates, with the remainder having floating rates ranging from 0% to 23%.  The allowance for unfunded loan commitments totaled $33.0 million at September 30, 2023 and $32.2 million at December 31, 2022.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amounts of $522.5 million at September 30, 2023 and $398.9 million at December 31, 2022.

Visa Class B Restricted Shares

In 2008, Old National received Visa Class B restricted shares as part of Visa’s initial public offering.  These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares.  This conversion will not occur until the final settlement of certain litigation for which Visa is indemnified by the holders of Visa’s Class B shares, including Old National.  Visa funded an escrow account from its initial public offering to settle these litigation claims.  Increases in litigation claims requiring Visa to fund the escrow account due to insufficient funds will result in a reduction of the conversion ratio of each Visa Class B share to unrestricted Class A shares.  As of September 30, 2023, the conversion ratio was 1.5875.  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, 2023 are carried at a zero cost basis and are included in other assets with our equity securities that have no readily determinable fair value.

NOTE 17 – FAIR VALUE

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

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

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

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

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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 SOFR 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.

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 market quotes developed using observable 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, 2023 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			$	69,880					$	69,880					$	—					$	—
Investment securities available-for-sale:
U.S. Treasury			548,126						548,126						—						—
U.S. government-sponsored entities and agencies			1,142,900						—						1,142,900						—
Mortgage-backed securities - Agency			3,862,705						—						3,862,705						—
States and political subdivisions			544,944						—						544,944						—
Pooled trust preferred securities			11,125						—						11,125						—
Other securities			304,961						—						304,961						—
Loans held-for-sale			122,033						—						122,033						—
Derivative assets			227,833						—						227,833						—
Financial Liabilities
Derivative liabilities			409,269						—						409,269						—

									Fair Value Measurements at December 31, 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			$	52,507					$	52,507					$	—					$	—
Investment securities available-for-sale:
U.S. Treasury			200,927						200,927						—						—
U.S. government-sponsored entities and agencies			1,175,080						—						1,175,080						—
Mortgage-backed securities - Agency			4,369,902						—						4,369,902						—
States and political subdivisions			663,852						—						663,852						—
Pooled trust preferred securities			10,811						—						10,811						—
Other securities			353,140						—						353,140						—
Loans held-for-sale			11,926						—						11,926						—
Derivative assets			169,001						—						169,001						—
Financial Liabilities
Derivative liabilities			380,704						—						380,704						—

Non-Recurring Basis

Assets measured at fair value at September 30, 2023 on a non-recurring basis are summarized below:

									Fair Value Measurements at September 30, 2023 Using
(dollars in thousands)			Carrying Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Collateral Dependent Loans:
Commercial loans			$	10,783					$	—					$	—					$	10,783
Commercial real estate loans			75,720						—						—						75,720
Foreclosed Assets:
Commercial			1,879						—						—						1,879

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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 $117.5 million, with a valuation allowance of $31.0 million at September 30, 2023.  Old National recorded provision expense associated with these loans totaling $2.1 million and $21.9 million for the three and nine months ended September 30, 2023, respectively.  Old National recorded provision expense associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $7.3 million and $20.1 million for the three and nine months ended September 30, 2022, respectively.

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 $1.9 million at September 30, 2023. There were $26 thousand of write-downs on other real estate owned for the three months ended September 30, 2023 and $0.1 million for nine months ended September 30, 2023. There were write-downs totaling $0.2 million and $0.6 million for the three and nine months ended September 30, 2022, respectively.

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, 2023 and no impairments or recoveries recorded during the three or nine months ended September 30, 2023. Old National recorded immaterial recoveries associated with loan servicing rights during the three and nine months ended September 30, 2022.

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

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

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

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

(dollars in thousands)

Fair Value

Valuation Techniques

Unobservable Input

Range (Weighted Average) (1)

September 30, 2023

Collateral Dependent Loans

Commercial loans

$

10,783

Discounted

Discount for type of property,

10% - 40% (33%)

cash flow

age of appraisal, and current status

Commercial real estate loans

75,720

Discounted

Discount for type of property,

1% - 38% (17%)

cash flow

age of appraisal, and current status

Foreclosed Assets

Commercial real estate

1,879

Fair value of

Discount for type of property,

4% - 17% (6%)

collateral

age of appraisal, and current status

December 31, 2022

Collateral Dependent Loans

Commercial loans

$

22,562

Discounted

Discount for type of property,

10% - 47% (28%)

cash flow

age of appraisal, and current status

Commercial real estate loans

48,026

Discounted

Discount for type of property,

1% - 26% (11%)

cash flow

age of appraisal, and current status

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

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.

Loans Held-For-Sale

Old National has elected the fair value option for 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.  Interest income for loans held-for-sale is included in the income statement totaling $0.4 million and $0.9 million for the three and nine months ended September 30, 2023, respectively, compared to $0.4 million and $1.6 million for the three and nine months ended September 30, 2022, respectively.

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

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

(dollars in thousands)			Aggregate Fair Value						Difference						Contractual Principal
September 30, 2023
Loans held-for-sale			$	122,033					$	72					$	121,961
December 31, 2022
Loans held-for-sale			$	11,926					$	221					$	11,705

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

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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, 2023
Loans held-for-sale			$	(327)					$	12					$	—					$	(315)
Three Months Ended September 30, 2022
Loans held-for-sale			$	(710)					$	1					$	—					$	(709)
Nine Months Ended September 30, 2023
Loans held-for-sale			$	(151)					$	2					$	—					$	(149)
Nine Months Ended September 30, 2022
Loans held-for-sale			$	(1,775)					$	7					$	—					$	(1,768)

Financial Instruments Not Carried at Fair Value

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

									Fair Value Measurements at September 30, 2023 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			$	1,663,430					$	1,663,430					$	—					$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies			824,223						—						617,010						—
Mortgage-backed securities - Agency			1,043,585						—						847,652						—
State and political subdivisions			1,160,106						—						928,959						—
Loans, net:
Commercial			9,207,028						—						—						9,078,129
Commercial real estate			13,770,202						—						—						13,302,502
Residential real estate			6,675,508						—						—						5,630,855
Consumer credit			2,621,114						—						—						2,526,277
Accrued interest receivable			209,503						1,093						45,597						162,813
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits			$	10,091,352					$	10,091,352					$	—					$	—
Checking, NOW, savings, and money market    interest-bearing deposits			21,585,620						21,585,620						—						—
Time deposits			5,575,704						—						5,527,361						—
Federal funds purchased and interbank borrowings			918						918						—						—
Securities sold under agreements to repurchase			279,061						279,061						—						—
FHLB advances			4,412,576						—						4,167,911						—
Other borrowings			863,455						—						843,629						—
Accrued interest payable			46,934						—						46,934						—
Standby letters of credit			1,224						—						—						1,224
Off-Balance Sheet Financial Instruments
Commitments to extend credit			$	—					$	—					$	—					$	3,582

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									Fair Value Measurements at December 31, 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			$	728,412					$	728,412					$	—					$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies			819,168						—						656,358						—
Mortgage-backed securities - Agency			1,106,817						—						982,963						—
State and political subdivisions			1,163,162						—						1,004,361						—
Loans, net:
Commercial			9,386,862						—						—						9,066,583
Commercial real estate			12,317,825						—						—						11,867,851
Residential real estate			6,438,525						—						—						5,372,491
Consumer credit			2,676,758						—						—						2,557,115
Accrued interest receivable			190,521						758						52,081						137,682
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits			$	11,930,798					$	11,930,798					$	—					$	—
Checking, NOW, savings, and money market    interest-bearing deposits			20,056,252						20,056,252						—						—
Time deposits			3,013,780						—						2,976,389						—
Federal funds purchased and interbank borrowings			581,489						581,489						—						—
Securities sold under agreements to repurchase			432,804						432,804						—						—
FHLB advances			3,829,018						—						3,739,780						—
Other borrowings			743,003						—						703,156						—
Accrued interest payable			19,547						—						19,547						—
Standby letters of credit			755						—						—						755
Off-Balance Sheet Financial Instruments
Commitments to extend credit			$	—					$	—					$	—					$	3,666

