What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-10 compared with 2021-02-10 · 358 added, 363 removed, 852 unchanged (46% of the section changed)

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Risk Management

Off-Balance Sheet Arrangements

Contractual Obligations, Commitments, and Contingent Liabilities

Critical Accounting Policies and Estimates

Material C ontractual Obligations, Commitments, and Contingent Liabilities

Critical Accounting Estimates

The following discussion is an analysis of our results of operations for the fiscal years ended December 31, 2021, 2020, and 2019, and financial condition as of December 31, 2021 and 2020.

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Old National is the largest financial holding company incorporated in the state of Indiana and maintains its principal executive offices in Evansville, Indiana.

Old National, through Old National Bank, provides a wide range of services, including commercial and consumer loan and depository services, and other traditional banking services.

Old National also provides services to supplement its traditional banking business including fiduciary and wealth management services, investment and brokerage services, investment consulting, and other financial services.

Our primary geographic markets are in Indiana, Kentucky, Michigan, Minnesota, and Wisconsin.

Old National, through Old National Bank, provides a wide range of banking services, including commercial and consumer loan and depository services, and other traditional banking services.

CORPORATE DEVELOPMENTS IN FISCAL 2021

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• net income of $277.5 million, or $1.67 per diluted share;

• record high commercial loan production of $3.5 billion;

• record mortgage production of $2.2 billion;

• strong credit quality metrics including charge-offs to average loans of 0.02%;

• low cost of total deposits at 0.18%;

• efficiency ratio of 62.91% in 2020.

Our net interest income decreased slightly to $596.1 million during 2020, compared to $604.3 million in 2019.

Noninterest income grew from $199.3 million in 2019 to $239.3 million in 2020 reflecting higher mortgage banking revenue, higher capital markets income, and higher debt securities gains.

These increases were partially offset by lower service charges on deposit accounts.

Our noninterest expenses remain well controlled, increasing from $508.5 million in 2019 to $541.4 million in 2020 reflecting higher charges related to The ONB Way strategic initiative in 2020.

ONB Way charges totaled $42.6 million in 2020 compared to $11.4 million in 2019.

This year, Old National implemented The ONB Way, a strategic plan designed to keep the Company’s clients at the center of all we do.

The ONB Way includes realigning the geographic organization structure to streamline our operating model through integrated commercial, community banking, and wealth teams.

We have successfully executed this transformation, delivered on the run rate expense savings, and are transitioning into the implementation phase of our planned revenue initiatives.

These revenue initiatives are underway for our

technology, Commercial, Wealth, and Treasury Management areas;

while our Community area initiatives are scheduled to commence throughout the remainder of 2021.

On December 27, 2020, President Trump signed into law the CAA.

The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses.

Old National is participating in the CAA’s second round of PPP lending.

In mid-January we opened our lending portal and have begun processing PPP loan applications.

Early indications support our belief that there will be a large volume of smaller sized loans.

We anticipate the average loan size to be less than $150,000.

Currently, we are focused on helping minority-owned business, women-owned business, not-for-profit entities, and existing first round PPP customers with the lending process.

Additionally, section 541 of the CAA extends the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022.

• high commercial loan production of $3.9 billion;

• wealth revenue (wealth management fees and investment product fees combined) of $65.0 million;

• net recoveries of $4.8 million;

• strong credit quality metrics including net charge-offs (recoveries) to average loans of (0.03)%;

• low cost of total deposits at 0.06% along with a loan to deposit ratio of 73%;

• efficiency ratio of 59.65%.

Our net interest income increased slightly to $596.4 million during 2021, compared to $596.1 million in 2020.

Noninterest income decreased from $239.3 million in 2020 to $214.2 million in 2021 reflecting lower mortgage banking revenue and lower debt securities gains.

Our noninterest expenses remain well controlled, decreasing from $541.4 million in 2020 to $500.6 million in 2021 reflecting higher charges related to The ONB Way strategic initiative in 2020 and lower amortization of tax credit investments in 2021.

The ONB Way charges totaled $42.6 million in 2020.

These decreases in noninterest expenses were partially offset by $14.6 million of diligence and merger charges in 2021 associated with the anticipated First Midwest merger.

On May 30, 2021, Old National entered into a definitive merger agreement with First Midwest to combine in an all-stock merger of equals transaction.

Under the terms of the merger agreement, which was unanimously approved by the Boards of Directors of both companies, First Midwest stockholders will receive 1.1336 shares of Old National common stock for each share of First Midwest common stock they own.

Following completion of the transaction,

former First Midwest stockholders are expected to collectively represent approximately 44% of the combined company.

The new organization will operate under the Old National Bancorp and Old National Bank names, with headquarters and the main office located in Evansville, Indiana and commercial and consumer banking operations headquartered in Chicago, Illinois.

During the third quarter of 2021, we received approval of the merger from the OCC and the shareholders of Old National and First Midwest.

On January 25, 2022, the OCC granted us an extension of 60 days to April 20, 2022 for consummating the bank merger.

On January 27, 2022, we received Federal Reserve approval for the merger.

With all necessary regulatory approvals received, the merger is expected to occur after the close of business and after the end of regular trading hours on the NASDAQ Stock Market on February 15, 2022, subject to customary closing conditions.

Pandemic Update

As previously disclosed, the novel strain of coronavirus, COVID-19, which was first reported in Wuhan, China had an impact on our operations during 2020.

This impact continues to be addressed by Old National as evidenced by our practice of occupying only 50% of our office buildings by rotating team members every 4 weeks for the foreseeable future.

We remain committed and focused on the health and safety of our team members, customers, and communities.

Our banking centers are still open for business and we continue to lend to qualified businesses for working capital and general business purposes, while our online banking network is continuously available for digital banking transactions.

We believe our historically strong underwriting practices, diverse and granular portfolios, and Midwest-based footprint will help to mitigate any adverse impact to Old National.

The impact of the pandemic on the Company’s business, financial condition, results of operations, and its customers has not fully manifested in 2020.

The fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to Old National.

Once these stimulus programs have been exhausted, we believe our credit metrics will worsen and loan losses will ultimately materialize.

Any potential loan losses will be contingent upon the resurgence of the virus, including any new strains, offset by the potency of the vaccine along with its extensive distribution, and the ability for customers and businesses to return to their pre-pandemic routines.

However, economic uncertainty remains high and bouts of elevated volatility are expected to continue, which may have a future adverse financial impact on Old National.

As previously disclosed, the COVID-19 pandemic has created economic and financial disruptions that have adversely affected our operations during 2020 and 2021.

Our historically careful underwriting practices, diverse and granular portfolios, and Midwest-based footprint has helped minimize any adverse impact to Old National.

In addition, the combination of the vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the impact of the pandemic on the Company’s business, financial condition, results of operations, and its clients as of December 31, 2021.

However, there are continuing concerns that indicate a slower return to pre-pandemic routines.

Examples of these concerns relate to increases in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions;

refusals to receive the vaccine along with new strain concerns;

supply chain issues remaining unresolved longer than anticipated;

unemployment increases while consumer confidence and spending falls;

and rising geopolitical tensions.

Given the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict the future adverse financial impact to Old National.

BUSINESS OUTLOOK

As we emerge from 2020, we have observed signs of an economic recovery in the United States with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels.

Additionally, progress toward an effective COVID-19 vaccine has been promising and the availability of that vaccine may drive the re-opening plans of state and local economies in 2021.

In 2020, the U.S.

economy contracted approximately 3.5% as measured by the change in GDP due to the COVID-19 pandemic which caused a deep contraction in the first half of 2020, with somewhat of a rebound in the second half of 2020.

The U.S economic outlook for 2021 estimates range between 6.4% and 0.8%, with a probable annual GDP expansion of 4.1%, indicating a return to pre-pandemic levels as early as April, 2021 to as late as sometime in 2022.

The GDP estimates are heavily influenced by the severity and timing of when COVID-19 peaks coupled with how widespread lockdowns are implemented, length of period for vaccine distribution, resurgence or stabilization of unemployment levels which currently is 6.7% as of December 31, 2020, and the success of the fiscal stimulus package.

The Federal Reserve monetary policy is very favorable for economic growth and is anticipated to remain so through 2022 at the earliest.

Residential housing coupled with a savings cushion are viewed as tailwinds to assist in U.S.

economic growth over the coming quarters.

Additional global risks that could trigger a halt to the U.S.

economic outlook include:

a prolonged shutdown of global economies caused by COVID-19 and a potential resurgence of economic and political tensions with China.

With the execution of The ONB Way transformation, where we have migrated from a generalist relationship management approach based on geography, to a specialist relationship management approach based on business segmentations, we remain a community bank at heart, dedicated to serving and strengthening our communities.

We saw a strong start to a strengthening economic recovery in 2021, which was damaged mid-year by the Delta COVID-19 variant and again late in 2021 by the Omicron variant.

The Moody’s U.S.

macroeconomic outlook predicts the pandemic to slowly recede, with each future wave of the virus expected to be less disruptive than the preceding wave as state and local governments and businesses skillfully mitigate the impact of the virus.

The Conference Board forecasted that GDP growth will approximate 6.0% in the fourth quarter of 2021 (vs.

2.3% growth in the third quarter of 2021), which is a 0.5% downgrade from earlier fourth quarter of 2021 GDP growth forecasts due to the rapid spread of the Omicron variant in December.

The previous Conference Board forecasts had assumed that a new variant would dampen economic growth in the United States, but not until the first quarter of 2022.

