OLD NATIONAL BANCORP /IN/ 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Management 68 Report of Independent Registered Public Accounting Firm (PCAOB ID: 173 ) 69 Consolidated Balance Sheets 72 Consolidated Statements of Income 73 Consolidated Statements of Comprehensive Income 74 Consolidated Statements of Changes in Shareholders’ Equity 75 Consolidated Statements of Cash Flows 76 Notes to Consolidated Financial Statements 77 Note 1. Basis of Presentation and Significant Accounting Policies 77 Note 2. Acquisition and Divestiture Activity 86 Note 3 . Investment Securities 87 Note 4 . Loans and Allowance for Credit Losses 89 Note 5 . Other Real Estate Owned 103 Note 6 . Premises and Equipment 103 Note 7 . Leases 104 Note 8 . Goodwill and Other Intangible Assets 106 Note 9 . Loan Servicing Rights 107 Note 10 . Qualified Affordable Housing Projects and Other Tax Credit Investments 107 Note 1 1 . Deposits 109 Note 12 . Securities Sold Under Agreements to Repurchase 109 Note 13 . Federal Home Loan Bank Advances 109 Note 1 4 . Other Borrowings 110 Note 1 5 . Accumulated Other Comprehensive Income (Loss) 112 Note 16 . Income Taxes 113 Note 1 7 . Share-Based Compensation and Other Employee Benefit Plans 115 Note 1 8 . Shareholders’ Equity 117 Note 1 9 . Fair Value 118 Note 20 . Derivative Financial Instruments 124 Note 2 1 . Commitments and Contingencies 127 Note 2 2 . Financial Guarantees 128 Note 23 . Revenue From Contracts With Customers 129 Note 2 4 . Regulatory Restrictions 130 Note 2 5 . Parent Company Financial Statements 132 Note 2 6 . Segment Information 133 67 REPORT OF MANAGEMENT MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING Management is responsible for the preparation of the financial statements and related financial information appearing in this annual report on Form 10-K. The financial statements and notes have been prepared in conformity with accounting principles generally accepted in the United States and include some amounts which are estimates based upon currently available information and management’s judgment of current conditions and circumstances. Financial information throughout this annual report on Form 10-K is consistent with that in the financial statements. Management maintains a system of internal accounting controls, which is believed to provide, in all material respects, reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are properly authorized and recorded, and the financial records are reliable for preparing financial statements and maintaining accountability for assets. In addition, Old National has a Code of Business Conduct and Ethics, a Senior Financial and Executive Officer Code of Ethics and Corporate Governance Guidelines that outline high levels of ethical business standards. Old National has also appointed a Chief Ethics Officer and had a third party perform an independent validation of our ethics program. All systems of internal accounting controls are based on management’s judgment that the cost of controls should not exceed the benefits to be achieved and that no system can provide absolute assurance that control objectives are achieved. Management believes Old National’s system provides the appropriate balance between cost of controls and the related benefits. In order to monitor compliance with this system of controls, Old National maintains an extensive internal audit program. Internal audit reports are issued to appropriate officers and significant audit exceptions, if any, are reviewed with management and the Audit Committee. The Board of Directors, through an Audit Committee comprised solely of independent outside directors, oversees management’s discharge of its financial reporting responsibilities. The Audit Committee meets regularly with Old National’s independent registered public accounting firm, Crowe LLP, and the managers of financial reporting, internal audit, and risk. During these meetings, the committee meets privately with the independent registered public accounting firm as well as with financial reporting and internal audit personnel to review accounting, auditing, and financial reporting matters. The appointment of the independent registered public accounting firm is made by the Audit Committee. The consolidated financial statements in this annual report on Form 10-K have been audited by Crowe LLP, for the purpose of determining that the consolidated financial statements are presented fairly, in all material respects in conformity with accounting principles generally accepted in the United States. Crowe LLP’s report on the financial statements follows. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Old National is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Old National’s management assessed the effectiveness of Old National’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria established in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework . Based on that assessment Old National has concluded that, as of December 31, 2021, Old National’s internal control over financial reporting is effective. Old National’s independent registered public accounting firm has audited the effectiveness of Old National’s internal control over financial reporting as of December 31, 2021 as stated in their report, which follows. 68 Crowe LLP Independent Member Crowe Global REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors of Old National Bancorp Evansville, Indiana Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Old National Bancorp (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting 69 principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates. Allowance and Provision for Credit Losses on Loans The allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the contractual life of financial assets carried at amortized cost and off-balance-sheet credit exposures as described in Notes 1 and 4 of the consolidated financial statements. A financial asset (or a group of financial assets), including the Company's loan portfolio, is required to be measured at amortized cost to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the expected life of the loans. In order to estimate the expected credit losses, the Company utilizes several loss estimation models. The Company utilizes a discounted cash flow (“DCF”) approach with probability of default (“PD”) methodology. The PD regression models use combinations of variables to assess risk including unsystematic risk to help gauge the risk of default from an individual borrower and variables for systematic risk applicable to all borrowers. Other assumptions used to determine the quantitative allowance include the loss given default (LGD), which is defined as credit loss incurred when an obligor of the bank defaults, and prepayment assumptions. Expected cashflows are created for each loan using reasonable and supportable forecasts and discounted using the loan’s effective yield. The discounted sum of expected cashflows is then compared to the amortized cost and any shortfall is recorded as a component of the ACL. Qualitative adjustments are applied to the quantitative component to adjust for factors such as current conditions. 70 The ACL and related Provision for Credit Losses was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout calculation, including the need to involve our valuation services specialists. The principal considerations resulting in our determination included the following: • Significant auditor judgment in evaluating the selection and application of the reasonable and supportable forecast of economic variables and reasonableness of other model assumptions. • Significant auditor judgment and effort in evaluating the qualitative factors used in the calculation related to adjustments for economic uncertainty in the forward-looking forecast. • Significant audit effort related to the completeness and accuracy of the high volume of data used and data flow between systems. The primary procedures performed to address the critical audit matter included: • Testing the effectiveness of management’s internal controls over preparation and evaluation of the ACL calculation, significant model assumptions, development and reasonableness of qualitative factors, completeness and accuracy of data used in the calculation, systems used in the development of the estimate, and the appropriateness of the overall calculation. • With the assistance of our valuation specialists, evaluating the effectiveness of management’s internal controls over PD model monitoring and validation of the assumptions, calculations, and functionality of the PD and DCF models. • Evaluating management’s judgments in the selection and application of reasonable and supportable forecasts of economic variables. • Substantively testing management’s process for developing qualitative factors and assessing the reasonableness, relevance, and reliability of data used to develop qualitative factors, including evaluating management’s judgments and assumptions for reasonableness. • Substantively testing the mathematical accuracy of the DCF model at a loan level, including the completeness and accuracy of loan data used in the model. • Substantively testing the completeness and accuracy of data used in the calculation and the data flow between the various systems. Crowe LLP We have served as the Company's auditor since 2005, which is the year the engagement letter was signed for the audit of the 2006 financial statements. Louisville, Kentucky February 10, 2022 71 OLD NATIONAL BANCORP CONSOLIDATED BALANCE SHEETS December 31, (dollars and shares in thousands, except per share data) 2021 2020 Assets Cash and due from banks $ 172,663 $ 268,208 Money market and other interest-earning investments 649,356 321,504 Total cash and cash equivalents 822,019 589,712 Equity securities, at fair value 13,211 2,547 Investment securities - available-for-sale, at fair value: U.S. Treasury 235,584 10,208 U.S. government-sponsored entities and agencies 1,542,773 841,988 Mortgage-backed securities 3,698,831 3,339,098 States and political subdivisions 1,654,986 1,492,162 Other securities 249,892 286,659 Total investment securities - available-for-sale 7,382,066 5,970,115 Federal Home Loan Bank/Federal Reserve Bank stock, at cost 169,375 169,433 Loans held for sale, at fair value 35,458 63,250 Loans: Commercial 3,391,769 3,956,422 Commercial real estate 6,380,674 5,946,512 Residential real estate 2,255,289 2,248,422 Consumer credit, net of unearned income 1,574,114 1,635,123 Total loans, net of unearned income 13,601,846 13,786,479 Allowance for credit losses ( 107,341 ) ( 131,388 ) Net loans 13,494,505 13,655,091 Premises and equipment, net 476,186 464,408 Operating lease right-of-use assets 69,560 76,197 Accrued interest receivable 84,109 85,306 Goodwill 1,036,994 1,036,994 Other intangible assets 34,678 46,014 Company-owned life insurance 463,324 456,110 Other assets 372,079 345,445 Total assets $ 24,453,564 $ 22,960,622 Liabilities Deposits: Noninterest-bearing demand $ 6,303,106 $ 5,633,672 Interest-bearing: Checking and NOW 5,338,022 4,977,046 Savings 3,798,494 3,395,747 Money market 2,169,160 1,908,118 Time deposits 960,413 1,122,870 Total deposits 18,569,195 17,037,453 Federal funds purchased and interbank borrowings 276 1,166 Securities sold under agreements to repurchase 392,275 431,166 Federal Home Loan Bank advances 1,886,019 1,991,435 Other borrowings 296,670 252,787 Operating lease liabilities 76,236 86,598 Accrued expenses and other liabilities 220,875 187,361 Total liabilities 21,441,546 19,987,966 Commitments and contingencies (Note 21) Shareholders' Equity Preferred stock, series A, 2,000 shares authorized, no shares issued or outstanding — — Common stock, $ 1.00 per share stated value, 300,000 shares authorized, 165,838 and 165,367 shares issued and outstanding, respectively 165,838 165,367 Capital surplus 1,880,545 1,875,626 Retained earnings 968,010 783,892 Accumulated other comprehensive income (loss), net of tax ( 2,375 ) 147,771 Total shareholders' equity 3,012,018 2,972,656 Total liabilities and shareholders' equity $ 24,453,564 $ 22,960,622 The accompanying notes to consolidated financial statements are an integral part of these statements. 72 OLD NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, (dollars and shares in thousands, except per share data) 2021 2020 2019 Interest Income Loans including fees: Taxable $ 490,042 $ 515,980 $ 569,718 Nontaxable 12,392 13,908 15,919 Investment securities: Taxable 98,031 98,953 113,832 Nontaxable 37,595 33,899 29,248 Money market and other interest-earning investments 589 568 1,670 Total interest income 638,649 663,308 730,387 Interest Expense Deposits 10,954 28,169 69,364 Federal funds purchased and interbank borrowings — 1,296 5,656 Securities sold under agreements to repurchase 397 854 2,517 Federal Home Loan Bank advances 21,075 27,274 37,452 Other borrowings 9,823 9,621 11,125 Total interest expense 42,249 67,214 126,114 Net interest income 596,400 596,094 604,273 Provision for credit losses (1) ( 28,812 ) 38,395 4,747 Net interest income after provision for credit losses 625,212 557,699 599,526 Noninterest Income Wealth management fees 40,409 36,806 37,072 Service charges on deposit accounts 34,685 35,081 44,915 Debit card and ATM fees 20,739 20,178 21,652 Mortgage banking revenue 42,558 62,775 26,622 Investment product fees 24,639 21,614 21,785 Capital markets income 21,997 22,480 13,270 Company-owned life insurance 10,589 12,031 11,539 Debt securities gains (losses), net 4,327 10,767 1,923 Other income 14,276 17,542 20,539 Total noninterest income 214,219 239,274 199,317 Noninterest Expense Salaries and employee benefits 284,098 293,590 289,452 Occupancy 54,834 55,316 55,255 Equipment 16,704 16,690 16,903 Marketing 12,684 10,874 15,898 Data processing 47,047 41,086 37,589 Communication 10,073 9,731 10,702 Professional fees 20,077 15,755 22,854 FDIC assessment 6,059 6,722 6,030 Amortization of intangibles 11,336 14,091 16,911 Amortization of tax credit investments 6,770 18,788 2,749 Other expense 30,887 58,774 34,144 Total noninterest expense 500,569 541,417 508,487 Income before income taxes 338,862 255,556 290,356 Income tax expense 61,324 29,147 52,150 Net income $ 277,538 $ 226,409 $ 238,206 Net income per common share - basic 1.68 1.37 1.39 Net income per common share - diluted 1.67 1.36 1.38 Weighted average number of common shares outstanding - basic 165,178 165,509 171,907 Weighted average number of common shares outstanding - diluted 165,929 166,177 172,687 Dividends per common share 0.56 0.56 0.52 (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 was based on incurred loss methodology. The accompanying notes to consolidated financial statements are an integral part of these statements. 73 OLD NATIONAL BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, (dollars in thousands) 2021 2020 2019 Net income $ 277,538 $ 226,409 $ 238,206 Other comprehensive income (loss): Change in debt securities available-for-sale: Unrealized holding gains (losses) for the period ( 187,955 ) 125,214 123,006 Reclassification adjustment for securities (gains) losses realized in income ( 4,327 ) ( 10,767 ) ( 1,923 ) Income tax effect 43,997 ( 25,243 ) ( 27,604 ) Unrealized gains (losses) on available-for-sale debt securities ( 148,285 ) 89,204 93,479 Change in securities held-to-maturity: Adjustment for securities transferred to available-for-sale — — 8,200 Amortization of unrealized losses on securities transferred from available-for-sale — — 2,812 Income tax effect — — ( 2,497 ) Changes from securities held-to-maturity — — 8,515 Change in cash flow hedges: Net unrealized derivative gains (losses) on cash flow hedges 1,898 8,261 ( 543 ) Reclassification adjustment for (gains) losses realized in net income ( 4,605 ) ( 5,153 ) ( 596 ) Income tax effect 666 ( 764 ) 280 Changes from cash flow hedges ( 2,041 ) 2,344 ( 859 ) Change in defined benefit pension plans: Amortization of net loss recognized in income 239 21 30 Income tax effect ( 59 ) ( 5 ) ( 8 ) Changes from defined benefit pension plans 180 16 22 Other comprehensive income (loss), net of tax ( 150,146 ) 91,564 101,157 Comprehensive income $ 127,392 $ 317,973 $ 339,363 The accompanying notes to consolidated financial statements are an integral part of these statements. 74 OLD NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (dollars in thousands, except per share data) Common Stock Capital Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Balance, December 31, 2018 $ 175,141 $ 2,031,695 $ 527,684 $ ( 44,950 ) $ 2,689,570 Cumulative effect of change in accounting principles — — 6,322 — 6,322 Balance, January 1, 2019 175,141 2,031,695 534,006 ( 44,950 ) 2,695,892 Net income — — 238,206 — 238,206 Other comprehensive income (loss) — — — 101,157 101,157 Dividends - common stock ($ 0.52 per share) — — ( 89,474 ) — ( 89,474 ) Common stock issued 36 531 — — 567 Common stock repurchased ( 6,174 ) ( 96,239 ) — — ( 102,413 ) Share-based compensation expense — 7,993 — — 7,993 Stock activity under incentive compensation plans 613 465 ( 553 ) — 525 Balance, December 31, 2019 169,616 1,944,445 682,185 56,207 2,852,453 Cumulative effect of change in accounting principles — — ( 31,150 ) — ( 31,150 ) Balance, January 1, 2020 169,616 1,944,445 651,035 56,207 2,821,303 Net income — — 226,409 — 226,409 Other comprehensive income (loss) — — — 91,564 91,564 Dividends - common stock ($ 0.56 per share) — — ( 92,946 ) — ( 92,946 ) Common stock issued 43 534 — — 577 Common stock repurchased ( 5,115 ) ( 77,243 ) — — ( 82,358 ) Share-based compensation expense — 7,707 — — 7,707 Stock activity under incentive compensation plans 823 183 ( 606 ) — 400 Balance, December 31, 2020 165,367 1,875,626 783,892 147,771 2,972,656 Net income — — 277,538 — 277,538 Other comprehensive income (loss) — — — ( 150,146 ) ( 150,146 ) Dividends - common stock ($ 0.56 per share) — — ( 92,829 ) — ( 92,829 ) Common stock issued 35 548 — — 583 Common stock repurchased ( 208 ) ( 3,523 ) — — ( 3,731 ) Share-based compensation expense — 7,497 — — 7,497 Stock activity under incentive compensation plans 644 397 ( 591 ) — 450 Balance, December 31, 2021 $ 165,838 $ 1,880,545 $ 968,010 $ ( 2,375 ) $ 3,012,018 The accompanying notes to consolidated financial statements are an integral part of these statements. 