The methods utilized to measure the fair value of financial instruments at September 30, 2023 and December 31, 2022 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, 2023 and 2022, and financial condition as of September 30, 2023, compared to December 31, 2022.  This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes, as well as our 2022 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the SEC, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute forward‐looking statements within the meaning of the Act. These statements include, but are not limited to, descriptions of Old National’s financial condition, results of operations, asset and credit quality trends, profitability and business plans or opportunities. Forward-looking statements can be identified by the use of the words “anticipate,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “should,” and “will,” and other words of similar meaning. These forward-looking statements express management’s current expectations or forecasts of future events and, by their nature, are subject to risks and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those in such statements. Factors that might cause such a difference include, but are not limited to: competition; government legislation, regulations and policies; the ability of Old National to execute its business plan; 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 and economic and business uncertainty which could materially impact credit quality trends and the ability to generate loans and gather deposits; inflation and governmental responses to inflation, including increasing interest rates; market, economic, operational, liquidity, credit, and interest rate risks associated with our business; our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses; uncertainty about the discontinued use of LIBOR and the transition to an alternative rate; the potential impact of current and future business combinations on our performance and financial condition, including our ability to successfully integrate the businesses and the success of revenue-generating and cost reduction initiatives; 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; disruptive technologies in payment systems and other services traditionally provided by banks; failure or disruption of our information systems; computer hacking and other cybersecurity threats; the effects of climate change on Old National and its customers, borrowers, or service providers; political and economic uncertainty and instability; the impacts of pandemics, epidemics, and other infectious disease outbreaks; other matters discussed in this report; and other factors identified in filings with the SEC. These forward-looking statements are made only as of the date of this report and are not guarantees of future results, performance, or outcomes.

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

Investors should consider these risks, uncertainties, and other factors in addition to the factors under the heading “Risk Factors” included in our other filings with the SEC.

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FINANCIAL HIGHLIGHTS

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

			Three Months Ended
(dollars and shares in thousands, except per share data)			September 30,			June 30,			March 31,			December 31,			September 30,
			2023			2023			2023			2022			2022
Income Statement:
Net interest income			$	375,086		$	382,171		$	381,488		$	391,090		$	376,589
Taxable equivalent adjustment (1) (4)			5,837			5,825			5,666			5,378			4,950
Net interest income - taxable equivalent basis (4)			380,923			387,996			387,154			396,468			381,539
Provision for credit losses (2)			19,068			14,787			13,437			11,408			15,490
Noninterest income			80,938			81,629			70,681			165,037			80,385
Noninterest expense (2)			244,776			246,584			250,711			282,675			262,444
Net income available to common shareholders			$	143,842		$	151,003		$	142,566		$	196,701		$	136,119
Per Common Share Data:
Weighted average diluted common shares			291,717			291,266			292,756			293,131			292,483
Net income (diluted)			$	0.49		$	0.52		$	0.49		$	0.67		$	0.47
Cash dividends			0.14			0.14			0.14			0.14			0.14
Common dividend payout ratio (3)			29		%	27		%	29		%	21		%	30		%
Book value			$	17.07		$	17.25		$	17.24		$	16.68		$	16.05
Stock price			14.54			13.94			14.42			17.98			16.47
Tangible common book value (4)			9.87			10.03			9.98			9.42			8.75
Performance Ratios:
Return on average assets			1.22		%	1.29		%	1.25		%	1.74		%	1.22		%
Return on average common equity			11.39			12.01			11.58			16.77			11.13
Return on tangible common equity (4)			20.54			21.20			20.20			29.25			22.07
Return on average tangible common equity (4)			20.18			21.35			21.03			31.53			20.49
Net interest margin (4)			3.49			3.60			3.69			3.85			3.71
Efficiency ratio (4)			51.66			51.22			52.81			49.12			55.26
Efficiency ratio (prior presentation) (5)			N/A			N/A			N/A			N/A			56.17
Net charge-offs (recoveries) to average loans			0.24			0.13			0.21			0.05			0.10
Allowance for credit losses on loans to ending loans			0.93			0.93			0.94			0.98			0.99
Allowance for credit losses (6) to ending loans			1.03			1.04			1.05			1.08			1.08
Non-performing loans to ending loans			0.80			0.91			0.74			0.81			0.81
Balance Sheet:
Total loans			$	32,577,834		$	32,432,473		$	31,822,374		$	31,123,641		$	30,528,933
Total assets			49,059,448			48,496,755			47,842,644			46,763,372			46,215,526
Total deposits			37,252,676			36,231,315			34,917,792			35,000,830			36,053,663
Total borrowed funds			5,556,010			6,034,008			6,740,454			5,586,314			4,264,750
Total shareholders’ equity			5,239,537			5,292,095			5,277,426			5,128,595			4,943,383
Capital Ratios:
Risk-based capital ratios:
Tier 1 common equity			10.41		%	10.14		%	9.98		%	10.03		%	9.88		%
Tier 1			11.06			10.79			10.64			10.71			10.58
Total			12.32			12.14			11.96			12.02			11.84
Leverage ratio (to average assets)			8.70			8.59			8.53			8.52			8.26
Total equity to assets (averages)			10.88			10.96			11.00			10.70			11.18
Tangible common equity to tangible assets (4)			6.15			6.33			6.37			6.18			5.82
Nonfinancial Data:
Full-time equivalent employees			3,981			4,021			4,023			3,967			4,008
Banking centers			257			256			256			263			263

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

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

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

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

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

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

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The following table sets forth certain financial highlights of Old National for the year-to-date periods:

			Nine Months Ended September 30,
(dollars and shares in thousands, except per share data)			2023			2022
Income Statement:
Net interest income			$	1,138,745		$	936,846
Taxable equivalent adjustment (1) (4)			17,328			13,036
Net interest income - taxable equivalent basis (4)			1,156,073			949,882
Provision for credit losses (2)			47,292			133,391
Noninterest income			233,248			234,742
Noninterest expense (2)			742,071			755,508
Net income available to common shareholders			$	437,411		$	217,468
Per Common Share Data:
Weighted average diluted common shares			291,809			271,123
Net income (diluted)			$	1.50		$	0.80
Cash dividends			0.42			0.42
Common dividend payout ratio (3)			28		%	53		%
Book value			$	17.07		$	16.05
Stock price			14.54			16.47
Tangible common book value (4)			9.87			8.75
Performance Ratios:
Return on average assets			1.25		%	0.72		%
Return on average common equity			11.66			6.26
Return on tangible common equity (4)			20.82			12.05
Return on average tangible common equity (4)			20.85			11.50
Net interest margin (4)			3.59			3.34
Efficiency ratio (4)			51.89			62.17
Efficiency ratio (prior presentation) (5)			N/A			63.46
Net charge-offs (recoveries) to average loans			0.19			0.06
Allowance for credit losses on loans to ending loans			0.93			0.99
Allowance for credit losses (6) to ending loans			1.03			1.08
Non-performing loans to ending loans			0.80			0.81
Balance Sheet:
Total loans			$	32,577,834		$	30,528,933
Total assets			49,059,448			46,215,526
Total deposits			37,252,676			36,053,663
Total borrowed funds			5,556,010			4,264,750
Total shareholders’ equity			5,239,537			4,943,383
Capital Ratios:
Risk-based capital ratios:
Tier 1 common equity			10.41		%	9.88		%
Tier 1			11.06			10.58
Total			12.32			11.84
Leverage ratio (to average assets)			8.70			8.26
Total equity to assets (averages)			10.95			11.43
Tangible common equity to tangible assets (4)			6.15			5.82
Nonfinancial Data:
Full-time equivalent employees			3,981			4,008
Banking centers			257			263