Since then, the Omicron variant has spread more rapidly than anticipated and is yielding record high new infections, yet appears to be less severe since hospitalizations and mortality rates have not spiked to the same degree as the initial COVID-19 virus.

However, The Conference Board notes that mass infections are impacting labor supply as workers recover from illness or postpone reentering the workforce.

This supply-side disruption could result in additional shortages and has resulted in an increase in the inflation forecast for early 2022.

As expected, in mid-December the Federal Reserve indicated that it will conclude its large-scale asset purchase program as soon as March 2022 and that three 25 basis point rate hikes would follow in 2022.

Additional Omicron-induced inflationary pressures could result in even more aggressive tightening, which is a downside risk to The Conference Board’s forecast.

This forecast includes spending associated with the bipartisan infrastructure package approved in 2021.

However, it does not incorporate the proposed Build Back Better social and climate package.

The 2021 annual growth is currently estimated to be 5.6% for the year and The Conference Board forecasts that the U.S.

economy will grow by an estimated 3.5% in 2022 and an estimated 2.9% in 2023.

If Omicron and other future variants evolve to be less severe, it could help the U.S.

economy “return to normal” pre-pandemic levels.

While we are cautiously optimistic about 2022 from a U.S.

economic standpoint, risks related to supply chain disruption, slowing job growth, significant and persistent tightening in financial market conditions, inflation, and geopolitical tensions could halt this recovery.

Our strategy evolution continues into a commercially-oriented regional bank that consistently delivers top quartile performance.

This is accomplished by continuing to focus on the fundamentals of basic banking, which are loan growth, noninterest income growth, prudent capital deployment, and expense management.

As the transformation phase finishes, we transition into the implementation phase of our planned revenue initiatives.

Organic loan growth remains a priority.

Our loan production and pipeline are at high levels as we enter into 2021, yet we continue to adhere to our disciplined underwriting process.

Our practice of recognizing underperforming credits early, along with active engagement with these borrowers ultimately leads to lower credit losses.

Despite the challenging economic environment in 2020, overall credit quality remains healthy, and we have not experienced any specific sector credit related weaknesses, yet we are watching a small number of credits and have identified certain industries that deserve extra attention in this current economic environment.

In regard to future partnerships, we are growing more confident in our ability to evaluate the fair value of a potential acquisition target’s loan portfolio in the current economic environment.

However, our acquisition strategy is consistent as an active looker and a selective buyer.

We continue to wait patiently for advantageous opportunities while we remain focused on execution of our strategies.

As we look ahead to 2021, we remain committed to generating positive operating leverage.

Execution of these fundamentals will help us deliver meaningful positive operating leverage.

Organic loan growth continues to be our priority.

As we enter into 2022, our commercial loan production and pipeline are at record high levels, yet we continue to adhere to our disciplined underwriting process.

We believe our approach to downgrading troubled credits early and a patient approach to resolving issues results in better outcomes for our clients and ultimately lower costs for Old National Bank.

Despite the lingering challenges due to the pandemic in 2021, overall credit quality remains healthy.

Old National has not experienced any specific sector credit related weaknesses, yet we remain watchful for any credits that deserve extra attention as we slowly return to a pre-pandemic economic environment.

As we look ahead to 2022 and our anticipated partnership with First Midwest, we are positioned to close the merger after the close of business and after the end of regular trading hours on the NASDAQ Stock Market on February 15, 2022.

We have established the organizational structure and leadership positions for all client segments and support areas and have communicated those decisions throughout the organization.

Further, we also agreed upon our core processing system and supporting applications.

Finally, we are initiating our recruiting process for talent in Chicago, as we anticipate that the Chicago and Minneapolis markets will be a significant focus in 2022.

FINANCIAL HIGHLIGHTS

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Net interest income - tax equivalent basis 150,223 155,073 164,596 610,313 609,680

Provision for loan losses (4) (1,100) — 1,264 38,395 4,747

Provision for credit losses (1,914) (4,613) (1,100) (28,812) 38,395

Noninterest income 51,484 54,515 58,552 214,219 239,274

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Net charge-offs (recoveries) to average loans (0.04) (0.09) (0.03) (0.03) 0.02

Allowance for loan losses to ending loans (4) 0.95 0.95 0.45 0.95 0.45

Allowance for credit losses to ending loans 0.79 0.79 0.95 0.79 0.95

Non-performing loans to ending loans 0.92 0.94 1.20 0.92 1.20

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Refer to the “Non-GAAP Financial Measures” section for reconciliations to GAAP financial measures.

(4) Beginning January 1, 2020, calculation is based on current expected loss methodology.

Prior to January 1, 2020, calculation is based on incurred loss methodology.

NON-GAAP FINANCIAL MEASURES

The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance.

Management believes these non-GAAP financial measures enhance an investor’s understanding of our financial results by

providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance.

This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results.

Management believes these non-GAAP financial measures enhance an investor’s understanding of our financial results by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance.

This information supplements our GAAP reported results, and should not be viewed in isolation

from, or as a substitute for, our GAAP results.

Accordingly, this financial information should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2021, included elsewhere in this report.

Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.

Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

The following table presents GAAP to non-GAAP reconciliations.

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Tangible common equity to tangible assets 8.30 % 8.64 % 8.30 % 8.64 %

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.

These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

RESULTS OF OPERATIONS

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Net interest income $ 596,400 $ 596,094 $ 604,273

Provision for loan losses (1) 38,395 4,747 6,966

Provision for credit losses (1) (28,812) 38,395 4,747

Noninterest income 214,219 239,274 199,317

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Net charge-offs (recoveries) to average loans (0.03) % 0.02 % 0.05 %

(1) Beginning January 1, 2020, calculation is based on current expected loss methodology.

(1) Beginning January 1, 2020, with the adoption of CECL, calculation is based on current expected credit loss methodology.

Prior to January 1, 2020, calculation is based on incurred loss methodology.

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Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of interest-earning assets and interest-bearing liabilities.

We have observed signs of an economic recovery in the United States, with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels.

Additionally, progress toward an effective COVID-19 vaccine has been promising and the availability of that vaccine may drive the re-opening plans of state and local economies in 2021.

However, economic uncertainty remains high and bouts of elevated volatility are expected to continue.

Interest rates remained at near historic lows during the second half of 2020 after declining dramatically in the first half of 2020 due to the COVID-19 pandemic.

The path of the economy continues to depend on the course of COVID-19.

Progress on vaccinations and an easing of supply constraints are expected to support continued gains on economic activity.

Risks to the economic outlook remain, including from new variants of the virus.

Interest rates remained at near historic lows during 2021 after declining dramatically in the first half of 2020 due to the COVID-19 pandemic.

The Federal Reserve’s Federal Funds range is currently in a target range of 0.00% to 0.25%, with the Effective Fed Funds Rate in the 0.05% to 0.10% range.

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(dollars in thousands) 2021 2020 2019

Net interest income $ 596,094 $ 604,273 $ 537,602

Net interest income (GAAP) $ 596,400 $ 596,094 $ 604,273

Conversion to fully taxable equivalent 13,913 13,586 12,940

Net interest income - taxable equivalent basis $ 609,680 $ 617,213 $ 548,996

Net interest income - taxable equivalent basis (non-GAAP) $ 610,313 $ 609,680 $ 617,213

Average earning assets $ 21,152,209 $ 19,158,681 $ 17,385,180

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Net interest margin - taxable equivalent basis 2.89 % 3.18 % 3.55 %

Net interest income was $596.1 million in 2020, an $8.2 million decrease from $604.3 million in 2019.

Taxable equivalent net interest income was $609.7 million in 2020, a $7.5 million decrease from $617.2 million in 2019.

Net interest income was $596.4 million in 2021, a $0.3 million increase from $596.1 million in 2020.

Taxable equivalent net interest income was $610.3 million in 2021, a $0.6 million increase from $609.7 million in 2020.

The net interest margin on a fully taxable equivalent basis was 2.89% in 2021, a 29 basis point decrease compared to 3.18% in 2020.

The decrease in net interest income in 2020 when compared to 2019 was primarily due to lower yields on average earning assets and lower accretion income.

Partially offsetting these decreases were lower costs of average interest-bearing liabilities and interest and fees related to PPP loans.

The increase in net interest income in 2021 when compared to 2020 was primarily due to higher average earning assets and lower costs of average interest-bearing liabilities.

Substantially offsetting these increases were lower yields on average earning assets.

Net interest income in both 2021 and 2020 included accretion income (interest income in excess of contractual interest income) associated with acquired loans.

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We expect accretion income on loans to decrease over time, but this may be offset by future acquisitions.

Net interest income in 2020 included $38.0 million of interest and net fees combined on PPP loans.

Net interest income in 2021 included $44.4 million of interest and net fees combined on PPP loans, compared to $38.0 million in 2020.

Unamortized fees on remaining PPP loans totaled $6.4 million at December 31, 2021.

The following table presents a three-year average balance sheet and for each major asset and liability category, its related interest income and yield, or its expense and rate for the years ended December 31.