75 OLD NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (dollars in thousands) 2021 2020 2019 Cash Flows From Operating Activities Net income $ 277,538 $ 226,409 $ 238,206 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 27,276 28,911 26,719 Amortization of other intangible assets 11,336 14,091 16,911 Amortization of tax credit investments 6,770 18,788 2,749 Net premium amortization on investment securities 16,305 18,798 19,210 Accretion income related to acquired loans ( 16,747 ) ( 23,331 ) ( 42,772 ) Share-based compensation expense 7,497 7,707 7,993 Provision for credit losses ( 28,812 ) 38,395 4,747 Debt securities (gains) losses, net ( 4,327 ) ( 10,767 ) ( 1,923 ) Net (gains) losses on sales of loans and other assets ( 36,677 ) ( 23,787 ) ( 7,370 ) Increase in cash surrender value of company-owned life insurance ( 10,589 ) ( 12,031 ) ( 11,539 ) Residential real estate loans originated for sale ( 1,215,015 ) ( 1,432,488 ) ( 854,848 ) Proceeds from sales of residential real estate loans 1,274,812 1,455,067 834,024 (Increase) decrease in interest receivable 1,198 ( 183 ) 4,340 (Increase) decrease in other assets 2,641 ( 105,969 ) 22,253 Increase (decrease) in accrued expenses and other liabilities 17,174 20,210 ( 24,944 ) Net cash flows provided by (used in) operating activities 330,380 219,820 233,756 Cash Flows From Investing Activities Purchases of investment securities available-for-sale ( 3,321,653 ) ( 2,803,406 ) ( 2,366,089 ) Purchases of Federal Home Loan Bank/Federal Reserve Bank stock — ( 10,025 ) ( 21,142 ) Purchases of equity securities ( 11,000 ) — — Proceeds from maturities, prepayments, and calls of investment securities available-for-sale 1,511,510 1,990,383 1,175,272 Proceeds from sales of investment securities available-for-sale 198,886 299,885 424,140 Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity — — 115,648 Proceeds from sales of investment securities held-to-maturity — — 9,921 Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock 58 4,691 23 Proceeds from sales of equity securities 544 39,296 130 Loan originations and payments, net 206,145 ( 1,644,119 ) 163,551 Proceeds from company-owned life insurance death benefits 3,375 4,888 6,796 Proceeds from sale of premises and equipment and other assets 29,244 7,826 3,769 Purchases of premises and equipment and other assets ( 48,692 ) ( 30,871 ) ( 37,423 ) Net cash flows provided by (used in) investing activities ( 1,431,583 ) ( 2,141,452 ) ( 525,404 ) Cash Flows From Financing Activities Net increase (decrease) in: Deposits 1,531,742 2,484,056 203,448 Federal funds purchased and interbank borrowings ( 890 ) ( 349,248 ) 80,279 Securities sold under agreements to repurchase ( 38,891 ) 103,384 ( 34,512 ) Other borrowings 36,187 4,171 ( 4,377 ) Payments for maturities of Federal Home Loan Bank advances ( 146,505 ) ( 751,505 ) ( 377,978 ) Payments for modification of Federal Home Loan Bank advances ( 2,156 ) ( 31,124 ) — Proceeds from Federal Home Loan Bank advances 50,000 950,000 575,000 Cash dividends paid on common stock ( 92,829 ) ( 92,946 ) ( 89,474 ) Common stock repurchased ( 3,731 ) ( 82,358 ) ( 102,413 ) Proceeds from exercise of stock options — — 280 Common stock issued 583 577 567 Net cash flows provided by (used in) financing activities 1,333,510 2,235,007 250,820 Net increase (decrease) in cash and cash equivalents 232,307 313,375 ( 40,828 ) Cash and cash equivalents at beginning of period 589,712 276,337 317,165 Cash and cash equivalents at end of period $ 822,019 $ 589,712 $ 276,337 The accompanying notes to consolidated financial statements are an integral part of these statements. 76 OLD NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONS Old National Bancorp, a financial holding company headquartered in Evansville, Indiana, operates primarily in Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. Its principal subsidiary is Old National Bank. Through its bank and non-bank affiliates, Old National Bancorp provides to its clients a plethora of financial services including loan, deposit, wealth management, investment consulting, and investment products. NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned subsidiaries (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current presentation. Such reclassifications had no effect on prior year net income or shareholders’ equity and were insignificant amounts. Equity Securities Equity securities consist of mutual funds for Community Reinvestment Act qualified investments and mutual funds held in trusts associated with deferred compensation plans for former directors. Equity securities are recorded at fair value with changes in fair value recognized in other income. Investment Securities Old National classified all of its debt investment securities as available-for-sale at December 31, 2021 and December 31, 2020. Debt securities classified as available-for-sale are recorded at fair value with the unrealized gains and losses recorded in other comprehensive income, net of tax. Realized gains and losses affect income and the prior fair value adjustments are reclassified within shareholders’ equity. Prior to the fourth quarter of 2019, Old National also had debt securities classified as held-to-maturity. Debt securities classified as held-to-maturity, which management had the intent and ability to hold to maturity, were reported at amortized cost. Interest income included amortization of purchase premiums or discounts. Premiums and discounts were amortized on the level-yield method. Anticipated prepayments were considered when amortizing premiums and discounts on mortgage-backed securities. Gains and losses on the sale of available-for-sale debt securities are determined using the specific-identification method. Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses. 77 Federal Home Loan Bank/Federal Reserve Bank Stock Old National is a member of the FHLB system and its regional Federal Reserve Bank. Members are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB and Federal Reserve Bank stock are carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Loans Held for Sale Loans that Old National has originated with an intent to sell are classified as loans held for sale and are recorded at fair value, determined individually, as of the balance sheet date. The loan’s fair value includes the servicing value of the loans as well as any accrued interest. Conventional mortgage production is sold with servicing rights retained. Certain loans, such as government guaranteed mortgage loans are sold on servicing released basis. 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. Loans Loans that Old National intends to hold for investment purposes are classified as portfolio loans. Portfolio loans are carried at the principal balance outstanding, net of earned interest, purchase premiums or discounts, deferred loan fees and costs, and an allowance for credit losses. Interest income is accrued on the principal balances of loans outstanding. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured. Old National has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and initial allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is accreted or amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision for credit losses. Allowance for Credit Losses for Loans Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. With the adoption of ASC 326 effective January 1, 2020, the allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. 78 The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. 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 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. For the commercial and commercial real estate loans, the PD is forecast using a regression model to determine the likelihood of a loan moving into nonaccrual within the time horizon. For residential and consumer loans, the PD is forecast using a regression model to determine the likelihood of a loan being charged-off within the time horizon. The regression models use combinations of variables to assess systematic and unsystematic risk. Variables used for unsystematic risk are borrower specific and help to gauge the risk of default from an individual borrower. Variables for systematic risk, risk inherent to all borrowers, come from the use of forward-looking economic forecasts and include variables such as unemployment rate, gross domestic product, and house price index. The LGD is defined as credit loss incurred when an obligor of the bank defaults. Qualitative factors include items such as changes in lending policies or procedures and economic uncertainty in forward-looking forecasts. Prior to the adoption of ASC 326 on January 1, 2020, Old National calculated allowance for loan losses using incurred losses methodology. Further information regarding Old National’s policies and methodology used to estimate the allowance for credit losses for loans is presented in Note 4 to the consolidated financial statements. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Land is stated at cost. Depreciation is charged to operating expense over the useful lives of the assets, principally on the straight-line method. Useful lives for premises and equipment are as follows: buildings and building improvements – 10 to 39 years; and furniture and equipment – 3 to 7 years. Leasehold improvements are depreciated over the lesser of their useful lives or the term of the lease. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Interest costs on construction of qualifying assets are capitalized. Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are adjusted to fair value. Such impairments are included in other expense. Goodwill and Other Intangible Assets Goodwill arises from business combinations and is determined as the excess of the cost of acquired entities over the fair value of identifiable assets acquired less liabilities assumed as of the acquisition date. Amortization of goodwill and indefinite-lived assets is not recorded. However, the recoverability of goodwill and other intangible assets are tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. Other intangible assets, including core deposits and customer business relationships, are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years. Company-Owned Life Insurance Old National has purchased, as well as obtained through acquisitions, life insurance policies on certain key executives. Old National records company-owned life insurance at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Loan Servicing Rights When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gain on sales of loans. Fair value is based on market prices for comparable servicing 79 contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Loan servicing rights are included in other assets on the balance sheet. Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type, term, and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If Old National later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with mortgage banking revenue on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Servicing fee income, which is reported on the income statement as mortgage banking revenue, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. Derivative Financial Instruments As part of Old National’s overall interest rate risk management, Old National uses derivative instruments, including TBA forward agreements and interest rate swaps, collars, caps, and floors. All derivative instruments are recognized on the balance sheet at their fair value. At the inception of the derivative contract, Old National designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the change in value of the derivative, as well as the offsetting change in value of the hedged item attributable to the hedged risk, are recognized in current earnings during the period of the change in fair values. For a cash flow hedge, the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, in noninterest income. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Old National formally documents all relationships between derivatives and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Old National also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. Old National discontinues hedge accounting prospectively when it is determined that (1) the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item; (2) the derivative expires, is sold, or terminated; (3) the derivative instrument is de-designated as a hedge because the forecasted transaction is no longer probable of occurring; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management otherwise determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transaction is still expected to occur, changes in value that were accumulated in other comprehensive income are amortized or accreted into earnings over the same periods which the hedged transactions will affect earnings. Old National enters into various stand-alone mortgage-banking derivatives in order to hedge the risk associated with the fluctuation of interest rates. Changes in fair value are recorded as mortgage banking revenue. Old National also enters into various stand-alone derivative contracts to provide derivative products to clients, which are carried at fair value with changes in fair value recorded as other noninterest income. 80 Old National is exposed to losses if a counterparty fails to make its payments under a contract in which Old National is in the net receiving position. Old National anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. In addition, Old National obtains collateral above certain thresholds of the fair value of its hedges for each counterparty based upon their credit standing. All of the contracts to which Old National is a party settle monthly, quarterly, or semiannually. Further, Old National has netting agreements with the dealers with which it does business. Credit-Related Financial Instruments In the ordinary course of business, Old National’s bank subsidiary has entered into credit-related financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. The notional amount of these commitments is not reflected in the consolidated financial statements until they are funded. Old National maintains an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet and is adjusted as a provision for credit loss expense included in other expense. Repossessed Collateral Other real estate owned and repossessed personal property are initially recorded at the fair value of the property less estimated cost to sell and are included in other assets on the balance sheet. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through the completion of a deed in lieu of foreclosure or through a similar legal agreement. Any excess recorded investment over the fair value of the property received is charged to the allowance for credit losses. Any subsequent write-downs are recorded in noninterest expense, as are the costs of operating the properties. Gains or losses resulting from the sale of collateral are recognized in noninterest expense at the date of sale. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase We purchase certain securities, generally U.S. government-sponsored entity and agency securities, under agreements to resell. The amounts advanced under these agreements represent short-term secured loans and are reflected as assets in the accompanying consolidated balance sheets. We also sell certain securities under agreements to repurchase. These agreements are treated as collateralized financing transactions. These secured borrowings are reflected as liabilities in the accompanying consolidated balance sheets and are recorded at the amount of cash received in connection with the transaction. Short-term securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Securities, generally U.S. government and federal agency securities, pledged as collateral under these financing arrangements can be repledged by the secured party. Additional collateral may be required based on the fair value of the underlying securities. Share-Based Compensation Compensation cost is recognized for stock options, stock appreciation rights, and restricted stock awards and units issued to employees based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options and appreciation rights, while the market price of our Common Stock at the date of grant is used for restricted stock awards. The market price of our Common Stock at the date of grant less the present value of dividends expected to be paid during the performance period is used for restricted stock units where the performance measure is based on an internal performance measure. A third party provider is used to value certain restricted stock units where the performance measure is based on total shareholder return. Compensation expense is recognized over the required service period. Forfeitures are recognized as they occur. Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. 81 We recognize a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize interest and/or penalties related to income tax matters in income tax expense. Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. Certain of these assets qualify for the proportional amortization method and are amortized over the period that Old National expects to receive the tax credits, with the expense included within income tax expense on the consolidated statements of income. The other investments are accounted for under the equity method, with the expense included within noninterest expense on the consolidated statements of income. All of our tax credit investments are evaluated for impairment at the end of each reporting period. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. See Note 21 to the consolidated financial statements for further disclosure. Cash Equivalents and Cash Flows For the purpose of presentation in the accompanying consolidated statement of cash flows, cash and cash equivalents are defined as cash, due from banks, federal funds sold and resell agreements, and money market investments, which have maturities less than 90 days. Cash flows from loans, either originated or acquired, are classified at that time according to management’s intent to either sell or hold the loan for the foreseeable future. When management’s intent is to sell the loan, the cash flows of that loan are presented as operating cash flows. When management’s intent is to hold the loan for the foreseeable future, the cash flows of that loan are presented as investing cash flows. The following table summarizes supplemental cash flow information: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Cash payments: Interest $ 42,196 $ 70,043 $ 127,713 Income taxes (net of refunds) 31,875 24,436 5,494 Noncash Investing and Financing Activities: Securities transferred from held-to-maturity to available-for-sale — — 381,992 Transfer of premises and equipment to assets held for sale 9,539 16,661 2,689 Operating lease right-of-use assets obtained in exchange for lease obligations 776 ( 116 ) 113,498 Finance lease right-of-use assets obtained in exchange for lease obligations 7,477 5,225 7,871 Business Combinations Old National accounts for business combinations using the acquisition method of accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net assets acquired is capitalized as goodwill. Alternatively, a gain is recorded if the fair value of the net assets acquired exceeds the purchase price. Old National typically issues Common Stock and/or pays cash for an acquisition, depending on the terms of the acquisition agreement. The value of Common Stock issued is determined based on the market price of the stock as of the closing of the acquisition. Acquisition costs are expensed when incurred. There were no acquisitions during 2021, 2020, or 2019. 82 Impact of Accounting Changes Accounting Guidance Adopted in 2021 FASB ASC 715 – In August 2018, the FASB issued ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans . The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update became effective for fiscal years ending after December 15, 2020 and did not have a material impact on the financial statements. FASB ASC 740 – In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this update became effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and did not have a material impact on the financial statements. FASB ASC 321, 323, and 815 – In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The ASU clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update became effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The amendments are to be applied prospectively and did not have a material impact on the consolidated financial statements. Acquisitions and Dispositions of Businesses and Related Pro Forma Information – In May 2020, the SEC issued a final rule that revises the circumstances that require financial statements and related pro forma information for acquisitions and dispositions of businesses. The intent of the rule is to allow for more meaningful conclusions on when an acquired or disposed business is significant as well as to improve the related disclosure requirements. The changes are intended to improve the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure. The final rule was effective January 1, 2021. FASB ASC 310 – In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs , to clarify that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. The ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The new guidance did not have a material impact on the consolidated financial statements. FASB ASC 470 – In October 2020, the FASB issued ASU No. 2020-09, Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762 , which amends and supersedes various SEC paragraphs to reflect SEC Release No. 33-10762. That release amends the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. These changes are intended to both improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings 83 on a registered basis. The final rules were effective on January 4, 2021. The amendments did not have a material impact on the consolidated financial statements. Codification Improvements – In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements . The amendments improve codification by having all disclosure-related guidance available in the disclosure sections of the codification. Prior to this ASU, various disclosure requirements or options to present information on the face of the financial statements or as a note to the financial statements were not included in the appropriate disclosure sections of the codification. The codification improvements also contain various other minor amendments to codification that are not expected to have a significant effect on current accounting practice. The amendments became effective for annual periods beginning after December 15, 2020. FASB ASC 848 – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: • A change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria. • When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. ASU 2020-04 permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. Accordingly, Old National is evaluating and reassessing the elections on a quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, Old National elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any expected modification in terms related to reference rate reform. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope , which addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is expected to be modified as a result of reference rate reform, commonly referred to as the “discounting transition.” The amendments clarify that certain optional expedients and exceptions in Topic 848 do apply to derivatives that are affected by the discounting transition. The amendments in ASU 2021-01 are effective immediately. Old National believes the adoption of this guidance on activities subsequent to December 31, 2021 through December 31, 2022 will not have a material impact on the consolidated financial statements. Guidance on Non-TDR Loan Modifications due to COVID-19 – The CAA, which was signed into law on December 27, 2020, extends certain provisions of the CARES Act. Section 4013 of the CARES Act provided temporary relief from TDR accounting and is amended by Division N, Section 540 of the CAA, by extending the end date from December 31, 2020, to the earlier of January 1, 2022, or 60 days after the date on which the COVID-19 national emergency terminates. In response, the OCC updated its two-page reference guide, “TDR Designation and COVID-19 Loan Modifications,” to conform to the extended TDR provisions. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 4 to the consolidated financial statements for further information on non-TDR loan modifications. 84 Accounting Guidance Pending Adoption FASB ASC 470 and 815 – In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , to clarify the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature model. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in-capital. In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The ASU also revises the derivative scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption will be permitted, but no earlier than for fiscal years beginning after December 15, 2020. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. FASB ASC 842 – In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments , to amend the lease classification requirements for lessors to align them with practice under ASC Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in ASC paragraphs 842-10-25-2 through 25-3; and (2) The lessor would have otherwise recognized a day-one loss. When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. FASB ASC 205, 942, and 946 – In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses , and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants . The amendments in this update are effective upon addition to the FASB Codification and will not have a material impact on the consolidated financial statements. FASB ASC 805 – In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers , to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination and applies to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period, for public business entities for periods for which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The new guidance will not have a material impact on the consolidated financial statements. 85 NOTE 2 – ACQUISITION AND DIVESTITURE ACTIVITY Pending Acquisition First Midwest Bancorp, Inc. On May 30, 2021, Old National entered into a definitive merger agreement with First Midwest to combine in an all-stock merger of equals transaction. Under the terms of the merger agreement, which 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. Holders of First Midwest Common Stock will receive cash in lieu of fractional shares. Each share of 7.000 % fixed-rate non-cumulative perpetual preferred stock, Series A, no par value, and each share of 7.000 % fixed-rate non-cumulative perpetual preferred stock, Series C, no par value, of First Midwest will be converted into the right to receive one share of a newly created series of preferred stock of Old National having terms that are not materially less favorable than the First Midwest preferred stock. Following completion of the transaction, former First Midwest stockholders are expected to collectively represent approximately 44 % of the combined company. The new organization will operate under the Old National Bancorp and Old National Bank names, with headquarters and the main office located in Evansville, Indiana and commercial and consumer banking operations headquartered in Chicago, Illinois. First Midwest reported loans totaling $ 14.665 billion, assets totaling $ 21.778 billion, and deposits totaling $ 17.191 billion at December 31, 2021. Based on Old National’s December 31, 2021 closing price of $ 18.12 per share, this represents a total transaction value of approximately $ 2.4 billion. The transaction value is likely to change until closing due to fluctuations in the price of Old National common stock and is also subject to adjustment under certain circumstances as provided in the merger agreement. During the third quarter of 2021, we received approval of the merger from the OCC and the shareholders of Old National and First Midwest. 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. Transaction costs totaling $ 11.0 million associated with the merger have been expensed through December 31, 2021 and additional transaction and integration costs will be expensed in future periods as incurred. Divestitures Based on an ongoing assessment of our service and delivery network, Old National consolidated 31 banking centers throughout its footprint in 2020: ten banking centers in each of Wisconsin and Indiana, five in Michigan, four in Minnesota, and two in Kentucky. 86 NOTE 3 – INVESTMENT SECURITIES The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio and the corresponding amounts of unrealized gains, unrealized losses, and basis adjustments recognized in accumulated other comprehensive income (loss): (dollars in thousands) Amortized Cost Unrealized Gains Unrealized Losses Basis Adjustments (1) Fair Value December 31, 2021 Available-for-Sale U.S. Treasury $ 234,555 $ 1,233 $ ( 7,751 ) $ 7,547 $ 235,584 U.S. government-sponsored entities and agencies 1,575,994 7,354 ( 37,014 ) ( 3,561 ) 1,542,773 Mortgage-backed securities - Agency 3,737,484 27,421 ( 66,074 ) — 3,698,831 States and political subdivisions 1,587,172 69,696 ( 1,882 ) — 1,654,986 Pooled trust preferred securities 13,756 — ( 4,260 ) — 9,496 Other securities 235,072 6,578 ( 1,254 ) — 240,396 Total available-for-sale securities $ 7,384,033 $ 112,282 $ ( 118,235 ) $ 3,986 $ 7,382,066 December 31, 2020 Available-for-Sale U.S. Treasury $ 9,909 $ 299 $ — $ — $ 10,208 U.S. government-sponsored entities and agencies 841,133 5,744 ( 3,921 ) ( 968 ) 841,988 Mortgage-backed securities - Agency 3,249,002 91,086 ( 990 ) — 3,339,098 States and political subdivisions 1,405,868 86,325 ( 31 ) — 1,492,162 Pooled trust preferred securities 13,763 — ( 5,850 ) — 7,913 Other securities 265,079 14,260 ( 593 ) — 278,746 Total available-for-sale securities $ 5,784,754 $ 197,714 $ ( 11,385 ) $ ( 968 ) $ 5,970,115 (1) Basis adjustments represent the cumulative fair value adjustments included in the carrying amounts of fixed-rate investment securities assets in fair value hedging arrangements . Proceeds from sales or calls of available-for-sale investment securities and the resulting realized gains and realized losses were as follows: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Proceeds from sales of available-for-sale debt securities $ 198,886 $ 299,885 $ 424,140 Proceeds from calls of available-for-sale debt securities 158,818 465,179 441,851 Total $ 357,704 $ 765,064 $ 865,991 Realized gains on sales of available-for-sale debt securities $ 4,188 $ 11,172 $ 4,620 Realized gains on calls of available-for-sale debt securities 317 121 93 Realized losses on sales of available-for-sale debt securities ( 145 ) ( 500 ) ( 2,760 ) Realized losses on calls of available-for-sale debt securities ( 33 ) ( 26 ) ( 30 ) Debt securities gains (losses), net $ 4,327 $ 10,767 $ 1,923 Investment securities pledged to secure public and other funds had a carrying value of $ 2.701 billion at December 31, 2021 and $ 2.427 billion at December 31, 2020. At December 31, 2021, Old National had a concentration of investment securities issued by certain states and their political subdivisions. The aggregate market value issued by Indiana was $ 647.6 million, which represented 21.5 % of shareholders’ equity. Of the Indiana municipal bonds, 97 % are rated “A” or better, and the remaining 3 % generally represent non-rated local interest bonds where Old National has a market presence. 87 All of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities. The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yield is based on amortized cost. At December 31, 2021 (dollars in thousands) Amortized Cost Fair Value Weighted Average Yield Maturity Available-for-Sale Within one year $ 101,565 $ 102,886 2.87 % One to five years 2,377,074 2,389,054 2.05 % Five to ten years 2,496,036 2,449,808 1.75 % Beyond ten years 2,409,358 2,440,318 2.40 % Total $ 7,384,033 $ 7,382,066 2.07 % The following table summarizes the available-for-sale investment securities with unrealized losses for which an allowance for credit losses has not been recorded by aggregated major security type and length of time in a continuous unrealized loss position: Less than 12 months 12 months or longer Total (dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2021 Available-for-Sale U.S. Treasury $ 91,063 $ ( 7,751 ) $ — $ — $ 91,063 $ ( 7,751 ) U.S. government-sponsored entities and agencies 1,032,566 ( 21,167 ) 312,949 ( 15,847 ) 1,345,515 ( 37,014 ) Mortgage-backed securities - Agency 2,415,923 ( 59,277 ) 163,685 ( 6,797 ) 2,579,608 ( 66,074 ) States and political subdivisions 178,570 ( 1,849 ) 2,729 ( 33 ) 181,299 ( 1,882 ) Pooled trust preferred securities — — 9,496 ( 4,260 ) 9,496 ( 4,260 ) Other securities 56,976 ( 943 ) 21,133 ( 311 ) 78,109 ( 1,254 ) Total available-for-sale $ 3,775,098 $ ( 90,987 ) $ 509,992 $ ( 27,248 ) $ 4,285,090 $ ( 118,235 ) December 31, 2020 Available-for-Sale U.S. government-sponsored entities and agencies $ 355,528 $ ( 3,921 ) $ — $ — $ 355,528 $ ( 3,921 ) Mortgage-backed securities - Agency 275,833 ( 895 ) 3,572 ( 95 ) 279,405 ( 990 ) States and political subdivisions 3,497 ( 31 ) — — 3,497 ( 31 ) Pooled trust preferred securities — — 7,913 ( 5,850 ) 7,913 ( 5,850 ) Other securities 19,404 ( 70 ) 24,871 ( 523 ) 44,275 ( 593 ) Total available-for-sale $ 654,262 $ ( 4,917 ) $ 36,356 $ ( 6,468 ) $ 690,618 $ ( 11,385 ) Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for sale debt securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale debt securities 88 was needed at December 31, 2021 or December 31, 2020. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses and totaled $ 35.5 million at December 31, 2021 and $ 27.0 million at December 31, 2020. The U.S. government sponsored entities and agencies and mortgage-backed securities – agency are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. Prior to the adoption of ASC 326 on January 1, 2020, we did not record OTTI in 2019. At December 31, 2021, Old National’s securities portfolio consisted of 1,918 securities, 357 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. Treasury, U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates. Old National’s pooled trust preferred securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. At 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. Old National’s pooled trust preferred securities have experienced credit defaults. However, we believe that the value of the instruments lies in the full and timely interest payments that will be received through maturity, the steady amortization that will be experienced until maturity, and the full return of principal by the final maturity of the collateralized debt obligations. Old National did not recognize any losses on these securities for the years ended December 31, 2021 or December 31, 2020. Equity Securities Old National’s equity securities with readily determinable fair values totaled $ 13.2 million at December 31, 2021 and $ 2.5 million at December 31, 2020. There were gains on equity securities of $ 0.2 million during 2021, $ 1.4 million during 2020, and $ 0.7 million during 2019. Old National also has equity securities without readily determinable fair values that are included in other assets that totaled $ 186.0 million at December 31, 2021 and $ 105.8 million at December 31, 2020. These equity securities without readily determinable fair values are illiquid investments that consist of partnerships, limited liability companies, and other ownership interests that support affordable housing, economic development, and community revitalization initiatives in low-to-moderate income neighborhoods. There were no impairments or adjustments on equity securities without readily determinable fair values, except for amortization of tax credit investments during 2021 and 2019. There were impairments on these securities totaling $ 117 thousand in 2020. NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans Old National’s loans consist primarily of loans made to consumers and commercial clients in many diverse industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size. 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. 