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

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

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

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

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

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

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

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

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

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

						Three Months Ended
(dollars and shares in thousands, except per share data)						September 30,						June 30,						March 31,						December 31,						September 30,
						2023						2023						2023						2022						2022
Tangible common book value:
Shareholders’ common equity						$	4,995,818					$	5,048,376					$	5,033,707					$	4,884,876					$	4,699,664
Deduct: Goodwill and intangible assets						2,106,835						2,112,875						2,118,935						2,125,121						2,135,792
Tangible shareholders’ common equity (1)						$	2,888,983					$	2,935,501					$	2,914,772					$	2,759,755					$	2,563,872
Period end common shares						292,586						292,597						291,922						292,903						292,880
Tangible common book value (1)						9.87						10.03						9.98						9.42						8.75
Return on tangible common equity:
Net income applicable to common shares						$	143,842					$	151,003					$	142,566					$	196,701					$	136,119
Add:  Intangible amortization (net of tax) (2)						4,530						4,545						4,639						5,090						5,317
Tangible net income (1)						$	148,372					$	155,548					$	147,205					$	201,791					$	141,436
Tangible shareholders’ common equity (1)    (see above)						$	2,888,983					$	2,935,501					$	2,914,772					$	2,759,755					$	2,563,872
Return on tangible common equity (1)						20.54		%				21.20		%				20.20		%				29.25		%				22.07		%
Return on average tangible common equity:
Tangible net income (1) (see above)						$	148,372					$	155,548					$	147,205					$	201,791					$	141,436
Average shareholders’ common equity						$	5,050,353					$	5,030,083					$	4,922,469					$	4,692,863					$	4,890,434
Deduct: Average goodwill and intangible assets						2,109,944						2,115,894						2,122,157						2,132,480						2,129,858
Average tangible shareholders’ common equity (1)						$	2,940,409					$	2,914,189					$	2,800,312					$	2,560,383					$	2,760,576
Return on average tangible common equity (1)						20.18		%				21.35		%				21.03		%				31.53		%				20.49		%
Net interest margin:
Net interest income						$	375,086					$	382,171					$	381,488					$	391,090					$	376,589
Taxable equivalent adjustment						5,837						5,825						5,666						5,378						4,950
Net interest income - taxable equivalent basis (1)						$	380,923					$	387,996					$	387,154					$	396,468					$	381,539
Average earning assets						$	43,617,456					$	43,097,198					$	41,941,913					$	41,206,695					$	41,180,026
Net interest margin (1)						3.49		%				3.60		%				3.69		%				3.85		%				3.71		%
Efficiency ratio:
Noninterest expense						$	244,776					$	246,584					$	250,711					$	282,675					$	262,444
Deduct:  Intangible amortization expense						6,040						6,060						6,186						6,787						7,089
Adjusted noninterest expense (1)						$	238,736					$	240,524					$	244,525					$	275,888					$	255,355
Net interest income - taxable equivalent basis (1)    (see above)						$	380,923					$	387,996					$	387,154					$	396,468					$	381,539
Noninterest income						80,938						81,629						70,681						165,037						80,385
Deduct:  Debt securities gains (losses), net						(241)						17						(5,216)						(173)						(172)
Adjusted total revenue (1)						$	462,102					$	469,608					$	463,051					$	561,678					$	462,096
Efficiency ratio (1)						51.66		%				51.22		%				52.81		%				49.12		%				55.26		%
Tangible common equity to tangible assets:
Tangible shareholders’ equity (1) (see above)						$	2,888,983					$	2,935,501					$	2,914,772					$	2,759,755					$	2,563,872
Assets						$	49,059,448					$	48,496,755					$	47,842,644					$	46,763,372					$	46,215,526
Deduct: Goodwill and intangible assets						2,106,835						2,112,875						2,118,935						2,125,121						2,135,792
Tangible assets (1)						$	46,952,613					$	46,383,880					$	45,723,709					$	44,638,251					$	44,079,734
Tangible common equity to tangible assets (1)						6.15		%				6.33		%				6.37		%				6.18		%				5.82		%

(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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The following table presents GAAP to non-GAAP reconciliations for the year-to-date periods:

						Nine Months Ended September 30,
(dollars and shares in thousands, except per share data)						2023			2022
Tangible common book value:
Shareholders’ common equity						$	4,995,818		$	4,699,664
Deduct: Goodwill and intangible assets						2,106,835			2,135,792
Tangible shareholders’ common equity (1)						$	2,888,983		$	2,563,872
Period end common shares						292,586			292,880
Tangible common book value (1)						9.87			8.75
Return on tangible common equity:
Net income applicable to common shares						$	437,411		$	217,468
Add:  Intangible amortization (net of tax) (2)						13,714			14,302
Tangible net income (1)						$	451,125		$	231,770
Tangible shareholders’ common equity (1) (see above)						$	2,888,983		$	2,563,872
Return on tangible common equity (1)						20.82		%	12.05		%
Return on average tangible common equity:
Tangible net income (1) (see above)						$	451,125		$	231,770
Average shareholders’ common equity						$	5,001,437		$	4,628,831
Deduct: Average goodwill and intangible assets						2,115,953			1,941,270
Average tangible shareholders’ common equity (1)						$	2,885,484		$	2,687,561
Return on average tangible common equity (1)						20.85		%	11.50		%
Net interest margin:
Net interest income						$	1,138,745		$	936,846
Taxable equivalent adjustment						17,328			13,036
Net interest income - taxable equivalent basis (1)						$	1,156,073		$	949,882
Average earning assets						$	42,891,660		$	37,924,490
Net interest margin (1)						3.59		%	3.34		%
Efficiency ratio:
Noninterest expense						$	742,071		$	755,508
Deduct:  Intangible amortization expense						18,286			19,070
Adjusted noninterest expense (1)						$	723,785		$	736,438
Net interest income - taxable equivalent basis (1) (see above)						$	1,156,073		$	949,882
Noninterest income						233,248			234,742
Deduct:  Debt securities gains (losses), net						(5,440)			85
Adjusted total revenue (1)						$	1,394,761		$	1,184,539
Efficiency ratio (1)						51.89		%	62.17		%
Tangible common equity to tangible assets:
Tangible shareholders’ equity (1) (see above)						$	2,888,983		$	2,563,872
Assets						$	49,059,448		$	46,215,526
Deduct: Goodwill and intangible assets						2,106,835			2,135,792
Tangible assets (1)						$	46,952,613		$	44,079,734
Tangible common equity to tangible assets (1)						6.15		%	5.82		%

(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 asset size with consolidated assets of approximately $49 billion at September 30, 2023.  The Company’s corporate headquarters and principal executive office is located in Evansville, Indiana with commercial and consumer banking operations headquartered in Chicago, Illinois. Old National, through Old National Bank, provides a wide range of banking services throughout the Midwest region, including commercial and consumer loan and depository services, as well as other traditional banking services.  Old National also provides services to supplement its traditional banking business including fiduciary and wealth management services, investment and brokerage services, investment consulting, and other financial services.

Net income applicable to common shareholders for the third quarter of 2023 was $143.8 million, or $0.49 per diluted common share, compared to $151.0 million, or $0.52 per diluted common share, for the second quarter of 2023.

Results for the third quarter of 2023 were impacted by $6.3 million of merger-related charges. The second quarter of 2023 was impacted by pre-tax charges of $3.4 million related to the tragic April 10 event at our downtown Louisville location (“Louisville expenses”), merger-related charges of $2.4 million, and $0.2 million for property optimization.

We achieved strong results during the third quarter of 2023, including growth in total deposits and loans, modest compression of net interest income reflective of the rate environment, stable credit quality, and disciplined expense management.

Deposits:  Period-end total deposits increased $1.0 billion, or 3%, to $37.3 billion, reflecting continued efforts to compete for new client relationships as well as seasonal patterns in public funds compared to June 30, 2023.

Loans:  Our loan balances, excluding loans held-for-sale, increased $145.4 million to $32.6 billion at September 30, 2023 compared to June 30, 2023.  This was primarily driven by disciplined commercial real estate loan growth, partially offset by $389 million of commercial loan sales during the quarter.

Net Interest Income: Net interest income decreased $7.1 million to $375.1 million compared to the second quarter of 2023 driven by higher funding costs, partly offset by loan growth and higher rates on interest-earning assets.

Provision for Credit Losses:  Provision for credit losses increased $4.3 million to $19.1 million compared to the second quarter of 2023 reflecting net charge-offs and loan growth, as well as economic factors.

Noninterest Income:  Noninterest income decreased $0.7 million to $80.9 million compared to the second quarter of 2023 reflecting lower company-owned life insurance and other income offset by increases in all fee income categories.

Noninterest Expense:  Noninterest expense decreased $1.8 million compared to the second quarter of 2023. Noninterest expense included $6.3 million of merger-related expenses in the third quarter of 2023 compared to $6.0 million of Louisville expenses, merger-related charges, and charges for property optimization in the second quarter of 2023. Excluding these expenses, noninterest expense decreased $2.1 million compared to the second quarter of 2023 primarily due to higher salary and employee benefits in the second quarter of 2023 resulting from performance-driven incentive accruals.