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Investment securities:

Treasury and government-

sponsored agencies 547,054 12,124 2.22 657,233 16,091 2.45 673,171 14,433 2.14

Treasury and government- sponsored agencies

1,573,855 24,209 1.54 547,054 12,124 2.22 657,233 16,091 2.45

Mortgage-backed securities 3,356,950 60,479 1.80 3,246,520 70,611 2.17 2,866,600 73,835 2.58

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Total earning assets 21,152,209 $ 652,562 3.09 % 19,158,681 $ 676,894 3.53 % 17,385,180 $ 743,327 4.28 %

Allowance for loan losses (3) (115,321) (56,624) (52,316)

Allowance for credit losses (3) (117,436) (115,321) (56,624)

Non-Earning Assets

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Money market accounts 2,092,661 1,756 0.08 1,866,197 4,585 0.25 1,789,065 14,130 0.79

Other time deposits 1,337,269 14,013 1.05 1,748,552 27,400 1.57 1,654,548 21,012 1.27

Brokered deposits 85,041 966 1.14 173,439 4,094 2.36 185,426 3,404 1.84

Time deposits 1,020,359 5,115 0.50 1,421,216 14,978 1.05 1,921,991 31,494 1.64

Total interest-bearing deposits 11,735,516 10,954 0.09 10,865,968 28,169 0.26 10,491,956 69,364 0.66

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(2) Includes loans held for sale.

(3) Beginning January 1, 2020, calculation is based on current expected loss methodology.

(3) Beginning January 1, 2020, with the adoption of CECL, calculation is based on current expected credit loss methodology.

Prior to January 1, 2020, calculation was based on incurred loss model.

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Average earning assets increased by $1.994 billion, or 10%.

The increase in average earning assets consisted of a $404.6 million increase in investment securities, a $1.261 billion increase in loans, and a $107.4 million increase in money market and other interest-earning investments.

The increase in average earning assets consisted of a $1.297 billion increase in

investment securities, a $421.0 million increase in loans, and a $275.7 million increase in money market and other interest-earning investments.

Average interest-bearing liabilities increased $623.3 million, or 5%.

The increase in average interest-bearing liabilities consisted of a $374.0 million increase in interest-bearing deposits, a $33.3 million increase in securities sold under agreements to repurchase, and a $279.2 million increase in FHLB advances, partially offset by a $103.4 million decrease in federal funds purchased and interbank borrowings and an $8.5 million decrease in other borrowings.

The increase in average interest-bearing liabilities consisted of an $869.5 million increase in interest-bearing deposits, a $16.8 million increase in securities sold under agreements to repurchase, and a $26.8 million increase in other borrowings, partially offset by a $137.1 million decrease in federal funds purchased and interbank borrowings and a $152.7 million decrease in FHLB advances.

Average noninterest-bearing deposits increased by $1.218 billion.

The continued spread and impact of the COVID-19 pandemic may offset the recent positive economic momentum and government stimulus programs, and could negatively impact net interest margin.

Accordingly, there is still much uncertainty regarding the economy.

The increase in average earning assets in 2020 compared to 2019 was due to increases in average loans and average investment securities.

The loan portfolio, including loans held for sale, which generally has an average yield higher than the investment portfolio, was 70% of average interest earning assets in 2020 and 2019.

Average loans including loans held for sale increased $1.261 billion in 2020 compared to 2019 due to increases in average commercial loans, commercial real estate loans, and residential real estate loans, partially offset by lower average consumer loans.

The increase in average commercial loans reflected strong PPP loan production, which began in April 2020.

Average PPP loans for the year ended December 31, 2020 totaled $957.9 million.

Average investments increased $404.6 million in 2020 compared to 2019 reflecting higher fair values and excess liquidity.

The increase in average earning assets in 2021 compared to 2020 was due to increases in average investment securities, average loans, and average money market and other interest-earning investments.

The loan portfolio, including loans held for sale, which generally has an average yield higher than the investment portfolio, was 65% of average interest earning assets in 2021, compared to 70% in 2020.

Average loans including loans held for sale increased $421.0 million in 2021 compared to 2020 due to higher average commercial real estate loans, partially offset by lower average commercial loans, residential real estate loans, and consumer loans.

Excluding the $258.6 million decrease in average PPP loans, average commercial loans increased reflecting organic growth.

Average investments increased $1.297 billion in 2021 compared to 2020 reflecting excess liquidity.

Average non-interest-bearing deposits increased $1.218 billion in 2021 compared to 2020 primarily due to PPP funds on deposit.

Average interest-bearing deposits increased $869.5 million in 2021 compared to 2020.

Average borrowed funds increased $200.6 million in 2020 compared to 2019 primarily due to increases in FHLB advances and securities sold under agreements to repurchase, partially offset by a decrease in federal funds purchased and interbank borrowings.

Average borrowed funds decreased $246.2 million in 2021 compared to 2020 primarily due to decreases in FHLB advances and federal funds purchased and interbank borrowings, partially offset by increases in other borrowings and securities sold under agreements to repurchase.

The following table presents fluctuations in taxable equivalent net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31.

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Money market deposits (2,829) 371 (3,200) (9,545) 399 (9,944)

Other time deposits (13,387) (5,377) (8,010) 6,388 1,309 5,079

Brokered deposits (3,128) (1,545) (1,583) 690 (92) 782

Time deposits (9,863) (3,127) (6,736) (16,516) (6,694) (9,822)

Federal funds purchased and interbank

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using the federal statutory tax rate in effect of 21%.

Provision for Loan Losses

The provision for loan losses was an expense of $38.4 million in 2020, compared to an expense of $4.7 million in 2019.

Net charge-offs totaled $3.0 million in 2020, compared to net charge-offs of $5.6 million in 2019.

The higher provision for loan losses was driven by the implementation of ASC 326 and its current expected loss methodology, which uses an economic forecast that now includes the impact of the COVID-19 pandemic.

PPP loans were factored in the provision for credit losses in 2020;

Provision for Credit Losses

Old National recorded a provision for credit losses recapture of $28.8 million in 2021, compared to an expense of $38.4 million in 2020.

Net recoveries totaled $4.8 million in 2021, compared to net charge-offs of $3.0 million in 2020.

The provision for credit losses recapture in 2021 reflected the improved economic forecast.

The provision for credit losses expense in 2020 reflected the implementation of ASC 326 and the macroeconomic factors surrounding the COVID-19 pandemic.

PPP loans were factored in the provision for credit losses in 2021 and 2020;

however due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant.

Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense.

Additionally, with the adoption of ASC 326 beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

For additional information about non-performing loans, charge-offs, and additional items impacting the provision, refer to the “Risk Management – Credit Risk” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Debt securities gains (losses), net 4,327 10,767 1,923 (59.8) 459.9

Net gain on banking center divestitures — — 13,989 N/M (100.0)

Other income 14,276 17,542 20,539 (18.6) (14.6)

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(1) Total revenue includes the effect of a taxable equivalent adjustment of $13.9 million in 2021, $13.6 million in 2020, and $12.9 million in 2019.

The increase in noninterest income in 2020 compared to 2019 was primarily due to higher mortgage banking revenue, higher capital markets income, and higher debt securities gains.

These increases were partially offset by lower service charges on deposit accounts.

Service charges and overdraft fees decreased $9.8 million in 2020 compared to 2019 reflecting lower overdraft fees due to the impact of the COVID-19 pandemic.

Debit card and ATM fees decreased $1.5 million in 2020 compared to 2019 reflecting lower interchange income due to the impact of the COVID-19 pandemic.

Mortgage banking revenue increased $36.2 million in 2020 compared to 2019 primarily due to increased mortgage originations, sales, and strong pipeline growth in 2020.

Capital markets income is comprised of customer interest rate swap fees, debt placement fees, foreign currency exchange fees, net gains (losses) on foreign currency adjustments, and tax credit fee income.

Capital markets income increased $9.2 million in 2020 compared to 2019 primarily due to higher customer interest rate swap fees.

Debt securities gains (losses), net had a favorable variance of $8.8 million in 2020 compared to 2019 primarily due to higher realized gains on sales of available-for-sale securities and lower realized losses on sales of available-for-sale debt securities in 2020.

Other income decreased $3.0 million in 2020 compared to 2019 primarily due to lower branded card incentives, unfavorable variance in net gains (losses) on derivatives, and lower insurance income.

The decrease in noninterest income in 2021 compared to 2020 was primarily due to lower mortgage banking revenue and lower debt securities gains.

Wealth management fees increased $3.6 million in 2021 compared to 2020 primarily due to higher personal trust fees, fiduciary account fees, and corporate trust fees.

Mortgage banking revenue decreased $20.2 million in 2021 compared to 2020 reflecting lower refinance transactions related to higher rates in 2021, which caused pipeline levels to drop and gain on sale margins to partially normalize.

Investment product fees increased $3.0 million in 2021 compared to 2020 reflecting higher investment and advisor fees.

Debt securities gains (losses), net decreased $6.4 million in 2021 compared to 2020 primarily due to lower realized gains on sales of available-for-sale securities in 2021.

Other income decreased $3.3 million in 2021 compared to 2020 primarily due to lower branded card incentives and $1.5 million of swap termination fees in 2021.

Noninterest Expense

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Total noninterest expense $ 500,569 $ 541,417 $ 508,487 (7.5) % 6.5 %

Noninterest expense increased $32.9 million in 2020 compared to 2019 reflecting higher charges related to The ONB Way strategic initiative in 2020.

ONB Way charges totaled $42.6 million in 2020 compared to $11.4 million in 2019.

Noninterest expense decreased $40.8 million in 2021 compared to 2020 reflecting $42.6 million of charges in 2020 related to the ONB Way strategic initiative and lower amortization of tax credit investments in 2021.

These decreases were partially offset by $14.6 million of diligence and merger charges in 2021 associated with the anticipated First Midwest merger.

Salaries and employee benefits is the largest component of noninterest expense.