89 The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios are classified into seven segments of loans - commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The portfolio segment reclassifications follow: Segment Statement Portfolio After (dollars in thousands) Balance Reclassifications Reclassifications December 31, 2021 Commercial $ 3,391,769 $ ( 191,557 ) $ 3,200,212 Commercial real estate 6,380,674 ( 159,190 ) 6,221,484 BBCC N/A 350,747 350,747 Residential real estate 2,255,289 — 2,255,289 Consumer 1,574,114 ( 1,574,114 ) N/A Indirect N/A 873,139 873,139 Direct N/A 140,385 140,385 Home equity N/A 560,590 560,590 Total $ 13,601,846 $ — $ 13,601,846 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 composition of loans by portfolio segment follows: December 31, (dollars in thousands) 2021 2020 Commercial (1) (2) $ 3,200,212 $ 3,757,700 Commercial real estate 6,221,484 5,774,811 BBCC 350,747 370,423 Residential real estate 2,255,289 2,248,422 Indirect 873,139 913,902 Direct 140,385 164,807 Home equity 560,590 556,414 Total loans 13,601,846 13,786,479 Allowance for credit losses ( 107,341 ) ( 131,388 ) Net loans $ 13,494,505 $ 13,655,091 (1) Includes direct finance leases of $ 25.1 million at December 31, 2021 and $ 32.3 million at December 31, 2020. (2) Includes remaining PPP loans of $ 169.0 million at December 31, 2021 and $ 943.0 million December 31, 2020. The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are classified primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being 90 financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. 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. 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. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees. During 2020, Old National originated over 9,700 loans with balances of approximately $ 1.518 billion to new and existing clients through the PPP. 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. 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 . Commercial Real Estate Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Included with commercial real estate are construction loans, which are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders (including Old National), sales of developed property, or an interim loan commitment from Old National until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. At 230 %, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300 % at December 31, 2021. BBCC BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owners and guarantors, and the ability to show relatively stable earnings as criteria to help mitigate risk. Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by changes in economic conditions such as unemployment levels. Residential With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, Old National typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if 91 that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Indirect Indirect loans are secured by automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint. Old National typically mitigates the risk of indirect loans by establishing minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, conservative credit policies, and ongoing reviews of dealer relationships. Direct Direct loans are typically secured by collateral such as auto or real estate or are unsecured. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies. Home Equity Home equity loans are generally secured by 1-4 family residences that are owner occupied. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, along with conservative credit policies as well as monitoring of updated borrower credit scores. Related Party Loans In the ordinary course of business, Old National grants loans to certain executive officers, directors, and significant subsidiaries (collectively referred to as “related parties”). Activity in related party loans is presented in the following table: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Balance at beginning of period $ 2,444 $ 2,345 $ 9,310 New loans 41,962 1,848 1,218 Repayments ( 20,093 ) ( 1,715 ) ( 2,063 ) Officer and director changes — ( 34 ) ( 6,120 ) Balance at end of period $ 24,313 $ 2,444 $ 2,345 Allowance for Credit Losses Loans Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on 92 loans is excluded from the estimate of credit losses and totaled $ 47.6 million at December 31, 2021 and $ 57.3 million at December 31, 2020. The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. The allowance for credit losses decreased for the year ended December 31, 2021 primarily due to changes in the economic forecast. The forecast scenario includes improved unemployment and house price index. In addition to the quantitative inputs, several qualitative factors were considered. These factors include the risk that unemployment and gross domestic product prove to be more severe and/or prolonged than our baseline forecast, the consumption of the vaccine is less than anticipated, the presence of communicable strains of the virus, and supply chain issues. The mitigating impact of the economy remaining open was also considered. Old National’s activity in the allowance for credit losses for loans by portfolio segment was as follows: (dollars in thousands) Balance at Beginning of Period Impact of Adopting ASC 326 Sub-Total Charge-offs Recoveries Provision for Credit Losses Balance at End of Period Year Ended December 31, 2021 Allowance for credit losses: Commercial $ 30,567 $ — $ 30,567 $ ( 1,228 ) $ 791 $ ( 2,898 ) $ 27,232 Commercial real estate 75,810 — 75,810 ( 264 ) 4,403 ( 15,945 ) 64,004 BBCC 6,120 — 6,120 ( 144 ) 105 ( 3,623 ) 2,458 Residential real estate 12,608 — 12,608 ( 346 ) 339 ( 3,254 ) 9,347 Indirect 3,580 — 3,580 ( 1,087 ) 1,682 ( 2,432 ) 1,743 Direct 855 — 855 ( 1,159 ) 777 55 528 Home equity 1,848 — 1,848 ( 82 ) 978 ( 715 ) 2,029 Total $ 131,388 $ — $ 131,388 $ ( 4,310 ) $ 9,075 $ ( 28,812 ) $ 107,341 Year Ended December 31, 2020 Allowance for credit losses: Commercial $ 21,359 $ 7,150 $ 28,509 $ ( 5,593 ) $ 3,629 $ 4,022 $ 30,567 Commercial real estate 20,535 25,548 46,083 ( 4,323 ) 4,515 29,535 75,810 BBCC 2,279 3,702 5,981 ( 95 ) 140 94 6,120 Residential real estate 2,299 6,986 9,285 ( 824 ) 633 3,514 12,608 Indirect 5,319 ( 1,669 ) 3,650 ( 2,754 ) 1,922 762 3,580 Direct 1,863 ( 1,059 ) 804 ( 1,763 ) 819 995 855 Home equity 965 689 1,654 ( 201 ) 922 ( 527 ) 1,848 Total $ 54,619 $ 41,347 $ 95,966 $ ( 15,553 ) $ 12,580 $ 38,395 $ 131,388 PPP loans were factored in the provision for credit losses for the years ended December 31, 2021 and 2020; however, due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant. 93 Unfunded Loan Commitments Old National maintains an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet. Old National’s activity in the allowance for credit losses on unfunded loan commitments was as follows: Years Ended December 31, (dollars in thousands) 2021 2020 Allowance for credit losses on unfunded loan commitments: Balance at beginning of period $ 11,689 $ 2,656 Impact of adopting ASC 326 — 4,549 Sub-Total 11,689 7,205 Expense (reversal of expense) for credit losses ( 810 ) 4,484 Balance at end of period $ 10,879 $ 11,689 Credit Quality Old National’s management monitors the credit quality of its loans on an ongoing basis with the AQR for commercial loans reviewed annually or at renewal and the performance of its residential and consumer loans based upon the accrual status refreshed at least quarterly. Internally, management assigns an AQR to each non-homogeneous commercial, commercial real estate, and BBCC loan in the portfolio. The primary determinants of the AQR are the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The AQR will also consider current industry conditions. Major factors used in determining the AQR can vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden. Old National uses the following definitions for risk ratings: Criticized . Special mention loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Classified – Substandard . Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Classified – Nonaccrual . Loans classified as nonaccrual have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, in doubt. Classified – Doubtful . Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Pass rated loans are those loans that are other than criticized, classified – substandard, classified – nonaccrual, or classified – doubtful. 94 The following table summarizes the amortized cost of term loans by risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment and class of loan: Origination Year Revolving to Term (dollars in thousands) 2021 2020 2019 2018 2017 Prior Revolving Total December 31, 2021 Commercial: Risk Rating: Pass $ 918,456 $ 563,869 $ 271,158 $ 98,468 $ 156,136 $ 235,639 $ 667,628 $ 130,470 $ 3,041,824 Criticized 9,998 7,885 6,660 — 7,809 2,658 14,601 10,076 59,687 Classified: Substandard 14,773 14,468 10,200 9,849 5,521 945 6,883 10,322 72,961 Nonaccrual 1,069 3,507 1,276 3,721 1,448 — 845 7,796 19,662 Doubtful — 178 — 288 337 5,275 — — 6,078 Total $ 944,296 $ 589,907 $ 289,294 $ 112,326 $ 171,251 $ 244,517 $ 689,957 $ 158,664 $ 3,200,212 Commercial real estate: Risk Rating: Pass $ 1,555,880 $ 1,474,271 $ 846,921 $ 481,508 $ 462,176 $ 611,680 $ 42,609 $ 451,544 $ 5,926,589 Criticized 27,622 24,790 39,914 — 21,614 22,157 — 34,387 170,484 Classified: Substandard 4,706 12,118 9,933 9,058 18,165 11,351 2,291 4,339 71,961 Nonaccrual 1,620 2,997 — 1,627 3,419 8,905 315 871 19,754 Doubtful 6,653 — 1,970 342 11,218 12,513 — — 32,696 Total $ 1,596,481 $ 1,514,176 $ 898,738 $ 492,535 $ 516,592 $ 666,606 $ 45,215 $ 491,141 $ 6,221,484 BBCC: Risk Rating: Pass $ 81,710 $ 69,749 $ 54,580 $ 34,461 $ 25,113 $ 8,296 $ 47,571 $ 18,778 $ 340,258 Criticized 1,320 1,170 841 160 — — 670 1,578 5,739 Classified: Substandard 284 24 79 7 187 465 103 239 1,388 Nonaccrual — 88 — — 66 162 — 1,136 1,452 Doubtful — 25 284 1,391 — 210 — — 1,910 Total $ 83,314 $ 71,056 $ 55,784 $ 36,019 $ 25,366 $ 9,133 $ 48,344 $ 21,731 $ 350,747 95 Origination Year Revolving to Term (dollars in thousands) 2020 2019 2018 2017 2016 Prior Revolving Total December 31, 2020 Commercial: Risk Rating: Pass $ 1,675,964 $ 420,736 $ 171,228 $ 227,710 $ 124,041 $ 262,538 $ 549,849 $ 148,508 $ 3,580,574 Criticized 23,982 9,603 15,003 9,508 3,383 5,369 10,307 2,685 79,840 Classified: Substandard 6,501 6,369 10,077 9,836 2,774 8,441 15,344 3,049 62,391 Nonaccrual 2,600 3,754 4,701 6,951 49 4,379 778 7,013 30,225 Doubtful — — 1,016 2,748 296 610 — — 4,670 Total $ 1,709,047 $ 440,462 $ 202,025 $ 256,753 $ 130,543 $ 281,337 $ 576,278 $ 161,255 $ 3,757,700 Commercial real estate: Risk Rating: Pass $ 1,537,226 $ 1,041,305 $ 749,102 $ 677,119 $ 496,086 $ 513,658 $ 28,122 $ 382,219 $ 5,424,837 Criticized 6,874 49,271 26,464 46,994 17,648 33,490 — 19,804 200,545 Classified: Substandard 11,451 4,700 13,565 26,691 5,308 8,665 — 2,911 73,291 Nonaccrual 1,408 2,054 5,393 9,456 1,635 12,564 — 313 32,823 Doubtful — 1,832 — 18,926 19,283 3,274 — — 43,315 Total $ 1,556,959 $ 1,099,162 $ 794,524 $ 779,186 $ 539,960 $ 571,651 $ 28,122 $ 405,247 $ 5,774,811 BBCC: Risk Rating: Pass $ 94,828 $ 73,913 $ 49,875 $ 36,288 $ 24,946 $ 5,327 $ 52,393 $ 19,353 $ 356,923 Criticized 1,599 1,403 621 414 643 — 868 1,259 6,807 Classified: Substandard 233 1,417 195 246 33 — 317 701 3,142 Nonaccrual 161 551 134 200 — — 89 1,466 2,601 Doubtful — 3 847 70 — 30 — — 950 Total $ 96,821 $ 77,287 $ 51,672 $ 37,218 $ 25,622 $ 5,357 $ 53,667 $ 22,779 $ 370,423 96 For residential real estate and consumer loan classes, Old National evaluates credit quality based on the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost of term residential real estate and consumer loans based on payment activity: Origination Year Revolving to Term (dollars in thousands) 2021 2020 2019 2018 2017 Prior Revolving Total December 31, 2021 Residential real estate: Performing $ 625,582 $ 632,705 $ 272,600 $ 72,766 $ 103,866 $ 529,293 $ 12 $ 105 $ 2,236,929 Nonperforming 96 165 166 350 855 16,728 — — 18,360 Total $ 625,678 $ 632,870 $ 272,766 $ 73,116 $ 104,721 $ 546,021 $ 12 $ 105 $ 2,255,289 Indirect: Performing $ 361,485 $ 231,156 $ 146,978 $ 68,513 $ 41,598 $ 20,819 $ — $ 9 $ 870,558 Nonperforming 262 524 614 510 430 241 — — 2,581 Total $ 361,747 $ 231,680 $ 147,592 $ 69,023 $ 42,028 $ 21,060 $ — $ 9 $ 873,139 Direct: Performing $ 34,058 $ 16,135 $ 14,396 $ 14,579 $ 7,432 $ 15,831 $ 36,812 $ 192 $ 139,435 Nonperforming 13 53 130 133 35 536 42 8 950 Total $ 34,071 $ 16,188 $ 14,526 $ 14,712 $ 7,467 $ 16,367 $ 36,854 $ 200 $ 140,385 Home equity: Performing $ — $ — $ 633 $ 349 $ 535 $ — $ 539,057 $ 16,768 $ 557,342 Nonperforming — — 16 9 41 1 258 2,923 3,248 Total $ — $ — $ 649 $ 358 $ 576 $ 1 $ 539,315 $ 19,691 $ 560,590 Origination Year Revolving to Term 2020 2019 2018 2017 2016 Prior Revolving Total December 31, 2020 Residential real estate: Performing $ 624,435 $ 453,132 $ 132,107 $ 190,376 $ 202,457 $ 620,999 $ — $ 122 $ 2,223,628 Nonperforming 65 251 680 892 2,131 20,775 — — 24,794 Total $ 624,500 $ 453,383 $ 132,787 $ 191,268 $ 204,588 $ 641,774 $ — $ 122 $ 2,248,422 Indirect: Performing $ 352,989 $ 253,514 $ 134,893 $ 96,587 $ 52,225 $ 21,088 $ — $ 77 $ 911,373 Nonperforming 22 443 777 666 429 192 — — 2,529 Total $ 353,011 $ 253,957 $ 135,670 $ 97,253 $ 52,654 $ 21,280 $ — $ 77 $ 913,902 Direct: Performing $ 32,499 $ 29,189 $ 30,510 $ 16,182 $ 8,527 $ 19,465 $ 26,028 $ 1,229 $ 163,629 Nonperforming 22 141 171 64 247 526 4 3 1,178 Total $ 32,521 $ 29,330 $ 30,681 $ 16,246 $ 8,774 $ 19,991 $ 26,032 $ 1,232 $ 164,807 Home equity: Performing $ 1 $ 997 $ 444 $ 891 $ 238 $ — $ 529,275 $ 20,314 $ 552,160 Nonperforming — 37 — — 11 116 94 3,996 4,254 Total $ 1 $ 1,034 $ 444 $ 891 $ 249 $ 116 $ 529,369 $ 24,310 $ 556,414 97 Nonaccrual and Past Due Loans Old National does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured. The following table presents the aging of the amortized cost basis in past due loans by class of loans: (dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due Past Due 90 Days or More Total Past Due Current Total Loans December 31, 2021 Commercial $ 2,723 $ 617 $ 1,603 $ 4,943 $ 3,195,269 $ 3,200,212 Commercial real estate 1,402 280 7,042 8,724 6,212,760 6,221,484 BBCC 747 162 109 1,018 349,729 350,747 Residential 8,273 2,364 4,554 15,191 2,240,098 2,255,289 Indirect 3,888 867 554 5,309 867,830 873,139 Direct 687 159 162 1,008 139,377 140,385 Home equity 693 199 777 1,669 558,921 560,590 Total $ 18,413 $ 4,648 $ 14,801 $ 37,862 $ 13,563,984 $ 13,601,846 December 31, 2020 Commercial $ 2,977 $ 664 $ 2,100 $ 5,741 $ 3,751,959 $ 3,757,700 Commercial real estate 887 128 27,272 28,287 5,746,524 5,774,811 BBCC 894 882 61 1,837 368,586 370,423 Residential 11,639 3,296 7,666 22,601 2,225,821 2,248,422 Indirect 5,222 960 492 6,674 907,228 913,902 Direct 753 533 426 1,712 163,095 164,807 Home equity 1,075 377 1,663 3,115 553,299 556,414 Total $ 23,447 $ 6,840 $ 39,680 $ 69,967 $ 13,716,512 $ 13,786,479 The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan: December 31, 2021 December 31, 2020 (dollars in thousands) Nonaccrual Amortized Cost Nonaccrual With No Related Allowance Past Due 90 Days or More and Accruing Nonaccrual Amortized Cost Nonaccrual With No Related Allowance Past Due 90 Days or More and Accruing Commercial $ 25,740 $ 9,574 $ — $ 34,895 $ 3,394 $ 122 Commercial real estate 52,450 25,139 — 76,138 22,152 20 BBCC 3,362 — — 3,551 — — Residential 18,360 — — 24,794 — — Indirect 2,581 — 4 2,529 — 12 Direct 950 — 3 1,178 27 13 Home equity 3,248 — — 4,254 45 — Total $ 106,691 $ 34,713 $ 7 $ 147,339 $ 25,618 $ 167 Interest income recognized on nonaccrual loans was insignificant during the years ended December 31, 2021 and 2020. 98 When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of collateral dependent loans by class of loan : Type of Collateral (dollars in thousands) Real Estate Blanket Lien Investment Securities/Cash Auto Other December 31, 2021 Commercial $ 8,100 $ 13,816 $ 3,394 $ 80 $ 302 Commercial Real Estate 38,657 — 961 — 6,653 BBCC 1,895 1,331 43 93 — Residential 18,360 — — — — Indirect — — — 2,581 — Direct 724 — 1 152 20 Home equity 3,248 — — — — Total $ 70,984 $ 15,147 $ 4,399 $ 2,906 $ 6,975 December 31, 2020 Commercial $ 8,976 $ 19,253 $ 5,379 $ 394 $ 893 Commercial Real Estate 60,844 472 1,137 — 13,685 BBCC 1,425 1,929 63 134 — Residential 24,794 — — — — Indirect — — — 2,529 — Direct 901 — 2 235 29 Home equity 4,254 — — — — Total $ 101,194 $ 21,654 $ 6,581 $ 3,292 $ 14,607 Loan Participations Old National has loan participations, which qualify as participating interests, with other financial institutions. At December 31, 2021, these loans totaled $ 1.256 billion, of which $ 619.6 million had been sold to other financial institutions and $ 636.1 million was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree. Troubled Debt Restructurings Old National may choose to restructure the contractual terms of certain loans. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection. Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans includes one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan. Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months . 99 If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier. For commercial TDRs, an allocated reserve is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value. To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent. The allocated reserve is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly. When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs. The following table presents activity in TDRs: (dollars in thousands) Beginning Balance (Charge-offs)/ Recoveries (Payments)/ Disbursements Additions Ending Balance Year Ended December 31, 2021 Commercial $ 11,090 $ — $ ( 4,535 ) $ 901 $ 7,456 Commercial real estate 17,606 24 ( 2,166 ) 1,694 17,158 BBCC 112 8 ( 33 ) — 87 Residential 2,824 ( 4 ) ( 385 ) — 2,435 Indirect — 3 ( 3 ) — — Direct 739 2 ( 101 ) 2,064 2,704 Home equity 282 3 ( 86 ) — 199 Total $ 32,653 $ 36 $ ( 7,309 ) $ 4,659 $ 30,039 Year Ended December 31, 2020 Commercial $ 12,412 $ 633 $ ( 4,557 ) $ 2,602 $ 11,090 Commercial real estate 14,277 4,801 ( 8,502 ) 7,030 17,606 BBCC 578 ( 19 ) ( 447 ) — 112 Residential 3,107 — ( 283 ) — 2,824 Indirect — 9 ( 9 ) — — Direct 983 23 ( 267 ) — 739 Home equity 381 3 ( 102 ) — 282 Total $ 31,738 $ 5,450 $ ( 14,167 ) $ 9,632 $ 32,653 TDRs included within nonaccrual loans totaled $ 11.7 million at December 31, 2021 and $ 14.9 million at December 31, 2020. Old National has allocated specific reserves to clients whose loan terms have been modified as TDRs totaling $ 0.7 million at December 31, 2021 and $ 1.6 million at December 31, 2020. Old National had no t committed to lend any additional funds to clients with outstanding loans that were classified as TDRs at December 31, 2021 or December 31, 2020. 