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RESULTS OF OPERATIONS

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

(dollars in thousands, except    per share data)			Three Months Ended September 30,												% Change						Nine Months Ended September 30,												% Change
			2023						2022												2023						2022
Income Statement Summary:
Net interest income			$	375,086					$	376,589					(0.4)			%			$	1,138,745					$	936,846					21.6			%
Provision for credit losses			19,068						15,490						23.1						47,292						133,391						(64.5)
Noninterest income			80,938						80,385						0.7						233,248						234,742						(0.6)
Noninterest expense			244,776						262,444						(6.7)						742,071						755,508						(1.8)
Net income applicable to common    shareholders			143,842						136,119						5.7						437,411						217,468						101.1
Net income per common share -    diluted			0.49						0.47						4.3						1.50						0.80						87.5
Other Data:
Return on average common equity			11.39			%			11.13			%									11.66			%			6.26			%
Return on tangible common equity (1)			20.54						22.07												20.82						12.05
Return on average tangible common    equity (1)			20.18						20.49												20.85						11.50
Efficiency ratio (1)			51.66						55.26												51.89						62.17
Efficiency ratio (prior presentation) (2)			N/A						56.17												N/A						63.46
Tier 1 leverage ratio			8.70						8.26												8.70						8.26
Net charge-offs (recoveries) to    average loans			0.24						0.10												0.19						0.06

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

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

Net Interest Income

Net interest income is the most significant component of our earnings, comprising 83% of revenues for the nine months ended September 30, 2023.  Net interest income and net interest margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations.  Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of interest-earning assets and interest-bearing liabilities.

Interest rates increased during the third quarter of 2023. The Federal Reserve’s Federal Funds Rate is currently in a target range of 5.25% to 5.50%, with the Effective Federal Funds Rate increasing 25 basis points from June 30, 2023 to 5.33% at September 30, 2023. Management actively takes balance sheet restructuring, derivative, and deposit pricing actions to help mitigate interest rate risk. See the section of this Item 7 titled “Market Risk” for additional information regarding this risk.

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

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

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

(Tax equivalent basis, dollars in thousands)			Three Months Ended September 30, 2023																		Three Months Ended September 30, 2022
Earning Assets			Average Balance						Income (1)/ Expense						Yield/ Rate						Average Balance						Income (1)/ Expense						Yield/ Rate
Money market and other interest-earning    investments			$	980,813					$	13,194					5.34		%				$	514,362					$	935					0.72		%
Investment securities:
Treasury and government sponsored agencies			2,376,864						23,037						3.88		%				2,326,070						13,212						2.27		%
Mortgage-backed securities			5,079,091						33,237						2.62		%				5,891,283						36,157						2.45		%
States and political subdivisions			1,737,037						14,220						3.27		%				1,829,322						14,631						3.20		%
Other securities			793,196						10,127						5.11		%				718,735						6,781						3.77		%
Total investment securities			9,986,188						80,621						3.23		%				10,765,410						70,781						2.63		%
Loans: (2)
Commercial			9,612,102						163,869						6.82		%				9,045,009						113,491						5.02		%
Commercial real estate			13,711,156						219,575						6.41		%				11,929,892						136,780						4.59		%
Residential real estate loans			6,712,269						62,775						3.74		%				6,189,503						56,432						3.65		%
Consumer			2,614,928						42,322						6.42		%				2,735,850						33,049						4.79		%
Total loans			32,650,455						488,541						5.98		%				29,900,254						339,752						4.54		%
Total earning assets			43,617,456						$	582,356					5.34		%				41,180,026						$	411,468					3.99		%
Deduct: Allowance for credit losses on loans			(300,071)																		(290,215)
Non-Earning Assets
Cash and due from banks			382,755																		503,841
Other assets			4,960,383																		4,522,171
Total assets			$	48,660,523																	$	45,915,823
Interest-Bearing Liabilities
Checking and NOW			$	7,515,439					$	25,531					1.35		%				$	8,681,392					$	5,751					0.26		%
Savings			5,414,775						4,268						0.31		%				6,733,465						547						0.03		%
Money market			7,979,999						65,549						3.26		%				5,344,567						2,072						0.15		%
Time deposits			5,412,920						52,080						3.82		%				2,508,152						2,450						0.39		%
Total interest-bearing deposits			26,323,133						147,428						2.22		%				23,267,576						10,820						0.18		%
Federal funds purchased and interbank    borrowings			62,921						910						5.74		%				122,311						720						2.34		%
Securities sold under agreements to repurchase			302,305						710						0.93		%				436,225						106						0.10		%
FHLB advances			4,537,250						40,382						3.53		%				3,025,844						13,027						1.71		%
Other borrowings			841,307						12,003						5.66		%				676,874						5,256						3.08		%
Total borrowed funds			5,743,783						54,005						3.73		%				4,261,254						19,109						1.78		%
Total interest-bearing liabilities			$	32,066,916					$	201,433					2.49		%				$	27,528,830					$	29,929					0.43		%
Noninterest-Bearing Liabilities and    Shareholders’ Equity
Demand deposits			$	10,338,267																	$	12,575,011
Other liabilities			961,268																		677,829
Shareholders’ equity			5,294,072																		5,134,153
Total liabilities and shareholders’ equity			$	48,660,523																	$	45,915,823
Net interest income - taxable equivalent basis									$	380,923					3.49		%										$	381,539					3.71		%
Taxable equivalent adjustment									(5,837)																		(4,950)
Net interest income (GAAP)									$	375,086					3.44		%										$	376,589					3.66		%

(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, 2023																		Nine Months Ended September 30, 2022
Earning Assets			Average Balance						Income (1)/ Expense						Yield/ Rate						Average Balance						Income (1)/ Expense						Yield/ Rate
Money market and other interest-earning    investments			$	736,225					$	25,258					4.59		%				$	976,579					$	3,073					0.42		%
Investment securities:
Treasury and government sponsored agencies			2,266,177						58,923						3.47		%				2,336,897						33,249						1.90		%
Mortgage-backed securities			5,268,509						102,618						2.60		%				5,593,341						94,067						2.24		%
States and political subdivisions			1,771,155						43,306						3.26		%				1,801,053						42,839						3.17		%
Other securities			785,474						28,726						4.88		%				682,937						16,392						3.20		%
Total investment securities			10,091,315						233,573						3.09		%				10,414,228						186,547						2.39		%
Loans: (2)
Commercial			9,644,541						475,210						6.57		%				7,888,730						264,517						4.47		%
Commercial real estate			13,180,509						598,337						6.05		%				10,753,988						327,733						4.06		%
Residential real estate loans			6,626,551						181,592						3.65		%				5,369,844						142,105						3.53		%
Consumer			2,612,519						120,428						6.16		%				2,521,121						85,442						4.53		%
Total loans			32,064,120						1,375,567						5.72		%				26,533,683						819,797						4.12		%
Total earning assets			42,891,660						$	1,634,398					5.08		%				37,924,490						$	1,009,417					3.55		%
Deduct: Allowance for credit losses on loans			(301,909)																		(247,558)
Non-Earning Assets
Cash and due from banks			412,998																		350,848
Other assets			4,917,592																		4,249,986
Total assets			$	47,920,341																	$	42,277,766
Interest-Bearing Liabilities
Checking and NOW			$	7,793,561					$	69,248					1.19		%				$	7,977,524					$	8,133					0.14		%
Savings			5,791,780						9,745						0.22		%				6,295,628						1,809						0.04		%
Money market			6,577,317						120,917						2.46		%				4,819,252						3,791						0.11		%
Time deposits			4,540,042						111,085						3.27		%				2,253,711						5,468						0.32		%
Total interest-bearing deposits			24,702,700						310,995						1.68		%				21,346,115						19,201						0.12		%
Federal funds purchased and interbank    borrowings			306,480						11,404						4.97		%				41,993						722						2.30		%
Securities sold under agreements to repurchase			351,362						2,389						0.91		%				450,966						287						0.09		%
FHLB advances			4,699,074						123,466						3.51		%				2,891,347						25,915						1.20		%
Other borrowings			806,575						30,071						4.98		%				574,589						13,410						3.12		%
Total borrowed funds			6,163,491						167,330						3.63		%				3,958,895						40,334						1.36		%
Total interest-bearing liabilities			$	30,866,191					$	478,325					2.07		%				$	25,305,010					$	59,535					0.31		%
Noninterest-Bearing Liabilities and    Shareholders’ Equity
Demand deposits			$	10,864,375																	$	11,540,293
Other liabilities			944,619																		601,619
Shareholders’ equity			5,245,156																		4,830,844
Total liabilities and shareholders’ equity			$	47,920,341																	$	42,277,766
Net interest income - taxable equivalent basis									$	1,156,073					3.59		%										$	949,882					3.34		%
Taxable equivalent adjustment									(17,328)																		(13,036)
Net interest income (GAAP)									$	1,138,745					3.54		%										$	936,846					3.29		%