Salaries and employee benefits increased $4.1 million in 2020 compared to 2019 primarily due to higher commissions, personnel expenses related to The ONB Way, and higher corporate incentives, partially offset by fewer employees at December 31, 2020.

Marketing expenses decreased $5.0 million in 2020 compared to 2019 primarily due to lower advertising expenses, public relations, and business development expenses.

Professional fees decreased $7.1 million in 2020 compared to 2019 reflecting higher consulting fees incurred in 2019 related to The ONB Way.

Salaries and employee benefits decreased $9.5 million in 2021 compared to 2020.

Personnel expenses related to the ONB Way strategic initiative totaling $8.3 million in 2020 were the primary driver of this decline.

Marketing expenses increased $1.8 million in 2021 compared to 2020 primarily due to higher advertising expenses.

Data processing expenses increased $6.0 million in 2021 compared to 2020 related to the modernization of our technology infrastructure.

Professional fees increased $4.3 million in 2021 compared to 2020.

Professional fees in 2021 included $10.0 million related to the First Midwest merger.

Professional fees in 2020 included $2.8 million of consulting fees related to the ONB Way strategic initiative.

Amortization of intangibles decreased $2.8 million in 2021 compared to 2020 primarily due to lower amortization of core deposit intangibles.

Amortization of tax credit investments increased $16.0 million in 2020 compared to 2019.

Amortization of tax credit investments decreased $12.0 million in 2021 compared to 2020.

The recognition of tax credit amortization expense is contingent upon the successful completion of the rehabilitation of a historic building or completion of a solar project within the reporting period.

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See Note 10 to the consolidated financial statements for additional information on our tax credit investments.

Other expense increased $24.6 million in 2020 compared to 2019 primarily due to lease termination charges and impairments on long-lived assets related to banking center consolidations that were part of the ONB Way strategic initiative totaling $27.1 million in 2020.

Other expense decreased $27.9 million in 2021 compared to 2020 primarily due to lease termination charges and impairments on long-lived assets related to banking center consolidations that were part of the ONB Way strategic initiative totaling $27.1 million in 2020.

Provision for Income Taxes

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The effective tax rate was 18.1% in 2021 compared to 11.4% in 2020.

The lower effective tax rate in 2020 compared to 2019 was primarily the result of an increase in federal tax credits available.

The higher effective tax rate in 2021 compared to 2020 was primarily the result of an increase in pre-tax book income and lower federal tax credits available.

See Note 16 to the consolidated financial statements for additional details on Old National’s income tax provision.

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In 2020, we generated net income of $226.4 million and diluted net income per share of $1.36 compared to $238.2 million and diluted net income per share of $1.38, respectively, in 2019.

The 2019 earnings included a $66.7 million increase in net interest income, an $8.8 million decrease in noninterest expense, a $4.0 million increase in noninterest income, and a $2.2 million decrease in provision for loan losses.

These favorable variances in net income were partially offset by a $34.3 million increase in income tax expense.

Record high commercial loan production, record mortgage production, consistently strong credit quality metrics, and well controlled noninterest expenses all contributed to favorable 2019 performance when compared to 2018.

Net interest income was $604.3 million in 2019, a $66.7 million increase from $537.6 million in 2018.

Taxable equivalent net interest income was $617.2 million in 2019, a 12% increase from $549.0 million in 2018.

Average earning assets increased by $1.884 billion in 2019 and the yield on average earning assets increased 13 basis points from 4.15% in 2018 to 4.28% in 2019.

The provision for loan losses was an expense of $4.7 million in 2019, compared to an expense of $7.0 million in 2018.

The 2020 earnings included a $40.0 million increase in noninterest income and a $23.0 million decrease in income tax expense.

These favorable variances in net income were offset by an $8.2 million decrease in net interest income, a $32.9 million increase in noninterest expense, and a $33.6 million increase in provision for credit losses.

High commercial loan production and mortgage production, consistently strong credit quality metrics, and low cost of total deposits all contributed to favorable 2020 performance when compared to 2019.

Net interest income was $596.1 million in 2020, an $8.2 million decrease from $604.3 million in 2019.

Taxable equivalent net interest income was $609.7 million in 2020, a $7.5 million decrease from $617.2 million in 2019.

Average earning assets increased by $1.774 billion in 2020 and the yield on average earning assets decreased 75 basis points from 4.28% in 2019 to 3.53% in 2020.

The provision for credit losses was an expense of $38.4 million in 2020, compared to an expense of $4.7 million in 2019.

The increase in provision for credit losses expense reflected the implementation of ASC 326 and the macroeconomic factors surrounding the COVID-19 pandemic.

Charge-offs remained low during 2020 and we continued to see positive trends in credit quality.

Noninterest income increased $4.0 million in 2019 compared to 2018 primarily due to higher mortgage banking revenue, higher capital markets income, and higher noninterest income attributable to the full year impact of the Klein partnership as compared to 2018, which only reflected two months of Klein operations.

These increases were partially offset by a $14.0 million gain on the sale of ten Wisconsin banking centers in the fourth quarter of 2018.

Noninterest expense decreased $8.8 million in 2019 compared to 2018 reflecting a decrease in amortization of tax credit investments and lower charitable contributions.

These decreases were partially offset by higher professional fees, higher salaries and employee benefits, and higher operating expenses and acquisition and integration costs associated with the full year impact of the Klein partnership.

Noninterest income increased $40.0 million in 2020 compared to 2019 primarily due to higher mortgage banking revenue, higher capital markets income, and higher debt securities gains.

These increases were partially offset by lower service charges on deposit accounts.

Noninterest expense increased $32.9 million in 2020 compared to 2019 reflecting higher charges related to the ONB Way and higher commissions and corporate incentives, partially offset by fewer employees at December 31, 2020.

The provision for income taxes was $29.1 million in 2020 compared to $52.2 million in 2019.

Old National’s effective tax rate was 11.4% in 2020 compared to 18.0% in 2019.

The higher effective tax rate in 2019 compared to 2018 was primarily the result of a decrease in federal tax credits available as well as an increase in pre-tax book income.

The lower effective tax rate in 2020 compared to 2019 was primarily the result of an increase in federal tax credits available.

FINANCIAL CONDITION

At December 31, 2021, our assets were $24.454 billion, a 7% increase compared to $22.961 billion at December 31, 2020.

The increase was primarily due to higher commercial loans driven by strong PPP loan production in the second quarter of 2020.

As of December 31, 2020, PPP loans totaled $943.0 million.

The increase in assets also reflected higher commercial real estate loans and investment securities.

We have observed signs of an economic recovery in the United States with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels.

Additionally, progress toward an effective COVID-19 vaccine has been promising and the availability of that vaccine may drive the re-opening plans of state and local economies in 2021.

However, economic uncertainty remains high and bouts of elevated volatility are expected to continue.

The increase was primarily due to higher investment securities and organic loan growth, excluding the decline in PPP loans.

We have observed signs of an economic recovery in the United States since the onset of COVID-19, with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels.

However, there have been concerns about the emergence of communicable strains of the virus, whether enough people will agree to be vaccinated, supply chain issues, labor supply constraints, and inflation.

Economic uncertainty remains and bouts of elevated volatility are expected to continue.

Earning Assets

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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.

We classify substantially all of our investment securities as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements.

Equity securities are recorded at fair value and totaled $13.2 million at December 31, 2021 compared to $2.5 million at December 31, 2020.

At December 31, 2020, the investment securities portfolio, including equity securities, was $6.142 billion compared to $5.556 billion at December 31, 2019, an increase of $586.1 million, or 11%.

The increase in equity securities was primarily due to an increase in mutual funds.

At December 31, 2021, the investment securities portfolio, including equity securities, was $7.565 billion compared to $6.142 billion at December 31, 2020, an increase of $1.423 billion, or 23%.

Investment securities represented 35% of earning assets at December 31, 2021, compared to 30% at December 31, 2020.

Stronger commercial loan demand in the future could result in management’s decision to reduce the securities portfolio.

As of December 31, 2020, management does not intend to sell any securities in an unrealized loss position and does not believe we will be required to sell such securities prior to their anticipated recovery.

The investment securities available-for-sale portfolio had net unrealized gains of $186.3 million at December 31, 2020, compared to net unrealized gains of $71.9 million at December 31, 2019.

Net unrealized gains (losses) increased from December 31, 2019 to December 31, 2020 reflecting higher net unrealized gains on mortgage-backed and tax exempt municipal securities due to a decline in long-term interest rates.

As of December 31, 2021, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.

The investment securities available-for-sale portfolio had net unrealized losses of $6.0 million at December 31, 2021, compared to net unrealized gains of $186.3 million at December 31, 2020.

The change in net unrealized gains (losses) from December 31, 2020 to December 31, 2021 was primarily due to an increase in long-term interest rates impacting market values for mortgage-backed, U.S.

government-sponsored entities and agencies, and tax exempt municipal securities.

The investment portfolio had an effective duration of 4.26 at December 31, 2021, compared to 4.08 at December 31, 2020.

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The weighted average yields on investment securities, on a taxable equivalent basis, were 2.10% in 2021 and 2.52% in 2020.

At December 31, 2020, Old National had a concentration of investment securities issued by certain states and their political subdivisions with the following aggregate market values:

$515.6 million issued by Indiana, which represented 17.3% of shareholders’ equity, and $194.3 million issued by Texas, which represented 6.5% of shareholders’ equity.

Of the Indiana municipal bonds, 99% are rated “A” or better, and the remaining 1% generally represent non-rated local interest bonds where Old National has a market presence.