100 The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the years ended December 31, 2021, 2020, and 2019 are the same except for when the loan modifications involve the forgiveness of principal. The following table presents loans modified as TDRs that occurred during the years ended December 31, 2021, 2020, and 2019: (dollars in thousands) Total Year Ended December 31, 2021 TDR: Number of loans 3 Pre-modification outstanding recorded investment $ 4,659 Post-modification outstanding recorded investment 4,659 Year Ended December 31, 2020 TDR: Number of loans 4 Pre-modification outstanding recorded investment $ 9,632 Post-modification outstanding recorded investment 9,632 Year Ended December 31, 2019 TDR: Number of loans 14 Pre-modification outstanding recorded investment $ 21,131 Post-modification outstanding recorded investment 21,131 The TDRs that occurred during 2021 decreased the allowance for credit losses by $ 0.9 million and resulted in no charge-offs during 2021. The TDRs that occurred during 2020 increased the allowance for credit losses by $ 0.3 million and resulted in no charge-offs during 2020. The TDRs that occurred during 2019 increased the allowance for loan losses by $ 2.0 million and resulted in $ 3.9 million in charge-offs during 2019. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. TDRs for which there was a payment default within twelve months following the modification during the year were insignificant in 2021, 2020, and 2019. The terms of certain other loans were modified during 2021 and 2020 that did not meet the definition of a TDR. It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment. In general, once a modified loan is considered a TDR, the loan will always be considered a TDR until it is paid in full, otherwise settled, sold, or charged off. However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall . However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings , the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring. 101 Non-TDR Loan Modifications due to COVID-19 In March 2020, the Interagency Statement was issued by our banking regulators that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. Additionally, section 541 of the CAA extends the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022. 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. Allowance for Loan Losses (Prior to January 1, 2020) Prior to the adoption of ASC 326 on January 1, 2020, Old National calculated allowance for loan losses using incurred losses methodology. The following tables are disclosures related to the allowance for loan losses in the year ended December 31, 2019. Old National’s activity in the allowance for loan losses was as follows: (dollars in thousands) Commercial Commercial Real Estate Residential Consumer Total Year Ended December 31, 2019 Allowance for loan losses: Balance at beginning of period $ 21,742 $ 23,470 $ 2,277 $ 7,972 $ 55,461 Charge-offs ( 3,819 ) ( 2,846 ) ( 661 ) ( 7,463 ) ( 14,789 ) Recoveries 1,650 3,774 146 3,630 9,200 Provision 3,012 ( 2,810 ) 537 4,008 4,747 Balance at end of period $ 22,585 $ 21,588 $ 2,299 $ 8,147 $ 54,619 The following table presents Old National’s average balance of impaired loans. Only purchased loans that had experienced subsequent impairment since the date acquired (excluding loans acquired with deteriorated credit quality) are included in the table below. (dollars in thousands) Year Ended December 31, 2019 Average Recorded Investment With no related allowance recorded: Commercial $ 22,629 Commercial Real Estate - Construction 6,465 Commercial Real Estate - Other 39,401 Residential 2,052 Consumer 923 With an allowance recorded: Commercial 15,816 Commercial Real Estate - Construction 6,912 Commercial Real Estate - Other 20,420 Residential 981 Consumer 1,219 Total $ 116,818 102 The following table presents activity in TDRs: (dollars in thousands) Beginning Balance (Charge-offs)/ Recoveries (Payments)/ Disbursements Additions Ending Balance Year Ended December 31, 2019 Commercial $ 10,275 $ ( 1,911 ) $ ( 3,733 ) $ 10,231 $ 14,862 Commercial real estate 27,671 ( 2,112 ) ( 23,182 ) 10,027 12,404 Residential 3,390 — ( 971 ) 557 2,976 Consumer 2,374 13 ( 1,207 ) 316 1,496 Total $ 43,710 $ ( 4,010 ) $ ( 29,093 ) $ 21,131 $ 31,738 NOTE 5 – OTHER REAL ESTATE OWNED Other real estate owned in included in other assets on the balance sheet. The following table presents activity in other real estate owned: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Balance at beginning of period $ 1,324 $ 2,169 $ 3,232 Additions (1) 1,955 965 1,192 Sales ( 1,164 ) ( 1,505 ) ( 2,077 ) Impairments ( 85 ) ( 305 ) ( 178 ) Balance at end of period (2) $ 2,030 $ 1,324 $ 2,169 (1) Includes repossessed personal property of $ 0.1 million at December 31, 2021 and $ 0.2 million at December 31, 2020. Foreclosed residential real estate property recorded as a result of obtaining physical possession of the property included in the table above totaled $ 0.1 million at December 31, 2021 and $ 0.8 million at December 31, 2020. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $ 1.7 million at December 31, 2021 and $ 2.7 million at December 31, 2020. NOTE 6 – PREMISES AND EQUIPMENT The composition of premises and equipment was as follows: December 31, (dollars in thousands) 2021 2020 Land $ 71,014 $ 72,600 Buildings 394,400 373,660 Furniture, fixtures, and equipment 118,124 110,735 Leasehold improvements 46,330 44,734 Total 629,868 601,729 Accumulated depreciation ( 153,682 ) ( 137,321 ) Premises and equipment, net $ 476,186 $ 464,408 Depreciation expense was $ 27.3 million in 2021, $ 28.9 million in 2020, and $ 26.7 million in 2019. Finance Leases Old National leases certain banking center buildings and equipment under finance leases that are included in premises and equipment. See Notes 7 and 14 to the consolidated financial statements for detail regarding these leases. 103 NOTE 7 – LEASES Old National determines if an arrangement is or contains a lease at contract inception. Operating leases are included in operating lease right-of-use assets and operating lease liabilities in our consolidated balance sheets. Finance leases are included in premises and equipment and other borrowings in our consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use the implicit lease rate when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. Old National has operating and finance leases for land, office space, banking centers, and equipment. These leases are generally for periods of 5 to 20 years with various renewal options. We include certain renewal options in the measurement of our right-of-use assets and lease liabilities if they are reasonably certain to be exercised. Variable lease payments that are dependent on an index or a rate are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Variable lease payments that are not dependent on an index or a rate are excluded from the measurement of the lease liability and are recognized in profit and loss when incurred. Variable lease payments are defined as payments made for the right to use an asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. Old National has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since they are generally able to be segregated. For certain equipment leases, Old National accounts for the lease and non-lease components as a single lease component using the practical expedient available for that class of assets. Old National does not have any material sub-lease agreements. The components of lease expense were as follows: Affected Line Item in the Statement of Income Years Ended December 31, (dollars in thousands) 2021 2020 2019 Operating lease cost Occupancy/Equipment expense $ 12,336 $ 23,548 $ 17,001 Finance lease cost: Amortization of right-of-use assets Occupancy expense 2,356 1,044 651 Interest on lease liabilities Interest expense 431 364 320 Short-term lease cost Occupancy expense — — 6 Sub-lease income Occupancy expense ( 438 ) ( 512 ) ( 703 ) Total $ 14,685 $ 24,444 $ 17,275 104 Supplemental balance sheet information related to leases was as follows: December 31, (dollars in thousands) 2021 2020 Operating Leases Operating lease right-of-use assets $ 69,560 $ 76,197 Operating lease liabilities 76,236 86,598 Finance Leases Premises and equipment, net 16,451 11,351 Other borrowings 17,233 11,813 Weighted-Average Remaining Lease Term (in Years) Operating leases 10.4 10.6 Finance leases 7.6 10.3 Weighted-Average Discount Rate Operating leases 3.34 % 3.40 % Finance leases 3.02 % 3.46 % Supplemental cash flow information related to leases was as follows: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 13,823 $ 15,906 $ 17,493 Operating cash flows from finance leases 431 364 320 Financing cash flows from finance leases 2,057 819 465 The following table presents future undiscounted lease payments by lease classification at December 31, 2021: (dollars in thousands) Operating Leases Finance Leases 2022 $ 13,024 $ 2,906 2023 9,564 2,943 2024 8,516 2,959 2025 8,380 2,943 2026 7,972 1,706 Thereafter 43,410 5,914 Total undiscounted lease payments 90,866 19,371 Amounts representing interest ( 14,630 ) ( 2,138 ) Lease liability $ 76,236 $ 17,233 Old National leases certain office space and buildings to unrelated parties in exchange for consideration. All of these tenant leases are classified as operating leases. 105 The following table presents a maturity analysis of the Company’s tenant leases at December 31, 2021: (dollars in thousands) Tenant Leases 2022 $ 2,465 2023 1,747 2024 1,558 2025 1,182 2026 671 Thereafter 2,376 Total undiscounted lease payments $ 9,999 NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents the changes in the carrying amount of goodwill: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Balance at beginning of period $ 1,036,994 $ 1,036,994 $ 1,036,258 Acquisitions and adjustments — — 736 Balance at end of period $ 1,036,994 $ 1,036,994 $ 1,036,994 Old National performed the required annual goodwill impairment test as of August 31, 2021 and there was no impairment. No events or circumstances since the August 31, 2021 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists. The gross carrying amounts and accumulated amortization of other intangible assets were as follows: (dollars in thousands) Gross Carrying Amount Accumulated Amortization and Impairment Net Carrying Amount December 31, 2021 Core deposit $ 92,754 $ ( 60,036 ) $ 32,718 Customer trust relationships 16,547 ( 14,587 ) 1,960 Total intangible assets $ 109,301 $ ( 74,623 ) $ 34,678 December 31, 2020 Core deposit $ 112,723 $ ( 69,623 ) $ 43,100 Customer trust relationships 16,547 ( 13,633 ) 2,914 Total intangible assets $ 129,270 $ ( 83,256 ) $ 46,014 Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years. Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded in 2021, 2020, or 2019. Total amortization expense associated with intangible assets was $ 11.3 million in 2021, $ 14.1 million in 2020, and $ 16.9 million in 2019. 106 Estimated amortization expense for future years is as follows: (dollars in thousands) 2022 $ 9,014 2023 7,053 2024 5,645 2025 4,509 2026 3,386 Thereafter 5,071 Total $ 34,678 NOTE 9 – LOAN SERVICING RIGHTS Loan servicing rights are included in other assets on the balance sheet. At December 31, 2021, loan servicing rights derived from mortgage loans sold with servicing retained totaled $ 30.0 million, compared to $ 26.7 million at December 31, 2020. Loans serviced for others are not reported as assets. The principal balance of mortgage loans serviced for others was $ 3.662 billion at December 31, 2021, compared to $ 3.613 billion at December 31, 2020. Custodial escrow balances maintained in connection with serviced loans were $ 18.2 million at December 31, 2021 and $ 16.2 million at December 31, 2020. The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Balance at beginning of period $ 28,124 $ 25,399 $ 24,512 Additions 11,759 12,810 6,499 Amortization ( 9,798 ) ( 10,085 ) ( 5,612 ) Balance before valuation allowance at end of period 30,085 28,124 25,399 Valuation allowance: Balance at beginning of period ( 1,407 ) ( 31 ) ( 15 ) (Additions)/recoveries 1,361 ( 1,376 ) ( 16 ) Balance at end of period ( 46 ) ( 1,407 ) ( 31 ) Loan servicing rights, net $ 30,039 $ 26,717 $ 25,368 At December 31, 2021, the fair value of servicing rights was $ 33.8 million, which was determined using a discount rate of 9 % and a conditional prepayment rate of 10 %. At December 31, 2020, the fair value of servicing rights was $ 26.8 million, which was determined using a discount rate of 9 % and a conditional prepayment rate of 14 %. NOTE 10 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. As of December 31, 2021, Old National expects to recover its remaining investments through the use of the tax credits that are generated by the investments. 107 The following table summarizes Old National’s investments in qualified affordable housing projects and other tax credit investments: (dollars in thousands) December 31, 2021 December 31, 2020 Investment Accounting Method Investment Unfunded Commitment (1) Investment Unfunded Commitment LIHTC Proportional amortization $ 68,989 $ 41,355 $ 33,609 $ 6,845 FHTC Equity 21,241 15,252 18,660 22,398 NMTC Proportional amortization 18,727 — 6,120 — Renewable Energy Equity 1,985 — 3,611 862 Total $ 110,942 $ 56,607 $ 62,000 $ 30,105 (1) All commitments will be paid by Old National by December 31, 2027. The following table summarizes the amortization expense and tax benefit recognized for Old National’s qualified affordable housing projects and other tax credit investments: (dollars in thousands) Amortization Expense (1) Tax Expense (Benefit) Recognized (2) Year Ended December 31, 2021 LIHTC $ 3,450 $ ( 4,543 ) FHTC 2,557 ( 2,884 ) NMTC 2,887 ( 3,625 ) Renewable Energy 1,326 ( 562 ) Total $ 10,220 $ ( 11,614 ) Year Ended December 31, 2020 LIHTC $ 3,105 $ ( 4,071 ) FHTC 13,237 ( 15,582 ) NMTC 900 ( 1,100 ) Renewable Energy 4,651 ( 4,122 ) Total $ 21,893 $ ( 24,875 ) Year Ended December 31, 2019 LIHTC $ 3,168 $ ( 4,102 ) FHTC 1,113 ( 1,244 ) CReED (3) 13 — Renewable Energy 1,623 ( 1,740 ) Total $ 5,917 $ ( 7,086 ) (1) The amortization expense for the LIHTC investments is included in our income tax expense. The amortization expense for the FHTC, NMTC, CReED, and Renewable Energy tax credits is included in noninterest expense. (2) All of the tax benefits recognized are included in our income tax expense. The tax benefit recognized for the FHTC, NMTC, CReED, and Renewable Energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) and deferred tax liability of the investments’ income (loss). (3) The CReED tax credit investment qualified for an Indiana state tax credit. 108 NOTE 11 – DEPOSITS At December 31, 2021, the scheduled maturities of total time deposits were as follows: (dollars in thousands) Due in 2022 $ 663,230 Due in 2023 149,526 Due in 2024 86,502 Due in 2025 33,469 Due in 2026 23,165 Thereafter 4,521 Total $ 960,413 The aggregate amount of time deposits in denominations that met or exceeded the FDIC insurance limit of $250,000 totaled $ 252.8 million at December 31, 2021 and $ 285.1 million at December 31, 2020. NOTE 12 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are secured borrowings. Old National pledges investment securities to secure these borrowings. The following table presents securities sold under agreements to repurchase and related weighted-average interest rates for each of the years ended December 31: (dollars in thousands) 2021 2020 Outstanding at year-end $ 392,275 $ 431,166 Average amount outstanding 392,777 375,961 Maximum amount outstanding at any month-end 405,278 438,039 Weighted-average interest rate: During year 0.10 % 0.23 % End of year 0.10 0.12 The following table presents the contractual maturity of our secured borrowings and class of collateral pledged: At December 31, 2021 Remaining Contractual Maturity of the Agreements (dollars in thousands) Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 days Total Repurchase Agreements: U.S. Treasury and agency securities $ 392,275 $ — $ — $ — $ 392,275 Total $ 392,275 $ — $ — $ — $ 392,275 The fair value of securities pledged to secure repurchase agreements may decline. Old National has pledged securities valued at 109 % of the gross outstanding balance of repurchase agreements at December 31, 2021 to manage this risk. NOTE 13 – FEDERAL HOME LOAN BANK ADVANCES The following table summarizes Old National Bank’s FHLB advances: December 31, (dollars in thousands) 2021 2020 FHLB advances (fixed rates 0.45 % to 4.96 % and variable rates 0.07 % to 0.09 %) maturing October 2022 to January 2041 $ 1,902,655 $ 1,999,160 Fair value hedge basis adjustments and unamortized prepayment fees ( 16,636 ) ( 7,725 ) Total other borrowings $ 1,886,019 $ 1,991,435 109 FHLB advances had weighted-average rates of 1.30 % at December 31, 2021 and 1.32 % at December 31, 2020. Investment securities and residential real estate loans collateralize these borrowings up to 140 % of outstanding debt. In 2021, Old National modified $ 50.0 million pertaining to two FHLB advances, which lowered their weighted average effective rates from 1.53 % to 0.33 %. In 2020, Old National modified $ 500.0 million pertaining to four FHLB advances, which lowered their weighted average effective rates from 2.00 % to 1.28 %. At December 31, 2021, unamortized prepayment fees related to all debt modifications totaled $ 26.2 million, compared to $ 30.0 million at December 31, 2020. Contractual maturities of FHLB advances at December 31, 2021 were as follows: (dollars in thousands) Due in 2022 $ 27,500 Due in 2023 155 Due in 2024 25,000 Due in 2025 550,000 Due in 2026 100,000 Thereafter 1,200,000 Fair value hedge basis adjustments and unamortized prepayment fees ( 16,636 ) Total $ 1,886,019 NOTE 14 – OTHER BORROWINGS The following table summarizes Old National’s other borrowings: December 31, (dollars in thousands) 2021 2020 Old National Bancorp: Senior unsecured notes (fixed rate 4.125 %) maturing August 2024 $ 175,000 $ 175,000 Unamortized debt issuance costs related to senior unsecured notes ( 403 ) ( 559 ) Junior subordinated debentures (variable rates of 1.72 % to 1.97 %) maturing March 2035 to June 2037 42,000 42,000 Other basis adjustments ( 3,044 ) ( 3,195 ) Old National Bank: Finance lease liabilities 17,233 11,813 Subordinated debentures (variable rate 4.49 %) 12,000 12,000 Leveraged loans for NMTC (fixed rates of 1.00 % to 1.43 %) maturing December 2046 to December 2052 51,045 15,300 Other 2,839 428 Total other borrowings $ 296,670 $ 252,787 Contractual maturities