(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, 2022 to Three Months Ended September 30, 2023																		From Nine Months Ended September 30, 2022 to Nine Months Ended September 30, 2023
			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			$	12,259					$	3,583					$	8,676					$	22,185					$	(4,544)					$	26,729
Investment securities (2)			9,840						(5,708)						15,548						47,026						(6,630)						53,656
Loans (3)			148,789						36,149						112,640						555,770						203,985						351,785
Total interest income			170,888						34,024						136,864						624,981						192,811						432,170
Interest Expense
Checking and NOW deposits			19,780						(2,318)						22,098						61,115						(951)						62,066
Savings deposits			3,721						(554)						4,275						7,936						(474)						8,410
Money market deposits			63,477						11,456						52,021						117,126						16,819						100,307
Time deposits			49,630						15,478						34,152						105,617						30,621						74,996
Federal funds purchased and interbank    borrowings			190						(599)						789						10,682						7,200						3,482
Securities sold under agreements to    repurchase			604						(170)						774						2,102						(375)						2,477
FHLB advances			27,355						10,010						17,345						97,551						31,804						65,747
Other borrowings			6,747						1,824						4,923						16,661						7,028						9,633
Total interest expense			171,504						35,127						136,377						418,790						91,672						327,118
Net interest income			$	(616)					$	(1,103)					$	487					$	206,191					$	101,139					$	105,052

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

(2)Interest income on investment securities includes taxable equivalent adjustments of $2.9 million and $8.7 million during the three and nine months ended September 30, 2023, respectively, using the federal statutory rate in effect of 21%.

(3)Interest income on loans includes taxable equivalent adjustments of $3.0 million and $8.6 million during the three and nine months ended September 30, 2023, respectively, using the federal statutory rate in effect of 21%.

The decrease in net interest income for the three months ended September 30, 2023 when compared to the same period in 2022 was primarily due to higher balances and costs of average interest-bearing liabilities and lower accretion income, partially offset by higher rates on loans and loan growth. The increase in net interest income for the nine months ended September 30, 2023 when compared to the same period in 2022 was primarily due to higher rates on loans and loan growth, partially offset by higher balances and costs of average interest-bearing liabilities and lower accretion income. Accretion income associated with acquired loans and borrowings totaled $7.5 million and $22.1 million in the three and nine months ended September 30, 2023, respectively, compared to $25.4 million and $76.2 million in the three and nine months ended September 30, 2022, respectively.

The decrease in the net interest margin on a fully taxable equivalent basis for the three months ended September 30, 2023 compared to the same period in 2022 was primarily due to higher costs of interest-bearing liabilities, partially offset by higher yields on interest earning assets. The increase in the net interest margin on a fully taxable equivalent basis for the nine months ended September 30, 2023 when compared to the same period in 2022 was primarily due to higher yields on interest earning assets, partially offset by higher costs of interest-bearing liabilities. The yield on interest earning assets increased 135 basis points and the cost of interest-bearing liabilities increased 206 basis points in the three months ended September 30, 2023 compared to the same quarter a year ago.  The yield on interest earning assets increased 153 basis points and the cost of interest-bearing liabilities increased 176 basis points in the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022.  Accretion income represented 7 basis points of the net interest margin in both of the three and nine months ended September 30, 2023, compared to 25 basis points and 27 basis points in the three and nine months ended September 30, 2022, respectively.

Average earning assets were $43.6 billion and $41.2 billion for the three months ended September 30, 2023 and 2022, respectively, an increase of $2.4 billion, or 6%, primarily due to strong commercial, commercial real estate, and residential real estate loan growth. Average earning assets were $42.9 billion and $37.9 billion for the nine

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months ended September 30, 2023 and 2022, respectively, an increase of $5.0 billion, or 13%, primarily due to the merger with First Midwest and strong loan growth.

Average loans, including loans held-for-sale, increased $2.8 billion and $5.5 billion for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022. The increase for the three months ended September 30, 2023 was primarily due to strong commercial, commercial real estate, and residential real estate loan growth. The increase for the nine months ended September 30, 2023 was primarily due to the merger with First Midwest and strong loan growth.

Average investments decreased $779.2 million and $322.9 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022. These decreases reflect the utilization of securities cash flows to fund loan growth.

Average noninterest-bearing deposits decreased $2.2 billion while average interest-bearing deposits increased $3.1 billion for the three months ended September 30, 2023 when compared to the same period in 2022 reflecting total deposit growth and a mix shift as a result of the current rate environment. Average noninterest-bearing deposits decreased $675.9 million while interest-bearing deposits increased $3.4 billion for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022 primarily due to the First Midwest merger and a mix shift as a result of the current rate environment.

Average borrowed funds increased $1.5 billion and $2.2 billion for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022.

Provision for Credit Losses

The following table details the components of the provision for credit losses:

			Three Months Ended September 30,												%						Nine Months Ended September 30,												%
(dollars in thousands)			2023						2022						Change						2023						2022						Change
Provision for credit losses on loans			$	23,115					$	11,288					104.8			%			$	46,520					$	117,951					(60.6)			%
Provision (release) for credit losses on    unfunded loan commitments			(4,047)						4,203						(196.3)						772						15,290						(95.0)
Provision for credit losses on held-to-    maturity securities			—						(1)						(100.0)						—						150						(100.0)
Total provision for credit losses			$	19,068					$	15,490					23.1			%			$	47,292					$	133,391					(64.5)			%
Net (charge-offs) recoveries on non-PCD    loans			$	(20,143)					$	(1,405)					N/M			%			$	(28,870)					$	(1,386)					N/M			%
Net (charge-offs) recoveries on PCD    loans			455						(6,190)						(107.4)						(17,339)						(10,741)						61.4
Total net (charge-offs) recoveries on    loans			$	(19,688)					$	(7,595)					159.2			%			$	(46,209)					$	(12,127)					281.0			%

The provision for credit losses on loans in the nine months ended September 30, 2022 included $96.3 million to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. The provision for credit losses on unfunded loan commitments in the nine months ended September 30, 2022 included $11.0 million for unfunded loan commitments acquired in the First Midwest merger. Net charge-offs on non-PCD loans for the three and nine months ended September 30, 2023 included a $12.2 million charge-off related to a single commercial credit that is not representative of broader credit concerns. 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.

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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)			2023						2022						Change						2023						2022						Change
Wealth and investment services fees			$	26,687					$	25,359					5.2			%			$	80,128					$	75,183					6.6			%
Service charges on deposit accounts			18,524						20,042						(7.6)						53,278						54,392						(2.0)
Debit card and ATM fees			10,818						10,608						2.0						31,453						29,429						6.9
Mortgage banking revenue			5,063						5,360						(5.5)						12,628						19,127						(34.0)
Capital markets income			5,891						8,906						(33.9)						19,003						20,609						(7.8)
Company-owned life insurance			3,740						3,361						11.3						11,624						11,456						1.5
Debt securities gains (losses), net			(241)						(172)						40.1						(5,440)						85						N/M
Other income			10,456						6,921						51.1						30,574						24,461						25.0
Total noninterest income			$	80,938					$	80,385					0.7			%			$	233,248					$	234,742					(0.6)			%

Noninterest income increased $0.6 million for the three months ended September 30, 2023 compared to the same period in 2022 primarily due to higher other income and wealth and investment services fees, substantially offset by lower capital markets income and service charges on deposit accounts. Noninterest income decreased $1.5 million for the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to lower mortgage banking revenue, capital markets income, and $5.4 million of net losses on sales of debt securities in the nine months ended September 30, 2023, partially offset by the full-period 2023 impact of the First Midwest merger which occurred in February of 2022.