All of the Texas municipal bonds are rated “A” or better, and the majority of issues are backed by the “AAA” rated State of Texas Permanent School Fund Guarantee Program.

Loan Portfolio

We lend primarily to consumers and small to medium-sized commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.

We lend primarily to consumers and small to medium-sized commercial and commercial real estate clients in many diverse industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.

Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, Kentucky, Michigan, Minnesota, and Wisconsin.

The following table presents the composition of the loan portfolio at December 31.

(dollars in thousands) 2020 2019 2018 2017 2016 Four-Year

(dollars in thousands) 2021 2020

Commercial (1) $ 3,391,769 $ 3,956,422

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Consumer 1,574,114 1,635,123

Total loans excluding residential

real estate 11,538,057 9,783,235 9,995,488 8,951,068 6,922,982 13.6

Total loans excluding residential real estate 11,346,557 11,538,057

Residential real estate 2,255,289 2,248,422

Total loans 13,601,846 13,786,479

Allowance for loan losses (1) 131,388 54,619 55,461 50,381 49,808

Allowance for credit losses 107,341 131,388

Net loans $ 13,494,505 $ 13,655,091

(1) Beginning January 1, 2020, calculation is based on current expected loss methodology.

Prior to January 1, 2020, calculation was based on incurred loss model.

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classification within earning assets, representing 49% at December 31, 2020, compared to 45% at December 31, 2019.

At December 31, 2020, commercial and commercial real estate loans were $9.903 billion, an increase of $1.846 billion, or 23%, compared to December 31, 2019.

The increase was driven by strong PPP loan production in the second quarter of 2020.

As of December 31, 2020, PPP loans totaled $943.0 million.

The following table presents the maturity distribution and rate sensitivity of commercial and commercial real estate loans at December 31, 2020 and an analysis of these loans that have predetermined and floating interest rates.

(1) Includes remaining PPP loans of $169.0 million at December 31, 2021, compared to $943.0 million at December 31, 2020.

The following table presents the maturity distribution and rate sensitivity of loans at December 31, 2021 and an analysis of these loans that have predetermined and floating interest rates.

(dollars in thousands) Within

1 Year After 1 - 5

Years After 5 - 15

15 Years Total % of

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Total $ 497,579 $ 3,363,100 $ 2,385,981 $ 134,014 $ 6,380,674 100 %

Residential Real Estate

Interest rates:

Predetermined $ 2,850 $ 67,419 $ 607,554 $ 1,314,485 $ 1,992,308 88 %

Floating 52 1,296 29,941 231,692 262,981 12

Total $ 2,902 $ 68,715 $ 637,495 $ 1,546,177 $ 2,255,289 100 %

Interest rates:

Predetermined $ 17,266 $ 576,701 $ 382,979 $ 5,897 $ 982,843 62 %

Floating 9,974 99,292 205,482 276,523 591,271 38

Total $ 27,240 $ 675,993 $ 588,461 $ 282,420 $ 1,574,114 100 %

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classification within earning assets, representing 45% at December 31, 2021, compared to 49% at December 31, 2020.

At December 31, 2021, commercial and commercial real estate loans were $9.772 billion, a decrease of $130.5 million compared to December 31, 2020 driven by a decline in PPP loans, partially offset by organic loan growth.

As of December 31, 2021, total PPP loans were $169.0 million, compared to $943.0 million at December 31, 2020.

The following table provides detail on commercial loans by industry classification (as defined by the North American Industry Classification System) and by loan size at December 31.

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Total 100 % 100 % 100 % 100 % 100 % 100 %

The following table provides detail on commercial real estate loans classified by property type at December 31.

(dollars in thousands) Outstanding % Outstanding %

By Property Type:

Multifamily $ 1,995,803 31 % $ 1,598,614 27 %

Retail 1,037,034 16 1,041,384 17

Office 1,018,973 16 1,001,589 17

Warehouse / Industrial 851,956 14 821,022 14

Single family 333,221 5 341,273 6

Other (1) 1,143,687 18 1,142,630 19

Total $ 6,380,674 100 % $ 5,946,512 100 %

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

Residential Real Estate Loans

Residential real estate loans held in our portfolio, primarily 1-4 family properties, decreased $85.9 million at December 31, 2020 compared to December 31, 2019.

Residential real estate loans held in our portfolio, primarily 1-4 family properties, increased $6.9 million at December 31, 2021 compared to December 31, 2020.

Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans.

Consumer Loans

Consumer loans, including automobile loans and personal and home equity loans and lines of credit, decreased $91.0 million, at December 31, 2020 compared to December 31, 2019 primarily due to decreases in consumer direct and indirect loans.

Consumer loans, including automobile loans and personal and home equity loans and lines of credit, decreased $61.0 million, at December 31, 2021 compared to December 31, 2020 primarily due to decreases in consumer indirect and consumer direct loans.

Allowance for Credit Losses on Loans and Unfunded Commitments

Beginning January 1, 2020, we calculated allowance for credit losses using current expected credit losses methodology.

Beginning January 1, 2020, with the adoption of CECL, we calculated allowance for credit losses using current expected credit losses methodology.

As of January 1, 2020, Old National increased the allowance for credit losses for loans by $41.3 million and increased the allowance for credit losses for unfunded loan commitments by $4.5 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions.

The increase related to the acquired loan portfolio totaled $27.1 million.

At December 31, 2020, the allowance for credit losses was $131.4 million.

At December 31, 2021, the allowance for credit losses was $107.3 million, compared to $131.4 million at December 31, 2020.

The decrease in the allowance for credit losses reflected the improved economic forecast.

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.

Prior to January 1, 2020, we calculated allowance for loan losses using incurred losses methodology.

At December 31, 2019, the allowance for loan losses was $54.6 million.

Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may be more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements.

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The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense.

The allowance for credit losses on unfunded commitments was $11.7 million at December 31, 2020.

Prior to January 1, 2020, we calculated allowance for losses on unfunded loan commitments using incurred losses methodology.

At December 31, 2019, the allowance for unfunded commitments was $2.7 million.

The allowance for credit losses on unfunded loan commitments totaled $10.9 million at December 31, 2021, compared to $11.7 million at December 31, 2020.

Additional information about our Allowance for Credit Losses is included in the “Risk Management – Credit Risk” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 1 and 4 to the consolidated financial statements.

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Mortgage loans held for immediate sale in the secondary market were $35.5 million at December 31, 2021, compared to $63.3 million at December 31, 2020.

Certain mortgage loans are committed for sale at or prior to origination at a contracted price to an outside investor.

Certain mortgage loans are committed for sale at or prior to

origination at a contracted price to an outside investor.

Other mortgage loans held for immediate sale are hedged with TBA forward agreements and committed for sale when they are ready for delivery and remain on the Company’s balance sheet for a short period of time (typically 30 to 60 days).

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Mortgage originations are subject to volatility due to interest rates and home sales, among other factors.

We have elected the fair value option prospectively for residential loans held for sale.

We have elected the fair value option for residential loans held for sale.

The aggregate fair value exceeded the unpaid principal balance by $1.3 million at December 31, 2021 and $3.5 million at December 31, 2020.

Other assets increased $93.5 million since December 31, 2019 primarily due to an increase in derivative assets.

Other assets increased $26.6 million since December 31, 2020 primarily due to higher tax credit investments and net deferred tax assets related to net unrealized gains (losses) on investment securities.

These increases were partially offset by lower derivative assets.

Total funding, comprised of deposits and wholesale borrowings, was $21.144 billion at December 31, 2021, an increase of $1.430 billion from $19.714 billion at December 31, 2020.

Total deposits were $18.569 billion, an increase of $1.532 billion compared to December 31, 2020.

Noninterest-bearing demand deposits increased

$1.591 billion from December 31, 2019 to December 31, 2020.

Noninterest-bearing demand deposits increased $669.4 million from December 31, 2020 to December 31, 2021.

Interest-bearing checking and NOW deposits increased $361.0 million from December 31, 2020 to December 31, 2021, while savings deposits increased $402.7 million.

Money market deposits increased $261.0 million from December 31, 2020 to December 31, 2021.

Other time deposits decreased $486.7 million, while brokered deposits increased $27.3 million.

Time deposits decreased $162.5 million.

We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position.

At December 31, 2021, wholesale borrowings, including federal funds purchased and interbank borrowings, securities sold under agreements to repurchase, FHLB advances, and other borrowings, totaled $2.575 billion, a decrease of $101.3 million from December 31, 2020.

The decrease in wholesale funding from December 31, 2019 to December 31, 2020 was due to a decrease in federal funds purchased and interbank borrowings, partially offset by increases in FHLB advances, securities sold under agreements to repurchase, and other borrowings.

The decrease in wholesale funding from December 31, 2020 to December 31, 2021 was due to decreases in FHLB advances, securities sold under agreements to repurchase, and federal funds purchased and interbank borrowings, partially offset by an increase in other borrowings.

Wholesale funding as a percentage of total funding was 12% at December 31, 2021, compared to 14% at December 31, 2020.

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Money market deposits 2,092,661 1,866,197 1,789,065 12.1 4.3

Other time deposits 1,337,269 1,748,552 1,654,548 (23.5) 5.7

Brokered deposits 85,041 173,439 185,426 (51.0) (6.5)

Time deposits 1,020,359 1,421,216 1,921,991 (28.2) (26.1)

Total deposits 17,899,453 15,811,474 14,379,426 13.2 10.0

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Total funding sources $ 20,465,234 $ 18,623,489 $ 16,990,879 9.9 % 9.6 %

The following table presents a maturity distribution for certificates of deposit with denominations of $100,000 or more at December 31.