of other borrowings at December 31, 2021 were as follows: (dollars in thousands) Due in 2022 $ 2,497 Due in 2023 2,582 Due in 2024 177,649 Due in 2025 2,686 Due in 2026 1,495 Thereafter 110,369 Unamortized debt issuance costs and other basis adjustments ( 608 ) Total $ 296,670 110 Senior Notes In August 2014, Old National issued $ 175.0 million of senior unsecured notes with a 4.125 % interest rate. These notes pay interest on February 15 and August 15. The notes mature on August 15, 2024. Junior Subordinated Debentures Junior subordinated debentures related to trust preferred securities are classified in “other borrowings.” Junior subordinated debentures qualify as Tier 2 capital for regulatory purposes, subject to certain limitations. Through various acquisitions, Old National assumed junior subordinated debenture obligations related to various trusts that issued trust preferred securities. Old National guarantees the payment of distributions on the trust preferred securities issued by the trusts. Proceeds from the issuance of each of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by the trusts. Old National, at any time, may redeem the junior subordinated debentures at par and, thereby cause a redemption of the trust preferred securities in whole or in part. The following table summarizes the terms of our outstanding junior subordinated debentures as of December 31, 2021: (dollars in thousands) Name of Trust Issuance Date Issuance Amount Rate Rate at December 31, 2021 Maturity Date St. Joseph Capital Trust II March 2005 $ 5,000 3-month LIBOR plus 1.75 % 1.97 % March 17, 2035 Anchor Capital Trust III August 2005 5,000 3-month LIBOR plus 1.55 % 1.77 % September 30, 2035 Home Federal Statutory Trust I September 2006 15,000 3-month LIBOR plus 1.65 % 1.85 % September 15, 2036 Monroe Bancorp Capital Trust I July 2006 3,000 3-month LIBOR plus 1.60 % 1.72 % October 7, 2036 Tower Capital Trust 3 December 2006 9,000 3-month LIBOR plus 1.69 % 1.86 % March 1, 2037 Monroe Bancorp Statutory Trust II March 2007 5,000 3-month LIBOR plus 1.60 % 1.80 % June 15, 2037 Total $ 42,000 Subordinated Debentures On November 1, 2017, Old National assumed $ 12.0 million of subordinated fixed-to-floating notes related to the acquisition of Anchor (MN). The subordinated debentures had a 5.75 % fixed rate of interest through October 29, 2020. From October 30, 2020 to the October 30, 2025 maturity date, the debentures have a floating rate of interest equal to the three-month LIBOR rate plus 4.356 %. Leveraged Loans The leveraged loans are directly related to the New Markets Tax Credit structure. As part of the transaction structure, Old National has the right to sell its interest in the entity that received the leveraged loans at an agreed upon price to the leveraged lender at the end of the New Markets Tax Credit seven year compliance period. See Note 10 to the consolidated financial statements for additional information on the Company’s New Markets Tax Credit investments. Finance Lease Liabilities Old National has long-term finance lease liabilities for certain banking centers and equipment totaling $ 17.2 million at December 31, 2021. See Note 7 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities. 111 NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes within each classification of AOCI, net of tax: (dollars in thousands) Unrealized Gains and Losses on Available- for-Sale Debt Securities Unrealized Gains and Losses on Held-to- Maturity Securities Gains and Losses on Cash Flow Hedges Defined Benefit Pension Plans Total Year Ended December 31, 2021 Balance at beginning of period $ 145,335 $ — $ 2,584 $ ( 148 ) $ 147,771 Other comprehensive income (loss) before reclassifications ( 144,948 ) — 1,433 — ( 143,515 ) Amounts reclassified from AOCI to income (1) ( 3,337 ) — ( 3,474 ) 180 ( 6,631 ) Balance at end of period $ ( 2,950 ) $ — $ 543 $ 32 $ ( 2,375 ) Year Ended December 31, 2020 Balance at beginning of period $ 56,131 $ — $ 240 $ ( 164 ) $ 56,207 Other comprehensive income (loss) before reclassifications 97,596 — 6,230 — 103,826 Amounts reclassified from AOCI (1) ( 8,392 ) — ( 3,886 ) 16 ( 12,262 ) Balance at end of period $ 145,335 $ — $ 2,584 $ ( 148 ) $ 147,771 Year Ended December 31, 2019 Balance at beginning of period $ ( 37,348 ) $ ( 8,515 ) $ 1,099 $ ( 186 ) $ ( 44,950 ) Other comprehensive income (loss) before reclassifications 94,964 6,419 ( 410 ) — 100,973 Amounts reclassified from AOCI (1) ( 1,485 ) 2,096 ( 449 ) 22 184 Balance at end of period $ 56,131 $ — $ 240 $ ( 164 ) $ 56,207 (1) See table below for details about reclassifications to income. The following table summarizes the significant amounts reclassified out of each component of AOCI: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Details about AOCI Components Amount Reclassified from AOCI Affected Line Item in the Statement of Income Unrealized gains and losses on available-for-sale debt securities $ 4,327 $ 10,767 $ 1,923 Debt securities gains (losses), net ( 990 ) ( 2,375 ) ( 438 ) Income tax (expense) benefit $ 3,337 $ 8,392 $ 1,485 Net income Unrealized gains and losses on held-to-maturity securities $ — $ — $ ( 2,812 ) Interest income (expense) — — 716 Income tax (expense) benefit $ — $ — $ ( 2,096 ) Net income Gains and losses on cash flow hedges Interest rate contracts $ 4,605 $ 5,153 $ 596 Interest income (expense) ( 1,131 ) ( 1,267 ) ( 147 ) Income tax (expense) benefit $ 3,474 $ 3,886 $ 449 Net income Amortization of defined benefit pension items Actuarial gains (losses) $ ( 239 ) $ ( 21 ) $ ( 30 ) Salaries and employee benefits 59 5 8 Income tax (expense) benefit $ ( 180 ) $ ( 16 ) $ ( 22 ) Net income Total reclassifications for the period $ 6,631 $ 12,262 $ ( 184 ) Net income 112 NOTE 16 – INCOME TAXES Following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statement of income: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Provision at statutory rate of 21 % $ 71,161 $ 53,667 $ 60,975 Tax-exempt income: Tax-exempt interest ( 11,066 ) ( 10,776 ) ( 10,243 ) Section 291/265 interest disallowance 114 189 435 Company-owned life insurance income ( 2,138 ) ( 2,290 ) ( 2,423 ) Tax-exempt income ( 13,090 ) ( 12,877 ) ( 12,231 ) State income taxes 9,308 4,840 6,720 Tax credit investments - federal ( 5,212 ) ( 15,159 ) ( 4,411 ) Other, net ( 843 ) ( 1,324 ) 1,097 Income tax expense $ 61,324 $ 29,147 $ 52,150 Effective tax rate 18.1 % 11.4 % 18.0 % The higher effective tax rate in 2021 when compared to 2020 was primarily the result of an increase in pre-tax book income and lower tax credits. The lower effective tax rate in 2020 when compared to 2019 was primarily the result of an increase in federal tax credits available in 2020. The provision for income taxes consisted of the following components: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Current expense: Federal $ 31,943 $ 19,223 $ 22,908 State 8,461 6,498 4,490 Deferred expense: Federal 17,514 3,188 20,402 State 3,406 238 4,350 Deferred income tax expense 20,920 3,426 24,752 Income tax expense $ 61,324 $ 29,147 $ 52,150 113 Net Deferred Tax Assets Net deferred tax assets are included in other assets on the balance sheet. Significant components of net deferred tax assets (liabilities) were as follows: December 31, (dollars in thousands) 2021 2020 Deferred Tax Assets Allowance for credit losses, net of recapture $ 28,843 $ 34,971 Benefit plan accruals 18,348 20,076 Net operating loss carryforwards 14,823 18,982 Deferred gain on securities 1,215 2,102 Acquired loans 8,039 11,989 Operating lease liabilities 22,961 24,245 Unrealized losses on available-for-sale investment securities 3,003 — Tax credit investments and other partnerships 301 1,054 Other, net 1,914 488 Total deferred tax assets 99,447 113,907 Deferred Tax Liabilities Purchase accounting ( 18,524 ) ( 18,232 ) Loan servicing rights ( 7,379 ) ( 6,582 ) Premises and equipment ( 16,972 ) ( 14,008 ) Prepaid expenses ( 796 ) ( 955 ) Operating lease right-of-use assets ( 21,129 ) ( 21,569 ) Unrealized gains on available-for-sale investment securities — ( 40,756 ) Unrealized gains on hedges ( 177 ) ( 1,080 ) Other, net ( 1,564 ) ( 1,555 ) Total deferred tax liabilities ( 66,541 ) ( 104,737 ) Net deferred tax assets $ 32,906 $ 9,170 Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at December 31, 2021 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $ 52.8 million. Of this total, $ 50.9 million was acquired from Anchor (WI), and $ 1.9 million was acquired from Lafayette Savings Bank. Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. Old National Bank has no intention of making such a nondividend distribution. Accordingly, under current accounting principles, a related deferred income tax liability of $ 13.0 million has not been recognized. No valuation allowance was recorded at December 31, 2021 or 2020 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards totaling $ 36.7 million at December 31, 2021 and $ 52.4 million at December 31, 2020. This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016. If not used, the federal net operating loss carryforwards will expire from 2030 to 2033. Old National has recorded state net operating loss carryforwards totaling $ 116.1 million at December 31, 2021 and $ 132.2 million at December 31, 2020. If not used, the state net operating loss carryforwards will expire from 2027 to 2033. The federal and recorded state net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code section 382. Old National believes that all of the recorded net operating loss carryforwards will be used prior to expiration. Unrecognized Tax Benefits Old National reduced an immaterial amount of unrecognized tax benefits to zero in 2020 after an Internal Revenue Service audit was finalized. 114 Old National and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. The 2018 through 2021 tax years are open and subject to examination. NOTE 17 – SHARE-BASED COMPENSATION AND OTHER EMPLOYEE BENEFIT PLANS Our Amended and Restated 2008 Incentive Compensation Plan (the “ICP”), which was shareholder-approved, permits the grant of share-based awards to its employees. At December 31, 2021, 2.3 million shares were available for issuance. The granting of awards to key employees is typically in the form of restricted stock awards or units. We believe that such awards better align the interests of our employees with those of our shareholders. Total compensation cost that has been charged against income for the ICP was $ 7.5 million in 2021, $ 7.7 million in 2020, and $ 8.0 million in 2019. The total income tax benefit was $ 1.8 million in 2021, $ 1.9 million in 2020, and $ 2.0 million in 2019. Restricted Stock Awards Restricted stock awards require certain service requirements and commonly have vesting periods of three years . Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. A summary of changes in our nonvested shares for the year follows: (shares in thousands) Shares Weighted Average Grant-Date Fair Value Year Ended December 31, 2021 Nonvested balance at beginning of period 558 $ 15.51 Granted during the year 254 17.28 Vested during the year ( 243 ) 15.92 Forfeited during the year ( 15 ) 14.76 Nonvested balance at end of period 554 $ 16.16 As of December 31, 2021, there was $ 6.0 million of total unrecognized compensation cost related to nonvested restricted stock awards. The cost is expected to be recognized over a weighted-average period of 1.8 years. The total fair value of the shares vested was $ 4.3 million in 2021, $ 2.9 million in 2020, and $ 3.4 million in 2019. Restricted Stock Units Restricted stock units require certain performance requirements and have vesting periods of three years . The level of performance could increase or decrease the number of shares earned. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. A summary of changes in our nonvested shares for the year follows: (shares in thousands) Shares Weighted Average Grant-Date Fair Value Year Ended December 31, 2021 Nonvested balance at beginning of period 911 $ 14.18 Granted during the year 184 15.64 Vested during the year ( 242 ) 14.26 Dividend equivalents adjustment 33 14.05 Nonvested balance at end of period 886 $ 14.80 As of December 31, 2021, there was $ 3.8 million of total unrecognized compensation cost related to nonvested restricted stock units. The cost is expected to be recognized over a weighted-average period of 1.7 years. 115 Stock Options and Appreciation Rights Option awards are generally granted with an exercise price equal to the market price of our Common Stock at the date of grant; these option awards have vesting periods ranging from 3 to 5 years and have 10 -year contractual terms. Old National has not granted stock options since 2009. However, Old National did acquire stock options and stock appreciation rights through prior year acquisitions. Old National recorded no incremental expense associated with the conversion of these options and stock appreciation rights. As of December 31, 2021, all options were fully vested and all compensation costs had been expensed. At December 31, 2021, the outstanding shares consisted of stock appreciation rights acquired through prior year acquisitions. A summary of the activity in stock appreciation rights in 2021 follows: (shares in thousands) Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Aggregate Intrinsic Value (in thousands) Year Ended December 31, 2021 Outstanding at beginning of period 41 $ 4.24 Exercised ( 13 ) 4.12 Outstanding at end of period 28 $ 4.30 0.47 $ 387.4 Options exercisable at end of year 28 $ 4.30 0.47 $ 387.4 Information related to stock option and appreciation rights follows: Year Ended December 31, (dollars in thousands) 2021 2020 2019 Intrinsic value of options/appreciation rights exercised $ 171 $ 213 $ 178 Cash received from options/appreciation rights exercises — — 280 Tax benefit realized from options/appreciation rights exercises 68 85 71 Outside Director Stock Compensation Program Old National maintains a director stock compensation program covering all outside directors. Compensation shares are earned semi-annually. Beginning in 2017, any shares awarded to directors are anticipated to be issued from the ICP. In 2021, 25 thousand shares were issued to directors, compared to 28 thousand shares in 2020, and 12 thousand shares in 2019. Employee Stock Ownership Plan The Employee Stock Ownership and Savings Plan (the “401(k) Plan”) permits employees to participate the first month following one month of service. Old National matches 75 % of employee compensation deferral contributions of the first 4 % of compensation, and 50 % of the next 4 % of compensation. In addition to matching contributions, Old National may make discretionary contributions to the 401(k) Plan in the form of Old National stock or cash. Our Board of Directors designated no discretionary profit sharing contributions in 2021, 2020, or 2019. All contributions vest immediately and plan participants may elect to redirect funds among any of the investment options provided under the 401( k) Plan. The number of Old National shares in the 401(k) Plan were 0.5 million at December 31, 2021 and 0.6 million at December 31, 2020. All shares owned through the 401(k) Plan are included in the calculation of weighted-average shares outstanding for purposes of calculating diluted and basic earnings per share. Contribution expense under the 401(k) Plan was $ 9.8 million in 2021, $ 9.5 million in 2020, and $ 9.8 million in 2019. 116 NOTE 18 – SHAREHOLDERS' EQUITY Dividend Reinvestment and Stock Purchase Plan Old National has a dividend reinvestment and stock purchase plan under which common shares issued may be either repurchased shares or authorized and previously unissued shares. A new plan became effective on August 12, 2021, with total authorized and unissued common shares reserved for issuance of 3.3 million. At December 31, 2021, 3.3 million authorized and unissued common shares were available for issuance under the plan. Employee Stock Purchase Plan Old National has an employee stock purchase plan under which eligible employees can purchase common shares at a price not less than 95 % of the fair market value of the common shares on the purchase date. The amount of common shares purchased cannot exceed 10 % of the employee’s compensation. The maximum number of shares that may be purchased under this plan is 500,000 shares. In 2021, 35,000 shares were issued related to this plan with proceeds of approximately $ 583,000 . In 2020, 43,000 shares were issued related to this plan with proceeds of approximately $ 577,000 . Share Repurchase Plan In the first quarter of 2021, the Board of Directors approved the repurchase of up to $ 100 million of shares of Common Stock, as conditions warrant, through January 31, 2022. During 2021 and through January 31, 2022, no common shares were repurchased under the plan. Net Income per Share Basic and diluted net income per share are calculated using the two-class method. Net income is divided by the weighted-average number of common shares outstanding during the period. Adjustments to the weighted average number of common shares outstanding are made only when such adjustments will dilute net income per common share. Net income is then divided by the weighted-average number of common shares and common share equivalents during the period. The following table reconciles basic and diluted net income per share. (dollars and shares in thousands, except per share data) Years Ended December 31, 2021 2020 2019 Basic Net Income Per Share Net income $ 277,538 $ 226,409 $ 238,206 Weighted average common shares outstanding 165,178 165,509 171,907 Basic Net Income Per Share $ 1.68 $ 1.37 $ 1.39 Diluted Net Income Per Share Net income $ 277,538 $ 226,409 $ 238,206 Weighted average common shares outstanding 165,178 165,509 171,907 Effect of dilutive securities: Restricted stock 729 632 733 Stock options and appreciation rights 22 36 47 Weighted average shares outstanding 165,929 166,177 172,687 Diluted Net Income Per Share $ 1.67 $ 1.36 $ 1.38 117 NOTE 19 – FAIR VALUE Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: • Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. • Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. • Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Old National used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Investment securities and equity securities : The fair values for investment securities and equity securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using swap and LIBOR curves plus spreads that adjust for loss severities, volatility, credit risk, and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. Residential loans held for sale : The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2). Derivative financial instruments : The fair values of derivative financial instruments are based on derivative valuation models using market data inputs as of the valuation date (Level 2). 