Wealth and investment services fees increased $1.3 million and $4.9 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to higher wealth management fees as a result of continued sales to new and existing customers as well as favorable market conditions. In addition, wealth and investment services fees increased for the nine months ended September 30, 2023 compared to the same period in 2022 due to the full-period 2023 impact of the First Midwest merger which occurred in February of 2022.

Service charges on deposit accounts for the three and nine months ended September 30, 2023 were impacted by several enhancements to overdraft protection programs implemented in late 2022 to provide clients with more flexibility. The changes included the elimination of the non-sufficient fund (“NSF”) fee when an item is returned, among other modifications that benefit consumers. The impact of these enhancements for the nine months ended September 30, 2023 compared to the same period in 2022 was substantially offset by increased service charges on deposit accounts due to the full-period 2023 impact of the First Midwest merger which occurred in February of 2022.

Mortgage banking revenue decreased $0.3 million and $6.5 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to the higher rate environment and lower gain on sale margins.

Capital markets income decreased $3.0 million and $1.6 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to lower levels of commercial client interest rate swap fees and tax credit income, partially offset by higher foreign currency exchange fees. The decrease for the nine months ended September 30, 2023 compared to the same period in 2022 was partially offset by the full-period 2023 impact of the First Midwest merger which occurred in February of 2022.

Other income increased $3.5 million and $6.1 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to higher commercial loan fees and net gains on sales of other assets in the three months ended September 30, 2023.

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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)			2023						2022						Change						2023						2022						Change
Salaries and employee benefits			$	131,541					$	147,203					(10.6)			%			$	404,715					$	433,167					(6.6)			%
Occupancy			25,795						26,418						(2.4)						80,162						73,933						8.4
Equipment			8,284						7,328						13.0						23,394						20,046						16.7
Marketing			9,448						10,361						(8.8)						28,698						23,756						20.8
Technology			20,592						20,269						1.6						59,850						64,914						(7.8)
Communication			4,075						5,392						(24.4)						12,768						14,687						(13.1)
Professional fees			5,956						6,559						(9.2)						19,085						32,686						(41.6)
FDIC assessment			9,000						6,249						44.0						29,028						13,523						114.7
Amortization of intangibles			6,040						7,089						(14.8)						18,286						19,070						(4.1)
Amortization of tax credit investments			2,644						2,662						(0.7)						8,167						5,703						43.2
Property optimization			—						—						N/A						1,559						—						N/A
Other expense			21,401						22,914						(6.6)						56,359						54,023						4.3
Total noninterest expense			$	244,776					$	262,444					(6.7)			%			$	742,071					$	755,508					(1.8)			%

Noninterest expense decreased $17.7 million for the three months ended September 30, 2023 compared to the same period in 2022. Noninterest expense included $6.3 million of merger-related expenses for the three months ended September 30, 2023, compared to $22.7 million for the three months ended September 30, 2022. Excluding these expenses, noninterest expense for the three months ended September 30, 2023 was stable compared to the same period in 2022 as fully achieved merger-related benefits were substantially offset by higher FDIC assessment expense.

Noninterest expense decreased $13.4 million for the nine months ended September 30, 2023 compared to the same period in 2022. Noninterest expense included merger-related expenses totaled $23.2 million for the nine months ended September 30, 2023, compared to $100.6 million for the nine months ended September 30, 2022. In addition, noninterest expense for the nine months ended September 30, 2023 included $3.4 million of Louisville expenses and $1.6 million for property optimization. Excluding these expenses, noninterest expense for the nine months ended September 30, 2023 increased $59.1 million, reflective of the additional operating costs associated with the full-period 2023 impact of the First Midwest merger which occurred in February of 2022, marketing campaigns, and higher FDIC assessment expense.

FDIC assessment expense increased $2.8 million and $15.5 million for the three and nine months ended September 30, 2023, respectively, when compared to the same periods in 2022 primarily due to higher assessment rates and deposit balances.

Amortization of tax credit investments increased $2.5 million for the nine months ended September 30, 2023 when compared to the same period in 2022. The recognition of tax credit amortization expense is contingent upon the successful completion of the rehabilitation of a historic building or completion of a solar project within the reporting period. Many factors including weather, labor availability, building regulations, inspections, and other unexpected construction delays related to a rehabilitation project can cause a project to exceed its estimated completion date.  See Note 9 to the consolidated financial statements for additional information on our tax credit investments.

FDIC Special Assessment Proposed Rule

On May 11, 2023, the Federal Deposit Insurance Corporation (“FDIC”) released a proposed rule that would impose special assessments to recover the losses to the deposit insurance fund (“DIF”) resulting from the FDIC’s use, in March 2023, of the systemic risk exception to the least-cost resolution test under the Federal Deposit Insurance Act in connection with the receiverships of Silicon Valley Bank and Signature Bank. The FDIC stated that it currently estimates those assessed losses to total $15.8 billion and that the amount of the special assessments would be adjusted as the loss estimate changes. Under the proposed rule, the assessment base would be an insured depository institution’s (“IDI”) estimated uninsured deposits, as reported in the IDI’s December 31, 2022 Call Report, excluding the first $5 billion in estimated uninsured deposits. The special assessments would be collected at an annual rate of approximately 12.5 basis points per year (3.13 basis points per quarter) over eight quarters in 2024

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and 2025, with the first assessment period beginning January 1, 2024 (with the first assessment payment due by June 28, 2024). Under the proposed rule, the estimated loss pursuant to the systemic risk determination would be periodically adjusted, and the FDIC would retain the ability to cease collection early, extend the special assessment collection period and impose a final shortfall special assessment on a one-time basis. In its December 31, 2022 Call Report, Old National Bank reported estimated uninsured deposits of approximately $12.0 billion. Old National expects the special assessments would be tax deductible. Although the proposal could be changed and the timing of accounting recognition is still under consideration, if the assessments, as proposed, were recorded as an expense in a single quarter, the estimated $17 million expense would significantly affect noninterest expense and results of operations for that quarter.

Provision for Income Taxes

We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes.  The major difference between the effective tax rate applied to our financial statement income and the federal statutory tax rate is caused by a tax benefit from our tax credit investments and interest on tax-exempt securities and loans.  The effective tax rate was 23.1% for the three months ended September 30, 2023, compared to 21.7% for the same period in 2022.  The effective tax rate was 22.9% for the nine months ended September 30, 2023, compared to 19.5% for the same period in 2022 reflecting an increase in pre-tax book income combined with smaller increases in tax-exempt income and tax credits. Other contributing factors were increases in non-deductible officer compensation and non-deductible FDIC premiums as well as the First Midwest merger in February 2022. See Note 14 to the consolidated financial statements for additional information..  In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at September 30, 2023 based on the current estimate of the effective annual rate.

FINANCIAL CONDITION

Overview

At September 30, 2023, our assets were $49.1 billion, a $2.3 billion increase compared to assets of $46.8 billion at December 31, 2022.  The increase was driven by disciplined loan growth and higher cash balances funded through higher deposits.

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 $43.9 billion at September 30, 2023, a $2.2 billion increase compared to earning assets of $41.6 billion at December 31, 2022 driven primarily by loan growth.

Investment Securities

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

The investment securities portfolio, including equity securities, was $9.9 billion at September 30, 2023 compared to $10.2 billion at December 31, 2022.  Investment securities represented 23% of earning assets at September 30, 2023, compared to 25% at December 31, 2022.  At September 30, 2023, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.

The investment securities available-for-sale portfolio had net unrealized losses of $1.1 billion at September 30, 2023, compared to net unrealized losses of $844.4 million at December 31, 2022.  The investment securities held-to-maturity portfolio had net unrealized losses of $634.3 million at September 30, 2023, compared to net unrealized losses of $445.5 million at December 31, 2022. Net unrealized losses increased from December 31, 2022 to September 30, 2023 primarily due to higher market interest rates.

The investment securities available-for-sale portfolio including securities hedges had an effective duration of 4.33 at September 30, 2023, compared to 4.57 at December 31, 2022.  The total investment securities portfolio had an

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effective duration of 5.48 at September 30, 2023, compared to 6.45 at December 31, 2022. Effective duration represents the percentage change in the fair value of the portfolio in response to a change in interest rates and is used to evaluate the portfolio’s price volatility at a single point in time.  Generally, there is more uncertainty in interest rates over a longer average maturity, resulting in a higher duration percentage.  The annualized average yields on investment securities, on a taxable equivalent basis, were 3.23% and 3.09% for the three and nine months ended September 30, 2023, respectively, compared to 2.63% and 2.39% for the three and nine months ended September 30, 2022, respectively.