Maturity Distribution

(dollars in thousands) Year-End

2020 $ 575,055 $ 212,671 $ 129,273 $ 146,453 $ 86,658

2019 983,598 445,434 214,412 209,075 114,677

2018 1,133,130 397,990 265,232 280,402 189,506

At December 31, 2021, time deposits in excess of the FDIC insurance limit and estimated time deposits that are otherwise uninsured by maturity were as follows:

(dollars in thousands) Individual

Instruments in

Denominations that

Meet or Exceed the

FDIC Insurance

Limit Estimated Aggregate

Time Deposits that

Meet or Exceed the

FDIC Insurance

Limit and Otherwise

Uninsured Time

Three months or less $ 95,506 $ 111,993

Over three through six months 55,170 68,582

Over six through 12 months 44,856 89,236

Over 12 months 57,219 120,946

Total $ 252,751 $ 390,757

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities increased $25.8 million, or 16%, from December 31, 2019 primarily due to increases in accrued incentive payments, allowance for credit losses on unfunded commitments, and derivative liabilities.

Accrued expenses and other liabilities increased $33.5 million, or 18%, from December 31, 2020 primarily due to increases in unfunded commitments on low income housing tax credit investments and derivative liabilities.

Shareholders’ equity totaled $3.012 billion, or 12% of total assets, at December 31, 2021 and $2.973 billion, or 13% of total assets, at December 31, 2020.

Old National repurchased 4.9 million shares of Common Stock in 2020 under a stock repurchase plan that was approved by the Company’s Board of Directors, which reduced equity by $78.7 million, and 0.2 million shares of Common Stock associated with employee share-based incentive programs reducing equity by $3.6 million.

We suspended the stock repurchase plan approved by the Company's Board of Directors in 2020 given the uncertain economic conditions.

We also paid cash dividends of $0.56 per share in 2020,

which reduced equity by $92.9 million.

The change in unrealized gains (losses) on available-for-sale investment securities increased equity by $89.2 million during 2020.

The change in unrealized gains (losses) on available-for-sale investment securities decreased equity by $148.3 million during 2021.

Old National paid cash dividends of $0.56 per share in 2021, which reduced equity by $92.8 million.

Old National’s Common Stock is traded on the NASDAQ under the symbol “ONB” with 36,320 shareholders of record at December 31, 2021.

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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.

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The Risk Appetite Statement addresses the following major risks:

strategic, market, liquidity, credit, operational/technology/cyber, regulatory/compliance/legal, reputational, and human resources.

strategic, market, liquidity, credit, operational/technology/cybersecurity, talent management, regulatory/compliance/legal, and reputational.

Our Chief Risk Officer is independent of management and reports directly to the Chair of the Board’s Enterprise Risk Management Committee.

The following discussion addresses these major risks:

credit, market, liquidity, operational/technology/cyber, and regulatory/compliance/legal.

During the COVID-19 pandemic, we are committed and focused on the health and safety of our team members, clients, and communities.

We will continue to evaluate and adjust our banking center hours, lobby usage, and return to work efforts as necessary depending on the path of the virus across our footprint.

We are occupying only 50% of our office buildings by rotating team members every 4 weeks.

credit, market, liquidity, operational/technology/cybersecurity, and regulatory/compliance/legal.

Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms.

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These securities remained classified as available-for-sale and the unrealized loss on our pooled trust preferred securities was $4.3 million at December 31, 2021.

The fair value of these securities should improve as we get closer to maturity, but not in all cases.

The fair value of these securities is expected to improve as we get closer to maturity, but may be adversely impacted by credit deterioration.

All of our mortgage-backed securities are backed by U.S.

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Commercial and industrial loans are made primarily for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes.

Lease financing consists of direct financing leases and is used by commercial customers to finance capital purchases ranging from computer equipment to transportation equipment.

Lease financing consists of direct financing leases and is used by commercial clients to finance capital purchases ranging from computer equipment to transportation equipment.

The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant.

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In addition, a personal guarantee of the loan or a portion thereof is often required from the principal(s) of the borrower.

In most cases, we require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property.

In most cases, we require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and flood

insurance, if appropriate, in order to protect our security interest in the underlying property.

In addition, business interruption insurance or other insurance may be required.

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In addition, the committee reviews and approves recommended loan policy changes to assure our policy remains appropriate for the current lending environment.

We lend to commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.

Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size.

At December 31, 2020, our average commercial loan size (excluding PPP loans) was under $355,000 and our average commercial real estate loan size was under $820,000.

In addition, while loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold.

We lend to commercial and commercial real estate clients in many diverse industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.

Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.

At December 31, 2021, our average commercial loan size was approximately $205,000 and our average commercial real estate loan size was approximately $940,000.

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 December 31, 2021, we had minimal exposure to foreign borrowers and no sovereign debt.

Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, Kentucky, Michigan, Minnesota, and Wisconsin.

We have experienced an impact from COVID-19 during 2020;

however, the depth of this crisis is ongoing and its effect is anticipated to be very broad-based.

Management believes that trends in under-performing, criticized, and classified loans will be highly dependent on both the ability to roll out vaccinations in an efficient and timely manner, as well as the length of time it will take consumers to return to their pre-pandemic spending routines.

We have experienced an adverse impact from COVID-19 during 2020 and 2021;

however, the depth of this crisis is ongoing and its effect is very broad-based.

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

The following table presents a summary of under-performing, criticized, and classified assets at December 31:

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TDRs still accruing 18,378 17,749

Total past due loans (90 days or more and still

accruing) 167 570 1,353 894 328

Total past due loans (90 days or more and still accruing) 7 167

Other real estate owned 2,030 1,324

Total under-performing assets $ 127,106 $ 166,579

Classified loans (includes nonaccrual, TDRs

still accruing, past due 90 days, and other

problem loans) $ 304,782 $ 296,671 $ 334,785 $ 226,583 $ 220,429

Classified loans (includes nonaccrual, TDRs still accruing,

past due 90 days, and other problem loans) $ 269,270 $ 304,782

Other classified assets (1) 4,338 3,706

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Asset Quality Ratios:

Nonaccrual loans/total loans (2) 0.78 % 1.07 %

Non-performing loans/total loans (2) (3) 0.92 1.20

Under-performing assets/total loans and

other real estate owned (2) (4) 1.21 1.22 1.47 1.39 1.82

Under-performing assets/total loans and other real

estate owned (2) 0.93 1.21

Under-performing assets/total assets 0.52 0.73

Allowance/under-performing assets (4) (5) 78.87 37.03 30.91 32.67 30.25

Allowance/nonaccrual loans (5) 89.17 43.21 35.22 40.33 37.90

Allowance for credit losses/under-performing assets 84.45 78.87

Allowance for credit losses/nonaccrual loans 100.61 89.17

(1) Includes one pooled trust preferred security and two insurance policies at December 31, 2021.

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

(4) Includes acquired loans that were recorded at fair value at the date of acquisition.

As such, the credit risk was incorporated in the fair value recorded and no allowance for loan losses was recorded prior to 2020.

(5) Beginning January 1, 2020, the allowance is based on current expected loss methodology.

Prior to January 1, 2020, the allowance was based on incurred loss methodology.

Under-performing assets totaled $127.1 million at December 31, 2021, compared to $166.6 million at December 31, 2020.

Under-performing assets as a percentage of total loans and other real estate owned at December 31, 2021 were 0.93%, a 28 basis point improvement from 1.21% at December 31, 2020.

Nonaccrual loans increased $20.9 million from December 31, 2019 to December 31, 2020 primarily due to an increase in commercial real estate nonaccrual loans.

As a percentage of nonaccrual loans, the allowance was 89.17% at December 31, 2020, compared to 43.21% at December 31, 2019.

Beginning January 1, 2020, the allowance is based on current expected loss methodology.

Prior to January 1, 2020, the allowance was based on current expected loss methodology.

Nonaccrual loans decreased $40.6 million from December 31, 2020 to December 31, 2021 primarily due to lower commercial real estate and commercial nonaccrual loans.

As a percentage of nonaccrual loans, the allowance for credit losses was 100.61% at December 31, 2021, compared to 89.17% at December 31, 2020.

If nonaccrual and renegotiated loans outstanding at December 31, 2021 and 2020, respectively, had been accruing interest throughout the year in accordance with their original terms, interest income of approximately $5.1 million in 2021 and $5.8 million in 2020 would have been recorded on these loans.

The amount of interest income actually recorded on nonaccrual and renegotiated loans was $1.3 million in 2021 and $2.9 million in 2020.

Total criticized and classified assets were $595.7 million at December 31, 2020, an increase of $61.2 million from December 31, 2019.

Total criticized and classified assets were $509.5 million at December 31, 2021, a decrease of $86.2 million from December 31, 2020.

Other classified assets include investment securities that fell below investment grade rating totaling $4.3 million at December 31, 2021, compared to $3.7 million at December 31, 2020.

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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 include one or a combination of the following:

The modification of the terms of such loans includes one or a combination of the following:

a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

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For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances.

Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that are 90 days or more delinquent and do not have adequate collateral support.

For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

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TDRs included within nonaccrual loans totaled $14.9 million at December 31, 2020.

Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $1.6 million at December 31, 2020 and $0.9 million at December 31, 2019.