118 Recurring Basis Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which we have elected the fair value option, are summarized below: Fair Value Measurements at December 31, 2021 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Equity securities $ 13,211 $ 13,211 $ — $ — Investment securities available-for-sale: U.S. Treasury 235,584 235,584 — — U.S. government-sponsored entities and agencies 1,542,773 — 1,542,773 — Mortgage-backed securities - Agency 3,698,831 — 3,698,831 — States and political subdivisions 1,654,986 — 1,654,986 — Pooled trust preferred securities 9,496 — — 9,496 Other securities 240,396 — 240,396 — Residential loans held for sale 35,458 — 35,458 — Derivative assets 74,226 — 74,226 — Financial Liabilities Derivative liabilities 41,872 — 41,872 — Fair Value Measurements at December 31, 2020 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Equity securities $ 2,547 $ 2,547 $ — $ — Investment securities available-for-sale: U.S. Treasury 10,208 10,208 — — U.S. government-sponsored entities and agencies 841,988 — 841,988 — Mortgage-backed securities - Agency 3,339,098 — 3,339,098 — States and political subdivisions 1,492,162 — 1,492,162 — Pooled trust preferred securities 7,913 — — 7,913 Other securities 278,746 — 278,746 — Residential loans held for sale 63,250 — 63,250 — Derivative assets 140,201 — 140,201 — Financial Liabilities Derivative liabilities 18,187 — 18,187 — 119 The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3): (dollars in thousands) Pooled Trust Preferred Securities States and Political Subdivisions Year Ended December 31, 2021 Balance at beginning of period $ 7,913 $ — Accretion (amortization) of discount or premium 20 — Sales/payments received ( 27 ) — Increase (decrease) in fair value of securities 1,590 — Balance at end of period $ 9,496 $ — Year Ended December 31, 2020 Balance at beginning of period $ 8,222 $ 40 Accretion (amortization) of discount or premium 15 — Sales/payments received ( 64 ) ( 40 ) Increase (decrease) in fair value of securities ( 260 ) — Balance at end of period $ 7,913 $ — Year Ended December 31, 2019 Balance at beginning of period $ 8,495 $ 4,108 Accretion (amortization) of discount or premium 12 — Sales/payments received ( 62 ) ( 35 ) Increase (decrease) in fair value of securities ( 223 ) — Transfers out of Level 3 — ( 4,033 ) Balance at end of period $ 8,222 $ 40 The accretion of discounts or amortization of premiums on securities in the table above is included in interest income. The increase or decrease in the fair value of securities in the table above is included in the unrealized holding gains (losses) for the period in the statement of other comprehensive income. An increase in fair value is reflected in the balance sheet as an increase in the fair value of investment securities available-for-sale, an increase in accumulated other comprehensive income, which is included in shareholders’ equity, and a decrease in other assets related to the tax impact. A decrease in fair value is reflected in the balance sheet as a decrease in the fair value of investment securities available-for-sale, a decrease in accumulated other comprehensive income, which is included in shareholders’ equity, and an increase in other assets related to the tax impact. During 2019, Old National received third party pricing on a $ 4.0 million state and political subdivisions security and transferred it out of Level 3. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy: (dollars in thousands) Fair Value Valuation Techniques Unobservable Input Range (Weighted Average) (4) December 31, 2021 Pooled trust preferred securities $ 9,496 Discounted cash flow Constant prepayment rate (1) 0.0 % Additional asset defaults (2) 5.7 % - 8.5 % ( 6.5 %) Expected asset recoveries (3) 0.0 % - 46.0 % ( 14.1 %) December 31, 2020 Pooled trust preferred securities $ 7,913 Discounted cash flow Constant prepayment rate (1) 0.0 % Additional asset defaults (2) 6.0 % - 8.7 % ( 6.8 %) Expected asset recoveries (3) 0.0 % - 23.2 % ( 7.3 %) (1) Assuming no prepayments. (2) Each currently performing pool asset is assigned a default probability based on the banking environment, which is adjusted for specific issuer evaluation, of 0 %, 50 %, or 100 %. (3) Each currently defaulted pool asset is assigned a recovery probability based on specific issuer evaluation of 0 %, 25 %, or 100 %. (4) Unobservable inputs are weighted by the estimated number of defaults and current performing collateral of the instruments. 120 Significant changes in any of the unobservable inputs used in the fair value measurement in isolation would have resulted in a significant change to the fair value measurement. The pooled trust preferred securities Old National owns are subordinate note classes that rely on an ongoing cash flow stream to support their values. The senior note classes receive the benefit of prepayments to the detriment of subordinate note classes since the ongoing interest cash flow stream is reduced by the early redemption. Generally, a change in prepayment rates or additional pool asset defaults would have an impact that is directionally opposite from a change in the expected recovery of a defaulted pool asset. Non-Recurring Basis Assets measured at fair value on a non-recurring basis are summarized below: Fair Value Measurements at December 31, 2021 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral Dependent Loans: Commercial loans $ 2,634 $ — $ — $ 2,634 Commercial real estate loans 16,308 — — 16,308 Loan servicing rights 140 — 140 — Commercial and commercial real estate loans that are deemed collateral dependent are valued using the discounted cash flows. The liquidation amounts are based on the fair value of the underlying collateral using the most recently available appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral. These commercial and commercial real estate loans had a principal amount of $ 21.0 million, with a valuation allowance of $ 2.1 million at December 31, 2021. Old National recorded provision recapture associated with these loans totaling $ 0.1 million in 2021. Other real estate owned and other repossessed property is measured at fair value less costs to sell. Old National did not have any other real estate owned or repossessed property measured at fair value on a non-recurring basis at December 31, 2021. There were write-downs of other real estate owned of $ 23 thousand in 2021. Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2). The valuation allowance for loan servicing rights with impairments at December 31, 2021 totaled $ 46 thousand. Old National recorded recoveries associated with these loan servicing rights totaling $ 1.4 million in 2021. Assets measured at fair value on a non-recurring basis at December 31, 2020 are summarized below: Fair Value Measurements at December 31, 2020 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral Dependent Loans: Commercial loans $ 10,747 $ — $ — $ 10,747 Commercial real estate loans 40,653 — — 40,653 Loan servicing rights 26,717 — 26,717 — At December 31, 2020, commercial and commercial real estate loans that were deemed collateral dependent had a principal amount of $ 57.2 million, with a valuation allowance of $ 5.8 million. Old National recorded provision expense associated with these loans totaling $ 2.1 million in 2020. 121 Old National did not have any other real estate owned or other repossessed property measured at fair value on a non-recurring basis at December 31, 2020. There were write-downs of other real estate owned of $ 0.2 million in 2020. The valuation allowance for loan servicing rights with impairments at December 31, 2020 totaled $ 1.4 million. There were impairments associated with these loan servicing rights totaling $ 1.4 million in 2020. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy: (dollars in thousands) Fair Value Valuation Techniques Unobservable Input Range (Weighted Average)(1) December 31, 2021 Collateral Dependent Loans Commercial loans $ 2,634 Discounted cash flow Discount for type of property, age of appraisal, and current status 14 % - 15 % ( 14 %) Commercial real estate loans 16,308 Discounted cash flow Discount for type of property, age of appraisal, and current status 6 % - 10 % ( 8 %) December 31, 2020 Collateral Dependent Loans Commercial loans $ 10,747 Discounted cash flow Discount for type of property, age of appraisal, and current status 0 % - 33 % ( 12 %) Commercial real estate loans 40,653 Discounted cash flow Discount for type of property, age of appraisal, and current status 0 % - 18 % ( 7 %) (1) Unobservable inputs were weighted by the relative fair value of the instruments. Fair Value Option Old National may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made. Residential Loans Held For Sale Old National has elected the fair value option for residential loans held for sale. For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the financial assets (except any that are on nonaccrual status). None of these loans are 90 days or more past due, nor are any on nonaccrual status. Included in the income statement is interest income for loans held for sale totaling $ 1.5 million in 2021, $ 2.0 million in 2020, and $ 1.4 million in 2019. Old National has elected the fair value option for newly originated conforming fixed-rate and adjustable-rate first mortgage loans held for sale. These loans are intended for sale and are hedged with derivative instruments. Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification. The fair value option was not elected for loans held for investment. The difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was as follows: (dollars in thousands) Aggregate Fair Value Difference Contractual Principal December 31, 2021 Residential loans held for sale $ 35,458 $ 1,342 $ 34,116 December 31, 2020 Residential loans held for sale $ 63,250 $ 3,485 $ 59,765 Accrued interest at period end is included in the fair value of the instruments. 122 The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value: (dollars in thousands) Other Gains and (Losses) Interest Income Interest (Expense) Total Changes in Fair Values Included in Current Period Earnings Year Ended December 31, 2021 Residential loans held for sale $ ( 2,139 ) $ 2 $ ( 6 ) $ ( 2,143 ) Year Ended December 31, 2020 Residential loans held for sale $ 1,962 $ 18 $ ( 24 ) $ 1,956 Financial Instruments Not Carried at Fair Value The carrying amounts and estimated fair values of financial instruments not carried at fair value were as follows: Fair Value Measurements at December 31, 2021 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Cash, due from banks, money market, and other interest-earning investments $ 822,019 $ 822,019 $ — $ — Loans, net: Commercial 3,363,175 — — 3,335,009 Commercial real estate 6,315,574 — — 6,211,854 Residential real estate 2,245,942 — — 2,216,900 Consumer credit 1,569,814 — — 1,582,600 Accrued interest receivable 84,109 688 35,790 47,631 Financial Liabilities Deposits: Noninterest-bearing demand deposits $ 6,303,106 $ 6,303,106 $ — $ — Checking, NOW, savings, and money market interest-bearing deposits 11,305,676 11,305,676 — — Time deposits 960,413 — 968,658 — Federal funds purchased and interbank borrowings 276 276 — — Securities sold under agreements to repurchase 392,275 392,275 — — FHLB advances 1,886,019 — 1,935,140 — Other borrowings 296,670 — 311,532 — Accrued interest payable 5,496 — 5,496 — Standby letters of credit 454 — — 454 Off-Balance Sheet Financial Instruments Commitments to extend credit $ — $ — $ — $ 4,678 123 Fair Value Measurements at December 31, 2020 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Cash, due from banks, money market, and other interest-earning investments $ 589,712 $ 589,712 $ — $ — Loans, net: Commercial 3,922,642 — — 3,912,948 Commercial real estate 5,867,795 — — 5,797,447 Residential real estate 2,235,814 — — 2,264,274 Consumer credit 1,628,840 — — 1,618,365 Accrued interest receivable 85,306 21 27,977 57,308 Financial Liabilities Deposits: Noninterest-bearing demand deposits $ 5,633,672 $ 5,633,672 $ — $ — Checking, NOW, savings, and money market interest-bearing deposits 10,280,911 10,180,911 99,957 — Time deposits 1,122,870 — 1,140,922 — Federal funds purchased and interbank borrowings 1,166 1,166 — — Securities sold under agreements to repurchase 431,166 431,166 — — FHLB advances 1,991,435 — 2,092,033 — Other borrowings 252,787 — 254,612 — Accrued interest payable 5,443 — 5,443 — Standby letters of credit 462 — — 462 Off-Balance Sheet Financial Instruments Commitments to extend credit $ — $ — $ — $ 11,822 The methods utilized to measure the fair value of financial instruments at December 31, 2021 and 2020 represent an approximation of exit price, however, an actual exit price may differ. NOTE 20 – DERIVATIVE FINANCIAL INSTRUMENTS As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, collars, caps, and floors. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. Old National’s exposure is limited to the termination value of the contracts rather than the notional, principal, or contract amounts. There are provisions in our agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, we minimize credit risk through credit approvals, limits, and monitoring procedures. Derivatives Designated as Hedges Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner: Cash flow hedges : changes in fair value are recognized as a component in other comprehensive income. Fair value hedges : changes in fair value are recognized concurrently in earnings. As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100 % of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings. 124 The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item. Cash Flow Hedges Interest rate swaps of certain borrowings were designated as cash flow hedges totaling $ 150.0 million notional amount at December 31, 2021 and $ 325.0 million notional amount at December 31, 2020. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $ 600.0 million notional amount at December 31, 2021 and $ 400.0 million notional amount at December 31, 2020. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms. Old National has designated its interest rate collars as cash flow hedges. The structure of these instruments is such that Old National pays the counterparty an incremental amount if the collar index exceeds the cap rate. Conversely, Old National receives an incremental amount if the index falls below the floor rate. No payments are required if the collar index falls between the cap and floor rates. Old National has designated its interest rate floor transactions as cash flow hedges. The structure of these instruments is such that Old National receives an incremental amount if the index falls below the floor strike rate. No payments are required if the index remains above the floor strike rate. Fair Value Hedges Interest rate swaps of certain borrowings were designated as fair value hedges totaling $ 377.5 million notional amount at December 31, 2021 and $ 379.0 million notional amount at December 31, 2020. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $ 910.0 million notional amount at December 31, 2021 and $ 347.5 million notional amount at December 31, 2020. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms. The following table summarizes Old National’s derivatives designated as hedges: December 31, 2021 December 31, 2020 Fair Value Fair Value (dollars in thousands) Notional Assets (1) Liabilities (2) Notional Assets (1) Liabilities (2) Cash flow hedges: Interest rate collars and floors on loan pools $ 600,000 $ 459 $ 2,173 $ 400,000 $ 6,636 $ — Interest rate swaps on borrowings 150,000 4,316 — 325,000 628 1,816 Fair value hedges: Interest rate swaps on investment securities 909,957 10,961 14,643 347,516 1,145 172 Interest rate swaps on borrowings 377,500 2,475 96 379,000 8,793 — Total $ 18,211 $ 16,912 $ 17,202 $ 1,988 (1) Derivative assets are included in other assets on the balance sheet. (2) Derivative liabilities are included in other liabilities on the balance sheet. 125 The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income were as follows: (dollars in thousands) Gain (Loss) Recognized in Income on Related Hedged Items Derivatives in Fair Value Hedging Relationships Location of Gain or (Loss) Recognized in Income on Derivative Gain (Loss) Recognized in Income on Derivative Hedged Items in Fair Value Hedging Relationships Location of Gain or (Loss) Recognized in in Income on Related Hedged Item Year Ended December 31, 2021 Interest rate contracts Interest income/(expense) $ ( 6,413 ) Fixed-rate debt Interest income/(expense) $ 6,296 Interest rate contracts Interest income/(expense) ( 4,656 ) Fixed-rate investment securities Interest income/(expense) 4,954 Total $ ( 11,069 ) $ 11,250 Year Ended December 31, 2020 Interest rate contracts Interest income/(expense) $ 7,238 Fixed-rate debt Interest income/(expense) $ ( 7,283 ) Interest rate contracts Interest income/(expense) 973 Fixed-rate investment securities Interest income/(expense) ( 967 ) Total $ 8,211 $ ( 8,250 ) Year Ended December 31, 2019 Interest rate contracts Interest income/(expense) $ 12,577 Fixed-rate debt Interest income/(expense) $ ( 12,587 ) The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income were as follows: Years Ended December 31, Years Ended December 31, 2021 2020 2019 2021 2020 2019 Derivatives in Cash Flow Hedging Relationships Location of Gain or (Loss) Reclassified from AOCI into Income Gain (Loss) Recognized in Other Comprehensive Income on Derivative Gain (Loss) Reclassified from AOCI into Income Interest rate contracts Interest income/(expense) $ 1,898 $ 8,261 $ ( 543 ) $ 4,605 $ 5,153 $ 596 Amounts reported in AOCI related to cash flow hedges will be reclassified to interest income or interest expense as interest payments are received or paid on Old National’s derivative instruments. During the next 12 months, we estimate that $ 1.5 million will be reclassified to interest income and $ 0.1 million will be reclassified to interest expense. Derivatives Not Designated as Hedges Commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. These derivative contracts do not qualify for hedge accounting. At December 31, 2021, the notional amounts of the interest rate lock commitments were $ 90.7 million and forward commitments were $ 126.1 million. At December 31, 2020, the notional amounts of the interest rate lock commitments were $ 224.7 million and forward commitments were $ 261.0 million. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans. Old National also enters into derivative instruments for the benefit of its clients. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $ 2.433 billion at December 31, 2021. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $ 2.008 billion at December 31, 2020. These derivative contracts do not qualify for hedge accounting. These instruments include interest rate swaps, caps, and collars. Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of clients by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms. 126 Old National enters into derivative financial instruments as part of its foreign currency risk management strategies. These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its clients. Old National does not designate these foreign currency forward contracts for hedge accounting treatment. The following table summarizes Old National’s derivatives not designated as hedges: December 31, 2021 December 31, 2020 Fair Value Fair Value (dollars in thousands) Notional Assets (1) Liabilities (2) Notional Assets (1) Liabilities (2) Interest rate lock commitments $ 90,731 $ 2,352 $ — $ 224,719 $ 9,375 $ — Forward mortgage loan contracts 126,107 242 — 261,027 — 2,335 Customer interest rate swaps 2,433,177 52,439 11,658 2,008,149 113,300 133 Counterparty interest rate swaps (3) 2,433,177 583 12,956 2,008,149 — 13,543 Customer foreign currency forward contracts 10,292 399 — 9,990 324 — Counterparty foreign currency forward contracts 10,205 — 346 9,854 — 188 Total $ 56,015 $ 24,960 $ 122,999 $ 16,199 (1) Derivative assets are included in other assets on the balance sheet. (2) Derivative liabilities are included in other liabilities on the balance sheet. (3) The fair values of certain counterparty interest rate swaps are zero due to the settlement of centrally-cleared variation margin rules. The net adjustment was $ 28.9 million as of December 31, 2021 and $ 100.4 million as of December 31, 2020. The effect of derivatives not designated as hedging instruments on the consolidated statements of income were as follows: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Derivatives Not Designated as Hedging Instruments Location of Gain or (Loss) Recognized in Income on Derivative Gain (Loss) Recognized in Income on Derivative Interest rate contracts (1) Other income/(expense) $ 279 $ ( 551 ) $ ( 174 ) Mortgage contracts Mortgage banking revenue ( 4,446 ) 5,692 789 Foreign currency contracts Other income/(expense) ( 104 ) 13 50 Total $ ( 4,271 ) $ 5,154 $ 665 (1) Includes the valuation differences between the customer and offsetting swaps. NOTE 21 – COMMITMENTS AND CONTINGENCIES COVID-19 The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the business, financial condition, and results of operations of the Company and its clients. The COVID-19 pandemic caused changes in the behavior of clients, businesses, and their employees, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Future effects, including additional actions taken by federal, state, and local governments to contain COVID-19 or treat its impact, are unknown. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of Old National’s clients to fulfill their contractual obligations to the Company. This could cause Old National to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Old National’s intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives. Litigation In the normal course of business, Old National Bancorp and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. 127 Old National contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, Old National cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of Old National, although the outcome of such matters could be material to Old National’s operating results and cash flows for a particular future period, depending on, among other things, the level of Old National’s revenues or income for such period. Old National will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated. Old National is not currently involved in any material litigation. Credit-Related Financial Instruments In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of $ 4.489 billion and standby letters of credit of $ 75.7 million at December 31, 2021. At December 31, 2021, approximately $ 4.151 billion of the loan commitments had fixed rates and $ 338.2 million had floating rates, with the floating interest rates ranging from 0 % to 14 %. At December 31, 2020, loan commitments totaled $ 3.720 billion and standby letters of credit totaled $ 86.9 million. These commitments are not reflected in the consolidated financial statements. The allowance for unfunded loan commitments totaled $ 10.9 million at December 31, 2021 and $ 11.7 million at December 31, 2020. Old National had credit extensions with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients totaling $ 21.8 million at December 31, 2021 and $ 7.9 million at December 31, 2020. Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $ 6.5 million at December 31, 2021 and $ 7.5 million December 31, 2020. Old National did not provide collateral for the remaining credit extensions. Visa Class B Restricted Shares In 2008, Old National received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the final settlement of certain litigation for which Visa is indemnified by the holders of Visa’s Class B shares, including Old National. Visa funded an escrow account from its initial public offering to settle these litigation claims. Increases in litigation claims requiring Visa to fund the escrow account due to insufficient funds will result in a reduction of the conversion ratio of each Visa Class B share to unrestricted Class A shares. As of December 31, 2021, the conversion ratio was 1.6181 . Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the 65,466 Class B shares that Old National owns at December 31, 2021 are carried at a zero cost basis and are included in other assets with our equity securities that have no readily determinable fair value. NOTE 22 – FINANCIAL GUARANTEES Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees in accordance with FASB ASC 460-10 (FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ) , which requires Old National to record the instruments at fair value. Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties. Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract. Credit risk associated with standby letters of credit is essentially the same as that associated with extending loans to clients and is subject to normal credit policies. The term of these standby letters of credit is typically one year or less. At December 31, 2021, the notional amount of standby letters of credit was $ 75.7 million, which represented the maximum amount of future funding requirements, and the carrying value was $ 0.5 million. At December 31, 2020, the notional amount of standby letters of credit was $ 86.9 million, which represented the maximum amount of future funding requirements, and the carrying value was $ 0.5 million. Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of $ 97.7 million at December 31, 2021. 128 NOTE 23 – REVENUE FROM CONTRACTS WITH CUSTOMERS Old National’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income. The consolidated statements of income include all categories of noninterest income. The following table reflects only the categories of noninterest income that are within the scope of Topic 606: Years Ended December 31, (dollars in thousands) 2021 2020 2019 Wealth management fees $ 40,409 $ 36,806 $ 37,072 Service charges on deposit accounts 34,685 35,081 44,915 Debit card and ATM fees 20,739 20,178 21,652 Investment product fees 24,639 21,614 21,785 Other income: Merchant processing fees 3,733 3,150 3,105 Gain (loss) on other real estate owned 298 240 254 Safe deposit box fees 999 957 1,206 Insurance premiums and commissions 114 407 815 Total $ 125,616 $ 118,433 $ 130,804 Wealth management fees : Old National earns wealth management fees based upon asset custody and investment management services provided to individual and institutional customers. Most of these customers receive monthly or quarterly billings for services rendered based upon the market value of assets in custody. Fees that are transaction based are recognized at the point in time that the transaction is executed. Service charges on deposit accounts : Old National earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which Old National satisfies its performance obligation. Debit card and ATM fees : Debit card and ATM fees include ATM usage fees and debit card interchange income. As with the transaction-based fees on deposit accounts, the ATM fees are recognized at the point in time that Old National fulfills the customer’s request. Old National earns interchange fees from cardholder transactions processed through card association networks. Interchange rates are generally set by the card associations based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Investment product fees : Investment product fees are the commissions and fees received from a registered broker/dealer and investment adviser that provide those services to Old National customers. Old National acts as an agent in arranging the relationship between the customer and the third-party service provider. These fees are recognized monthly from the third-party broker based upon services already performed, net of the processing fees charged to Old National by the broker. 129 NOTE 24 – REGULATORY RESTRICTIONS Restrictions on Cash and Due from Banks Prior to March of 2020, Old National’s affiliate bank was required to maintain reserve balances on hand and with the Federal Reserve Bank that are interest-bearing and unavailable for investment purposes. The Federal Reserve Board reduced reserve requirement ratios to 0% effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. Old National had cash and due from banks which was held as collateral for collateralized swap positions of $ 14.6 million at December 31, 2021 and $ 7.8 million at December 31, 2020. Restrictions on Transfers from Affiliate Bank Regulations limit the amount of dividends an affiliate bank can declare in any year without obtaining prior regulatory approval. Prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year plus retained net profits for the preceding two years . Prior regulatory approval to pay dividends was not required in 2019, 2020, or 2021 and is not currently required. Restrictions on the Payment of Dividends Old National has traditionally paid a quarterly dividend to common shareholders. The payment of dividends is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on Old National’s earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors. Capital Adequacy Old National and Old National Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can elicit certain mandatory actions by regulators that, if undertaken, could have a direct material effect on Old National’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Old National and Old National Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require Old National and Old National Bank to maintain minimum amounts and ratios as set forth in the following tables. At December 31, 2021, Old National and Old National Bank exceeded the regulatory minimums and Old National Bank met the regulatory definition of “well-capitalized” based on the most recent regulatory notification. There have been no conditions or events since that notification that management believes have changed Old National Bank’s category. 130 The following table summarizes capital ratios for Old National and Old National Bank: Actual Regulatory Guidelines Minimum (1) Prompt Corrective Action “Well Capitalized” Guidelines (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2021 Total capital to risk-weighted assets Old National Bancorp $ 2,119,176 12.77 % $ 1,741,789 10.50 % N/A N/A % Old National Bank 2,119,405 12.82 1,735,385 10.50 1,652,748 10.00 Common equity Tier 1 capital to risk-weighted assets Old National Bancorp 1,998,056 12.04 1,161,193 7.00 N/A N/A Old National Bank 2,040,285 12.34 1,156,923 7.00 1,074,286 6.50 Tier 1 capital to risk-weighted assets Old National Bancorp 1,998,056 12.04 1,410,020 8.50 N/A N/A Old National Bank 2,040,285 12.34 1,404,835 8.50 1,322,198 8.00 Tier 1 capital to average assets Old National Bancorp 1,998,056 8.59 930,318 4.00 N/A N/A Old National Bank 2,040,285 8.81 926,821 4.00 1,158,526 5.00 December 31, 2020 Total capital to risk-weighted assets Old National Bancorp $ 1,949,757 12.69 % $ 1,613,753 10.50 % N/A N/A % Old National Bank 1,973,180 12.90 1,606,657 10.50 1,530,149 10.00 Common equity Tier 1 capital to risk-weighted assets Old National Bancorp 1,805,194 11.75 1,075,835 7.00 N/A N/A Old National Bank 1,870,617 12.23 1,071,104 7.00 994,597 6.50 Tier 1 capital to risk-weighted assets Old National Bancorp 1,805,194 11.75 1,306,371 8.50 N/A N/A Old National Bank 1,870,617 12.23 1,300,627 8.50 1,224,119 8.00 Tier 1 capital to average assets Old National Bancorp 1,805,194 8.20 880,845 4.00 N/A N/A Old National Bank 1,870,617 8.67 863,087 4.00 1,078,859 5.00 (1) Basel III Capital Rules require banking organizations to maintain: a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”; a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer; a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer; and a minimum ratio of Tier 1 capital to adjusted average consolidated assets of at least 4.0 %. In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC published an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). Old National is adopting the capital transition relief over the permissible five-year period. 131 NOTE 25 – PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed parent company only financial statements of Old National: OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS December 31, (dollars in thousands) 2021 2020 Assets Deposits in affiliate bank $ 102,953 $ 73,340 Equity securities 3,257 2,435 Investment securities - available-for-sale 13,888 14,198 Investment in affiliates: Banking subsidiaries 3,053,575 3,037,930 Non-banks 4,949 4,969 Other assets 83,531 89,776 Total assets $ 3,262,153 $ 3,222,648 Liabilities and Shareholders' Equity Other liabilities $ 36,582 $ 36,746 Other borrowings 213,553 213,246 Shareholders' equity 3,012,018 2,972,656 Total liabilities and shareholders' equity $ 3,262,153 $ 3,222,648 OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME Years Ended December 31, (dollars in thousands) 2021 2020 2019 Income Dividends from affiliates $ 125,000 $ 230,000 $ 165,000 Debt securities gains (losses), net 334 574 631 Other income 3,030 3,622 2,209 Other income from affiliates 5 5 5 Total income 128,369 234,201 167,845 Expense Interest on borrowings 8,285 8,649 10,203 Other expenses 13,951 16,351 15,505 Total expense 22,236 25,000 25,708 Income before income taxes and equity in undistributed earnings of affiliates 106,133 209,201 142,137 Income tax expense (benefit) ( 5,113 ) ( 5,317 ) ( 6,165 ) Income before equity in undistributed earnings of affiliates 111,246 214,518 148,302 Equity in undistributed earnings of affiliates 166,292 11,891 89,904 Net income $ 277,538 $ 226,409 $ 238,206 132 OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS Years Ended December 31, (dollars in thousands) 2021 2020 2019 Cash Flows From Operating Activities Net income $ 277,538 $ 226,409 $ 238,206 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 30 46 52 Debt securities (gains) losses, net ( 334 ) ( 574 ) ( 631 ) Share-based compensation expense 7,497 7,707 7,993 (Increase) decrease in other assets 10,547 ( 51 ) ( 3,685 ) Increase (decrease) in other liabilities ( 4,918 ) 1,084 1,046 Equity in undistributed earnings of affiliates ( 166,292 ) ( 11,891 ) ( 89,904 ) Net cash flows provided by (used in) operating activities 124,068 222,730 153,077 Cash Flows From Investing Activities Proceeds from dissolution of subsidiary — — 224 Proceeds from sales of investment securities 1,000 — — Proceeds from sales of equity securities 540 4,431 130 Purchases of investment securities ( 15 ) ( 10,073 ) ( 3,085 ) Proceeds from sales of premises and equipment — 354 847 Purchases of premises and equipment ( 3 ) ( 354 ) ( 869 ) Net cash flows provided by (used in) investing activities 1,522 ( 5,642 ) ( 2,753 ) Cash Flows From Financing Activities Payments for maturities/redemptions of other borrowings — ( 10,310 ) ( 8,000 ) Cash dividends paid on common stock ( 92,829 ) ( 92,946 ) ( 89,474 ) Common stock repurchased ( 3,731 ) ( 82,358 ) ( 102,413 ) Proceeds from exercise of stock options — — 280 Common stock issued 583 577 567 Net cash flows provided by (used in) financing activities ( 95,977 ) ( 185,037 ) ( 199,040 ) Net increase (decrease) in cash and cash equivalents 29,613 32,051 ( 48,716 ) Cash and cash equivalents at beginning of period 73,340 41,289 90,005 Cash and cash equivalents at end of period $ 102,953 $ 73,340 $ 41,289 NOTE 26 – SEGMENT INFORMATION Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Old National Bank, Old National’s bank subsidiary, is the only significant subsidiary upon which management makes decisions regarding how to allocate resources and assess performance. Each of the banking centers of Old National Bank provide a group of similar community banking services, including such products and services as commercial, real estate and consumer loans, time deposits, checking and savings accounts, cash management, brokerage, trust, and investment advisory services. The individual banking centers located throughout our Midwest footprint have similar operating and economic characteristics. While the chief decision maker monitors the revenue streams of the various products, services, and regional locations, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the community banking services and banking center locations are considered by management to be aggregated into one reportable operating segment, community banking. 133 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.