Loan Portfolio

The following table presents the composition of the loan portfolio:

(dollars in thousands)			September 30, 2023						December 31, 2022						$ Change			% Change
Commercial			$	9,333,448					$	9,508,904					$	(175,456)		(2)		%
Commercial real estate			13,916,221						12,457,070						1,459,151			12
Residential real estate			6,696,288						6,460,441						235,847			4
Consumer			2,631,877						2,697,226						(65,349)			(2)
Total loans			$	32,577,834					$	31,123,641					$	1,454,193		5		%

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classifications within earning assets, representing 53% of earning assets at both September 30, 2023 and December 31, 2022.  The increase in commercial and commercial real estate loans at September 30, 2023 compared to December 31, 2022 was driven by disciplined loan production that was well balanced across our market footprint and product lines, partially offset by commercial loan sales.

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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, 2023									December 31, 2022
(dollars in thousands)			Outstanding			Exposure(1)			Nonaccrual			Outstanding			Exposure(1)			Nonaccrual
By Industry:
Manufacturing			$	1,626,629		$	2,699,161		$	6,154		$	1,757,907		$	2,803,883		$	2,464
Health care and social assistance			1,338,875			1,719,741			7,529			1,588,392			2,043,105			11,806
Wholesale trade			802,398			1,577,859			4,262			857,400			1,552,985			2,895
Real estate rental and leasing			655,993			1,008,673			1,307			642,511			962,549			1,135
Construction			624,767			1,429,685			1,828			556,913			1,307,582			1,517
Finance and insurance			583,107			953,601			6			484,532			858,391			17
Transportation and warehousing			475,731			702,232			2,372			422,643			633,267			3,496
Professional, scientific, and   technical services			422,730			770,941			4,304			507,940			832,407			4,735
Accommodation and food services			363,025			488,254			425			399,915			512,025			596
Retail trade			362,840			660,614			5,948			332,367			538,135			7,386
Administrative and support and   waste management and   remediation services			310,439			481,089			169			315,785			446,655			13,860
Educational services			246,121			425,426			7			210,850			378,955			3,750
Agriculture, forestry, fishing,   and hunting			223,203			364,732			417			261,355			382,376			996
Other services			221,141			394,719			12,429			194,998			356,743			2,656
Public administration			219,090			294,745			—			231,453			325,834			846
Other			857,359			1,141,447			1,618			743,943			1,122,409			739
Total			$	9,333,448		$	15,112,919		$	48,775		$	9,508,904		$	15,057,301		$	58,894
By Loan Size:
Less than $200,000			3		%	3		%	4		%	3		%	3		%	3		%
$200,000 to $1,000,000			11			11			22			11			11			20
$1,000,000 to $5,000,000			25			26			43			25			26			36
$5,000,000 to $10,000,000			15			15			7			15			15			24
$10,000,000 to $25,000,000			31			28			24			31			27			17
Greater than $25,000,000			15			17			—			15			18			—
Total			100		%	100		%	100		%	100		%	100		%	100		%

(1)    Includes unfunded loan commitments.

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

			September 30, 2023									December 31, 2022
(dollars in thousands)			Outstanding			Exposure(1)			Nonaccrual			Outstanding			Exposure(1)			Nonaccrual
By Property Type:
Multifamily			$	4,584,203		$	6,542,155		$	7,519		$	4,188,137		$	5,920,414		$	13,749
Warehouse / Industrial			2,593,868			3,304,937			5,381			1,976,804			2,533,892			9,090
Retail			1,903,321			1,978,067			30,804			1,808,041			1,895,345			18,155
Office			1,900,752			2,104,761			36,971			1,813,007			1,979,272			13,728
Single family			446,134			471,469			3,984			515,390			615,216			7,022
Other (2)			2,487,943			2,934,260			60,638			2,155,691			2,667,780			61,977
Total			$	13,916,221		$	17,335,649		$	145,297		$	12,457,070		$	15,611,919		$	123,721

(1)    Includes unfunded loan commitments.

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

Residential Real Estate Loans

At September 30, 2023, residential real estate loans held in our loan portfolio were $6.7 billion, an increase of $235.8 million compared to December 31, 2022.  Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans.

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Consumer Loans

Consumer loans, including automobile loans, personal, and home equity loans and lines of credit, decreased $65.3 million to $2.6 billion at September 30, 2023 compared to December 31, 2022 reflecting lower direct loans.

Other Assets

Other assets at September 30, 2023 increased $143.9 million from December 31, 2022 primarily due to higher net deferred tax assets related to the market value adjustments of certain investment securities and higher derivative assets.

Funding

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

(dollars in thousands)			September 30, 2023						December 31, 2022						$ Change			% Change
Deposits:
Noninterest-bearing demand			$	10,091,352					$	11,930,798					$	(1,839,446)		(15)		%
Interest-bearing:
Checking and NOW			7,495,417						8,340,955						(845,538)			(10)		%
Savings			5,296,985						6,326,158						(1,029,173)			(16)		%
Money market			8,793,218						5,389,139						3,404,079			63		%
Time deposits			5,575,704						3,013,780						2,561,924			85		%
Total deposits			37,252,676						35,000,830						2,251,846			6		%
Wholesale borrowings:
Federal funds purchased and interbank borrowings			918						581,489						(580,571)			(100)		%
Securities sold under agreements to repurchase			279,061						432,804						(153,743)			(36)		%
Federal Home Loan Bank advances			4,412,576						3,829,018						583,558			15		%
Other borrowings			863,455						743,003						120,452			16		%
Total wholesale borrowings			5,556,010						5,586,314						(30,304)			(1)		%
Total funding			$	42,808,686					$	40,587,144					$	2,221,542		5		%

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 13% at September 30, 2023 compared to 14% at December 31, 2022.

Capital 

Shareholders’ equity totaled $5.2 billion at September 30, 2023, compared to $5.1 billion at December 31, 2022.  This increase was driven by retained earnings along with changes in unrealized gains (losses) on derivatives. These increases were partially offset by dividends, changes in unrealized gains (losses) on available-for-sale investment securities, and the repurchase of 1.8 million shares of Common Stock in the nine months ended September 30, 2023 (all of which were repurchased in the first quarter of 2023) under a stock repurchase plan that was approved by the Company’s Board of Directors, which reduced equity by $29.5 million.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At September 30, 2023, Old National and its bank subsidiary exceeded the regulatory minimums and Old National Bank met the regulatory definition of “well-capitalized” based on the most recent regulatory definition.

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

			Regulatory Guidelines Minimum						Prompt Corrective Action "Well Capitalized" Guidelines						September 30, 2023						December 31, 2022
Tier 1 capital to total average assets (leverage    ratio)			4.00			%			N/A			%			8.70			%			8.52			%
Common equity Tier 1 capital to risk-weighted    total assets			7.00						N/A						10.41						10.03
Tier 1 capital to risk-weighted total assets			8.50						6.00						11.06						10.71
Total capital to risk-weighted total assets			10.50						10.00						12.32						12.02
Shareholders’ equity to assets			N/A						N/A						10.68						10.97

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

			Regulatory Guidelines Minimum						Prompt Corrective Action "Well Capitalized" Guidelines						September 30, 2023						December 31, 2022
Tier 1 capital to total average assets (leverage    ratio)			4.00			%			5.00			%			8.84			%			8.47			%
Common equity Tier 1 capital to risk-weighted    total assets			7.00						6.50						11.26						10.66
Tier 1 capital to risk-weighted total assets			8.50						8.00						11.26						10.66
Total capital to risk-weighted total assets			10.50						10.00						12.00						11.35

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

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

RISK MANAGEMENT

Overview

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

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Credit Risk

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

Asset Quality

We lend to commercial and commercial real estate clients in many diverse industries including, among others, real estate rental and leasing, manufacturing, healthcare, wholesale trade, construction, and agriculture.  Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.  At September 30, 2023, our average commercial loan size was approximately $630,000 and our average commercial real estate loan size was approximately $1,400,000. 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, 2023, we had minimal exposure to foreign borrowers and no sovereign debt.  Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily in the Midwest region.

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

(dollars in thousands)			September 30, 2023						December 31, 2022
Total nonaccrual loans			$	261,346					$	238,178
TDRs still accruing (1)			N/A						15,313
Loans 90 days or more past due and still accruing			1,192						2,650
Foreclosed assets			9,761						10,845
Total under-performing assets			$	272,299					$	266,986
Classified loans (includes nonaccrual, TDRs still accruing,    past due 90 days, and other problem loans) (1)			$	825,965					$	745,485
Other classified assets (2)			48,998						24,735
Criticized loans			775,526						636,069
Total criticized and classified assets			$	1,650,489					$	1,406,289
Asset Quality Ratios:
Nonaccrual loans/total loans (3)			0.80			%			0.77			%
Non-performing loans/total loans (3) (4)			0.80						0.81
Under-performing assets/total loans (3)			0.84						0.86
Under-performing assets/total assets			0.56						0.57
Allowance for credit losses on loans/under-performing assets			111.64						113.74
Allowance for credit losses on loans/nonaccrual loans			116.31						127.50

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

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

(3)Loans exclude loans held-for-sale.

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

Under-performing assets increased to $272.3 million at September 30, 2023, compared to $267.0 million at December 31, 2022.  Under-performing assets as a percentage of total loans at September 30, 2023 were 0.84%, a 2 basis point decrease from 0.86% at December 31, 2022.

Nonaccrual loans increased $23.2 million from December 31, 2022 to September 30, 2023 reflecting PCD loan migration in the commercial real estate portfolio. As a percentage of nonaccrual loans, the allowance for credit losses on loans was 116.31% at September 30, 2023, compared to 127.50% at December 31, 2022.

Total criticized and classified assets were $1.7 billion at September 30, 2023, an increase of $244.2 million from December 31, 2022 primarily due to higher criticized commercial loans. Other classified assets include investment securities that fell below investment grade rating totaling $49.0 million at September 30, 2023, compared to $24.7 million at December 31, 2022.

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Allowance for Credit Losses on Loans and Unfunded Commitments

Net charge-offs on loans totaled $19.7 million during the three months ended September 30, 2023, compared to $7.6 million for the same period in 2022. Annualized, net charge-offs to average loans were 0.24% for the three months ended September 30, 2023, compared to 0.10% for the same period in 2022. The three months ended September 30, 2023 included net recoveries on PCD loans totaling $0.5 million, or (0.01)% on an annualized basis of average loans, compared to net charge-offs on PCD loans totaling $6.2 million, or 0.08% on an annualized basis of average loans for the three months ended September 30, 2022. Net charge-offs on loans totaled $46.2 million during the nine months ended September 30, 2023, compared to $12.1 million for the same period in 2022. Annualized, net charge-offs to average loans were 0.19% for the nine months ended September 30, 2023, compared to 0.06% for the same period in 2022. The nine months ended September 30, 2023 included net charge-offs on PCD loans totaling $17.3 million, or 0.07% on an annualized basis of average loans, compared to net charge-offs on PCD loans totaling $10.7 million, or 0.05% on an annualized basis of average loans for the nine months ended September 30, 2022. In addition, the three and nine months ended September 30, 2023 included a $12.2 million charge-off related to a single commercial credit that is not representative of broader credit concerns. Management will continue its efforts to reduce the level of non-performing loans and may consider the possibility of sales of troubled and non-performing loans, which could result in additional charge-offs to the allowance for credit losses on loans.

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

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

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

The allowance for credit losses on loans was $304.0 million at September 30, 2023, compared to $303.7 million at December 31, 2022. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, provision expense may be volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

We maintain an allowance for credit losses on unfunded loan commitments to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses on loans, modified to take into account the probability of a drawdown on the commitment.  The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for unfunded loan commitments is included in the provision for credit losses. The allowance for credit losses on unfunded loan commitments totaled $33.0 million at September 30, 2023, compared to $32.2 million at December 31, 2022.

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

Market Risk

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

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

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

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

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

•changing product pricing strategies;

•modifying characteristics of the investment securities portfolio; or

•using derivative financial instruments, to a limited degree.

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

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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, 2023 and 2022:

			Immediate Rate Decrease												Immediate Rate Increase
(dollars in thousands)			-300 Basis Points			-200 Basis Points			-100 Basis Points			Base			+100 Basis Points			+200 Basis Points			+300 Basis Points
September 30, 2023
Projected interest income:
Money market, other interest    earning investments, and    investment securities			$	722,474		$	777,196		$	834,683		$	890,384		$	958,522		$	1,026,439		$	1,094,063
Loans			2,966,315			3,323,529			3,684,648			4,040,544			4,393,546			4,747,308			5,100,845
Total interest income			3,688,789			4,100,725			4,519,331			4,930,928			5,352,068			5,773,747			6,194,908
Projected interest expense:
Deposits			528,719			785,519			1,047,596			1,279,764			1,547,400			1,826,990			2,100,598
Borrowings			366,090			432,424			521,008			598,589			676,220			753,909			831,590
Total interest expense			894,809			1,217,943			1,568,604			1,878,353			2,223,620			2,580,899			2,932,188
Net interest income			$	2,793,980		$	2,882,782		$	2,950,727		$	3,052,575		$	3,128,448		$	3,192,848		$	3,262,720
Change from base			$	(258,595)		$	(169,793)		$	(101,848)					$	75,873		$	140,273		$	210,145
% change from base			(8.47)		%	(5.56)		%	(3.34)		%				2.49		%	4.60		%	6.88		%
									Immediate Rate Decrease						Immediate Rate Increase
									-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		%

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

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

We use cash flow and fair value hedges, primarily interest rate swaps, collars, and floors, to mitigate interest rate risk. Derivatives designated as hedging instruments were in a net liability position with a fair value loss of $25.5 million and $36.1 million at September 30, 2023 and December 31, 2022, respectively.  See Note 15 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 Asset/Liability Executive 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 May 31, 2023, 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 not as predictable as they are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace.  We continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.

A maturity schedule for Old National Bank’s time deposits is shown in the following table at September 30, 2023.

(dollars in thousands)
Maturity Bucket			Amount						Rate
2023			$	1,474,228					3.62			%
2024			3,832,949						4.33
2025			151,114						1.66
2026			66,492						0.91
2027			34,479						0.70
2027 and beyond			16,442						1.25
Total			$	5,575,704					4.00			%

Our ability to acquire funding at competitive prices is influenced by rating agencies’ views of our credit quality, liquidity, capital, and earnings.

The credit ratings of Old National and Old National Bank at September 30, 2023 are shown in the following table.

			Moody’s Investors Service
			Long-term			Short-term
Old National			Baa1			N/A
Old National Bank			A1			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, 2023, Old National and its subsidiaries had the following availability of liquid funds and borrowings:

(dollars in thousands)			Parent Company						Subsidiaries
Available liquid funds:
Cash and due from banks			$	1,409,813					$	253,617
Unencumbered government-issued debt securities			—						297,043
Unencumbered investment grade municipal securities			—						114,908
Unencumbered corporate securities			—						34,618
Availability of borrowings*:
Amount available from Federal Reserve discount window			—						875,670
Amount available from Federal Reserve Bank Term Funding Program			—						2,354,901
Amount available from Federal Home Loan Bank			—						5,536,299
Total available funds			$	1,409,813					$	9,467,056

* 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, 2023, Old National Bancorp’s other borrowings outstanding were $481.0 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 Old National Bank to Old National Bancorp on an unconsolidated basis without obtaining prior regulatory approval.  Prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year plus retained net profits for the preceding two years.  Prior regulatory approval to pay dividends was not required in 2022 and is not currently required.

CRITICAL ACCOUNTING ESTIMATES

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

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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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, 2022.

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)
07/01/23 - 07/31/23			27,973						$	14.01					—						$	170,476,849
08/01/23 - 08/31/23			303						$	16.76					—						$	170,476,849
09/01/23 - 09/30/23			3,479						$	15.79					—						$	170,476,849
Total			31,755						$	14.24					—						$	170,476,849

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

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

ITEM 5.  OTHER INFORMATION

(a)None

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

(c)During the three months ended September 30, 2023, no director or Section 16 officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.

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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						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, 2023, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
104						The cover page from Old National’s Form 10-Q Report for the quarterly period ended September 30, 2023, 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 1, 2023

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