At December 31, 2020, Old National had not committed to lend any additional funds to customers with outstanding loans that are classified as TDRs, compared to $2.3 million at December 31, 2019.

Old National has allocated specific reserves to clients whose loan terms have been modified in TDRs totaling $0.7 million at December 31, 2021 and $1.6 million at December 31, 2020.

Old National had not committed to lend any additional funds to clients with outstanding loans that are classified as TDRs at December 31, 2021 or December 31, 2020.

The terms of certain other loans were modified during 2021 and 2020 that did not meet the definition of a TDR.

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We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold, or charged off.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR until it is paid in full, otherwise settled, sold, or charged off.

However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances:

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The Interagency Statement issued by our banking regulators encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates.

Section 541 of the CAA extends this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date.

the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates.

The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations.

In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due.

These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

The table below presents these loan deferrals by loan category:

(dollars in thousands) June 30, 2020

Balance September 30, 2020

Balance December 31, 2020

Balance (1) December 31, 2020 Number of Deferrals

Commercial and commercial real estate $ 1,170,119 $ 125,603 $ 53,823 101

Residential real estate 78,639 1,654 1,855 6

Consumer 54,786 10,315 8,224 348

Total $ 1,303,544 $ 137,572 $ 63,902 455

(1) Includes second deferrals between 90 and 180 days totaling $6.3 million of commercial and commercial real estate loans and $0.6 million of consumer loans.

Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the PPP, a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic.

Old National has participated in the PPP as a lender.

These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

Additionally, loan payments will also be deferred for the first six months of the loan term.

The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020.

No collateral or personal guarantees are required.

Neither the government nor lenders are permitted to charge the recipients any fees.

On December 27, 2020, President Trump signed into law the CAA.

The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses.

Old National is participating in the CAA’s second round of PPP lending.

In mid-January we opened our lending portal and have begun processing PPP loan applications.

Early indications support our belief that there will be a large volume of smaller sized loans.

We anticipate the average loan size to be less than $150,000.

Currently, we are focused on helping minority-owned business, women-owned business, not-for-profit entities, and existing first round PPP customers with the lending process.

As of January 31, 2021, we had received 2,740 applications under the CAA round of PPP lending, representing $348.0 million in funding.

As of December 31, 2020, Old National had originated over 9,700 loans with balances in excess of $1.5 billion to new and existing customers through the PPP.

To the extent the PPP loans are forgiven, this represents outside funds to our borrowers;

and, especially with respect to vulnerable industries, we believe these capital injections are going to be instrumental in assisting our borrowers in navigating through the pandemic.

This capital injection, along with the level of capital each borrower had just prior to COVID-19 impacting them, are critical factors in determining the staying power of our borrowers.

Upon receipt of interim financial results from our borrowers, we will use that information to update our understanding of the underlying strengths or weaknesses in each individual relationship and take actions, as appropriate.

As of January 31, 2021, we have received payment from the SBA on 5,689 of our loans totaling $702.6 million.

After this date, we will follow the GAAP accounting treatment to determine if new modifications meet the definition of a TDR.

In accordance with such guidance, during 2020 and throughout 2021 we offered short-term modifications in response to COVID-19 to borrowers who were current and otherwise not past due.

These included short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that were insignificant.

These loan deferrals totaled $6.4 million at December 31, 2021.

Small Business Administration Paycheck Protection Program

In 2020, Section 1102 of the CARES Act created the PPP, a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic.

Old National participated in the PPP as a lender.

During 2020, Old National originated over 9,700 loans with balances of approximately $1.518 billion to new and existing clients through the PPP.

As of December 31, 2021, we have received payment from the SBA on 9,502, or 97%, of these loans totaling $1.503 billion.

On December 27, 2020, the CAA was signed into law.

The CAA, among other things, extended the life of the PPP, effectively creating a second round of PPP loans for eligible businesses.

Old National participated in the CAA’s second round of PPP lending.

During 2021, Old National originated approximately 6,200 loans totaling $583.7 million through the second round of the PPP.

As of December 31, 2021, we have received payment from the SBA on 4,566, or 74%, of these loans totaling $424.1 million.

Additionally, section 541 of the CAA extended the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022.

At December 31, 2021, remaining PPP loans totaled $169.0 million .

Allowance for Credit Losses on Loans and Unfunded Commitments

Beginning January 1, 2020, we calculated allowance for credit losses using current expected credit losses methodology.

Beginning January 1, 2020, with the adoption of CECL, we calculated allowance for credit losses using current expected credit losses methodology.

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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:

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;

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The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments.

The composition of loans by portfolio segment as of December 31, 2020 follows:

December 31, 2020 Segment December 31, 2020

The portfolio segment reclassifications follow:

Statement Portfolio After

(dollars in thousands) Balance Reclassifications Reclassifications

December 31, 2021

Commercial $ 3,391,769 $ (191,557) $ 3,200,212

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Total $ 13,601,846 $ — $ 13,601,846

The activity in our allowance for credit losses for loans was as follows:

December 31, 2020

Commercial $ 3,956,422 $ (198,722) $ 3,757,700

Commercial real estate 5,946,512 (171,701) 5,774,811

BBCC N/A 370,423 370,423

Residential real estate 2,248,422 — 2,248,422

Consumer 1,635,123 (1,635,123) N/A

Indirect N/A 913,902 913,902

Direct N/A 164,807 164,807

Home equity N/A 556,414 556,414

Total $ 13,786,479 $ — $ 13,786,479

The following table details activity in our allowance for credit losses for loans for the years ended December 31:

(dollars in thousands) 2021 2020

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Indirect 1,087 2,754

Direct 1,159 1,763

Home equity 82 201

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Indirect 1,682 1,922

Direct 777 819

Home equity 978 922

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Allowance/average loans (1) 0.78 0.98

Net charge-offs (recoveries)/average loans 0.02

(1) Loans exclude loans held for sale.

At December 31, 2020, the allowance for credit losses was $131.4 million.

The following table details net charge-offs to average loans outstanding by loan category for the years ended December 31:

(dollars in thousands) 2021 2020

Net charge-offs (recoveries) $ 437 $ 1,964

Average loans for the year $ 3,553,527 $ 3,520,397

Net charge-offs (recoveries)/average loans 0.01 % 0.06 %

Commercial real estate:

Net charge-offs (recoveries) $ (4,139) $ (192)

Average loans for the year $ 6,022,408 $ 5,436,791

Net charge-offs (recoveries)/average loans (0.07) % — %

Net charge-offs (recoveries) $ 39 $ (45)

Average loans for the year $ 355,310 $ 363,463

Net charge-offs (recoveries)/average loans 0.01 % (0.01) %

Residential real estate:

Net charge-offs (recoveries) $ 7 $ 191

Average loans for the year (1) $ 2,257,878 $ 2,336,428

Net charge-offs (recoveries)/average loans — % 0.01 %

Net charge-offs (recoveries) $ (595) $ 832

Average loans for the year $ 879,525 $ 935,233

Net charge-offs (recoveries)/average loans (0.07) % 0.09 %

Net charge-offs (recoveries) $ 382 $ 944

Average loans for the year $ 150,620 $ 195,795

Net charge-offs (recoveries)/average loans 0.25 % 0.48 %

Net charge-offs (recoveries) $ (896) $ (721)

Average loans for the year $ 547,322 $ 553,570

Net charge-offs (recoveries)/average loans (0.16) % (0.13) %

Net charge-offs (recoveries) $ (4,765) $ 2,973

Average loans for the year (1) $ 13,766,590 $ 13,341,677

Net charge-offs (recoveries)/average loans (0.03) % 0.02 %

(1) Average loans exclude loans held for sale.

The allowance for credit losses was $107.3 million at December 31, 2021, compared to $131.4 million at December 31, 2020.

The decrease in the allowance for credit losses reflected the improved economic forecast.

There were no industry segments representing a significant share of total net charge-offs.

Over the last twelve months, net charge-offs have remained low.

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.

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Prior to January 1, 2020, we calculated allowance for loan losses using incurred losses methodology.

The activity in our allowance for loan losses was as follows:

The activity in our allowance for loan losses for the year ended December 31, 2019 was as follows:

(dollars in thousands) 2019

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(1) Loans exclude loans held for sale.

We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements.

The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment.

The allowance for credit losses on unfunded commitments was $11.7 million at December 31, 2020.

Prior to January 1, 2020, we calculated allowance for losses on unfunded loan commitments using incurred losses methodology.

At December 31, 2019, the allowance for unfunded commitments was $2.7 million.

The following table details the allowance for credit losses for loans by loan category and the percent of loans in each category compared to total loans at December 31.

(dollars in thousands) Allowance

Loans Allowance

Commercial $ 27,232 23.5 % $ 30,567 27.3 %

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Total $ 107,341 100.0 % $ 131,388 100.0 %

The following table details the allowance for loan losses by loan category and the percent of loans in each category compared to total loans at December 31.

2019 2018 2017 2016

(dollars in thousands) Allowance

Loans Allowance

Commercial $ 22,585 23.9 % $ 21,742 26.4 % $ 19,246 24.4 % $ 21,481 21.3 %

Commercial real estate 21,588 42.6 23,470 40.5 21,436 39.2 18,173 34.7

Residential real estate 2,299 19.3 2,277 18.4 1,763 19.5 1,643 23.2

Consumer credit 8,147 14.2 7,972 14.7 7,936 16.9 8,511 20.8

Total $ 54,619 100.0 % $ 55,461 100.0 % $ 50,381 100.0 % $ 49,808 100.0 %

We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements.

The allowance for credit losses on unfunded loan commitments totaled $10.9 million at December 31, 2021, compared to $11.7 million at December 31, 2020.

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.

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This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans.

Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments.

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.

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% change from base (2.83) % 4.38 % 8.19 % 11.29 %

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

Our asset sensitivity increased year over year primarily due to deposit growth, higher mix of floating rate loans, and changes in our hedging strategies.

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.

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Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources.

The Funds Management Committee of the Board of

Directors establishes liquidity risk guidelines and, along with the Balance Sheet Management Committee, monitors liquidity risk.

The Funds Management Committee of the Board of Directors establishes liquidity risk guidelines and, along with the Balance Sheet Management Committee, monitors liquidity risk.

The objective of liquidity management is to ensure we have the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner.

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We continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.

At December 31, 2020, brokered deposits consist of $100.0 million of demand deposits and $19.6 million of time deposits.

A maturity schedule for Old National Bank’s total time deposits is shown in the following table at December 31, 2020.

A maturity schedule for Old National Bank’s time deposits is shown in the following table at December 31, 2021.

(dollars in thousands)

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

Moody’s Investor Service places us in an investment grade that indicates a low risk of default.

Moody’s Investors Service places us in an investment grade that indicates a low risk of default.

For both Old National and Old National Bank:

• Moody’s Investor Service affirmed the Long-Term Rating of “A3” for Old National’s senior unsecured/issuer rating on February 3, 2020.

• Moody’s Investor Service affirmed Old National Bank’s long-term deposit rating of “Aa3” on February 3, 2020.

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

• Moody’s Investors Service affirmed Old National Bank’s long-term deposit rating of “Aa3” on February 17, 2021.

The bank’s short-term deposit rating was affirmed at “P-1” and the bank’s issuer rating was affirmed at “A3.”

The rating outlook from Moody’s Investor Service is stable.

Moody’s Investor Service concluded a rating review of Old National Bank on February 3, 2020.

Moody’s Investors Service concluded a rating review of Old National Bank on February 17, 2021.

The rating outlook from Moody’s Investors Service was moved from “Stable” to “Ratings Under Review” on June 2, 2021 due to the merger announced June 1, 2021.

The credit ratings of Old National and Old National Bank at December 31, 2021 are shown in the following table.

Moody's Investor Service

Moody's Investors Service

Long-term Short-term

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At December 31, 2021, Old National Bank could pay dividends of $268.1 million without prior regulatory approval.

Operational/Technology/Cyber Risk

Operational/technology/cyber risk is the danger that inadequate information systems, operational problems, breaches in internal controls, information security breaches, fraud, or unforeseen catastrophes will result in unexpected losses and other adverse impacts to Old National, such as reputational harm.

Operational/Technology/Cybersecurity Risk

Operational/technology/cybersecurity risk is the danger that inadequate information systems, operational problems, breaches in internal controls, information security breaches, fraud, or unforeseen catastrophes will result in unexpected losses and other adverse impacts to Old National, such as reputational harm.

We maintain frameworks, programs, and internal controls to prevent or minimize financial loss from failure of systems, people, or processes.

This includes specific programs and frameworks intended to prevent or limit the effects of cyber risks including cyber-attacks or other information security breaches that might allow unauthorized transactions or unauthorized access to customer, associate, or company sensitive information.

Metrics and measurements are used by our management team in the management of day-to-day operations to ensure effective customer service, minimization of service disruptions, and oversight of operational and cyber risk.

We continually monitor and report on operational, technology, and cyber risks related to clients, products, and business practices;

external and internal fraud;

business disruptions and systems failures;

This includes specific programs and frameworks intended to prevent or limit the effects of cybersecurity risk including, but not limited to, cyber-attacks or other information security breaches that might allow unauthorized transactions or unauthorized access to client, team member, or company sensitive information.

Metrics and measurements are used by our management team in the management of day-to-day operations to ensure effective client service, minimization of service disruptions, and oversight of cybersecurity risk.

We continually monitor and report on operational, technology, and cybersecurity risks related to business disruptions and systems failures;

cyber-attacks, information security or data breaches;

clients, products, and business practices;

damage to physical assets;

and execution, delivery, and process management.

The Enterprise Risk Management Committee of the Board of Directors is responsible for the oversight, guidance, and monitoring of risks, including operational/technology/cyber risks, being taken by the Company.

employee and workplace safety;

execution, delivery, and process management;

and external and internal fraud.

The monitoring is accomplished through ongoing review of management reports, data on risks and policy limits, and consistent discussion on enterprise risk management strategies, policies, and risk assessments.

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Regulatory/compliance/legal risk is the risk that the Company violated or was not in compliance with applicable laws, regulations or practices, industry standards, or ethical standards.

The legal portion assesses the risk that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively impact the Company.

The Board of Directors expects that we will perform business in a manner compliant with applicable

laws and/or regulations and expects issues to be identified, analyzed, and remediated in a timely and complete manner.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements include commitments to extend credit and financial guarantees.

Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers.

Our banking affiliates have entered into various agreements to extend credit, including loan commitments of $3.720 billion and standby letters of credit totaled $86.9 million at December 31, 2020.

At December 31, 2020, approximately $3.463 billion of the loan commitments had fixed rates and $257.8 million had floating rates, with the floating interest rates ranging from 0% to 14%.

At December 31, 2019, loan commitments were $2.779 billion and standby letters of credit totaled $87.8 million.

The term of these off-balance sheet arrangements is typically one year or less.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of $54.3 million at December 31, 2020.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENT LIABILITIES

The following table presents our significant fixed and determinable contractual obligations and significant commitments at December 31, 2020.

The legal portion assesses the risk that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively impact the

The Board of Directors expects that we will perform business in a manner compliant with applicable laws and/or regulations and expects issues to be identified, analyzed, and remediated in a timely and complete manner.

MATERIAL CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENT LIABILITIES

The following table presents our material fixed and determinable contractual obligations and significant commitments at December 31, 2021.

Further discussion of each obligation or commitment is included in the referenced note to the consolidated financial statements.

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Reference One Year

or Less One to

Three Years Three to

Five Years Over

Five Years Total

One Year Total

Deposits without stated maturity $ 17,608,782 $ — $ 17,608,782

IRAs, consumer, and brokered

certificates of deposit 10 825,822 221,754 68,227 7,067 1,122,870

Federal funds purchased and

interbank borrowings 1,166 — — — 1,166

Securities sold under agreements

to repurchase 11 431,166 — — — 431,166

IRAs, consumer, and brokered certificates of deposit 11 663,230 297,183 960,413

Securities sold under agreements to repurchase 12 392,275 — 392,275

Federal Home Loan Bank advances 13 27,500 1,858,519 1,886,019

Other borrowings 13 1,025 2,205 177,368 72,189 252,787

Fixed interest payments (1) 35,103 67,931 54,941 60,375 218,350

Operating leases 6 14,245 22,775 16,482 50,462 103,964

Other long-term liabilities (2) 27,093 2,963 44 5 30,105

(1) Our senior notes, subordinated notes, certain trust preferred securities, and certain FHLB advances have fixed rates ranging from 0.14% to 4.96%.

All of our other long-term debt is at LIBOR based variable rates at December 31, 2020 .

The projected variable interest assumes no increase in LIBOR rates from December 31, 2020 .

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

We rent certain premises and equipment under operating leases.

See Note 6 to the consolidated financial statements for additional information on long-term lease arrangements.

We are party to various derivative contracts as a means to manage the balance sheet and our related exposure to changes in interest rates, to manage our residential real estate loan origination and sale activity, and to provide derivative contracts to our clients.

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48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No.

109 ) are not included in the table because the amount

and timing of any cash payments cannot be reasonably estimated.

109 ) are not included in the table because the amount and timing of any cash payments cannot be reasonably estimated.

Further discussion of income taxes and liabilities is included in Note 16 to the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our accounting policies are described in Note 1 to the consolidated financial statements.

Certain accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities.

We consider these policies to be critical accounting policies.

The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances.

CRITICAL ACCOUNTING ESTIMATES

Our most significant accounting policies are described in Note 1 to the consolidated financial statements.

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, and 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.

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We utilize a discounted cashflow approach to determine the allowance for credit losses for performing loans and nonperforming loans.

Expected cashflows are created for each loan and discounted using the effective yield.

The discounted sum of expected cashflows is then compared to the

amortized cost and any shortfall is recorded as reserve.

Expected cashflows are created for each loan and discounted using the effective yield method.

The discounted sum of expected cashflows is then compared to the amortized cost and any shortfall is recorded as reserve.

Expected cashflows are created using a combination of contractual payment schedules, calculated PDs, LGD and prepayment assumptions as well as qualitative factors.

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In either instance, unanticipated changes could have a significant impact on results of operations.

One of the most significant judgments used in determining the allowance for credit losses is the macroeconomic forecast provided by a third party.

The economic indices sourced from the macroeconomic forecast and used in projecting loss rates include the national unemployment rate, changes in commercial real estate prices, changes in home values, and changes in the United States gross domestic product.

The economic index used in the calculation to which the calculation may be most sensitive is the national unemployment rate.

Each reporting period, several macroeconomic forecast scenarios are considered by

Management selects the macroeconomic forecast that is most reflective of expectations at that point in time.

Changes in the macroeconomic forecast, especially for the national unemployment rate, could significantly impact the calculated estimated credit losses.

The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis